The revisions to Practice Note 19 reflect revisions to UK auditing standards (ISAs (UK)), with the most significant changes involving a rewrite of the guidance on handling ISA (UK) 540 Auditing Accounting Estimates and Related Disclosures, which is effective for audits of financial statements for periods beginning on or after 15 December 2019 (early adoption is permitted).

This guidance clarifies the audit of estimates for expected credit losses (ECL), hedge accounting and effective interest rate accounting which are of particular relevance in banks and building societies.

This will be relevant for auditors even if they have not early adopted ISA (UK) 540 (Revised December 2018).

Auditors of banks and building societies need to be aware of the specific regulatory requirements, including capital adequacy requirements, that apply to banks and building societies, some of which impact on the auditor. The latest 129-page Practice Note also gives guidance on these.

As publication pre-empts the UK’s Brexit departure, the guidance includes all relevant EU rules. There have also been a number of changes in relevant legislation and regulation (at the time of publication, there are EU regulations, including binding technical standards, that apply directly to UK banks and building societies). References to EU regulations have been included in the revised practice note. When the UK ceases to be a member of the EU these references will be updated, the FRC confirmed.

The guidance also needed updating as it had not been revised since the establishment of the Prudential Regulatory Authority (PRA) and Financial Conduct Authority (FCA), which replaced the Financial Services Authority (FSA) in 2013 after the financial crash.

The practice note has been developed with input from an expert working group including representation from audit firms with bank audit expertise, the banking industry, and the banking regulators. The revisions that the FRC has made will support the delivery of high quality audit, and responds to findings from the FRC’s audit inspection work covering bank audits, which were covered extensively in public reports in June 2018.

Practice notes are intended to assist practitioners to comply with the requirements of UK auditing standards, by providing additional contextual material on the application of those standards in particular circumstances or in specialised sectors.

FRC Practice Note 19 issued 3 July 2019

Sara White