SME Audits Need to Improve Part 1

SME Audits Need to Improve Part 1

Nearly a third of UK audits completed by small and mid-tier firms need ‘significant improvements’ after inspections by the Financial Reporting Council (FRC). The inspections were carried out for the year ended 31 March 2023 on 32 firms in total and reported by the Financial Reporting Council in late 2023.

These inspection results will be influential for Irish regulators like the Chartered Accountants Ireland, the CPA Ireland, the ACCA as well as the Irish Audit & Accounting Supervisory Authority when carrying out their inspections of Irish audit firms in 2024.

The Financial Reporting Council say that ‘disappointingly, many of our findings were in routine areas, such as

  • the audit of journal entries;
  • complying with archiving requirements;
  • the audit of judgments and estimates (17% worse than in the previous report), and
  • the audit of going concern.

Audit teams need to demonstrate a greater effort at robust professional scepticism when it comes to both the audit of judgments and estimates, and going concern.

The FRC also suggested audit teams refer to the FRC paper, What Makes a Good Audit.

We will continue with Part Two of this blog next week.

Please also go to our website www.jmcc.ie/training to see our latest:

  • Latest updated AML for Accountants webinar (December 2023) which explains the current legal AML reporting position for accountancy firms and includes a quiz. Upon completion, you receive a CPD Certificate of attendance in your inbox. A 20% discount is available for orders of five or more webinars/products, if bought together.
  • There are other accounting/audit webinars on the site and more will follow throughout 2024.
  • Anti-Money Laundering Policies Controls & Procedures Manual (March 2022) – View the Table of Contents click here.
  • letters of engagement and similar templates. Please visit our site here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items if bought together.
  • ISQM TOOLKIT – We can also tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. The ISQM TOOLKIT 2022 is available to purchase here.
SME Audits Need to Improve Part 2

SME Audits Need to Improve Part 2

In last week’s blog ‘SME Audits Need to Improvewe highlighted a recent report by the Financial Reporting Council (FRC) in the UK about their audit inspection findings for the year ended 31 March 2023. We continue with extracts from the report below.

Going concern was described as ‘an area of particular concern to audit firms’ by the FRC and it resulted in worse findings by 1% compared to the previous review.

Key findings of the review were:

  • going concern included insufficient procedures to test cash flow forecasts;
  • inadequate procedures to elevate the impact of loan covenants;
  • insufficient procedures to assess the financing of debt; and
  • There were ‘shortcomings in the reviews of audit work performed by engagement partners and/or engagement quality control reviewer’.

Other areas that led to such a high number of audits needing significant

 improvement were:

  • Revenue accuracy; and
  • material accounting errors during an

Improvements recommended by the Financial Reporting Council include investment in:

  • audit methodology;
  • human resources,
  • audit quality functions; and
  • learning from mistakes made throughout their current auditing processes.

The FRC also suggested audit teams refer to the FRC paper, What Makes a Good Audit. See how to do this here.

Please also go to our website www.jmcc.ie/training to see our latest:

  • Latest updated AML for Accountants webinar (December 2023) which explains the current legal AML reporting position for accountancy firms and includes a quiz. Upon completion, you receive a CPD Certificate of attendance in your inbox. A 20% discount is available for orders of five or more webinars/products, if bought together.
  • There are other accounting/audit webinars on the site and more will follow throughout 2024.
  • Anti-Money Laundering Policies Controls & Procedures Manual (March 2022) – View the Table of Contents click here.
  • letters of engagement and similar templates. Please visit our site here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items if bought together.
  • ISQM TOOLKIT – We can also tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. The ISQM TOOLKIT 2022 is available to purchase here.

FRC Staff Factsheets on FRS 102

Suite of seven staff factsheets issued in December 2018

The Financial Reporting Council (FRC) has issued a suite of seven staff factsheets in December 2018 on aspects of FRS 102, including the 2017 triennial review.

These become effective from 1 January 2019, with early adoption allowed under certain conditions. They are available here:

Fact Sheet 1 – FRS 102: Triennial Review 2017 Amendments (PDF)

This factsheet consists of two parts: the first part outlines the five principal amendments that have been made while the second part outlines notable amendments by section. FRS 102 .

Fact Sheet 2 – FRS 102: Triennial Review 2017 Transition (PDF) – outlines the most notable amendments by section.

There are five other Factsheets which are fully updated for the recent changes as follows:

Fact Sheet 3 – FRS 102: Illustrative Statement of Cash Flows (PDF)
Fact Sheet 4 – FRS 102: Financial Instruments (PDF)
Fact Sheet 5 – FRS 102: Property: Fair Value Measurement (PDF)
Fact Sheet 6 – FRS 102: Business Combinations (PDF)
Fact Sheet 7 – FRS 102: Transition to FRS 102 

For more on the latest FRS 102 developments please see our webinar, ‘FRS 102 The New Regime from 1 January 2019’, here.

We have several other up to date webinars to choose from here with special offer prices for bundle purchases.


First FRC review makes FRS 102 Investment Property Accounting Tougher

First FRC review makes FRS 102 Investment Property Accounting Tougher

For more on FRS 102 (including the new Section 1A for ‘small’ entities) and the proposed changes in FRED 67 come to our next series of CPD courses in the Talbot Hotel, Stillorgan, County Dublin starting on Monday 27 November 2017. Other courses are also available at Ticket Tailor here.

In its first review since 2013 of the new Irish GAAP, the Financial Reporting Council (FRC) has proposed changes to reporting of investment property, the definition of financial instruments and the treatment of directors’ loans.

It seems hard to believe that FRS 102, the latest version of which is September 2015, was originally published in March 2013. Meanwhile four years later, in March 2017, the FRC published Financial Reporting Exposure Draft 67 (FRED 67), setting out changes to the standard as a result of its first triennial review. FRED 67 contains some significant changes which are expected to become effective from 1 January 2019.

In this first of a two-part blog, we look at one of the main areas most likely to affect our readers.

Investment property

At present, FRS 102 requires that investment property should be measured at fair value through profit or loss, unless obtaining a reliable fair value on an ongoing basis would amount to ‘undue cost or effort’ (interpreted as only rarely applying, where it is practically impossible to locate a valuer), in which case it can be measured at cost. However, this provision has not always been applied correctly in practice.

The exposure draft states that entities may be treating the ‘undue cost or effort’ option as a free accounting policy choice and states clearly that this is not the case. FRED 67 suggests removing the ‘undue cost or effort’ exception entirely, meaning that investment property will always, with one exception, need to be held at fair value. The exception is for property let out to another group member, where the FRED introduces an accounting policy choice between cost/fair value.

Where investment property is partly let out to a group member and partly let out to an external party, the property will need to be split between the two and the externally let portion must be shown at fair value.

The proposals mean that the requirements for investment property accounting will become tougher than they are at present, while there is some welcome relaxation of the requirements in group situations.

Other proposals relate to financial instruments, intangible assets and small entity directors’ loans. We will cover these in another a blog very soon.

It is expected that the updated version of FRS 102 will be published in late 2017 in time for use for accounting periods commencing on/after 1 January 2019, with early adoption expected to be allowed for accounting periods commencing on/after 1 January 2018.

Exposure draft FRED 67

For a copy of the 142-page exposure draft go to this link FRED 67, Draft amendments to FRS 102 Financial Reporting Standard applicable in the UK and Republic of Ireland, Triennial review 2017.

For more on FRS 102 (including the new Section 1A for ‘small’ entities) and the proposed changes in FRED 67 come to our next series of CPD courses in the Talbot Hotel, Stillorgan, County Dublin starting on Monday 27 November 2017. Other courses are also available at Ticket Tailor here.

 

FRS 102 – Interim relief for Treatment of Directors’ Loans

FRS 102 – Interim relief for Treatment of Directors’ Loans

FRS 102 – Interim relief for Treatment of Directors’ Loans

by John McCarthy

On Monday 8 May 2017, the Financial Reporting Council (FRC) issued a press release on director’s loan reporting for small companies. It has announced that it is withdrawing the requirement to find a market rate of interest where a loan is made on an off-market basis under Irish GAAP. This is an unusual move for the FRC, as it is making the change without consultation, presumably on the basis of demand from the profession.

In March, the FRC published Financial Reporting Exposure Draft 67 (FRED 67) which set out changes to FRS 102 as a result of the first triennial review, outlining potential changes to be made to director’s loans accounting. We will cover the changes in this FRED in a future blog.

The FRC has now responded to calls to create an interim optional exemption for small companies, allowing them to measure a basic financial liability that is a director’s loan initially at transaction price.

The FRC Press Release states: ‘A small entity, as an exception to paragraph 11.13, may measure a basic financial liability that is a loan from a director who is a natural person and a shareholder in the small entity (or a close member of the family of that person) initially at transaction price.  Subsequently, for the same financial liability, a small entity is also exempt from the final sentence of paragraph 11.14.’

The measure announced applies to credit loans. The FRC has clarified that the interim measure will not apply to loans from small companies to their directors/shareholders i.e. debit loans.

As it is an interim measure, the amendment will be deleted as part of the finalisation of FRED 67, expected around January 2018. It will then be replaced with permanent requirements based on the proposal in FRED 67 after the outcome of the consultation process. The changes in FRED 67 are not expected to come into effect until periods commencing 1 January 2019, but early adoption may be allowed.

The FRC said: ‘Whilst it is usual for the FRC to consult formally on amendments to an extant standard, the FRC has concluded that this is not essential in this case as the amendment is only an interim measure, it merely defers for many entities the first-time application of an accounting policy of measuring such loans initially at present value and the permanent removal of this policy is already subject to an on going consultation.’

‘We have also explained that, in the context of owner-managed businesses in particular, many question the value of the notional interest charge to profit or loss in such circumstances, especially where the notes to the accounts adequately disclose the nature and terms of outstanding directors’ loans.’

For more on FRS 102 and the proposed changes in FRED 67 come to our next CPD course at the Talbot Hotel Stillorgan County Dublin on Monday 27 November.  For more details and online bookings see here.

 Other courses are also available at Ticket Tailor here.