The new rules of Audit Confirmation Process

The Public Company Accounting Oversight Board (PCAOB) on July 13, 2010 approved the publication of a proposed auditing standard regarding Confirmation. In a statement issued with the proposed new standard, PCAOB Acting Chairman Daniel L. Goelzer said the proposal modernizes the current confirmation standard, AU Section 330, The Confirmation Process, and strengthens the confirmation requirements to better protect investors and other users of audited financial statements.

This proposed standard comprises of 36 paragraphs which provides guidance about the confirmation process in audits performed in accordance with generally accepted auditing standards.

It defines the confirmation process (see par. 04), discusses the relationship of confirmation procedures to the auditor’s assessment of audit risk (see par. 05 through 10), describes certain factors that affect the reliability of confirmations (see par. 16 through 27), provides guidance on performing alternative procedures when responses to confirmation requests are not received (see par. 31 and 32). It also provides guidance on evaluating the results of confirmation procedures as states in par. 33.

In par. 05 the standards states that in determining the audit procedures to be applied, including whether they should include confirmation procedure, the auditor uses the audit risk assessment.

In relation with the audit risk assessment (read about the concept of audit risk in here), par. 07 states that the greater the combined assessed level of inherent and control risk, the greater the assurance that the auditor needs from substantive tests related to the financial statement assertion. In this situation, the auditor might use confirmation procedures rather than or in conjunction with tests directed toward documents or parties within the entity.

While par. 06 states that confirmation is undertaken to obtain evidence from third parties about financial statement assertions made by management. In general, as states in Section 326, Evidential Matter, it is presumed that “when evidential matter can be obtained from independent sources outside an entity, it provides greater assurance of reliability for the purposes of an independent audit than that secured solely within the entity.”

There are two types of confirmation requests : the positive and the negative form. If the auditor uses the positive form of confirmation, he or she should considering since there is a risk that recipients of a positive form of confirmation request with the information to be confirmed contained on it may sign and return the confirmation without verifying that the information is correct, blank forms may be used as one way to mitigate this risk.

When the auditor has not received replies to positive confirmation requests, he or she should apply alternative procedures to the non-responses to obtain evidence necessary to reduce audit risk to an acceptably low level. However, the omission of alternative procedures may be acceptable in several circumstances as stated in par. 31 to the standard.

The nature of alternative procedures varies according to the account and assertion in question. In the examination of account receivable, for example, the auditor may conduct the examination of subsequent cash receipts, shipping documents, or other client documentation to provide evidence for the existence assertion.

The complete proposed standard and another related materials are downloadable in here

Comments for the proposed auditing standard are due on September 13, 2010.

Audit the Opening Balances, how far should the Auditor go?

ISA 510 Initial Audit Engagements – Opening Balances para. A3 – A7 underlines the nature and extent of audit procedures necessary to obtain sufficient appropriate audit evidence regarding opening balances which depend on such matters as follows :

(a) the accounting policies followed by the entity

(b) the nature of the account balances, classes of transactions and disclosures and the risks of material misstatement in the current period’s financial statements

(c) the significance of the opening balance relative to the current period’s financial statements

(d) whether the prior period’s financial statements were audited and, if so, whether the predecessor auditor’s opinion was modified

If the prior period’s financial statements were audited by a predecessor auditor, the auditor may be able to obtain sufficient appropriate audit evidence regarding the opening balances by reviewing the predecessor auditor’s working paper. Whether such a review provides sufficient appropriate audit evidence is influenced by the professional competence and independence of the predecessor auditor.

Audit evidence about opening balances for current assets and liabilities may be obtained as part of the current period’s audit procedures. For example, the collection (payment) of opening account receivable (account payable) during the current period will provide some audit evidence of their existence, rights and obligations, completeness and valuation at the beginning of the period.

In the case of inventories, however, the current period’s audit procedures on the closing inventory balance provide little audit evidence regarding inventory on hand at the beginning of the period. Therefore, additional audit procedures may be necessary, and one or more of the following may provide sufficient appropriate audit evidence : (1) observing a current physical inventory count and reconciling it to the opening inventory quantities, (2) performing audit procedures on the valuation of the opening inventory items, (3) performing audit procedures on gross profit and cutoff.

For non-current assets and liabilities, such as property, plant and equipment, investments and long-term debt, some audit evidence may be obtained by examining the accounting records and other information underlying the opening balances. In certain cases, the auditor may be able to obtain some audit evidence regarding opening balances through confirmation with third parties, for example, for long-term debt and investments. In other cases, the auditor may need to carry out additional audit procedures.

So, now can you figure it out how far should the auditor go for the audit of opening balances ?

The Opening Balances

Some questions may arise when we are appointed to replace the former auditor of a company or when the previously financial statements were not audited. What kind of audit procedures have to be conducted by the auditor at the initial audit engagement within this condition ? If the auditor did not apply any audit procedure regarding on the opening balance of the current period’s financial statements, would it be affected to the audit opinion ?

International Standard on Auditing (ISA) 510 Initial Audit Engagements – Opening Balances rules this conditions clearly. This ISA is effective for audits of financial statements for periods beginning on or after December 15, 2009.

Para.3 of this ISA states that in conducting an initial audit engagement (wherein the financial statements for the prior period were not audited, or were audited by a predecessor auditor), the objective of the auditor with respect to opening balance is to obtain sufficient appropriate audit evidence about whether :

(a) opening balances contain misstatements that materially affect the current period’s financial statements; and

(b) appropriate accounting policies reflected in the opening balances have been consistently applied in the current period’s financial statements, or changes thereto are appropriately accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework.

Following are several audit procedures that should be done by the successor auditor regarding the opening balance of financial statements :

1. the auditor shall read the most recent financial statements, if any, and the predecessor auditor’s report thereon, if any, for information relevant to opening balances, including disclosures.

2. the auditor shall obtain sufficient appropriate audit evidence about whether the opening balance contain misstatements that materially affect the current period’s financial statements by :

(a) determining whether the prior period’s closing balances have been correctly brought forward to the current period or, when appropriate, have been restated;

(b) determining whether the opening balance reflect the application of appropriate accounting policies, and

(c) performing one or more of the following : (i) where the prior year financial statements were audited, reviewing the predecessor auditor’s working papers to obtain evidence regarding the opening balances, (ii) evaluating whether audit procedures performed in the current period provide evidence relevant to the opening balance, or (iii) performing specific audit procedures to obtain evidence regarding the opening balances.

If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances, the auditor shall express a qualified opinion or disclaim an opinion on the financial statements, as appropriate, in accordance with ISA 705.

If the auditor concludes that the opening balances contain a misstatement that materially affects the current period’s financial statements, and the effect of the misstatement is not appropriately accounted for or not adequately presented or disclosed, the auditor shall express a qualified opinion or an adverse opinion.

If the auditor concludes that : (a) the current period’s accounting policies are not consistently applied in relation to opening balances in accordance with the applicable financial reporting framework, or (b) a change in accounting policies is not appropriately accounted for or not adequately presented or disclosed in accordance with the applicable financial reporting framework, the auditor shall express a qualified opinion or an adverse opinion (Hrd).

Reference : ISA 510 Initial Audit Engagements – Opening Balances

The Physical Count of Inventory

Timing and Extent of Inventory Observation

The timing and extent of inventory observation are determined by the client's inventory system and the effectiveness of its inventory controls. If the client maintains perpetual inventory records and the inventory controls are effective, the auditor may limit the extent of his or her observation and may observe the physical count at various times during the year.

If the client has a periodic inventory system, a physical inventory should be taken at least once during the year. No matter how many times during the year the client takes a physical inventory, the auditor should observe the count that occurs at or near year-end.

When quantities of inventory are determined solely by physical count and all counts are made as of the balance sheet date or within a reasonable time before or after the balance sheet date, the auditor should ordinarily be present when inventory is counted.

If the records are well kept and checked by the client periodically by comparisons with physical counts, the auditor may observe inventory either during or after the end of the period under audit.

Necessity to Observe Physical Count

The auditor should make or observe, some physical counts of the ending inventory. Tests of the accounting records alone are not sufficient for the auditor to become satisfied about inventory quantities at the balance sheet date.

Sometimes the auditor may not have observed the beginning inventory of a period he or she is being asked to report on. Ordinarily, this occurs in new engagement.

If the auditor is satisfied about the current year-end inventory, he or she may be able to satisfy himself or herself of prior period inventories by the following procedures :

1. Tests of prior transactions;
2. Reviews of records of prior counts;
3. Tests of gross profit.

The two major steps in the observation of a physical inventory are as follows :

1. Planning the physical inventory
2. Taking the physical inventory

Planning the physical inventory before conducting the physical count is essential. The auditor should review or prepare the client instructions and should work closely with the client in the planning stage. The inventory should be taken at a time when operations are suspended or minimal.

The client has primary responsibility for planning and conducting the physical inventory. Because of the auditor's important role in the taking of the inventory, however, he or she should participate in the planning stage.

Before taking the inventory, the client should submit a plan containing the following :

1. Date and time inventory is to be taken
2. Locations of inventory
3. Method of counting and recording
4. Instructions to employees
5. Provisions for the following : (a) receipts and shipments of inventory during the counts, (b) segregation of inventory not owned by client, (c) physical arrangement of inventory.

(Source : WILEY - Practitioner's Guide to GAAS 2010 - Steven M.Bragg)

Audit Approach

The Audit Approach is a risk analysis methodology that focuses on the combined impact of the environment in which a client operates, the client's management information and financial results, and the effectiveness of the client's internal controls. It is based on a thorough, up-to-date understanding of the client's business and industry, which is obtained through a comprehensive analysis of the external and internal operating environments. It enables us to design an audit programme that includes the most effective and efficient combination of test responsive to a client's unique circumstances. In addition, it provides a uniform method for developing and documenting the basis for the audit programme.

The Audit Approach enables us to plan our effort to be proportionate to the risk of material error in specific accounts and transactions. This provides the basis for planning the minimum effort necessary to limit audit risk in each area to a low level. As a result, every audit procedure has a specific purpose that is related to the company's particular situation – nothing is "routine" and hence potentially unnecessary. By following this approach we can avoid overauditing and underauditing, and we can distribute our audit work more evenly throughout the year.

MATERIALITY AND AUDIT RISK

Professional standards require us to consider materiality and audit risk when planning the nature, timing and extent of our audit procedures, and when evaluating the results of those procedures. Materiality is determined at two levels during the initial planning stage :

1. An overall level as relates to the accounts taken as a whole – planning materiality; and
2. An individual balance or class of transactions level – tolerable error.

Audit risk is defined as the risk that an auditor may unknowingly fail to modify his or her opinion on accounts that are materially misstated. We address materiality and audit risk at an overall level to help us develop an audit strategy that will provide sufficient evidence to enable us to evaluate whether the accounts are materially misstated.

At the account balance or class of transactions level, audit risk is the product of the risks that :

1. Factors in a company's internal or external operating environment, before considering the functioning of internal controls, will lead to a material error – inherent risk;
2. A material error will not prevented or detected on a timely basis by the system of internal control – control risk; and
3. The auditor's procedures will fail to detect a material error not detected by the system of internal control – detection risk.

The Audit Approach provides a methodology for relating these risk concepts to materiality and correlating them to the nature, timing, and extent of our audit procedures. This is accomplished through the Specific Risk Analysis and the Preliminary Audit Approach.

SPECIFIC CONTROL OBJECTIVES

A key element of the Audit Approach is the relationship of specific control objectives to transactions and accounts. Specific control objectives are derived from the five general control objectives that an accounting system should be expected to achieve. The first three of the five – authorization, recording, and safeguarding – relate to establishing the system of accountability and provide for the prevention of errors and irregularities. The fourth general objective – reconciliation – ties together the system of accountability established by the first three and, along with the fifth objective – valuation – provides for the detection of errors and irregularities.

We have translated these general objectives into specific control objectives that are related to the accounts and transactions of a business. Specific control objectives relate to the activities in each operating component that originate and process transactions. Each type of transaction results in either debits or credits to various accounts. Because a number of accounts and transactions are normally affected by a single specific control objective, the specific control objectives provide convenient and efficient reference points for considering the inputs to the Specific Risk Analysis.

PHASES OF THE AUDIT APPROACH

We can divide an audit into three phases – initial planning, programme development, and programme execution. On paper, each phase – and each step within it – appears as a separate activity. However, in practice, the phases and steps are closely interrelated and should not be regarded as distinct steps that are set aside when done. Throughout any audit, we should be alert for new developments that may affect the client's business or industry. We should continue to challenge the effectiveness and efficiency of audit procedures, and modify them if necessary (Hrd).

Responsibilities of Management and The Independent Auditor over the Audited Financial Statements

The fundamental to a financial statement audit is the division of responsibility between management and the independent auditor. The critical distinction is :

• Management is responsible for preparing the financial statements and the contents of the statements are the assertions of management
• The independent auditor is responsible for examining management’s financial statements and expressing an opinion on their fairness

Management’s responsibility for the fairness of the representations in the financial statements carries with it the privilege of determining which disclosures it considers necessary. Although management has the responsibility for the preparation of the financial statements and the accompanying footnotes, the auditor may assist in the preparation of financial statements. For example, he may counsel management as to the applicability of a new accounting principle, and, during the course of the audit, he may propose adjustments to the client’s statements. However, acceptance of his advice and the inclusion of the suggested adjustments in the financial statements do not alter the basic separation of responsibility. Ultimately, management is responsible for all decisions concerning the form and content of the statements.

In the event that management insists on financial statement disclosure that the auditor finds unacceptable, the auditor can either issue an adverse or qualified opinion or withdraw from the engagement.

The auditor’s responsibility is limited to performing the audit investigation and reporting the results in accordance with generally accepted auditing standards. In most cases, any material errors and omissions will be discovered if the audit has been so performed. Yet the possibility always exists that the auditor’s selected evidence will fail to uncover a material error. In this event, the auditor’s best defense is that the audit was performed and the report prepared with due care in accordance with generally accepted auditing standards.

If the auditor were responsible for making certain that all the representations in the statements were correct, it would make him a guarantor or insurer of the reliability of the financial statements. If auditors had that responsibility, evidence requirements and the resulting cost of the audit function would be increased to such an extent that audits would not be economically feasible.

It is usually more difficult for auditors to uncover irregularities (intentional misstatement of financial statements or misappropriation of assets) than errors (unintentional mistakes). This is because of the intended deception associated with irregularities. The auditor’s responsibility for uncovering irregularities deserves special mention.

References :

1)  Auditors Responsibility for Fraud Detection (JofA)

2)  Auditors’ Responsibilities Formalized Under SAS 109 (CPA Journal)

3)  New Fraud Guidance (JofA)

4)  ISA 240 (redrafted) : Auditors and Fraud

5)  IFAC.org Projects

Audit Risk Model, an introduction

ISA 315 states that the auditor should identify and assess the risks of material misstatement of the financial statement level, and  at the assertion level for classes of transactions, account balances, and disclosures.

Audit risk, as it directly affects the specific audit approach to the engagement, is generally considered at the account balance or class of transaction level.

At this level, audit risk consists of :

• The risk (consisting of inherent and control risk) that the account balance or class of transactions contain misstatements  that could be material to the financial statements whether individually or when aggregated with misstatements in other balances or classes.
• the risk (detection risk) that the auditor will not detect such misstatements.

Audit Risk Model :  AR = IR X CR X DR, where AR = Audit Risk, IR = Inherent Risk, CR = Control Risk, DR = Detection Risk

INHERENT RISK

Inherent risk is the susceptibility of an account balance or class of transactions to material misstatement, individually or when aggregated with misstatements in other balances or classes assuming that there were no related internal controls. The inherent risk of misstatement is greater for some types of transactions or accounts than for others. For example :

• Account balances and transactions subject to complex calculations are more susceptible to error than those based on simple calculations.
• Assets such as cash are more susceptible to theft than assets such as fixed assets.
• Account balances subject to judgment and estimation are more likely to be misstated than account balances based on historical, factual data.

CONTROL RISK

Control risk is the risk that a misstatement, that could occur in an account balance or class of transactions and that could be material individually or when aggregated with misstatements in other balances or classes, will not be prevented or detected and corrected on a timely basis by the accounting and internal control systems.

Control risk will vary inversely with the level of effectiveness of the internal control structure. However, because of the inherent limitations of any internal control structure (e.g. those due to human error), there will always be some level of control risk within internal control structure.

It is often difficult to distinguish between inherent and control risk because of the close relationship between the two.

Assume, for example, the auditor believes there is a 50 percent inherent risk that inventory is misstated by more than tolerable error because of technological changes that have taken place in the client's industry during the past year. The auditor also concludes that internal accounting controls are sufficiently effective to assign a control risk of 30 percent.  Using a portion of the audit risk model, AR = IR X CR X DR, the likelihood of an error occurring is 15 percent (IR X CR = 50% X 30%).

Before an auditor can use a control risk of less than 100 percent, he is required to do two things : evaluate how well a client's internal control system functions and test the system for effectiveness.

DETECTION RISK

Detection risk is the risk that auditor's substantive procedures will not detect a misstatement that exist in an account balance or class of transactions that could be material, individually or when aggregated with misstatements in other balances or classes.

Detection risk is a function of the effectiveness of auditor's audit procedures and how well the auditor apply them. Such risk exists partly because auditor typically examine less than 100% of an entity's transactions (sampling risk) and partly because auditor may select inappropriate audit procedures, apply audit procedures incorrectly, or misinterpret the results of audit procedures.

The level of detection risk that auditor can accept varies inversely with the level of inherent and control risk. The higher the inherent and control risk, the less detection risk that auditor can accept to keep the risk of material misstatement at an acceptably low level.

The less detection risk that auditor can accept, the more reliable of substantive procedures must be.

Using the example discussed in the control risk section, assume there was a detection risk of 20 %. The audit risk is therefore 3 % (IR X CR X DR = 0,50 x 0,30 x 0,20). The auditor can conclude there is a 3 percent risk that inventory is misstated by more than tolerable error. This conclusion is based upon the assumption that the auditor can measure the component risks in a precise manner (Hrd) ***

WHY We Need to Know the Client's Business ?

Obtaining an understanding of the client’s business is key to an effective and efficient audit. It enables us not only to tailor our work to meet the individual facts and circumstances of each client, but also to carry out that work and to evaluate our findings in an informed manner. Our knowledge of the client’s business also helps us to develop and maintain a positive professional relationship with the client.

International Standards on Auditing (ISA) 315 states that the auditor should obtain an understanding of the entity and its environment, including its internal control, sufficient to identify and assess the risks of material misstatement of the financial statements whether due to fraud or error, and sufficient to design and perform further audit procedures.

Understanding the entity is an iterative process, continuing throughout the entire duration of the audit.

Prior the accepting an audit engagement, we should obtain a preliminary knowledge of the industry and of the ownership, management and operations of the entity to be audited.

Detailed information is required at the planning stage of our audit to enable us to plan our work adequately. We need to understand the nature of client’s business, its organization, its method of operation and the industry in which it is involved. This understanding enables us to appreciate which events and transactions are likely to have a significant effect on the financial statements.

Specifically, such an understanding helps us to :

• Identify the areas of high risk where we should concentrate our audit effort
• Maximize efficiency in other areas of audit significance
• Assess the potential for use of analytical procedures, by enabling us to identify the information which we can use to make predictions and comparisons
• Obtain an understanding of the internal control structure
• Assess the inherent and control risks in the key areas of audit significance
• Develop an audit strategy enabling us to obtain the necessary audit evidence in the most effective and efficient manner possible.

Knowing the client’s business helps us in a number of ways both during the conduct of the audit, and when we come to complete our work.

This includes, for example, helping us in :

• Recognising errors in the financial statements
• Asking the right questions and evaluating the reasonableness of the answers we receive
• Making judgements about the appropriateness of the client’s accounting principles, policies and procedures
• Identifying unusual or unexpected transactions and related party transactions
• Interpreting the results of audit tests and evaluating their effect
• Carrying out appropriate procedures to review events occurring after the balance sheet date
• Carrying out an overall review of the financial statements.

Knowledge of the client’s business and the industry in which it operates is essential also to the development of a positive relationship and it helps us as follows :

• In understanding the management’s philosophy and aspirations for the business
• Understanding the business strategy and plans
• Providing relevant and practical business advice to the client
• Identifying areas in which the client might benefit from other professional services which we provide.

ISA 315 states that :

• the auditor should obtain an understanding of relevant industry, regulatory, and other external factors including the applicable financial reporting framework
• the auditor should obtain an understanding of the nature of the entity
• the auditor should obtain an understanding of the entity's selection and application of accounting policies and consider whether they are appropriate for its business and consistent with the applicable financial reporting framework and accounting policies used in the relevant industry
• the auditor should obtain an understanding of the entity's objectives and strategies, and the related business risks that may result in material misstatement of the financial statements
• the auditor should obtain an understanding of the measurement and review of the entity's financial performance.

Each year, the auditor's understanding of the entity should be updated and details of significant changes documented (Hrd) ***

Audit Procedures on Accounting Estimates

An accounting estimate is an approximation of a financial statement element, item, or account in the absence of exact measurement. Examples of accounting estimates include periodic depreciation, the provision for bad debts, net realizable value of inventory, revenues from contracts accounted for by the percentage-of-completion method, and pension and warranty expenses.

Management is responsible for establishing the process and controls for preparing accounting estimates. Judgment is requires in making an accounting estimate. Accounting estimates may have a significant affect on a company’s financial statements.

The auditor is responsible for evaluating the reasonableness of accounting estimates made by management in the context of the financial statements taken as a whole. As estimates are based on subjective as well as objective factors, it may be difficult for management to establish controls over them. Even when management’s estimation process involves competent personnel using relevant and reliable data, there is potential for bias in the subjective factors. Accordingly, when planning and performing procedures to evaluate accounting estimates, the auditor should consider, with an attitude of professional skepticism, both the subjective and objective factors.

SAS No. 57, Auditing Accounting Estimates (AU 342.07), states that the auditor’s objective in evaluating accounting estimates is to obtain sufficient competent evidential matter to provide reasonable assurance that :

1. All accounting estimates that could be material to the financial statements have been developed;
2. The accounting estimates are reasonable in the circumstances;
3. The accounting estimates are presented in conformity with applicable accounting principles and are properly disclosed.

In determining whether all necessary estimates have been made, the auditor should consider the industry in which the entity operates, its methods of conducting business, and new accounting pronouncements. To evaluate the reasonableness of an estimate, the auditor should normally concentrate on the key factors and assumptions used by management including those that are :

1. significant to the accounting estimate;
2. sensitive to variations;
3. deviations from historical patterns, and
4. subjective and susceptible to misstatement and bias.

Evidence of the reasonableness of an estimate may be obtained by the auditor from one or a combination of the following approaches :

1. Perform procedures to review and test management’s process in making the estimate;
2. Prepare an independent expectation of the estimate;
3. Review subsequent transactions and events occurring prior to completing the audit that pertain to the estimate.

The procedures to be performed include :

1. considering the relevance, reliability, and sufficiency of the data and factors used by management,
2. evaluating the reasonableness and consistency of the assumptions, and
3. re-performing the calculations made by management.

In some cases, it may be useful to obtain the opinion of a specialist regarding the assumptions.

Because no one accounting estimate can be considered accurate with certainty, the auditor may determine that a difference between an estimated amount best supported by the audit evidence and the estimated amount included in the financial statements may not be significant, and such difference would not be considered to be a likely misstatement. However, if the auditor believes the estimated amount included in the financial statements is unreasonable, he or she should treat the difference between that estimate and the closes reasonable estimate as a likely misstatement (SAS No. 57 AU 342.14).

Baker Tilly International, amongst the world’s top ten Accounting Firms

Baker Tilly International is one of the world’s leading networks of independently owned and managed accountancy and business advisory firms united by a commitment to provide exceptional client service.

Baker Tilly International refers to a worldwide network of member firms of Baker Tilly separate and independent legal entity, with 147 high quality, independent accounting and business advisory firms in 114 countries across four geographic areas of Asia Pacific, Europe, Middle East & Africa, Latin America and North America, with more than 25,000 professionals. In Indonesia, Kantor Akuntan Johan Malonda Astika & Rekan (known also as Baker Tilly Indonesia) is an independent member of Baker Tilly International. Being an independent member that is to say each member firm is a separate and independent legal entity. None of Baker Tilly branded entity, Baker Tilly International, nor any of the other independent member firms of Baker Tilly International has any liability for each other’s acts or omissions.

In 2009, Baker Tilly International had been ranked No. 8 (in the top 10) in Global Accounting Networks based on The 2009 International Accounting Bulletin World Survey.

Accountancy Age in its annual survey of “Top 50 UK Accounting Firms, 2009” ranked Baker Tilly in No. 7, after BDO Stoy Hayward. While in 2010, it ranked Baker Tilly in No. 8 after RSM Tenon Group (Read in here).

In 2010, Accounting Today in its annual Top 100 Firms publication ranked Baker Tilly Virchow Krause in No. 13.

The survey reported that Baker Tilly International has maintained its position as the world’s eighth largest accounting network by combined revenue. Of the 10 largest networks, Baker Tilly International was one of only two to report positive growth in 2009 with a total fee income of $3.13 billion.

Vault.com in it its publication of “Vault Guide to the Top 20 Accounting Firms” ranked Baker Tilly in No. 7 after BDO Stoy Hayward LLP within the survey of “The 20 most prestigious UK accounting firms year 2010”.

Baker Tilly can trace its origins back to 1870, with the founding of Walter Howard. Historical name changes and mergers with many different firms have brought the partnership to where it is today. The name Baker Tilly was created in 1988 through the merger between Howard Tilly and Baker Rooke. Today, Baker Tilly is the 7th largest accountancy and business advisory firm in the UK. It is also a member of Baker Tilly International, the world’s eighth largest network of accountancy firms.

The world headquarter of Baker Tilly International is at : 2 Bloomsbury Street, London WC1B 3ST United Kingdom. Visit the website in here

PCAOB Issues Staff Audit Practice Alert on Auditor Considerations of Significant Unusual Transactions

On April 7, 2010, The Public Company Accounting Oversight Board  issued a Staff Audit Practice Alert to remind auditors of public companies about their responsibilities to assess and respond to the risk of material misstatement of the financial statements due to error or fraud posed by significant unusual transactions.

Staff Audit Practice Alert No. 5, Auditor Considerations Regarding Significant Unusual Transactions (Practice Alert No. 5) compiles relevant requirements from existing PCAOB auditing standards regarding significant unusual transactions to assist the auditor in reviews of interim financial information and audits of financial statements.

"The PCAOB’s message to auditors, in this challenging economic environment, has consistently emphasized attention to audit risk and adherence to existing audit requirements," said Martin F. Baumann, Chief Auditor and Director of Professional Standards.

Practice Alert No. 5 complements Staff Audit Practice Alert No. 3, Audit Considerations in the Current Economic Environment, by further addressing risks of material misstatement associated with significant unusual transactions, a risk that the staff believes continues to exist today.

Practice Alert No. 5 compiles existing requirements from PCAOB auditing standards regarding significant unusual transactions and groups them into the following categories:

• Identifying and assessing risks of material misstatement
• Responding to risks of material misstatement
• Consulting others
• Evaluating financial statement presentation and disclosure
• Communicating with audit committees
• Reviewing interim financial information

"Practice Alert No. 5 will assist auditors as they begin their work related to 2010 quarterly reviews and audits of financial statements," said Mr. Baumann.

These alerts are prepared to highlight new, emerging, or otherwise noteworthy circumstances that may affect how auditors conduct audits under the existing requirements of PCAOB standards and relevant laws.

Auditors should determine whether and how to respond to these circumstances based on the specific facts presented. The statements contained in Staff Audit Practice Alerts are not rules of the Board and do not reflect any Board determination or judgment about the conduct of any particular firm, auditor, or any other person.

• Staff Audit Practice Alert No. 5, Auditor Considerations Regarding Significant Unusual Transactions (April 7, 2010)

Source : PCAOB Website

Read also a related article from Journal of Accountancy in here

Accountancy Age’s 2010 UK Top 50 Accountancy Firms

Accountancy Age has released its annual survey of "Top 50 + 50 UK Accountancy Firms 2010." Amongst the top ten list, PricewaterhouseCoopers seated at the top, ranked #1, still unchanged from the last year position with the UK fee income of £2,248 million, Deloitte ranked in #2 (unchanged from 2009) with £1,969 million, KPMG took the place of #3 (unchanged from 2009) with £1,630 million. While Ernst & Young placed in the lowest amongst the big four, ranked #4 (unchanged from 2009) with its revenue of £1,383 million.

Grant Thornton UK and BDO Stoy Hayward stood still at the position of #5 and #6 respectively. While RSM Tenon Group moved up from #9 in 2009 to #7. Baker Tilly moved down from the 7th position to the 8th position and Smith & Williamson also moved down from the 8th position to the 9th position. At the bottom of the top ten was PKF (UK), remain unchanged at #10.

“If you thought that 2009 had been a tough year for the UK's top accounting firms, it's got nothing on 2010. Things have gone from bad to worse for the UK's top accounting firms this year. While there was overall nominal growth in the Top 50, 19 firms failed to improve their incomes on the previous year. The situation was even tougher in the +50, where growth rates stagnated,” said Accountancy Age.

Accountancy Age is published in the UK by Incisive Media, one of the world's leading B2B information provider.

Read the complete report from here : Top 50 + 50 Accountancy Firms 2010

Code of Ethics for Professional Accountants (revised July 2009)

On July 10, 2009, the International Ethics Standards Board for Accountants (IESBA) has issued a revised Code of Ethics for Professional Accountants (the Code), clarifying requirements for all professional accountants and significantly strengthening the independence requirements of auditors. The revised Code has been released following the consideration and approval by the Public Interest Oversight Board (PIOB) of due process and extensive public interest consultation.

"Strong and clear independence standards are vital to investor trust in financial reporting," emphasizes IESBA Chair Richard George. "The increase in trust and certainty that flow from familiarity with standards, including a common understanding of what it means to be independent when providing assurance services, will contribute immeasurably to a reduction in barriers to international capital flows."

The revised Code, which is effective on January 1, 2011, includes the following changes to strengthen independence requirements:

(a)  Extending the independence requirements for audits of listed entities to all public interest entities;

(b)  Requiring a cooling off period before certain members of the firm can join public interest audit clients in certain specified positions;

(c)  Extending partner rotation requirements to all key audit partners;

(d)  Strengthening some of the provisions related to the provision of non-assurance services to audit clients;

(e)  Requiring a pre- or post-issuance review if total fees from a public interest audit client exceed 15% of the total fees of the firm for two consecutive years; 

(f)  Prohibiting key audit partners from being evaluated on or compensated for selling non-assurance services to their audit clients.

The revised Code maintains the principles-based approach supplemented by detailed requirements where necessary, resulting in a Code that is robust but also sufficiently flexible to address the wide-ranging circumstances encountered by professional accountants.

"This approach should also help to facilitate global convergence," points out Mr. George.

The International Federation of Accountants' Statements of Membership Obligations have as a central objective the convergence of a country's national code with the Code of Ethics for Professional Accountants. Further, the requirements specify that member bodies should not apply less stringent standards than those stated in the Code.

"It is especially critical that member bodies focus on the implementation of the revised Code as soon as possible," emphasizes Mr. George. "To help them in this process, the IESBA plans to provide them with some additional support and guidance in the coming months." 

Source of this article : IFAC.org

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