In April and May, the Institute’s Standard Setting Department responded to the following consultation documents of the International Auditing and Assurance Standards Board (IAASB) and International Ethics Standards Board for Accountants (IESBA):
Consultation documents issued by the IAASB:
- The IAASB’s Proposed Strategy and Work Plan for 2024-2027
- Proposed International Standard on Auditing (ISA) 500 (Revised) Audit Evidence and Proposed Conforming and Consequential Amendments to Other ISAs
- Proposed Part 10 Audits of Group Financial Statements of the Proposed ISA for Audits of Financial Statements of Less Complex Entities (ISA for LCE) and Proposed Conforming Amendments
Consultation document issued by the IESBA:
- Proposed Revisions to the Code Addressing Tax Planning and Related Services
The Institute had responded to the proposals based on comments received from the local comment period. The following provides a high-level summary of our responses, and the full responses are available on our website (Auditing and Assurance / Code of Ethics).
The IAASB’s Proposed Strategy and Work Plan for 2024-2027
The proposal describes the IAASB’s proposed strategy and technical standard-setting work plan from 2024 to 2027 to meet the needs of stakeholders in the external reporting ecosystem, while balancing timeliness with quality.
Overall, the Institute supported the IAASB’s identified possible new-standard setting projects within the area of audits and reviews, while expressing our views that the following topics might warrant higher priorities:
- A modernization of ISA 330 The Auditor’s Responses to Assessed Risks to address today’s environment and current practice, and to ensure the coherence of the suite of ISAs as a whole.
- “External confirmations”, “analytical procedures” and “audit sampling” are closely related to “responding to assessed risks”. Hence, we proposed that revisions to ISA 330, ISA 505 External Confirmations, ISA 520 Analytical Procedures and ISA 530 Audit Sampling be considered as a bundle in the same project.
- A revamp of ISA 620 Using the Work of an Auditor’s Expert would be appropriate given the increasing use of experts in audit engagements.
- Separate projects on audit of digital assets and use of big data in audit engagements, or as part of ISA 330, ISA 505, ISA 520 and ISA 530 modernization.
We also supported the IAASB to develop an overarching standard for assurance on sustainability reporting, in particular, reports or disclosures prepared in accordance with the IFRS Sustainability Disclosure Standards developed by the International Sustainability Standards Board.
The IAASB anticipates approving their strategy and work plan in the last quarter of 2023.
The IAASB’s proposed ISA 500 (Revised) Audit Evidence and Proposed Conforming and Consequential Amendments to Other ISAs
The proposals provide a “reference framework” for auditors when making judgements about audit evidence throughout the audit. It requires auditors to evaluate the relevance and reliability of information intended to be used as audit evidence, i.e. information (the input) needs to be subject to audit procedures to become audit evidence (the output).
While we agreed with the proposed reference framework, we drew the IAASB’s attention on the possible difficulty to apply it in practice. For instance, it might be difficult for auditors to apply concrete audit procedures to assess the reliability of an external information published by the government or a government agency which does not have any alternative sources. Accordingly, we sought clarification from the IAASB on whether information in circumstances as such could be qualified as audit evidence, i.e. no further audit procedures could be performed but professional judgement would be applied.
Proposed ISA 500 (Revised) puts forward a separate conditional requirement whereby auditors shall obtain audit evidence about the accuracy and completeness of information when these attributes are applicable in the circumstances. Although we did not object to the requirement, we encouraged the IAASB to develop application materials on the other three attributes of information reliability (i.e. authenticity, bias and credibility) to promote a thorough understanding on all attributes and to avoid the other attributes being undermined by auditors.
Our comment letter also stated our agreement to the proposed “stand back” requirement, which is consistent with the approach of ISA 315 (Revised 2019) Identifying and Assessing the Risks of Material Misstatement and ISA 540 (Revised) Auditing Accounting Estimates and Related Disclosures. However, we noted that the proposed application materials do not provide guidance on how to demonstrate the auditor’s thought process in reaching the conclusion in the audit documentation, and recommended the IAASB to expand the guidance in this regard.
In addition, we suggested the IAASB to develop non-authoritative guidance relating to the use of automated tools and techniques in the context of the proposed ISA 500 (Revised), in a way similar to the IAASB’s technology FAQ on the use of automated tools and techniques in a risk assessment under ISA 315 (Revised 2019).
The IAASB expects to approve ISA 500 (Revised) in June 2024.
The IAASB’s proposed Part 10 Audits of Group Financial Statements of the Proposed ISA for LCE and Proposed Conforming Amendments
The proposed Part 10 is intended to form part of the ISA for LCE. Given stakeholders’ feedback, the IAASB incorporated audits of less complex groups as part of the ISA for LCE, which were not included in the original scope of the proposed ISA for LCE.
The Institute welcomed the IAASB’s decision to include group audits in the application of the LCE standard, but expressed concerns that the proposals prohibit group audits when component auditors are involved, other than in limited circumstances when physical presence is required.
Our responses stressed that the presence of a component auditor is not always a driver for complexity. In Hong Kong, it would be common for non-complex groups to have subsidiaries situated in Mainland China or overseas. Meanwhile, using component auditors could enhance the efficiency and effectiveness of the group audit, such as eliminating the travelling needs and leveraging the component auditors’ knowledge on the overseas environment and legal requirements. Accordingly, we recommended the IAASB to consider, in the context of group audits under ISA for LCE, to
- Allow the use of component auditors in case of restricted access to the component due to laws and regulations; and
- Develop guidance for the group auditor to overcome access restriction to the component in the absence of component auditors.
With respect to the proposed group-specific qualitative characteristics, we expressed our concerns on the drafting of “access to information or people” and “consolidation process” in the proposals:
- Given that ISA for LCE allows the use of component auditors in limited circumstances, we suggested the IAASB to re-consider the drafting on whether access to information and people could be provided by the component management in addition to the group management, for alignment with ISA 600 (Revised).
- In practice, it would be common for entities or business units not in the same territory as the group to have different accounting policies or reporting period-end from that applied by the group financial statements. It would also be common for simple and less complex groups to have one or more than one sub-consolidation. Accordingly, we recommended the IAASB to re-consider the examples to a “simple consolidation process” in the proposed application material which would have excluded the above situations.
The IAASB expects to approve the proposed Part 10 at the same time as the remaining parts of the proposed ISA for LCE in September 2023.
The IESBA’s proposed Revisions to the Code Addressing Tax Planning and Related Services
The proposed revisions to the International Code of Ethics for Professional Accountants (including International Independence Standards) (the Code) strengthen the ethical expectations for professional accountants (PA) in business and in public practice when performing tax planning (TP) activities for employing organizations or providing TP services to clients. The revisions provide practical guidance to assist PAs in navigating situations of uncertainty when carrying out TP activities.
In our comment letter, we supported the IESBA’s approach to address TP and related services by creating two new, Sections 280 and 380, in the Code. However, we pointed out that the proposed requirement to obtain an understanding of, and advise the employing organization or client to comply with anti-avoidance rules would not always be practicable, for example, when a PA is involved in advising a client who wishes to challenge an interpretation of the rules by the revenue authority.
In addition, we suggested that the definition of “regulations” should be made clear. The revenue authority may have a stated practice that is not necessarily explicitly stated in the law. In our view, reference should be made to “established practices” in relation to determining whether there is a credible basis for a TP arrangement, because where the law is silent, unclear or ambiguous, there may be a body of established practice that provides a credible basis for a TP arrangement.
We also expressed concerns on the proposed “stand-back test”. We pointed out that there would be a wide range of stakeholders to a TP arrangement and they would not all have the same views and perceptions. It would be nearly impossible for a PA to determine those views and how much weight should be given to each. Accordingly, we suggested this provision to simply point out that there could be reputational, commercial and wider economic implications associated with a particular TP arrangement, which a PA should be aware of and should consider, as appropriate.
The IESBA anticipates to approve the final pronouncement in December 2023.
This article was contributed by the Institute’s Standard Setting Department.
