Archives For David York

oil barrels

By David York, head of auditing practice, ACCA

There is an old saying that a fool can ask a question that a wise man cannot answer. Actually, in the age of the Internet I should not say that. Not particularly because of a change in the tools available to the wise man, but because I ought to check the actual wording of the statement and clarify whether it is a saying, a proverb, a truism or some other particular part of the English language.

Just for once, I’m not going to reach for the tools. Instead, let’s examine a question: ‘Do users of audited financial statements believe the introduction of a new section in the auditor’s report describing the matters the auditor determined to be of most significance in the audit will enhance the usefulness of the auditor’s report? If not, why?’ It is best not to examine the wording of the question too closely else we begin speculating on the meaning of ‘useful’ in this context, or on whether those answering can be expected to predict the future.

The question is the first posed in a public consultation by the International Auditing and Assurance Standards Board (IAASB). This ‘exposure draft’ is huge at 200 pages and is hugely important. There is a proposed new auditing standard on communicating ‘Key Audit Matters’, major revisions to five existing standards and a raft of conforming amendments to others. This will bring about the most visible change in auditing globally for well over a decade. For a listed entity, the auditor will publicly report the most important of the matters already communicated privately to, for example the company’s Audit Committee. This is not just a cut and paste, as the audiences are different and the very fact of disclosure will inevitably affect how preparers and auditors treat a matter.

The exposure draft is a significant stage in a project that has been firmly based on research and extensive outreach to stakeholders. Indeed, ACCA has already provided views in response to a 2011 Consultation Paper and a 2012 Invitation to Comment. Our own activities, including roundtables and research, have confirmed the need for change because investors are demanding more informative reporting.

In parallel with the exposure draft, which is open for comment up to 22 November 2013, the IAASB is proposing a field test to enable auditors and companies to experiment and the IAASB to learn whether its standards need further refinement to enhance the usefulness of the auditor’s report.

To get an answer to the question, using the internet as the research tool, it might be foolish to suggest that the IAASB would like every user of audited financial statements on the planet to state their belief and explain why, or why not, the proposals are good:

‘Do users of audited financial statements believe the introduction of a new section in the auditor’s report describing the matters the auditor determined to be of most significance in the audit will enhance the usefulness of the auditor’s report? If not, why?’

You can do that on the IAASB website (you will need to register). If you are an ACCA member or student you can also email your view to us and we will take your views into account when we respond to the consultation. See http://www.accaglobal.com/en/technical-activities/technical-policy/forthcoming-responses.html

A staff-prepared document highlighting considerations that may be of assistance to those who plan to undertake field testing is available on the IAASB website.

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By David York, head of auditing practice at ACCA

The Higgs Boson is no doubt feeling rather exposed right now, which probably makes a change from feeling hunted. Even the Financial Times has gotten excited about the discovery.

The news recently has been full of the discovery of what some have dubbed ‘the god particle’, a fundamental building block of the universe that gives other particles their mass. Actually it is a bit more complicated than that – trust me I’m a physicist – or at least I have a degree in physics which is a starter. You will see from the job title that these days I am more of an auditing expert, so what is the connection?

When I joined the accountancy profession straight after university I was surprised to find that accountants were better experimenters than the scientists. A scientist reports the results of an experiment, plus or minus the margin of error, but an accountant can estimate the value of work in progress to the nearest pound. That is why financial statements balance – but in reality it’s all a bit of smoke and mirrors.

Auditors are also in an envious position in comparison to scientists because they can form a judgement, and report only that ‘in our opinion the financial statements give a true and fair view’. The auditor’s smoke and mirrors are hidden elsewhere in the report where readers are told that the evidence the auditor bases the opinion on is sufficient to ‘give reasonable assurance’. Actually it is a bit more complicated than that – trust me I’m an auditor.

In fact, it’s so complicated you would probably find the standard model of particle physics easier. To make a start on that you could do worse than the BBC's Q&As about the Higgs Boson

But one thing in all the news coming out of the Large Hadron Collider (the Cern Giant) that I found strange yet charming was the life breathed into Sigma – a Greek letter that has unfortunately never been as popular as Alpha and Omega. The physicists analysing the results applied a test of statistical significance call 5-sigma – and achieved instant popularity because it would have been less catchy to have to refer to five standard deviations; although that itself might make a boson blush.

5-sigma means that there is a 99.99994% chance the results are right. Which seems pretty certain, although perhaps only what we should consider necessary for something so important. 

So what about audit opinions? They are important too – just ask yourself how much the global capital markets moved on the announcement of the Higgs Boson discovery! Well as I said such things are complicated. But think 2-sigma (95.5%) or 3-sigma (99.73%) as a maximum – not quite the certainty the Higgs Boson has required.

Who has it right? You choose.