Audit News Briefing: 15 July 2016

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

July 14, 2016

Business Wire (press release)

IESBA Redefines Accountants’ Ethical Role When Laws and Regulations Broken

International Federation of Accountants (IFAC) 32-page July 14, 2016 Publication: Responding to Non-Compliance with Laws and Regulations – http://www.ifac.org/publications-resources/responding-non-compliance-laws-and-regulations

The global organization for accountancy profession released this new standard today through its independent standard-setting board, the International Ethics Standards Board for Accountants (IESBA).

IESBA Technical Director Ken Siong: “The board carefully calibrated the standard based on the rich and diverse input from a wide range of stakeholders to ensure that it is proportionate and, importantly, globally operable … The standard fills a gap in jurisdictions where legislation or regulation does not address professional accountants’ responsibilities in these situations, and by providing helpful guidance it may well complement legislation or regulation in jurisdictions that do address it. This has been a long journey, and now it’s time for national standard setters, professional accountancy organizations, and accounting firms to adopt and implement the standard.”

Please follow link for details: http://www.businesswire.com/news/home/20160714005837/en/IESBA-Redefines-Accountants%E2%80%99-Ethical-Role-Laws-Regulations

July 14, 2016

Accounting Today

5 Questions to Ask Before Moving into Advisory Services

Accounting technology veteran Amy Vetter recently featured a new revenue generating undertaking – that is, advisory service. It is based on the Global SMP Survey by the International Federation of Accountants (IFAC) which revealed a 32% increase in advisory and consultancy service by small and mid-size firms in North America.

She have found in her career that auditors tend to have the most natural skills to transition into advisory work – “They’re used to reviewing financial statements for anomalies and asking questions. Shifting to advisory is a natural evolution of the work: instead of delivering a report, you’re sitting down with clients to discuss the report in the context of improving their business operations.”

Please follow link for details:

http://www.accountingtoday.com/accounting-technology/news/5-questions-to-ask-before-moving-into-advisory-services-78674-1.html

July 14, 2016

Economia

FRC survey reveals fears that audit profession becoming less attractive

YouGov Survey by the Financial Reporting Council (FRC): “There is growing concern that the audit profession is becoming less attractive as a result of increased public and regulatory scrutiny”

·         It was stressed that the audit profession’s recruitment, level of quality and judgment skill development are disadvantaged after the implementation of EU Regulation and Audit Directive (ARD) last month.

·         Related FRC survey of audit market emphasized the concentration of the FTSE 350 audit market in the Big Four firms.

FRC executive director for audit Melanie McLaren: “Our vision for audit is that it is trusted to provide reliable assurance on the public reporting of financial information, and in doing so, promotes good governance and facilitates the effective allocation of capital … The FRC’s strategy is to promote continuous improvement in audit quality. One of the key factors in achieving this is to engage with other regulatory professional bodies, auditors, audit committees and investors to communicate good practice.”

Please follow link for details: http://economia.icaew.com/news/july-2016/frc-survey-reveals-fears-that-audit-profession-becoming-less-attractive

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 Firm: Personality of Auditor

There are a few personal characteristics that are important for an auditor to have:

• Auditors should possess a strong ethical framework and report on issues (or anticipated issues) as they come across them. There is a temptation to "let things go" as further investigation may require more work or reveal embarrassing processes, performance and/or fraud.

• Good communication skills allow auditors to have a rapport with a variety of employees, managers, directors and external parties. As auditors establish good rapport with a variety of individuals, however, they should keep in mind the objectives of the audit (for instance, the reliability, verifiability, accuracy and timeliness of information), as they can often be tempted to not report on issues discovered.

• Strong interpersonal skills are important, due to the variety of informational requests - and often, resistance to those requests - required from a variety of sources. Strong and/or ambitious types may attempt to dissuade auditors from revealing embarrassing findings.

• Auditors need to be team players. As the scope of the audit can be fairly large, it is beneficial to help in other areas of an audit when resource constraints warrant it.

• Finally, "professional skepticism" is an important trait to have, especially when reviewing a company's internal controls. One needs to assess how perpetrators of fraud can beat a company's controls, and auditors need to design and implement a system that can effectively protect the organization's assets.

Audit Firm: Message from Financial Reporting Council to the Big 4

The Financial Reporting Council is the UK’s independent regulator responsible for promoting high quality corporate governance. It recently issued Audit Quality Inspection Report for the year 2014/15.

The review of the firm’s policies and procedures supporting audit quality is undertaken by the Audit Quality Review team of the Financial Reporting Council (“the FRC”) and it covered aspects of the following areas: 

• Tone at the top and internal communications
• Transparency report
• Independence and ethics
• Performance evaluation and other human resource matters
• Audit methodology, training and guidance
• Client risk assessment and acceptance / continuance
• Consultation and review
• Audit quality monitoring
• Other firm-wide matters

 Some of the key messages given by the FRC to the Big 4 audit firms are as follows: 

• Improve the testing of management reports and other system generated information to obtain assurance on its reliability for audit purposes.
• Improve the testing of controls.
• Ensure that audit planning discussions are held with Audit Committees on a more timely basis to enable their input to be reflected appropriately in the audit plan.
• Ensure audit teams pay more attention to the nature and complexity of entities when determining the scope and extent of group and component audit procedures.
• Improve the audit approach in relation to the testing of journals including the selection of journals based on the characteristics of fraud risk
• Ensure that, when using the firm’s valuation and other specialists, audit teams obtain sufficient appropriate audit evidence to corroborate their conclusions.
• Take action to ensure that partners are notified promptly of new audited entities and dispose of any financial interests held in them on a timely basis.
• Ensure that the firm’s audit reports accurately describe the audit procedures performed to address the identified risks.

Additional Thoughts

The key messages given by the FRC to the audit firms can be used as guidelines by the firms to improve the quality of their audits. Firms should develop more stringent internal quality control review mechanisms to improve audit quality and deliver services to the complete satisfaction of all the stakeholders. 

Week-End: Right Decisions Matter!

I would like to present you a good story about the auditor and making right decisions in life:

"The accounting department dean had worked for the prestigious firm of Arthur Anderson for a number of years. He had been one of their rising stars until he had a tiff with upper management concerning how to report certain transactions for a client. Arthur Anderson management wanted the transactions recorded in a manner which would make the client look good. The Dean however insisted on full disclosure with the transactions being reported clearly and informatively. That wouldn't have been favourable for the client. So rather than compromise his integrity, he resigned from Arthur Anderson and found the job of dean of the accounting department at St. Martins College."  

From the Book: Odyssey of the Auditor Interns

Author: Thomas McGoldrick

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.