Changes in audit requirements
- PSAA has completed a programme of research to consider the likely audit work and fee impact of changes in local audit requirements. The objective was to consider whether it is possible to determine at a national level the additional audit work and fees needed for new audit requirements.
The starting point for the research was to review the potential impact of the following expected changes in audit requirements:
- the Code of Audit Practice 2020 (the Code);
- proposed International Standards on Quality Management 1 and 2;
- revised International Standards on Auditing (UK) 220, 230, 240, 250, 260, 315, 500, 540, 570, 580, 600, 620, 700, 701 and 720;
- amendments to IFRS 9, IAS 19, and IAS28; and
- IFRS 16.
The research was initially undertaken in 2021 and has been refreshed in 2022. The conclusions are that some of this list of changes are unlikely to result in an increase in audit work as a general rule, although there may be individual cases where local circumstances require specific work. However, some of the changes in audit requirements do require additional audit work. Some requirements, particularly the VFM commentary requirement of the new Code of Audit Practice, require a higher skill mix than some other audit work.
Key changes and their impact are as follows:
Key areas of additional audit work – 2021/22 audits
| Audit requirement | Summary of change | Expected impact |
| Code of Audit Practice 2020 | Auditors will no longer issue a single conclusion on arrangements to secure VFM. Instead, they will report significant weaknesses in arrangements when they identify them and make recommendations for improvement. Their main output on VFM will be a commentary contained in a new Auditor’s Annual Report. | Significant additional work at a high skill mix required in the first year. In some circumstances a small reduction in the additional ongoing input may be possible in future years. |
| ISA 220 Quality control of an audit of financial statements | Extension in relation to public interest entities of role of engagement quality control review. | Applies to a small group of bodies only (those who are public interest entities). Variable impact depending on each relevant body’s circumstances. |
| ISA 540 Auditing accounting estimates and related disclosures | Fundamental update with enhanced risk assessment requirements and increased focus on professional scepticism. | Applies to all audited bodies, but with variable impact for each audited body. |
| ISA 600 Specific considerations – audit of group financial statements | Enhanced approach to planning and performing a group audit. | Variable depending on number and nature of components involved. |
There are also two requirements to note for future audit years:
- IFRS 16 (Leases): deferred for public sector implementation until 2023/24 audits. We expect to provide information on possible minimum additional fee ranges for this additional requirement, subject to local circumstance, in advance of the start of 2023/24 audits.
- ISA 315 (Identifying and assessing the risks of material misstatement), for implementation in 2022/23. It has not been possible at this stage for the research to propose minimum fee ranges, but we have provided information at Appendix 1 on the factors that might affect the level of additional fees required, to support any early local discussions in advance of the 2022/23 audits.
The research conclusions highlight several key points in relation to the impact of these particular changes in audit requirements:
- the new requirements of the Code of Audit Practice and ISA 540 will have a significant impact, requiring a significant increase in audit time, seniority and expertise;
- for most new requirements, the impact in the first years of implementation are more significant than for subsequent years, but an ongoing increase will be required; and
- the local arrangements and circumstances of individual opted-in bodies have a significant impact on the amount of additional audit work needed – the minimum fee ranges are guidelines, how they apply specifically to individual bodies will be highly dependent on local factors.
The next section of this briefing sets out information on minimum fee ranges for the additional audit work needed for these new requirements, where there is enough information to establish these. It also provides information on the local factors that may influence the level of additional fees needed at individual opted-in bodies.
The increased work resulting from revised requirements strengthens audit quality, and the new VFM arrangements requirements have the potential to provide a welcome boost to the usefulness of local audit to all parties. However, PSAA continues to be very concerned about timeliness which has suffered as a result of the demands of additional regulatory requirements.
The research has noted that the ability of audit firms to deliver the additional work depends on:
- for each firm, access to sufficient numbers of individuals with the necessary expertise, skills and seniority to deliver the additional work;
- the capacity of each firm to commit the costs and development time needed for the work programmes, training and review arrangements for each new requirement;
- competing demands on limited auditor resources, including dealing with any outstanding audit completions; and
- the preparedness of opted-in bodies themselves to respond to the new requirements and provide the input auditors will need.