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.