The incentive for writing this post was recent article by Lisa Weaver, ACCA Advanced Audit examiner, on the topic of audit completion. Following essential subjects were covered there:
1) Review of audit files and evaluation of misstatements (ISA 220, ISA 230, ISA 450);
2) Final analytical procedures (ISA 520);
3) Subsequent events and going concern procedures (ISA 560);
4) Written representation and communication with those charged with governance (ISA 580, ISA 260);
5) Audit clearance meeting.
The issue of subsequent events and going concern auditing I have already covered in one ofmy previous articles. In this post I would like to consider analytical procedures and meetings with client.
The task of performing analytical procedures in respect of financial statements usually called overall analytical review (OAR). It enables to examine client’s financials in terms of common sense and ensure that test of details were relevant. In addition, for audit senior or manager it is great opportunity to show broadness of mind and deepness of understanding of client. Of course, the quality of work done would influence his/her performance assessment.
|Example of Gross Margin Analysis|
The major problem, which auditors face in performing OAR is lack of time. This is because at the end of audit project everybody expects deliverables from you, there are lots of work need to be done. So it is necessary to organise audit process in a way that it would save time in future.
One possible solution is to delegate part of work to junior staff while they are doing audit of separate accounting sections. For example, after performing principal audit procedures junior auditor would be responsible to make reasonable analysis from the business point of view. Why inventory item in trial balance increased so dramatically this year? So by the time of doing OAR senior auditor will have preliminary analysis of item in balance sheet, which could be expanded or left as it is if explanation provided is comprehensive and sensible.
|Inventory structure analysis|
I would also like to emphasise necessity of using understanding of general business tendencies and economic factors while doing OAR. For example, I had following case. The inventory of client increased and accountant explained vaguely that it is due to prices leap. To address this explanation I have undertaken following steps:
1) Found out what kind of inventory caused increase: it was special alloyed construction steel;
2) Found out that sales and percentage of this kind of steel in total inventory also increased;
3) Found out from external sources (steel producers magazines, special business overviews) and internal sources (invoices, contract specifications) that special alloyed construction steel is rather expensive type of metal;
4) Found out that due to increase of demand on construction steel in
(it was before 2008) price on all types construction steel and its components (e.g., chemical additives) had increased. China
So the shift to production of more expensive special alloy steel was driven by market and fit into general economic tendencies, i.e. there was nothing controversial in client’s explanations of increase in inventory value.
I like analytical procedures, because it is creative and intellectual task: it allows you to compare facts from different sources, and find out if client explanations are coherent and persuasive enough.
At the end of audit it is necessary to discuss major issues occurred during audit process and their implications. Generally, there are no problems in carrying out this meeting. However, there are some issues arising in case of multilocation audit. Management of subsidiary is usually rather nervous about audit outcomes and sometimes there is a substantial lag between the moment of fieldwork end and issuing of audit opinion. So to my opinion if auditors want to maintain good relations with local management it would be good to communicate some preliminary (flexible) deadlines of finalising work or find words which make client employees understand further steps and ensure your future effective cooperation.
If you have any interesting examples of your experience finalising audit please comment and give some tips.