#EYDisrupt

Have you considered the power of your connections? LinkedIn will present at our next #EYDisrupt event on 14 July. To RSVP please click here.

Audit Method: Client Acceptance Procedure

This first step in an audit engagement of client acceptance is very crucial where the practicing firm has to decide whether to accept the new client relationship or in case of existing client a periodic review whether to continue with the existing relationship. The decision to accept or continue an audit engagement depends on the client evaluation and ethical considerations.

As per paragraph 26 of ISQC-1, “The firm shall establish policies and procedures for the acceptance and continuance of client relationships and specific engagements, designed to provide the firm with reasonable assurance that it will only undertake or continue relationships and engagements where the firm:

• Is competent to perform the engagement and has the capabilities, including time and resources, to do so;
• Can comply with relevant ethical requirements; and
• Has considered the integrity of the client”

If the issues have been identified, and the firm decides to accept or continue the client relationship or a specific engagement, the firm shall document how the issues were resolved.

As per paragraphs 12 and 13 of ISA-220 on Quality Control for an Audit of Financial Statements, the engagement partner shall be satisfied that the firm’s policies and procedures were duly followed in acceptance and continuation of client relationship and audit engagement and shall determine that the conclusions reached in this regard are appropriate.

The auditor shall be alert to and appropriately address the following threats while accepting a new engagement or continuing an existing one:

• Self interest
• Self-review
• Familiarity
• Intimidation
• Advocacy

Practice

The auditor is generally more careful about accepting the new client because of lack of previous experience with the management and those charged with the governance and knowledge of the business, transactions and associated risks affecting the financial statements. While certain assessment procedures for both the prospective and existing clients would be common, however, they may assume additional importance in case of a new client.

Audit News Briefing: 28 June 2016

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

June 27, 2016

AccountingWeb.com

Internal Controls Over Information Technology at Your Firm

American Institute of CPA awardee for Information Management & Technology Assurance, Sundeep Bablani wrote: “… enhancements in technology have significantly changed the outlook of evaluating controls from an auditor’s perspective.” This is about organizations’ reliance on manual controls in identifying unusual transactions. He explained the ‘integrated audit technique’ and emphasized on the necessity to conduct frequent IT audit evaluations in view of constant change in technology.

“Controls over technology have a direct impact on the overall reliability of financial statements regardless of the size of the organization. Financial auditors are therefore required to obtain a general understanding of information technology (IT) controls as part of their audits.”

Please follow link for details: http://www.accountingweb.com/technology/trends/internal-controls-over-information-technology-at-your-firm

June 24, 2016

AccountingToday.com

Will the Brexit Break E.U. Audit Firm Rotation?

Editor-in-chief Michael Cohn explained the impact of timing – when U.K. voted to “Brexit” from the E.U. only a week before the effectivity of the new rules for mandatory audit firm rotation.

His opinion states: “It’s probably too soon to say for sure. The mandatory audit firm provisions are only part of a wide-ranging set of audit market reforms now mandated in the E.U. They aim to force large public companies to tender requests for new audit firms at least every 10 years and to actually rotate audit firms at least every 20 years.”

He also disclosed a recent statistical finding by Ernst & Young that – One out of five large companies in the United Kingdom is “woefully unprepared” for the new EU rules on audit firm rotation.

Please follow link for details: http://www.accountingtoday.com/blogs/debits-credits/news/will-the-brexit-break-eu-audit-firm-rotation-78506-1.html

June 14, 2016

Economia.ICAEW.com

Big Four will take in each other's dirty washing under new audit law, says Lord Hodgson

Pointing out concerns regarding the effect of the new regulation – The Statutory Auditors and Third Country Auditors Regulations 2016 (effective 17 June 2016), Lord Hodgson of Astley Abbots lobby for joint auditing: “The challenge to the government and the profession is: how do you achieve break-in to the magic circle? One way would be to encourage joint auditing.”

He raised lack of competition in the audit market – an issue that the new regulation failed to resolve: “These regulations are the produce of tired thinking. It is a shame that the profession and its regulators have not been able to think more creatively about the real issues and, instead, have fallen back on the old policy of, ‘If in doubt, stick in another regulation’.”

Please follow link for details: http://economia.icaew.com/news/june-2016/big-four-will-take-in-each-others-dirty-washing-under-new-audit-law

June 8, 2016

The Wall Street Journal

WSJ: Top 10 Audit Firms Now Audit 61% of SEC Registrants

Based on the recent data released by the Audit Analytics research provider, CFO Journal’s Senior Editor Maxwell Murphy marked the observation that audit work is now concentrated among fewer accounting firms. The reason – top 10 U.S. accounting firms have stepped up the share of corporate books they oversee.

·         3.8% increase from 2015 – top firms audit 60.7% of nearly 7,000 firms and funds under SEC audit regulation.

·         Global Six audit 96.8% of large multinational accounts of companies categorized as “accelerated filers”. The Big Four handle almost 91% of these audit work.

·         Global six also captured 2/3 or more of smaller accelerated filers and non-accelerated filers.

Please follow link for details: http://blogs.wsj.com/cfo/2016/06/08/top-10-audit-firms-now-audit-61-of-sec-registrants-2/

Audit Firm: PwC Chairman Interview

Petra Justenhoven recently sat down in Frankfurt with Dennis Nally, Chairman of PricewaterhouseCoopers International Limited, to get his views on a range of issues and events related to the past year. 

Petra: Dennis, as people look through the 2015 Global Annual Review, despite some challenges, it seems like it was a very successful year for PwC.

Dennis: Overall, it was a very strong performance for PwC. The environment that we are dealing with today is challenging – whether it’s the global economy, the geopolitical issues, or the stiff competition. PwC performed really well with revenue growth of 10% putting us over the US$35 billion mark for the first time. We’ve got great momentum going into FY16, with much to build on. There’s a lot to be proud of across the PwC network.

Petra: You mention solid growth overall – do specific areas stand out?

Dennis: As we look at the results for the last 12 months, all of our lines of service showed really positive growth – led by Advisory which is up 18%, Tax up 7% and our Assurance business – notwithstanding some really difficult competitive market pressures – up 6%.

And when I look across the globe there are a lot of positives. I start with the US, the largest firm in our network, revenues up by an impressive 10%; our UK firm, a robust performance, up 9%; South America a strong result in a very challenging region – up 8%.

Growth in the Eurozone is challenging, as you well know, but I look at practices such as Italy up 11%, Germany 8% and France 6%, doing well in a very difficult marketplace

China is going through a lot of adjustments to its economy but our firm, the largest of all professional services firms in China, grew 8%.

And India, the fastest growing firm in the PwC network, up 17%.

And so, as I say, it gives us much to build upon as we head into FY16.

Petra: Coming back to Europe, you know that here the regulators are focused on audit, and even more on tax advice. What kind of impact does that have on PwC?

Dennis: Well, the regulatory environment continues to be very challenging, not just for us but for our clients. One of our biggest challenges is that the regulatory environment is not always aligned in all parts of the world. Also, the movement to mandatory firm rotation here in Europe is going to generate significant change for everyone – not only for the profession, but also for our clients as they implement the new rules.

Having the highest quality audits is the key to success and the foundation of our brand. Whilst we support reforms that will enhance audit quality, we don’t believe that mandatory firm rotation is going to achieve this. But the rules are the rules, and we will work with our clients to deal with these changes, whilst ensuring our quality remains of the highest standard.

As for tax reform, I think everyone agrees that in many cases tax regulations were written many years ago for a different type of global economy.

So we need tax rules that are really fit for purpose. With PwC having the largest tax practice in the world, we feel that it is a part of our responsibility to engage in that debate and to share our points of view and perspectives. And, of course, we’ll do so. But it is a challenge.

Petra: Eighteen months ago, PwC made history with our largest acquisition, Booz & Company, now known as Strategy&. How has that progressed?

Dennis: Without question it’s an incredibly strong move for PwC. The marketplace is continually telling us that the need to move from just providing advice to really dealing with solutions is an absolute must. The capabilities that Strategy& has brought into PwC allow us to do that.

But this is not just about advisory. The whole notion of going from strategy to concrete solutions is applicable to our assurance business and our tax practice. So we are very excited about Strategy&. We are well on our way to making this transaction a real success for PwC across the world.

Petra: In addition to acquisitions, PwC continues to develop joint business ventures and alliances – the most recent being with Google. Can you talk about that?

Dennis: Yes it’s a great point Petra, because I would say whether it’s Google or some of our other alliances with Oracle or Microsoft, we need to think about new ways of doing business.

The idea that as a professional services network we would house all of those capabilities within PwC is a model that’s really outdated.

We are working with Google in a number of areas, like cyber security, to co-create solutions for our clients. We bring in the content, they bring in the technology. So you can expect more of those types of arrangements in the future.

Petra: You just mentioned technology driving client services. What does technology mean for us?

Dennis: The whole issue of technology is clearly one of the most significant megatrends that we’ve seen. It’s transforming everything – whether it’s the digitalisation of business or the use of big data.

We have an important role to play in terms of how we help our clients, and obviously the alliances that we talked about will help facilitate that. But if this is disrupting our clients’ businesses, it’s going to disrupt PwC’s business as well. So we now think about the use of technology in a very different way, to provide better, more efficient services across the whole PwC network. Our aspiration is to become much more of a technology-enabled organisation.

Petra: You’ve talked about the focus on technology, but we are a people business.

Let’s step into the shoes of our future colleagues. So what would you say to persuade potential employees to join PwC?

Dennis: The world is such a dynamic place today – there are so many tremendous opportunities out there to help clients – it’s an exciting time to be part of a professional services network, and particularly PwC – so come join us!

I think PwC is unique because of our special focus on talent – not only attracting the best and brightest but how we help develop their careers, and give them the right kinds of experiences.

I like to say we help them build their résumé, we help them build their balance sheets. What we want to do is help individuals set goals that meet their needs, their timetable and their aspirations.

We want them to be part of a culture that allows everyone to succeed.

Petra: Has anything changed in terms of the kinds of people or skills we are looking for?

Dennis: Well, obviously the world is changing pretty rapidly, and so our talent needs to keep up with that. I talk about the necessity of every one of our people continually reinventing themselves and having a focus on progressing their own careers. We have talked a lot about technology, and having the ability to continually adapt to new technologies will be, I think, a real skill for the future.

But the world is so complex today, we need people who know how to work with teams, people who know how to collaborate, and who know how to listen. The whole issue of diversity and being able to work with different people with different backgrounds and cultures is a critical skill set. We help our people develop these skills and capabilities – that’s why I think it’s so exciting to be a part of PwC today.

Petra: You’ve mentioned diversity and I know PwC is involved in many programmes promoting diversity. Just this year we saw PwC joining a UN initiative called HeForShe. Could you talk about what we are doing in this area?

Dennis: I’m absolutely convinced that when we bring people together from different backgrounds – whether it’s gender or diverse types of capabilities – there is no question that the quality of our thought process is significantly enhanced. And so creating an environment where all of our people feel that they can make a contribution and that we value that contribution is critical for us.

We think HeForShe is a unique way to approach the diversity agenda – getting men across the PwC network to think about the issue of gender diversity in a different way. Sometimes I get a little frustrated that we are not making as much progress as we want to on the gender diversity issue, but PwC has a real focus on it – starting from the very top.

Petra: Many organisations are deliberating over their purpose. How would you define the Purpose of PwC?

Dennis: Given the world that we are operating in today, I believe every institution needs to have a clearly defined and articulated purpose.

For PwC, it’s about building trust in society and solving important problems. It starts with a fundamental premise that as an organisation that is over 160 years old and that’s providing substantial comfort to the capital markets, we believe we have an important role to help build trust in our society.

Secondly, there are some pretty challenging and difficult issues out there and resolving those problems is a real focal point for PwC.

A good example is our work in Norway to help develop a new clinical pathway for patients with acute stroke.

I see Purpose as our guiding light, who we are and what we are trying to get accomplished.

Petra: What do you think PwC will look like in 10 years, in 2025?

Dennis: Well, 2025 may be a little bit of a stretch – the world is moving so quickly. But we all know this global economy is so interconnected today, and to me that presents a lot of exciting opportunities. So at PwC we need to continue to evolve to deal with those issues and challenges.

That includes becoming much more of a technology-enabled organisation, and continuing to anticipate the solutions our clients will need in this ever-evolving business environment.

That translates into a lot of opportunities for all of our people, and to me that’s really the exciting part of the journey to 2025.

Petra: One last question before we close.

You will step down as the Global Chairman next year. Is there any final thought you would like to share?

Dennis: Well, first off I have a lot to do here over the next eight months or so, and I’m very much focused on what we are trying to achieve within the PwC network. But as I mentioned at the outset, we have a fabulous foundation to build upon, and I’m really excited about the momentum that we have in terms of what we are doing for clients and other stakeholders, and where we are trying to take the PwC network.

And I would sum up by saying it’s just a tremendous time to be in professional services and, more importantly, to be a part of PwC – it’s a chance to make a contribution that is value added and to really make a difference as you shape your career.

Petra: That’s a great message. Dennis, many thanks for your time and for sharing these insights with us.

Dennis: Thanks, great to be with you Petra.

Reference:

Text:  http://www.pwc.com/gx/en/about/global-annual-review-2015/chairmans-interview.html

Image: http://www.pwc.com/gx/en/about/leadership/dennis-nally.html

Audit Firm: Framework to Deal with Brexit

Yesterday the UK decided to leave EU. This is an interesting outcome and at least a positive thing it terms that it will provide us with the topic for discussion for the rest of the year. 

Okay, the business, including auditors, now in situation where actions have to be taken and decisions to be made. 

The scenarios and preliminary analysis of Brexit situation were issued by the    Big 4 firms recently. Please, follow links to find the reports available on the internet:

• Materials from EY
• Materials from PWC
• Materials from Deloitte
• Materials from KPMG

Based on these readings the companies influenced by Brexit will apply following framework:

After Referendum: 2016 -2018

• Deep analysis and development of the plan for full implementation of Brexit actions
• Communication of implications to customers, employees and other third parties
• Start partial/interim implementation of actions
• Political activity to lobby more positive post-brexit options 

Brexit implementation by UK Government: from 2018

• Full implementation of the plan previously designed

Week-End: Formula for Success

Everyone wants personal success and to learn the keys to success. Everyone wants to have a happy, healthy life, do meaningful work, and achieve financial independence. Everyone wants to make a difference in the world, to be significant, to have a positive impact on those around him or her. Everyone wants to do something wonderful with his or her life.

The great keys to success to change your life have always been the same. Here are the four keys to success.

-       Decide exactly what you want and where you want to go.

-       Set a deadline and make a plan to get there. (Remember, a goal is just a dream with a deadline.)

-       Take action on your plan; do something everyday to move toward your goal.

-       Resolve in advance that you will persist until you succeed, that you will never, ever give up.

This formula is your key to success and has worked for almost everyone who has ever tried it.  It will require the very most you can give and the best qualities you can develop. In developing and following these keys to personal success, you will evolve and grow to become an extraordinary person.

Reference: 

http://www.briantracy.com/blog/personal-success/personal-success-keys-to-success-change-your-life/

Audit Method: Accounting for BREXIT

Auditors should consider the implications of BREXIT? The  EU referendum is carried out today and tomorrow by 9:00 AM Greenwich time we should be able to know the preliminary results.

Lets think about fictional accounting standard "Brexit accounting". We, auditors, have clients who work both in UK and EU and would like to know impact of Brexit outcome. 

I would consider following topics in this standard:

• Accounting for uncertainties;
• Disclosure and recognition of contingent assets;
• Disclosure and recognition of contingent liabilities;
• Disclosure of business risks related with change of UK status in EU

Some questions

• do we need to calculate long term provisions for employment termination  for EU employees from outside UK;
• discontinued operations: is there risk for the business to do that in case Brexit legislation would be enacted
• disclosure of future development in the strategic reports of companies who would benefit from Brexit

Some articles on the topic

EY helps boards to prepare:

http://www.ey.com/Publication/vwLUAssets/ey-helping-boards-assess-and-prepare-for-the-uk-referendum-on-eu-membership/$FILE/ey-helping-boards-assess-and-prepare-for-the-uk-referendum-on-eu-membership.pdf

Careers:

http://www.careersinaudit.com/article/how-will-brexit-affect-auditors-/

PWC involvement:

http://news.sky.com/story/1640482/accounting-giant-pwc-kicks-off-brexit-debate

Tax matters:

http://www.accountancyage.com/2016/04/13/would-brexit-mean-the-end-of-vat-in-the-uk/

Boards readiness:

https://iia.org.uk/media-centre/news/ftse-250-boards-finding-possible-brexit-planning-challenging/

Audit Method: Internal Audit Function

ISA 610 explains the relationship between internal audit function and the external auditor. Internal audit function is an appraisal activity established or provided as a service to the entity. Its functions include, amongst other things, examining, evaluating and monitoring the adequacy and effectiveness of internal control.

Preliminary assessment of the internal audit function

When it appears that internal audit is relevant to the external audit of the financial statements in specific audit areas, we make a preliminary assessment of internal audit by obtaining information about matters such as:

• the objectivity of internal audit function i.e. status and reporting of internal audit function in the entity
• the due professional care of internal audit, especially whether the work is adequately planned, supervised and reviewed
• the technical competence of the internal audit function
• whether management acts on internal audit's reports and recommendations and how this is evidenced

Evaluate and test the work of internal audit

When we intend to use specific work of internal audit, we evaluate and test that work to confirm its adequacy for our purposes.

For evaluation, we check that:

• the work is performed by persons with adequate technical training and proficiency.
• the work of assistants is properly planned, supervised, reviewed and documented.
• sufficient appropriate audit evidence is obtained to afford a reasonable basis for the conclusions reached.
• conclusions are appropriate in the circumstances and reports are consistent with the results of the work performed.
• any exceptions or unusual matters disclosed by internal audit are properly resolved by management.

For testing, we may perform any of the procedures below relating to testing of internal audit that may be considered given specific client circumstances. Our tests of the internal audit function's work may include the following procedures.

• Observe the internal audit function perform audit procedures.
• Re-perform some of the audit procedures previously performed by the internal audit function.
• Perform different audit procedures. For example, we may test controls, transactions or balances other than those the internal audit function tested.
• Examine internal audit's working papers.

Practice

Remember that the external auditor has sole responsibility for the audit opinion expressed, and that responsibility is not reduced by the external auditor's use of the work of the internal auditors. Evaluating the internal audit function becomes relevant only when the external auditor has determined, in accordance with ISA 315, that the internal audit function is likely to be relevant to the audit. The internal audit function is considered relevant when the nature of the internal audit function's responsibilities and activities are related to the entity's financial reporting, and the auditor expects to use the work of the internal auditors to modify the nature or timing, or reduce the extent, of audit procedures to be performed.

Audit Firm: Changes in the Audit Regulations

Effective financial reporting and auditing is essential for the efficient functioning of capital markets. It supports the development of top quality businesses that attracts investors and also provides the basis for sound commercial decision making along with trust and confidence. Auditing is an essential safety measure to provide independent assurance that the financial reporting of businesses properly reveals their overall condition, and supports the maintenance of the integrity of the business environment.

In UK, the Audit Regulations have been updated with effect from 17 June 2016 to take account of the changes in audit regulation initiated by the European Union Audit Regulation and Directive of 2014. These were transposed into UK law last week by the Statutory Auditors and Third Country Auditors Regulations (SATCAR). The changes apply to various facets of the auditing activity in the shape of eligibility criteria, accounting standards, ethical standards and governance criteria. They also include a restructuring of audit oversight and the enforcement process in the UK, and this restructure has required a number of changes in the audit regulations. The legislation has taken the form of a short new legislation in its own right which recognises the Financial Reporting Council (FRC) as the ultimate competent authority. It also makes a number of amendments to the Companies Act 2006 and Schedule 10 which sets out the role and obligations of the Recognised Supervisory Bodies (RSBs) including ICAEW.

Most firms will observe a very little change in process from the current regime, but in reality the FRC will be exercising a lot more control over the regulatory process. In particular they will be able to apply enforcement sanctions directly without any contact with the RSBs. They can apply these not only to Public Interest Entities (PIE) and AIM auditors but to any audit firm where they have elected to take over the audit inspection and investigation of individual cases.

The powers of the FRC also include the ability to move licences of individual firms between bodies or directly administer them themselves. In such cases the rules of the new RSB can apply to that firm. This requirement is set out in 1.02A.The ARD required some additional sanctioning powers be given to the regulatory bodies, and these have been brought into chapter 6 of the regulations. These include the ability to order repayment of an audit fee in part or whole, and to declare an audit report invalid

Additional Thoughts

Auditing is improving but there is more to do as the future of audit will require a change in thinking from auditors, investors and companies alike.

The complete text of the DIRECTIVE 2014/56/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 16 April 2014 can be found here on this link.

http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32014L0056

Reference: http://goo.gl/OeoMF7

i-Monday: There's an Alternative Course of Action

This week, we will be inspired by one of the America’s business giants named Mary Kay Ash. She has a unique story, bold ideas, and a revolutionary actions.

Inspiring and motivating people came easy for Mary Kay Ash. People from all walks of life could relate to her down-to-earth wisdom and easy speaking style. Through her words in her speeches, books and in everyday life, she showed others how to reach higher in their lives while recognizing all the blessings they enjoyed. 

Here are some of the famous lines of Mary Kay Ash:

“Don't limit yourself. Many people limit themselves to what they think they can do. You can go as far as your mind lets you. What you believe, remember, you can achieve.”

“If you think you can, you can. And if you think you can't, you're right.”

“For every failure, there's an alternative course of action. You just have to find it. When you come to a roadblock, take a detour.”

“We must have a theme, a goal, a purpose in our lives. If you don't know where you're aiming, you don't have a goal. My goal is to live my life in such a way that when I die, someone can say, she cared.”

“Most people live and die with their music still unplayed. They never dare to try.”

References:   http://www.marykaytribute.com/Wisdom.aspx

http://www.brainyquote.com/quotes/authors/m/mary_kay_ash.html

Picture Reference:   http://www.marykay.com/en-US/about-mary-kay/companyfounder/Pages/about-mary-kay-ash.aspx

Week-End: Interview tips. Video by PWC

Amp up your interview!

Express yourself with the power of storytelling. Be authentic and memorable!

Here is a practical application of some of the top Interview tips from PWC US recruiter.

Audit Method: Subsequent Events

Subsequent Events as defined in ISA 560 are “Events occurring between the date of the financial statements and the date of the auditor’s report, and facts that become known to the auditor after the date of the auditor’s report.”

The objectives of the auditor for considering subsequent events are:

(a) To obtain sufficient appropriate audit evidence about whether events occurring between the date of the financial statements and the date of the auditor’s report that require adjustment of, or disclosure in, the financial statements are appropriately reflected in those financial statements in accordance with the applicable financial reporting framework; and

(b) To respond appropriately to facts that become known to the auditor after the date of the auditor’s report, that, had they been known to the auditor at that date, may have caused the auditor to amend the auditor’s report.

Perform audit procedures designed to obtain sufficient appropriate audit evidence that all events up to the date of the audit report that may require adjustment of, or disclosure in, the financial statements have been identified

·   Consider changes in the areas which may affect the financial statements and other information in the annual report such as banking arrangements, currency and interest rates, key markets, key products, customers or vendors, key management or employees, government regulation or policy and the ratio of orders to sales and cash receipts and the position of the order book.

·   Consider other significant knowledge gained, for example press comment, internal audit reports, changes in client trading patterns, changes in laws or regulations, currency devaluations, major fires or catastrophes, or technology failures (e.g. computer operations failures) and security incidents.

·   Evaluate procedures management has established to ensure that subsequent events are identified.

·   Inquire of management and, where appropriate, those charged with governance as to whether any subsequent events have occurred which might affect the financial statements.

·   Review the results of the review of minutes of meetings of the entity’s owners, management and those charged with governance, including audit, executive and other Board committees since the balance sheet date.

·   Consider reviewing invoices from lawyers received after the year-end to determine whether any litigation, claims or assessments exist that were not previously identified in our analysis of legal expenses and other procedures.

·   Review the latest available interim financial statements and, as considered necessary and appropriate, budgets, cash flow forecasts and other related management reports. Consider whether they reveal any adverse trends or significant movements in balance sheet headings compared to the audited financial statements. Consider whether the management information is reliable.

Practice

Where a material subsequent event has been identified, determine whether it is reflected in the financial statements in accordance with the applicable financial reporting framework by adequate disclosure and, where appropriate, adjustment of the account balances and transactions affected. Consider also its effect on the audit report.