tag:blogger.com,1999:blog-43262976433996946962024-03-23T17:14:35.831+07:00Auditing for AuditorsPosting topics regarding on auditing issues mostly that of in relation with International Standard on Auditing (ISA)Unknownnoreply@blogger.comBlogger40125tag:blogger.com,1999:blog-4326297643399694696.post-52733213636607402352018-08-16T11:54:00.001+07:002018-08-16T11:58:32.709+07:00Agreed-Upon Procedures (AUP), an alternative Engagement<p>International Standard on Related Services 4400 (ISRS 4400), <em>Engagements to Perform Agreed-Upon Procedures Regarding Financial Information</em> is the international standard that addresses AUP engagements. The standard establishes requirements and provides guidance for performing an AUP engagement. Under ISRS 4400, an AUP engagement involves a practitioner performing procedures that have been agreed to by the practitioner, the entity and any appropriate third parties, and reporting on the factual findings based on the procedures performed.</p><p>Paragraph 4 of ISRS 4400 states that the objective of an agreed-upon procedures engagement is for the auditor to carry out procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings.</p><p>As the auditor simply provides a report of the factual findings of agreed-upon procedures, no assurance is obtained and neither is a conclusion nor opinion expressed. Instead, users of the report assess for themselves the procedures and findings reported by the auditor and draw their own conclusions from the auditor’s work. The report provided is not distributed publicly – it is restricted to those parties that have agreed to the procedures.</p><p>An engagement to perform AUP may involve the auditor in performing certain procedures concerning individual items of financial data (for example, accounts payable, accounts receivable, purchases from related parties and sales and profits of a segment of an entity), a financial statement (for example, a balance sheet) or even a complete set of financial statements.</p><p>Who uses an AUP Report ?</p><p>(<em>Excerpted from : IFAC publication “Agreed-Upon Procedures Engagements, a Growth and Value Opportunity”</em>) A wide range of stakeholders use reports of factual findings for a variety of reasons and the demand for AUP engagements continues to grow. For many entities, the demand for AUP engagements may be driven in part of the growth in regulation and the need for increased accountability around funding and grants. For example, funding bodies may ask for a report of factual findings to support or complement information such as audited financial statements or grant applications. For smaller entities, the increase in audit exemption thresholds in some jurisdictions may affect demand, prompting stakeholders to look for alternatives to audits. For example, banks may request a report of factual findings on receivables or inventory in place of audited financial statements. This more narrow focus may represent key areas of emphasis in support of lending agreements </p><p><strong>Defining the Terms of the Engagement</strong></p><p>Paragraph 9 of ISRS 4400 states that the auditor should ensure with representatives of the entity and, ordinarily, other specified parties who will receive copies of the report of factual findings, that there is a clear understanding regarding the agreed procedures and the conditions of the engagement. Matters to be agreed include the following :</p><ul><li>Nature of the engagement including the fact that the procedures performed will not constitute an audit or a review and that accordingly no assurance will be expressed</li><li>Stated purpose for the engagement</li><li>Identification of the financial information to which the agreed-upon procedures will be applied</li><li>Nature, timing and extent of the specific procedures to be applied</li><li>Anticipated form of the report of factual findings</li><li>Limitations on distribution of the report of factual findings. When such limitation would be in conflict with the legal requirements, if any, the auditor would not accept the engagement.</li></ul><p>It is in the interests of both the client and the auditor that the auditor sends an engagement letter documenting the key terms of the appointment. An engagement letter confirms the auditor’s acceptance of the appointment and helps avoid misunderstanding regarding such matters as the objectives and scope of the engagement, the extent of the auditor’s responsibilities and the forms of reports to be issued.</p><p>Matters that would be included in the engagement letter include the following :</p><ul><li>A listing of the procedures to be performed as agreed upon between the parties</li><li>A statement that the distribution of the report of factual findings would be restricted to the specified parties who have agreed to the procedures to be performed.</li></ul><p>In addition, the auditor may consider attaching to the engagement letter a draft of the type of report of factual findings that will be issued (HRD).</p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-4326297643399694696.post-60276604423411805722015-08-11T16:43:00.001+07:002015-08-11T16:43:38.496+07:00When to perform Tests of Controls in an audit ?<p>The objective of the auditor while performing the audit is to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement, through DESIGNING and IMPLEMENTING appropriate responses to those risks.</p> <p>TESTS of CONTROLS is an audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level.</p> <p>As required by ISA 330, the auditor shall design and implement overall responses to address the assessed risks of material misstatement at the financial statement level.</p> <p>Further, paragraph 6 of ISA 330 states that the auditor shall design and perform further audit procedures whose nature, timing and extent are based on and are responsive to the assessed risks of material misstatement at the assertion level.</p> <p>In designing the further audit procedures to be performed, the auditor shall :</p> <ol> <li>Consider the reasons for the assessment given to the risk of material misstatement at the assertion level for each class of transactions, account balance, and disclosure, including :</li> <ul> <li>The likelihood of material misstatement due to the particular characteristics of the relevant class of transactions, account balance, or disclosure (that is, the inherent risk); and</li> <li>Whether the risk assessment takes account of relevant controls (that is, the control risk), thereby requiring the auditor to obtain audit evidence to determine whether the controls are operating effectively (that is, the auditor intends to rely on the operating effectiveness of controls in determining the nature, timing and extent of substantive procedures); </li></ul> <li>Obtain more persuasive audit evidence the higher the auditor’s assessment risk.</li></ol> <p>The auditor shall design and perform TESTS of CONTROLS to obtain sufficient appropriate audit evidence as to the operating effectiveness of relevant controls IF :</p> <ol> <li>The auditor’s assessment of risks of material misstatement at the assertion level includes an expectation that the controls are operating effectively (that is, the auditor intends to rely on the operating effectiveness of controls in determining the nature, timing and extent of substantive procedures); OR</li> <li>Substantive procedures alone cannot provide sufficient appropriate audit evidence at the assertion level.</li></ol> <p>In designing and performing tests of controls, the auditor shall obtain more persuasive audit evidence the greater the reliance the auditor places on the effectiveness of a control (<em>A higher level of assurance may be sought about the operating effectiveness of controls when the approach adopted consists primarily of tests of controls, in particular where it is not possible or practicable to obtain sufficient appropriate audit evidence only from substantive procedures</em>) (HRD).</p> Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-4326297643399694696.post-64646490046872429492015-08-11T15:37:00.001+07:002015-08-11T15:58:59.869+07:00Considering whether EXTERNAL CONFIRMATION procedures are to be performed as Substantive Audit Procedures<p>Substantive procedure is an audit procedure designed to detect material misstatements at the assertion level. Substantive procedures comprise :</p> <ol> <li>Tests of details (of classes of transactions, account balances, and disclosures); and</li> <li>Substantive analytical procedures</li></ol> <p>While conducting substantive audit procedures, the auditor is required to consider whether EXTERNAL CONFIRMATION procedures are to be performed as part of substantive audit procedures.</p> <p>ISA 330 paragraph A48 states that EXTERNAL CONFIRMATION procedures frequently are relevant when addressing assertions associated with account balances and their elements, but need not be restricted to these items. For example, the auditor may request external confirmation of the terms of agreements, contracts, or transactions between and entity and other parties. External confirmation procedures also may be performed to obtain audit evidence about the absence of certain conditions. For example, a request may specifically seek confirmation that no”side agreement” exists that may be relevant to an entity’s revenue cutoff assertion. Other situations where external confirmation procedures may provide relevant audit evidence in responding to assessed risks of material misstatement include :</p> <ul> <li><em>Bank balances and other information relevant to banking relationships</em></li> <li><em>Account receivable balances and terms</em></li> <li><em>Inventories held by third parties at bonded warehouse for processing or on consignment</em></li> <li><em>Property title deeds held by lawyers or financiers for safe custody or as security</em></li> <li><em>Investments held for safekeeping by third parties, or purchased from stockbrokers but not delivered at the balance sheet date</em></li> <li><em>Amounts due to lenders, including relevant terms of repayment and restrictive covenants</em></li> <li><em>Account payable balances and terms</em></li></ul> <p>Although external confirmations may provide relevant audit evidence relating to certain assertions, there are some assertions for which external confirmations provide less relevant audit evidence. For example, external confirmations provide less relevant audit evidence relating to the recoverability of accounts receivable balance, than they do of their existence.</p> <p>The auditor may determine that external confirmation procedures performed for one purpose provide and opportunity to obtain audit evidence about other matters. For example, confirmation requests for bank balances often include requests for information relevant to other financial statement assertions. Such considerations may influence the auditor’s decision about whether to perform external confirmation procedures.</p> <p>As detailed in paragraph A51 of ISA 330, there are several factors that may assist the auditor in determining whether external confirmation procedures are to be performed as substantive audit procedures, include:</p> <ul> <li>The confirming party’s knowledge of the subject matter – responses may be more reliable if provided by a person at the confirming party who has the requisite knowledge about the information being confirmed</li> <li>The ability or willingness of the intended confirming party to respond – for example, the confirming party :</li> <ul> <li>May not accept responsibility for responding to a confirmation request;</li> <li>May consider responding too costly or time consuming;</li> <li>May have concerns about the potential legal liability resulting from responding;</li> <li>May account for transactions in different currencies; or</li> <li>May operate in an environment where responding to confirmation requests is not a significant aspect of day-to-day operations</li></ul></ul> <blockquote> <p>In such situations, confirming parties may not respond, may respond in a casual manner or may attempt to restrict the reliance placed on the response</p></blockquote> <ul> <li>The objectivity of the intended confirming party – if the confirming party is a related party of the entity, responses to confirmation requests may be less reliable.</li></ul> Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-4326297643399694696.post-45411222999169955472015-07-16T13:57:00.000+07:002015-07-16T13:58:50.838+07:00Revised of ISA addressing Disclosures in the Audit of Financial Statements<p><font size="5">As</font> dropped into my mail inbox by today, July 16, 2015, the IAASB has announced on July 15, 2015 the finalization of Amendments to Auditing Standards to Promote Greater Focus on Financial Statements Disclosures.</p> <p>It said that the IAASB on July 15, 2015 released its revised <a title="http://www.ifac.org/publications-resources/addressing-disclosures-audit-financial-statements" href="http://www.ifac.org/publications-resources/addressing-disclosures-audit-financial-statements" target="_blank">International Standards on Auditing (ISAs), Addressing Disclosures in the Audit of Financial Statements</a>. The revisions to the standards aim to focus auditors more explicitly on disclosures throughout the audit process and drive consistency in auditor behavior in applying the requirements of the ISAs.</p> <p>As a complement to these revisions, IAASB staff has also developed a publication, <a title="http://www.ifac.org/publications-resources/addressing-disclosures-audit-financial-statements" href="http://www.ifac.org/publications-resources/addressing-disclosures-audit-financial-statements" target="_blank">Addressing Disclosures in the Audit of Financial Statements and Related Conforming Amendments</a>, for auditors that describes financial reporting disclosure trends and their possible implications from an audit perspective and highlights how the ISAs as revised guide the auditor in addressing disclosures. This publication is intended to help the consistent, effective, and proper application of the IASs when addressing disclosures as part of an audit of financial statements, and may be particularly relevant to small and medium practices implementing the changes to the ISAs.</p> <p>The IAASB firmly believes these changes to the ISAs will enhance audit quality and are capable of being applied proportionately in audits of entities of all sizes, and in all jurisdictions and sectors.</p> <p>A staff-prepared <a title="http://www.ifac.org/publications-resources/addressing-disclosures-audit-financial-statements" href="http://www.ifac.org/publications-resources/addressing-disclosures-audit-financial-statements" target="_blank">Basis for Conclusions</a>, which explains the IAASB’s rationale for its decisions, and an <a title="http://www.ifac.org/publications-resources/addressing-disclosures-audit-financial-statements" href="http://www.ifac.org/publications-resources/addressing-disclosures-audit-financial-statements" target="_blank">At a Glance</a> document, which explains the main changes to the ISAs, are also now available.</p> <p>The revisions to the standards encompass changes to 10 ISAs and conforming amendments to five other ISAs. They will be effective for audits of financial statements for periods ending on or after December 15, 2016, in line with the effective date for the new and revised <a title="http://www.iaasb.org/new-auditors-report" href="http://www.iaasb.org/new-auditors-report" target="_blank">Auditor Reporting Standards</a> and <a title="http://www.iaasb.org/new-auditors-report" href="http://www.iaasb.org/new-auditors-report" target="_blank">ISA 720 (Revised), The Auditor's Responsibilities Relating to Other Information</a> (HRD).</p> Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-4326297643399694696.post-17057912113213565312015-06-15T13:35:00.000+07:002015-07-14T13:35:43.268+07:002015 Edition of Code of Ethics for Professional Accountants<p>The IESBA has published the 2015 IESBA Handbook which contains the entire <em>Code of Ethics for Professional Accountants</em>. This handbook replaces the 2014 edition of the Handbook of the Code of Ethics for Professional Accountants.</p> <p>The 2015 edition of the handbook contains the following changes to the Code addressing certain non-assurance services provisions for audit clients in Section 290 :</p> <ul> <li>The exception provisions (paragraphs 290.171 and 290.183) that permit an audit firm to provide certain bookkeeping and taxation services to public interest entity audit clients in emergency or other unusual situations have been withdrawn</li> <li>The provision addressing management responsibility have been strengthened, with additional guidance and clarification provided regarding what constitutes management responsibility</li> <li>The guidance regarding the concept of “routine or mechanical” services relating to the preparation of accounting records and financial statements for audit clients that are not public interest entities has been enhanced and clarified</li></ul> <p>Corresponding and conforming changes have been made to Section 291 of the Code with respect to assurance clients.</p> <p>The changes will be effective on April 15, 2016, except for the changes to Section 290, which will be effective for audits of financial statements for periods commencing on or after April 15, 2016. Early adoption is permitted.</p> <p><a title="http://www.ifac.org/ethics/iesba-code" href="http://www.ifac.org/ethics/iesba-code" target="_blank">Click here</a> to access the Code.</p> Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-4326297643399694696.post-1017777658496100252014-07-28T09:14:00.000+07:002014-08-16T09:42:29.386+07:002014 Handbook of the Code of Ethics for Professional Accountants<p><font size="5">On</font> 17 July 2014, IESBA published the 2014 edition of the <em>Handbook of the Code of Ethics for Professional Accountants</em>. This handbook replaces the 2013 edition. It contains the following changes to the Code :</p> <ul> <li><em>Definition of “Those Charged with Governance”</em>. The IESBA has revised the definition of the term “those charged with governance” to more closely align it with that in the International Auditing and Assurance Standards Board (IAASB)’s International Standard on Auditing (ISA) 260, <em>Communication with Those Charged with Governance</em>. The IESBA also added a new paragraph 100.25 and made a change to paragraph 290.28 to clarify that a subgroup of those charged with governance of an entity, such as an audit committee, may assist the governing body in meeting its responsibilities. The revised definition of “those charged with governance” and related changes to the Code are effective on July 1, 2014. The changes were published on the IESBA website in September 2013.</li> <li><em>Conforming Changes to Part A of the Code Based on Newly Defined Term “Professional Activity”</em>. Conforming changes have been made to paragraphs 100.5 (c), 100.9, 100.12 (b), 120.2, 130.1 (b), and 130.6 based on the newly defined term “professional activity” arising from changes to the Code addressing conflicts of interest, which the IESBA issued in March 2013.</li></ul> <p>The Code of Ethics for Professional Accountants contains three parts. PART A – GENERAL APPLICATION OF THE CODE, establishes the fundamental principles of professional ethics for professional accountants and provides a conceptual framework that professional accountants shall apply to :</p> <ol> <li>Indentify threats to compliance with the fundamental principles;</li> <li>Evaluate the significance of the threats identified; and</li> <li>Apply safeguards, when necessary, to eliminate the threats or reduce them to an acceptable level. </li></ol> <p> A professional accountant shall use professional judgment in applying this conceptual framework.</p> <p>PART B – PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE and PART C – PROFESSIONAL ACCOUNTANTS IN BUSINESS, these two parts of the Code describe how the conceptual framework applies in certain situations. They provide examples of safeguards that may be appropriate to address threats to compliance with the fundamental principles. They also describe situations where safeguards are not available to address the threats, and consequently, the circumstance or relationship creating the threats shall be avoided.</p> <p>Part B applies to professional accountants in public practice. While Part C applies to professional accountants in business. Professional accountants in public practice may also find Part C relevant to their particular circumstances.</p> <p>The use of the world “shall” in this Code imposes a requirement on the professional accountant or firm to comply with the specific provision in which “shall” has been used. Compliance is required unless an exception is permitted by this Code.</p> <p>The handbook is available at : <a title="http://www.ifac.org/publications-resources/2014-handbook-code-ethics-professional-accountants" href="http://www.ifac.org/publications-resources/2014-handbook-code-ethics-professional-accountants" target="_blank">IFAC webpage</a></p> Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-4326297643399694696.post-7119902185265588422014-02-06T14:48:00.000+07:002014-08-08T14:50:58.886+07:00Audit Procedures to be DONE when EVENTS or CONDITIONS that may cast doubt about GOING CONCERN have been Identified<p><font size="5">As</font> described within my previous post, <a title="http://hardi-teh.blogspot.com/2013/02/events-or-conditions-that-may-cast.html" href="http://hardi-teh.blogspot.com/2013/02/events-or-conditions-that-may-cast.html" target="_blank">Event or Conditions that may cast DOUBT about GOING CONCERN Assumption</a>, if events of conditions have been identified that may cast significant doubt on the entity’s ability to continue as a GOING CONCERN, the auditor shall obtain sufficient appropriate audit evidence to determine whether or not a material uncertainty exists through performing ADDITIONAL AUDIT PROCEDURES, including consideration of mitigating factors.</p> <p>As disclosed in paragraph 16 of ISA 570, the required additional audit procedures to be done shall include :</p> <ol> <li>Where management has not yet performed an assessment of the entity’s ability to continue as a going concern, requesting management to make its assessment; <li>Evaluating management’s plans for future actions in relation to its going concern assessment, whether the outcome of these plans is likely to improve the situation and whether management’s plans are feasible in the circumstances; <li>Where the entity has prepared a cash flow forecast, and analysis of the forecast is a significant factor in considering the future outcome of events or conditions in the evaluation of management’s plans for future action : (i) Evaluating the reliability of the underlying data generated to prepare the forecasts; and (ii) Determining whether there is adequate support for the assumptions underlying the forecast; <li>Considering whether any additional facts or information have become available since the date on which management made its assessment; <li>Requesting written representation from management and, where appropriate, those charged with governance, regarding their plans for future action and the feasibility of these plans</li></ol> <p>Several audit procedures which are relevant to the requirement in paragraph 16 of ISA 570 may include the following :</p> <ol> <li>Analyzing and discussing cash flow, profit and other relevant forecasts with management</li> <li>Analyzing and discussing the entity’s latest available interim financial statements</li> <li>Reading the terms of debentures and loan agreements and determining whether any have been breached</li> <li>Reading minutes of the meetings of shareholders, those charged with governance and relevant committees for reference to financing difficulties</li> <li>Inquiring of the entity’s legal counsel regarding the existence of litigation and claims and the reasonableness of management’s assessments of their outcome and the estimate of their financial implications</li> <li>Confirming the existence, legality and enforceability of arrangements to provide or maintain financial support with related and third parties and assessing the financial ability of such parties to provide additional funds</li> <li>Evaluating the entity’s plans to deal with unfilled customer orders</li> <li>Performing audit procedures regarding subsequent events to identify those that either mitigate or otherwise affect the entity’s ability to continue as a going concern</li> <li>Confirming the existence, terms and adequacy of borrowing facilities</li> <li>Obtaining and reviewing reports of regulatory actions</li> <li>Determining the adequacy of support for any planned disposals of assets</li></ol> <p>Evaluating management’s plans for future actions may include inquiries of management as to its plans for future action, including, for example, its plans to liquidate assets, borrow money or restructure debt, reduce or delay expenditures, or increase capital (HRD).</p> Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-4326297643399694696.post-77306863289744574302013-02-26T12:01:00.000+07:002014-08-07T12:27:55.054+07:00Events or Conditions That May Cast Doubt about GOING CONCERN Assumption<p><font size="5">ISA 570</font> regarding Going Concern deals with the auditor’s responsibilities in the audit of financial statements relating to management’s use of the going concern assumption in the preparation of the financial statements.</p> <p>As stated in paragraph 2 of ISA 570, under the going concern assumption, an entity is viewed as continuing in business for the foreseeable future. General purpose financial statements are prepared on a going concern basis, unless management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so. Special purpose financial statements may or may not be prepared in accordance with a financial reporting framework for which the going concern basis is relevant. When the use of the going concern assumption is appropriate, assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business.</p> <p>Auditor is required by ISA 570 to obtain sufficient appropriate audit evidence about the appropriateness of management’s use of the going concern assumption in the preparation of the financial statements and to conclude whether there is a material uncertainty about the entity’s ability to continue as a going concern.</p> <p>Therefore, it is necessary for the auditor to be able to identify events or conditions which may cast doubt about client’s ability to continue as a going concern.</p> <p>Paragraph A2 of ISA 570 details several examples of events or conditions that, individually or collectively, may cast significant doubt about the going concern assumptions. Such listing is not all-inclusive nor does the existence of one ore more of the items always signify that a material uncertainty exists.</p> <p><strong>FINANCIAL</strong></p> <ul> <li>Net liability or net current liability position <li>Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment, or excessive reliance on short-term borrowings to finance long-term assets <li>Indications of withdrawal of financial support by creditors <li>Negative operating cash flows indicated by historical or prospective financial statements <li>Adverse key financial ratios <li>Substantial operating losses or significant deterioration in the value of asses used to generate cash flows <li>Arrears or discontinuance of dividends <li>Inability to pay creditors on due dates <li>Inability to comply with the terms of loan agreements <li>Change from credit to cash-on-delivery transactions with suppliers <li>Inability to obtain financing for essential new product development or other essential investments</li></ul> <p><strong>OPERATING</strong></p> <ul> <li>Management intentions to liquidate the entity or to cease operations <li>Loss of key management without replacement <li>Loss of a major market, key customer(s), franchise, license, or principal supplier(s) <li>Labor difficulties <li>Shortages of important supplies <li>Emergence of a highly successful competitor</li></ul> <p><strong>OTHER</strong></p> <ul> <li>Non-compliance with capital or other statutory requirements <li>Pending legal or regulatory proceedings against the entity that may, if successful, result in claims that the entity is unlikely to be able to satisfy <li>Changes in law or regulation or government policy expected to adversely affect the entity <li>Uninsured or underinsured catastrophes when they occur</li></ul> <p>The significance of such events or conditions often can be mitigated by other factors. For example, the effect of an entity being unable to make its normal debt repayments may be counter-balanced by management’s plans to maintain adequate cash flows by alternative means, such as by disposing of assets, rescheduling loan repayments, or obtaining additional capital. Similarly, the loss of a principal supplier may be mitigated by the availability of a suitable alternative source of supply (HRD).</p> Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-4326297643399694696.post-86561184959426962802012-08-30T18:02:00.001+07:002014-08-07T13:19:26.815+07:00WHO IS AUDITOR’S EXPERT AND WHAT THEY DO IN AN AUDIT WORK ?<p><font size="5">Auditors</font> are experts in accounting and auditing matters, but they are not reasonably expected to be experts in any other field. Therefore, in performing the audit works the auditor needs the assistance from an expert to assist the auditor in obtaining sufficient appropriate audit evidence.</p> <p>ISA 620 deals with using the work of an auditor’s expert. As stated in para.3 :</p> <blockquote> <p><em>The auditor has sole responsibility for the audit opinion expressed, and that responsibility is not reduced by the auditor’s use of the work of an auditor’s expert. Nonetheless, if the auditor using the work of an auditor’s expert, having followed this ISA, concludes that the work of that expert is adequate for the auditor’s purposes, the auditor may accept that expert’s findings or conclusions in the expert’s field as appropriate audit evidence</em></p></blockquote> <p>So, WHO IS AUDITOR’S EXPERT that meet the definition of ISA 620 ? </p> <p>Auditor’s expert is an individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence. An auditor’s expert may be either an auditor’s internal expert (who is a partner or staff, including temporary staff, of the auditor’s firm or a network firm), or an auditor’s external expert.</p> <p>Expertise in a field other than accounting or auditing may include expertise in relation to such matters as :</p> <ul> <li>The valuation of complex financial instruments, land and buildings, plant and machinery, jewelry, works of art, antiques, intangible assets, assets acquired and liabilities assumed in business combinations and assets that may have been impaired <li>The actuarial calculation of liabilities associated with insurance contracts or employee benefit plans <li>The estimation of oil and gas reserves <li>The valuation of environmental liabilities, and site clean-up costs <li>The interpretation of contracts, laws and regulations <li>The analysis of complex or unusual tax compliance issues</li></ul> <p>As stated in para. A2 of ISA 620, in many cases, distinguishing between expertise in accounting or auditing, and expertise in another field, will be straightforward, even where this involves a specialized area of accounting or auditing. For example, an individual with expertise in applying methods of accounting for deferred income tax can often be easily distinguished from an expert in taxation law. The former is not an expert for the purposes of ISA 620 as this constitutes accounting expertise; the latter is an expert for the purposes of ISA 620 as this constitutes legal expertise. Similar distinctions may also be able to be made in other areas, for example, between expertise in methods of accounting for financial instruments, and expertise in complex modeling for the purpose of valuing financial instruments. </p> <p>In some cases, however, particularly those involving an emerging area of accounting or auditing expertise, distinguishing between specialized areas of accounting or auditing, and expertise in another field, will be a matter of professional judgment. Applicable professional rules and standards regarding education and competency requirements for accountants and auditors may assist the auditor in exercising that judgment (HRD).</p> Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-4326297643399694696.post-23541939879303035432012-08-24T11:55:00.000+07:002014-08-07T13:19:49.123+07:002012 Handbook of the CODE of ETHICS for PROFESSIONAL ACCOUNTANTS<p>On July 31, 2012, the International Ethics Standards Board for Accountants (IESBA) of IFAC has issued the 2012 Handbook of the <em>Code of Ethics for Professional Accountants </em>(the Code).</p> <p>The 2012 Handbook which effective since January 1, 2011 replaces the 2010 edition of the Handbook of the Code of Ethics for Professional Accountants. No changes of substance of the 2012 edition of the handbook from the previous version. However, editorial amendments have been made.</p> <p>The issuance of the Code by IESBA is aimed for use by professional accountants around the world. As stated within the Section 100.1 of the Code :</p> <blockquote> <p><em>A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. Therefore, a professional accountant’s responsibility is not exclusively to satisfy the needs of an individual client or employer. In acting in the public interest, a professional accountant shall observe and comply with the Code. If a professional accountant is prohibited from complying with certain parts of this Code by law or regulation, the professional accountant shall comply with all other parts of this Code.</em></p></blockquote> <p>The Code contains three parts. PART A establishes the fundamental principles of professional ethics for professional accountants and provides a conceptual framework that professional accountants shall apply to :</p> <ol> <li>Identify threats to compliance with the fundamental principles; <li>Evaluate the significance of the threats identified; and <li>Apply safeguards, when necessary, to eliminate the threats or reduce them to an acceptable level. Safeguards are necessary when the professional accountant determines that the threats are not at a level at which a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances available to the professional accountant at that time, that compliance with the fundamental principles is not compromised.</li></ol> <p>A professional accountant shall use professional judgment in applying this conceptual framework.</p> <p>PART B and C describe how the conceptual framework applies in certain situations. They provide examples of safeguards that may be appropriate to address threats to compliance with the fundamental principles. They also describe situations where safeguards are not available to address the threats, and consequently, the circumstance or relationship creating the threats shall be avoided.</p> <p>Part B applies to professional accountants in public practice. While Part C applies to professional accountants in business. Nevertheless, professional accountants in public practice may also find Part C relevant to their particular circumstances.</p> <p>Download the Code from here : <a href="http://www.ifac.org/publications-resources/2012-handbook-code-ethics-professional-accountants" target="_blank">The 2012 Handbook of the Code of Ethics for Professional Accountants</a></p> Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-4326297643399694696.post-60102803523134735542011-09-23T15:02:00.000+07:002014-08-07T13:34:32.251+07:00The Auditor’s Discussion and Analysis (AD&A), the new improvement of the auditor’s reporting model<p>On June 21, 2011, the Public Company Accounting Oversight Board (PCAOB) issued the<em> Concept Release on Possible Revisions to PCAOB Standards Related to Reports on Audited Financial Statements</em>. </p> <p>As stated in the publication, the purpose of issuing this concept release is to seek public comment on potential changes to the auditor’s reporting model based on concerns of investors and other financial statement users. Auditors, as a result of the performance of required audit procedures, often have significant information regarding a company’s financial statements and the audit of such financial statement, that is not today reported in the standard auditor’s report to the financial statements users. This information might be useful to investors and other financial statement users and could lead to more efficient markets and improved allocations of capital.</p> <p>The objective of this concept release is to discuss several alternatives for changing the auditor’s reporting model that could increase its transparency and relevance to financial statement users, while not compromising audit quality. </p> <p>The alternatives presented in the concept release are :</p> <ul> <li><font size="2">Auditor’s Discussion and Analysis (AD&A), </font> <li><font size="2">Required and expanded use of emphasis paragraphs, </font> <li><font size="2">Auditor assurance on other information outside the financial statements, and </font> <li><font size="2">Clarification of language in the standard auditor’s report.</font></li></ul> <p>The above alternatives are not mutually exclusive. A revised auditor’s report could include one or a combination of these alternatives or elements of these alternatives. Additionally, there may be other alternatives to consider that this concept release does not present.</p> <p>Regarding the Auditor’s Discussion and Analysis (AD&A), the concept release proposes that a revised auditor’s reporting model could include a supplemental narrative report, which some have described as an Auditor’s Discussion and Analysis (AD&A). An AD&A could provide investors and other financial statement users with a view of the audit and the financial statements “through the auditor’s eyes.”</p> <p>Further, the concept release described that the intent of an AD&A would be to provide the auditor with the ability to discuss in a narrative format his or her views regarding significant matters. The AD&A could include information about the audit, such as audit risk identified in the audit, audit procedures and results, and auditor independence. It also could include a discussion of the auditor’s views regarding the company’s financial statements, such as management’s judgments and estimates, accounting policies and practices, and difficult or contentious issues, including “close calls.”.</p> <p>Additionally, an AD&A could provide the auditor with discretion to comment on those material matters that might be in technical compliance with the applicable financial reporting framework, but in the auditor’s view, the disclosure of such matters could be enhanced to provide the investor with an improved understanding of the matters and their impact on the financial statements.</p> <p>Read further the full version of the Concept Release in here : <a title="http://pcaobus.org/Rules/Rulemaking/Docket034/Concept_Release.pdf" href="http://pcaobus.org/Rules/Rulemaking/Docket034/Concept_Release.pdf" target="_blank">PCAOB : Concept Release</a>.</p> <p>The comment period for the concept release ends on September 30, 2011.</p> <p>Read also another related article : <a title="http://www3.cfo.com/article/2011/9/auditing_investors-accountants-debate-auditors-discussion-analysis-plan" href="http://www3.cfo.com/article/2011/9/auditing_investors-accountants-debate-auditors-discussion-analysis-plan" target="_blank">What were the Auditors Thinking?</a></p> Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-4326297643399694696.post-71039526012015840752011-04-06T18:09:00.001+07:002014-08-07T13:34:58.082+07:00The Importance of External Confirmations as Audit Evidence<p>ISA 505 deals with the auditor’s use of external confirmation procedures to obtain audit evidence in accordance with the requirements of ISA 330 regarding The Auditor’s Responses to Assessed Risks, and ISA 500 regarding Audit Evidence. It does not address inquiries regarding litigation and claims, which are dealt with in ISA 501 regarding Audit Evidence – Specific Considerations for Selected Items. </p> <p>ISA 500 indicates that the reliability of audit evidence is influenced by its source and by its nature, and is dependent on the individual circumstances under which it is obtained. That ISA also includes the following generalizations applicable to audit evidence :</p> <ul> <li><font size="2">Audit evidence is more reliable when it is obtained from independent sources outside the entity </font> <li><font size="2">Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly or by inference </font> <li><font size="2">Audit evidence is more reliable when it exists in documentary form, whether paper, electronic or other medium</font></li></ul> <p>Accordingly, depending on the circumstances of the audit, audit evidence in the form of external confirmations received directly by the auditor from confirming parties may be more reliable than evidence generated internally by the entity. This ISA is intended to assist the auditor in designing and performing external confirmation procedures to obtain relevant and reliable audit evidence.</p> <p>Other ISAs recognize the importance of external confirmations as audit evidence, for example :</p> <p><font size="4"><em>(1)</em></font> ISA 330 discusses the auditor’s responsibility to design and implement overall responses to address the assessed risks of material misstatement at the financial statement level, and to design and perform further audit procedures whose nature, timing and extent are based on, and are responsive to, the assessed risks of material misstatement at the assertion level. In addition, ISA 330 requires that, irrespective of the assessed risks of material misstatement, the auditor designs and performs substantive procedures for each material class of transactions, account balance, and disclosure. The auditor is also required to consider whether external confirmation procedures are to be performed as substantive audit procedures</p> <p><font size="4"><em>(2)</em></font> ISA 330 requires that the auditor obtain more persuasive audit evidence the higher the auditor’s assessment risk. To do this, the auditor may increase the quantity of the evidence or obtain evidence that is more relevant or reliable, or both. For example, the auditor may place more emphasis on obtaining evidence directly from third parties or obtaining corroborating evidence from a number of independent sources. ISA 330 also indicates that external confirmation procedures may assist the auditor in obtaining audit evidence with the high level of reliability that the auditor requires to respond to significant risks of material misstatement, whether due to fraud or error.</p> <p><font size="4"><em>(3)</em></font> ISA 240 indicates that the auditor may design confirmation requests to obtain additional corroborative information as a response to address the assessed risks of material misstatement due to fraud at the assertion level.</p> <p><font size="4"><em>(4)</em></font> ISA 500 indicates that corroborating information obtained from a source independent of the entity, such as external confirmations, may increase the assurance the auditor obtains from evidence existing within the accounting records or from representations made by management.</p> <p>Source of this article : <em>ISA 505 – External Confirmations, paragraphs 1-3</em></p> Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-4326297643399694696.post-45683902777680748872011-03-30T12:15:00.001+07:002014-08-07T13:35:40.417+07:00What Circumstances Meet the Condition that the Auditor is Unable to Obtain Sufficient Appropriate Audit Evidence ?<p><font size="4">The auditor’s</font> inability to obtain sufficient appropriate audit evidence (also referred to as a limitation on the scope of the audit) may arise from :</p> <ol> <li><font size="2">Circumstances beyond the control of the entity; </font> <li><font size="2">Circumstances relating to the nature or timing or the auditor’s work; or </font> <li><font size="2">Limitations imposed by management</font></li></ol> <p>An inability to perform a specific procedures does not constitute a limitation on the scope of the audit if the auditor is able to obtain sufficient appropriate audit evidence by performing alternative procedures. </p> <p>Examples of circumstances beyond the control of the entity include when :</p> <ol> <li><font size="2">The entity’s accounting records have been destroyed </font> <li><font size="2">The accounting records of a significant component have been seized indefinitely by governmental authorities</font></li></ol> <p>Examples of circumstances relating to the nature of timing of the auditor’s work include when :</p> <ol> <li><font size="2">The entity is required to use the equity method of accounting for an associated entity, and the auditor is unable to obtain sufficient appropriate audit evidence about the latter’s financial information to evaluate whether the equity method has been appropriately applied </font> <li><font size="2">The timing of the auditor’s appointment is such that the auditor is unable to observe the counting of the physical inventories </font> <li><font size="2">The auditor determines that performing substantive procedures alone is not sufficient, but the entity’s controls are not effective</font></li></ol> <p>Examples of an inability to obtain sufficient appropriate audit evidence arising from a limitation on the scope of the audit imposed by management include when :</p> <ol> <li><font size="2">Management prevents the auditor from observing the counting of the physical inventory </font> <li><font size="2">Management prevents the auditor from requesting external confirmation of specific account balances.</font></li></ol> <p>Source : <em>IAS 705 – Modifications to the Opinion in the Independent Auditor’s Report paragraphs A8 - A12 </em></p> Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-4326297643399694696.post-48320872141349586852011-03-30T09:19:00.001+07:002014-08-07T13:36:38.833+07:00In What Circumstances the Material Misstatements of Financial Statements May Arise ?<p>ISA 700 requires the auditor, in order to form an opinion on the financial statements, to conclude as to whether reasonable assurance has been obtained about whether the financial statements as a whole are free from material misstatement. This conclusion takes into account the auditor’s evaluation of uncorrected misstatements, if any, on the financial statements in accordance with ISA 450.</p> <p>ISA 450 defines a misstatement as a difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework.</p> <p>Accordingly, a material misstatement of the financial statements may arise in relation to :</p> <ol> <li><font size="2">The appropriateness of the selected accounting policies; </font> <li><font size="2">The application of the selected accounting policies; or </font> <li><font size="2">The appropriateness or adequacy of disclosures in the financial statements</font></li></ol> <p><strong><font size="3">Appropriateness of the Selected Accounting Policies</font></strong></p> <p>In relation to the appropriateness of the accounting policies management has selected, material misstatements of the financial statements may arise when :</p> <ol> <li><font size="2">The selected accounting policies are not consistent with the applicable financial reporting framework; or </font> <li><font size="2">The financial statements, including the related notes, do not represent the underlying transactions and events in a manner that achieves fair presentation</font></li></ol> <p>Financial reporting frameworks often contain requirements for the accounting for, and disclosure of, changes in accounting policies. Where the entity has changed its selection of significant accounting policies, a material misstatement of the financial statements may arise when the entity has not complied with these requirements.</p> <p><font size="3"><strong>Application of the Selected Accounting Policies</strong></font></p> <p>In relation to the application of the selected accounting policies, material misstatements of the financial statements may arise :</p> <ol> <li><font size="2">When management has not applied the selected accounting policies consistently with the financial reporting framework, including when management has not applied the selected accounting policies consistently between periods or to similar transactions and events (consistency in application); or </font> <li><font size="2">Due to the method of application of the selected accounting policies (such as an unintentional error in application).</font></li></ol> <p><strong><font size="3">Appropriateness or Adequacy of Disclosures in the Financial Statements</font></strong></p> <p>In relation to the appropriateness or adequacy of disclosures in the financial statements, material misstatements of the financial statements may arise when :</p> <ol> <li><font size="2">The financial statements do not include all of the disclosures required by the applicable financial reporting framework; </font> <li><font size="2">The disclosures in the financial statements are not presented in accordance with the applicable financial reporting framework; or </font> <li><font size="2">The financial statements do not provide the disclosures necessary to achieve fair presentation.</font></li></ol> <p>Source : <em>ISA 705 – Modifications to the Opinion in the Independent Auditor’s Report paragraphs A2 - A7</em></p> Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-4326297643399694696.post-54440935163402891012011-02-01T11:06:00.000+07:002021-12-21T15:25:20.435+07:00The 2010 Big Four Firms Performance Analysis by www.Big4.com<p>Big4.com is the accounting, tax consulting and IT professions’ premier resource that focused on professionals and alumni of the Big Four Accounting and Consulting Firms – Accenture, Deloitte, Ernst & Young (E&Y), KPMG, PricewaterhouseCoopers PwC, Andersen, BearingPoint and Capgemini. It is not affiliated with any Big Four firm. </p> <p>Recently, it has published “The 2010 Big Four Firms Performance Analysis”, an analysis report of the 2010 Financial Performance of the World’s Largest Accounting Firms, PricewaterhouseCoopers PwC, Deloitte Touche Tohmatsu, Ernst & Young and KPMG. </p> <p>Within the executive summary, it reports that after an extraordinary period of continuous revenue growth from the early 2000s to 2008, combined revenue for the four firms in fiscal 2009 fell by 7% from fiscal 2008 in US dollar terms, ranged from negative 5% for Deloitte to negative 7% each for Ernst & Young and PricewaterhouseCoopers to negative 11% for KPMG. However, in 2010 the situation improved remarkably, with $95 billion combined revenue for the four firms in fiscal 2010 increasing 1.4% from $94 billion in fiscal 2009 in US dollar terms, ranged from negative 0.9% for Ernst & Young, 1.5% for PwC, 1.8% for Deloitte and 2.6% for the fastest-grower, KPMG.</p> <p>The big story of 2010 was that Deloitte with its 1.8% growth was able to beat PricewaterhouseCoopers with its 1.5% growth to gain first place and become the largest accounting firm on the planet. In 2009, PwC was narrowly ahead of Deloitte, but Deloitte’s 2010 revenues of $26.578 billion was ahead of PwC’s 2010 revenues of $26.569 billion by an ultra-slim, but very significant, $9 million. Ernst & Young took the third spot at $21.3 billion, and KPMG maintained its position as the smallest of the Big Four firms at $20.6 billion, but narrowed the gap against E&Y.</p> <p>While the outlook for 2011 and beyond is quite optimistic. Revenue is expected to grow at a steady pace, with help from strong emerging markets and advisory services. 2011 will also prove whether Deloitte can maintain its lead over PwC; and whether the gap between E&Y and KPMG will narrow further. </p> <p>The full study can be downloaded as Adobe pdf at <a href="http://www.big4.com/bigfourperformanceanalysis.html" target="_blank">http://www.big4.com/bigfourperformanceanalysis.html</a></p> Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-4326297643399694696.post-69759181791864208532010-12-11T11:47:00.001+07:002010-12-11T11:48:43.506+07:00Audit Risk and Materiality – Desired and Achieved Audit Risk<p>Audit risk is the risk that the financial statements are materially misstated and the auditor fails to detect such a misstatement. </p> <p>Audit risk and materiality are closely related. Materiality must be established before audit risk has any meaning. For example, a 4% risk of a $20,000 misstatement of income has a completely different meaning than a 4% risk of a $200,000 misstatement.</p> <p><em><font size="4">Desired audit risk</font></em> is the subjectively determined risk that the auditor is willing to take that the financial statements are not fairly stated after the audit is completed and an unqualified opinion has been reached. The lower the desired audit risk, the more sure the auditor wants to be that the financial statements are not materially misstated. Zero risk would be certainty, and a 100% risk would be complete uncertainty. Audit risk can range anywhere from zero to one (0 to 100 percent), but no more or less. Complete assurance (zero risk) of the accuracy of the financial statements is not economically practical. The auditor cannot guarantee the complete absence of material errors and irregularities.</p> <p>The concept of desired audit risk can be more easily understood by thinking in terms of a large number of audits, say ten thousand. What portion of these audits could include material errors without having an adverse effect on society? Certainly, the portion would be below ten percent. It is probably much closer to one or one-half of 1% or perhaps even one-tenth of 1%. If an auditor feels the appropriate percentage for a given audit is one, desired audit risk is 1%.</p> <p><font size="4"><em>Achieved audit risk</em></font> is the actual level of risk, after the audit is completed and an unqualified opinion issued, that the statements are materially misstated. Achieved risk must be less than desired risk or the auditor should not issue an unqualified opinion.</p> <p>The auditor achieves a reduction of audit risk by gathering evidence. The lower the desired audit risk, the more evidence the auditor must obtain. Since an increased amount of evidence means increased cost, the decision concerning the proper audit risk is one of cost versus benefit. The important question is : at what point does the cost of acquiring more evidence exceed the benefit obtained from the additional information? When the desired risk is reached, the auditor should stop accumulating evidence.</p> <p>The auditor will have sufficient competent evidence when the achieved audit risk equals desired audit risk. Lower audit risk could be achieved, but cost would be increased.</p> <p>If the auditor believes the additional cost exceeds the additional benefit from continuing the accumulate evidence, but audit risk is still not satisfactory, he has several options. He may negotiate for a higher audit fee, issue a disclaimer of opinion, bear the additional costs himself, or withdraw from the engagement (Hrd).</p> <p>Source of this article : <em>Auditing – An Integrated Approach</em>, Alvin A.Arens & James K. Loebbecke</p> Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-4326297643399694696.post-44687485743457251622010-12-09T15:07:00.001+07:002011-09-29T11:31:53.322+07:00The Nature of Audit Risk and Materiality<p><font size="4">Audit risk</font> is the risk that the financial statements are materially misstated and the auditor fails to detect such a misstatement. The auditor must perform the audit to reduce audit risk to a low level. </p> <p>Audit risk is a function of two components :</p> <ol> <li><font size="2"><em>Risk of material misstatement</em>, which is the risk that an account or disclosure item contains a material misstatement, and </font> <li><font size="2"><em>Detection risk</em>, which is the risk that the auditor will not detect such misstatements</font>.</li></ol> <p>To reduce audit risk to a low level requires the auditor to :</p> <ol> <li><font size="2">Assess the risk of material misstatement, and, based on that assessment, </font> <li><font size="2">Design and perform further audit procedures to reduce overall audit risk to an appropriately low level.</font></li></ol> <p>The concept of materiality recognizes that some matters are more important for the fair presentation of the financial statements than others. In performing your audit, you are concerned with matters that, individually or in the aggregate, could be material to the financial statements. Your responsibility is to plan and perform the audit to obtain reasonable assurance that you detect all material misstatement, whether caused by error or fraud.</p> <p>The accounting standards define <strong>Materiality</strong> as <strong><em>the magnitude of an omission or misstatement of accounting information that, in light or surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed by the omission or misstatement</em></strong>.</p> <p>Thus, materiality is influenced by your perception of the needs of financial statement users who will rely on the financial statements to make judgments about your client.</p> <p><font size="4">ISA 320</font> <em>Materiality in Planning and Performing an Audit,</em> in paragraph A1 states that :</p> <blockquote> <p>In conducting an audit of financial statements, the overall objectives of the auditor are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and to report on the financial statements, and communicate as required by the ISAs, in accordance with the auditor’s findings. The auditor obtains reasonable assurance by obtaining sufficient appropriate audit evidence to reduce audit risk to an acceptably low level. </p> <p>Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk.</p> <p>Materiality and audit risk are considered throughout the audit, in particular, when :</p> <ol> <li><font size="2">Identifying and assessing the risks of material misstatement; </font> <li><font size="2">Determining the nature, timing and extent of further audit procedures; and </font> <li><font size="2">Evaluating the effect of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor’s report</font>.</li></ol></blockquote> <p>Source : <a href="http://www.amazon.com/Wiley-Practitioners-Guide-GAAS-2010/dp/0470453265/ref=sr_1_1?ie=UTF8&s=books&qid=1291882599&sr=1-1" target="_blank">WILEY – Practitioner’s Guide to GAAS 2010, Steven M.Bragg</a> and ISA 320 <em>Materiality in Planning and Performing an Audit</em></p> Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-4326297643399694696.post-50634791773587890002010-12-08T15:56:00.001+07:002011-09-29T11:33:08.744+07:00Materiality in the Context of an Audit<p><font size="4">ISA 320</font> <em>Materiality in Planning and Performing an Audit</em> paragraph 2 states that financial reporting frameworks often discuss the concept of materiality in the context of the preparation and presentation of financial statements. Although financial reporting frameworks may discuss materiality in different terms, they generally explain that :</p> <ul> <li><font size="2">Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements; </font> <li><font size="2">Judgments about materiality are made in light of surrounding circumstances, and are affected by the size or nature of a misstatement, or a combination of both; and </font> <li><font size="2">Judgments about matters that are material to users of the financial statements are based on a consideration of the common financial information needs of users as a group. The possible effect of misstatements on specific individual users, whose needs may vary widely, is not considered</font>.</li></ul> <p>Para. 3 states that such a discussion, if present in the applicable financial reporting framework, provides a frame of reference to the auditor in determining materiality for the audit. If the applicable financial reporting framework does not include a discussion of the concept of materiality, the characteristics referred to in para. 2 provide the auditor with such a frame of reference.</p> <p>The auditor’s determination of materiality is a matter of professional judgment, and is affected by the auditor’s perception of the financial information needs of users of the financial statements. In this context, it is reasonable for the auditor to assume that users :</p> <ol> <li><font size="2">Have a reasonable knowledge of business and economics activities and accounting and a willingness to study the information in the financial statements with reasonable diligence; </font> <li><font size="2">Understand that financial statements are prepared, presented and audited to levels of materiality; </font> <li><font size="2">Recognize the uncertainties inherent in the measurement of amounts based on the use of estimates, judgment and the consideration of future events; and </font> <li><font size="2">Make reasonable economic decisions on the basis of the information in the financial statements</font></li></ol> <p>The concept of materiality is applied by the auditor both in planning and performing the audit, and in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor’s report.</p> <p>In planning the audit, the auditor makes judgments about the size of misstatements that will be considered material. These judgments provide a basis for :</p> <ol> <li><font size="2">Determining the nature, timing and extent of risk assessment procedures; </font> <li><font size="2">Identifying and assessing the risks of material misstatements; and </font> <li><font size="2">Determining the nature, timing and extent of further audit procedures</font></li></ol> <p>The materiality determined when planning the audit does not necessarily establish an amount below which uncorrected misstatements, individually or in the aggregate, will always be evaluated as immaterial. The circumstances related to some misstatements may cause the auditor to evaluate them as material even if they are below materiality. Although it is not practicable to design audit procedures to detect misstatements that could be material solely because of their nature, the auditor consider not only the size but also the nature of uncorrected misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements (Hrd). </p> Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-4326297643399694696.post-46140539039475537002010-11-05T13:18:00.000+07:002021-12-21T15:26:24.501+07:00PricewaterhouseCoopers and Ernst & Young amongst the Forbes : America’s Largest Private Companies<p>On November 3, 2010, Forbes Magazine has published its special report of ‘America’s Largest Private Companies’. </p> <p>Within this 26th ranking of the largest privately held firms in the U.S which ranked 223 private companies that qualified as the largest in America, Cargill Inc., a privately held, multinational corporation based in Minneapolis, Minnesota in the U.S with the estimation of $109.84 billion in revenue and 130,500 employees picked on top of the list.</p> <p>At the second place of the list was Koch Industries, Inc., an American private energy conglomerate based in Wichita, Kansas with the estimation revenue of $100 billion and 70,000 employees. Following by Bechtel Corporation, the largest engineering company in the United States with the headquarter in the Financial District of San Francisco at the third place with $30.80 billion of revenue and 49,000 employees.</p> <p>There are two of the Big Four Accounting Firms within the top ten biggest companies. PricewaterhouseCoopers ranked at #7 with $26.57 billion in revenue and 161,718 employees, and Ernst & Young at #9 with $21.26 billion in revenue and 141,000 employees.</p> <p>Here is the list of the top ten biggest companies :</p> <ol> <li><font size="2">Cargill (ranked #1 in 2009) </font> </li><li><font size="2">Koch Industries (ranked #2 in 2009) </font> </li><li><font size="2">Bechtel (ranked #5 in 2009) </font> </li><li><font size="2">HCA (ranked #7 in 2009) </font> </li><li><font size="2">Mars (ranked #6 in 2009) </font> </li><li><font size="2">Chrysler (ranked #3 in 2009) </font> </li><li><font size="2">PricewaterhouseCoopers (ranked #8 in 2009) </font> </li><li><font size="2">Publix Super Markets (ranked #9 in 2009) </font> </li><li><font size="2">Ernst & Young (ranked #10 in 2009) </font> </li><li><font size="2">C&S Wholesale Grocers (ranked #12 in 2009) </font></li></ol> <p>Read the complete publication : <a href="http://www.forbes.com/2010/11/01/largest-private-companies-business-private-companies-10-intro.html" target="_blank" title="http://www.forbes.com/2010/11/01/largest-private-companies-business-private-companies-10-intro.html">America's Largest Private Companies</a> and the <a href="http://www.forbes.com/lists/2010/21/private-companies-10_rank.html" target="_blank" title="http://www.forbes.com/lists/2010/21/private-companies-10_rank.html">Complete List</a></p> Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-4326297643399694696.post-43672486809581906142010-10-29T12:10:00.000+07:002010-10-30T12:10:09.574+07:00Changes to the Rules of Financial Information Compilation Engagements<p>The IAASB on October 28, 2010 released for public comment the exposure draft of Proposed International Standard on Related Services (ISRS) 4410, <em>Compilation Engagements </em>as the revision of the extant ISRS 4410, <em>Engagements to Compile Financial Statements</em>.</p> <p>Within the Explanatory Memorandum of the ED, the IAASB noted that it believes the proposed ISRS will help practitioners performing compilation engagements around the world converge on use of a globally accepted benchmark for such engagements.</p> <p>There are several key principles within the revision of ISRS 4410 which underlying the financial information compilation engagement :</p> <ol> <li><font size="2">Clearly distinguishable from audits and reviews of financial statements (that is, assurance engagements)</font></li> <li><font size="2">Meaningful for users, in context of the benefit delivered from application of professional expertise in accounting and financial reporting, and compliance with relevant professional standards and ethical principles</font></li> <li><font size="2">Able to be performed on a cost-effective basis</font></li> </ol> <p>The proposed ISRS 4410 makes clear that the procedures employed in a compilation engagement are not designed, and do not enable the practitioner, to express any assurance on the financial information. It explains, however, that users of the compiled financial information derive benefit from application of the practitioner’s expertise in accounting and financial reporting and compliance with professional standards, including delivering the service in accordance with the ethical principles of integrity, objectivity, professional competence and due care.</p> <p>The proposed engagement standard has also been developed to be capable of being used on a stand-alone basis for engagement performance purposes, without the need for practitioners to refer to the International Standards on Auditing (ISAs) or the review engagement standards. This recognizes that practitioners who regularly undertake compilations in their professional practices may not necessarily perform assurance engagements, and therefore may not maintain up-to-date familiarity with developments in assurance standards.</p> <p>Within the Scope of Proposed ISRS 4410, the IAASB emphasized the importance to obtain respondents’ views on the intended scope of proposed ISRS 4410, which is different from the scope of extant ISRS 4410.</p> <p>It said that the practitioners can have many different forms of involvement in compiling information in different situations to meet various types of needs. Practitioners may also provide a variety of communications in the course of providing various types of services commonly referred to as “accounting services.” The IAASB determined that the focus of proposed ISRS 4410, however should be on where the practitioner compiles historical financial information using the applicable financial reporting framework specified in the terms of the compilation engagement. This is the most common context for compilation engagements encountered in practice, and is the most relevant to a broad range of users of historical financial information, in particular in the SME sector.</p> <p>Accordingly, the IAASB determined that proposed ISRS should be focused to apply in the following circumstances :</p> <ol> <li><font size="2">When the practitioner is engaged to compile historical financial information in accordance with the proposal ISRS; and</font></li> <li><font size="2">Where the practitioner provides a report for the engagement in accordance with the requirements of the proposed ISRS.</font></li> </ol> <p>Proposed ISRS 4410 is premised on the basis that a firm providing compilation engagements under the standard is required to apply, or has applied, ISQC 1 or requirement that are at least as demanding.</p> <p>The proposed ISRS also requires the practitioner to determine, at the time of accepting the engagement, that the applicable financial reporting framework to be used for the compilation is acceptable, in the practitioner’s judgment, in view of the intended use of the financial information and the intended users. The practitioner cannot accept an engagement under the proposed ISRS if this overall test is not met (see Proposed ISRS 4400 (revised), paragraph 23(b)).</p> <p>Read further the publication of ED ISRS 4410 from the IFAC Press Center : <a title="http://press.ifac.org/news/2010/10/iaasb-addresses-compilation-engagements-exposes-enhanced-standard" href="http://press.ifac.org/news/2010/10/iaasb-addresses-compilation-engagements-exposes-enhanced-standard" target="_blank">IAASB Addresses Compilation Engagements; Exposes Enhanced Standard</a></p> Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-4326297643399694696.post-31378343092032309472010-10-21T16:50:00.001+07:002011-09-29T11:35:47.599+07:00The requirements of an independent auditor in forming an opinion on the audited financial statements<p><font size="4">ISA 700</font> states that the objectives of the auditor (independent auditor) are :</p> <ol> <li><font size="2">To form an opinion on the financial statements based on an evaluation of the conclusions drawn from the audit evidence obtained; and </font> <li><font size="2">To express clearly that opinion through a written report that also describes the basis for that opinion </font></li></ol> <p>In this ISA, the meaning of financial statements is a complete set of general purpose financial statements, including the related notes, which ordinarily comprise a summary of significant accounting policies and other explanatory information.</p> <p>Regarding the financial statements, the auditor (independent auditor) shall form an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.</p> <p>As stated in para. 11 of ISA 700, in order to form that opinion, the auditor shall conclude as to whether the auditor has obtained reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. That conclusion shall take into account :</p> <ol> <li><font size="2">The auditor’s conclusion, in accordance with ISA 330, whether sufficient appropriate audit evidence has been obtained; </font> <li><font size="2">The auditor’s conclusion, in accordance with ISA 450, whether uncorrected misstatements are material, individually or in aggregate; and </font> <li><font size="2">The evaluations required by paragraphs 12-15.</font> </li></ol> <p>Then, para. 12 states that the auditor shall evaluate whether the financial statements are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework. This evaluation shall include consideration of the qualitative aspects of the entity’s accounting practices, including indicators of possible bias in management’s judgments.</p> <p>Following, para. 13 states that in particular, the auditor shall evaluate whether, in view of the requirements of the applicable financial reporting framework :</p> <ol> <li><font size="2">The financial statements adequately disclose the significant accounting policies selected and applied; </font> <li><font size="2">The accounting policies selected and applied are consistent with the applicable financial reporting framework and are appropriate; </font> <li><font size="2">The accounting estimates made by management are reasonable; </font> <li><font size="2">The information presented in the financial statements is relevant, reliable, comparable, and understandable; </font> <li><font size="2">The financial statements provide adequate disclosures to enable the intended users to understand the effect of material transactions and events on the information conveyed in the financial statements; and </font> <li><font size="2">The terminology used in the financial statements, including the title of each financial statement, is appropriate. </font></li></ol> <p>Further, para. 14 of ISA 700 prescribes that when the financial statements are prepared in accordance with a fair presentation framework, the evaluation required by paragraphs 12-13 shall also include whether the financial statements achieve fair presentation. The auditor’s evaluation as to whether the financial statements achieve fair presentation shall include consideration of :</p> <ol> <li><font size="2">The overall presentation, structure and content of the financial statements; and </font> <li><font size="2">Whether the financial statements, including the related notes, represent the underlying transactions and events in a manner that achieves fair presentation.</font> </li></ol> <p>While, para. 15 requires the auditor to evaluate whether the financial statements adequately refer to or describe the applicable financial reporting framework (Hrd).</p> Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-4326297643399694696.post-4335303582529658112010-10-05T09:31:00.001+07:002011-09-29T11:36:40.368+07:00A guide to an initial assessment of Control Risk<p>Control Risk is the risk that a material error in an account will not be prevented or detected on a timely basis by the client’s internal control structure.</p> <p>Assessing control risk is the process of evaluating the effectiveness of an entity’s internal control structure in preventing or detecting material misstatements in the financial statements.</p> <p>Control risk must ultimately be assessed in terms of financial statement assertions. For example, there should be separate assessments of the existence and completeness assertions for sales.</p> <p>Control risk may be assessed at the maximum level or below the maximum. </p> <p>An initial assessment of control risk at the maximum occurs when (1) controls do not pertain to an assertion, (2) controls that pertain are unlikely to be effective, or (3) evaluating the effectiveness of relevant controls would be inefficient. An assessment of control risk below the maximum means that there are effective controls to prevent or detect misstatements in a financial statement assertion. The assessment of control risk below the maximum should be based on evidence of the operating effectiveness of the controls.</p> <p>Control risk may be expressed qualitatively such as low, moderate, or high. Alternatively, the risk may be stated quantitatively as a percentage or a numerical probability such as .75 or 1.0. The initial assessment of control risk starts with the auditor’s understanding of the control environment followed by his knowledge of the accounting system. If management’s attitude toward controls is good, the likelihood of making an initial assessment of control risk below the maximum is enhanced. In some cases, the initial assessment may be based on the effectiveness of the controls in the prior year’s audit, provided that the auditor has determined that such controls are still effective in the current year.</p> <p>Assessing control risk is a matter of professional judgment. In making the assessment, it is necessary for the auditor to :</p> <ol> <li><font size="2">Identify misstatements that could occur in financial statement assertions. </font> <li><font size="2">Identify the controls that could likely prevent or detect the misstatements. </font> <li><font size="2">Obtain evidence from test of controls as to whether the controls are operating effectively. </font></li></ol> <p>The first two steps should be performed for all material financial statement assertions. The third step is required only when the auditor assesses control risk below the maximum (Hrd).</p> <p>Source : <i><a href="http://www.amazon.com/Modern-Auditing-William-C-Boynton/dp/047118909X" target="_blank">Modern Auditing – Walter G. Kell, William C. Boynton & Richard E. Ziegler</a></i></p> Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-4326297643399694696.post-18304800141517953922010-09-07T11:41:00.001+07:002011-09-29T11:37:40.218+07:00Audit of leases, the audit objectives and audit program to be prepared while auditing the lessee obligation<p>For accounting and financial reporting purposes, an entity as the lessee has two alternatives in classifying a lease : (1) Operating Lease, (2) Finance Lease. The proper classification of a lease is determined by the circumstances surrounding the leasing transaction. According to IAS 17 : Leases, whether a lease is a finance lease or not will have to be judged based on the substance of the transaction, rather than on its mere form. If substantially all of the benefits and risks of ownership have been transferred to the lessee, the lease should be classified as a finance lease. Besides, IAS 17 also stipulates that substantially all of the risks or benefits of ownership are deemed to have been transferred if a lease transaction meets any one of criteria as prescribed in para. 10 and para. 11 of IAS 17. </p> <p>While conducting an audit of lease transaction, the auditor shall take notes of the following principal objectives :</p> <ul> <li><font size="2">Determine that all finance leases are recorded in the balance sheet with appropriate classification of the leased asset and the obligation </font> <li><font size="2">Ascertain that depreciation expenses and interest expense relating to finance leases and rent expense on operating leases have been calculated and reported properly in the income statement </font> <li><font size="2">Ascertain that footnote disclosure of finance lease and operating lease obligations are adequate and are in compliance with the disclosure requirements of IAS 17 </font></li></ul> <p>The auditing procedures related to lessee obligations consist principally of a careful examination and study of the lease documents to determine the substance of the transaction and the proper accounting treatment. During the examination of the lease agreements, the auditor normally prepares a summary of the terms and provisions of each lease for his or her permanent file working papers documentation.</p> <p>Then, how the auditor should prepare his or her audit program in relation with the audit of lease transaction ?</p> <p>An audit program for lease obligations would include the following steps :</p> <ul> <li><font size="2">Examine lease agreements and prepare a summary of key terms and pertinent data for the permanent file </font> <li><font size="2">Determine that leases have been properly classified as either finance leases or operating leases using the criteria of IAS 17 </font> <li><font size="2">For capitalized leases, check the present value computations and determine the appropriateness of the discount rate used </font> <li><font size="2">Determine that lease payments and expenses included in the accounts are in agreement with the provisions of the lease contracts </font> <li><font size="2">Determine that executory costs to be paid by the lessee (property taxes, insurance, etc.) have been properly accrued and included in expenses </font> <li><font size="2">Determine that any additional contingent rents payable have been accrued (such contingent rents may result from escalation clauses, gross receipts, provisions, etc.) </font> <li><font size="2">Ascertain that footnote and balance sheet disclosures are in accordance with IAS 17</font> </li></ul> <p>Source : <em>Accountants’ Handbook – Lee.J.Seidler and D.R.Carmichael</em></p> <p>For further reference, read also :</p> <ul> <li><a title="http://faainc.blogspot.com/2010/07/right-way-to-classify-lease.html" href="http://faainc.blogspot.com/2010/07/right-way-to-classify-lease.html" target="_blank"><font size="2">The right way to classify a lease</font></a><font size="2"> </font> <li><a title="http://faainc.blogspot.com/2010/09/how-is-treatment-of-land-and-buildings.html" href="http://faainc.blogspot.com/2010/09/how-is-treatment-of-land-and-buildings.html" target="_blank"><font size="2">How is the treatment of land and buildings lease transaction ?</font></a><font size="2"> </font> <li><a title="http://faainc.blogspot.com/2010/09/effect-of-operating-and-finance-leases.html" href="http://faainc.blogspot.com/2010/09/effect-of-operating-and-finance-leases.html" target="_blank"><font size="2">Effect of operating and finance leases on lessee financial statements and key financial ratios</font></a><font size="2"> </font></li></ul> Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-4326297643399694696.post-3552371999932072362010-08-15T15:06:00.001+07:002010-08-15T15:06:49.879+07:00Risk Assessment Procedures and Related Activities<p>ISA 315, <em>Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment</em>, para. 5 to 10 prescribes the audit risk assessment procedures and related activities. <p>The auditor shall perform risk assessment procedures to provide a basis for the identification and assessment of risks of material misstatement at the financial statement and assertion levels. Risk assessment procedures by themselves, however, do not provide sufficient appropriate audit evidence on which to base the audit opinion. <p>The risk assessment procedures shall include the following : <p>(a) Inquiries of management, and of others within the entity who in the auditor's judgment may have information that is likely to assist in identifying risks of material misstatement due to fraud or error. Much of the information obtained by the auditor's inquiries is obtained from management and those responsible for financial reporting. However, the auditor may also obtain information, or a different perspective in identifying risks of material misstatement, through inquiries of others within the entity and other employees with different levels of authority. <p>(b) Analytical procedures; the analytical procedures performed as risk assessment procedures may identify aspects of the entity of which the auditor was unaware and may assist in assessing the risk of material misstatement in order to provide a basis for designing and implementing responses to the assessed risks. Analytical procedures performed as risk assessment procedures may include both financial and non-financial information, for example, the relationship between sales and square footage of selling space or volume of goods sold. <p>(c) Observation and inspection; the observation and inspection procedures may support inquiries of management and others, and may also provide information about the entity and its environment. Examples of such audit procedures include observation or inspection of the following : (i) the entity's operations, (ii) documents (such as business plans and strategies), records, and internal control manuals, (iii) reports prepared by management (such as quarterly management reports and interim financial statements) and those charged with governance (such as minutes of board of directors' meetings), (iv) the entity's premises and plant facilities. <p>The auditor shall consider whether information obtained from the auditor's client acceptance or continuance process is relevant to identifying risks of material misstatement. <p>If the engagement partner has performed other engagements for the entity, the engagement partner shall consider whether information obtained is relevant to identifying risks of material misstatement. <p>Where the auditor intends to use information obtained from the auditor's previous experience with the entity and from audit procedures performed in previous audits, the auditor shall determine whether changes have occurred since the previous audit that may affect its relevance to the current audit. This is because changes in the control environment, for example, may affect the relevance of information obtained in the prior year. To determine whether changes have occurred that may affect the relevance of such information, the auditor may make inquiries and perform other appropriate audit procedures, such as walk-through of relevant systems. <p>The auditor's previous experience with the entity and audit procedures performed in previous audits may provide the auditor with information about such matters as : (i) past misstatements and whether they were corrected on a timely basis, (ii) the nature of the entity and its environment, and the entity's internal control (including deficiencies in internal control), (iii) significant changes that the entity or its operations may have undergone since the prior financial period, which may assist the auditor in gaining a sufficient understanding of the entity to identify and assess risks of material misstatement. <p>Further, the standard states that the engagement partner and other key engagement team members shall discuss the susceptibility of the entity's financial statements to material misstatement, and the application of the applicable financial reporting framework to the entity's facts and circumstances. The engagement partner shall determine which matters are to be communicated to engagement team members not involved in the discussion (Hrd) *** </p> Unknownnoreply@blogger.com5tag:blogger.com,1999:blog-4326297643399694696.post-66846968571413440022010-08-13T13:21:00.000+07:002010-12-09T13:21:22.479+07:00The U.S. 2010 Top 100 Accounting Firms<p>The INSIDE Public Accounting (IPA) through its August 2010, Vol. 24, Number 8 publication released the list of "The 2010 Top 100 Firms - The Largest Accounting Firms in the U.S."</p> <blockquote> <p>INSIDE Public Accounting is an independent newsletter for reporting and analyzing news, trends, strategies and politics, published monthly by The Platt Consulting Group. Read more : <a href="http://insidepublicaccounting.com/" target="_blank">http://insidepublicaccounting.com/</a></p></blockquote> <p>Here is a little quotation from the publication :</p> <blockquote> <p>The headline this year focuses on the ability of the IPA Top 100 to move, pivot, change and adapt. Throughout the country, strategic discussions took place among owners to figure out how to react to the challenging economy and how to best position their firms to success once a recovery begins. "TIGHTEN THE BELT!" was the battle cry for most. But beyond that, strategies were as varied as the firms that pursued them.</p></blockquote> <p>In the list of the 2010 Top 100 Firms, which was ranked based on the U.S Net Revenue, <strong>Deloitte LLP & Subsidiaries</strong> of New York seated at the top, ranked #1 with the total revenue of $10,938,000,000. Following, in the 2nd place was <strong>Ernst & Young LLP</strong> of New York with total revenue of $7,620,000,000. While <strong>PricewaterhouseCoopers LLP</strong> of New York ranked in the 3rd place with total revenue of $7,369,000,000.</p> <p><strong>KPMG LLP</strong> of New York, <strong>RSM McGladrey Inc. and McGladrey & Pullen LLP</strong> of Minneapolis and <strong>Grant Thornton LLP</strong> of Chicago took the 4th, 5th and 6th places respectively.</p> <p>The ranked of #1 until #12 remain unchanged from that of in 2009. Read further the publication : <a href="http://www.insidepublicaccounting.com/PDF/top100_2010.pdf" target="_blank">INSIDE Public Accounting - The 2010 Top 100 Firms</a></p> Unknownnoreply@blogger.com1