17 July 2020
For someone whose main task is to audit financial information, auditing mainly non-financial service performance information can be challenging. A deliberate shift of perspective is required – like putting on a different kind of auditing hat.
NOTE: This article has had to be updated a couple of times because of deferrals to the standards, resulting in a mismatch of application dates. We suggest that if PBE FRS 48 has been adopted that NZ AS1 be used to audit it as there is a clear line between the two standards. For the XRB’s reasoning see here.
In December 2015 the XRB issued EG Au9 “Guidance on the audit or review of the performance report of Tier 3 not-for-profit public benefit entities”. This helped us all get started, but it was clear that a new standard applying to a wider field than just Tier 3 entities and addressing service performance information more specifically was needed.
To meet this need, the NZ Auditing and Assurance Board (NZAASB) released NZ As1 “The Audit of Service Performance Information”. Now effective from 1st of January 2023 (but with early adoption permitted), this provides much more clarity. We have now released audit templates to help apply this standard (see below).
EG Au9 provided limited help through a simple set of prescriptive guidelines referencing ISAE (NZ) 3000, whereas NZ AS 1 provides clear objectives, principles, requirements, and application material. NZ AS 1 applies to a much broader range of potential service performance reporting (including Tier 1 and 2 PBE as per PBE FRS 48 – see below).
Problems addressed by the new standard
Since reporting on service performance information is relatively new, many reporting entities are still coming to grips with the objectives and requirements of service performance reporting. This has resulted in problems such as:
- Changes made to information presented year after year to present the organisation in the best possible light
- Reporting the “easy” results and omitting the important ones
- Reporting outcomes and outputs which are often unsubstantiated and with little evidence to support the claims made
- Inconsistent reporting year to year
Even when an entity provides an SSP with outputs and outcomes that could be substantiated it was often difficult to understand the audit risks. More application guidance was needed especially concerning:
- Materiality levels
- What constitutes a misstatement in service performance information
- How the outcomes and outputs relate to the assertions
What are the features of the new standard?
The complexity and confusion around the production and audit of service performance information highlighted the need for clearer direction for auditors. NZ AS 1, therefore, addresses a very specific type of financial statement with very different reporting goals from conventional reporting.
NZ AS 1 relates closely to ISA 200, “Overall Objectives of the Independent Auditor and Conduct of an Audit in Accordance with the International Standards on Auditing”, and should be read in conjunction with this standard. Remember that service performance auditing is still auditing, but the information being audited is new and unfamiliar. So NZ AS1 incorporates familiar key audit principles into planning, performing, evaluation procedures, and reporting. It references many other auditing standards as they apply to this new mode of reporting such as:
- Agreement on audit engagement terms
- Laws and regulations
- Communication with those charged with governance
- The auditor’s responses to assessed risks
- Forming an opinion and reporting content.
Further analysis of NZ AS1 is included on our support website. This breaks down the key concepts of the standard.
The relationship between PBE FRS 48 and NZ AS-1
The XRB released PBE FRS 48 “Service Performance Reporting” in November 2017. This standard for Tier 1 and 2 PBEs is effective for reporting periods beginning on or after 1 Jan 2022 (early adoption permitted).
For now, most Audit Assistant users applying the new standard will be doing so in the context of a Tier 3 PBE SSP. So while they will not need to follow the requirements of PBE FRS 48, we recommend that they familiarise themselves with the principles within this standard. It will help them to understand concepts like qualitative characteristics and pervasive constraints. It will also help to identify what constitutes service performance information, what information can be verified, which information faithfully represents the entity, what makes information understandable to users, and whether the information is comparable to either the prior year or comparable entities.
Note that we have a PBE FRS 48 compliance checklist within our Tier 1 and 2 PBE reporting checklists and audit templates.
Audit Assistant Service Performance Audit Template
Our new Audit Assistant NZ AS1 template is currently available in a stand-alone format, so that it may be used alongside other audit work (including for firms not using Audit Assistant for their audit work – contact us for a custom signup).
The content is also incorporated into our new LCE Tier 3 and 4 PBE templates. In these templates, amendments have been made to reports to include changes in audit opinions related to the statement of service performance, written representations in the client representation letter and the audit report, including specific reference to NZ AS1. The new content has been designed to reach the key objectives that have been set out in the new standard. It consists of seven sections:
• Acceptance of engagement
• Checklist shared with the client to gather service performance information
• Internal Controls Assessment
• Materiality assessment
• Risk analysis
• Detailed testing
We are committed to improving the quality of our products so we welcome any feedback on this new template.
Your new service performance auditing hat may feel uncomfortable at first, but after a while, there will be certain comfort and familiarity!