Times are changing - Audit and Assurance
By Craig Fisher - 13 November 2011
To borrow some words of Bob Dylan: “...the times they are a-changin”. Craig Fisher looks at recent changes as they are impacting auditing and assurance of not-for-profit entities in New Zealand.
Audits continue to be the most popular form of independent
assurance requested over financial statements; however, recent
years have seen some very significant changes in auditing both
internationally and in New Zealand. This is, and will continue
to, impact audits of not-for-profit entities. Accordingly it
is important that all those involved, such as the entity governing
bodys', their donors, and other key stakeholders understand the
changes and the implications.
What's changed? - Standards
New Zealand has adopted a new suite of audit standards,
completely replacing the old, which will be applied to all audits
of financial statements. These are mandatory standards that
all qualified accountants are ethically bound to follow when
performing an audit in New Zealand. Failure to do so potentially
exposes the auditor to disciplinary action and ultimately could see
them lose their license to practice.
These new standards are called International Standards on
Auditing (New Zealand), which is a bit of a mouthful, so already
they are more commonly being referred to as ISA (NZ)s. As the name
indicates, these are international standards albeit subject to a
New Zealand review and approval process. In a very few cases
they have had minor modifications to suit the New Zealand
environment. The end result is that we now have a truly
international set of auditing standards in place in New
Zealand. This change was needed to maintain the credibility of
New Zealand's auditing internationally. It also means that New
Zealand is now keeping up with the best of any international
developments in audit standards. These include many steps to
strengthen standards in the wake of various financial disasters
around the world.
Important to note is the fact that the audit standards are
entity neutral, meaning that there is only one set of audit
standards. These apply to all audits of financial statements
regardless of entity type, size, or complexity. There is no
'audit-lite' version. If you want an audit under New Zealand
standards the full suite are applicable.
The good news is that the essential nature of auditing and
approach to an audit of financial statements has remained
fundamentally unchanged under the new standards. However, the
ISA (NZ)s are much longer and more detailed. As a quantum
there are now 36 standards with a total of 700 pages, compared to
28 previous standards with a total of 250 pages. More significantly
though, the new standards are far more prescriptive in the steps
that auditors must undertake in all audits. As a comparison
they include a total of 519 mandatory steps as opposed to only 221
under the old standards.
Many entities being audited will only see some of these changes
as much of the new mandatory impositions on auditors concern the
levels of documentation they are required to
maintain. However, most entities should notice an increased
level of communication from their auditors about the audit, the
process and the findings.
What's changing? - Regulation
The financial collapses over the past few years coupled with an
increase in oversight bodies internationally, has really put the
spotlight on auditors. The subsequent financial losses have
also increased the liability risk and general exposure for
In the past regulation has been carried out by the New Zealand
Institute of Chartered Accountants. This body has done a good
job and their reviews of auditors have become increasingly rigorous
over the last few years. So much so that this has motivated many
occasional and smaller auditors to turn their back on the
discipline as it is simply too risky or the process too involved
for them to continue.
The current system of self-regulation has been changed. In it's
place is a new statutory accounting and audit standard setting body
established from 1 July 2011. It's called the External Reporting
Board (XRB) and it is designed to provide greater independence to
the standard setting process. More information about this
board and its two standard setting sub-boards can be found at www.xrb.govt.nz. I highly
recommend visiting this website and registering for their email
updates as it they will help keep you in the information loop re
ongoing changes and developments.
In addition to a new standard setter, the newly formed Financial
Markets Authority (FMA - see www.fma.govt.nz ) represents a
shakeup of the financial regulatory function in New Zealand. It has
taken over the functions of a number of former regulators such as
the Securities Commission, parts of the Companies Office etc.
The FMA is established to enforce securities, financial
reporting and company law as they apply to financial services and
securities markets. They also regulate securities exchanges,
financial advisers and brokers, trustees and issuers - including
issuers of KiwiSaver and superannuation schemes. Shortly they will
also regulate the auditors of any issuers in New
Zealand. Hence from 1 July 2012 any auditors who wish to audit
an issuer will be required to apply to be licensed and their firm
registered with the FMA.
All in all, these changes are prompting many in the auditing and
assurance profession to re-think their on-going involvement in
providing audit services, as for many the risk-reward equation is
no longer stacking up. While no-one can deny the benefits of
having specialist and very well regulated auditors, sadly a likely
casualty of the changes is the not-for-profit sector, which has in
the past relied upon the largess of accountants who 'did some
auditing'. In future we are possibly likely to see less
accountants willing to audit.
Also, those that remain are far more likely to be specialist
auditors and as such unlikely to offer their services at discounted
or pro-bono rates as the costs to them, such as insurance and
risks, will be too much.
Perhaps the issue is not the availability of auditors, but
rather whether audit is the most appropriate form of independent
assurance over financial statements. An issue that deserves