Transcript Reports to ARC

QAD audit webinar
Get the inside track on audit quality
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What is this webinar for?
• Based on 2011 QAD audit roadshows
• Relevant to all audit firms
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Your Firm & Co, Chartered Accountants of
Anytown.
Breach: Failure to comply with the requirements of
the audit regulations
Decision: Registration as company auditor
withdrawn
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Your Firm Ltd of Anytown.
Breach: Failed to arrange for an external whole
firm review and cold file reviews to be carried out.
Decision: Regulatory penalty of £2,500
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Reports to ARC
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Contents
• Audit weaknesses
• Why firms fail
• Three golden rules
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Audit weaknesses – key areas
• Documentation
• Audit test design
• Using the work of an
expert
• Ethical standards
• Professional
scepticism
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Documentation
• Planning and risk assessment
– Checklists need substance
• Audit testing
– Objectives and conclusions
• Meetings
– Need minutes; on the file
• Judgments
– Clear rationale, sources of evidence and conclusion
• The ‘Accounts Preparation’ file
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Documentation – audit systems
• Ensure you and your staff know what
documentation is mandatory
• Specialist documentation – replacement or a
supplement for standard programmes
• Permanent files – update
• New / computer-based system challenges
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Audit test design
• Assertions
– Transactions (occurrence, completeness, accuracy, cut-off,
classification)
– Balances (existence, rights and obligations, completeness,
valuation and allocation)
– Presentation and disclosure (occurrence and rights and
obligations, completeness, classification and understandability,
accuracy and valuation)
• Directional testing
– For over-, and under-statement
• Population
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Flawed design
• Post year end sales used for stock net realisable
value test
• Trade creditors traced to payments
• Existence of fixed asset additions alone
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Using the work of an expert
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ISAs
• ISA 620 Using the work of an auditor’s expert
– Includes experts who are:
– Contracted by the auditor
– Employed by the auditor
• ISA 500 Audit evidence
– Includes experts who are:
– Contracted by the entity
– Employed by the entity
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Basic requirements
• Evaluate professional competence and objectivity
– Professional certification / licensing
– Experience and reputation
– Employment with entity / other financial dependence
• Scope of the expert’s work must be adequate for the audit
– Consider terms of reference
– Possible need to communicate directly
• Evaluate the appropriateness of the work performed
– Source data and assumptions
– Make enquiries about methodology
– Review / test data
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What might an expert be involved in?
• Pensions / retirement benefit schemes
• Valuations
– Investment properties
– Share options / financial instruments
• Determine quantities or physical condition of assets, stockpiles,
underground mineral or oil reserves
• Measurement of work completed on contracts
• Legal opinions
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Audit documentation
• May find simply a report referenced into the file
– Little evidence of any other work to comply with ISA 620/500
• Some audit systems have specific audit programmes
• A standard template will assist
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Evaluate professional competence and
objectivity
• Review website of the expert’s company
• Obtain and research qualifications (genuine?)
• Ascertain if the expert is independent from the company
• Easier if
– Nationally recognised organisations
– Licensing bodies have public lists of members
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Evaluate scope of work
• Is there an engagement letter?
• Terms of reference within a report may give enough information
• Any direct communication
– Likely if it is an auditor’s expert
– Seems rare when management’s expert
• Issues may be evident from caveats in the report or information from
other areas of the audit
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Evaluate appropriateness of work performed
• Source data
– Where from, is it current, has it been audited?
• Assumptions and methods
– Any comparable data
– Alternative methods / strengths and weaknesses
– Use of method allowed by IFRS
• Review or test data
– An auditor’s expert might review the work of a management
expert?
– Discuss sensitivities with the expert
– Look at comparative valuations (eg properties)
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Ethical standards (1)
• Ethical Standard 1: Integrity, objectivity and independence
– Fundamental requirements
– Documentation
– Communication with client
• Ethical Standard 2: Financial, business and personal relationships
– Mostly well understood
– Company secretarial appointments not allowed
– Trusteeships difficult
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Ethical Standards (2)
• Ethical Standard 3: Long association with the audit engagement
– Listed audits: clear rules
– Unlisted audits: firm’s own policies are important
– Documentation and communication to client
• Ethical Standard 4: Fees, remuneration and evaluation policies,
gifts, litigation and hospitality
– 10% rule: hot file review
– 15% rule: cannot audit if fees >15% on a regular basis
– Evaluate staff on audit quality not ‘sales’
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Ethical standards (3)
• Ethical Standard 5: Non-audit services provided to audited entities
– Management threat
– Accounts preparation and corporation tax safeguards
– Documentation
– Listed audits
• Provisions available to small entities
– Management threat or informed management?
– Alternative provisions: extend cold file reviews
– Exemptions: accounts disclosure
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Professional scepticism
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Characteristics
• Curiosity / having a questioning mind
• Deferral of judgment / not jumping to premature
conclusions
• Understanding management behaviour and
motivations
• Self-confidence
• Freedom of action
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The Shaub and Lawrence model
Aggressive
sceptics
Reluctant
sceptics
Conflicted
sceptics
Action
Measured
sceptics
Thought
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The Shaub and Lawrence model
Aggressive
sceptics
Reluctant
sceptics
Conflicted
sceptics
Action
Measured
sceptics
Thought
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Audit examples
• Mandatory meetings of the audit team to discuss the susceptibility of
the entity to:
– Misstatements
– Fraud
– Fraud or error that could result from related party relationships
• Reviewing the outcome of opening provisions
• Checking a sample of journal adjustments
• Evaluating risks in relation to revenue transactions based on the
presumption that there are risks of fraud in revenue recognition
• Investigating significant related party transactions outside the
entity’s normal course of business
• Assessing other key assumptions and judgments made by
management
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Reference
APB Discussion Paper
Auditor Scepticism: Raising the bar
October 2010
frc.org.uk/apb/publications/pub2343.html
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Why firms fail
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QAD audit visit outcomes
2011
Visits closed without follow-up action
69%
Some further follow-up action
21%
Detailed report to Audit Registration Committee
10%
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Factors
• Approach to audit work
• Competence
• Attitude
• Monitoring
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Approach to audit work
• Reliance on accounts
preparation
• Safeguards
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Competence
• Understanding the
objectives of an audit
• Adequate procedures
• Audit regulations, ISA
and Ethical Standards
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Attitude
• ‘ISAs don’t / shouldn’t
apply to small audits’
• Under-selling the
value of audit
• Insignificant to
practice
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Monitoring
• 80% of detailed reports were
firms who did internal ACRs or
no ACR
– Remaining 20% did not take
action or limited external
review
• 84% did not comply with Audit
Regulation 3.20
• Sole RIs find reviewing their
own files challenging
– External assistance is
invaluable
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Clarified ISAs
• Accounting estimates and
the outcome of prior year
estimates
• Related parties
• Risk of fraud in revenue
recognition and from
management override of
controls
• Performance materiality
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Three golden rules
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Audit work is a specialism
• Regular audit updates – include specialist areas
• Concentrate audit work with expert staff
• Ensure you know your audit system
• Identify weak areas for further CPD
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Document your audit work
• ‘Experienced auditor’ test
• Separate ‘audit’ from ‘accounts preparation’
• Develop templates
• Review file thoroughly, fix weaknesses, train
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Independent and effective audit compliance
reviews
• External or another experienced auditor
• Document findings and actions
• Use the findings to improve audit quality
• Build audit quality into objectives, training and appraisals
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Further reading
• Quality control in the audit environment (Audit
and Assurance Faculty)
• Right First Time with the Clarified ISAs (Audit
and Assurance Faculty)
• Audit & Beyond June 2011: ‘Is your audit
compliance review process effective?’
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A world leader of the
accountancy and finance profession
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