Requirement for External Cold File Review

A change has been made to the Audit Regulations which applies to audits for periods ending on or after 15 December 2010. The change is in respect of arrangements for compliance reviews following a change to ISQC1 which also applies from that date.

Change to audit regulations
Chapter 3 of the regulations deals with the conduct of audit work and section 3.20 deals with monitoring. This section includes the requirements in respect of cold reviews of completed audit work to ensure that the ISAs and the firms audit procedures are followed. It indicates that as regards the frequency of reviews, sole practitioners, firms with only one responsible individual and other small firms may have few audit clients. However, consistent with other firms, they still need to consider factors such as employee turnover, high risk clients, changes to auditing standards and new statutory and accounting standard requirements in deciding which files to review; in addition their responsible individuals also tend to retain their own portfolios of clients for lengthy periods. This very familiarity may cause problems and to guard against this a sample of files should be reviewed each year.

Section 3.20 now includes a new paragraph as follows:

In addition, sole practioners, firms with only one responsible individual and other small firms should note that ISQC1 does not permit the responsible individual or the engagement quality control reviewer for a particular audit to undertake a cold file review on that audit. It may be that there is another individual in the firm who, although not a responsible individual, is very experienced in current auditing requirements. Assuming that this individual did not take part in the audit, the firm may decide this individual would be a suitable person to undertake the review. If this is not possible, then the firm should use an external reviewer at least once every three years.

As regards who should perform this review there is a further new paragraph as follows:

There is no need for the firm to conduct the review itself. Some firms may find it more practical and cost-effective to use a service provided by the Institute or some other organisation. In choosing a reviewer, it is important that the firm is satisfied that the reviewer has sufficient experience to undertake the review.

The ICAEW in their recent issue of Audit News have expanded on the above to say that although the revised guidance suggests an external review every three years, for this first cycle of audits that need to comply with the revised ISQC1 it should not be left until year three. Given the changes that implementation of the clarified ISAs may cause, it is important for all firms to review completed clarified ISA audits as soon as possible. Therefore, for firms to whom the revised guidance applies, the suggestion is to arrange an external review as soon as the first audits are completed under the revised ISAs. An external review may be of benefit to larger firms to whom this guidance does not necessarily apply.

File reviews from SWATUK
SWATUK can assist you in ensuring compliance with the Audit Regulations by performing annual compliance reviews and cold file reviews on your behalf.

View further details of SWATUK's audit services.