The Auditing Practices Board (APB) today issued Bulletin 2008/1 which provides guidance for auditors on audit issues that may arise when financial market conditions are difficult and credit facilities may be restricted. While the Bulletin may be of assistance to the auditors of financial institutions it has been written to apply more generally and focuses on the possible risks of misstatement to the financial statements for all entities arising from:

• The possibility of the reduced availability of finance, and
• Difficulties with valuing some assets for balance sheet purposes, especially those that are required to be measured at ‘fair value’.

Bulletin 2008/1 draws on existing material within the APB’s standards and guidance. Additional guidance for auditors of banks, insurance companies and investment business is included in Practice Notes 19, 20 and 21.

While the guidance in the Bulletin has been developed to assist with audits of December 2007 financial statements it is also likely to be relevant to other audits undertaken in 2008 and auditors will wish to consider the issues involved during their planning of such audits.

Richard Fleck, Chairman of the APB, commented:

“The so called ‘credit crunch’ may increase the risks of material misstatement in the financial statements of some entities. This Bulletin has been prepared to assist auditors in being alert to issues relating to the availability of finance and the valuation of some assets for balance sheet purposes and, thereby, to help them complete their current audits with appropriate rigour.”

The Bulletin can be downloaded, free of charge, from the Publications/Bulletins section of the APB’s website (www.frc.org.uk/apb). Printed copies will be available in early February (price £6) from:

FRC Publications
145 London Road
Kingston upon Thames
Surrey KT2 6SR

Telephone: 020 8247 1264
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1. The Financial Reporting Council (FRC) is the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance. Its functions are exercised principally by its operating bodies (the Accounting Standards Board, the Auditing Practices Board, the Board for Actuarial Standards, the Financial Reporting Review Panel, the Professional Oversight Board and the Accountancy and Actuarial Discipline Board) and by the Committee on Corporate Governance.
2. The APB is committed to leading the development of auditing practice in the United Kingdom and the Republic of Ireland so as to:
   • establish high standards of auditing;
   • meet the developing needs of users of financial information; and
   • ensure public confidence in the auditing process.
3. Practice Notes and Bulletins are persuasive rather than prescriptive and are indicative of good practice. Practice Notes assist auditors in applying APB engagement standards to particular circumstances and industries and Bulletins provide timely guidance on new or emerging issues. Auditors should be aware of and consider Practice Notes applicable to the engagement. Auditors who do not consider and apply the guidance included in a relevant Practice Note should be prepared to explain how the basic principles and essential procedures in APB standards have been complied with.
4. In determining fair values, the objective of using a measurement technique is to establish what the transaction price would have been on the measurement date in an arm’s length exchange motivated by normal business considerations (IAS 39, paragraph 48A). An example of a non-adjusting event after the balance sheet date is the decline in market value of investments between the balance sheet date and the date when the financial statements are authorised for issue. The decline in market value does not normally relate to the condition of the investments at the balance sheet date, but reflects circumstances that have arisen subsequently. Therefore, an entity does not adjust the amounts recognised in the financial statements for the investments. Similarly, the entity does not update the amounts disclosed for the investments as at the balance sheet date, although it may need to give additional disclosure (IAS 10, paragraph 11).
5. For further information please contact Jon Grant, APB Executive Director, on 020 7492 2410.