1. BUSINESS WITH CONFIDENCE icaew.com Get the inside track on audit quality QAD audit webinar

2. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012

3. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 What is this webinar for? Based on 2011 QAD audit roadshows Relevant to all audit firms

4. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Your Firm & Co, Chartered Accountants of Anytown. Breach: Failure to comply with the requirements of the audit regulations Decision: Registration as company auditor withdrawn

5. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Your Firm Ltd of Anytown. Breach: Failed to arrange for an external whole firm review and cold file reviews to be carried out. Decision: Regulatory penalty of £2,500

6. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Reports to ARC

7. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Contents Audit weaknesses Why firms fail Three golden rules

8. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Audit weaknesses – key areas Documentation Audit test design Using the work of an expert Ethical standards Professional scepticism

9. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Documentation Planning and risk assessment – Checklists need substance Audit testing – Objectives and conclusions Meetings – Need minutes; on the file Judgments – Clear rationale, sources of evidence and conclusion The ‘Accounts Preparation’ file

10. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Documentation – audit systems Ensure you and your staff know what documentation is mandatory Specialist documentation – replacement or a supplement for standard programmes Permanent files – update New / computer-based system challenges

11. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Audit test design Assertions – Transactions (occurrence, completeness, accuracy, cut-off, classification) – Balances (existence, rights and obligations, completeness, valuation and allocation) – Presentation and disclosure (occurrence and rights and obligations, completeness, classification and understandability, accuracy and valuation) Directional testing – For over-, and under-statement Population

12. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Flawed design Post year end sales used for stock net realisable value test Trade creditors traced to payments Existence of fixed asset additions alone

13. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Using the work of an expert

14. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 ISAs ISA 620 Using the work of an auditor’s expert – Includes experts who are: – Contracted by the auditor – Employed by the auditor ISA 500 Audit evidence – Includes experts who are: – Contracted by the entity – Employed by the entity

15. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Basic requirements Evaluate professional competence and objectivity – Professional certification / licensing – Experience and reputation – Employment with entity / other financial dependence Scope of the expert’s work must be adequate for the audit – Consider terms of reference – Possible need to communicate directly Evaluate the appropriateness of the work performed – Source data and assumptions – Make enquiries about methodology – Review / test data

16. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 What might an expert be involved in? Pensions / retirement benefit schemes Valuations – Investment properties – Share options / financial instruments Determine quantities or physical condition of assets, stockpiles, underground mineral or oil reserves Measurement of work completed on contracts Legal opinions

17. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Audit documentation May find simply a report referenced into the file – Little evidence of any other work to comply with ISA 620/500 Some audit systems have specific audit programmes A standard template will assist

18. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Evaluate professional competence and objectivity Review website of the expert’s company Obtain and research qualifications (genuine?) Ascertain if the expert is independent from the company Easier if – Nationally recognised organisations – Licensing bodies have public lists of members

19. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Evaluate scope of work Is there an engagement letter? Terms of reference within a report may give enough information Any direct communication – Likely if it is an auditor’s expert – Seems rare when management’s expert Issues may be evident from caveats in the report or information from other areas of the audit

20. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Evaluate appropriateness of work performed Source data – Where from, is it current, has it been audited? Assumptions and methods – Any comparable data – Alternative methods / strengths and weaknesses – Use of method allowed by IFRS Review or test data – An auditor’s expert might review the work of a management expert? – Discuss sensitivities with the expert – Look at comparative valuations (eg properties)

21. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Ethical standards (1) Ethical Standard 1: Integrity, objectivity and independence – Fundamental requirements – Documentation – Communication with client Ethical Standard 2: Financial, business and personal relationships – Mostly well understood – Company secretarial appointments not allowed – Trusteeships difficult

22. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Ethical Standards (2) Ethical Standard 3: Long association with the audit engagement – Listed audits: clear rules – Unlisted audits: firm’s own policies are important – Documentation and communication to client Ethical Standard 4: Fees, remuneration and evaluation policies, gifts, litigation and hospitality – 10% rule: hot file review – 15% rule: cannot audit if fees >15% on a regular basis – Evaluate staff on audit quality not ‘sales’

23. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Ethical standards (3) Ethical Standard 5: Non-audit services provided to audited entities – Management threat – Accounts preparation and corporation tax safeguards – Documentation – Listed audits Provisions available to small entities – Management threat or informed management? – Alternative provisions: extend cold file reviews – Exemptions: accounts disclosure

24. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Professional scepticism

25. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Characteristics Curiosity / having a questioning mind Deferral of judgment / not jumping to premature conclusions Understanding management behaviour and motivations Self-confidence Freedom of action

26. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 The Shaub and Lawrence model Reluctant sceptics Measured sceptics Conflicted sceptics Aggressive sceptics Action Thought

27. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 The Shaub and Lawrence model Reluctant sceptics Measured sceptics Conflicted sceptics Aggressive sceptics Action Thought

28. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Audit examples Mandatory meetings of the audit team to discuss the susceptibility of the entity to: – Misstatements – Fraud – Fraud or error that could result from related party relationships Reviewing the outcome of opening provisions Checking a sample of journal adjustments Evaluating risks in relation to revenue transactions based on the presumption that there are risks of fraud in revenue recognition Investigating significant related party transactions outside the entity’s normal course of business Assessing other key assumptions and judgments made by management

29. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Reference APB Discussion Paper Auditor Scepticism: Raising the bar October 2010 frc.org.uk/apb/publications/pub2343.html

30. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Why firms fail

31. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 QAD audit visit outcomes 2011 Visits closed without follow-up action69% Some further follow-up action21% Detailed report to Audit Registration Committee10%

32. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Factors Approach to audit work Competence Attitude Monitoring

33. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Approach to audit work Reliance on accounts preparation Safeguards

34. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Competence Understanding the objectives of an audit Adequate procedures Audit regulations, ISA and Ethical Standards

35. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Attitude ‘ISAs don’t / shouldn’t apply to small audits’ Under-selling the value of audit Insignificant to practice

36. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Monitoring 80% of detailed reports were firms who did internal ACRs or no ACR – Remaining 20% did not take action or limited external review 84% did not comply with Audit Regulation 3.20 Sole RIs find reviewing their own files challenging – External assistance is invaluable

37. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Clarified ISAs Accounting estimates and the outcome of prior year estimates Related parties Risk of fraud in revenue recognition and from management override of controls Performance materiality

38. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Three golden rules

39. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Audit work is a specialism Regular audit updates – include specialist areas Concentrate audit work with expert staff Ensure you know your audit system Identify weak areas for further CPD

40. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Document your audit work ‘Experienced auditor’ test Separate ‘audit’ from ‘accounts preparation’ Develop templates Review file thoroughly, fix weaknesses, train

41. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Independent and effective audit compliance reviews External or another experienced auditor Document findings and actions Use the findings to improve audit quality Build audit quality into objectives, training and appraisals

42. BUSINESS WITH CONFIDENCE icaew.com © ICAEW 2012 Further reading Quality control in the audit environment (Audit and Assurance Faculty) Right First Time with the Clarified ISAs (Audit and Assurance Faculty) Audit & Beyond June 2011: ‘Is your audit compliance review process effective?’

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