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 changes relevant to local audit requirements, including:
- 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 updated in 2022 and 2023. For the 2023 research, the researchers considered specifically the impact on audit fees of:
- the VFM arrangements commentary;
- updated standards; and
- the potential impact of initiatives in progress to review a range of topics, including current requirements relating to: infrastructure asset reporting, non-investment property and materiality.
Research findings
The conclusions of the research are that many changes are unlikely to result in a substantial 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 substantial additional audit work. Some requirements, particularly the requirement in the Code of Audit Practice 2020 for a VFM arrangements commentary, also require a higher skill mix than previously.
Key changes and their impact for 2022/23 audits are as follows:
Key areas of additional audit work for 2022/23 audits
| Audit requirement | Summary of change | Expected impact |
|---|---|---|
| Code of Audit Practice 2020 | Auditors no longer issue a single conclusion on arrangements to secure VFM. Instead, they report significant weaknesses in arrangements when they identify them and make recommendations for improvement. Their main output on VFM arrangements is a commentary contained in the Auditor’s Annual Report. | Applies to all audited bodies (except pension fund audits) but with variable impact for each audited body type. Substantial additional work at a high skill mix. |
| ISA 220 Quality control of an audit of financial statements | Extension in relation to public interest entities of the 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 depending on circumstances. |
| 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. |
| ISA 240 The auditor’s responsibilities relating to fraud in an audit of financial statements | Clarifies the auditor’s objective to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement due to fraud, including identifying and assessing risks of material misstatement, and obtaining sufficient appropriate audit evidence. | Applies to all audited bodies, however the impact will be variable and highly dependent on the inherent and control risks relevant to the body. Auditors are required to determine whether specialist skills are required which may lead to deployment of senior resources not previously deployed and a consequent increase in cost. |
| ISA 315 Identifying and assessing the risks of material misstatement | Significantly rewritten with additional requirements, some of which increase the quantum and skill mix of work required, for example on IT risk assessment. Requires auditors to assess inherent risk and control risk separately, and introduces five new inherent risk factors. Requires the auditor to obtain a wider understanding of an entity’s system of internal control. Introduces increased documentation requirements. | Applies to all audited bodies, however variable impact for each audited body type. No current consensus between firms on the volume of additional work required. Additional work at a high skill mix in the first year. Significant additional fees at audited bodies where risk assessment leads to conclusion that use of specialist resources is the appropriate audit response. Potential for a reduction in the additional ongoing input may be possible in future years. |
Other changes in requirements
The audit profession has been subject to high levels of scrutiny in recent years following several widely reported financial failures in the private sector. Over this period there have been growing delays in completing local audits. In July 2023 the Department for Levelling Up, Housing and Communities (DLUHC) announced proposals to address the backlog, and is working with all stakeholders to tackle the complex issues involved. The proposals include the possibility of a time-limited revision to the Code of Audit Practice, which may reduce the amount of audit work needed while the backlogs are resolved. We will work closely with our consultants, DLUHC, the Financial Reporting Council’s Local Audit Director and the NAO to assess the implications for audit fees of any confirmed changes. If the changes involve a reduction in work required and therefore fees, we expect to manage these through our fee variation process as negative fee variations. We also expect to re-evaluate the position when we consult on and set the 2024/25 fee scale.
The NAO’s auditor guidance note AGN07 was revised on 31 January 2023 to include pension fund auditors providing IAS 19 assurances to auditors of relevant local audit bodies as work under the Code of Audit Practice – previously this work had been outside the Code. The consultation on the fee scale for 2023/24 audits sets out proposals for including an additional fee for this work into the 2023/24 scale fee for pension fund audits.
There are other requirements to note for future audit years. At this stage we do not have enough information to consider the impact on audit fees, but they will be considered as part of consulting on and setting fee scales each year:
- IFRS 16 (Leases): deferred for public sector implementation until 2024/25 audits. The impact will be dependent on the extent of leases, and the preparedness of audited bodies, but may be significant in some cases;
- update to the Code of Practice on Local Authority Accounting in relation to infrastructure assets reporting: work is in progress;
- His Majesty’s Treasury thematic review on changes in reporting of non-investment property: there is no certainty about the potential changes at this stage; and
- potential changes to PN 10 in respect of materiality: there is currently no proposal on whether this will be applied to local audit.
Key research messages
The research conclusions highlight several key points in relation to the impact of the changes in audit requirements reviewed:
- the requirements of the Code of Audit Practice, ISA 540 and ISA 315 have a significant impact, requiring a substantial increase in audit time, seniority and expertise;
- for most new requirements, the impact in the first years of implementation is more significant than for subsequent years, but in cases of substantial change an ongoing increase may be required; and
- the local arrangements and circumstances of individual opted-in bodies have a substantial impact on the amount of additional audit work needed. Where we are able to provide suggested minimum fee ranges these are guidelines, how they apply specifically to individual bodies will be highly dependent on local factors.
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 to respond to the new requirements and provide the input auditors will need.
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 and many other parties continue to be very concerned about timeliness and the loss of audit impact.
The next section of this briefing sets out information on minimum fee ranges for the additional audit work needed for some 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.