NZAuASB Meeting 21 October 2020

Here is a summary of the main matters considered at the public session:

Quality Management

The IAASB approved its three quality management standards in September 2020, subject to final approval by the Public Interest Oversight Board.

These standards raise the bar for firms by incorporating a proactive and risk-based approach to how firms enable the consistent performance of quality engagements through their systems of quality management. The standards also deepen the engagement partner’s responsibility for audit quality at the engagement level, and include improvements related to engagement quality reviews.

For more details on these projects, see the ISQM 1, ISQM 2 and ISA 220 project pages on the IAASB website.

The IAASB has also recently published its implementation plans for each of the three standards ahead of the anticipated release. The plans explain what implementation materials stakeholders can anticipate, topics covered, and expected timing.

Have a look

The NZAuASB noted an analysis of the way in which the approved quality management standards have addressed the key concerns the NZAuASB raised in its submissions in response to the IAASB’s exposure drafts.

The Board provided the following indicative thoughts on compelling reason changes for the development of a New Zealand exposure draft:

• While scalability concerns remain, the NZAuASB agreed to adopt the standards, and to highlight the challenges of adopting these changes through the New Zealand exposure draft process. The Board will monitor implementation guidance the IAASB issues and the need to supplement those for smaller and medium sized firms in New Zealand.
• The Board agreed to continue to change references from listed entities to FMC reporting entities considered to have a higher level of public accountability (for both the scope of the engagement quality review requirement and to require communication with those charged with governance regarding the firms system of quality management).

The Board intends to approve the New Zealand exposure drafts at its meeting in February 2020.

Auditor Reporting Post-Implementation Review

The Board considered the draft response to PART E of the IAASB’s post-implementation survey, targeted at National Standard Setters.

The draft was prepared by drawing on prior interviews with various stakeholders. Those interviews were held when collecting input into the joint publications with the FMA on the New Zealand experience with reporting Key Audit Matters:

1. November 2017 “Key audit matters: A stock take of the first year in New Zealand”
2. May 2020 “Enhanced auditor reporting: A review of the third year of the revised auditor’s report”

In addition, the Board has drawn on more recent feedback heard related to auditor reporting and the COVID-19 environment.

In light of the extension of the due date for responding to the survey to 23 November 2020, the Board agreed to liaise further with various stakeholders, to identify any additional points to raise prior to finalising the response.

Agreed-Upon Procedures

The Board considered the submissions received from stakeholders on the New Zealand ED based on the newly-revised international standard.

The Board noted that the AUASB has since approved the international standard for adoption in Australia with some limited “compelling reason” changes. These include a restriction on use requirement that ties back to the terms in the AUP engagement.

In accordance with the harmonisation policy, the Board discussed whether to mandate a restriction on use of the agreed-upon procedures report, similar to the AUASB.

The Board will consider a compelling reason analysis on the proposed amendments adopted in Australia at its December meeting before finalising the standard.

Role and Mindset of the Assurance Practitioner

The Board approved as a final standard Revisions to Professional and Ethical Standard 1: Revisions to the Code to Promote the Role and Mindset Expected of Assurance Practitioners.

These revisions involve significant reforms to the behavioural characteristics expected of all professional accountants, which emerged from a discussion paper considering the expansion of professional scepticism beyond the context of audit and assurance.

While that approach was not adopted, the IESBA’s objective was to ensure that the Code nevertheless promotes the role, mindset and behavioural characteristics expected of all professional accountants when performing their professional activities. The reforms include:

• new application material for PAs to meet their responsibility to act in the public interest;
• revised text on Fundamental Principles: Integrity (reference to “strength of character to act appropriately”), Objectivity (reference to Technology), Professional Behaviour (reference to responsibility to act in the public interest), Professional Competence and Due Care (reference to Technology);
• requirement to exercise Professional Judgment and having an “inquiring mind” (expected of all PA’s) when applying the conceptual framework; and
• new application material about the risks of cognitive bias in its various forms.

In finalising the standard, the Board discussed whether it would be appropriate to include in PES-1 that the professional accountant is responsible for maintaining and enhancing the public trust in the profession.

The Board considered the compelling reason analysis and agreed the proposed amendment does not meet the compelling reason test. The Board also noted such an amendment is outside the mandate of the XRB, which is limited to setting professional and ethical standards for assurance practitioners.

The outcome of those deliberations is that the international changes will be adopted without amendment in PES 1. The NZAuASB expects that CA ANZ will also consider adopting the changes in the NZ Code of Ethics.

Going Concern and Fraud Consultation

The Board noted the IAASB discussion paper on Fraud and Going Concern in an Audit of Financial Statements and approved the outreach plan, which includes a virtual roundtable to be held 24 November 2020.

This is an important initiative by the IAASB, which responds to the Covid-19 crisis but more broadly is an attempt to respond in an agile way to other developments in the world of auditing (including the UK Brydon report and the parliamentary committee inquiry in Australia), which have raised significant questions about audit expectation gaps in these areas.

The Board also discussed ways to promote engagement with those charged with governance on these issues, acknowledging the broader role of all players in the financial reporting supply chain when it comes to dealing with risks of fraud and making judgements about going concern, while noting the need to focus the discussions on what the auditing standards can do in this space.

Meeting with Lyn Provost

The Board met with Lyn Provost, IAASB member, for an update on recent activities of the IAASB.

Joint meeting with the Australian Auditing and Assurance Standards Board

The NZAuASB had a joint virtual meeting with the AUASB to discuss current and ongoing collaboration work.  This included proposed changes to the current NZAuASB/AUASB policies that determine the principles of convergence to International Standards and harmonisation with the standards of the AUASB/NZAuASB. The two boards work closely together, collaborating on their work at both board member and staff level.

The collaboration policies have been in place since July 2014, and the objective of the review is to determine whether they remain fit for purpose in the current auditing and assurance environment, both globally and in the two jurisdictions.

The Boards discussed and preliminarily agreed the key areas where the policies can be enhanced, noting the importance of ensuring the public interest considerations are emphasised upfront, as well as reference to the strategies of the Boards as “standard takers” to influence international standard setting.

The Boards preliminarily approved proposed amendments that clarify the following key areas of the policy:

• The principles of harmonisation, which are:
  • Regulatory harmonisation requires a flexible approach that takes account of both the benefits and costs of a particular solution.
  • Achieving harmonisation in relation to the Australian and New Zealand assurance standards benefits from a collaborative approach to the adoption of the international standards in the respective jurisdictions, based on a common set of principles (in particular, the compelling reason test).
  • In seeking harmonisation, the standards should be consistent or compatible to the extent that they do not result in barriers for users of the standards in the Trans-Tasman environment.
  • However, there may be instances where the standards will differ in the two jurisdictions because of country specific requirements and the public interest considerations in each country.
• The requirement to consider the public interest (with reference to the qualitative characteristics in the Monitoring Group’s Public Interest Framework) when amending the international standards for principles and practices considered appropriate.
• The requirement for amendments not to conflict with or result in lesser requirements than the international standards.
• The need for the policy to be more flexible and to include newly identified principles or practices as potential compelling reason changes. The current policy has a potential for a backward-looking focus on existing practices.
• The communication protocols the AUASB and the NZAuASB apply to ensure a joint consideration of compelling reason amendments and harmonisation during the two boards’ standard setting processes.

Staff from the two Boards are jointly considering the feedback received from the meeting to develop a joint position for the two Boards to further consider for approval at their respective meetings in December.