THIS week’s column is the fifth of our series and we discuss the structure that auditing and accounting standards bring to
Auditing and Accounting Standards
The application of auditing and accounting standards to the operations of SMEs has also been raised as onerous obligations in recent times. In these debates the focus has been on cost rather than an assessment of the benefits. We support the view that “an audit is an audit” and that auditing standards can be applied to entities of all sizes. However, the audit of a SME will have different areas of focus to those identified in the audit of a large public interest entity. The audit of a SME is likely to focus on risks that arise due to their relatively small size and evolving management structures. The audit of a SME is unlikely to be concerned with complex accounting issues. In contrast, the audit of a large listed entity is more likely to focus on areas of risk arising from diversity in operations and complex transactions, which in turn raise more complex accounting issues.
It is our view that the “onerous costs” of an audit are associated with developing the extensive documentation requirements of auditing standards. However, these costs can be minimised if a standardised SME audit approach is implemented. Guidance issued by the International Federation of Accountants (IFAC) clearly demonstrates how auditing standards can be applied to very small entities, and consequently the same principle can be applied to the audit of SMEs.
We consider that the professional accounting bodies should be developing a standardised SME audit approach in accordance with auditing standards for small practitioners. The SME audit approach should be explicitly designed to reflect a typical SME environment with the ability to enter entity specific data, which can be updated at minimum cost each year to reflect changes in the entity’s operations.
The role of a “trusted advisor” in working alongside an SME has been encouraged by the professional accounting bodies over many years. However, the “trusted advisor” role runs the risk of self-interest as the practitioner finds opportunities to sell a broad range of services rather than focusing on issues of relevance to the SME. The application of auditing standards to the audit of SMEs ensures that a structured approach is adopted to consider all aspects of the business following a comprehensive framework. Perceived deficiencies in the mitigation of risk, the lack of appropriate internal control or the use of inappropriate accounting measures for decision-making purposes are critical aspects of business practice, which will be reported by the auditor to management if encountered during the course of the audit.
Further, consideration of the accounting principles set out in accounting standards also promotes many good internal management and reporting practices, and enables benchmarking of performance with other industry participants.
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Baker Tilly International is the world’s 8th largest accountancy and business advisory network by combined fee income of its independent members. It is represented by 126 independent firms in 147 countries with combined fee income of US$3.8bn and 28,000 people worldwide. Its members are high quality, independent accountancy and business advisory firms, all of whom are committed to providing the best possible service to their clients, both in their own marketplace and across the world. Our key services include Auditing, Advisory, Tax and Accounting.
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