Audit Method: Sampling

Audit sampling as defined by ISA 530 is “The application of audit procedures to less than 100% of items within a population of audit relevance such that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis on which to draw conclusions about the entire population.”

The means available to the auditor for selecting items for testing are;

• Selecting all items (100% examination)
• Selecting specific items; and
• Audit Sampling

Audit sampling can be applied using either non-statistical or statistical sampling approaches.

Statistical approach has the following characteristics:

• Random selection of the sample items; and
• The use of probability theory to evaluate sample results, including measurement of sampling risk.

 A sampling approach which does not possess the above characteristics is called non-statistical sampling.

Steps in planning the sample are as follows:

• Determining the objectives of the test;
• Defining what errors or deviation are being sought;
• Identifying the population and sampling units; and
• Deciding the size of the sample.

Generally, larger the size of the sample, the more it will be representative of a population. Many audit firms would like to standardize the size of sample based on general and specific risk factors. Errors increase the imprecision of results from sampling. Therefore, if they are expected, a larger sample size is required. Finally in evaluating misstatements, the auditor, should exclude ‘anomalous’ error(s) which are misstatement or deviation that are demonstrably not representative of misstatements or deviations in a population from his projected misstatements. However, such errors may be considered when evaluating all misstatements within the sample and auditors shall obtain sufficient appropriate audit evidence to corroborate the fact that an error or deviation is anomalous.

Practice

Auditors need to consider the specific objectives to be achieved and the combination of audit procedures that is most likely to achieve those objectives. Audit sampling is applicable to both tests of control and substantive procedures.

Audit Firm: Governance Code

The market for large audits in the UK is dominated by four firms and the risk of the withdrawal of a major firm is a matter of continuing concern to the UK Financial Reporting Council (FRC) and many others. In January 2010 the FRC and Institute of Chartered Accountants in England and Wales (ICAEW) published the Audit Firm Governance Code.

It is applicable to those firms that audit more than 20 listed companies and it is applicable from financial years beginning on or after 1 June 2010. The Code currently applies to seven audit firms that together audit about 95% of the companies listed on the Main Market of the London Stock Exchange. For these firms, the code sets a benchmark for good governance which other audit firms may wish to voluntarily adopt in full or in part. It also codifies much existing good practice and links to matters that audit firms must comply with as regulated professional partnerships.

The seven firms to which the code currently applies are:

• Baker Tilly LLP
• BDO LLP
• Deloitte LLP
• Ernst & Young LLP
• Grant Thornton LLP
• KPMG LLP
• PricewaterhouseCoopers LLP

The Code is designed to play four major roles:

• enhance the stature of firms as highly visible exemplars of best practice governance;
• enrich firms’ transparency reports;
• encourage changes in governance which improve the way that firms are run; and
• strengthen the regulatory regime by achieving transparent and effective governance without disproportionate regulation.

The FRC monitors the extent to which these firms comply with the Code. Regular reviews are conducted by FRC to check compliance by firms with all the provisions of the code.

Additional Thoughts

High quality corporate governance is mandatory to foster investment in the economy. Audit firms play the role of watchdogs in the economy and it is essential for them to implement sound governance practices within their own organizations. The Code in this regard will help the audit firms by more sharply defining the public interest, particularly by explicitly recognizing the importance of audit quality.

Audit News Briefing: 6 November 2015

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

November 3, 2015

Accountancy Age

EU's plan gives opportunity to restore audit confidence

The Financial Reporting Council's (FRC) recent panel discussion: 'Enhancing justifiable confidence in audit through implementation of the EU Audit Regulation and Directive'.

FRC CEO Stephen Haddrill highlighted that the new legislation gave the profession the opportunity to "make sure the public can have confidence in the regulatory regime" while also ensuring that it implements the standards that underscore "the independence of the auditor and the auditor's freedom from influence from the company that they are auditing".

Please follow link for details: http://www.accountancyage.com/aa/news/2433138/eus-plan-gives-opportunity-to-restore-audit-confidence

October 29, 2015

Accountancy Age

Auditors to be hit with increased FRC levy demands as government funding ends

The government cuts all funding to the Financial Reporting Council (FRC) from 2016. While it provided funding of £2.7m since 2009 – currently, it contributes just £250,000. This is half the figure from the previous two years.

The FRC intends to consult the relevant accountancy bodies and major audit firms, on the ways and amounts needed to secure additional contributions to fund its expanded remit and plug the funding gap caused by the government.

The shortfall emerged as the FRC announced its 2016/19 strategy outlining its priorities for the next three years.

Please follow link for details: http://www.accountancyage.com/aa/analysis/2432613/auditors-to-be-hit-with-increased-frc-levy-demands-as-government-funding-ends

October 19, 2015

Accounting Web

U.S.: PCAOB Urges Auditors to Be Better at Assessing Risk

“Significant Priority” – this is how the Public Company Accounting Oversight Board (PCAOB) is urging audit firms to make in reviewing and improving their risk assessment processes.

“The procedures required by these (board’s risk assessment) standards underlie the entire audit process, including the procedures that the auditor performs to support the opinion expressed in the auditor’s report,” the U.S. audit regulator states in October 15 report. “For that reason, noncompliance with these standards can have serious implications for the audit of internal control over financial reporting or the audit of the financial statements and may affect whether the auditor performs enough work to support the auditor’s opinion.”

Notable examples of common deficiencies under those auditing standards include:

• Failing to perform substantive procedures specifically responsive to fraud risks and other significant risks identified.
• Not evaluating the accuracy and completeness of financial statement disclosures.
• Not testing the accuracy and completeness of information produced by the company.

Please follow link for details: http://www.accountingweb.com/aa/auditing/pcaob-urges-auditors-to-be-better-at-assessing-risk

Audit Firm: Recruitment

Are you a recent accounting graduate and want to get hired at any of the big accounting firms? Here are some tips that will prove to be helpful in your search.

Curriculum Vitae: An employer will first meet you on paper through your CV. Prepare a good professional CV that defines your career goal, your education, past experience (if any) and your skills and expertise. CV is a marketing tool for a job seeker and you should use that tool to the greatest effect.

Cover Letter: The purpose of constructing an effective cover letter is to demonstrate your suitability for an organization by identifying how your past academic background and employment make you a top candidate.

Interview: Before going for the interview research the firm and understand the organization and job description. Dress appropriately for the interview, generally this means business professional dress. As it is rightly said that your energy introduces you even before you speak so try to make a good first impression on the interviewer. Ask some intelligent questions during the interview when asked about having any questions from your research conducted earlier on about the company.

Follow up: After the interview send an email to the employer and thanks them for the interview opportunity. This will not only enhance your image as a good communicator but will also ensure that the employer keeps you in the queue for potential selection. 

Some of the key soft skills that employers these days are looking for are:

• Problem solving and analytical thinking
• Initiative and drive
• Team player
• Communication skills (written and verbal)

Some of the key technical skills employers look for in young graduates aspiring to join the auditing profession are:

• Financial accounting and reporting
• Tax strategy, planning and control 
• Risk management and internal control
• IT Skills

Additional Thoughts

Some very useful information can be obtained from the websites of the big Four firms about their recruitment process and policies.

• EY
• PWC
• Deloitte
• KPMG

Audit Method: Fraud

Accounting fraud has long been the buzzword in the industry due to its wider and deeper implications on the company, industry and the economy at large. Window dressing is a term used in accounting for presenting financial statements in such a manner that disguise the actual financial transactions and present them in a more favorable way. According to PWC Economic crime survey the five most commonly reported types of economic crimes are asset misappropriation, procurement fraud, bribery and corruption, cybercrime and accounting fraud.

Auditors are required to keep themselves up to date about all these fraudulent practices and should apply professional skepticism while conducting the audit of financial statements.

ISA 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements addresses all the issues which an auditor has to deal with while conducting the audit. Under ISA-240, auditors are now required to evaluate the effectiveness of an entity’s risk management framework (internal control) in preventing misstatements whether through fraud or otherwise, in all audits. Furthermore, auditors are now required to be more proactive in their search for fraud. The auditor is responsible for maintaining an attitude of professional skepticism throughout the audit, recognizing the possibility that a material misstatement due to fraud could exist, notwithstanding the auditor’s past experience of the honesty and integrity of the entity’s management and those charged with the governance. An overriding requirement of ISA 240 is that auditors are aware of the possibility of there being misstatements due to fraud.

The objectives of the auditor are:

a) To identify and assess the risks of material misstatement of the financial statements due to fraud;

b) To obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and

c) To respond appropriately to fraud or suspected fraud identified during the audit.

The ISA, however, recognize the fact that owing to inherent limitation of an audit, there is an unavoidable risk that some material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed in accordance with the ISAs.

Practice

 Misstatements in the financial statements can arise from either fraud or error. The distinguishing factor between fraud and error is whether the action that results in the misstatement of the financial statements is intentional or unintentional. In planning the audit, auditors must be alert to the possibility of fraud and assess the risk that fraud might occur. The auditor shall treat those assessed risks of material misstatement due to fraud as significant risks and accordingly, the auditor shall obtain an understanding of the entity’s related controls, including control activities, relevant to such risks.

Week-End: Accountant Stress Relief

Do you want to de-stress an Accountant? Does that CPA need soothing? Is the Financial Controller flustered?

Here are 20 financial words and phrases that will have accountants smiling at their spreadsheets and comforted by calculators:

• Favorable variance
• Authorized
• Fully Reconciled
• Checklists
• Profit
• Immaterial
• Clean audit report
• Fully compliant
• Segregation of duties
• Strong internal controls
• Peace and Quiet
• Fully supported journals
• Chart of Accounts
• Prudent
• Cross-referenced
• Within budget
• No surprises
• Audit Trail
• Matched Purchase Order
• Balanced

 See more at: http://www.workileaks.com/accountant-stress-relief.html

Audit News Briefing: 29 October 2015

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

October 28, 2015

Accounting Today

U.S.: AICPA Releases New Auditing Standard and Interpretation on Sustainability Financial Statements

The subject interpretation is concerning the sustainability financial statements used by the government for long-term projections of social insurance programs. In the interpretation - an auditor may report on the basic financial statements, which include the statements of social insurance, changes in social insurance amounts, and long-term fiscal projections, in accordance with Generally Accepted Auditing Standards. The interpretation also provides an illustrative auditor’s report containing an unmodified opinion on the U.S. government-wide financial statements.

Please follow link for details: http://www.accountingtoday.com/news/audit-accounting/aicpa-auditing-standard-interpretation-sustainability-financial-statements-76230-1.html

October 26, 2015

Business Insider

Marvell Technology's auditor resigned and now the stock is crashing

On October 20, PricewaterhouseCoopers (PwC) resigned as auditor of a leading fabless semiconductor company – Marvell Technology. The company audit committee neither made any request, recommendation, nor approval of said resignation.

PwC advised Marvell that in 2016 it will need to expand the scope of its audit in four areas. (1) Entity level controls (2) Process and controls over establishment of significant and judgmental reserves (3) Process and controls over identification, communication and approval of related party transactions (4) The adequacy of financial reporting resources.

Please follow link for details: http://www.businessinsider.com/marvell-technology-auditor-resigns-2015-10

October 23, 2015

Accountancy Age

PwC wrestles Virgin Money audit from KPMG

Global financial services brand, Virgin Money, released an audit committee statement thru chairman Norman McLuskie: "KPMG has been  auditor since 2004 and we would like to thank them for their significant contribution as auditors and for their consistently high standards of professionalism in executing this role. We have undertaken a very thorough, open and transparent tender process, a description of which will be included in the 2015 Annual Report and Accounts." This is in view of their intention to appoint PricewaterhouseCoopers (PwC) effective 1 January 2016, subject to shareholder approval at its 2016 Annual General Meeting.

Please follow link for details: http://www.accountancyage.com/aa/news/2431800/pwc-wrestles-virgin-money-audit-from-kpmg