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.

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/