Audit News Briefing: 26 July 2016

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

July 20, 2016

Accounting Today (Debits&Credits)

Internal Auditors Move to Combat Cyberattacks

New Report – Institute of Internal Auditors: Growing Role of Internal Audit Profession in Cybersecurity

The kind of support needed:

·         Not simply focused on prevention.

·         Setting and management of expectation.

·         Helping the company assess readiness in dealing with the inevitable.

IIA President and CEO Richard Chambers: “What we continue to find is that cybersecurity is recognized almost universally as one of the most significant risks that organizations face … It’s one that internal auditors have increasingly begun to recognize they have to help address. But what we also find is that in a lot of instances the focus can’t just be on trying to prevent a cyberattack because cyberattacks are virtually inevitable. Anyone who tells their board or their customers that they are immune from a cybersecurity attack is just not being truthful.”

Please follow link for details: http://www.accountingtoday.com/blogs/debits-credits/news/internal-auditors-move-to-combat-cyberattacks-78732-1.html

July 19, 2016

Accounting Today (Accounting Technology)

Internal Audit Function Varies Globally

19-July REPORT – Internal Auditors Research Foundation: Found a variety of factors affecting the maturity levels of internal audit in different parts of the globe, including the:

-       age and size of the internal audit function,

-       the type of industry,

-       the size of the organization, and

-       other variables.

Highlight: technological variation across regions – regions still relying on manual systems and processes (13%) North America (36%) East Asia and Pacific.

Please follow link for details: http://www.accountingtoday.com/news/audit-accounting/internal-audit-function-varies-globally-78716-1.html

June 29, 2016

Accounting Web

PCAOB Issues Staff Guidance for Firms on the New Form AP

(AP) Audit Participants NEW FORM requires disclosure of the following:

·         The name of the engagement partner for all public company audits issued on or after Jan. 31, 2017.

·         Information about other audit firms participating in the audit for all public company audits issued on or after June 30, 2017. That information will include the names, locations, and extent of participation of other accounting firms that took part in the audit, if their work constituted 5 percent or more of the total audit hours. It also will include the number and aggregate extent of participation of all other accounting firms that took part in the audit whose individual participation was less than 5 percent of the total audit hours.

Written Statement of Martin Baumann (PCAOB chief auditor and director of professional standards) – “Form AP will provide transparency to investors about the engagement partner and other accounting firms that took part in the audit… The guidance issued today (29-Jun) will help firms implement the processes required to deliver that information.”

Please follow link for details: http://www.accountingweb.com/aa/auditing/pcaob-issues-staff-guidance-for-firms-on-the-new-form-ap  

Audit Method: Internal Control Component: Information Systems

The ISA 315, has divided the entity’s internal control process in to five components. One among these components is the Information Systems. According to ISA 315, while conducting the audit of financial statements, the auditor needs to obtain an understanding of the information system, including the related business processes, relevant to financial reporting, including the following areas:

·         The classes of transactions in the entity’s operations that are significant to the financial statements;

·         The procedures, within both information technology and manual systems, by which those transactions are initiated, recorded, processed, corrected as necessary, transferred to the general ledger and reported in the financial statements;

·         The related accounting records, supporting information and specific accounts in the financial statements that are used to initiate, record, process and report transactions;

·         How the information system captures events and conditions, other than transactions, that are significant to the financial statements;

·         The financial reporting process used to prepare the entity’s financial statements, including significant accounting estimates and disclosures; and

·         Controls surrounding journal entries, including non-standard journal entries used to record non-recurring, unusual transactions or adjustments.

The information system relevant to financial reporting objectives, which includes the accounting system, consists of the procedures and records designed and established to:

·         Initiate, record, process, and report entity transactions (as well as events and conditions) and to maintain accountability for the related assets, liabilities, and equity;

·         Resolve incorrect processing of transactions, for example, automated suspense files and procedures followed to clear suspense items out on a timely basis;

·         Process and account for system overrides or bypasses to controls;

·         Transfer information from transaction processing systems to the general ledger;

·         Capture information relevant to financial reporting for events and conditions other than transactions, such as the depreciation and amortization of assets and changes in the recoverability of accounts receivables; and

·         Ensure information required to be disclosed by the applicable financial reporting framework is accumulated, recorded, processed, summarized and appropriately reported in the financial statements.

Practice

Significant and rapid changes in information systems can change the risk relating to internal control. The extent and nature of the risks to internal control vary depending on the nature and characteristics of the entity’s information system. The entity should respond to the risks arising from the use of IT in internal control by establishing effective controls in light of the characteristics of the entity’s information system.

Audit Firm: Regulation of Audit Firms in UK

The Companies Act 2006 of United Kingdom provides powers to bodies known as Recognised Supervisory Bodies (RSBs) to register and supervise auditors. The RSBs are:

• The Institute of Chartered Accountants of Scotland
• Chartered Accountants Ireland
• The Institute of Chartered Accountants in England and Wales
• The Association of Chartered Certified Accountants
• The Association of Authorised Public Accountants

The regulatory system of RSBs involves the following:

• Registration processes
• Monitoring
• Investigation and discipline

The RSBs are also subject to independent oversight.  The Financial Reporting Council (FRC) has statutory powers delegated to it by Government for the recognition, supervision and de-recognition of the RSBs.  The FRC conducts regular inspection visits to the RSBs to ensure that their responsibilities are being discharged appropriately.  The FRC also has the power to sanction RSBs. In addition to the quality assurance and monitoring undertaken by the RSBs, the Audit Quality Review (AQR) team of the FRC has the responsibility for the monitoring of the audits of all listed and other major public entities. 

The FRC operates an independent disciplinary scheme for accountants and accountancy in the UK. The Accountancy Scheme operates independently of the professional bodies. The FRC deals with cases of potential misconduct which raise or appear to raise important issues affecting the public interest in the UK. All other cases of potential misconduct continue to be dealt with by the professional bodies above.  The FRC Conduct Committee has oversight over the operation of the disciplinary arrangements. The Conduct Committee’s responsibilities in this regard include:

• Operating independent disciplinary Schemes for the investigation of cases which raise or appear to raise important issues affecting the public interest in the UK; and
• Where appropriate, bringing disciplinary proceedings against those whose conduct appears to have fallen short of the standard reasonably to be expected of members or member firms of the relevant professional body.
• Keeping under review the working of the Schemes and the supporting Regulations to ensure that they are operating effectively; and
• Regular publicity for the FRC’s disciplinary activities and achievements as appropriate.

Additional Thoughts

Compliance with local laws and regulations is a matter of utmost care for the audit firms. The audit firms should abide by all the laws and regulations in order to gain the trust of the authorities and the general public.

Reference:      http://goo.gl/1XOfUS

http://goo.gl/7wWT0q

Audit News Briefing: 15 July 2016

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

July 14, 2016

Business Wire (press release)

IESBA Redefines Accountants’ Ethical Role When Laws and Regulations Broken

International Federation of Accountants (IFAC) 32-page July 14, 2016 Publication: Responding to Non-Compliance with Laws and Regulations – http://www.ifac.org/publications-resources/responding-non-compliance-laws-and-regulations

The global organization for accountancy profession released this new standard today through its independent standard-setting board, the International Ethics Standards Board for Accountants (IESBA).

IESBA Technical Director Ken Siong: “The board carefully calibrated the standard based on the rich and diverse input from a wide range of stakeholders to ensure that it is proportionate and, importantly, globally operable … The standard fills a gap in jurisdictions where legislation or regulation does not address professional accountants’ responsibilities in these situations, and by providing helpful guidance it may well complement legislation or regulation in jurisdictions that do address it. This has been a long journey, and now it’s time for national standard setters, professional accountancy organizations, and accounting firms to adopt and implement the standard.”

Please follow link for details: http://www.businesswire.com/news/home/20160714005837/en/IESBA-Redefines-Accountants%E2%80%99-Ethical-Role-Laws-Regulations

July 14, 2016

Accounting Today

5 Questions to Ask Before Moving into Advisory Services

Accounting technology veteran Amy Vetter recently featured a new revenue generating undertaking – that is, advisory service. It is based on the Global SMP Survey by the International Federation of Accountants (IFAC) which revealed a 32% increase in advisory and consultancy service by small and mid-size firms in North America.

She have found in her career that auditors tend to have the most natural skills to transition into advisory work – “They’re used to reviewing financial statements for anomalies and asking questions. Shifting to advisory is a natural evolution of the work: instead of delivering a report, you’re sitting down with clients to discuss the report in the context of improving their business operations.”

Please follow link for details:

http://www.accountingtoday.com/accounting-technology/news/5-questions-to-ask-before-moving-into-advisory-services-78674-1.html

July 14, 2016

Economia

FRC survey reveals fears that audit profession becoming less attractive

YouGov Survey by the Financial Reporting Council (FRC): “There is growing concern that the audit profession is becoming less attractive as a result of increased public and regulatory scrutiny”

·         It was stressed that the audit profession’s recruitment, level of quality and judgment skill development are disadvantaged after the implementation of EU Regulation and Audit Directive (ARD) last month.

·         Related FRC survey of audit market emphasized the concentration of the FTSE 350 audit market in the Big Four firms.

FRC executive director for audit Melanie McLaren: “Our vision for audit is that it is trusted to provide reliable assurance on the public reporting of financial information, and in doing so, promotes good governance and facilitates the effective allocation of capital … The FRC’s strategy is to promote continuous improvement in audit quality. One of the key factors in achieving this is to engage with other regulatory professional bodies, auditors, audit committees and investors to communicate good practice.”

Please follow link for details: http://economia.icaew.com/news/july-2016/frc-survey-reveals-fears-that-audit-profession-becoming-less-attractive

Audit Method: Best practices in Audit Documentation

ISA 230, deal with the auditor’s responsibility to prepare the audit documentation. Audit Documentation is defined in ISA 230 as “The record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached (terms such as “working papers” or “workpapers” are also sometimes used).” The auditor shall prepare audit documentation that is sufficient 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 performed
• ·         Significant matters arising during the audit and the conclusions reached thereon

In documenting the nature, timing and extent of audit procedures performed, the auditor shall record:

• ·         The identifying characteristics of the specific items or matters tested;
• ·         Who performed the audit work and the date such work was completed; and
• ·         Who reviewed the audit work performed and the date and extent of such review.

The auditor shall assemble the audit documentation in an audit file and complete the administrative process of assembling the final audit file on a timely basis. After the assembly of the final audit file has been completed, the auditor shall not delete or discard audit documentation of any nature before the end of its retention period.

Audit documentation may be recorded on paper or on electronic or other media. Examples of audit documentation include:

• ·         Audit programs.
• ·         Analyses.
• ·         Issues memoranda.
• ·         Summaries of significant matters.
• ·         Letters of confirmation and representation.
• ·         Checklists.
• ·         Correspondence (including e-mail) concerning significant matters.

However it should be kept in mind that neither auditing standards nor any audit firm policy prohibits the audit team members from including documentation in the file that they believe necessary to support their work.

Practice

Documentation prepared after the audit work has been performed is likely to be less accurate than documentation prepared at the time such work is performed. ISQC 1, requires firms to establish policies and procedures for the timely completion of the assembly of audit files. An appropriate time limit within which to complete the assembly of the final audit file is ordinarily not more than 60 days after the date of the auditor’s report.

Audit Firm: US PCAOB regulation of US Audit Firms

The Public Company Accounting Oversight Board (PCAOB) is a private-sector, nonprofit corporation established by the U.S. Congress to oversee the audits of public companies in United States in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports. In U.S in early 2000, when the Enron and WorldCom Scandal came to surface, the congress felt the need for more strict regulations for the audit firms and thus promulgated the Sarbanes Oxley Act on July 30, 2002. This act mandated the formation of PCAOB to oversee the audit of public companies that are subject to the securities laws, in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports for companies the securities of which are sold to, and held by public investors.

Before the Sarbanes-Oxley Act of 2002, the audit profession was self-regulated in U.S., but after its promulgation, it required that auditors of U.S. public companies be subject to external and independent oversight for the first time in history. In passing this Act, Congress sought to restore investor confidence and address serious gaps in the U.S. regulatory framework that were identified through the financial scandals of 2001-2002. The PCAOB comprises of five members, including the Chairman and are appointed to staggered five-year terms by the Securities and Exchange Commission (SEC).

The PCAOB has five primary responsibilities:

·         Registration of public accounting firms (including non-US firms) that audit public companies (including non-US issuers) trading in US securities markets;

·         Inspections of registered public accounting firms;

·         Establishment of auditing and related attestation, quality control, ethics, and independence standards for registered public accounting firms; and

·         Investigation and discipline of registered public accounting firms and their associated persons for violations of specified laws or professional standards.

·         Enforcing compliance with Sarbanes-Oxley Act.

Additional Thoughts

Although the Sarbanes-Oxley Act, through establishment of PCAOB, introduced much strict regulations for the audit profession, but the WorldCom and Enron scandal alongwith the dissolution of the then big five firm Arthur Andersen which was found guilty of fudging Enron accounts, brought a great disrepute for the profession. Audit firms need to develop a sense of self-regulation and high ethical standards so that the investors and public in general endow trust upon the profession.

Reference: https://goo.gl/YU1dgc

                  https://goo.gl/mpKGaX

Audit News Briefing: 7 July 2016

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

July 7, 2016

CPAPracticeAdvisor.com

Financial Execs Struggle To Measure and Mitigate Risks

Accounting and Audit segment of CPA Practice Advisor highlighted this struggle through managing editor Isaac M. O’Bannon.

Basis: New Survey conducted by Grant Thornton LLP. Accounting and Business Consultancy, which states – Almost two-thirds of executives or 64% see strategic risk as a highly significant threat to their organizations compared to other types of risk – including compliance risk, operational risk and financial risk.

Among the important audit issues highlighted are as follows:

·         21% of organizations don’t rate third parties by the risks they pose, and nearly half or 41% don’t audit any of their third parties.

·         For departments involved in GRC activities, 43% of executives cite skill shortages in audit departments, while 38% cite skill shortages in operations leadership/management departments.

Please follow link for details: http://www.cpapracticeadvisor.com/news/12229007/financial-execs-struggle-to-measure-and-mitigate-risks

July 5, 2016

Australian Financial Review

The Big Four firms are now more technology than accounting

AFR data editor Edmund Tadros recently raised the concern that fast-growing areas of consulting, technology and digital services have already outpaced the companies’ original accounting roots. “Only one in five partners appointed to PricewaterhouseCoopers, Deloitte, EY and KPMG in the past year were in the traditional businesses of audit and assurance,” he said.

According to Lynn Kraus, the head of markets at EY Oceania: “Over the last two years, the acquisitions that the big four firms have been making are hugely different to four or five years ago … At EY, we've made six acquisitions over 24 months, all with a lens for this whole concept for digital and cyber skills.”

Please follow link for details: http://www.afr.com/business/accounting/the-big-four-firms-now-more-technology-than-accounting-20160701-gpwsd7

June 30, 2016

AccountancyAge

One in 20 audit firms quit as market evolves

June 2016 Key Facts and Trends in the Accounting Profession

By Financial Reporting Council (FRC.org.uk)

https://www.frc.org.uk/Our-Work/Publications/Professional-Oversight/Key-Facts-and-Trends-2016.pdf

This is the FRC (watchdog) publication report which head editor Kevin Reed have recently featured in Accountancy Age. It indicated considerable changes in the accounting profession, particularly in the field of audit — 304 practices have dropped their audit licence since December 2014. Taking into account that in 2004, there were 9,950 that are into UK’s accounting profession – it extensively decreased to 6,331 or a 4.6% fall.

Please follow link for details: https://www.accountancyage.com/2016/06/30/one-in-20-audit-firms-quit-as-market-evolves/

June 27, 2016

The Straits Times

Audit sector 'can benefit from opportunities tech brings'

Singapore-based English daily broadsheet newspaper featured the important role of technology in the accounting profession. Deputy Prime Minister Tharman Shanmugaratnam said, "The audit sector is one which can leverage new technologies to develop new capabilities in advanced audit analytics." This is during his opening address at Deloitte University Asia Pacific in Amara Sanctuary Resort in Sentosa, a centre set up by the Big Four accounting firm to groom employees into leaders.

Please follow link for details: http://www.straitstimes.com/business/companies-markets/audit-sector-can-benefit-from-opportunities-tech-brings

Audit Method: Quality Review

ISA 220, deals with quality control for an audit of financial statements. Engagement teams have a responsibility to implement quality control procedures that are applicable to the audit engagement and that are within the context of the firm’s system of quality control. The objective of the auditor is to implement quality control procedures at the engagement level that provide the auditor with reasonable assurance that:

• The audit complies with professional standards and applicable legal and regulatory requirements; and
• The auditor’s report issued is appropriate in the circumstances.

ISQC 1, deals with the firm’s responsibilities to establish and maintain its system of quality control for audit engagements. The system of quality control includes policies and procedures that address each of the following elements:

• Leadership responsibilities for quality within the firm;
• Relevant ethical requirements;
• Acceptance and continuance of client relationships and specific engagements;
• Human resources;
• Engagement performance; and
• Monitoring.

For audits of financial statements of listed entities, and those other audit engagements, if any, for which the firm has determined that an engagement quality control review is required, the engagement partner shall:

• Determine that an engagement quality control reviewer has been appointed;
• Discuss significant matters arising during the audit engagement, including those identified during the engagement quality control review, with the engagement quality control reviewer; and
• Not date the auditor’s report until the completion of the engagement quality control review.

Practice

The engagement partner shall take responsibility for the overall quality on each audit engagement to which that partner is assigned. The engagement partner should ensure that

• Appropriate procedures regarding the acceptance and continuance of client relationships and audit engagements have been followed;
• All ethical requirements are met;
• Independence criterion is met;
• Assignment of team members is appropriate;
• Overall direction, supervision and monitoring of the audit engagement is carried out.

Audit Firm: Impact of Brexit on Audit Firms in UK & Europe

On June 23, 2016, the UK voted to leave the European Union (EU) voluntarily. Amid the highest turnout at a UK-wide vote since 1992, with a 70% turnout rate, the Leave campaign received 52% of the referendum, compared to 48% received by the Remain campaign. The particulars of how the UK will leave the EU will be the subject of negotiations for at least the next two years.

Economists anticipate market and currency instability in the short-term, but the longer term implications will depend heavily on the details of how the UK unravels its participation in the EU. Economists are also anticipating several years of uncertainty, and uncertainty typically does not indicate positive signs for financial markets or economic indicators. Uncertainty among businesses would see a brake applied to investment and deal-making, which would hit one among the most lucrative of areas for accounting practitioners – transactional services market.

From one perspective, for the accountancy sector, the EU is maybe less important as the share of revenue generated by clients in other EU countries is just 4.2%. However, as key major companies and banks might relocate from London to Frankfurt in near future – this will mean a lot less money for accounting firms, but there may be a recovery later.

British relationships with the IASB, which lay outside the EU will remain unchanged. As the UK has always been a keen proponent of IFRS, thus it is unlikely that there would be any retreat to British accounting standards after Brexit. One more area on which accountants are focused are the potential tax implications. Taxation has remained a policy area over which EU member states retain close control. Now after the Brexit vote, EU laws on direct and indirect taxation will cease to apply within the UK, and Britain will regain the right to vary its VAT and excise duty rates beyond the restrictions imposed by EU legislation.

Workload is likely to increase for audit firms due to Brexit but their lucrative value-added services offerings may suffer as a result. Auditors would struggle to provide high-value advice to their clients, instead having to focus on technical questions borne out of the UK leaving the EU.

Additional Thoughts

Nobody can predict with certainty what is going to happen after the Brexit. It is an extraordinary event and determined by many unknown factors. The audit firms should consider what it will look like in the future and should assess their client base. To secure the longevity of the practice, audit firms need to ensure that their client base is well spread. 

References:

http://goo.gl/BV4xGs

http://goo.gl/e85sOH

Brexit chronicles

There are some interesting articles on Brexit. The FT and Economist provide the analysis and some predictions. Please see the links:

• Brexit and the City: Europe plots a bank heist
• Brexit business tracker
• Brexit and the City of London. From folly to Fragmentation

#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.