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November 2019 (Issue 6)


The exercise of judgment is a key factor in audit and attest engagements performed by public accountants. With the growing complexity of accounting systems and standards, judgement plays an increasingly crucial part in the process. Our first article describes several steps professional organizations are taking to address the practical application of judgment where quantitative measures may not be adequate.

Accounting firms have found over the years that consulting services can often be more lucrative and creative then audit services. The robust growth of consulting has led to concerns about independence and potential conflicts of interest that may arise between the two disciplines. Our second article reports on a new study that asserts that not only should consulting specialties be allowed alongside the audit function, but that the expertise of the specialists enhances the quality of audits.

Finally, our Worldwide Update covers news from organizations across the globe.
Gerald Herter - Editor

Cultivating Sound Judgement in a Complex World

New proposals for assessing materiality and estimates in accounting and auditing

Judgment is a critical skill that successful auditors and accountants build on with experience. While automation continues to eliminate human involvement in quantitative functions, the professional’s role in discernment becomes ever more important. With artificial intelligence threatening to take over even some of the judgmental tasks, the future demands that practitioners enhance their proficiency to a higher degree of sophistication.

Recognizing the need for the advancement of judgment skills, as well as the rise of new arenas requiring qualitative insights, professional bodies are developing guidance and standards to point the way.

The AICPA on August 15, 2019 issued a discussion paper titled Materiality Considerations for Attestation Engagements Involving Aspects of Subject Matters That Cannot Be Quantitatively Measured. An example of such subject matter is sustainability. While some aspects of sustainability can be quantitatively measurable, such as the requirement for a certain amount of a raw material versus the known availability and proven reserves of that commodity, other aspects may be difficult to measure, such as potential availability of employees with the needed skills or competence.

The discussion paper presents areas where determining materiality may be difficult to assess, as well as possible approaches for tackling those areas. After discussing the challenges and requirements of attestation engagements in contrast to examinations and reviews of historical financial statements, qualitative factors are described. Some of these are the inclusion or omission of important matters, selection of wording used to avoid distortion, the relative importance of various factors, the choice of methods of presentation of subject matter, the nature of misstatements, the relation to compliance with legal requirements, potential impact of misstatement on past or future reporting, intentionality of misstatement, comparisons to expectations, presence of related parties, and the inherent uncertainty of the subject matter.

Applying the qualitative factors, followed by accumulating misstatements and considering how and if they can be aggregated, the result described by the discussion paper guides the extent to which reporting is impacted, and whether disclosure and modification is indicated. In cases where misstatement is pervasive, a more drastic measure, such as an adverse opinion or withdrawal may be necessary. The discussion paper asked for practitioners’ comments by October 31, 2019.

Another aspect of judgment is addressed by the AICPA Auditing Standards Board (ASB). The proposed Statement on Auditing Standards, Auditing Accounting Estimates and Related Disclosures, was issued August 22, 2019. The proposal noted that deficiencies in this area were the most common ones noted globally. Recent efforts by the International Auditing and Assurance Standards Board (IAASB) and Public Company Accounting Oversight Board (PCAOB) were taken into account in the ASB’s deliberations.

According to the proposal, this update on audit procedures for estimates “is intended to enable auditors to appropriately address the increasingly complex scenarios that arise from new accounting standards that include estimates and related disclosures, and to enhance the auditor’s focus on factors driving estimation uncertainty and potential management bias.” The proposal lists the fundamental aspects as:
  1. Laying the groundwork – the nature of accounting estimates and the concept of estimation uncertainty
  2. Scalability – applying to a range from simple to complex estimates
  3. Separate assessment of inherent risk and control risk - describing the “spectrum of inherent risk” and the consideration of testing controls
  4. Enhanced risk assessment – more specific and addressed to more complex situations
  5. Responses to the assessed risks of material misstatement – emphasizing responsiveness
  6. Reference to relevant requirements of other audit standard sections
  7. Exercise of professional skepticism – importance increases with greater uncertainty and complexity
  8. Evaluation of the estimates – reasonability in the context of the reporting framework
  9. Appendixes – expands on explanations of inherent risk factors, communications, and amendments to SAS’s.
The comment period ends on November 22, 2019.
One other area requiring new application of auditor judgment is the reporting of critical audit matters (CAM) in the auditor report. The Public Company Accounting Oversight Board requirement went into effect for large companies starting with June 2019 fiscal year ends. A proposal for private companies is also in the works at the ASB. The PCAOB rule requires that the audit report include disclosure of items reported to the company’s audit committee that are material to the financial statements and involve especially challenging, subjective, or complex auditor judgment.

A September 2019 report from Intelligize Inc, a compliance resource provider for business professionals, analyzed preparations of a number of public companies for CAM disclosures. The most often mentioned areas involved income taxes, revenue recognition, lease accounting, intangible assets and goodwill impairment, business combinations, and loss reserve valuations including loan and lease allowances. The preparation process was found to identify additional controls that were needed in almost half of the companies studied. The new rule adds a second layer of judgment. Just as judgment is employed in determining the accounting for the issues at hand, further judgment is exercised in deciding which of the issues to disclose as a CAM. A respondent’s final comment in the report stated “It is so wide open and judgement oriented, we will take a wait and see approach to how we utilize.”

Further details can be found at AICPA Discussion Paper on Materiality and  Proposed Statement on Auditing Standards, Auditing Accounting Estimates and Related Disclosures.
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Are Accounting Firm Audit and Consulting Units in Conflict?

New study challenges governmental push to require breakup of the two services 

Running parallel to the Brexit controversy in the United Kingdom, governmental commissions have been deliberating on the way forward to resolve the spate of audit failures in recent years. In April, the Competitions and Markets Authority (CMA) issued a final report recommending, but not outright requiring, that the consulting divisions of accounting firms be placed in separate independent firms. Though government action is still pending, Big Four accounting firms are modifying their practices in anticipation.
Recognizing that complete legal separation of services may not be practically attainable, the CMA calls for an “operational” split, whereby management, compensation, and profit-sharing of the audit and consulting functions are totally divorced from each other. Big Four firms, such as KPMG and PwC have already taken steps in this direction.

Now a new report published on September 25, 2019, Audit Quality in a Multidisciplinary Firm, claims that the “multidisciplinary model”, whereby services like audit and consulting are active within the same firm, “is one of the best mechanisms to develop the skills, expertise and consistency needed for quality audits.” Developed jointly by the International Federation of Accountants (IFAC), Chartered Accountants Australia and New Zealand (CA ANZ) and the Association of Chartered Certified Accountants (ACCA), the report’s evidence “draws from leading academic literature, policy and expert views, and an in-depth study of how regulators worldwide manage risk.”
The report first points out from one study that the amount of non-audit work (i.e. consulting specialists) for non-audit clients far exceeds that for audit clients. Another study shows that consulting work is expected to grow more than auditing. Even so, a third study states that current restrictions around non-audit work are greater than the public expects, and that there is “limited support for audit-only firms.”

Correspondingly, the Public Company Oversight Board (PCAOB) found that most audits inspected use specialists, and the CMA considers the input of specialists on large firm audits to constitute a “material amount of expertise.” The question then is whether the consulting specialists should be allowed in audit firms, and if so, whether they should be allowed to provide non-audit services to audit clients, as well as to non-audit clients.

The report goes on to quote various studies that support the importance of in-house specialist expertise for firms that perform financial audits. Audit quality was found to be enhanced from the sharing of specialist expertise, and from the knowledge transfer that takes place. While one supportive case study noted that “a limited number of papers indicate that, beyond a certain point, financial dependence may pose a threat to independence,” others saw no threat or impact, only added cost and impairment of valuable expertise. Current restrictions were considered as adequate protections. The report provides a list of various countries’ laws providing protections in this area.

While safeguards in place may appear adequate to accounting practitioners, changing public perceptions may present more of a challenge. Auditors are continually faced with maintaining the appearance of independence as well as the reality. For example, in the July 2019 issue of the Audit & Accounting Report, we referred to the ACCA Global (Association of Chartered Certified Accountants) survey, Closing the expectation gap in audit, which found that “55% of those [members of the public] surveyed believed that existing audit standards, if followed, would prevent company failure. 35% want auditors to always identify and report any fraud. 70% would like audit to evolve to prevent company failures.” That report went on to indicate that the public needed to be better educated on what an audit was designed to do, that auditors needed to perform better, and that the role of the auditor needed to be reassessed. That guidance may have resonance also for future deliberations over the multidisciplinary firm.

 Further details can be found at the Audit Quality in a Multidisciplinary Firm. (
Periodic roundup of recent and upcoming actions and activities by audit and accounting organizations throughout the world.
International Accounting Standards Board (
  1. Interest Rate Benchmark Reform- Amendments to IFRS 9, IAS 39 and IFRS 7, issued September 26, 2019, modifies “some specific hedge accounting requirements to provide relief from potential effects of the uncertainty caused by the IBOR reform. In addition, the amendments require companies to provide additional information to investors about their hedging relationships which are directly affected by these uncertainties.” Effective for annual reporting periods beginning in 2020 with early adoption permitted.

International Federation of Accountants (
  1. International Standards: 2019 Global Status Report, published October 14, 2019, “detailing how and where international accountancy standards—which focus on audit and assurance, ethics, education, and private and public sector accounting—are being adopted and implemented globally. The report, which includes data from the more than 170 professional accountancy organizations that comprise IFAC’s membership, shows strong and sustained support for both the adoption and implementation of international standards, especially in areas where IFAC member organizations are involved in the process from start to finish.”
  2. Audit Quality in a Multidisciplinary Firm, research report issued September 25, 2019 in partnership with CA ANZ and ACCA, shows “that the multidisciplinary model is one of the best mechanisms to develop the skills, expertise and consistency needed for quality audits.
  3. International Public Sector Accounting Standards Board (IPSASB) - Exposure Draft 69 - Public Sector Financial Instruments, Amendments to IPSAS 41, Financial Instruments, issued August 27, 2019, proposes to “augment existing guidance in IPSAS 41, Financial Instruments, and improves that Standard’s requirements by introducing guidance on: Monetary gold; Currency in circulation; IMF quota subscriptions; and Special Drawing Rights.” The comment period ends on December 31, 2019.

Association of Chartered Certified Accountants (
  1. Social and Environmental Value Creation, research report issued September 23, 2019 with CFA Institute, “examines the role of business in environmental, social and governance (ESG) issues which are under increasing focus from investors and society more widely. It assesses the current state of corporate disclosures on key social and environmental issues in different regions around the world and outlines five disclosure and decision-making approaches that can support business to create inclusive and sustainable value for society over the long-term.”

Chartered Institute of Management Accountants (

No new developments.

International Integrated Reporting Council
  1. Driving Alignment in Climate-related Reporting, report published by the Corporate Reporting Dialogue on September 24, 2019, “maps the Better Alignment Project participants’ standards and frameworks against the seven principles for effective disclosure, the 11 recommended disclosures and 50 illustrative example metrics detailed in the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. It also documents the commonalities and differences between the Dialogue participants within the parameters of the TCFD recommendations’ example metrics... The mapping showed strong alignment between the participants’ frameworks and standards and the TCFD recommendations.”

  1. Regional Risks for Doing Business 2019, survey report of 13,000 business leaders worldwide, issued October 1, 2019, stating that the top leading risk to doing business at a global scale is fiscal crises, followed by cyberattacks, un/under-employment, energy price shock, failure of national governance, and profound social instability.
Africa, Europe, India, and the Middle East (AEIME)

FRC– Financial Reporting Council of the UK(
  1. Understanding citizens’ views on the regulation of corporate reporting, corporate governance and audit, research report issued October 2, 2019, “supports the Financial Reporting Council (FRC) taking firmer action to hold companies to account. Participants in a series of ‘citizens’ juries’ believed the FRC should have more "power" and "teeth" to hold companies to account, but any increase in regulation should not stifle companies’ ability to operate and flourish.” 
  2. International Standard on Auditing (ISA UK 570) – Going Concern (Revised), issued September 30, 2019, “follows concerns about the quality and rigour of audit and increases the work auditors are required to do when assessing whether an entity is a going concern. It means UK auditors will follow significantly stronger requirements than those required by current international standards.” Effective for audits commencing on or after December 31, 2019, with early adoption permitted.
  3. Disclosures on the sources and uses of cash, project report issued September 25, 2019, “considers how companies can answer investors’ questions about how a company generates cash and how it intends to use that cash. It provides practical guidance on how companies can give more information and context around its cash disclosures, beyond those in the cash flow statement including business model disclosures, capital allocation frameworks, reverse factoring arrangements and many others.”
  4. Letter to firms - EU exit preparations, issued September 19, 2019, directed to audit committee chairs and finance directors to assist with preparations for the United Kingdom’s exit from the European Union.
ICAEW- Institute of Chartered Accountants in England and Wales(
No new developments.

EFRAG– European Financial Reporting Advisory Group(
     No new developments.

Americas, Asia, Australia and New Zealand (AAANZ)

AICPA American Institute of Certified Public Accountants(
  1. Auditing Standards Board – Exposure Draft- Amendments to AU-C Sections 800, 805, and 810 to Incorporate Auditor Reporting Changes from SAS No. 134, issued August 28, 2019, to extend auditor reporting changes to reports relating to special purpose frameworks, single financial statements, specific elements, accounts or items of a financial statement, and summary financial statements. The comment period ends October 28, 2019.
  2. Auditing Standards Board Exposure Draft - Statement on Auditing Standards, Auditing Accounting Estimates and Related Disclosures, issued August 22, 2019. See first article in this issue for details.
  3. Materiality Considerations for Attestation Engagements Involving Aspects of Subject Matters That Cannot Be Quantitatively Measured, Discussion Paper issued August 15, 2019. See first article in this issue for details.
FASB Financial Accounting Standards Board (
  1. Exposure Draft (Revised)– Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus Noncurrent), issued September 12, 2019, “to improve guidance used to determine whether debt should be classified as a current or noncurrent liability in a classified balance sheet.” The comment period ends October 28, 2019.
  2. Exposure Draft – Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting, issued September 5, 2019, “would provide temporary optional guidance to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting.” The comment period ends October 7, 2019.
GASB– Governmental Accounting Standards Board(
  1. Exposure Draft – Replacement of Interbank Offered Rates, issued September 26, 2019, “ to assist state and local governments in the transition away from existing interbank offered rates (IBORs) to other reference rates.” The comment period ends November 27, 2019.
COSOThe Committee of Sponsoring Organizations of the Treadway Commission(
                 No new developments.
PCAOB– Public Company Accounting Oversight Board(
                                    No new developments.
SASB– Sustainability Accounting Standards Board(
                                    No new developments.
SEC– Securities and Exchange Commission(
                                  No new developments.


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 Audit & Accounting Alert is a publication of Integra International intended to highlight emerging issues in the profession.  The goal is to give Integra members an awareness of developments impacting the practice of Audit & Accounting enabling them to stay on the forefront of industry trends.This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice.  Please refer to your advisors forspecific advice.

Editor Gerald E. Herter ~ HMWC CPAs & Business Advisors, 17501 E. 17th Street, Suite 100, Tustin CA
email:  [email protected]
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