IFAC's SMP Related Activities
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This document summarizes Giancarlo Attolini's presentation on IFAC's support for small- and medium-sized practices (SMPs) in implementing international standards. It discusses IFAC's SMP Committee and their role in providing input and guidance to SMPs. It also summarizes insights from IFAC's SMP Quick Poll on challenges facing SMPs and their clients. Finally, it provides an overview of proportional application of international standards like ISAs and ISQC1 for SMPs.
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IFAC's SMP Related Activities
- 1. IFAC’s SMP Related Activities Supporting SMPs & International Standard Implementation Giancarlo Attolini, Chair, SMP Committee IBRACON Sao Paulo, Brazil August 19, 2014 Page 1 | Confidential and Proprietary Information
- 2. Page 2 | Confidential and Proprietary Information Agenda • IFAC & SMP Committee • Global Knowledge Gateway • Insights from IFAC SMP Quick Poll • Proportionality of ISAs and ISQC1 – ISA 200, 210, 315 • New Guide to Review Engagements • Resources
- 3. IFAC Overview Strengthening Organizations, Advancing Economies Page 3 | Confidential and Proprietary Information
- 4. Page 4 | Confidential and Proprietary Information IFAC SMP Committee—Overview I • To represent interests of SMPs • Comprised of 18 members from 17 countries • Regular input to policy, regulation, and international standards • Develops tools and guidance • Promotes the visibility and recognition of SMPs
- 5. Page 5 | Confidential and Proprietary Information Input to Standards (IAASB & IESBA) • Robust and regular input on key projects – Recent Comment Letters include: – IAASB Auditor Reporting Exposure Draft (March 2014) – IAASB Proposed Strategy 2015-2019 and Work Plan 2015-2016 (April 2014) – IESBA Strategy and Work Plan 2014-2018 (March 2014) – Quarterly Agenda Papers – current IAASB projects on its Strategy and Work Plan, Auditing Disclosures, Auditor Reporting and IESBA on Structure of the Code, Long Association, Non Assurance Services
- 6. Page 6 | Confidential and Proprietary Information SMP Committee—Publications
- 7. Page 7 | Confidential and Proprietary Information Global Knowledge Gateway Support for Professional Accountants • News, views, resources, thought leadership – Access global resources – Learn about emerging areas – Stay connected to pressing news – Exchange views, make recommendations, share information and resources
- 8. Page 8 | Confidential and Proprietary Information Support for Professional Accountants Global Knowledge Gateway • Business reporting • Ethics • Financial leadership & development • Governance • Performance and financial management • Risk management & internal control • Sustainability • Audit & assurance • Practice management
- 9. Insights from IFAC SMP Quick Poll I • Latest poll Nov-Dec 2013 attracted over 3,700 Page 9 | Confidential and Proprietary Information respondents • Report at www.ifac.org/publications-resources/ifac-smp-quick- poll-2013-year-end-round • Poll was conducted in 17 languages • Responses are heavily skewed in favor of practitioners from Europe and Asia working in smallest categories of practice
- 10. • What is the biggest challenge faced by your SME clients? Page 10 | Confidential and Proprietary Information Insights from IFAC SMP Quick Poll II 5% 3% Economic uncertainty 18% 15% 15% 14% 9% 8% 13% Difficulties accessing finance Pressure to lower prices of their products and services Rising costs Lack of demand for their products and services Compliance with regulation Competition Attracting and retaining staff Other
- 11. Insights from IFAC SMP Quick Poll III • What is the biggest challenge your practice is facing right Page 11 | Confidential and Proprietary Information now? 24% 21% 15% 5% 6% 7% 7% 5% 7% 2% 2% Attracting and retaining clients Pressure to lower fees Keeping up with new regulations and standards Attracting and retaining staff Competition Work-life balance Rising costs Other Ability to adapt to changing client needs Keeping up with new technology Succession planning
- 12. Insights from IFAC SMP Quick Poll IV • What is the fastest growing source of revenue for your Page 12 | Confidential and Proprietary Information practice? 33% 23% 17% 21% 6% Accounting, Compilation, and Other Non-assurance/ Related Services Audit and Assurance Advisory/Consulting Services Tax Other
- 13. • What is the main driver of your practice’s profitability? Page 13 | Confidential and Proprietary Information Insights from IFAC SMP Quick Poll V 34% 2% 33% 9% 11% 9% 2% Acquisition of new clients Better retention of existing clients Increased productivity Reduced overheads Increased average fee size Other Better utilization of working capital and other assets
- 14. Insights from IFAC SMP Quick Poll VI • How does your practice expect business to be in 2014 Page 14 | Confidential and Proprietary Information compared to 2013? 47% 22% 31% About the same Better than this year Worse than this year • Next Quick Poll October 2014
- 15. Page 15 | Confidential and Proprietary Information Structure of the ISAs • New structure in which information is presented in separate sections: Introduction, Objective, Definitions, Requirements and Application and Other Explanatory Material • Emphasis on professional judgment, the standards are principles based which allows practitioners to tailor audit procedures • Contain special considerations for smaller entity audits • Some ISAs only apply to larger entity audits • Many requirements may not be relevant to SME audits
- 16. Page 16 | Confidential and Proprietary Information Why reading all the ISAs is critical • SMPs need to understand all the ISAs so you can: – Tailor them to the specific circumstances of your practice – React appropriately to unusual circumstances – Communicate effectively with your clients – Reduce engagement risk – Make your audits as efficient as possible
- 17. Page 17 | Confidential and Proprietary Information Proportional Application – ISA 200 • ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing – The practitioner needs to comply with all ISAs relevant to the audit and with all requirements in ISAs relevant to the audit – A complete knowledge of all the standards is essential in order to make a professional judgment as to what to leave out – Not all ISAs are relevant to every audit as the standards are designed to cover audits in every situation globally.
- 18. Page 18 | Confidential and Proprietary Information Proportional Application – ISA 210 • ISA 210 Agreeing the Terms of Audit Engagements – Paragraph 6, agreeing the terms of engagement with management and paragraphs 9 and 10 which require you to communicate the terms in writing to management in a letter will be applicable in every engagement – Paragraphs 7 and 8 deal with an imposed scope limitation and the situation where the preconditions do not exist. Paragraphs 14 – 17 deals with changes to the terms of engagement in mid-audit and paragraphs 18 - 21 the situation where laws and regulation supersede the ISAs • It is important to know what the requirements are, but these situations are also likely to be far and few between for most SME audits
- 19. Page 19 | Confidential and Proprietary Information Proportional Application – ISA 315 I • ISA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment – The objective of the auditor is to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels, through understanding the entity and its environment, including the entity’s internal control, thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement. • Focus on Significant risks – effectiveness and efficiency – Understand the business – important from an engagement risk perspective – Identify significant risks up front and focus audit effort on these
- 20. Page 20 | Confidential and Proprietary Information Proportional Application – ISA 315 II • ISA 315 focus on Significant risks – effectiveness and efficiency continued – Substantive tests are required for each material class of transactions, account balances and disclosures, but tests of details only required for significant risks – Consider analytical procedures (follow requirements of ISA 520 Analytical Procedures) for non-significant risk items where appropriate – ISAs explicitly encourage the auditor to exercise professional judgment in determining the form and extent of documentation – they acknowledge extent may vary depending on the circumstances
- 21. Page 21 | Confidential and Proprietary Information Proportional Application of ISAs • Examples of some of the ISAs that would not be relevant in an SME audit include: – ISA 402 Audit Considerations Relating to an Entity Using a Service Organization if the SME does not use a service organization – ISA 510 Initial Audit Engagements – Opening Balances if the SME is a continuing, and not an initial, engagement – ISA 600, Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors) if the SME audit engagement is not a group audit – ISA 610 Using the Work of Internal Auditors if the SME has no internal audit function
- 22. Page 22 | Confidential and Proprietary Information Proportional Application of ISQC 1 • ISQC 1 Quality Control for Firms that Perform Audits and Reviews of Financial Statements and Other Assurance and Related Services Engagements – Applies to firms of all sizes that provide services covered by the IAASB’s International Standards – Requirement for the firm to comply with each requirement of the standard unless, in the circumstances of the firm, the requirement is not relevant to the services provided… – Contains special considerations for smaller practices – Indicates that the form and content of documentation evidencing the operation of each of the elements of the system of quality control is a matter of judgment and depends on the size, nature and complexity of the firm and number of offices
- 23. Page 23 | Confidential and Proprietary Information New Guide to Review Engagements • International Standard on Review Engagements (ISRE) 2400 (Revised) • The Guide to Review Engagements available on www.ifac.org/SMP • Translation in progress in multiple languages
- 24. Page 24 | Confidential and Proprietary Information Uses of Review Engagements Uses Commentary Increased Credibility Independent credibility to the F/S—attract new investors, obtain finance. Enhanced Confidence Provides accountability & confidence to shareholders, management, partners, government agencies and regulators, and other stakeholders. Plan for Success Enables the business to plan for the future—prepares growing business for transition to audit or preparing to sell.
- 25. Page 25 | Confidential and Proprietary Information Benefits of Review Engagements SME Benefits Commentary Alternative to Audit Audit exemptions for small- and medium-sized entities (SMEs) are becoming more prevalent. Less time consuming for client. Lower Cost A review engagement is normally a lower cost for an entity than an audit. Limited Assurance Limited assurance obtained on the F/S as opposed to no assurance with a compilation.
- 26. Benefits of the Guide to Review Engagements Page 26 | Confidential and Proprietary Information Guide Benefits Commentary Extracts from the Standard All requirements from ISRE 2400 (Revised) Tailored Examples and Consider Points Illustrated examples and Consider Points including efficiency suggestions Full Appendix Checklists and forms for adaption Staff Training Day-to-day reference tool for staff—can be used for training Ensure SMP staff develop a consistent approach
- 27. Page 27 | Confidential and Proprietary Information Some Highlights in the Guide from the Practitioner’s Point of View
- 28. Page 28 | Confidential and Proprietary Information Some Highlights in the Guide from the Practitioner’s Point of View Example ‘Documentation’
- 29. Page 29 | Confidential and Proprietary Information References – IAASB • Staff Q&A, Applying ISAs Proportionately with the Size and Complexity of an Entity: http://www.ifac.org/publications-resources/staff-questions-answers-applying-isas-proportionately- size-and-complexity-ent • Staff Q&A, Applying ISQC 1 Proportionately with the Nature and Size of a Firm: http://www.ifac.org/sites/default/files/publications/files/Staff%20QA%20ISQC%201%20Prop ortionality_FINAL.pdf • The Clarified ISAs—Findings from the Post-Implementation Review: http://www.ifac.org/publications-resources/clarified-isas-findings-post-implementation-review
- 30. References – Knowledge Sharing - Implementation • Guide to Using International Standards on Auditing in the Audits of Small- and Medium-Sized Entities (Third Edition) (incl. companion manual and slides): https://www.ifac.org/publications-resources/guide-using- Page 30 | Confidential and Proprietary Information international-standards-auditing-audits-small-and-medium-sized-en • Guide to Quality Control for Small- and Medium-Sized Practices (Third Edition) (incl. companion manual and slides): www.ifac.org/publications-resources/guide-quality-control-small-and-medium-sized-practices- third-edition-0 • Boosting the Quality and Efficiency of Smaller Entity Audits article: https://www.ifac.org/news-events/ 2013-07/boosting-quality-and-efficiency-smaller-entity-audits • Tips for Cost-Effective ISA Application article: https://www.ifac.org/publications-resources/tips-cost-effective- isa-application • Tips for Cost-Effective ISQC 1 Application article: https://www.ifac.org/publications-resources/tips-cost-effective- isqc-1-application
- 31. • IFAC SMP Committee: www.ifac.org/SMP • Follow us on Twitter: IFAC_SMP • IFAC SMP Quick Poll www.ifac.org/smp • Join us on LinkedIn: IFAC SMP Community • Global Knowledge Gateway www.ifac.org/Gateway Page 31 | Confidential and Proprietary Information IFAC Resources
- 32. www.ifac.org/SMP
Editor's Notes
- SMEs and SMPs are an IFAC priority
- 3
- SMPs constitute the vast majority of accountancy practices worldwide. IFAC SMP Committee (SMPC) represents the interests of professional accountants who work in SMPs. Formed in November 2005, it advises and assists IFAC as it executes its strategy in relation to SMPs and SMEs. The SMPC activities fall broadly into three categories: Timely input on matters of relevance – policy, regulation and international standards: SMPC reguarly provides input on international standards, including those on auditing, assurance, quality control, ethics, and accounting, at all stages of their development to help ensure their relevance and proportionality to SMEs and SMPs. Development of tools and resources - to help SMPs best serve their SME clients. For example, two comprehensive implementation guides (ISA and ISQC 1), a practice management guide for SMPs and most recently the Guide to Review Engagements. The Committee collaborates with IFAC member organizations to share and leverage support materials including articles with tools and tips to support practice management and ISA implementation. Promoting the visibility and recognition of SMPs – the Committee members, IFAC leadership and staff speak out on behalf of SMPs to raise awareness of their role and value, especially in supporting SMEs, and the importance of the small business sector overall.
- The IFAC SMP Committee has issued a number of comprehensive publications. Guide to Using ISAs in the Audits of Small- and Medium Sized Entities (ISA Guide) Fundamental concepts of a risk-based audit in conformance with the ISAs Practical guidance on performing SME audits. Includes two illustrative case studies—one of an SME audit and one of a micro-entity audit Guide to Quality Control for Small- and Medium Sized Practices Helps SMPs apply ISQC 1 proportionately and efficiently. Includes guidance, case study, two sample QC manuals and checklists Reference, training, customize manuals and checklists Guide to Review Engagements This guide aims to help professional accountants in practice, especially those operating in small- and medium-sized practices (SMPs), in conducting review engagements in compliance with International Standard on Review Engagements (ISRE) 2400 (Revised), Engagements to Review Historical Financial Statements. Guide to Practice Management Organized into eight stand-alone modules, the Guide provides SMPs with knowledge of practice management principles and best practice guidance on a whole range of practice management topics including: Planning, practice models and networks Building and growing your firm Developing a people strategy Technology and e-business Client relationship management Risk management, and Succession planning
- IFAC also provides knowledge and support to accountants around the world, especially for professional accountants in business and small- and medium-sized practices, which support small- and medium-sized entities. IFAC has long supported initiatives that benefit these constituencies, developing relevant resources and guidance and working with them to raise their profiles and represent their interests. Recently, IFAC launched the Global Knowledge Gateway, a platform designed to bring together news, views, resources, and thought leadership for the worldwide accountancy profession. The Gateway Newly minted global hub Content from IFAC, our member organizations, and other notable groups and individuals The result of a year-long project to answer the call to better leverage IFAC’s position as the global accountancy organization Designed to serve IFAC’s member organizations and the profession by sharing the valuable resources members produce with a broader, global audience of professional accountants Allows professionals to access resources from around the world learn about emerging areas of the profession stay connected to the most pressing accountancy issues and news of the day interact by exchanging views, making recommendations, and sharing information and resources.
- Nine topic areas: Business reporting Ethics Financial leadership & development Governance Performance and financial management Risk management & internal control Sustainability Audit & assurance Practice management
- One of the activities the SMP Committee has undertaken since early 2011 is the IFAC SMP Quick Poll. The intent of the quick poll is to take a snapshot of key issues facing the SMP sector around the world which provides insight into key trends and developments facing both SMPS and their small business clients. The results are critical to IFAC because they provide a deeper understanding of the challenges and opportunities faced by SMPs globally. Responses heavily skewed in favor of practitioners from Europe (45%) and Asia (27%) working in the two smallest categories of practice (sole practitioner and 2-5 professional staff – 61%). Brazil 44 responses – 1.2%. - Thank IBRACON in particular Ricardo Rodil for translating into Portuguese and disseminating the Quick Poll.
- Globally Economic uncertainty (18%) topped the list of challenges faced by SMPs’ small business clients. However, by a smaller margin than in previous editions of the poll. In Brazil: Rising costs - 22% Pressure to lower prices of their products and services - 20% Attracting and retaining staff - 18% Compliance with regulation - 16%
- Globally, the foremost challenges for SMPs were attracting and retaining clients (24%), followed by pressure to lower fees (21%). In Brazil: Attracting and retaining staff – 31% Keeping up with new regulations and standards – 18% Attracting and retaining clients – 18% Pressure to lower fees – 11%
- Globally, Accounting, compilation, and other non-assurance/ related services was reported to be the fatest growing source of revenue by 33% of respondents, some way ahead of audit and assurance (23%). Tax (17%) was least likely to be the fatest growing revenue source. In Brazil it was similar: Accounting, compilation, and other non-assurance/related services – 31% Audit and assurance – 29% Advisory/consulting services – 22% Tax – 9%
- The top two drivers of practice profitability was business from new clients (34%) and better retention of existing clients (33%). In Brazil: Better retention of existing clients – 33% Acquisition of new clients – 24% Increased productivity – 22%
- Globally nearly half the respondents expect that business in 2014 will be the same as it was in 2013. In Brazil – more positive! Better than 2013 – 64% About the same – 29% Worse than 2013 – 7% Next poll: October 2014. It would be great if Brazil could increase the number of its respondents.
- Several of the 36 ISAs will not be relevant to the audit of SMEs and many requirements in relevant ISAs may need only the briefest consideration. Once they have been considered and determined not to be relevant, they can be disregarded year after year unless engagement circumstances change.
- If you don’t know what is there then you will not know what can be left out!
- ISAs acknowledge that the appropriate exercise of professional judgment is essential to the proper conduct of an audit. Professional judgment is necessary, in particular, regarding decisions about the nature, timing, and extent of audit procedures used to meet the requirements of the ISAs and gather audit evidence. However, while the auditor of an SME needs to exercise professional judgment, this does not mean that the auditor can decide not to apply a requirement of an ISA except in exceptional circumstances and provided that the auditor performs alternative audit procedures to achieve the aim of the requirement.
- Why is ISA 210 so long? (58 paragraphs + appendices) The standard needs to cover: 1) Every type of audit engagement 2) Every size of reporting entity 3) Every mix of management/TCWG 4) Every type of reporting framework 5) Every country globally 6) Every form of legal/regulatory regulations To summarize, of the 16 requirements in IAS 210, paragraphs 6, 9 and 10 are critical and will apply in every engagement. For SMPs, knowing they have to deal with 3 main requirements out of 16 is a lot less daunting than considering all 16 every time.
- The objective of ISA 315 is critical and underpins every audit engagement regardless of size. The requirement in ISA 315 is for the auditor to obtain an understanding of the entity and its environment. While the audit considerations underlying this requirement will be equally relevant for both large and small entities, the typically simpler structure and processes in an SME often mean that the auditor may obtain an understanding of the entity and its environment quite readily and document this in a straightforward manner. This is emphasized several times in the ISAs e.g. “Smaller entities may use less structured means and simpler processes and procedures to achieve their objectives” (ISA 315, paragraph A45). ISAs allow for an effective and efficient audit. The ISAs explain that the appropriate audit approach for designing and performing audit procedures depends on the auditor’s risk assessment. For example, in the context of an SME audit where there are not many control activities in the SME that can be identified by the auditor, the auditor may decide that it is efficient to perform further audit procedures that are primarily substantive procedures (ISA 330, paragraph A18).
- ISAs also include useful guidance that assists the auditor in understanding or applying specific requirements in the ISAs in the context of an SME audit. Analytical procedures For example, because interim or monthly financial information may not be available in an SME for purposes of analytical procedures to identify and assess the risks of material misstatement, the auditor may need to plan to perform analytical procedures when an early draft of the entity’s financial statements becomes available (ISA 315, paragraph A10). Documentation For example, “the form, content, and extent of documentation depend on various factors, including the size and complexity of the entity”, and the audit methodology and technology used in the audit (ISA 230, paragraph A2, ISA 315, paragraph A131. “The documentation for the audit of a smaller entity is generally less extensive than that for the audit of a larger entity (ISA 230, paragraph A16). “Documentation may be simple and relatively brief” (ISA 315, paragraph A132). ISAs provide examples of how the documentation in an SME audit can be approached in an efficient and effective manner, e.g. - The documentation of the understanding of the entity may be incorporated in the auditor’s documentation of the overall strategy and audit plan. Similarly, the results of the risk assessment may be documented as part of the auditor’s documentation of further procedures (ISA 315, paragraph A131)
- The auditor need not be concerned with ISAs that are not relevant to the audit. Nevertheless, it is necessary that the auditor understands the scope of each ISA to determine whether it is relevant or not in the circumstances.
- The objective of implementing a system of quality control is the same for all firms regardless of their nature or size. However, this does not mean that all firms have to design and implement exactly the same specific policies and procedures, or policies and procedures at the same level of detail, to achieve the objective and requirements of ISQC 1. Smaller firms will find that effective and proportionate implementation may be best achieved by first studying the provisions of ISQC 1 and then, in light of the nature and size of a firm and the services the firm provides, developing policies and procedures tailored to the firm’s circumstances. The ISQC does not call for compliance with requirements that are not relevant (ISQC 1 paragraph 14). Explains that smaller firms may use more informal methods in the documentation of their systems of quality control such as manual notes, checklists and forms (ISQC 1 paragraph A75). Firms can draw on external resources to meet some of the requirements of ISQC 1. For example, in relation to the requirements of ISQC 1 addressing the need for sufficient personnel with the competence and capabilities to perform engagements in accordance with professional standards, firms may use a suitably qualified external person, for example, when internal technical and training resources are unavailable. Often, this will likely be an effective (and cost effective) way to achieve the aims of the requirements.
- ISRE 2400 (Revised) was issued in September 2012 and comes into effect for periods ending on or after December 31, 2013. The standard addresses the practitioner’s responsibilities when engaged to perform a review of historical financial statements (when the practitioner is not the auditor of the entity) and the form and content of the practitioner’s report on the financial statements. The Guide to Review Engagements was published in December 2013 and provides non-authoritative guidance on applying ISRE 2400 (Revised). It is not to be used as a substitute for reading the standard, but rather as a supplement to support consistent implementation of the standard. Translations underway in: - Bulgaria, ICPAB: Bulgarian - Mexico, IMCP: Spanish - Russia, Russian Collegium of Auditors (RCA): Russian - Sweden, FAR: Swedish - United Kingdom, KPMG: English – reproduction
- SMEs that do not require a statutory audit may still want some degree of independent assurance to increase the credibility of their statements; in which case, a review can be an ideal solution.
- A review engagement may be better suited to the needs of some SMEs and place less strain on the client’s time and resources. It also normally costs less than an audit.
- This Guide is directed primarily at those with knowledge of auditing, but little or no experience with performing review engagements. Checklists & forms in the Guide include: Client Acceptance/Continuance Checklist (Appendix B) Sample Engagement Letter (Appendix C) Checklist for Understanding the Entity (Appendix D) Examples of Analytical Procedures (Appendix E) Going-Concern Events and Conditions (Appendix F) Sample File Completion Checklist (Appendix G) Example of Written Representations from Management (Appendix H)
- IFAC offers a wide host of resources and information related to the latest news within the profession, particularly as it relates to the SMP environment. Links to these various mediums are provided here.