Impact of International Auditing Standard & Ethical Standards

The Auditing Practices Board (APB) have introduced the International Auditing Standards (ISA+s) and replacement Ethical Standards (ESs) which become effective for all audits of accounting periods commencing on or after 15 December 2004. These standards will radically transform the way in which auditors undertake their audit work and provide extensive guidance regarding the ethical implications of accepting and continuing audit assignments.

The following represent some of the major issues that auditors will need to be aware of:

• Auditors of clients which consistently provide 15% (10% for listed clients) of either a practice’s annual income or where profits are not equally shared, a partner’s annual income from the practice, will have to resign. The practice can continue to provide non-audit services to the client but will not be able to continue to act as auditor.
  
  

• Auditors of clients which consistently provide 10% (5% for listed clients) of a practice’s income will have to arrange for external quality control reviews prior to sign-off of the audit report.
  
  

• All listed or public interest clients should include an independent partner review to ensure that the practice has considered all threats to independence and introduced safeguards to preserve independence.
  
  

• Where the same audit engagement partner or key member of an audit team have been involved with a client for a number of years, steps must be taken to ensure that independence is maintained. It is recommended that where individuals have acted for 10 years for an unlisted client and 5 years for listed clients that staff are rotated. Alternatively, external reviews should be undertaken to ensure that the practice is independent.
  
  

• Where a partner involved in the audit of a client in the preceding two years leaves the practice to become a member of key management of that client, the practice should resign as auditor until a period of two years has elapsed since the date the former partner joined the client.
  
  

• Appropriate safeguards must be introduced where a firm provides non-audit services to an audit client. Specific examples include tax planning work provided by a firm which could be judged to affect its ability to provide an audit opinion as it attempts to justify the tax planning option chosen. Additionally, where the same staff member undertakes the audit work and prepares the corporation tax computations, a review must be undertaken on the corporation tax by another individual within the firm.
  
  

• Firms with at least three Responsible Individuals are required to appoint an Ethics partner whose responsibility is to ensure that the firm and engagement partners are complying with the relevant ethical standards.
  
  

• Increased depth of audit work will be inevitable due to the more demanding nature of some of the ISA+s which place much more emphasis on identification of potential risks and implementation of specific audit testing to ensure that these risks are adequately considered. This risk based approach is coupled by much more extensive guidance with regard to the identification and consideration of potential fraud and this subsequently results in an increased workload for the auditor.