The Auditing Practices Board (APB) is proposing to adopt the International Standards of Auditing (‘ISAs’) issued by the International Auditing and Assurance Standards Board (IAASB). At the same time, the APB will ensure that the quality of the auditing standards that apply in the United Kingdom and Republic of Ireland will be maintained.

Audit risk, fraud, and quality control
The APB believes that UK auditing standards need to be reviewed in the context of  recent  financial reporting irregularities in the US and Continental Europe to ensure that they are as effective as possible in addressing fraudulent financial reporting and aggressive earnings management. Rather than working on this in isolation, the APB decided that it would be more effective to contribute to the international effort, through the IAASB, and thereby demonstrate our commitment to the worldwide harmonisation of auditing standards. The IAASB has recently introduced new standards in the critical areas of audit risk, fraud, and quality control. In APB’s view the new ISAs represent a significant strengthening of the auditing standards currently in force in the United Kingdom and Ireland and, in order to ensure that standards in the UK and Ireland remain at the highest level, the APB must either adopt these ISAs or update its own Statements of Auditing Standards (SASs).

On 4 March 2004 the APB announced its intention that the new ISAs relating to audit risk, fraud, and quality control should apply in the UK and Ireland for audits of accounting periods commencing on or after 15 December 2004. When this announcement was made, the APB acknowledged that this approach - particularly the adoption of the audit risk standards - would mean that significant consequential changes would need to be made to existing SASs. It announced that it was exploring the option of undertaking this work as part of a general move towards the adoption of all ISAs.

The adoption of all ISAs
The APB has now reviewed the work needed to make consequential changes to SASs and has concluded that the most efficient way of dealing with the issue will be to adopt the complete suite of ISAs to which conforming changes have already been made by IAASB. Adoption of ISAs at this time would also provide the following strategic advantages:

a. It will help maintain the stature of UK and Irish standards internationally. In the aftermath of accounting and auditing failures in the US and Continental Europe, securities regulators and governments have recognised the value of harmonised auditing standards. In particular the European Commission is in the process of introducing an amended Directive on the statutory audit that will, in all probability, require the adoption of ISAs by all Member States.

b. It will allow APB to benefit efficiently from future improvements to ISAs. APB members are involved in working parties to revise the ISAs on materiality and accounting estimates and, in so doing, focus on the issue of management bias - a common element in aggressive earnings management. The UK is also involved in IAASB projects to revise ISAs on audit reports, group audits and related parties.

The APB concluded that the alternative route for benefiting from IAASB’s work on audit risk and fraud (namely to update all its existing SASs to reflect the thinking in ISAs 315, 330 and 240) would be inefficient and, because the European Commission is likely to require national standards to be replaced with ISAs within the foreseeable future, would require practitioners to become familiar with new standards only for them to be replaced within a relatively short period.

Maintaining the quality of UK and Ireland’s auditing standards
The APB has reviewed all of its SASs to identify instances where they contain higher standards than those contained in equivalent ISAs. It has also identified guidance in SASs that was developed after the equivalent ISA was issued and which the APB believes continues to be both relevant and helpful. As a result the APB has concluded that it is necessary to incorporate some material from existing SASs into the ISAs to avoid a reduction in the quality of  UK and Irish standards. This additional material will be clearly differentiated from the international standards and, over time, the APB hopes to be able to withdraw such supplementary material as relevant ISAs are revised by IAASB.

The APB intends to issue exposure drafts of 29 new standards in June 2004. The APB anticipates that some auditors will be concerned at the volume of material involved in the introduction of ISAs and the educational and logistical challenge that this might give rise to.  It is important to emphasise however that, with the exception of the new audit risk and fraud standards (ISAs 315, 330 and 240), APB believes that the adoption of the other ISAs will not involve many changes of substance to existing standards or to the work currently undertaken by auditors, since the ISA requirements are to a large degree already addressed in existing SASs.
Richard Fleck, Chairman of APB commented:
 “International standards are in the process of being significantly strengthened and several key ISAs have recently been revised.  The APB has contributed substantially to this work and believes that it results in improved standards for all audits which should be applied with the minimum delay.

Announcing this important strategic decision now allows audit firms sufficient time to plan for their introduction for 2005 in an orderly manner.  Although the APB will be formally exposing revised standards later in the year, I would encourage auditors to begin now to familiarise themselves with the latest ISAs”. 

Copies of all the ISAs issued by the IAASB can be downloaded free of charge from the IAASB’s web site (www.ifac.org/IAASB).

For further information please contact:

Richard Fleck
APB Chairman
Tel: 020-7374-8000

Jon Grant
APB Executive Director
Tel: 020-7293-7930