The International Federation of Accountants (IFAC) Small and Medium Practices (SMP) Committee has released a report on research into whether the proposed International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs), developed by the International Accounting Standards Board (IASB), is suitable for micro-entity financial reporting. The paper, Micro-Entity Financial Reporting: Some Empirical Evidence on the Perspectives of Preparers and Users, presents the findings of focus group interviews of users and preparers of micro-entity financial reports in Italy, Kenya, Poland, Uruguay, and the United Kingdom.

Focus group participants indicated that the current exposure draft of the IFRS for SMEs appears to be too complex for micro-entities - defined as entities with fewer than 10 employees - and suggested that relatively minor changes to the current draft might not be sufficient to address this concern. Participants who supported the development of a separate set of accounting guidance for micro-entities generally felt that two levels should be developed: a concise version that would be easy for business owners to follow and understand and a more technical version for preparers of financial statements. In addition, there was general support for some form of attestation, such as a statement made by the professional accountant, to be attached to the financial reports of micro-entities.

"The research offers some interesting insights into the views of preparers and users drawn from a small but diverse range of countries," states Sylvie Voghel, Chair of the IFAC SMP Committee. "While these countries do not constitute a globally representative sample, the research does question the suitability of the proposed IFRS for SMEs to micro-entities."

The paper was developed as part of the second phase of the SMP Committee's project on micro-entity financial reporting and follows the release in December 2006 of an information paper entitled Micro-Entity Financial Reporting: Perspectives of Preparers and Users. The findings in the new paper were considered in the development of the IFAC comment letter on the proposed IFRS for SMEs, which can be viewed online.

The following IFAC member bodies assisted in organizing focus groups: Accountants Association in Poland, Association of Chartered Certified Accountants, Colegio de Contadores Economistas y Administradores del Uruguay, Consiglio Nazionale Dottori Commercialisti, and the Institute of Certified Public Accountants of Kenya. The research was undertaken by Dr. Suki Sian of Cardiff Business School, Wales and Professor Clare Roberts of the University of Aberdeen, Scotland.

The information paper can be downloaded free-of-charge from the SMP section of the IFAC online bookstore. Further information on IFAC's work to support SMPs and SMEs is available at http://www.ifac.org/smp.

For more information on the development of an IFRS for SMEs, visit the IASB's website.

IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC is comprised of 158 members and associates in 118 countries, representing more than 2.5 million accountants in public practice, education, government service, industry and commerce. Through its independent standard-setting boards, IFAC establishes international standards on ethics, auditing and assurance, education, and public sector accounting. It also issues guidance to encourage high quality performance by professional accountants in business and those working in small and medium practices.

This paper presents the findings of focus group interviews on whether the proposed International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs), developed by the International Accounting Standards Board, is suitable for micro-entity financial reporting.

These guidelines are designed to support the development of collaborative and mentoring relationships between professional accountancy organizations.

At its recent meeting in Washington, D.C., the International Auditing and Assurance Standards Board (IAASB), an independent standard-setting board under the auspices of the International Federation of Accountants (IFAC), approved three new proposed standards: two focus on enhancing the auditors’ consideration of controls at service organizations, and the third addresses the communication of deficiencies in internal control to those charged with governance. These standards reflect the importance of internal control within audited entities and at their service organizations, and of the auditor’s responsibility to make significant findings available to those charged with governance. The IAASB is also releasing two exposure drafts written in accordance with the new clarity drafting conventions.

Third Party Service Organizations
Many entities outsource aspects of their businesses to organizations that provide services ranging from performing a specific task under the direction of the entity to replacing one or more of the entity’s business units or functions. Frequently, services provided by such organizations are integral to the entity’s information system relevant to financial reporting.

Following a risk-based approach, proposed International Standard on Auditing (ISA) 402 (Revised and Redrafted), Audit Considerations Relating to an Entity Using a Third Party Service Organization, deals with the auditor’s responsibilities to obtain audit evidence when an entity uses one or more service organizations. This may include obtaining reports prepared by the auditors of those organizations.

Proposed International Standard on Assurance Engagements (ISAE) 3402, Assurance Reports on Controls at a Third Party Service Organization, is the first subject matter-specific standard developed under the IAASB’s International Framework for Assurance Engagements. It complements proposed ISA 402 (Revised and Redrafted) in that reports prepared in accordance with proposed ISAE 3402 will be capable of providing appropriate audit evidence under the proposed ISA. It will help to bring consistency in reporting on controls at service organizations, thereby assisting such organizations to meet the needs of clients (“user entities”) and their auditors. In particular, it should ensure that reports issued in one country are likely to meet the requirements of the auditors of user entities in other countries.

“The proposed standards reflect the IAASB’s recognition of the increasing use of service organizations worldwide. In revising our existing standard for the auditors of user entities, and complementing it with a new standard for the auditors of service organizations, we are proposing consistent and comprehensive guidance for this important aspect of auditing,” says John Kellas, Chairman of the IAASB.

Communicating Deficiencies in Internal Control
The IAASB also seeks comments on proposed ISA 265, Communicating Deficiencies in Internal Control. This deals with the auditor’s responsibility to communicate to management and those charged with governance deficiencies in internal control that have been identified by the auditor. It distinguishes between significant and other deficiencies in order to establish requirements to communicate to the appropriate levels within the audited entity. It also requires the former to be communicated in writing to those charged with governance.

“This new proposed standard is intended to enhance the effectiveness of the auditor’s communication of deficiencies in internal control by requiring a clearer focus on what is important to those taking ultimate responsibility for control over financial reporting. The proposed standard will require these matters to be communicated in writing, and on a timely basis so that those charged with governance can take steps to strengthen internal control,” explains Mr. Kellas.

New Clarity Exposure Drafts
The IAASB has also approved the following exposure drafts of proposed ISAs:

• ISA 501 (Redrafted), Audit Evidence Regarding Specific Financial Statement Account Balances and Disclosures; and
• ISA 520 (Redrafted), Analytical Procedures.

These exposure drafts form part of the IAASB’s ambitious 18-month program to redraft existing standards and to develop new and revised standards following the new clarity drafting conventions. Subject to any comments on exposure, the final standards will become effective for audits of financial statements for periods beginning on or after December 15, 2009.

How to Comment
Comments on the exposure drafts are requested as follows:

• Proposed redrafted ISAs 501 and 520 by March 31, 2008;
• Proposed ISA 402 (Revised and Redrafted) and proposed ISA 265 by April 30, 2008; and
• Proposed ISAE 3402 by May 31, 2008.

The exposure drafts may be viewed by going to http://www.ifac.org/EDs. Comments may be submitted by email to EDComments@ifac.org. They can also be faxed to the attention of the Executive Director, Professional Standards at +1 (212) 286-9570 or mailed to IFAC, 545 Fifth Avenue, 14th Floor, New York, NY 10017, USA. All comments will be considered a matter of public record and will ultimately be posted on IFAC’s website.

About the IAASB and IFAC
The objective of the IAASB is to serve the public interest by setting high quality auditing and assurance standards and by facilitating the convergence of international and national standards, thereby enhancing the quality and uniformity of practice throughout the world and strengthening public confidence in the global auditing and assurance profession. The Public Interest Oversight Board oversees the activities of the IAASB and, as one element of that oversight, establishes its due process and working procedures.

Founded in 1977, IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC is comprised of 158 members and associates in 123 countries and jurisdictions, representing more than 2.5 million accountants in public practice, education, government service, industry and commerce. In addition to setting international auditing and assurance standards through the IAASB, IFAC, through its independent standard-setting boards, sets international ethics, education, and public sector accounting standards. It also issues guidance to encourage high quality performance by professional accountants in business.

The International Auditing and Assurance Standards Board (IAASB), an independent standard-setting board under the auspices of the International Federation of Accountants (IFAC), has reached another milestone in its Clarity Project. Following the consideration and approval of due process by the Public Interest Oversight Board (PIOB), the IAASB issued three final standards that reflect its new clarity drafting conventions:

• International Standard on Auditing (ISA) 230 (Redrafted), Audit Documentation;
• ISA 260 (Revised and Redrafted), Communication with Those Charged with Governance; and
• ISA 720 (Redrafted), The Auditor's Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements.

The standards form part of the IAASB's ambitious 18-month program to redraft existing standards and to develop new and revised standards following the clarity drafting conventions.¹
 
"The complete set of clarified ISAs, including some newly revised standards also under development, will be effective for audits of financial statements for periods beginning on or after December 15, 2009. We are releasing standards as they are approved in order to provide standard setters, regulators and auditors with sufficient time to plan for the adoption and implementation of the standards," explains John Kellas, IAASB Chairman.

Audit Documentation
ISA 230 (Redrafted) incorporates several enhancements and additional guidance to clarify the auditor's documentation obligations. In particular, it explains in clearer terms what is expected of the auditor in fulfilling the requirement to document compliance with ISAs, and provides clarifying guidance regarding the circumstances in which it is appropriate for the auditor to prepare audit documentation relating to the use of professional judgment. The flow of the requirements in the redrafted ISA, particularly in relation to changes to audit documentation after the date of the auditor's report, has also been simplified and clarified.

Communication with Those Charged with Governance
ISA 260 (Revised and Redrafted) has been fully revised. It sets out an overarching framework for communication with those charged with governance; it also identifies specific matters to be communicated by the auditor, including a requirement to communicate in writing about auditor independence. It acknowledges that law or regulation or an agreement with the entity, for example, may require that other matters be communicated. The ISA contains new requirements and guidance dealing with the communication process, including a specific requirement for the auditor to evaluate the adequacy of the two-way communication between the auditor and those charged with governance.

"The quality of the relationship between auditors and directors, audit committees and others charged with governance is one of the most important factors in achieving an effective audit. That is why the IAASB has emphasized the importance of two-way communication. A constructive and open working relationship between the auditor and those charged with governance not only assists the auditor in obtaining relevant information, but also assists those charged with governance in fulfilling their responsibility to oversee the financial reporting process," notes Mr. Kellas.

The Auditor's Responsibility in Relation to Other Information
ISA 720 (Redrafted) deals with the auditor's responsibility in relation to other information in documents containing audited financial statements and the corresponding auditor's report. It requires the auditor to read this other information and to respond appropriately when such information could undermine the credibility of the financial statements.

The clarified ISAs can be downloaded from the IFAC online bookstore at http://www.ifac.org/store.

About the IAASB and IFAC
The objective of the IAASB is to serve the public interest by setting high quality auditing and assurance standards and by facilitating the convergence of international and national standards, thereby enhancing the quality and uniformity of practice throughout the world and strengthening public confidence in the global auditing and assurance profession. The Public Interest Oversight Board oversees the activities of the IAASB and, as one element of that oversight, establishes its due process and working procedures.

Founded in 1977, IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC is comprised of 158 members and associates in 123 countries and jurisdictions, representing more than 2.5 million accountants in public practice, education, government service, industry and commerce. In addition to setting international auditing and assurance standards through the IAASB, IFAC, through its independent standard-setting boards, sets international ethics, education, and public sector accounting standards. It also issues guidance to encourage high quality performance by professional accountants in business.

Further information about IAASB may be obtained from its website: http://www.iaasb.org. The PIOB website address is http://www.ipiob.org.

¹ Key elements of the clarity drafting conventions include: establishing an objective for the auditor with respect to the subject matter of each standard; clearly distinguishing requirements from guidance on their application; avoiding ambiguity through eliminating the present tense to describe actions by the auditor and using more imperative language where a requirement was intended; and other structural and drafting improvements to enhance the overall readability and understandability of the standards.

To increase the accessibility of its guidance worldwide, the International Federation of Accountants (IFAC) has developed a database that enables professional accountants to locate third-party translations of its pronouncements in more than 30 languages. The database features information on the languages available, publication titles, names of translating organizations and, where available, lists of translated key terms. To facilitate translation and reproduction of its pronouncements, IFAC has released the following two updated policy statements: Policy for Reproducing, or Translating and Reproducing, Publications Issued by the International Federation of Accountants; and Permission to State that the International Federation of Accountants has Considered a Translating Body's Process for Translating Standards and Guidance. These initiatives are the first of a number of ways in which IFAC is working to make its standards and guidance, especially those of its independent standard-setting boards, available to the widest international audience. This is central to IFAC’s mission of serving the public interest, promoting adherence to high quality professional standards, and furthering international convergence. The translations database and the policy statements can be accessed on the IFAC website at http://www.ifac.org/translations. Founded in 1977, IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC is comprised of 158 members and associates in 123 countries, representing more than 2.5 million accountants in public practice, education, government service, industry and commerce. Through its independent standard-setting boards, IFAC sets international standards on ethics, auditing and assurance, education and public sector accounting. It also issues guidance to encourage high quality performance by professional accountants in business.To increase the accessibility of its guidance worldwide, the International Federation of Accountants (IFAC) has developed a databasethat enables professional accountants to locate third-party translations of its pronouncements in more than 30 languages. The database features information on the languages available, publication titles, names of translating organizations and, where available, lists of translated key terms. To facilitate translation and reproduction of its pronouncements, IFAC has released the following two updated policy statements:

• Policy for Reproducing, or Translating and Reproducing, Publications Issued by the International Federation of Accountants; and
• Permission to State that the International Federation of Accountants has Considered a Translating Body's Process for Translating Standards and Guidance.

These initiatives are the first of a number of ways in which IFAC is working to make its standards and guidance, especially those of its independent standard-setting boards, available to the widest international audience. This is central to IFAC’s mission of serving the public interest, promoting adherence to high quality professional standards, and furthering international convergence. The translations database and the policy statements can be accessed on the IFAC website at http://www.ifac.org/translations. Founded in 1977, IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC is comprised of 158 members and associates in 123 countries, representing more than 2.5 million accountants in public practice, education, government service, industry and commerce. Through its independent standard-setting boards, IFAC sets international standards on ethics, auditing and assurance, education and public sector accounting. It also issues guidance to encourage high quality performance by professional accountants in business.

The International Federation of Accountants (IFAC) has released a policy position on professional regulation of the accountancy profession in which it states that professional accountancy bodies, acting in the public interest, must play an active role in the regulation of the profession. The paper also emphasizes that effective regulation is "proportionate, transparent, implemented consistently and fairly, and subject to regular review."