Guidance emerging from the International Federation of Accountants might prove useful even in the United States in the coming weeks as companies close the books on 2011 and plan for the year ahead.
IFAC's International Auditing and Assurance Standards Board has issued a practice note on special considerations that should be taken into account when auditing financial instruments. The alert, titled International Auditing Practice Note 1000, provide some practical assistance to auditors when dealing with valuation and other issues related to financial statement assertions, a touchy and complex area in any entity's financial statements in light of economic pressures and an increasing focus on fair value.
According to IAASB Chairman Arnold Schilder, the practice note can help auditors understand the nature of and risks associated with financial instruments as well as the different valuation techniques and types of controls entities may use in relation to them. The guidance also highlights audit considerations that should be taken into account throughout the audit process. IAASB Technical Director James Gunn said through a statement that the exercise of developing the guidance was informative even to the board, which will further inform the board's work as it develops future auditing standards.
In a separate release, IFAC's Professional Accountants in Business Committee has proposed some best practices guidance on evaluating and improving internal controls to help organizations benchmark their work in maintaining effective controls. The committee says the guidance is intended to be useful to any organization, regardless of the internal control framework it uses, to help deal with internal control issues that are often problematic because of poor design or implementation.
Vincent Topoff, the committee's senior technical manager, says the guidance would be meaningful even to U.S. companies where internal controls are more closely scrutinized because it was developed in part by U.S. experts who have spent many years working to improve internal controls. “Together, they have identified in this guidance those areas where the application of good practice guidance often goes wrong,” he says. “This guidance considers the areas organizations need to continuously improve and the issues they need to address.” The guidance is not meant to replace any existing framework that is in use, he says.
Finally, the IAASB also refreshed its warnings to auditors to keep economic conditions and pressures in mind as they consider whether disclosures are adequate and whether there is reason to doubt an entity can continue as a going concern. Companies continue to face volatility in capital markets and exposure to debt in distressed countries, leading to uncertainty that puts pressure on cash flow and access to credit, the board advises. Those factors complicate the audit process, and therefore must be considered closely, the board says.
“We cannot stress enough the importance of professional skepticism and judgment in evaluating financial statement disclosures and the implications for the auditor's report when a material uncertainty exists relating to events or conditions that, individually or collectively, may cast doubt on the entity's ability to continue as a going concern,” said Shilder in a statement. He advises auditors to brush up on the board's 2009 staff audit practice alert, “Audit Considerations in Respect of Going Concern in the Current Economic Environment.”
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