Changes in audit requirements
Audit requirements have grown in recent years due to increased regulatory challenge on audit quality, updated auditing and financial reporting standards, and the move to a VFM arrangements commentary, with an impact on audit fees.
We can only include additional fees in the fee scale when we have reliable information on the actual impact of a change in audit requirements. The fee scale does not include a contingency element, as this would mean bodies paying more than is necessary for their auditor to deliver a Code-compliant audit in years when additional requirements do not apply.
We commission external independent technical research each year to help us understand the fee impact of changes to the Code and financial reporting standards. From a complete list of expected changes, the research focuses detailed work on those requirements that could have a significant impact on audit work and fees.
We use the results of the research to support our work on setting the fee scale each year and considering fee variations requested by auditors. There is a delay of more than one audit cycle between the introduction of a change in requirements and the point at which we can consolidate additional fees for ongoing work into the fee scale. This is because we need to wait for sufficient information on completed audits before we have evidence of the cost of the work to support any ongoing increase in fees.
For the period from introduction of a change in requirements to consolidation of fees into the fee scale, any additional fees needed are submitted to us as fee variations. The next section of this briefing provides information for 2023/24 audits on changes in local audit requirements where we have determined the need for additional fees.
2024 research scope
The 2024 research considered the potential impact of a range of revised local audit requirements, including:
- the Revised Ethical Standard 2024;
- the Code of Audit Practice 2020 (the Code);
- International Standards on Quality Management (ISQM) 1 and 2;
- revised International Standards on Auditing (UK) 200, 210, 220, 230, 240, 250, 260, 265, 300, 315, 320, 330, 402, 450, 500, 501, 505, 520, 530, 540, 550, 570, 580, 600, 610, 620, 700, 701, 720; and
- changes to the Code of Practice on Local Authority Accounting in the UK, including IAS 1, 7, 8, 12, 16, 19, 21, 26, 28, 32, 36, 37, 38, 40 and IFRS 3, 5, 7, 8, 9, 15, 16, 17, 18.
The research identified 12 standards where there are confirmed or proposed changes which could have a significant impact on the amount of audit work required:
Fees research 2024: focus areas
| Quality management | Planning | Law and Regulations | Groups | Leasing | Code of Practice |
| •ISQM (UK) 1 •ISQM (UK) 2 •ISA (UK) 220 | •ISA (UK) 240 •ISA (UK) 315 | •ISA (UK) 250 •ISA 2X0 (draft) | •ISA (UK) 600 | •IFRS 16 | •Infrastructure •Indexation •Pension disclosures |
Subsequent work has focused on establishing whether the additional work required in these areas is substantial and considering whether it is possible to determine the additional fees needed.
Impact on 2023/24 audit work
The research has concluded that many of the changes in audit requirements are unlikely to result in a substantial increase in audit work, although some may have an impact for individual bodies where local circumstances require specific work.
However, some changes do require substantial additional audit work, and some of these also require a higher skill mix than previously because the revised standards specify more senior input.
The key changes in local audit requirements that have an impact on audit work for 2023/24 are:
Key areas of additional audit work for 2023/24 audits
| Audit requirement | Summary of changes | Expected impact |
|---|---|---|
| ISA (UK) 220 Quality management for an audit of financial statements Effective from: 2023/24 | Revisions alongside ISQM 1 and 2. Changes relate to enhanced key audit partner responsibilities. | Additional senior resources required reflecting enhanced documentation and team engagement. Impact variable based on local circumstances. |
| ISA (UK) 240 The auditor’s responsibilities relating to fraud in an audit of financial statements Effective from: 2023/24 | Series of new requirements for risk identification and assessment, including risks of material misstatement, increased focus on professional scepticism and obtaining sufficient appropriate audit evidence. | Applies to all bodies – impact is variable and highly dependent on the body’s inherent and control risks, audit findings and specific frauds. Auditors are required to determine whether specialist skills are needed which may lead to use of senior resources not previously deployed and an increase in cost. Can be difficult to identify the separate effect from that of ISA (UK) 315. |
| ISA (UK) 315 Identifying and assessing the risks of material misstatement Effective from: 2022/23 | Significantly rewritten with additional requirements which increase the quantum and skill mix of work required. Requires auditors to assess inherent risk and control risk separately and introduces five new inherent risk factors. Requires a wider understanding of an entity’s system of internal control and increased documentation. | Applies to all audits. Volume of additional work influenced by the quality of arrangements and controls and the existence of elevated risks. Impact may be variable where specialist resources are required. Additional work at a high skill mix in the first year. Consolidating additional standard fees into the fee scale is appropriate after the implementation year. |
The research recommendations also highlight some key messages about the changes in local audit requirements that have a substantial impact on audit work and fees:
- for most new requirements, the impact in the first year of implementation is more significant than for subsequent years;
- the local arrangements and circumstances of individual opted-in bodies and the quality of the financial statements and supporting documentation and evidence they produce have a substantial impact on the amount of additional audit work needed;
- the preparedness of opted-in bodies to respond to the new requirements and provide the input auditors will need has a significant influence on the amount of work required; and
- increasing pressure on Key Audit Partner time for some revised standards creates further pressure on auditor resources to deliver the audit work required.
Future changes in local audit requirements
The research has identified some changes in local audit requirements for audit years beyond 2023/24 which will have an impact on fees:
Future changes in local audit requirements
| Audit requirement | Summary of changes | Expected impact |
|---|---|---|
| ISA (UK) 600 Specific considerations – audit of group financial statements Effective from: 2024/25 | Greater focus on identifying and assessing the risks and planning an approach to obtaining sufficient appropriate evidence. Enhanced documentation requirements. Strengthened communication with component auditors. | The impact is for entities preparing group accounts. Additional fees will be highly dependent on audited body circumstances and size and nature of group structure. May be possible to consolidate fees into the fee scale after the implementation year once there is more body-specific information. |
| IFRS 16 Leases Effective from: 2024/25 | Fundamentally new right of use accounting model. | Overall view unchanged from previous research. Additional fee will be highly dependent on audited body circumstances and level of work required. Significant year 1 impact not applicable subsequently. May be possible to consolidate fees once there is more body-specific information. |
We will consider additional audit work for these changes under the fee variations process until it is possible to determine any appropriate additional fees to consolidate into a future fee scale. As additional fees are likely to vary for these requirements depending on the local circumstances of individual bodies, we may not be able to estimate the ongoing impact on scale fees until we have information from completed audits.