NZAuASB Meeting 1 September 2021

Here is a summary of the main matters considered at the meeting:

Technology Presentation

The Chair welcomed Brett James, Deputy Director, International Auditing and Assurance Standards Board to the meeting, who provided an update on the IAASB’s technology working group’s activities, including disruptive technology and the audit implications. Board members were particularly interested in the impact of technology in the context of the recently revised quality management standards, as well as the risk that the high cost of implementing technology could further reduce the ability of smaller firms to compete.

Update on Climate and Audit Reform

The Chair welcomed Michele Embling to the meeting. Michele provided the Board with an update on recent targeted outreach with key New Zealand stakeholders in response to global audit and governance reform matters. Stakeholders have expressed support for the XRB to facilitate these conversations and continue to influence the future of the profession, by continuing to monitor if and where issues lie in the New Zealand context, and then explore the best options, which may extend beyond statutory changes.

The Board endorsed and restated its willingness to support this work. It reflected on the need to be agile to ensure that the value of assurance is well understood in a fast-changing environment.

The Board received an update on climate reporting and assurance from April Mackenzie, noting the select committee considering the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill had now reported back to the House recommending a delay in the introduction of the assurance requirements and a partial reduction of the scope of the assurance regime. Now that the scope of and timing for mandatory assurance is clearer, activity will be focussed on exploring the level of statutory assurance over the greenhouse gas disclosures together with an open and transparent process to ensure that a broad base of assurance practitioners (including those that currently use XRB assurance standards and those that use ISO standards) engage with developing assurance requirements that will be fit for purpose.

The Board discussed a need to monitor demand for voluntary assurance, beyond the greenhouse gas assurance, and factor this demand into planned activity going forward.

The Chair thanked Michele and April for their updates

Less Complex Entities

The Board CONSIDERED the key issues and PROVIDED preliminary feedback on the exposure draft.

The Board made the following observations:

• General support for the approach of a standalone standard. However, concerns were expressed that a separate standard might signal that an LCE audit is less than an ISA audit, or imply a two-tier auditing environment.
• The title “less” risks exacerbating this perception. Separating the standard from the ISAs also risks distinguishing the product as something different, or lesser.
• The proposed standard would be helpful to assist practitioners to navigate and scale the ISAs. In some ways the exposure draft is an indictment on the scalability of the ISAs highlighting that the core auditing requirements can be condensed into a much more readable and condensed document, which is easier to navigate and understand, i.e., that in the first instance the drafting approach to the auditing standards should start simple and scale up.
• Significant concern at the proposal that the LCE standard may not be applied to group audits. Many group audits are not complex. The definition of group in ISA 600 is broad, so this prohibition significantly reduces its applicability.
• General concern that the proposed prohibitions seem somewhat arbitrary and, together with the transitional proposals, would limit the usability of the proposed standard. There was a view that application is more about the sensitivity of the engagement (i.e., a risk-based decision) rather than the complexity of the entity.
• Consideration as to whether the decision about when to apply the LCE standard should be flipped around, i.e., based on why the engagement should be included rather than when it should be prohibited.
• Concern that there are too many layers of decision makers in the proposed approach to applicability and use of the standard.
• A lack of clarity as to when the standard might be used in New Zealand, given the statutory audit thresholds, the amount of judgement required, the uncertainty created by estimates that might require a practitioner to transition to the ISAs, and the knowledge and skill base of practitioners in New Zealand. However, at the same time, recognition that it might be helpful, given how banks are increasingly requiring more and more (including audits) from their micro client lenders.
• In the public sector there are a number of audits where the proposed LCE standard might be very helpful, for example, school audits and very small audits such as cemetery trust audits.
• In terms of cost, there may be some cost savings in terms of compliance or documentation requirements; however, an LCE audit requires the same level of evidence as a full ISA audit and so may not necessarily be cheaper. There is a risk that introducing the standard could place further pressure on audit fees if clients were to see use of the LCE standard as a bargaining tool to reduce fees. This raised a question of the extent to which the client should be notified, or even be the decision maker, as to whether the LCE standard would be used.

The Board AGREED with the proposed outreach plan which will target sole practitioners and smaller firms, and separately explore users and preparers thoughts as to whether use of a separate LCE audit standard is of concern.

The Board NOTED that messaging around this exposure draft will be key, to promote understanding that the proposed standard is about providing reasonable assurance in a less complex environment but avoid exacerbating any perception that an LCE audit would provide a second-tier audit, nor creating an expectation that an LCE audit would necessarily result in a lesser cost. Within that context, it would however be helpful to address with users the question of whether using the standard might produce either a better value audit and/or have an impact on audit cost. 

Alternative Engagement for Small Charities

The Board RECEIVED an update on the alternative engagement for small charities project. The Chair thanked the staff for using the exposure of the LCE standard (under the previous agenda item) as a means to re-think the value of another form of engagement for entities that either sit below the statutory audit/review threshold or retain an audit requirement in their foundation documents or need an audit for other reasons such as funding.

Board members noted the result of the outreach with Charities Services and generally expressed a level of surprise with the Charities Services view that there is limited demand for an alternative engagement.

The Board agreed that this may be symptomatic of a broad lack of understanding about what an audit is, the value of assurance, and how assurance might be obtained in ways different to the traditional understanding of an “audit”. This showed there is a need for more education on this matter as funding organisations continue to ask for audited financial statements, but often an audit does not meet their needs. It was noted that the level of knowledge is low, which is accompanied by a lack of ability/willingness to pay for any assurance engagement.

The Board AGREED with the staff recommendation to proceed with developing a report on the topic, recognising the need for an educational response.  Some Board members continued to express concern that the project seems to be taking on a problem or a responsibility that rests with others.

In relation to the draft report, one Board member suggested that the reporting for this alternative engagement should include recommendations; however an alternative view expressed was that this would place practitioners in an unwelcome position. Members were asked to provide further comments offline on the draft report/snapshot, noting that some additional context may be needed about what an agreed upon procedures engagement is. 

The Board also expressed support for the recommendation to engage with users and practitioners, as part of the engagement on the LCE exposure draft, to gather further information on its thinking to date about a potential alternative engagement.

The Board also considered that there is a strategic opportunity to co-ordinate in this project, and the LCE outreach, with work being done by the NZASB on new reporting requirements for micro entities, and to similarly simplify opportunities to enhance the trust and confidence in micro entities through this alternative engagement project.

The Board AGREED that the Chair raise this matter with the XRB Board as a strategic matter for the XRB.

Review of Service Performance Information

The Board NOTED an updated project plan, with a caveat that there is a need to be flexible, and allow this project to pause as needed, to enable work to enhance the auditing standard on service performance information, in conjunction with Office of the Auditor-General.

The Board provided feedback on the following matters related to developing a review standard for service performance information:

• Agreed with the recommendation to develop a separate review standard to cover service performance information.
• Agreed with the key areas identified as being similar for an audit and a review of service performance information including, but not limited to requirements for dealing with the suitability of service performance criteria and matters relating to materiality. One member expressed an alternate view, suggesting that the review standard should not include requirements dealing with the suitability of the service performance criteria given that this is the hardest part of the engagement.
• Agreed with the recommendation to apply the principle that the review identify where a material misstatement is likely to arise but not require identification at the assertion level. The Board however agreed it would be helpful to include application guidance to highlight how considering assertions to identify misstatements might be useful, noting that consideration of assertions is in an auditor’s DNA and is naturally how one would think about risk.
• One member commented that the example provided might be too granular, while another commented that linking the example to the nature of procedures would be helpful.
• Agreed with the recommendation that the nature of the work effort focus on enquiry, analytical procedures and other procedures for designing and performing procedures related to the service performance information.
• Agreed with the recommendation to require an understanding of internal controls.
• Recommended that the review standard should address the responsibility related to other information, with a request for staff to consider if this sits in ISRE (NZ) 2400 or the developing service performance standard.
• Agreed that the reporting should focus on the level of assurance rather than on describing the procedures performed.

The Board AGREED that ongoing work on the review standard will be co-ordinated around opportunities to work with the OAG on the auditing standard on service performance information.

NZASB Measurement Project

The Board welcomed Joanne Scott, Anthony Heffernan and Carolyn Cordery to the meeting to provide the Board with an overview of key matters arising in relation to four Exposure Drafts (EDs) issued by the International Public Sector Accounting Standards Board:

• ED 76 Conceptual Framework Update: Chapter 7, Measurement of Assets and Liabilities
• ED 77 Measurement
• ED 78 Property, Plant and Equipment
• ED 79 Non-current Assets Held for Sale and Discontinued Operations.

Board members expressed the following views:

• Aligning the definition of fair value in IFRS Standards and IPSAS (to the extent possible) is a positive move.
• Sharing the NZASB’s concerns about the lack of clarity regarding the proposed new measurement basis (current operational value), noting that the current requirements in PBE Standards are well understood and work reasonably well.
• The lack of clarity in the proposals is more of an issue than the proposed requirement to classify assets as being held for financial capacity or operational capacity. There are already different requirements for different types of assets.
• Any new proposals need to acknowledge that the concept of highest and best use is difficult to apply to certain types of assets such as national parks and sewerage systems.
• The costs of the proposed fair value disclosure in ED 79 paragraph 52 could be significant and are likely to outweigh the benefits.
• Climate change will give rise to new impairment issues (such as potential abandonment of assets) and the suitability of standards to deal with these issues should be considered. Staff noted that the EDs do not propose to change the current impairment requirements.
• Some of the heritage issues which have not been considered by the IPSASB are important in a New Zealand context.

The NZASB Chair and staff thanked the Board for the feedback and indicated that the NZASB expects to finalise its comment letter at its meeting in October. The NZAuASB offered to assist the NZASB further if required.

Implementation Support

The Board NOTED implementation support plans for both the quality management standards and ISA 315 (Revised 2019) Identifying and Assessing the Risks of Material Misstatement.

Quality Management-related Conforming Amendments to the Code

The Board CONSIDERED the draft submission in response to the IESBA’s exposure draft proposing conforming amendments to the International Code of Ethics for Professional Accountants following revisions to the IAASB’s quality management standards, noting that the decision about accepting or providing services to a client, is a decision taken by the engagement partner in conjunction with engagement quality reviewer and the firm’s risk partner.  The suggestion was that the language in 300.7 A5 might reflect that the engagement partners decision is undertaken in accordance with the risk policies of the firm.

The Board APPROVED the submission subject to any further responses from New Zealand stakeholders.

The Chair requested, due to the conflict of interest noted at agenda item 2.1, that the submission be signed off by an alternate.