FRC Proposes Revisions to ISA (UK) 250 Section A and ISA (UK) 250 Section B

The FRC has published a consultation on its proposals to revise ISA (UK) 250 Section A Consideration of Laws and Regulations in an Audit of Financial Statements and ISA (UK) 250 Section B The Auditor’s Statutory Right and Duty to Report to Regulators of Public Interest Entities and Regulators of Other Entities in the Financial Sector.

Despite there having been no change at an international level, much like when ISA (UK) 240 The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements was revised back in May 2021, the FRC is of the view that the proposed revisions are in the public interest.

ISA (UK) 250 Section A

Consideration of Laws and Regulations in an Audit of Financial Statements

Perhaps the most fundamental change proposed by the FRC is to remove the rules-based categories of ‘direct laws and regulations’, i.e. those which have a direct effect on the determination of material amounts and disclosures in the financial statements, and ‘other laws and regulations’, i.e. those which do not have a direct effect on the determination of material amounts and disclosures in the financial statements.

To date, this procedural distinction drives the work effort required:

• Direct laws and regulations – the auditor is responsible for obtaining sufficient appropriate audit evidence regarding compliance with the provisions of those laws and regulations.
• Other laws and regulations – the auditor’s responsibility is limited to undertaking specified audit procedures to help identify non-compliance with those laws and regulations that may have a material effect on the financial statements.

Instead, the FRC is proposing a more risk-based approach, with the risk assessment driving identification of the laws and regulations with which non-compliance may have a material effect on the financial statements, and the work effort required. Significantly more professional judgement will therefore be necessary.

This change is likely to result in an increased work effort in identifying such laws and regulations, additional risk assessment procedures and related activities, and additional work effort in responding to the assessed risks of material misstatement due to non-compliance with laws and regulations (NOCLAR).

Other proposed changes include:

• The introduction of explicit requirements to identify, assess and respond to the risks of material misstatement due to fraud or error relating to non-compliance with laws and regulations;
• A stand back requirement to assess whether sufficient appropriate audit evidence has been obtained relating to whether there is a material misstatement of the financial statements relating to non-compliance; and
• Better linkage with other ISAs (UK), specifically ISA (UK) 315 Identifying and Assessing the Risks of Material Misstatement.

ISA (UK) 250 Section B

The Auditor’s Statutory Right and Duty to Report to Regulators of Public Interest Entities and Regulators of Other Entities in the Financial Sector

Much of the content of the extant version of the standard is outdated, and the FRC is therefore proposing what is effectively a brand-new standard. As a result, the standard is likely to be renumbered and renamed Special considerations for audits of public interest entities – communicating and reporting to an appropriate audit authority.

Many definitions have been removed, with a new definition of a ‘reportable matter’ being incorporated instead. A reportable matter is defined as information about which the auditor becomes aware during the audit that the auditor:

• Is required to report to an appropriate authority outside the entity in accordance with law, regulation or relevant ethical requirements; or
• Has determined reporting such information to an appropriate authority outside the entity is an appropriate action in the circumstances; or
• Has determined is of such significance that it is in the public interest to report even where law, regulation or relevant ethical requirements do not require it.

The standard is broadly split into two parts – requirements which apply to audits of all public interest entities and requirements which apply only if the auditor becomes aware of information that may relate to a reportable matter.

The definition of a public interest entity is currently under review as part of a separate project, but it is expected that the revised ISA will apply to all entities caught by the future definition.

Timescales

The consultation remains open for comment until 12 January 2024. The FRC will then consider the responses it receives with a view to publishing the final versions of the revised standards.

The revised versions are expected to be effective for audits of financial statements for periods beginning on or after 15 December 2024, with early adoption permitted. This represents a fairly tight turnaround period as the FRC usually aims to offer at least a year from the final version of standards being published until they are effective.

How can Mercia help?

Mercia will be following the progress of the revised ISAs (UK) as they work their way through the consultation process. Our training and methodology will be updated to reflect revised requirements and our experts will be on hand to answer technical queries on the topic too.