Does size matter?

Intheblack, Jul 2007 by Wong, Jessie

Audit: BECAUSE ITS NEW AUDITING STANDARDS WERE WRITTEN WITH LARGER ENTITIES IN MIND, IT MAKES SENSE FOR THE AUASB TO DEVELOP GUIDELINES FOR THEIR APPLICATION TO SMEs, SAYS JESSIE WONG

FOLLOWING A SERIES OF CORPORATE collapses, the international audit profession experienced significant government intervention. This resulted in the introduction of "force-of-law" auditing standards and the setting up of the statutory Auditing and Assurance Standard Board (AUASB).

The AUASB was charged with the responsibility of redrafting and reissuing the existing suite of auditing standards.

It was also given the strategic direction by the Financial Reporting Council to base the new auditing standards on International Standards on Auditing (ISA) issued by the International Auditing and Assurance Standards Board. As some of these standards are written with large entitles in mind, practitioners from small and mediumsized firms have raised their concerns over these standards and their Impact on audit effort and costs.

A number of initiatives are under way to address these concerns. The International Federation of Accountants' small and medium-sized practices (SMP) committee has embarked on a project to develop a guide for SME audit engagements. The objective Is to help audit practitioners understand and comply with requirements In the ISAs in the case of an SME audit.

In January the UK Auditing Practices Board (APB) issued a consultation paper on the need for an explanatory guide to ISAs for use in SME audit engagements. The APB also Issued draft guidance on smaller entity audit documentation.

Practitioners In Australia share similar concerns. The issue is perhaps of greater relevance domestically given that auditing standards have the backing of law for all statutory audits.

The AUASB recently issued a discussion paper that identifies recent developments affecting the audit of SMEs. The paper includes discussion on assurance levels in the existing audit framework, as well as discussion of audit time and cost. It also sought constituents' views on matters such as the applicability of the existing suite of auditing standards to large listed entitles, as well as small and mediumsized entitles, and the viability of an alternative service (to the traditional audit) for SMEs.

An audit has the objective of providing a reasonable level of assurance that the financial report presented gives a true and fair view of the reporting entity's financial position and performance. If a differential set of auditing standards for SMEs is introduced providing a different level of assurance, this has the potential for creating confusion in the marketplace, thus worsening the expectation gap between providers and users of the audit.

If an alternative service is introduced to replace the (traditional) audit, it's natural to ask what level of assurance this will provide, and to which entitles this service should be available. Also, It is Important to bear In mind when debating an alternative service for SMEs that the needs of those who rely on the auditor's report are met. These include shareholders, credit providers and the Investing community. It is also important when assessing the suitability of any of these alternatives that financial reporting and disclosure requirements are not muddled with Issues relating to the audit.

It is no doubt worthwhile for the AUASB to develop guidance for practitioners on application of the AUASB standards and compliance with requirements in SME audit engagements. On top of the explanatory guidance currently contained In the auditing standards, assistance to practitioners on how to demonstrate compliance with mandatory requirements will be very valuable. This guidance can be contained In a revised AGS 1 048 The Special Considerations In the Audit of Small Entities. Members can send any comments to auditandassuranceOcpaau stralia.com.au. These will contribute to CPA Australia's advocacy activities.

Other relevant reading:

* A discussion paper has been released by CPA Australia that reflects the views expressed by participants at an audit round table about differential auditing. The discussion paper summarises consensus views on topics such as, "Should auditing standards be equally applicable to large listed entities as well as small and mediumsized entities?" and "What considerations should apply to not-forprofit entities?" The discussion paper can be viewed at www.cpaaustralia. com.au/links?1 41 31 _22731

* Following strong member Input through an online survey, CPA Australia made a submission to the AUASB on issues raised in its discussion paper, Auditing Small and Medium-Sized Entities. The submission can be viewed at www.cpaaustralia.com.au/ links?14131_22732

Jessie Wong is CPA Australia's audit and assurance policy adviser