IPR tests negative

The government will be left in a quandary over how to ensure that SME accounts are reliable after field tests around the country organised by the Auditing Practices Board revealed that the independent professional review (IPR) creates more problems than it solves (see also p 21).

The results of test IPRs carried out on 20 companies that will be exempt from the statutory audit once the audit threshold is lifted to £4.8m raise questions over its effectiveness - in six cases misstatements were picked up by audits following on from the IPR and in one case the audit uncovered a fraud that the IPR had missed. And practitioners voiced very real concerns about the expectation gap that might be created because they found it too difficult to distinguish an IPR from an audit and to communicate via the IPR report the limited assurance that it provides.

The IPR was first mooted by the Company Law Review as a 'light touch' alternative to the audit for companies with turnovers of £1m to £4.8m. The idea proved controversial, though, and the profession was split over questions of costs, benefits and effectiveness. As a result, the APB decided to pilot a model, which it based on the International Auditing Practices Committee's ISA 910 review.

The model is procedural rather than risk-based, and involves an enquiry and an analytical review. There is a ban on obtaining corroborative evidence and the reviewer's report provides negative assurance.

The IPR's design caused practitioners major headaches - in particular, its reliance on enquiry and the prohibition on corroboration.

As far as costs were concerned, the level of savings varied according to the company's size. Those with the lowest savings (average 27%) were smaller companies (average turnover £1.66m) whose auditors were involved in preparing the accounts as well as auditing them. Larger companies ( turnover £3.135m), which had inhouse expertise and so paid for a pure audit, saw average costs savings of 61% (£2,400). The accounts compiled by the auditors, however, had fewer misstatements than those that were prepared inhouse.

The APB's Steve Leonard said that those involved were unsure whether the cost reduction was worthwhile in terms of the reduced level of assurance provided. 'A lot of people felt that it was 50% of the cost of an audit but really only 30% of the benefit.'

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