APB today issued an update of Practice Note (PN) 23 providing interim guidance for auditors on “Auditing Complex Financial Instruments.” An exposure draft of the updated PN 23 was issued for consultation in October 2008.

The previous version of PN 23 was issued in April 2002 to provide guidance on auditing derivative financial instruments. Responses to the APB’s consultation supported its view that it is helpful to widen the scope of PN 23 to cover other complex financial instruments, as well as derivatives, as many of the audit considerations are the same.

The APB has decided to issue this version of PN 23 as interim guidance because:

• Relevant accounting standards are under review and future changes may have implications for auditors; and
• The guidance in the updated PN 23 has been aligned with the APB’s current International Standards on Auditing (ISAs) (UK and Ireland). However, for audits of entities with accounting periods ending on or after 15 December 2010 new ISAs (UK and Ireland) will be effective that reflect the ‘Clarity ISAs’ issued by the IAASB. One feature of the Clarity ISAs is that ISA 545 has been subsumed into a revised ISA 540, “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures.” Conforming changes will be needed to this Practice Note when the new ISA (UK and Ireland) 540 applies.

Richard Fleck, Chairman of the APB, commented:

“The audit of some financial instruments can be challenging, especially when market conditions make fair values difficult to estimate. The APB hopes that the updated PN 23, which contains much new guidance, will assist auditors in addressing current considerations that are relevant in the audit of financial statements of entities that use complex financial instruments.”

The updated Practice Note can be downloaded now, free of charge, from the Publications /Practice Notes section of the APB’s website (http://www.frc.org.uk/apb/publications/pub2143.html). From late October, hard copy booklets may be obtained (price £12 each post-free) from FRC Publications, 145 London Road, Kingston upon Thames, Surrey KT2 6SR. Telephone 020 8247 1264.

1. The Financial Reporting Council (FRC), 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 FRC Board. The Committee on Corporate Governance assists the Board in its work 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. The previous version of PN 23 was based on International Auditing Practice Statement (IAPS) 1012 issued by the International Auditing and Assurance Standards Board (IAASB). IAASB plans to update IAPS 1012 in the coming year and is using APB’ work on PN 23 to accelerate that process.
4. The purpose of Practice Notes issued by the APB is to assist auditors in applying Auditing Standards of general application to particular circumstances and industries. Practice Notes are persuasive rather than prescriptive. However, they are indicative of good practice, even though they may be developed without the full process of consultation and exposure used for Auditing Standards.
5. For further information please contact Jon Grant, APB Executive Director, on 020 7492 2410.