Most auditors welcome the opportunity to assist their clients in implementing new financial reporting requirements. But while a certain measure of assistance may be reasonable, auditors need to be mindful that there will be a stage where the auditor has provided so much input into the process that by the time they audit the results, they end up ‘marking their own homework’. This raises obvious independence problems and may diminish the value of the audit.
As business becomes more complex accounting standards become more complex and as such, those responsible for the preparation of the financial statements may need some help in applying the new financial reporting requirements. An example is calculating an expected credit loss allowance in terms of IFRS 9 Financial Instruments and applying the new lease requirements as contained in IFRS 16 Leases. The company’s auditor is naturally the first person to turn to for assistance because the accounting staff already have a relationship with their auditor and because the auditor has experience not only of that company but also of multiple companies that have had to implement the new financial reporting requirements.
According to the requirements contained in the International Standards,1 the Auditing Profession Act 26 of 2005, the Companies Act 71 of 2008 and the IRBA Code of Professional Conduct for Registered Auditors (Revised November 2018)2 (IRBA Code), auditors are required to be independent of the client when performing an audit, review and other assurance engagements. This becomes especially difficult for auditors serving small-to-medium-sized clients as they often have limited resources, including specialist skills, and are therefore more likely to require assistance with understanding highly technical accounting standards.
An important rule which can be found in the IRBA Code3 requires that an auditor shall not assume management responsibilities. This includes the preparation of financial statements. The auditor is therefore allowed to assist but should not cross the line in assuming any management responsibility for the output, in this case the preparation of the financial statements.
In an article in The Journal of Accountancy on how auditors can maintain independence when advising on revenue recognition, Ken Tysiac states that auditors are allowed to provide advice, research materials and assistance to help management make decisions.4 However, a practical example or detailed steps on how to perform the calculations provided by an auditor to their client may not be appropriate. In the event of the auditor providing the client with a practical example, the only likely difference will be found in the client’s numbers in place of the example. If the auditor is to provide the client with a calculation, this will result in the auditor auditing their own work. In both instances, a self-review threat will be created for the auditor.
In terms of providing a client with assistance, an auditor should be limited to clarifying the requirements of the actual standard and possibly pointing out more resources, if necessary.
In addition, in accordance with the IRBA Code,5 the requirement that independence should not only be regarded in ‘mind’ but also in ‘appearance’ means that the way the auditors’ involvement in the reporting process is perceived is also important. Auditors have therefore started referring clients to technical experts to assist them with the newly issued accounting standards to ensure independence in both mind and appearance is maintained.
The audit committee of a company plays an important role here in ensuring that the assistance provided by auditors is limited, as indicated above, and that the line has not been crossed. It is management’s responsibility to ensure that the company either has in-house or access to adequate technical resources to prepare financial statements that comply with the reporting standards.
Auditors and their clients must therefore be mindful of the need to maintain independence to ensure high-quality audit work. The factors noted above provide guidance on an acceptable level of involvement by the auditors while maintaining their independence.
1 International Standards on Quality Control and International Standards on Auditing issued by the International Auditing and Assurance Standards Board (IAASB) and adopted, issued and prescribed by the Independent Regulatory Board for Auditors (IRBA) for use by registered auditors, available at https://www.irba.co.za/guidance-to-ras/technical-guidance-for-auditors/auditing-standards-and-guides/handbooks-of-international-standards.
2 IRBA Code of Professional Conduct for Registered Auditors (Revised November 2018) (IRBA Code), paragraph 8, available at https://www.irba.co.za/guidance-for-ras/ethics:-the-rules-and-the-code/the-irba-code-revised-2018.
3 Ibid, section 600, Provision of non-assurance services to audit clients.
4 K Tysiac, How auditors can stay independent while advising on revenue recognition, Journal of Accountancy, 14 December 2019, https://www.journalofaccountancy.com/news/2019/dec/auditor-independence-while-advising-on-revenue-recognition-201922520.html.
5 Definition of ‘independence’ included in the IRBA Code.
AUTHORS | Henk Heymans CA(SA), Head of Audit at RSM South Africa; Shruti Maharaj, Audit Supervisor at RSM South Africa; and Dianne Anyango, Audit Supervisor at RSM South Africa