ISA (UK) 250: Consideration of Laws and Regulations in an Audit of Financial Statements

The impact of laws and regulations on financial statements varies greatly. The legal and regulatory framework is made up of the rules and regulations that an entity is bound by. Some laws or regulations have a direct impact on financial statements because they determine the reported amounts and disclosures in the financial statements of a company. Other laws or regulations must be followed by management or establish the conditions under which the corporation is permitted to operate, but they have no direct impact on the financial statements. Some businesses are involved in highly regulated industries (such as banks and chemical companies). Others are solely bound by the numerous laws and regulations that apply to the business's operational aspects (such as those relating to occupational safety and health and equal employment opportunity). Noncompliance with rules and regulations could result in penalties, litigation, or other consequences for the company, all of which could have a major impact on the financial statements.

Management responsibility

Management is responsible for ensuring that the entity's operations are done in conformity with rules and regulations, with oversight from those concerned with governance. Laws and regulations can have a variety of effects on an entity's financial statements. For example, they can alter the specific disclosures that the entity must make in its financial statements, or they can dictate the applicable financial reporting structure. They may also establish the entity's legal rights and liabilities, some of which will be reflected in the financial statements. In addition, violation of rules and regulations may result in sanctions.

Objectives of Auditor under ISA 250

According to paragraph 11 of ISA 250, the auditor's objectives are:

§  to gather adequate relevant audit proof of conformity with the provisions of those laws and regulations commonly recognized to have a direct impact on the assessment of material amounts and disclosures in financial statements.

§  to carry out certain audit procedures in order to detect instances of non-compliance with other laws and regulations that could have a major impact on the financial statements.

§  to respond appropriately to any suspected or identified non-compliance with laws and regulations discovered during the audit.

 

Practice:

When an auditor detects noncompliance with rules and regulations, he or she must tell those responsible for governance. However, the auditor must exercise caution because if the auditor suspects individuals in charge of governance are engaged, the auditor must notify the next highest level of authority, which might include the audit committee. If a higher level of authority is not available, the auditor will consider seeking legal advice. The auditor must also assess if the noncompliance has a material impact on the financial statements and, as a result, the influence on their report.

 

Reference:      https://bit.ly/3rVILnG 

https://bit.ly/3gRhOLA

ISA (UK) – 260: COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE

According to ISA (UK) 260, auditors must convey audit concerns of governance interest to persons charged with governance. It is critical that individuals in charge of governance are aware of all serious issues that have surfaced as a result of the audit process. The board of directors (executive and non-executive) of a firm, as well as members of an audit committee if one exists, are all entrusted with governance in the United Kingdom. It frequently comprises similar persons such as partners, proprietors, management committees, or trustees for various sorts of entities. Communication with individuals charged with governance should be considered as a critical audit reporting 'output.' It permits management to be aware of serious issues raised throughout the audit process, as well as the opportunity to reply to the auditor and take action to enhance the entity's accounting and financial reporting functions.

 

Matters to be communicated

§  Responsibilities of the Auditor in Relation to the Financial Statement Audit

§  Scope and timing of the audit as are planned

§  The Audit's Most Important Findings

§  Matter of Auditor’s independence in case of audit of a listed company

§  Other Supplementary Matters

 

Timing of Communication

A healthy two-way interaction between those responsible for governance and the auditor is aided by timely communication during the audit. However, depending on the conditions of the engagement, the best time to communicate would differ. The importance and nature of the issue, as well as the expected action by those in charge of governance, are all relevant circumstances. For example, communications about planning issues are frequently made early in the audit engagement and, in the case of an initial engagement, as part of agreeing on the engagement conditions. However, the auditor may communicate results from the audit, including his or her thoughts on the qualitative aspects of the entity's accounting practices as part of the final conversation.

 

Practice:

The many modes of communication that should be used are discussed in ISA 260. In most circumstances, communication will be in writing, which is a requirement of the standard in the UK and Ireland. Even if the auditor has no issues to bring to the notice of those charged with governance, a letter should be sent out noting that there are no important findings from the audit that need to be shared. In the case of oral communication, minutes provided by the entity may be included in the audit documentation as part of the oral communication documentation.

 

Source:           https://bit.ly/3soBWKg

  https://bit.ly/34MeRt9

How to make a plan for conducting an audit engagement (ISA-300)

 Establishing the overall audit strategy for the engagement and producing an audit plan are both part of the planning process for an audit. The type and scope of preparatory activities will vary depending on the entity's size and complexity, the past experience of key engagement team members with the entity, and changes in circumstances that occur throughout the audit engagement. Planning is not a distinct phase of an audit; rather, it is a continuous and iterative process that often begins soon after (or in conjunction with) the completion of the prior audit and continues until the current audit engagement is completed.

The audit approach and plan

According to ISA 300, audit planning activities should include:

§  establishing the overall audit strategy for the engagement; and

§  developing an audit plan.

Audit Strategy

The audit strategy lays out in broad terms how the audit will be done, as well as the audit's scope, timing, and direction. After that, the audit strategy directs the creation of the audit plan, which includes the comprehensive responses to the auditor's risk assessment.

Audit Plan

The audit plan is more specific than the overall audit strategy since it specifies the nature, time, and scope of audit procedures that engagement team members will undertake. Prior to the auditor's identification and assessment of the risks of material misstatement, planning includes such matters as:

§  The analytical procedures to be used as risk assessment procedures must be considered.

§  Getting a general grasp of the legal and regulatory framework that applies to the entity, as well as how that framework is being followed.

§  The process of determining materiality.

§  The participation of experts.

§  Performing of other risk assessment techniques.

Benefits of Audit Planning

The audit of financial statements benefits from adequate planning in various ways, including the following:

§  assisting the auditor in devoting adequate attention to critical areas of the audit

§  assisting the auditor in identifying and resolving potential issues in a timely manner.

§  assisting the auditor in appropriately organizing and managing the audit engagement in order for it to be completed in a timely and effective manner.

§  assisting in the selection of engagement team members with the necessary talents and expertise to respond to predicted risks, as well as the suitable assignment of tasks to them.

§  facilitating the direction, supervision, and evaluation of engagement team members' work.

§  assisting, if appropriate, in the coordination of work done by component auditors and experts.

Practice:

At the start of every audit engagement, the auditor must include the following in the audit documentation: (a) the overall audit strategy; (b) the audit plan; and (c) any major changes to the overall audit strategy or the audit plan made during the audit engagement, as well as the reasons for such changes.

 

Source: https://bit.ly/3Gok0V9

  https://bit.ly/3rnf5iZ

Audit Engagement Letter (ISA-210)

 The auditor's goal is to accept or continue an audit engagement only after the basis on which it will be performed has been agreed upon, which includes:

(a) determining whether the preconditions for an audit are present; and

(b) confirming that the terms of the audit engagement are understood by the auditor, management, and, where appropriate, those charged with governance.

Management or those in charge of governance, as applicable, must agree to the parameters of the audit engagement. The following items must be included in an audit engagement letter or another suitable form of a written agreement:

(a) the objective and scope of the financial statement audit;

(b) the auditor's responsibilities;

(c) management's responsibilities;

(d) identification of the applicable financial reporting framework for the preparation of the financial statements; and

(e) reference to the expected form and content of an audit report

(f) a statement that a report's form and substance may deviate from what is expected in certain instances.

Except for the fact that such law or regulation applies and management acknowledges and understands its responsibilities, the auditor does not need to record the terms of the audit engagement referred to above in a written agreement if the terms of the audit engagement referred to above are prescribed in sufficient detail by law or regulation. On recurring audits, the auditor must determine if the terms of the audit engagement need to be updated and whether the business needs to be reminded of the existing audit engagement terms.

If there is no reasonable justification, the auditor will not consent to a change in the terms of the audit engagement. If the auditor is asked to convert the audit engagement to one that provides a lower level of assurance before it is completed, the auditor must consider whether there is a reasonable rationale for doing so.

If the audit engagement's conditions change, the auditor and management must agree on and document the new terms in an engagement letter or other suitable form of a written agreement. If the auditor is unable to agree to a change in the audit engagement terms and is not permitted by management to continue the original audit engagement, the auditor shall:

(a) Withdraw from the audit engagement where possible under applicable law or regulation; and 

(b) Determine whether there is any contractual or other obligation to report the circumstances to other parties, such as those charged with governance, owners, or regulators.

 

Practice:

It is in both the entity's and the auditor's best interests to minimize misunderstandings about the audit. The auditor, thus, should issue an audit engagement letter before the start of the audit.

Source: https://bit.ly/3nZ6Ur6

ISA (UK) 200: Objectives of the Auditor

ISA (UK) 200 deals with the independent auditor’s overall responsibilities when conducting an audit of financial statements in line with International Standards on Auditing UK (ISAs UK).

The objective of an audit is to boost the amount of confidence of intended users in the financial statements. This is accomplished by the declaration of an opinion by the auditor on whether the financial statements are prepared in accordance with relevant financial reporting mechanism.

There are few elements to ISA (UK) 200

1. Objectives

2. Definitions of the key terms

3. Requirements


1. Objectives:

ISA (UK) 200 states there are two overall objectives of the auditor. First: 'To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.' Secondly: 'To report on the financial statements, and communicate as required by the ISAs in accordance with the auditor's findings

2. Definitions of the key terms given in standard:

· Applicable financial reporting framework

· Audit evidence

· Audit risk

· Auditor

· Detection risk

· Financial statements

· Historical financial information

· Management

· Misstatement

· Professional judgment

· Professional skepticism

· Reasonable assurance

· Risk of material misstatement


3. Requirements:

ISA (UK) 200 carries five separate requirements.

a) Ethical Requirements Relating to an Audit of Financial Statements— Comply with relevant ethical requirements.

b) Professional Skepticism— plan and perform an audit with professional skepticism.

c) Professional Judgment— exercise professional judgment in planning and performing

d) Sufficient Appropriate Audit Evidence and Audit Risk— sufficient appropriate audit evidence to reduce audit risk to an acceptably low level

e) Conduct of an Audit in Accordance with ISAs— comply with all ISAs relevant to the audit, understand the entire areas of ISA.



Practice

As we discussed above that according to ISA (UK) 200 there are basically two overall objectives, (a) to obtain reasonable assurance, (b) to report on financial statements. Experts suggest that ISA (UK) 200 is of vital importance therefore due care should be given to its compliance while conducting audit. The auditor shall design and perform analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of the entity. ISA 200 contains an objective relating to situations where reasonable assurance cannot be obtained, in which case the auditor, depending on the circumstances, may qualify the audit opinion, or disclaim an opinion, or withdraw from the assignment.



References:

https://www.accaglobal.com/sg/en/member/discover/cpd-articles/audit-assurance/isa-200.html

https://www.researchgate.net/publication/46534009_Recently_aspects_regarding_International_Auditing_Standard_200_Overall_Objectives_of_the_Independent_Auditor_and_the_Conduct_of_an_Audit_in_Accordance_with_International_Standards_on_Auditing

ISA (UK) 220: Quality Control for an Audit of Financial Statements

 

The auditor is responsible for the quality control of the audit of financial statements. This responsibility is not solely outlined through ISA 220, but also through ISQC 1 and is further to be corroborated through the applicable ethical requirements. Each audit firm is responsible for the implementation and maintenance of a quality control system in order to ensure that the firm and its personnel comply with the ethical, legal, and regulatory requirements [L&RR] and that the audit reports issued by the firm are appropriate.

Responsibilities of an Engagement Partner

Being the leader of the audit team, the engagement partner observes a higher need for the maintenance of quality control throughout the audit. He, being responsible for the overall quality of the audit engagement, should stay alert and skeptical for any instance of non-compliance with the ethical and regulatory requirements by any member of the audit team.

Ethical Requirements

While the ethical requirements may vary from jurisdiction to jurisdiction, the fundamental principles of ethics laid down by the IESBA Code of Ethics include Integrity, Objectivity, Professional Competence, Confidentiality, and Professional Behavior. Additional ethical requirements may be imposed on an auditor through the local codes of conduct prevalent in different jurisdictions.

Engagement Team and Performance

The engagement partner must ensure that the team deployed on the audit of financial statements under his audit engagement is competent and capable enough to comply with the professional standards and applicable L&RR. The audit team must have the necessary competence to enable an audit report under the given circumstances.

The responsibility for the audit report and its validity, however, rests with the engagement partner. He is also responsible for the direction, oversight, and performance of the audit engagement in accordance with the applicable LR&R and professional standards.

Practice

While accepting or continuing an audit engagement, an engagement partner shall obtain information from the firm and network firms to identify any potential threats of non-compliance with the applicable quality control requirements. In the instance of identifying any such threat, an auditor is advised to immediately report the matter in his reporting line, or seek the application of safeguards that reduce the threat to an acceptably low level, or where appropriate, withdraw from the audit engagement. Any inability to resolve a given matter should be disclosed to the firm immediately for appropriate action.

It is also advised to conduct a thorough and rigorous review of the audit documentation and working papers before or on the date of the audit report to be satisfied that sufficient and appropriate audit evidence has been obtained by the audit team to base the audit opinion on.

References:

https://www.frc.org.uk/getattachment/615b6684-314e-44ae-a47f-1fc8ffa92bac/ISA-(UK)-220_Revised-November-2019-With-Covers.pdf

ISA (UK) 210: Agreeing the terms of an Audit Engagement

Before an auditor accepts an audit engagement, he is responsible for agreeing on certain engagement terms with the management, and where required, with those charged with governance. ISA 210 requires the auditor to accept an audit engagement only when the following bases for an audit has been established:

1.    Preconditions for the audit are present.

2.    The auditor and management conform to a common understanding of the terms of the audit engagement.

Agreeing to the terms of an audit engagement is particularly important as it enables both the parties i.e. the auditor and the management to understand their respective responsibilities towards the conduct of an audit.

Preconditions for an audit engagement

The preconditions for an audit entail the following.

1.    Adoption of an acceptable financial reporting framework (FRF) by the management for the preparation of the entity's financial statements.

2.    Management's acceptance of its responsibility for the preparation of financial statements in accordance with the applicable FRF, implementation of adequate internal controls, and provision of access to the auditor to all the required information.

The acceptability of the FRF adopted by the entity varies with the nature of the entity, the nature, and purpose of the financial statements, and the requirements of the applicable law and regulations.

Agreement on the terms of an audit engagement

An auditor shall ensure that the management adequately understands and agrees to the terms of an audit engagement. These terms primarily include the scope and objective of the audit, the responsibilities of the auditor and the management, reference to the applicable FRF, the form and content of the audit report, and other relevant information. Once agreed, these terms are to be set out in the audit engagement letter.

Implications for Recurring Audits

The auditor is not required to send a new engagement letter for recurring audit engagements. However, certain circumstances may necessitate the revision or reiteration of the existing audit terms. These might include a significant change in the senior management or ownership of the entity, misapprehension of the previously laid out terms, change in the reporting requirements, etc.

Practice

It is only if the above-stated criteria are met that an auditor should accept and continue an audit engagement. In case the preconditions are not met, the auditor must take up the matter with those charged with governance. An auditor might often be required to change the terms of the engagement once the audit engagement has been accepted. However, such changes shall not be accepted until there is a reasonable justification to do so. For example, the conversion of a public entity into a private entity exempt from the requirements of audit of its financial statements. An auditor must issue a new engagement letter in case of a change in audit engagement terms.

References:

https://www.frc.org.uk/getattachment/b245bc7f-453f-49b8-ad9b-2ce992f6ca67/ISA-(UK)-210_Revised-June-2016_Updated-July-2017.pdf

Auditing and Assurance Standards in UK

Auditing standards are professional standards or requirements for the performance of an audit of financial statements. They include objectives for the auditor, together with requirements and related application and other explanatory material. Preparation of a uniform set of standards for auditing practice in UK was started back in March 1976 when the Auditing Practices Committee (APC) was established by the Consultative Committee of Accountancy Bodies (CCAB) to formalize the existing co-operation of the CCAB bodies on audit practices. At the time of its establishment the role of the Auditing Practices Committee was defined as:

“To provide a framework of practice for the exercise of an auditor's individual judgement, by proposing for the approval of the Councils of the governing bodies statements of explanation and guidance on auditing, and definitive statements of auditing standards.”

In 2004 the Financial Reporting Council (FRC) took over responsibility for the setting of audit standards through the Auditing Practices Board (APB) which became a subsidiary board of the FRC. The FRC was also charged with monitoring and enforcing these auditing standards. In the same year of 2004, the UK’s Auditing Practices Board (APB) took the decision to base UK and Irish auditing standards on ISAs. One of the reasons for this alignment was to benefit from future improvements to them.

New standards were issued by the International Federation of Accountants (IFAC) through the IAASB and were adopted in the UK in October 2009 as ISAs (UK), and apply to audits of financial statements for periods ending on or after 15 December 2010. Where necessary, the APB has augmented the international standards with a small number of additions to address specific UK and Irish legal and regulatory requirements. The FRC, in June 2016, stated that references to Standards (UK) have been amended to Standards (UK).

The Financial Reporting Council (FRC) is now the authorized body for setting auditing standards in the UK in accordance with the Companies Act of 2006 and Statutory Instrument on Statutory Auditors (Amendment of Companies Act 2006 and Delegation of Functions etc.) Order 2012 (SI 2012/1741). The Companies Act of 2006 establishes mandatory audit requirements (statutory audits) for all companies unless they qualify for exemptions based primarily on size, nature of activity and company type, or whether they are dormant.

To sum up the discussion, all financial statement audits in UK must be conducted in accordance with International Standards on Auditing (UK) issued by the FRC. The current International Standards on Auditing (UK) are based on the International Standards on Auditing (ISAs) of the same titles that have been issued by the International Auditing and Assurance Standards Board, published by the International Federation of Accountants, with some additions to account for UK Company law.

 

References:  

                      https://bit.ly/2VmXF8K

https://bit.ly/2TQkDoh

https://bit.ly/3je2o4Z

https://bit.ly/3lnG2kb

https://bit.ly/3rUddNl

https://bit.ly/2TOJHMm

Comparison: Old vs Revised ISA (UK) 220

While the revised standard mandates application of the revised guidelines for the financial statement audits commencing on or after 15th December 2022, it has also allowed voluntary early application to ensure the quality of the audit is maintained throughout the audit engagement. Here’s a comparison of the old standard vs. revised standard on quality of audit for financial statements.

Old Vs. Revised ISA (UK) 230 - Key Differences

Particulars	Old Standard	Revised Standard
Focus	More focus on exercising control over the Quality of the audit engagement.	Focusing the overall Quality of the audit is Managed responsibly.
Audit Concern	The firm’s policy decides the process, objectives and controls of the audit engagement.	Considering each firm’s risks, the audit quality management, process, objectives, procedures, and control should be decided.
Emphasis	The audit engagement should be accurately and effectively adhere to the audit quality controls.	More accurate and complete information and communications to maintain the quality of the audit.
Specific Requirements	Overall leadership responsibilities.	Active participation from the key auditor as well as the team members emphasizing on the accountability as well.
Documentation of Processes	Documenting and testing of the processes is not specified.	Specifically requires processes to be documented and tested.
Reference to ‘Resources’	The resources refer to the Human only	Wider reference so as to include Humans, intellectual, technological components

 

Challenges on the Practical Implication 

• The main challenge will be of an overall application as there are a lot of requirements and making all of those work together would be a bit of a hardship.

• The revised standard requires documentation and testing of the processes, which is quite challenging as the methods might be in place but documenting them could be cumbersome.

• The requirement of the risk-based approach makes it complicated to set the objectives, procedures based on the individual firm’s risks and threats. Such an approach will then become too subjective.

The best strategy to manage the transition period would be to match your firm’s objectives with the revised standard and create policies and procedures that meet the standard’s requirements.

References: 

1. ISA (UK) 220_Revised July 2021_final

2. https://www.frc.org.uk/getattachment/615b6684-314e-44ae-a47f-1fc8ffa92bac/ISA-(UK)-220_Revised-November-2019-With-Covers.pdf

3. New standards continue drive toward better audits

Quality Management for an Audit of Financial Statements

The ISA (UK) 220 (revised July 2021) on Quality Management for Audit of Financial Statements will be applicable for the audits of financial statements on or after 15 December 2022. The recent revision imposes significant responsibilities on the engagement partner (key auditor) to conduct the audits most effectively to maintain the audit quality so that the audit quality is maintained throughout. Let’s discuss these responsibilities in detail with the help of a practical example. 

Overview and the Purpose of this Standard

The standard focuses on the responsibilities carried out by the auditor to conduct the audit following the applicable professional standards, rules, and regulations. 

The standard requires from the key auditor the following to maintain the quality of the audits:

• Leadership responsibilities 

• Ethical compliances including independence of the auditor

• Determining policies and procedures to accept and continue the relationships with the clients and the audits  

• Availability of sufficient resources and the environment to the audit team from time to time

• Take responsibility to direct and supervise the work carried out by the audit team and review their work.

• Documentation, monitoring, and remediation related responsibilities 

Practical Implication with the Help of an Example

The Key Auditor and his team are conducting an audit of a stock broking company. To verify the transactions of such a vast company, the auditor will need a well-equipped Information Technology set-up at his firm. He will also need such an audit team that knows how to run verification reports. 

In the above example, the revised standard requires the key auditor of the firm to take leadership in maintaining the quality of the audit. His duty will be to direct and supervise the audit team members on how to verify the transactions of the stockbroking company and the understanding of how to conduct the entire audit effectively to ensure adherence to the standard. 

He is also responsible for making available necessary audit environment that enables the team members to conduct the audit more efficiently. The availability of sufficient IT infrastructure in the given example would be the responsibility of the key auditor. 

Thus, there have been substantial changes concerning the engagement partner’s responsibilities (key auditor) through the revised standard. The purpose is to maintain the utmost quality of the audit where the early adoption of the standard is also allowed.  

References:

1. ISA (UK) 220_Revised July 2021_final

2. The FRC's new requirements of auditors

The future of audit: Industry-wide commitment to innovation required to save profession’s reputation

The UK government’s consultation on audit and corporate governance reform, proposes a major overhaul for company directors and auditors in the wake of big name company collapses. With the public consultation now closed, the government hopes to publish its response by mid-October.

Reference:

Accountancy Age: https://www.accountancyage.com/2021/07/16/the-future-of-audit-industry-wide-commitment-to-innovation-required-to-save-professions-reputation/

Audit is cool!!!: Audit Procedures: Final Stage

Audit is cool!!!: Audit Procedures: Final Stage: The incentive for writing this post was recent article by Lisa Weaver, ACCA Advanced Audit examiner, on the topic of audit completion. Fol...

Audit is cool!!!: Audit Method: Best practices in Audit Documentation

Audit is cool!!!: 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 r...

Business Idea: Shamrock Audit Firms

No, it is not St. Patrick’s Day and we are not going to praise Guiness in this article J

I am currently studying different forms of business organisation and try to apply this knowledge in the field of audit. I was interested by Handy’s concept of shamrock organisation, which is defined in BPP P3 study text as follows:

     “The shamrock organisation, or flexible firm, has a core of permanent managers and specialist staff supplied by a contingent workforce of contractors and part-time and temporary workers.”

Thus, in this post I would like to discuss the concept of flexible firms, which might change not only the value chain and network of audit firms, but also the whole audit market.

Problems

Audit businesses face number of problems:

1.     Financial crisis – clients less keen on paying for audit and there is the necessity to cut costs;

2.    New Legislation – the split of audit and advisory services would lead to problems in staff utilization. Firms might face the issue of overstaffing or understaffing (before it was more leeway to balance advisory and audit projects).

3.   Employee expenses – as a result of the two issues above, fixed expenses related with employees become burdensome for audit firms. Fixed salaries, pension schemes and other elements of package expose pressure on profit.

4.      Efficiency – are resources invested in junior staff employees show real pay off?

5.   Focus – to pick up appropriate people for audit job accounting firms should  maintain comprehensive recruitment department, waste  time of managers involved in the process, which might seen as waste of resources and shift of focus from delivery of quality services.

I think that flexible firm structure might help to address these problems and change marker

Answer: Concept of Shamrock Organisation

The shamrock concept comprises four so called leaves or elements.

The first leaf is professional core, which consists of professionals defining organization’s core competence. In audit firms it could be employees above manager assistant level or even higher grade staff. They would elaborate methodology, business processes, communicate with clients on major negotiations, review audits and sign up audit reports, establish and implement strategy.

The second element is self-employed professionals and technicians. For audit firms it could be extremely relevant element. IT services might be outsourced and there no need to be reliant on huge army of salary-paid IT specialists; tax, legal, valuation personnel and audit seniors could be hired separately for each audit project. To satisfy demand for these services freelancers as well as specialised firms could be hired.

The third leaf is contingent work force. The hire of this type personnel would totally depend on the external demand for audit firm’s services. I always wandered why audit firms hire people with higher education to do stock counting or cash section audit? Give me a week or two and I will teach secondary school graduates how to audit not only above mentioned sections but also receivables, payables, and even deferred taxes provided that these guys would know that 2x2=4 and more or less have common sense.

Thus, the contingent work force would cover the work of junior level staff, second and third year associates; this might include also the work of senior auditors in some cases (small project; tightly controlled by manager).

The forth element is supposed to be the contribution of consumers. Indeed, unlike other industries there are whole bunch of opportunities for better interaction with client in audit, e.g. audit committee, internal audit departments. I am going to expand this idea further.

            

Practical Implications

The question is rather simple: how is this model going to work? I would outline following solutions:

·    Active markets of freelance professionals;

·    Human resources (staffing) firms specialising in recruiting and training staff in certain area. For example, such kind of company might develop diverse skills in secondary school graduates and utilize this employees’ hours efficiently by outsourcing them both to audit, advisory, financial and other firms (e.g. data input/processing centers; call centers). Thus, the contingent work force could be provided by special HR firms;

·    Overseas professionals. The new developments in IT and communication allow audit firms to transfer part of work to overseas professionals achieving economy in costs. Tax section and legal contact within audit project could be easily reviewed by specialist in China or India for less fee with the same quality.

·   Consumer intervention. The model might provide client with means to influence costs. For example, there are two HR firms (A and B) providing contingent work force for audit services: A has brand name, B is less known but charges lower fees. An audit firm might provide opportunity to client to chose the firm (A or B) to be included into audit budget.

The implementation of shamrock concept might lead to rise of staffing firms specialising on low skilled financial employees. Audit firms would be focused on recruitment experienced high skilled professionals. The necessity in audit seniors (also known as “audit executives” or “assistant managers”) could be liquidated: the managers should be able to undertake some tasks and delegate less complicated issues to temporary workers.

The exchanges (analogy to stock exchanges) of professional and semi-professional labor should become more developed, elaborated and structured. They should provide businesses/audit firms with access to information about freelancer’s previous works, rate per hour, references. There are professional and freelance internet projects (e.g. Odesk or LinkedIn), but they are patchy and not so developed as commodity or stock exchanges.

I would be glad if you share your thoughts on this subject. May be you have some reservations regarding this idea or you might offer the other ways to make audit business more profitable and professional

References

BPP. (2011). Paper P3. Business Analysis. Study Text. London: BPP Learning Media Ltd.

Disclaimer:
"This group is not associated with or approved by ACCA and the views expressed on this page do not necessarily reflect the views of ACCA".