By Hayes Knight – 7 December 2010

The world has changed for auditors! Auditors now have to comply with a complete new suite of audit standards. The International Standards on Auditing (New Zealand), or ISA (NZ)s as they are known, are the mandatory technical standards that specify what must be done in every audit and guide our work.

While most of the fundamentals of auditing have not changed with these new standards they do herald a move to a much greater degree of mandatory requirement.  That is, they make mandatory many of the things that were ‘suggested best practice’ under the old codified auditing standards.  As a comparison, the old standards contained 221 mandatory requirements in 250 pages whereas the ISA (NZ)’s have 519 mandatory requirements in 700 pages of standards.  Phew!

As a result of us applying ISA (NZ)s, you will see some changes in the way we audit for the 2010 audits and beyond. These will include:

  1. Treatment of uncorrected misstatements.  We are now required to report to your board on any misstatements in the year-end financial statements. This means our management letter to the board will include a list of all unadjusted errors, other than completely trivial ones, we find as a result of our audit.
  2. Representations obtained from management.  A list of any unadjusted errors will be attached to the representation letter we require the board to sign as part of the completion process.  That letter will include a representation that the board agrees that the errors are not significant to the financial statements.
  3. New style audit reports. There will be a revised format for audit reports for the 2010 audits. The wording and layout changes are an attempt to better clarify the respective responsibilities of the Board of Trustees and the auditor.  As regards wording, the most significant change means that instead of an unqualified audit report as in the past, the new term better correlates with a plain English understanding and will be called an unmodified audit report.
  4. Auditor’s responsibility in relation to fraud. You will note as a result of our procedures more of a focus on finding out about what policies and procedures your board has in place for reducing the risk of exposure to fraud and theft.  We remind everyone that it is ultimately the board’s responsibility to be designing and implementing appropriate policies and procedures in this important area. The auditor’s responsibility remains that of watchdog, not a bloodhound.  This means that if we find fraud through our audit testing we are obligated to report it to your board, however it is not our primary role or responsibility to detect fraudulent activity. This is because fraud can be very difficult to detect and hence the scope and extent of the auditor’s work would need to be extended significantly.  This would have significant cost implications.  Due to the diverse nature of fraud there is also no guarantee that any set of procedures could guarantee detection of all fraud.