Audit News Briefing: 27 August 2015

Audit-is-cool is pleased to accumulate and provide its readers with the news on audit and related topics:

August 25, 2015

Tax News

Country-By-Country Reporting: The Transfer Pricing Game-Changer

The Tax-News.com Editorial featured the proposals for new tax information reporting requirements for large multinational businesses. An introduced concept of standardized three-tier format on transfer pricing document serves to enhance determinations about where audit resources can most effectively be deployed, and, in the event audits are called for, provide information to commence and target audit inquiries. Please follow link for details: http://www.tax-news.com/features/CountryByCountry_Reporting_The_Transfer_Pricing_GameChanger__573035.html

August 18, 2015

Corporate Social Responsibility and the Law

U.K. Modern Slavery Act: New Disclosure Requirements for Companies Operating in the United Kingdom

This October, companies that do business in the U.K. should assess their exposure to the U.K. Modern Slavery Act. Among the steps required for compliance involve – review or implementation of auditing and verification mechanisms. The significant audit policy evaluation questions are:

•  How does your company verify compliance with its human rights policies?
•  Does your company have systems in place to audit its operations and its suppliers for compliance with corporate human rights policies?  What performance indicators support these systems?
•  Are existing, or planned, auditing procedures sufficient to evaluate the specific risks of slavery and human trafficking associated with your company’s business?
• Does your company use independent auditors?

Please follow link for details: http://www.csrandthelaw.com/2015/08/18/u-k-modern-slavery-act-new-disclosure-requirements-for-companies-operating-in-the-united-kingdom/?utm_source=Mondaq&utm_medium=syndication&utm_campaign=View-Original

August 25, 2015

Accountancy Live

Deloitte picks up Admiral Group audit

The largest professional services network, Deloitte, will replace Klynveld Peat Marwick Goerdeler (KPMG) as Admiral Group auditor. This is according to the insurer company’s interim financial statements on 15 August 2015. Please follow link for details: https://www.accountancylive.com/deloitte-picks-admiral-group-audit

August 20, 2015

Accountancy Live

Woolf: Toshiba audit raises red flag over quality and independence

Hyperion Insurance Group Board Director, Emile Woolf, articulated the professional significance of external audit on the edge of recent accounting scandals. On fraud investigation, he opined: “While audit methodology fails to reflect the environment in which results are reported, the real question concerns the corporate culture of the audit firm itself, as much as its client.” Please follow link for details: https://www.accountancylive.com/woolf-toshiba-audit-raises-red-flag-over-quality-and-independence

June 2015

ICAEW Press Release

Bank auditors could add credibility to capital numbers

The Institute of Chartered Accountants in England and Wales (ICAEW) has called for auditors to be ready to give independent assurance on bank capital numbers. Iain Coke, head of ICAEW’s Financial Services Faculty, said: “People need to have confidence in banks’ capital ratios. We need to know what society expects from bank auditors and how the auditors can meet those expectations. ICAEW will then design a framework that allows auditors to deliver this consistently across banks.” Responses are invited by 16 October 2015. Please follow link for details: http://www.icaew.com/en/about-icaew/newsroom/press-releases/2015-press-releases/bank-auditors-could-add-credibility-to-capital-numbers

  

List of SOURCES:

https://www.accountancylive.com/

http://www.accountancyage.com/

http://www.icaew.com/en/about-icaew/newsroom/press-releases/2015-press-releases

http://www.fca.org.uk/news

http://www.sfo.gov.uk/

http://pwc.blogs.com/press_room/

Audit Method: Controls

Control activities are the policies and procedures that help ensure that management directives are carried out. Control activities, whether within IT or manual systems, have various objectives and are applied at various organizational and functional levels. Examples of specific control activities include those relating to the following:

1. Authorization.
2. Performance reviews.
3. Information processing.
4. Physical controls.
5. Segregation of duties.

An auditor would be required to conduct a walk through test to confirm the understanding as documented. Identify the preventive (exercised before occurrence of transactions and event) and detective and corrective (exercised after occurrence of transactions and event) controls established by management to support its assertions. Preventive, detective and corrective controls can be:

1. Application controls
2. IT-dependent manual controls
3. Manual controls

Application controls are automated controls processed by the entity’s IT applications without manual interference. Examples of Application controls are Edit Checks, Validations, Automatic calculations, Authorizations etc.

IT-dependent manual controls are controls in which we consider both the manual and automated aspect of the control e.g. a review of a computer generated sales orders report to determine that all sales are invoiced.

Manual controls are those controls that are operated completely manually e.g. bank reconciliations when the entity reconciles cash to bank statement.

Recommendation

Controls are performed to check the accuracy, completeness, and authorization of transactions.  A concept called The Internal Control Stream is introduced by Thomas P. Houck in his book “Why and How Audits Must Change: Practical Guidance to Improve Your Audits”. According to Thomas P. Houck this concept help auditors better understand the many controls that can exist in a company. The "stream" represents the path that a transaction follows as it moves from inception to its ultimate resting place in the financial statements. Controls can be located at different spots along the stream. Upstream controls help to ensure that transactions are properly entered into the computer system. Information technology controls are automated controls that help to prevent misstatements. Downstream controls come into play after information is processed in a computer system. An auditor is required to apply appropriate tests of controls to assess the reasonableness of design of system of internal control by enquiring relevant client personnel and documenting the same.

Audit firms: Sponsorship Activities

Big accountancy firms have much to gain from sponsorship activities, from supporting charitable causes to developing leadership programmes and promoting sports and arts. Through sponsorship programmes the audit firms not only fulfill their corporate social responsibility by making a positive impact on society and the environment but also maximize value for their business. For the smaller accountancy firms, sponsorship is often more about cultivating business and identity locally. Sponsorships programmes aim to extend positive impact across communities, sports, the arts and business. Audit firms support others to make progress where it matters most whilst offering exciting opportunities for their people and clients to experience who they are in different ways. Firms pursue focused sponsorship partnership strategy where they support a large number of causes aligned with their vision, values and purpose.

Through various sponsorship programmes the Big 4 accountancyfirms spend money all over the world.

EY has been an official partner to the 2012 and the 2014 Ryder Cups. EY also will serve as an official supporter and exclusive provider of professional services in the consulting category for the Rio 2016 Olympic Games. On 15 July 2013, Tate and EY announced a major new three-year arts partnership, making EY one of the largest corporate supporters of Tate.

Deloitte has been a top-tier partner of the Royal Opera House in UK since 2007. British Paralympic Association is the official charity partner of the Deloitte Ride Across Britain event.

PWC sponsor PGA tour event TPC Sawgrass in USA. PWC also supports Irish rugby, Irish Ice Hockey and The America’s Cup.

KPMG's association with the golfers Stacy Lewis and Phil Mickelson reflects shared values.

Additional thoughts

How can the risks be managed?

The key to manage risks in a sponsorship deal is by clearly defining the expectations and objectives of the programme. Choosing the right sponsorship programme and knowing when to end the deal if any controversy erupts can potentially make or break a firm’s reputation. Endorsement insurance can also help protect the sponsor in the event of a scandal or negative publicity. Another method is to sponsor numerous programmes across a range of venues such as sports, arts, culture and charity thus weakening the link between sponsorship and brand.

Week End: Work-Life Balance

How many times our colleagues and bosses told us that we, auditors need to maintain work-life balance? Looks like it become the buzz word meaning not much. But now I know what is the secret! My friendly colleague noticed that I am going to leave late in the evening last Friday supplied me with masterpiece guidance which I am going to share with you. Please take a look at this funny picture :)

Real News: Audit News Briefing: 20 August 2015

Audit-is-cool is pleased to accumulate and provide its readers with the news on audit and related topics:







July 29, 2015

Euro News

Outside auditors should check bank capital, UK industry body says

Bank of England asked ICAEW to initiate public consultations regarding the methodology of audit bank ratios. Please follow link for details:

http://www.euronews.com/business-newswires/3046534-outside-auditors-should-check-bank-capital-uk-industry-body-says/

August 5, 2015

Financial Times

SFO and UK regulator launch probes into Quindell practices

The SFO and the Financial Conduct Authority are both investigating Quindell, after a review by PwC – the accounting firm, identified “aggressive” and “unacceptable” practices. Please follow link for details:

http://www.ft.com/cms/s/0/a355e568-3b69-11e5-8613-07d16aad2152.html#axzz3ijJMako8

August 6, 2015

Reuters

UK Anti-fraud agency to investigate claims firm Quindell

SFO Director confirmed the opening of criminal investigation into business and accounting practices at Quindell. Please follow link for details:

http://www.reuters.com/article/2015/08/06/quindell-results-idUSL3N10G49B20150806

August 10, 2015

Accountancy Live

NAO seeks feedback on draft auditor guidance

The National Audit Office has launched a consultation on the draft guidance to local government auditors in respect of their duties under the Code of Audit Practice. The deadline for responses is set on 30 September 2015. Please follow link for details:

https://www.accountancylive.com/nao-seeks-feedback-draft-auditor-guidance

August 11, 2015

Treasury Insider

UK financial services firms are sitting on data time bombs

In relation to audit trail retention – Director Stuart Clarke of cybersecurity and investigations services gave five proactive steps that financial services firms can take against data privacy breaches. Please follow link for details:

http://www.treasuryinsider.com/2015/08/11/uk-financial-services-firms-are-sitting-on-data-time-bombs/

August 19, 2015

Accountancy Live

Charities under-reporting charitable expenditure

The Charity Commission found that 43% of regulated high-income charities made errors either in their annual returns or their trustees’ annual reports and accounts, with the effect of significantly underreporting the level of their charitable expenditure. Please follow link for details:

https://www.accountancylive.com/charities-under-reporting-charitable-expenditure

August 19, 2015

Accountancy Age

Mid-tier firms avoid listed audits as high regulatory fees bite

Subject accountancy firms have hit out at ICAEW-imposed excessive fees and what they believe are restrictive and prohibitive financial hurdles to entering the listed audit market. Please follow link for details:

http://www.accountancyage.com/aa/analysis/2422182/mid-tier-firms-boycott-listed-audits-as-high-regulatory-fees-bite

Audit Method: Future of Audit. Technology.

The spaceship of an auditor from Earth landed on the green field of the planet Kepler-3571c. The auditor had a task to participate in a stock take of flying horses herd.

This is not another story from Airstrip One rubric. The purpose of this article is to discuss future application of technology in audit, but not as far as in the above introduction.

Survey

The reason for this post was the report “Audit 2020: A Focus on Change” issued by Forbes and KPMG on changes required in in audit services and profession [1]. The reports identifies number of directions in which audit should evolve: technology, culture and regulations, skills, quality and nature of services.

Technology captured might interest. 58% of respondents say that technology has the biggest impact on audit profession according to report. The technology implementation as mentioned in report is expected to impact audit process in following ways (top three are mentioned):

1. Provide tools for more sophisticated analysis;
2. Provide more efficiency;
3. Flag issues that require deeper investigation.

Current situation

The Big 4 audit firms have already taken measures to address challenges of new IT era. All big audit firms have own departments specialising on IT audit and data analysis. The expansions into the IT and related areas is not only organic, but also by means of acquisitions: KPMG purchased innovative HR firm [2], EY purchased a digital design consultancy [3] in 2015; PwC purchased IT consulting firm earlier in 2012 [4].

Nowadays it is common for auditors to use data analysis software to perform journal entries testing. This is because the complex software is needed to analyse large missives of journal entries downloaded from client’s accounting system. CAAT (Computer assisted audit technique) has become a buzz word in audit text books and instructions.

Auditor’s Future

I think it is time for another step forward in the area IT implementation. Audit firms should consider in which audit procedures audit software might totally replace human auditors. There are some shy thoughts regarding this idea in the report discussing that “audit should become continuous and ongoing to provide real-time analysis” [1]. The way this could be realised is by deploying into client IT system the independent software with the rights of ongoing check what has been entered into the system and do checks following algorithm written my human.

Potentially some procedures could be performed by robot-auditor even with current level of IT development in the world. For example, the procedure of invoice vouching could be done by robot. Robot might have questions and  at this point human auditor might interfere.

The replacement of human auditors by robots should be discussed openly to develop new skills required for future audit profession. A report by Deloitte with the University of Oxford predicts that the robot revolution will displace almost 35% of UK jobs [5] and the audit profession should be ready for these changes.  

Sources:

[1] http://www.forbes.com/forbesinsights/kpmg_audit/index.html

[2]http://www.kpmg.com/us/en/issuesandinsights/articlespublications/press-releases/pages/kpmg-to-acquire-towers-watsons-human-resources-service-delivery-practice.aspx

[3]http://www.cityam.com/222508/accounting-giant-ey-swoops-silicon-roundabout-firm-seren

[4]http://www.pwc.com/us/en/press-releases/2012/pwc-completes-acquisition-of-ray-group-international.jhtml

[5] http://www.consultancy.uk/news/1024/deloitte-robots-threatening-a-third-of-uk-workforce

PS. See my previous articles on changes in audit profession:

• New Audit Order: Take 1
• New Audit Order: Take 2. Remodeling audit services
• Pure Audit

News from Airstrip One: Violation of Independence

                                                 

The AKKA accounting qualification has been revoked for the partner, senior manager and manager who worked in audit firm KTC33. The investigation has been opened by firm ethics committee. The secret sources from KTC33 say that audit senior had a conflict with partner regarding preparation of cash flow statement for client. Partner asked audit senior to prepare the cash flow statement to speed up completion of audit. However the audit senior disagreed and reported the case directly to AKKA ethics committee. Management of KTC33 decided not to defend partner and fired audit team management. Our correspondent, Rob, asked for the comments from the audit specialist, Mr Task, in the city of Airstrip One:

• Rob: Is it common case when audit team in fact assists client to prepare financial statements instead of auditing them?
• Mr Task: These cases happen when client personnel do not understand value of audit and not motivated to supply audit team with evidence and deliverables. Audit firm partner should do his/her best a) to understand if client ready to have audit, including if the accounting personnel can provide adequate audit evidence; b) to explain the client the nature of services provided by audit firm. 

Disclaimer: all situations and names in this blog post are not real.

Week-end: Dialogue with manager

I found a funny video on Youtube. May be it is not very attractive in terms of special effects but dialogue does reflect the communication patterns with audit managers in some cases J

Recommended for all audit firm new joiners J

Coffee Break: Big Red Button

I have recently met a colleague at a coffee break. He is assigned at the moment at one of those really messy audit project: the work papers are 50% prepared, conclusions are not clear, work books hard to follow. This made him writing a lot of review comments and to do lots of corrections himself.

As we were going on with our small chat we had a very fresh idea :) The thing is that the work of re-doing something after somebody has already done something incorrectly is so frustrating in audit and in other intellectual jobs. So we suggested that as soon as an audit senior is being promoted to manager level he/she should be supplied with the laptop with just one big red button "Please, re-do!" to write review comments easily. Whenever you push this button it would generate this only comment: "Please, re-do!". :)

Probably the laptop* would look like this one on the pic :)

*Apple Introduces Revolutionary New Laptop With No Keyboard

Audit Method: Audit of Disclosures

In July the International Auditing and Assurance Standards Board (IAASB) issued revised international auditing standards focusing on disclosures with the aim to have consistent approach in audit. In this article I would like to provide a new definition of disclosures and consider planning audit procedures with regards to disclosure notes. The standard will become effective from December 2016.

Definition

First, the IAASB removed the term “related notes” from definition of financial statements and introduced the term “disclosures”.

Disclosures comprise explanatory or descriptive information, set out as required, expressly permitted or otherwise allowed by the applicable financial reporting framework, on the face of financial statement, or in the notes, or incorporated therein by cross-reference.

Explanatory or descriptive information required to be included in the financial statements by the applicable financial reporting framework may be incorporated therein by cross-reference to information in another document, such as a management report or a risk report.

Planning

The revised ISA 300 requires auditor to put “appropriate attention” and “plan adequate time” for the disclosures audit. The standard requires considering following factors in planning procedure for disclosures:

1. Changes in entity’s environment, financial condition or activities;
2. Changes in applicable financial reporting framework;
3. The need  for the involvement of an auditor’s expert;
4. Matters in disclosures which auditor may wish to discuss with those charged with governance.

Practical considerations

I think the audit of disclosures on some projects could be underestimated and IAASB did the right deed to revise its standards. I would emphasise following points with regards to audit of disclosures:

1. Disclosures need to be tracked: in my best practice experience there is usually Excel spreadsheet in audit file with list (check list) of all disclosures requiring audit. The disclosure list contains references to work papers where disclosure has been audited. In some case Excel spreadsheet with check list might contain documentation of audit procedures in it: for example, leasing disclosures audited within this Excel workbook.
2. All audit team members assigned to do the audit must be aware that they are responsible for audit of disclosures from the very beginning of audit. Ideally Excel workbook should contain Excel spreadsheet dedicated to disclosure note. The practice to be avoided is when audit of trial balance figures and disclosures are  carried out by different persons in team.
3. Considering point 2, the audit procedures in respect of each disclosure note should be carefully designed and elaborated. The practice to be avoided is when disclosures audit shifted to the end of audit and when it appears that disclosures might take more than planned time.
4. Some disclosures as mentioned by ISA might require expert’s involvement, e.g. pension benefit plans, derivatives valuation, management’s forecasts in strategic report. Significant or complex disclosures might require a) significant input of auditor’s time to carry out the procedure, b) numerous reviews from manager to partner.
5. During the audit of disclosers the errors might be detected which might affect general ledger. This is because disclosures might provide more information and bigger picture than merely the audit of breakdown. This is another argument to incorporate the audit of disclosures in early stages: the client may be unhappy if errors would be communicated in last stage of audit.

Source: IFAC website: https://www.ifac.org/publications-resources/addressing-disclosures-audit-financial-statements

Week-end: My Fuhrer, the client sent us new PBCs

This is audit theme of dubbing & subtitling of classic German film “Downfall”* (original “Der Untergang”). I find it very funny, I think such moments happened with every audit manager or partner who received  unpleasant surprise just before deadline J

*https://en.wikipedia.org/wiki/Downfall_(2004_film)

**PBC –  is abbreviation for “Prepared By Client”.  It is the evidence provided by client to support figures and other financial information presented/disclosed in financial statements

Audit Method: Analytical Procedures

The substantive analytical procedures (SAP) are one of the weakest points in audit program when it is come to execution. The authorities both in USA and UK when conducting review of audit work like to point on inappropriateness of evidence gained from analytical procedures.

Generally, the mistakes made when performing analytical procedures are as follows:

1. Insufficient reliability of data used in analytical procedures. For example, the data of average sales per employee taken from not independent source, a client representative. The information should be checked before used in our calculations.

2. Expectations regarding tendencies are not well elaborated and/or not based on understanding of  client business. For example, very often for PL analytics general expectation is used that sales/expenses are expected to grow same level as prior year or to be on the same level as prior year, which is not correct by default.

3. Analytical procedures might be performed well, but insufficient on it is own. Usually the procedures could be limited to SAP in case test of controls (TOC) are effective. But in real life the situation may be different:

• TOCs are effective but there are some material items within account, that may change picture completely and, hence, need to be tested;
• The account balance has significant risk, which means that SAP is not sufficient on its own and should be accompanied by test of details.
• When TOCs are ineffective, then we might talk only about application of SAP for the areas of audit where test of details were performed as well

My special comment to an audit firm new joiners: please, be aware when you are questioning client regarding changes in the account balance and then document explanations. I am sure you have a good guidance in your firm on how to perform inquiries and SAP. Moreover, there are a lot of instructions in internet on this issue.  Please, do not write comments like this, which might be then published in Thomas Houck book*: “Sales increased because the client sold more goods”. He refers sarcastically about these type of explanation as “stellar analytical explanation”. The focus of analytics should be real business reason of change in figures.

*Thomas P. Cook. Why and How Audits Must Change:  Practical guidance

News from Airstrip One: Promotions case

The investigation has been opened regarding integrity of promotions in the audit firm KTC33. The investigation was triggered by the embarrassing fact about the audit partner in KTC33 who advocated for promotion of one of his mistresses (Jenny): from audit manager to senior manager. The interesting moment is that the fact was reported to the firm management by his another lover (Kelly). She was jealous of what was happening and decided to revenge. Kelly reported of number of similar cases when promotion  was gained “through bed” or other non-professional activities regarding other partners. Our correspondent, Rob, asked for the comments from audit specialist, Mr Task, in the city of Airstrip One:

• Rob: What could be done to prevent such cases in the Oceanian audit firms? Should firms inspire whistleblowing in case of any relations at job?

• Mr Task: I do not think we need to inspire unnecessary whistleblowing. People might become too focused on somebody’s sins and not on their own. What I suggest we can put some procedures to mitigate such risks. For example, we might establish system where voice of one or two partners would not be decisive. I think, the investigation is just invitation for broader discussion about the systems used by audit firms to assess employees.

Disclaimer: all situations and names in this blog post are not real.