RSM South Africa

Auditors marking their own IFRS homework?

As business becomes more complex, accounting standards become more complex and everyone needs some help with applying some of the new requirements. For example, calculating an expected credit loss allowance in terms of IFRS 9, the new lease requirements in IFRS 16, etc. The company’s auditor is naturally the first person to turn to for assistance. Firstly, because the accounting staff already have a relation with their auditor, but also because the auditor has experience, not only of your company, but also of multiple companies that have had to deal with the same problem.

Most auditors would further welcome the opportunity to assist with improving the reporting and developing their clients’ staff. Whilst it is reasonable for auditors to assist their clients as much as possible, they are always mindful that there will be a stage where the auditor has provided so much input into the process that, by the time they audit the results, they end up “marking their own homework”. This raises obvious independence problems and reduces the value of the audit significantly.

According to the requirements of both the auditors’ standards and code of professional conduct, auditors should maintain an independent relationship with their clients. This becomes especially difficult for auditors serving small-to-medium sized clients, as they often have limited resources and need for specialist skills and are therefore more likely to require assistance with understanding highly technical accounting standards.

An important rule can be found in the international audit standards that requires that an auditor must not assume the responsibility of management, which is to prepare the financial statements. The auditor is therefore allowed to assist, but should never cross the line where they assume any management responsibility for the output. 

In an article in The Journal of Accountancy on how auditors can maintain independence when advising on revenue recognition, Ken Tysiac states that auditors are allowed to provide advice, research materials and assistance to help management make decisions.

However, a practical example or detailed steps on how to perform the calculations provided by an auditor may not be appropriate. If the auditor is to provide the client with a calculation, this will result in the auditors having audited their own work, and the only difference being the client’s numbers in place of the example, creating a self-review threat for the auditor.

In terms of providing a client with assistance, an auditor should be limited to clarifying the requirements of the actual standard and possibly pointing out more resources, if necessary.

In addition, the requirement that independence shouldn’t only be regarded in “mind” but also in “appearance” means that the way the auditors’ involvement in the reporting process is perceived is also important. Audit firms have therefore started referring clients to technical experts to assist them with the newly issued standards so as to ensure independence is maintained.

Management and directors play a very important role here in ensuring that the assistance provided by auditors is limited, as indicated above, and that the line has not been crossed. It is management’s responsibility to ensure that the company has, or has access to, adequate technical resources to prepare financial statements that comply with the reporting standards.

Auditors and their clients must be mindful of the need to maintain independence to ensure high quality audit work. The factors noted above should provide guidance on the level of involvement by the auditors whilst still considering their independence.

Henk Heymans                                                   Shruti Maharaj

Head of Audit                                                       Audit Supervisor


References

Herbette, J., & Regogliosi, A. (2017). 

International Federation of Accoutants. (2007, April). 

Levy, H. B. (2018). Maintaining Auditor Independence When Giving Accounting Assistance and Advice. CPA Journal.

Tysiac, K. (2019, December 14). How auditors can stay independent while advising on revenue recognition. Journal of Accountancy.


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