IFAC has noted that “public interest considerations must remain paramount in an age of COVID-19” and have produced an interesting article exploring some of the ethical and public interest issues raised by the current reporting and auditing environment.
Read the IFAC Public Interest Article.
The key issues they have highlighted are the heightened risk of fraud and error in corporate reports caused by the stress within the economy exacerbated by the challenges of remote working. They note “greater transparency and disclosure of forward-looking information on an organization’s operating performance, financial position, liquidity and future prospects are more critical than ever even though current circumstances make this more challenging. Professional accountants in business need to make reasonable, good-faith judgments in the context, and, on the basis of, information currently available”
This IFAC framework provides a comprehensive overview of the factors driving audit quality at an engagement, firm and national level. It reiterates much of previous guidance but contextualises the ideas within the debate around the increasing focus on public interest. The problems in ensuring audit quality in audit firms are clearly not easy to resolve as the regulatory review into audit firms in the UK routinely highlight areas of weakness and the spate of recent high profile audit scandals in PIE’s would support the idea that these problems result in poor quality in practice. It is therefore vital that students understand how audit quality is promoted and safeguarded in audit firms and it is an area that is frequently examined in this paper.
““While these results show some improvement on last year’s results, this improvement is marginal and significant change still needs to happen to meaningfully improve audit quality.
“High quality audit is essential to maintaining trust and confidence in the UK’s financial markets. If the UK is to retain its position as a world leading professional services marketplace, and a global financial centre, outstanding audit quality and rigorous professionalism is at the heart of this.
“Some may question what the FRC has been doing and why audit quality improvement remains slow. Over the last 12 months the FRC has initiated its own programme of measures in response to many of the recommendations in the Kingman review such as: initiating operational separation of the Big Four firms; introducing enhanced audit standards in relation to ethics and fraud; building on our supervisory oversight; and strengthening our enforcement capability. However, elements of these actions remain voluntary on the part of audit firms and this is why the BEIS White Paper ‘Restoring trust in audit and corporate governance’ is so important. Legislation will ensure that a new regulator, ARGA, with increased remit and powers can be created to promote improved audit quality as the key output of audit firm work, in the public interest.”
Financial Reporting Council (2021)“Firms’ Audit Quality Monitoring”.
In the UK there is evidence that audit firm quality procedures are not as robust as the regulator might prefer and there is also evidence that the audit firms have a tendency to under estimate problems with their own work. This is not entirely unexpected as sub conscious bias will tend to mean that auditors who work within a specific audit culture will not be able to appreciate its weaknesses and it is very difficult for an audit firm to be objective about its own quality. However, there is an increased focus from IFAC and national regulators on firm audit quality policies and monitoring of such.
A key issue arising from the impact of COVID-19 on audit firms is the change to remote working and the challenges this creates for ensuring audit quality and ethical compliance. The IESBA have produced a very helpful guide which explores how ethics may be compromised due to these issues, with some useful ideas of how this can be mitigated in practice.
IFAC have also explored how COVID-19 issues may increase the need for more extensive and frequent Engagement Quality Reviews. The challenge of performing these remotely is also addressed and IFAC observe the following:
Professional Judgement remains a key area of concern to regulators. The Brydon Report (2019) recommends:
“ARGA (the new UK Regulator) should revisit the existing definition of professional judgment with a view to strengthening, and demonstrating better, the use of judgment in audit. “
Brydon,D; (2019) Independent Review into the Quality and Effectiveness of Audit Crown Copyright
The developing ideas in ED Proposed Revisions to the Code to Promote the Role and Mindset Expected of Professional Accountants 2019 articulate key areas that all professional accountants should consider to ensure that professional judgement is robust. This includes:
The ideas around acting with integrity have also been further developed to expand from the idea of fair dealing and truthfulness and the requirement to be straightforward and honest in all professional and business relationships. Integrity also requires having the determination to act appropriately when confronting dilemmas and can include:
Professional Judgement – IFAC Exposure Draft 17 – Professional Judgement – Emphasis on Understanding Facts and Circumstances
The issues raised above are consistent with the ideas I highlighted from IFAC Exposure Draft 17 – Professional Judgement – Emphasis on Understanding Facts and Circumstances. This is a key area of understanding for students at paper 15 – the paper is concerned with the application of understanding and judgement to scenarios raised in the questions and students are expected to show that they are applying professional judgement robustly.
“Professional judgment involves the application of training, knowledge and experience taking into account the nature and scope of the professional activity being undertaken. When exercising professional judgment it is important that the professional accountant obtains a sufficient understanding of the facts and circumstances known to the accountant to identify, evaluate and address threats to compliance with the fundamental principles”.
Students should ensure that they are familiar with the debate around professional judgement and the ED 17 in their wider reading to contextualise the emerging debates around auditor conduct.
Exercise of Professional Judgment 120.5
A1 Professional judgment involves the application of training, knowledge and experience taking into account the nature and scope of the professional activity being undertaken. When exercising professional judgment it is important that the professional accountant obtains a sufficient understanding of the facts and circumstances known to the accountant to identify, evaluate and address threats to compliance with the fundamental principles.
In obtaining this understanding, the accountant might consider, among other matters, whether:
• There is an inconsistency between the known facts and circumstances and the accountant’s expectations.
• The information provides a reasonable basis on which to reach a conclusion.
• Other reasonable conclusions could be drawn from the information being considered.
• The accountant’s own preconception or bias might be affecting the accountant’s judgment.
• The accountant’s own expertise and experience are sufficient, or whether there is a need to consult with others with relevant expertise or experience.
Reasonable and Informed Third Party 120.5
A2A1 The reasonable and informed third party test is a consideration by the professional accountant about whether the same conclusions would likely be reached by another party. Such consideration is made from the perspective of a reasonable and informed third party, who weighs all the relevant facts and circumstances that the accountant knows, or could reasonably be expected to know, at the time the conclusions are made. The reasonable and informed third party does not need to be an accountant, but would possess the relevant knowledge and experience, to understand and evaluate the appropriateness of the accountant’s conclusions in an impartial manner.
Proposed Application Material Relating to: (a) Professional Scepticism – Linkage with the Fundamental Principles; and (b) Professional Judgment – Emphasis on Understanding Facts and Circumstances. Exposure Draft 17.
“Copyright © May 2017 by the International Federation of Accountants (IFAC). All rights reserved. Used with permission of IFAC. Permission is granted to make copies of this work to achieve maximum exposure and feedback.”
Professional Scepticism continues to be an ongoing issue. The FRC in the UK regards the poor application of professional scepticism as core to compromising the ability of the auditor to robustly challenge management judgement and therefore a significant contributor to recent audit failures. These include Carillion Plc, Thomas Cook Plc, Patisserie Valerie Plc and others. IFAC are currently reviewing their guidance on professional scepticism in order to meet public expectations and ICAEW have recently published a really helpful and practical insight into professional scepticism in the practice. This highlights some of the core challenges that compromise the ability of an auditor to maintain a sceptical mindset including time pressure and a lack of situational context. As Boards strive to faster reporting deadlines, time pressure is increasing. As audit clients become more complex and audit teams work against deadlines without really becoming immersed in the business, commercial factors seem to be conspiring to make being sceptical more difficult. An understanding and appreciation of the developing debate around scepticism is important to ensure that this final paper in audit embeds this critical skill area in students.
IFAC Professional Scepticism Consultation
ICAEW Guidance - Scepticism in the Practice
As all student accountants will be aware, the last few years has not been an easy one for the reputation of the profession. In the United Kingdom, the collapse of Carillion Plc was followed by months of media comment and a government Select Committee Report into the corporate failure. This lack of confidence in the ethics of accounting firms has driven the review of the functioning of the audit market and may see some substantial changes to audit practices over the next few years. This focus on the conduct of auditing firms is by no means limited to isolated cases of Big Four audits of PIE’s causing concern – and the problems relate to audits throughout the world. It is against this evidence of concerns over the quality of accounting ethics that the new International Code of Ethics for Professional Accountants was published last year and on 15th June 2019 came into force and in December 2019 the Brydon Review- Assess, Assure and Inform was published.
There are a number of very important developments to the new 2018 Code which, if adopted correctly, should do much to resolve some of the problems in ethics evidenced in recent scandals and to help to re-establish the reputation of the Accounting Profession. The IESBA launched the Code in April 2018 with the statement “While the fundamental principles of ethics have not changed, major revisions have been made to the unifying conceptual framework—the approach used by all professional accountants to identify, evaluate and address threats to compliance with the fundamental principles and, where applicable, independence “
The substantive revisions to the Code are summarised:
o A new section relating to pressure to breach the fundamental principles; and
o Revised provisions relating to the preparation and presentation of information.
Students are reminded that three articles regarding issues raised by the Code were published by AIA in the Student Accounting in July, August and September 2019.
Other Issues
This Brydon Review has proposed a wide range of reform ideas to resolve the ongoing issue with audit and include:
Whilst the detail recommendations may be beyond the content of DAA, the issues that they debate represent the very real concerns and challenges facing the global profession and students should be familiar with these.
I know that the DAA syllabus is significant but I hope that this discussion of the key developing issues in auditing and assurance have helped you to appreciate the context in which the examiner is setting the papers and to guide you to some useful resources to deepen your knowledge and understanding.
