12 December 2018
The Financial Reporting Council (FRC) has issued an International Standard on Auditing Accounting Estimates and Related Disclosures, covering the audit of expected credit losses in banks and which reflects the increased importance and complexity of estimates in financial statements. The FRC strongly supported the development on this standard.
The FRC is also consulting on updates to its Practice Note on The Audit of Banks and Building Societies in the United Kingdom, an area where the FRC has called for improved quality. The consultation reflects findings from the FRC’s audit inspection work covering bank audits, which were covered extensively in public reports in June 2018.
Mike Suffield, the FRC’s Acting Executive Director of Audit and Actuarial Regulation said:
“The UK strongly supports the development and adoption of high-quality global standards for corporate reporting and audit, enabling the UK to attract global investment. Changes to accounting standards have increased the significance of estimates in financial statements. The new standard provides a comprehensive, principles-based approach to delivering audits of estimates and related disclosures to a level that meets the needs of users and protects the public interest.”
The revised standard (ISA UK 540):
- Reflects revisions to the underlying international standard, and addresses issues arising from evolving financial reporting frameworks, particularly the move to accounting for financial instruments on an expected loss basis which is of particular significance for banks.
- Ensures the quality of auditing of management estimates and disclosures in the UK develops to meet users’ needs, as financial reporting becomes more forward looking, leading to an increase in the volume and complexity of accounting judgements.
- Requires better risk assessment and greater work effort on the part of auditors who will also need to apply a higher benchmark in assessing the adequacy of disclosures.
Early adoption of the new standard is permitted and is encouraged. It is effective for audits of financial statements for periods beginning on or after 15 December 2019.
The consultation period on the Practice Note (PN 19) closes at 5pm on Friday 8 March 2019.