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The AKKA accounting qualification has been revoked for the partner, senior manager and manager who worked in audit firm KTC33.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.