Audit experts court EU support

Accounting and auditing experts are to discuss next week (16-20 April) what requirements to place on auditors to report weaknesses in companies’ internal controls.

Standard-setters are trying to set a common definition of what should constitute "material weaknesses" and to win agreement on how auditors should respond if they find material weaknesses or other "reportable conditions".

The discussion of International Standards on Auditing (ISAs) could have far-reaching consequences for companies and auditors in the European Union. The European Commission envisages that under the 8th Company Law directive on statutory audit, which came into effect last June and has to be implemented by the member states by June 2008, the ISAs will be adopted for use in Europe. It does not however set a deadline for this to happen. The Commission will submit each ISA for consideration by representatives of national governments, through the Audit Regulatory Committee, and member states’ audit regulators, through the European Group of Auditors’ Oversight Bodies.

The existing ISAs are currently being revised and new ones drawn up by the International Auditing and Assurance Standards Board (IAASB) whichmeets in Sydney, Australia, next week.

The IAASB, which wants EU backing for its standards, is seeking to meet the Commission’s demands. At next week’s meeting, the board will discuss a revised ISA200 which will incorporate definitions of professional scepticism, reasonable assurance and inherent limits, which the Commission had wanted set out in an ISA. The board’s aim is to approve the draft revision so that it can be put out for public consultation.

James Gunn, vice-president of the IAASB, said that the new ISA200 would look at the fundamental principles underpinning the audit of financial statements.

Also on the board’s agenda will be a first consideration of the draft standard on "control deficiences noted in an audit" including what requirement to place on the auditor for reporting, how precisely to define the threshold for what it terms "a reportable condition" and how to define material weakness.

A taskforce that has prepared the draft is recommending that the auditor should be required to report material weakness to directors. Auditors would be required to report a broader set of "reportable weaknesses", which would include the material weaknesses, to management. The auditor would be permitted, but not required, to communicate the lesser reportable weaknesses to directors, if he or she believed it would be appropriate to do so.

The EU’s directive on statutory audit already requires statutory auditors to report identified material weaknesses to audit committees but it does not define material weaknesses. The new ISA, if it is approved by the EU, would effectively become the EU norm.

Accounting and auditing experts are to discuss next week (16-20 April) what requirements to place on auditors to report weaknesses in companies’ internal controls.