Audit News Briefing: 19 November 2015

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

November 18, 2015

SBWire

Global IT Spending by Audit Firms Is Expected to Reach over USD 5 Billion Dollars in Revenues by 2019: ResearchMoz

Press Release: Technavios market research analysts predict the global IT spending by audit firms will witness a steady growth face, reaching over USD 5 billion dollars in revenues by 2019. The audit market is highly concentrated and dominated by the big four firms, including Deloitte, E&Y, KPMG, and PwC. But, mandatory auditor tendering and rotation reforms by various regulators across the globe had led to the entry of several audit firms in this market. Big Four firms are slowly losing their market share as these firms further intensify the competition. Also, audit services are highly regulated and commoditized, thereby reducing differentiation opportunities for audit firms. It is leading to the increased adoption of information technology by audit firms to provide differentiation in their offerings. Please follow link for details: http://www.sbwire.com/press-releases/industry-analysis/global-it-spending-by-audit-fi/release-642397.htm?utm_source=djournal&utm_medium=feed&utm_campaign=distribution

ResearchMoz latest research report is entitled "Global IT Spending by Audit Firms 2015-2019: Industry Research, Analysis, Shares, Size, Trends, Growth, Survey, Forecast".

November 17, 2015

CivilSociety.co.uk Finance

Audit firms 'missed fundamental risks' of Kids Company model, say MPs

Bernard Jenkin MP, chair of the Public Administration and Constitutional Affairs Committee said: The auditors missed the “fundamental risk” that Kids Company operated a “high risk model” of committing almost all its funding to helping its client. This should have been “taken more seriously”. This was the major issue pointed out when MPs have criticised auditors PwC, PKF Littlejohn and Kingston Smith for not scrutinising Kids Company properly and missing key indicators during their dealings with the charity before it folded. Please follow link for details: http://www.civilsociety.co.uk/finance/news/content/20782/audit_firms_missed_fundemental_risks_at_kids_company_say_mps

November 17, 2015

MarketWatch

Big Four audit quality can differ widely — even at the same firm

Board member, Lewis H. Ferguson of the Public Company Accounting Oversight Board (PCAOB) and chair of the global public policy committee working group of the International Forum of Independent Audit Regulators (IFIAR) – at MarketWatch – recently discussed about the significant roles of PCAOB as projected by the U.S. Congress and IFIAR in determining cross-border aspects of audits.

He emphasized that: “It would be a mistake to presume that an audit firm’s inspection results in the United States necessarily speak to the quality of its global network. There can be a real difference among audit deficiency findings for the firms in the United States and what we see at their affiliates around the globe.” In conclusion, “While these inspection results are not a scorecard or a stand-alone measure of audit quality, they do reflect differences in the inspection results among audit firms and in different countries. They may well represent differences in audit quality among firms. At the least, they reflect that each firm’s global network also faces different auditing challenges.”

Please follow link for details: http://www.marketwatch.com/story/big-four-audit-quality-can-differ-widely-even-at-the-same-firm-2015-11-17

Audit Method: Oil & Gas Industry

The Oil & Gas Industry comprises of three sectors:

The Upstream sector: This is also called the exploration and production sector (E&P). It involves the search for potential underground or underwater crude oil and natural gas.

The Midstream sector: This sector involves the transportation, storage and marketing of petroleum products.

The Downstream sector: this sector is involved in the refining of crude petroleum products and processing and purification of the raw natural gas.

Accounting for oil and gas companies is a bit complicated because it has to reflect the company’s principal assets; the oil and gas reserves, with ownership rights often based on contractual relationships between the oil and gas producing entities and the owners of the mineral rights. 

Some of the specific accounting issues which arise in the Oil and gas sector are as follows: 

• Joint Arrangements: It is a common term for oil & gas companies to share the risks and costs of exploration and production activities. A separate Joint Venture Account statement is prepared which shows the advances received from working interest owners and how the amount is spent.
• Revenue recognition: The revenue arising from each transaction is recognized based on the terms of the underlying sales agreement.
• Exploration & Evaluation Assets and Development Assets: IFRS 6 - Exploration for and Evaluation of Mineral Resources explain the complete accounting for these assets.
• Depletion, depreciation and amortization (DD&A): The unit of production method is most commonly used to deplete upstream oil and gas assets.
• Impairment of non-financial assets: IFRS 6 relaxed the rules of annual impairment testing for exploration and evaluation (E&E) assets. IFRS 6 requires these assets to be tested for impairment only when the facts and circumstances suggest that the carrying amount may exceed its recoverable amount and on the transfer of E&E asset to development assets. 
• Reserves Reporting: The purpose of reserve reporting is to make available information about the oil and gas reserves which are controlled by the company. This information helps to assess the companies’ current performance and future prospects.
• Provisions for Decommissioning Costs: Due to exploration and evaluation activities oil and gas companies often are required to create a provision for meeting the costs of site restoration, decommissioning and dismantling of assets. It is covered by IAS 37.

Practice

While conducting the audit of oil & gas companies, the auditor should gain thorough and deep understanding of the industry and the practices followed by the oil & gas companies. Audit requirements may vary depending on whether the company is operating in an upstream, midstream or downstream sector. Moreover audit procedures in upstream sector also vary depending on whether the company is an operator or non-operator of and oil or gas well or lease. 

Audit Method: Telecom, Media and Entertainment

Media and Entertainment business include companies for movie studios, TV station groups, Cable distribution companies, Radio broadcasting companies, Advertising companies, Interactive gaming companies, Book publishing companies, Newspaper publishing companies and Internet companies. Media and Entertainment businesses live or die based on how well they identify and manage trends.

Telecommunications is a general term and include a vast array of technologies that transmit and receive voice, data, and video information over varying distances through electronic means. Telecommunications is a huge industry, comprising companies that make hardware, produce software and provide communication services.

The main area of concern for auditors while conducting the audit of a telecom media or entertainment company is to verify their revenue. Telecom operators continue to lose billions of dollars every year due to revenue and fraud leakage. Most telecom companies principally obtain revenue from providing the following telecommunication services: access charges, airtime usage, messaging, interconnect fees, data services and information provision, connection fees and equipment sales. Products and services may be sold separately or in bundled packages. The fast pace of change and intense commercial competition increase the likelihood of mistakes. There is significant complexity in determining the combined effect of interacting systems and processes; and the high-volume, low-value nature of transactions amplifies the financial implications of "small" errors.

Another area of concern for auditor is to verify the license fee paid by media and telecom companies to the government and compliance of companies with the regulations imposed under the provisions of these licenses by the government.

Fixed assets verification particularly in telecom service provider companies is also an area which requires auditor’s significant attention. Telecommunications is a very capital-intensive industry, with the fixed assets of network infrastructure forming a large part of a telecom company’s balance sheet whether it is a fixed line, mobile or fiber network. Fixed assets management remains an important competitive differentiator as it presents significant operational and internal control challenges. Auditor should be diligent in reviewing asset lives manually, as well as in a more sophisticated manner with the use of client integrated ERP systems generated reports.

Additional Thoughts

While conducting the audit of a telecom media or entertainment sector company; the principal rules remain the same for the auditor. The auditor should understand the entity and its environment, in which it is operating and identify and assess the risks of material misstatement. On the basis of this understanding the auditor should frame audit procedures to minimize the audit risk to an acceptable level.