Real News: Audit News Briefing: 20 August 2015

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







July 29, 2015

Euro News

Outside auditors should check bank capital, UK industry body says

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

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

August 5, 2015

Financial Times

SFO and UK regulator launch probes into Quindell practices

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

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

August 6, 2015

Reuters

UK Anti-fraud agency to investigate claims firm Quindell

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

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

August 10, 2015

Accountancy Live

NAO seeks feedback on draft auditor guidance

The National Audit Office has launched a consultation on the draft guidance to local government auditors in respect of their duties under the Code of Audit Practice.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

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

August 11, 2015

Treasury Insider

UK financial services firms are sitting on data time bombs

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

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

August 19, 2015

Accountancy Live

Charities under-reporting charitable expenditure

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

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

August 19, 2015

Accountancy Age

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

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

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

Audit Method: Future of Audit. Technology.

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

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

Survey

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

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

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

Current situation

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

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

Auditor’s Future

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

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

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

Sources:

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

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

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

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

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

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

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

News from Airstrip One: Violation of Independence

                                                 

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

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

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

Week-end: Dialogue with manager

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

Recommended for all audit firm new joiners J

Coffee Break: Big Red Button

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

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

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

*Apple Introduces Revolutionary New Laptop With No Keyboard

Audit Method: Audit of Disclosures

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

Definition

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

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

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

Planning

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

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

Practical considerations

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

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

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

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

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

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

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

Audit Method: Analytical Procedures

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

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

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

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

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

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

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

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

News from Airstrip One: Promotions case

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

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

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

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

Week-end: Monty Python

Here is a video from old good Monty Python on audit! I liked this joke, sounds all old good British and rather funny J

I wonder what was the audit firm's materiality basis on that engagement with such profit??? J

Audit Method: list of information requests

A list of information requests (LIR) is method to establish common understanding with audit client: what documents need to be prepared in order to progress with audit. The LIR also known in different audit firms as list of outstanding items, client assistance schedule, prepared by client (PBC) list. LIR is one of the project management tools when auditors track if all required information was provided in appropriate quality and on time.

In theory LIR needs to be very specific and at least have following characteristics: detailed description of the request (e.g. it should mention specific account in trial balance), auditor and client employee responsible for request processing, date when information due, format and if applicable prior year example.

I can give following tips on managing LIRs:

1. I advise to use Excel in managing LIRs;
2. The level of details in LIR depends on client: when client is difficult to manage, it might be better to add some more details to be always ready to answer specific questions;
3. The request should be ideally sent 2-3 weeks before start of the engagement, depending on the timing of audit procedures;
4. The auditor must meet and discuss LIR with client representative in charge of the audit after sending the first version of LIR. The protocols of  communication would depend on arrangements with client: e.g. the client might prefer the auditors to work directly with each responsible person in LIR;
5. LIR should be compared with status of audit work at list once a week. I would propose following formula: information received – information processed = unprocessed audit evidence. If there is a lot of unprocessed evidence then it raises questions if audit team have issues with adequate staffing in terms of time and skills of team members.
6.  LIR should be designed in the way to be able to support audit teams in calculating overruns and defend auditors’ position. This could be achieved by updating LIR once a week, calculating number of days/hours from the due date to current date.
7. Regular LIR status calls with client should be organised. All audit team members should participate being ready to provide an update on their section of Audit.

News from Airstrip One: Toxiba case

Toxiba company, one of the biggest in the region of Eurasia, apologised for using fraudulent methods of inflating its profit. The company artificially increased its profits by USD 1.2 bln during preceding 7 years.  The technique of defrauding financial statements was not innovative and referred by Capitalist (magazine in Oceania) as “101”. This usually includes overstating net revenues, booking early revenues and postponing expenses. The company had the auditor R&U, which failed to detected fraud. R&U is multinational company founded in Oceania, having offices in all big cities, including Airstrip One. Our correspondent, Rob, asked for the comments from the audit specialist, Mr Ask, in the city of Airstrip One:

• Rob: What could be done to prevent such cases?
• Mr Task: Well, first of all the corporate culture in Eurasia should change towards being more open and this depends from tone at the top. Second, I think the auditors from R&U should review their fraud detection and cut-off procedures, and then, question themselves, why they were not able to find the intentionally made errors.

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

Group and Statutory Audit tailoring

Hi there! Today we are going to talk about combination of two audits (let them be G&S in this blog post): a group and statutory audit. It’s not uncommon to perform them one after in another.

Both auditors and clients want to use synergy of two audits. The value for clients to be serviced by one firm for G&S is saved company’s time/efforts spent for audit and decreased combined price. An  auditor wins by decreasing costs of doing audit and improving realisation rates. However these benefits could be jeopardised by incorrect selection of approach to materiality and scope. There is a necessity to align and methodologically tailor both type of audits. There are number of issues which might differ and impact our samples and scope: materiality, risks (as well as new risks might appear by the time statutory audit starts or whichever is going to be the second), and accounts in scope.

The problem I see here is time lag between these assignments. Sometimes it’s unclear what surprises might appear in statutory accounts after G audit. Primary team instructions and activity also play a big role here.

As in case of multilocation audits I think that methodology should be developed for the purposes of combined (G&S) audit as well.

Restart

  The blog is about to restart.

The Results of Blog Polls

This post reports on the results of polls carried out in my blog from 18^th of January to 15^th of February 2012. The polls closed automatically on 15^th of February and have been seen for all readers of my blog on the right hand side of blog interface.

The rules of polls were published in separate post (see link). Total number of votes (voters) amounted 48 with the option to select three subjects. However, some voters selected less than 3 subjects and total number of votes is 125, not 144 (48x3) as it could have been expected if each of participants selected 3 options. Percentages are calculated by dividing number of votes for given subject by total polls participants, i.e. 48 voters (e.g. 9/48=19% for “6. Audit in entertaining context: books, videos”).

The most wanted subjects to be discussed in this blog are: option 3 – “audit methodology” (66%); option 5- “audit studies, research and other analytics” (54%); option 4 – “audit business, professional & regulation issues” (45%).

   

I would like to thank all my readers and those active people who participated in polls. My further blog posts would reflect your preferences. Actually I have already done that my last articles are related with mentioned subjects: Chinese Companies Need Vigilant Audit; Audit Firms: Financial Performance 2011; Audit Method: Audit Approach.

If you have any additional suggestions how to make blog more interesting you are welcome for comments.

Chinese Companies Need Vigilant Audit

Some of my readers have shown their interest to the assurance services in BRIC in the comments to the last post. And guess what? The recent issue of The Economist contains the article “Accounting in China”, which reflects my concerns about audit of companies from BRIC in general (see link). The beginning of the article is quite appealing:

“CAN you trust Chinese accounts? Many investors fear (and several short-sellers are betting) that the answer is “no”. Sino-Forest, a big forestry firm listed in Toronto, is a case in point. Last year Muddy Waters, a short-seller, accused it of running a Ponzi scheme, which it denies. On January 31st Sino-Forest released the final report of independent investigators into the charge. Insiders crow that the gumshoes found no smoking gun. The gumshoes grumbled that, lacking access to all the evidence, they were “not able to reach definitive conclusions”.

America’s SEC is trying to force the Shanghai office of Deloitte Touche Tohmatsu, a big Western accountancy firm, to hand over papers related to Longtop, a Chinese software firm that was delisted by the New York Stock Exchange last year. Deloitte refuses, saying this would violate Chinese laws on “state secrets”. Deloitte may have a point. If it co-operates, its local staff could be jailed under Chinese law.”

So, this is the question, which had to be raised sooner or later: can be the companies transparent while operating in the conditions of non-transparent political system? There are no big traditions of Chinese government accountability to citizens of China. The market incentives to provide true and fair financial statements are seem to be not enough.

How to deal with this issue?

China need not take all the blame for the failure to provide true financial statements. The problem is common for all emerging markets. It could be said that the reason for that is not necessarily deliberate misrepresentation. Errors might happen due to lack of knowledge, the absence of open communication tradition.

According to the article in The Economist one of the Big4 bosses acknowledged the issue and insisted that “the Big Four have greatly increased their vigilance in China”. To generalize this comment one can state an implicit rule for the audit of financial statements in emerging markets: the financial statement risk for all companies originated from emerging markets should be assessed as "high" at the beginning of audit unless otherwise could be proven. The proof of lower risk assessment could be obtained after one or two years of audit, which would provide evidence about low susceptibility of systems to errors and effective control system.

I agree that this proposal could be viewed as a strict and reactionary one, but I stated it to initiate discussion of what could be done regarding accounts provided by BRIC and other emerging markets. I expect you to share your valuable ideas in the comments, and we might discuss them.

PS Please, do not forget to vote for your top 3 favorite subjects. The polls are going on the right-hand side of the blog. The rules and explanations regarding subject are here.

Audit Firms: Financial Performance 2011

What do we know about financial performance of accounting firms, especially the Big Four firms? I planned to do some analytics in this area and provide my readers with results this week. However, the smart guys from Big4 site have already done this work and all I want to do is to provide some additional considerations.

Thus, this blog post is going to discuss revenues of accounting firms.

Big4: Business as usual

The Table 1 represents revenues of the Big4 accounting firms and growth rates.

Table 1: Big4 Revenues and Growth Rates 

Figure 1: Combined Big4 Revenues

I would consider following points:

First, generally the Big4 firms have overcome consequences of financial crisis, i.e. revenue of 2011($103.6 bln.) exceeded the pre-crises level of 2008 ($101.3 bln.). However, E&Y did not manage to achieve pre-crisis revenues.

Second, PwC showed good performance in 2011 with 10% growth and regained dominant position in Big4 after it was given in to Deloitte in 2010.

Third, Deloitte is distinguished by the highest compound annual growth rate (CAGR) for the period of 2007-2011. Meanwhile, E&Y has reported the lowest CAGR of all Big4 firms.

Big4 Audit Services

The blog is about audit, so we can’t avoid talking about audit fees percentages in total revenue, which are reported in Table 2.  J

Table 2: Big4: Audit Fees Share in Total Revenue

Figure 2: Combined Big4 Audit Fees Share in Total Revenues

The sharp decrease of E&Y’s audit fees share in 2008 should not mislead us. The issue is that E&Y reported the combined figures of assurance and advisory services before 2008. That is why, for illustration purposes I depicted tendencies in audit/assurance revenues starting from 2008 year.

The tendency of decline in audit & assurance services might indicate two issues. First, the accounting firms are eager to provide consulting/advisory services, especially in economic crisis time, when clients need some advice on how to improve their businesses. Second, clients might be dissatisfied by the level of assurance services provided: accounting firms can not provide in this area something special because of strict unification of reports, or e.g. some clients wanted to delist themselves from stock exchanges. Anyway, this is a very deep and serious issue, which deserves to be discussed separately.     

Non-Big4 Accounting firms

I decided to compare information about Big4 firms with 2 big accounting global networks, BDO and Grant Thornton International (GTI). I picked up these 2 firms because they publish their reports online and information was rather accessible. According to Accountancy Age global ranking BDO and GTI, occupied 5^th and 7^th places respectively in 2010.

Table 3: BDO and GTI Revenues and Growth Rates

Figure 3: Combined BDO and GTI Revenues

Remarkably, the combined revenues of BDO and GTI are 2.4 times less than their closest Big4 rival, KPMG! BDO has shown good CAGR for 2007-2011, and what could be also mentioned is that the decline in revenues of -2% in 2009 was the lowest comparing with Big4 and GTI. Regretfully, GTI was not able to achieve pre-crises revenues ($4 bln.)

Non-Big4 Audit Services Share

I made the same exercise here as in case with Big4 to provide information about audit revenues, see Table 4 and Figure 4.

Table 4: BDO and GTI: Audit Fees Share in Total Revenue

Figure 4: Combined BDO and GTI Audit Fees Share in Total Revenues

Quite interesting is that the tendency for audit and assurance services growth in BDO and GTI differs from the one shown by Big4 firms. Both firms increased share of audit fees in structure of their revenues in 2009 (from 50% to 53%), and were able to keep these fees on the same level.

Unfortunately, the picture here could be distorted by BDO reporting. The firm reports audit and accounting under the same line. Though report does not specify what sorts of “accounting” services are provided, it might be suggested that these are the services related with help to clients in financial statements compilation, i.e. having non-assurance nature.

Comments are welcomed!

If you have anything to add about performance of Big4 or the other global accounting firms, please feel yourself comfortable to leave a comment. Maybe you have some insightful information about accounting firms’ balance sheets or cash flows J

PS Please, do not forget to vote for your top 3 favorite subjects. The polls are going on the right-hand side of the blog. The rules and explanations regarding subject are here.

Sources: 

1. Reports and press-releases placed on the web-sites of the mentioned firms.

2. Big4.com analysis. 

Week-End: Hero Accountants

I like to read books about history and sometimes notice the role, which accountants played in our daily live, not just in a professional field. Recently I have read an interesting book by Andrew Marr “The Making of Modern Britain”. The author described an interesting episode in the chapter about World War II, or the Peoples War like it is also  named in the UK. Here is the small passage:

“In the Atlantic, which mattered most to Britain, the capital surface ships became a sideshow. The life or death struggle was led from Brittany by Admiral Doenitz, the leader of the U-boat fleet, based in a sardine-merchant’s château; and in Britain by a polio-stricken civilian lawyer, Rodger Winn, who, along with a chartered accountant, ran the Royal Navy’s Submarine Tracking Room in an ugly concrete building near Downing Street. Their game of bluff, counter-bluff, changing tactics and secret intercepts was an important fight as any other part of the war.”

The British Submarine, Triton Class

Thus, a chartered accountant helping to navigate Royal Navy’s submarines contributed to the victory over Nazi Germany!

It is interesting which accounting skills did he applied to do this glorious job? I would suggest that he had good analytical skills, could have analyse trends in the movements of U-boats, accurately measured the balance of power at the point of time in the Atlantic…

Unfortunately, the book does not tell us anything about this hero. Who was he? Why did he decide to take this job? What was his fate? It would be nice to get know about this man.

PS If you know any analogous stories about brave, heroic or simply good deeds of accountants which influenced our live, please leave a comment – share your knowledge.

PS2 Please, do not forget to vote for your top 3 favorite subjects. The polls are going on the right-hand side of the blog. The rules and explanations regarding subject are here.

Audit Method: Audit Approach

Audit planning is one of the most interesting steps in the audit process. It requires to apply audit specific knowledge, business skills, understanding of the own resources and velocity of their usage.

In this post I am going to make the brief overview of some audit approaches and their applicability in real life.

Audit Process

The audit process could be depicted very simply, but work done and time spent on each stage of audit process have crucial effect on audit efficiency and effectiveness (audit risk). The illustration demonstrates that basically we have two types of approach: business risk approach with controls testing and substantive approach.

Audit Process

The approach in strategy should not be confused with approach in tactics regarding the concrete account connected with business process. In any case, we have to detect most risky and material areas of clients’ financial statements, i.e. substantive testing of all accounts is not reasonable.
         The second step is to identify our tactic regarding concrete type of account and assertion. For example, account is “fixed assets” (FA) and assertion is “valuation”. The process which is reflected by these two elements is “FA purchases” process. So at this point we might decide to test value of FA items substantively or do some preliminary purchases tests of controls to reduce substantive work in later stages. 

To test or not to test?

The outcome of control testing should be combined risk assessment of financial statement risk and audit risk, i.e. the result per well-known models:

         Audit Risk = Inherent Risk x Control Risk x Detection Risk (1);

Audit Risk = Financial Statement Risk x Detection Risk (2).

The audit firms try to formalize risk assessments (low, moderate, high) and spot the point at which it would be reasonable to reduce substantive procedures. However, there is still a problem: test of controls is time and money spent on procedures. And how do we know whether we should even start testing controls? What if after extensive control testing they proved to be ineffective? The mistakes might lead to inefficient audit, harming auditors’ profit margin. Unfortunately, I might say in majority cases the decision is made based on common sense and subjective opinion, i.e. there is no 100% proven scientific way to figure this out. Admittedly, to facilitate a right decision auditors should understand client’s business process, document suggested controls, and do process walk-through. There are also some rules of thumb, e.g. if there are lots of small routine transaction, then tests of controls are likely to be the right option.

Additional factors

The audit with accurate planning stage, through understanding of business processes and risk detection would require highly proficient audit team. However, we live in a real world and we do not always have access to the best dream audit teams J . The point is that the audit approach should be understandable by team members and fit their abilities: for someone it would be easier (time/budget factor) to vouch 1000 transaction than make decision based analytical job of connecting facts from process narrative, walk-through, initial strategy, and audit methodology. I mean, that process need not be overcomplicated. I would suggest following basic principles for establishing strategy:

1. Efficiency (budget);
2. Effectiveness (prudence, audit risk);
3. Complexity/easiness to bring about;
4. Understandability (and acceptability) for all members of team: from partner to audit staff.

In the future blog posts, it would be interesting to elaborate each of the above principles.

Conclusions

This is only outline of audit approaches. The topic is enormous and I will try to cover most arguable areas. Your comments are welcome as usual.

PS Please, do not forget to vote for your top 3 favorite subjects. The polls are going on the right-hand side of the blog. 

Polls on 2012 Top Interesting Subjects

This blog post is aimed to notify my readers about the ability to vote for the subjects, which would interest you in 2012. As I promised I summarised all topics into groups and provide you with opportunity to choose the most interesting. The results of polls would be reflected in my articles, i.e. I am going to write posts on topics preferred by the readers of my blog.

The subject groups are as follows:

1. Scrutiny of ethical issues, audit scandals and relation of the audit political issues. Sample posts are Ethical Auditor; Audit in Politics; The Role of Big4.
2. Audit methodology and technique. Sample articles are Final Stage; Subsequent Events; Group Audit. 
3. Audit education, exam preparation. Sample post is Audit Exam.
4. Business, professional issues and changes regulation in audit area. Sample articles are New Regulations for Auditors; Pure Audit; Shamrock Audit.
5. Audit studies overviews; interesting analysis and observations. Samples of reviews are Audit Opinion and Share Prices; Some Colour to Fraud;  Auditors’ turn to needle Greece.
6. Entertaining posts related with audit, i.e. audit is popular culture, videos, literature etc. Sample posts are Sketches by Monty Python; Commercials; Accountancy in Literature.

Voting Rules

As proud and accurate auditors J we should agree on voting rules:

1. The polls are placed on the right hand side of the blog, right above “about me” section J;
2. The polls will be open for 4 weeks starting from today, 18^th of January. Thus, the polls will be closed on the 15^th of February;
3. There is possibility to vote more than once. I recommend to vote for your top 3 favorite subjects: the averaged percentages will show us preferences of auditorium;
4. The results of polls would be immediately published within the week after the closure date, i.e. till the 22^nd of February.

Comments

Dear readers, once again I would like to ask to you to vote only for your top 3 favorite topics otherwise the picture could be distorted.

If you have any additional suggestions regarding subjects, which we need to discuss in 2012 year,  you are welcome to place comments in my blog or contact me via LinkedIn.

Thank you very much for following “Audit-is-Cool” blog!

2011 Top Audit Events and Hot Topics

My congratulations to all accountants that 2011 year finally ended. I wish you all the luck in 2012 year, hope it would not upset you.

In this post I would like to summarise some hot issues in audit area for 2011 and the most read topics of this audit blog. I don’t claim to be ultimate truth oracle, and, of course, you are welcomed to share your opinions regarding most significant events in audit world for 2011.

Top 3 events of 2011 affecting audit profession

1. The discussions regarding changes in legislation for auditing firm. I think, that this was one of the hottest topics in audit in last year and it has potential significant impact on our industry. European authorities are aware about ethic issues, lack of competition and quality, and expectation gap in our industry. Thus, proposed changes are related with audit firm rotation, creation of pure audit firms, supervision of audit, services provided by auditors.

2. Olympus scandal in Japan. The scandal in audit industry are drivers of changes, just remember what effect had Enron and Arthur Anderson problem. Admittedly, the occurrence of significant change depends on the place where a scandal occurs, to have real effect it should be probably in USA or at least Western Europe. Olympus case involves several Big4 audit firms and is very interesting: strange and costly acquisitions, inflated consultancy fee, not clear intentions of management.

3. Problems in World Economy. We can’t ignore macroeconomic factors affecting audit clients. The news from Europe are murky and there is risk that slow recovery and high indebtedness might result future bankruptcies. Of course, the auditors in the public opinion would be partly responsible for weak balance sheets of their clients J

Top 10 topics of “Audit-is-Cool!!!” Blog        
The process of topic selection is simple and transparent. I just monitor “post” section of Blogspot, which gives me statistics of most popular posts. The chart of top posts is published below.

What can I say about these selection of my readers?

Generally, top 5 positions show that people are interested in: 1) ethics and ethical scandals, 2) self-education, 3) business ideas, 4) politics, and 5) audit technical issues. I am glad that scientific issues in audit area are also appealing to readers: my overview of papers investigating effect of audit opinions on share prices got place in top ten.

What next?

In my next post I am going to ask my readers what topics you would like me to discuss in this blog in 2012. I will try to arrange polls for this purposes.

Again, dear readers if you have your personal opinion regarding most significant or may be most interesting events for 2011, please share them in comments. I would be glad to discuss it with you.