Nexia International Audit Forum Sharing our strengths to build quality

Efficient audit documentation Kirsty Smith

Introduction Associate director, Smith & Williamson National Assurance Technical Group

Efficient audit documentation What do I mean by efficient? Working smarter not harder Reducing costs but improving audit quality Documenting the right information

Agenda 9.20Presentation 9.50Coffee 10.10Discussion 11.10Feedback 11.40Finish

Efficient audit documentation Audit planning Audit testing Examples Practical suggestions

What is the purpose of planning? Assist the audit team to plan and perform the audit Assist members of the audit team responsible for supervision to direct and supervise the audit work and also allows for proper review of the work Demonstrate the accountability of the audit team for its work (Nexia International Audit Manual)

Planning: what needs to be considered? The client and their business Their internal environment and processes The risk of material misstatement –Fraud or error? –Assertions The audit tests

Planning: how can we be more efficient? Update from last year Have team discussions Only document what you need to and only do it once Train the client Make use of the planning work

Planning: how can we be more efficient? Update from last year Have team discussions Only document what you need to and only do it once Train the client Make use of the planning work

Example: Background information Nature of the business Objectives and strategies Group structure and investments Financing Financial reporting Measurement and review of the entity’s financial performance Regulatory environment

Planning: how can we be more efficient? Update from last year Have team discussions Only document what you need to and only do it once Train the client Make use of the planning work

Example: Team discussion meeting

Planning: how can we be more efficient? Update from last year Have team discussions Only document what you need to and only do it once Train the client Make use of the planning work

Example: Understanding the information system and control activities

Planning: how can we be more efficient? Update from last year Have team discussions Only document what you need to and only do it once Train the client Make use of the planning work

Example: Client assistance schedule

Planning: how can we be more efficient? Update from last year Have team discussions Only document what you need to and only do it once Train the client Make use of the planning work

Example: Audit programme

Audit testing: What needs to be documented? The auditor should prepare the audit documentation so as to enable an experienced auditor, having no previous connection with the audit, to understand: The nature, timing, and extent of the audit procedures performed …; The results of the audit procedures and the audit evidence obtained; and Significant matters arising during the audit and the conclusions reached thereon. (ISA 230.9)

Audit testing: What needs to be documented? The assertions addressed The name or other identifying details of the report or listing used as the population for the test The number of items tested If a sample is used the reasoning for the sample size Sufficient details about items tested for them to be clearly identified The results A conclusion

What does not need to be documented? Copies of –Invoices –Bank statements –Client produced reports Effective documentation by the person doing the test will save time for the reviewer(s)

Audit testing: things we do not need to do Test immaterial balances …. …unless testing for completeness Do a test just because we did it last year Tests which do not address the right assertions Tests which compare data from the same source Tests which are not concluded on (e.g error in a sample not extrapolated)

Audit testing: practical suggestions Consider the power of analytical procedures as an audit test Test key items Consider who in the audit team does which tasks Encourage staff to stop and think Raise review points for “overauditing” as well as “underauditing” Don’t just do procedures, do an audit Make use of the planning work

Audit testing: some things to think about Can what we are doing actually detect a material misstatement? If not stop If we are recording information on an audit file which is not required by professional standards, can we justify why? Have we taken time to think our audit procedures through before we start testing?

Discussion session

Group A – MARCONI SUITE Group B – BAIRD SUITE Group C – EDISSON SUITE

Discussion Practical suggestions for improving efficiency –Planning –Testing –Review/completion Share best practice Additional standard documents?

Discussion 1 hour Return at Feedback results of discussions

Efficient audit documentation Kirsty Smith

Understanding and managing the risks in international assignments Yvonne Lang and Felix Lozano October 16, 2007

Where do the risks come from? UK Regulatory –FRC – quoted companies –Institutes – other companies Legal –Risks from our clients, employees and the services we provide Reputational –Effect of Nexia name being damaged in another part of the world US Regulatory – PCAOB – public companies – AICPA – private companies Legal – Risks from our clients, employees and the services we provide Reputational – Being held accountable for all of the Nexia firms’ actions

Non-compliance with regulations National audit standards –PCAOB and AICPA for the US –International Standards on Auditing for UK Ethical standards Effect of being part of a network

UK position – audit and ethical standards Parent company auditor has responsibility in law Audit standards require assessment of other auditors and confirmation of certain matters Involvement in directing the audit are set to increase Audit Inspection Unit review audits of full list companies and show increasing interest in how networks operate

US position – audit and ethical standards The AICPA's new Audit Risk Standards (SAS Nos ) have reworked the landscape of financial statement audits. –Effective for audits of financial statements for periods beginning on or after Dec. 15, 2006 –These standards provide greater guidance for how we should assess risk for risk-based audits PCAOB conducts required inspections on all accounting firms that audit US based public companies –This includes firms that are located outside of the US (1,700 firms or 40%)

US - Effects of being part of network AICPA Professional Ethics Executive Committee (PEEC) is proposing to redefine what constitutes a network firm If adopted, it will have significant ramifications especially when clients are the recipients of audit, review, compilation services. The network characteristics that are defined in the proposed interpretation include: –Uses a common brand name in the firm name, common business strategy, and common quality control policies…etc.

UK - Effects of being part of network Same definition is in both IFAC Code of Ethics and EU Audit Directive Similar to US definition and Nexia is a network Extension of auditor independence requirements to members of network even where they are not auditors

Legal risks UK Liability for actions in another jurisdiction UK and other EU members will soon be able to limit liability for their own audits Position is very different in other parts of world Nexia being a network could give rise to risk US A collection of firms perceived to be 'one-firm' creates a greater risk exposure for all related firms and, therefore, greater professional liability –D&T New York Court ruling

Reputational risk UK Possibly the biggest risk? Use of ‘one name’ No direct control over actions of members US Guilty by association Being held accountable for actions of another firms employees, clients, and services rendered

Discussion session

Group A – BERNERS LEE Group B – MARTELLO (West Wing) Group C – TALBOT (West Wing)