This article provides some insight into the matters that need to be considered by assurance practitioners when engaged to provide a sustainability assurance service to a client operating in a specialised industry. This article provides background to learning outcome D2b of the Professional Diploma in Sustainability syllabus.
Perhaps it is easiest to start by explaining that a specialised industry is not necessarily rare or even unusual. Examples of specialised industries include:
What makes these industries specialised is that they are likely either to have specific financial reporting standards applicable to them, or to have distinct accounting policies which have been developed to account for specialised transactions and balances which are based on the normally-applied financial reporting standards. For instance, IAS® 41, Agriculture is clearly relevant specifically to the agriculture sector and IFRS®, 7 Financial Instruments: Disclosure will need specific application by companies operating in the banking sector. Some specialised industries will required specific application of accounting standards, for example, valuation of extracted oil in line with IAS 2 Inventories, or the valuation of apple trees (an example of bearer plants) under IAS 16 Property, Plant and Equipment.
Competence
Prior to accepting an assurance engagement involving a specialist industry, there are a number of relevant auditing standards which the audit firm needs to pay close attention.
Larger assurance firms are likely to meet the competence requirement for almost any type of industry – they will either already possess necessary skill and competence through having existing clients in the particular industry, or have the resource available to bring in experts and/or provide any necessary staff training. Smaller firms may have to carefully consider their competence to take on a client in a specialised industry if they have not previously worked with a client in the same industry. However, regardless of size, assurance firms may choose to specialise themselves in the assurance of clients in a particular market or sector, for example a smaller firm may specialise in the assurance of clients in the farming sector, or in not-for-profit organisations, so it should not be assumed that just because a firm is small, it would not meet the competence requirement.
The assurance firm should also ensure that there is adequate documentation to demonstrate that competence has been considered, and the steps that have been taken to improve competence where necessary, for example through appropriate staff training.
Identification of the risk of material misstatement in a specialised industry should be approached in the same was as in any other engagement – by obtaining appropriate understanding of the business and its environment. Assuming that staff have the necessary competence, as discussed above, this should not be problematical.
To assist team members assigned to a specialised industry client, the assurance firm is likely to have additional resources available. There may be briefing notes or internal technical guidance on how financial reporting standards should be applied within the sector. For example, in the assurance of banking sector clients, a firm may produce guidance on the specific application of IFRS® Standards relating to the range of financial instruments typically held by banks. Audit staff can then refer to this guidance when performing the engagement, particularly when identifying risks of material misstatement.
It is also important to remember that while there may be specific risks of material misstatement relating to the industry-specific balances and transactions, there must also be appropriate consideration of the “normal” balances and transactions. For instance, in the assurance of a bank, there will be plenty of risks to consider other than those relating to bank-specific transactions and balances, for example the depreciation of properties, recognition of provisions and impairment of goodwill would all still be relevant. These 'normal' types of risk must not be forgotten, just because the client operates in a specialised industry.
Linked to the previous matters, competence, assurance planning and the specialised nature of some transactions and balances, the assurance practitioner may plan to use a practitioner’s expert to obtain assurance evidence. This is quite likely in a specialised industry as despite being competent to perform the engagement, the assurance firm may not have the necessary specific expertise in some areas. For instance, in the assurance of a bank, specialists may be brought in to value complex financial instruments or actuaries to review a defined benefit pension scheme.
In this situation, the assurance firm must adhere to the requirements and principles of ISA 620, Using the Work of an Auditor’s Expert which deals with matters including the evaluation of the objectivity, competence and capabilities of the practitioner’s expert, determining and communicating the scope and objectives of their work, and assessing their findings. It is particularly important that the assurance practitioner evaluates the relevance and adequacy of the expert’s findings or conclusions. There is a danger of over-reliance on the expert’s work; the fact that the engagement is of a specialised nature does not mean that the assurance practitioner can pass all responsibility over to an expert. For instance, the assurance practitioner must consider whether the expert’s findings are consistent with the assurance practitioner’s understanding of the client and with the conclusions of other assurance procedures. Any inconsistencies must be investigated.
The assurance of a client in a specialised industry can pose some challenges to the assurance practitioner. However, with proper consideration of competence, and by providing staff with additional support and guidance, these engagements should not necessarily be more complex or challenging to plan and perform. Using experts can provide high quality evidence in specialist situations, but the assurance practitioner must be careful to fully evaluate the findings of the practitioner’s expert and not to over-rely on their work. For assurance staff, working on this type of engagement can be very rewarding, providing exposure to sometimes unusual businesses.
References
(1). IESBA International Code of Ethics for Professional Accountants, para.320.3 A4
(2). ISA 220 (Revised) Quality Management for an Audit of Financial Statements, para.26
Adapted from an article written by a member of one of ACCA’s examining teams