ASSOCIATION OF INTERNATIONAL ACCOUNTANTS



ASSOCIATION OF INTERNATIONAL ACCOUNTANTS

Response to: International Auditing and Assurance Standards Board Consultation on Auditing Complex Financial Instruments

Submitted: 15 January 2010

Introduction

These comments are submitted by the Association of International Accountants, with input from a technical committee. AIA would like to thank John Dunn for his input in this response.

About AIA

The Association of International Accountants (AIA) was founded in the UK in 1928 as a professional accountancy body and from conception has promoted the concept of ‘international accounting’ to create a global network of accountants in over 85 countries worldwide.

AIA is one of six statutorily Recognised Qualifying Bodies (RQBs) in the United Kingdom for statutory auditors under the Companies Act 2006. The AIA professional qualification is recognised throughout the European Union and in other major financial centres around the world.

AIA promotes and supports the advancement of the accountancy profession both in the UK and internationally. The AIA exams are based on International Financial Reporting and International Auditing Standards and are complimented by a range of variant papers applicable to local tax and company law in key jurisdictions together with an optional paper in Islamic Accounting.

AIA members are fully professionally qualified to undertake accountancy employment in the public and private sectors; members in public practice are therefore concerned with the preparation of accounts and tax returns and in advising clients on taxation matters.

AIA Response to the IAASB Consultation Paper - Auditing Complex Financial Instruments

AIA welcomes the opportunity to comment on this paper. The IAASB provided a detailed set of questions and the AIA’s responses are provided below.

1. Do you agree with the IAASB’s overall approach for revising IAPS 1012, in particular the usefulness of the APB’s work as a starting point for the revision of an international auditing practice statement?

AIA believes that the APB’s work is a suitable starting point for the IAASB’s guidance in this area.

2. What are respondents’ views as to the overall structure and content of the Practice Note? In considering this question, respondents are asked for views about the level of detail of the APB’s Practice Note, including the length and flow of the document, and its suitability in an international context.

The Practice Note is very long. That may be inevitable given the complexity of the subject matter. AIA notes, however, that much of the content is pitched at a level that implies little or no prior knowledge or experience of the audit of financial statements. Arguably, an auditor who requires guidance at this level should consider whether it is appropriate to be auditing an entity that makes use of complex financial instruments.

3. If respondents think the Practice Note is insufficient, in what areas should the IAASB consider including additional guidance in revising IAPS 1012? Specific examples as well as the rationale for a particular suggestion would be helpful.

The Practice Note appears to be intended to provide auditors with a broad introduction to the issues arising from the audit of complex financial instruments rather than necessarily providing a detailed “master class” for those who are actively engaged in the audit of such instruments.

4. Are there currently any national standards or guidance in your particular jurisdiction that should also be considered by the IAASB in revising IAPS 1012?

AIA is not aware of any such guidance.

5. Is the Practice Note clear on what is meant by the term “complex financial instruments”? If it is not, how could the definition and illustrative examples be improved, bearing in mind the evolving nature of these instruments?

AIA believes that the guidance provided is sufficiently clear. Given that the purpose of the document is to alert the reader to the potential risks associated with the audit of such instruments, it is unlikely that there will ever be a great need for the final document to be particularly prescriptive in this regard.

6. Is the guidance included in paragraphs 9-12 of the Practice Note helpful in explaining its applicability to audits of entities of all sizes? If not, should such guidance be deleted or expanded in revising IAPS 1012; if so, how?

AIA believes that it is helpful to indicate that the audit issues associated with complex financial instruments are not necessarily restricted to the audits of banks or major multinational corporations. In a sense, the target readership probably does need this level of guidance. Audit firms could be exposed to substantial risks if they accept engagements from clients who have taken positions by means of instruments that they do not fully understand.

7. Throughout the Practice Note, examples of how the guidance can be applied in a range of entities – from smaller entities to larger financial institutions – have been included. Do respondents believe the guidance is adequately balanced, or would a revised IAPS 1012 be more helpful if focused at a different level?

As indicated above, AIA believes that this Practice Note is aimed at auditors who have very little experience of the audit of entities who use complex financial instruments. An advanced-level Practice Note that was intended to lay out best practice for auditors with an active interest in this area would really require a further document.

8. Many of the considerations described in the Practice Note can also be applied to simpler financial instruments. Would it be more appropriate in revising IAPS 1012 for the guidance to be developed to apply to all financial instruments rather than limiting it to complex financial instruments?

AIA does not believe that there is a problem. Given that complex financial instruments create their own particular problems it may well distract the reader’s attention if the document was given a broader remit.

9. Are the types of risks described in paragraph 59 of the Practice Note understood across a number of industries and applicable in an international context?

AIA does not believe that the risks associated with complex financial instruments are necessarily well understood. Having said that, the guidance offered in paragraph 59 is potentially extremely valuable. A reader who does not fully understand all of the issues raised will, at least, be alerted to the gap in his or her knowledge.

There may well be national differences in capital markets and legal systems that would affect the availability of and rights and obligations associated with complex financial instruments, but the broad issues of types of risk remain.

10. Is the guidance in paragraphs 64-84 (particularly related to information systems, control activities, and monitoring of controls) helpful for auditors in obtaining an understanding of controls for a financial statement audit? Is the guidance helpful for audits of entities that have smaller portfolios of complex financial instruments?

AIA’s only real concern in this regard is that this material may well leave some readers with the mistaken impression that the guidance does not really apply to them because they are dealing with an entity that has relatively modest activities. It may well be of some value to the auditors of smaller entities because they will at least be aware of the implications of a client developing an interest in complex instruments.

11. Is the guidance on substantive procedures in paragraphs 105-108 of the Practice Note helpful to auditors? Are there other procedures that should be considered in revising IAPS 1012?

AIA believes that the guidance is helpful because it underlines the need for some substantive procedures.

12. Are there additional issues or best practices relating to the auditor’s application of the audit risk standards that have been noted that should be included in revising IAPS 1012?

AIA believes that it would be difficult to provide any greater indication of best practice because this is an area that changes rapidly. It is also one where management may have rather dubious motives for taking positions and so any general guidance could prove insufficient in any given set of circumstances.

13. Is the additional guidance included in the Practice Note helpful for auditors in obtaining sufficient appropriate audit evidence in relation to complex financial instruments?

AIA does not believe that it is either necessary or appropriate to provide any additional guidance. The Practice Note serves a worthwhile end in itself.

14. Is the additional guidance relating to the valuation assertion applicable to most complex financial instruments? Are the concepts in this section easily understood and relevant in an international context?

AIA believes that the three headings are generally applicable. Clearly, the application of those headings will vary considerably.

15. Would it be helpful to include more generic guidance describing concepts such as broker quotes, the different types of pricing services that may be used, and other forms of evidence and cite examples of how this information is typically gathered and in what particular circumstances?

AIA’s concern is that such guidance may not be applicable internationally and that it may be misunderstood. The practice note equips auditors with the basic information that they require.

16. Is the guidance on the use of models, from both a preparer and auditor perspective, sufficient? If not, what further guidance could be added and why?

AIA believes that the Practice Note goes as far as is reasonably practical in this regard. The models themselves are potentially contested and open to misunderstanding. The danger is that any further guidance will prove unduly restrictive because it will be at risk of quickly becoming outdated.

17. Is the Practice Note sufficiently clear that the issues relating to valuation and the types of risks involved in financial instruments apply equally to financial assets and financial liabilities or should more guidance be added about financial liabilities?

AIA believes that the introductory remarks in the Practice Note provide sufficient background for this issue to be understood.

18. Are there additional issues or best practices relating to the auditor’s need to obtain sufficient appropriate audit evidence that have been noted that should be included in revising IAPS 1012?

AIA believes that there is sufficient guidance in the Practice Note and, indeed, in the ISAs themselves.

19. Is the guidance included in the Practice Note on disclosures helpful?

AIA does not believe that the Practice Note is impaired by this material, although it is somewhat superfluous given the IFRS guidance.

20. Is more guidance needed on the audit of disclosures? For example, is more guidance needed to address how the auditor would obtain sufficient appropriate audit evidence when the disclosures about risks and uncertainties are qualitative in nature or the information is derived from information systems that are not otherwise used to generate information for inclusion in the financial statements? How should the IAASB deal with these areas in revising IAPS 1012, while ensuring the framework neutrality?

AIA believes that it is sufficient for the Practice Note to guide auditors on the audit implications. Any guidance on the disclosures that are necessary in the financial statements should really be a matter for the IASB.

21. Is the guidance included on communication with those charged with governance helpful? Is there scope for adding additional guidance on the auditor’s communications with those charged with governance with respect to valuation and control issues that come to the auditor’s attention?

AIA believes that the guidance is helpful. If anything, the brevity of the points listed ensures that each of the areas can be considered on its merits without being overshadowed.

22. Are there best practices relating to auditor’s communications with regulators, prudential supervisors and others, for example, where such communication or reporting is required by law or regulation, that should be acknowledged in revising IAPS 1012?

Again, the AIA’s concern is that such guidance will not necessarily help in guiding an international readership, given the range of governance and regulatory systems in force.

23. Would further guidance on the possible implications for the auditor’s report when auditing complex financial instruments be helpful? For example, this could include guidance on the use of Emphasis of Matter paragraphs, Other Matter paragraphs and limitations on the scope of the audit.

AIA believes that this is covered in sufficient depth in existing auditing standards.

24. Is the use of an Overview section helpful or is such a section duplicative?

This is clearly a matter of house style, although the AIA believes that the Overview section as it stands serves a useful function in signposting some of the key issues that are expended on later in the Practice Note.

25. For the areas noted above, is the level of guidance included in the Practice Note helpful?

AIA believes that the Practice Note is useful and that it could serve a useful purpose if adapted slightly and published for a wider readership.

26. Are there any issues that may arise with the Practice Note from a translation perspective?

AIA is not aware of any such issues. The fact that the Practice Note is written in a fairly general way helps because it avoids the risks associated with attempting to translate complicated terms of art.

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