By Eric Turner and David Selley
Illustration: Mike Constable
 THE NEW SECTION 5049 IS BROADER IN SCOPE AND ENCOMPASSES ALL ASSURANCE ENGAGEMENTS IN WHICH A SPECIALIST MAY BE USED
This March, the Assurance Standards Board issued new Handbook Section 5049, "Use of specialists in assurance engagements." It replaces Public Sector Auditing Section PS6430, "Engaging and using specialists in value-for-money audits," and Section 5360, "Using the work of a specialist." It also replaces the limited guidance on use of specialists provided in Section 5025, revised to include cross-references to the new section.
The new section is broader in scope and encompasses all assurance engagements in which a specialist may be used. It is not restricted to audits of financial statements and value-for-money audits. Although the primary focus is on high-level assurance engagements (audits), it also provides guidance on the less frequent use of specialists in moderate-level assurance engagements (reviews).
The new section covers use of specialists in the following circumstances:
· In the complete range of subject matters on which practitioners report, including traditional reports on financial statements. That is, it is a true assurance standard: the first guidance standard issued at that level.
· In both high- and moderate-level assurance engagements, although with primary emphasis on the former.
· When the specialist is employed by, or engaged by, the accountable party, and when the specialist is employed by, or engaged by, the practitioner or his or her firm.
· When the specialist works at arm's length from the practitioner, or works as part of the practitioner's team. To illustrate this difference, an oil and gas reserve engineer, or an actuary who issues a statutory report on the reserves of a life insurance entity, usually works independently from the auditor of an entity's financial statements and issues a report that the practitioner uses as evidence. On the other hand, a practitioner may engage one or more environmental scientists to become part of the team in an assurance engagement to report on an accountable party's sustainability report. While communication is important in both cases, it will be continuous when the specialist is part of the team. When the specialist is at arm's length, documentation will usually consist of the specialist's report, evidence of communications and the practitioner's evaluation of the report. If the specialist is part of the team, documentation will usually form part of the practitioner's working papers. In many cases, such specialists will be members of the practitioner's firm.
The foundation of Section 5049 is Section 5025, "Standards for assurance engagements." The task force that shepherded the assurance standards through a discussion and exposure process in the mid-1990s realized that, as subject matters of assurance engagements increasingly expanded beyond financial information, use of specialists would likely become more common and pervasive. Furthermore, several respondents to the Section 5025 exposure draft recommended more guidance on use of specialists. Accordingly, when the final section was issued in 1997, the ASB included additional guidance on use of specialists. It also concluded that more comprehensive guidance would likely be required and commissioned a research report, "Use of specialists in assurance engagements," (2000). The new section flows from the report's recommendations and expands the guidance of the sections it replaces. Practitioners will need to pay particular attention to several areas where significantly more guidance is provided.
Throughout the process of formulating the standards, one difficult and controversial issue has been how far it is appropriate for public accountant practitioners to stray from subject matters in which they are professionally trained — primarily financial and accounting information and related subject matters such as systems and controls, tax and business finance. Section 5025 discusses limits on acceptance of assurance engagements. The new section expands on this discussion in the context of the use of specialists. While appropriate use of specialists can permit practitioners to expand the range of subject matters on which they may usefully report, there are limits beyond which it would be imprudent for practitioners to go –– e.g., the standard suggests in some cases it may be more appropriate for the specialist to provide assurance and the practitioner to provide assistance on assurance standards and techniques. As noted, the section provides guidance to help practitioners decide when it is appropriate to accept an assurance engagement and how to involve a specialist.
The new standard contains guidance on procedures to maintain confidentiality of accountable party information when the specialist is engaged by the practitioner or by the accountable party. Practitioners are required to instruct specialists they engage to maintain confidentiality of the accountable party and practitioner information. At the same time, the practitioner is required to obtain accountable party agreement for a free exchange of information between practitioners and the specialists they engage.
Expanded guidance is provided for communications between practitioners and specialists, focusing primarily on engagements where specialists are engaged by the practitioner and by the accountable party. The purpose of these communications is to enable the practitioner to be satisfied that there is an appropriate understanding between the practitioner and the specialist on their roles and responsibilities. For example, it is important that the practitioner and the specialist communicate sufficiently to minimize misunderstandings that could cause a practitioner to misinterpret the specialist's findings. The communication may range from no direct communication — when the specialist's findings are of little significance to the engagement — to formal written terms of engagement in a specialist engagement letter.
Guidance is significantly expanded on assessing the specialist's work and findings. It includes guidance on assessing the risk associated with use of the specialist's work and findings and a range of possible responses to that risk. Examples of risk factors are provided, relating to such matters as the significance of the specialist's work, the complexity of the subject matter and the practitioner's knowledge of and experience with the specialist's work. Risk also relates to the relationship between the specialist and the accountable party. For example, other things being equal, risk is higher when the accountable party employs the specialist.
When risk is judged to be low, enquiry, discussion and analytical procedures concerning the source data and criteria used by the specialist, the specialist's assumptions and methods, a review of the specialist's findings, and report, if any, may be a sufficient response. As risk is judged to be higher, further procedures would be considered, ranging from tests of source data, additional and more rigorous enquiry (an appendix offers further guidance), performance of corroborative procedures on the specialist's work, and review of the specialist's documentation. In some high-risk circumstances, the practitioner hires a second specialist to corroborate the findings of the first or to assist in the performance of corroborating procedures or review of documentation.
The reporting standards retain the existing Handbook prohibition on reference to use of a specialist in an unqualified audit, or short-form report, because the reference may unduly emphasize that source of evidence. However, reference to use of a specialist in long-form reports is permitted when appropriate, provided it does not detract from the practitioner's overall conclusion. A short-form report is limited to the minimum elements set out in the assurance standards and, in the case of audits of financial statements, in the auditor's standard report. A long-form report elaborates on some or all the elements or includes additional elements (e.g., value-for-money audits performed in the public sector may elaborate on the scope of the audit in which case it would be appropriate to describe any use of the work and findings of a specialist).
Appendices are provided on matters the practitioner considers in reaching a working agreement with a specialist, elements of a specialist's formal report and illustrative questions practitioners may ask specialists in certain circumstances.
As practitioners, particularly those in the private sector, increasingly provide assurance on nontraditional subject matters, the guidance in this new section will establish a framework that reduces the risks of venturing into less charted waters. Many believe it is important for our profession, and in the public interest, to apply our unparalleled skills and experience in auditing and assurance to a greater range of subject matters where users require assurance (for example, on sustainability reporting). Since it is unrealistic to expect accountants on their own to obtain sufficient subject matter knowledge to do this, use of specialists is an obvious solution. Ideally, the matching of the practitioner's assurance skills and the specialist's subject matter skills can be highly beneficial to accountable parties, to users of their reports, and to the public.
Eric Turner, CA, is a principal in the CICA's Assurance Standards department.
David Selley, FCA, is a consultant with assurance standards.
Technical Editor: Robert T. Rutherford, FCA, Vice-president, Standards, CICA. |
