Implementation of IAASB’s Clarity ISAs in the UK CCAB TRAINING PROVIDERS’ EVENT 17 November 2008

UK already harmonised with existing ISAs APB issued ISAs (UK & Ireland) in December 2004 for audits of accounting periods commencing on or after 15 December 2004 Based on ISAs Includes ‘+’s’ from existing UK auditing standards

But ISAs are going to change! 1.Clarity Project 2.Revisions

Practical forces leading to harmonisation of Auditing Standards Securities regulators want higher quality (IOSCO) Statutory Audit Directive (EC) New audit monitoring activities in many countries needing to work together (IFIAR) Large firms have difficulty with different audit standards in different countries. IAASB

IAASB Clarity Project Origins Status of ‘present tense’ guidance Disquiet about length and complexity of latest ISAs Questions as to the usability of new ISAs (especially small practitioners) Difficulties of linking ISAs to law

Main features of Clarity Project Set an objective in each standard Clarify Professional Requirements –Use ‘shall’ to identify requirements –Eliminate the use of the present tense to describe actions Improve the structure and readability

ISAs to be ‘revised and clarified’ –Groups –Qualified opinions –Related parties –Communication with those charged with governance –Materiality –Accounting estimates/fair values –Management representations –Experts –External confirmations –Terms of engagement –Service organisations

ISAs to be ‘clarified’ Recently revised –Audit risk –Fraud –Quality Control –Planning –Auditor’s Reports –Documentation Not revised for some time –Laws and regulations –Analytical procedures –Sampling –Subsequent events –Comparatives

Issues relating to adoption of ISAs in the UK Likelihood of EC adoption Implementation plans for other major countries Acceptability of final ISAs Extent to which the UK profession is prepared for implementation Regulatory impact assessment

Small audits <500 hours Large group audits >500 hours Single-entity audits >500 hours Average increase in recurring costs9.6%4.9%1.9% Average increase in non-recurring costs (ie: Year 1 implementation) 3.8%0.1% Average increase in Year 1 costs13.4%5.0%2.0% Summary cost impact – APB overall findings The key finding is that recurring costs are expected to rise by: 2% on large single-entity audits 5% on large audits within groups 10% on small audits

Areas of anticipated increase in work effort Management process and outturn of prior year estimates - ISA 540 Management processes around related parties and requirements to gather evidence - ISA 550 Group/component auditor interaction and documentation - ISA 600 Increased formality when using experts - ISA 620 Documentation generally – especially for smaller audits

Option 1 – apply Clarity ISAs as soon as practicable FOR Most rigorous standards applied in the UK New ISAs are clearer and easier to understand Certainty of date will enable all firms to focus on implementation/training plans AGAINST Added costs – but these will come anyway with EC adoption Risk that EC will make changes to ISAs as part of adoption process. But when is “as soon as practicable”??

Option 2 – wait for EC adoption FOR Avoids risks of needing to change standards again if there are changes on EC adoption AGAINST Uncertainty about EC adoption date Delay may be detrimental to UK’s reputation for high quality auditing Risk of audit failures that could be avoided

Implications of two sets of Standards Same “True and Fair” conclusion required by law Clarity ISAs designed to be easier to understand and improve audit quality Many firms audit both large and small entities –Which standards to apply? –Which standards to train staff in? Contrasting Stakeholder views –Companies will be influenced by cost –Stakeholders will be influenced by audit quality

APB consultation paper 1.Do you agree that ISAs (UK & Ireland) should be updated to reflect improvements in the underlying international auditing standards? If not, please explain your reasons. 2.If you agree that the ISAs (UK & Ireland) should be updated for improvements in the underlying international standards, do you believe that this should be done by adopting the Clarity ISAs: a)as soon as practicable, or b)if and when they are endorsed by the EC? 3.If you believe the Clarity ISAs should be adopted as soon as practicable, do you believe it will be practicable to require the resulting new ISAs (UK & Ireland) to apply to audits of UK and Irish entities with accounting periods commencing on or after 15 December 2009? 4.Do you support APB’s view that the same standards should apply to audits of entities of all sizes? If not please explain your reasons. Issued 23 October – responses 16 January 2009

Likely UK Timetable IAASB completes Clarity Project Possible UK Effective Date Consultation on principle Exposure draft of ISAs (UK & Ireland)