IAIS on Combined ED “Proposals Relating to IAPSs & IAPS 1000 Special Considerations in Auditing Complex Financial Instruments
11 February 2011
The IAIS welcomes the opportunity to comment on the IAASB's combined ED 'Proposals Relating to IAPSs and IAPS 1000 Special Considerations in Auditing Complex Financial Instruments'. The IAIS views this as an important document in relation to the audit of insurance companies and insurance groups.
The IAIS finds the revised proposed format for IAPS 1000 has enhanced the readability of the document, and congratulates the drafting team on the improvements that have been made. However, the IAIS continues to believe that a greater focus on practical advice on audit procedures when auditors are dealing with entities with more complex and structured financial instruments would enhance the usefulness to the reader. While the IAIS acknowledges that the Board has indicated on page 22 that “the proposed IAPS would be most useful and the demand for auditing guidance is best served by addressing the more general needs of the broadest group of auditors on an international basis, rather than endeavouring to comprehensively address the issues faced by auditors of a highly specialised industry”, the IAIS believes that entities other than large financial institutions also hold many complex instruments, and that there is a current and pressing need to address this audit area on a globally consistent basis, given the recent financial crisis. If these issues are not addressed, then the IAIS suggests that the IAASB take on this very important and timely project as soon as possible, especially in view of the new accounting standards in this area.
The IAIS believes that the document could be improved by addressing more complex financial instruments, such as procedures in relation to hedge accounting; procedures in relation to risk transfer and clean sale, wash sales and other complex sale/purchase arrangements (recognition and derecognition) and in particular where the entity has been involved in the origination and structuring of the financial instruments (see paragraph below); and procedures relating to disclosure when taking a holistic viewpoint of disclosures by the entity.
Second, the ED does not address the situation where the entity has been involved in the origination of complex, structured financial instruments. Usually, complex structured financial instruments are developed with particular accounting, taxation and perhaps regulatory outcomes in mind and require complex accounting, taxation and legal judgements.
The IAIS also continues to be of the view that there should be a greater obligation for auditors to take heed of the content of the IAPS than proposed in the ED. The IAIS would prefer a stronger status for the IAPS that requires auditors to consider the practice statement where it is relevant to an audit, and to be able to explain how else they have fulfilled the requirements of the ISAs if they have not taken into account the material aspects of the IAPS. There should be a requirement for the auditor to document their consideration and how the requirements of the ISAs were met if the IAPS was not followed.
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