All change (again) on Auditing Standards

Just this month (October 2009) the Auditing Practices Board issued a whole new set of ISA’s. This was as a result of the IAASB (the international board) issuing their revised ISA’s following their clarification project. These new standards apply for periods beginning on or after 10 December 2010.

What does this mean for your standards? Well, firstly they’ve all been ‘clarified’. That means each standard:

  • has an overall objective clearly stated
  • has separate Requirements & Application sections
  • has the required work prefaced by the word ‘shall’ rather than ‘should’
  • has had other ambiguities in the language taken away

Our UK versions of these standards are slightly different in that they:

  • have extra requirements to bring the standards in line with UK legal requirements included in a grey shaded box
  • do not adopt ISA 700 on Audit Reporting. We have kept our own version but we can still state that our audits have been done in line with the full ISA’s as the requirements of our standard are so similar

The key changes are that 2 new standards have been added and twelve existing standards have been changed, three of these existing standards have had significant changes, according to the APB’s own Staff Paper on the changes.

New Standards

1. ISA 265: communicating deficiencies in internal control to those charged with governance & management

Basically if there’s a control that’s no good in stopping misstatements or if there isn’t a control in place at all then let those responsible for governance know. Also let those responsible for management know. It sounds simple enough but as always there are lots of words to plough through before you come around to the conclusion that you’d probably do that anyway!

2. ISA 450: evaluation of misstatements identified during the audit

It’s both individual and cumulative errors that can be material. No change there then. Interestingly though the standard tells us that we should reassess the materiality level at the end of the audit as our judgement of the figure may have changed.

We should also state a de minimis limit below which we would think any error would be ‘trivial’ and therefore not worth considering even in our cumulative list of individual errors. This limit should be documented.

We should also document all other misstatements regardless of whether they are corrected or not.

This standard links in with the revised standard 320 on Materilaity

Revised Standards with a significant changes

1. 540:Fair Values & Estimates

The idea behind this one is to provide guidance on how to audit areas where management may have been creative with their estimates, including fair value estimates. The changes were driven by the problems of management bias in providing estimates that may have been beneficial to them personally or to their company.

The standard focuses on the auditor using professional scepticism when reviewing these estimates, including looking back at historical estimates and how they have actually turned out in reality.

2. 550: related Parties

The background to these changes is that recent financial scandals have often involved related parties being engaged in inappropriate transactions with companies. The emphasis is on the auditor taking a nmore rigorous approach to identifying both the parties and the types of transactions they are involved in, paying particular care to those transactions outside the entity’s normal business.

3. 600: Group issues

This one looks at the difficulties involved in auditing a group of companies, in particular when you don’t audit all of the subsidiaries. The group auditor will need to consider how involved he can be or needs to be with the auditors of components. He also needs to think about the existence of group-wide controls that may reduce the need to rely on the work of component auditors.


All in all there’s a lot to read through, but you can focus your initial reading on the above five areas and then eventually get in to the other nine amended standards and before you know it it will be Christmas 201o. Happy reading…


We all depreciate

You may have an idea what the word ‘depreciate’ means. It’s used to describe the fall in value of something and it’s that fall in value that we focus on when we use the word. So, for example, if you buy a car you may talk about how much it has ‘depreciated’ over the past 6 months. In other words your focus is on how much value it’s lost in that period.

In preparing financial statements we use the same idea and we focus on the spreading of that fall in value over the time that we use the asset. We allocate the fall in value to each period that we are preparing accounts for and we show that fall as a cost of running the business in that period. This cost is shown in our Profit & Loss Account (or Income & Expenditure Account in the public sector)

Fixed Assets

We depreciate ‘fixed assets’. Fixed assets are those things that we buy with the intention of keeping for the long term, say for example a computer for one of our managers. Some examples of items that are and aren’t fixed assets are as follows:

1. Cash: not a fixed asset as we hold this to spend, not to keep

2. A debtor (a customer who owes us money): not a fixed asset as we are owed this money by a customer and our intention is to receive the money from them as soon as possible.

3. A van: a fixed asset as we own this to use it in our business making deliveries.

4. A building: a fixed asset as we own this to run our business from.

5. A piece of stock (goods for resale): not a fixed asset as our intention is to sell the goods.

So we will depreciate items 3. & 4. in our accounts.


Let’s say we bought a van for £12,000 and we expected it to last 3 years. We expect that it will be worth nothing when we have finished using it at the end of year 3. We have made these estimates based on the fact that we have used a number of similar vans in the past that lasted us 3 years and were worth nothing when we’d finished with them.

We would therefore depreciate the van £4,000 each year (12,000/3). In each year’s Profit & Loss (Income & Expenditure) we would see a charge of £4,000. The same amount each year. If we were preparing monthly accounts, we would see £333.33 (4,000/12) in each month’s accounts.


For the non accountant it may seem strange that we charge the same depreciation each year. ‘Surely it depreciates more in the first year?’ says the non accountant. And if by that we mean ‘Surely it loses more market value in the first year’ then the comment is spot on. But, and here’s the difference in the way we as accountants use the word, we’re not trying to measure how much its market value has fallen. Remember that a fixed asset is something we have to keep and use in our business. Its market value is therefore not relevant to us.

What is more relevant to the accountant is that the business will be able to use the van for as many deliveries in the first year of owning it as they will be able to in the second year and the third year. Therefore the cost of the depreciation needs to be evenly spread across all 3 years. It’s true that the servicing and maintenance may be higher in years two and three, but those additional costs will also be added in to our Profit & Loss Account (Income & Expenditure) in addition to the depreciation.

The normal way of charging depreciation to the Profit & Loss Account (Income & Expenditure) is to spread the depreciation evenly over the period of ownership. This is called ‘straight line depreciation’. There are other methods that can be used where the business benefits more from the asset in some periods compared to others, but these are rarely used in practice.


So there it is, the process of depreciation spreads the cost of a fixed asset through the Profit & Loss Account (Income & Expenditure) evenly over the period that the organisation uses the asset. If you are using management accounts and you are responsible for fixed assets you will see a monthly charge for depreciation of these assets.  

The accountant is more concerned with allocating the cost of the van (or any fixed asset) to the periods over which it is used.

Final points to watch for

Some practical points that may be helpful:

1. Even if you have fixed assets in the department you manage, the depreciation charge may not appear in your management accounts. This will often be the case if you don’t have responsibility for buying fixed assets.

2. Not all fixed assets are depreciated. Investments can be classified as fixed assets and they will not be depreciated. Also, land is never depreciated.

3. You may sometimes hear the term ‘amortisation’ being used. This is like depreciation for ‘intangible fixed assets’. This is a fixed asset that you can’t touch.

An example of this would be where you had bought the legal right to make commemorative mugs for the 2012 Olympics. Let’s say the right to make the mugs lasted from 2010 to 2012 (3 years) and the British Olympic Association had sold you the right to use their logo on your mugs for £300,000. This legal right will benefit our business for 3 years and at the end of this period will be worth nothing. Therefore we should spread the cost of this over 3 years. We could spread it evenly over the three years and charge £100,000 to each of the three years. The legal right is called an intangible fixed asset and the cost of £100,000 charged each year is called amortisation.

That accruals thing

I was thinking the other day that if a man is an ape that can walk upright, then an accountant is a man who can use the accruals principle. It’s an evolutionary thing!

This accruals idea keeps accountants in business, it leads to them producing reams and reams of accounting rules and regulations and keeps the rest of the world in awe of them and the strange adjustments they make to their figures.

The idea is that expenses and income show up in the Profit and Loss account (or Income & Expenditure statement in the public sector) in the period when they are incurred or earned. It works the same way as your credit card statement. I’ve just got mine for August this year. It looks a bit like this:

  • P&O Ferries                                                                     38.00
  • La Forge de Ste Marie                                                137.48
  • Aire de Jacques Tattie                                                 75.30
  • Cafe de Marcelle                                                             48.15
  • Camping Chateau de Poinsouze                              115.32

That’s right, I went to France on my holidays in August and very nice it was indeed, by the way. We particularly enjoyed the camp site at the Chateau de Poinsouze in the Limousin where the faciulities were of the highest standards (very important to me and the wife).

The thing is that I won’t pay for these expenses until the end of this month or the start of next month. It may be that I even put off paying some of it until November but whenever I get around to paying it the fact of the matter is that I incurred those costs in August. So if I was doing a Profit & Loss account for La famille Carlyle (that’s French for the Carlyle family), which month would I put these expenses in? Does it make a difference when I pay for them?

The answer is that it makes a difference to my cash flow when I pay for them, but it wouldn’t make any difference to my Profit & Loss/Income & Expenditure statement because I incurred the costs in August and therefore they should appear in August’s P&L/I&E. The reason is that I got the benefit from these things in August; that’s when I used them and that’s when I enjoyed them. If my P&L/I&E is telling the story of what I did (how I ‘performed’) in August then it should show that I incurred some expenses relating to my French holiday in August’s P&L/I&E.

It’s a good job that I don’t actually produce a P&L/I&E for the family, but the idea outlined above is the one that all businesses and public sector organisations struggle with every month end. That is, they want to make sure that their P&L/I&E records the activity that has taken place in the month as opposed to the amount of cash they’ve spent.

UK GAAP: who still uses it?

From this fiscal year most of the public sector will be producing IFRS compliant financial statements (the Local Authorities have a further year’s grace and don’t need to produce IFRS accounts until 2010/11). That means that the following groups of organisations now use IFRS:

Companies quoted on UK Stock Exchange

Companies quoted on AIM

Public sector organisations (from 2009/10)

Local Authorities (from 2010/11)

Any other organisation that chooses to do so voluntarily

So who still uses UK GAAP? Well, many subsidiary companies of IFRS filers still prefer to keep their ledgers under UK GAAP and file accounts this way. Then there are all the private companies and public companies not in the above categories.

The UK Accounting Standards Board is also currently considering whether to adopt the International Financial Reporting Standard  for Smaller Entities (IFRSSE). A paper was published in August 2009 and the thinking is that this could come in from 2012 or 2013.

The IFRSSE is much wider than the UK FRSSE as the International version covers organisations that:

(a) do not have public accountability; and

(b) publish general purpose financial statements for external users.

There are no financial size limits on who could use it as there are for the UK FRSSE. The structure of GAAP that UK companies would use IF this came in would be:

IFRS for AIM & Quoted

IFRS for other ‘publicly accountable’ e.g. Investment trusts, building socs

IFRSSE Non publicly accountable companies

UK FRSSE small co’s!!!!!

This would be a little bit confusing perhaps for users and preparers alike but brilliant news for training companies like mine. ‘Every cloud…’ as they say.


Companies Act 2006 implementation

The last tranche of the Companies Act 2006 is due to be implemented in October 2009. This is the last of seven different implementations of the Uk’s largest piece of legislation.

The changes being introduced in this block include the following areas:

Registrar’s powers


Change of constitution

Treatment of name

Change of name

Directors’ service addresses

This has been a very long period of implementation, but then it’s a very big staute. Happy reading (or better still let me come and do a half day update for you)!



Codification of US GAAP

For those of you using US GAAP, the new ‘Codification’ goes live for any financial statements produced post 15 September 2009. What the standards setting authority in the US have done is taken all the thousands of pieces of guidance from the various sources and put them in to a ‘one stop shop’ document called the ‘Codification’. Instead of having to look at the FAS’s (some of which had been partially updated by other FAS’s!), Bulletins, EITF statements and Statements of Position by various bodies, the rules will all be contained in this one new codification document.

In addition, if you go to the site of the FASB ( you will be able to subscribe to their service to help you find your way around the new document. I haven’t used this service myself yet but it aims to allow users to quickly access all the rules relating to a particular area, say for example ‘impairments’.

The new Codification is split in to about 90 ‘Topic’ areas numbered in blocks from 100 to 900. The first block is for the concepts and currently starts on number 105.

Hopefully this will make life a lot easier when researching US GAAP items.