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The changing face of company audits

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7th May 2009
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Michelle Fisher of Sobell Rhodes explains how a new assurance service can help audit exempt companies save money whilst ensuring that their accounts are reliable and accurate.

The assurance service is a new reporting option pioneered in the UK for audit exempt companies that can only be offered by chartered accountants. This groundbreaking new facility offers a welcome aid to businesses during the recession, as well as raising the profile of chartered accountants and the services they offer.

Detail
The assurance service is appropriate for directors and shareholders who want to make use of the audit exemption but would like some independent work to be done on the accounts for added credibility. The assurance report helps to give an additional degree of comfort over the accounts and confirms to all interested parties that the accounts give a true and fair view of company’s financial status and have been properly prepared.

As part of this service, the chartered accountant analyses and discusses the company’s results with the directors and shareholders in greater depth and compares the information in the accounts with other relevant information to ensure it is consistent and makes sense. Any necessary further work specific to the company is then carried out, but this is less detailed than the work involved in an audit and hence less expensive. The guidance in the ICAEW Technical Release AAFO3/06 provides sample reports, engagement letters and letters of representation.

The assurance service is a voluntary product and is widely used in countries such as Canada and the USA, where they are known as review engagements. Prior to launching, the institute undertook market research, taking feed back from Companies House, HMRC, the British Bankers Association and other trade reference agencies. Other countries (particularly in Scandinavia) are watching our experience and the IAASB is also expressing interest.

Benefits
Back in 2004 when the audit exemption threshold had been raised from £1m to £5.6m, one of my clients found that his company no longer required an audit. “Surely you’ll carry out a mini-audit?”, he asked me. I explained that there was no facility for a ‘mini-audit’. At the time, a company not required to have its accounts audited could opt for a voluntary statutory audit or a compilation report. There was no interim level of reporting for companies that had previously been audited and relied on the credibility the audit offered, but at the same time wished to reduce red tape and the associated professional costs.

The introduction of the ICAEW’s interim technical release made my client’s company an obvious candidate for an assurance engagement.

The company’s turnover was approximately £2m and it had three shareholders, only one of whom was involved with the management of the company. My client (the financial director) was aided by two accounts staff. Being in a creative industry, the managing director was not interested in understanding the detail of the numbers, but did want an endorsement on the bigger picture.

As the two non-working shareholders and the bank would be scrutinising the company’s accounts, an assurance report gave sufficient comfort to the managing director that his accounts team had done an accurate job and that his management accounts (provided on a monthly basis throughout the year) were providing an accurate snapshot of his business’s performance.

Our client was highly satisfied with the assurance service, as it struck a balance between providing sufficient credibility to the accounts presented to the shareholders and being cost effective.

Many of our clients are now opting for an assurance engagement. These clients are typically made up of a mixture between those previously being audited and those not, but it is of particular interest to fast-growing companies or those with external shareholders.

All our new business proposals for SMEs include the offer of an assurance engagement and we find that this gives us a competitive edge over less proactive accounting firms who may not have told their clients about the service.

Michelle Fisher is a partner at Sobell Rhodes Chartered Accountants, as well as chair of the Small Entity Assurance Services Working Party of the ICAEW, who developed the assurance service.

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By User deleted
26th May 2009 12:39

Expensive ICAEW project
If the take-up of the service was low when the economy was good what's it going to be like when it's not and everyone is trying to cut discretionary costs?

My null hypothesis would be that it is yet another expensive ICAEW project that is really of little relevance. As ever, I would welcome some figures on take-up from the ICAEW but they would need to be accompanied by details of the costs of the project including the full costs of the staff involved.

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By Andrew.Guntert
11th May 2009 09:16

"Slow Burn"
is the right description for this service!
Firms offering it are finding real interest from clients but not many firms are offering it.

The timing though may now be better?
- Stricter QAD reviews of audit files
- A further increase in audit exemption limits
- The need to start using Clarity ISAs soon with extra cost
- Significant international interest in the ICAEW's guidance and Assurance Service

Providing the cost/benefit relationship is right for the client, and that bankers/lenders/credit reference businesses value it sufficiently , it could replace many existing audits, and take the place of many existing Chartered Accountants Reports on Audit Exempt Companies. It certainly can provide an additional option for both existing clients and new clients

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Mark Lee headshot 2023
By Mark Lee
08th May 2009 10:52

I was fascinated to hear about this at the recent ICAEW event
Michelle was one of the speakers at the ICAEW National Practitioner Forum about which I wrote last month. The main focus of the event was the future of auditing. I recall that Michelle spoke of her enthusiasm for the alternative assurance product described in her article above and which is available from an increasing number of Chartered Accountancy firms. “The Assurance Service” was introduced over two years ago and was highlighted in AccountingWeb's Practitioner’s Diary on 8 November 2007.

I'm in no doubt that the use of such assurance services will grow but it's evidently a 'slow-burn'. Two and half years on and it's still not that common.


Mark Lee
Tax Advice Network

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By User deleted
08th May 2009 14:19

Misleading
Unfortunately this article is rather misleading. Assurance reports are not restricted to Chartered Accountants only. Yes the Institute have launched their own version of 'assurance' reports but as the nature of these assignments will be specific to each client, ACCA members can, and do, undertake this work as well.

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By timneale
08th May 2009 12:23

Credible?
On the face of it, these are a very good idea, but I wonder if the slow uptake is due to the lack of knowledge of them from, for example, banks and lenders in general. A well-informed SME owner/director should be satisfied with an assurance report, but how have people found banks' acceptance of these? Are they (and other inetersted third parties) generally willing to accept these in place of the standard 'we would like audited accounts' request? A lot of the public out there will still see it as a question of 'audited' or 'unaudited'.

It'd be nice to see these used more, but if they're not accepted commercially then they're never going to be used much.

Any experiences that go against this?

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