by John McCarthy Consulting Ltd. | Nov 23, 2020 | Blog, News
There are important changes to three audit standards affecting 31 December 2020 audits. One of the changes will result in a new template for company reports (more on this in coming weeks) and all three standards will trigger the need to change audit programmes in line with the new requirements.
This week we will deal with the first of these changes regarding the audit of estimates. In these Covid times there are plenty of estimates that may be based on less than ideal foundations e.g. inventory obsolescence, revenue recognition on long-term contracts and impairment of long-lived assets, to name but a few. IAASA have just issued a discussion paper on the Audit of Accounting Estimates (23 November 2020) in which they give examples of good and poor practice in collecting audit evidence about estimates.
Main changes to ISA 540 Auditing Estimates and Related Disclosures
There are significant changes to this standard for the audits of accounting periods commencing on/after 15 December 2019. It has 27 requirements versus 16 in the previous standard, along with 152 paragraphs of application material versus 128 in the old standard.
The key changes are that:
- The standard enhances the “stand back” requirement for auditors to assess estimates including both corroborative and contradictory audit evidence.
- There is greater emphasis placed on the need for the auditor to display, in writing, professional scepticism about the managements’ estimates and estimation techniques.
- A more detailed assessment is required of accounting estimates that could be materially misstated. This will need corroborated with written documentation. The application material contains an extensive list of examples of estimates that are likely to arise in the preparation of financial statements.
- A greater focus is placed on the level of response by the auditor to estimation uncertainty, complexity and subjectivity when preparing accounting estimates, including the assessment of management bias.
- The auditor is expected to document the auditor’s own estimate, assess subsequent events and document a more detailed understanding of the significant matters involved which influenced management’s key judgments and decision making.
- A greater degree of audit work is expected on the audit file to show that the work underpinning the disclosure of accounting estimates in the financial statements is sufficiently robust.
- All of the above needs to be supported by detailed written representations from management.
An example of poor practice from the IAASA Discussion Paper includes over-reliance by an auditor on a spreadsheet provided by the company’s administrator to support fair value pricing calculations where financial assets were a key risk. There was insufficient evidence of the auditor performing procedures to check the accuracy and completeness of the information provided within this spreadsheet.
These changes come into effect for the audit of accounting periods commencing 15 December 2019 which in practical terms means audits for periods ending 31 December 2020. An associated Technical Alert called ‘Information and support in implementing the revised ISA 540’ has just been issued by Chartered Accountants Ireland.
For a complete list of our time-saving engagement letter templates for FRS 102 audit, FRS 102 audit-exempt, VAT, visit our store here. All our engagement and representation letter templates are up to date for Brexit and Covid-19.
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by John McCarthy Consulting Ltd. | Nov 16, 2020 | Blog, News
In recent weeks we have written about the issue of carrying out remote stocktakes as well as remote audits. Last week we covered five key matters to consider when carrying out a remote stocktake.
A quite common occurrence will arise where staff don’t feel comfortable attending an inventory audit, given the risk to their health. What are the options if management delays the inventory count for a number of months, hoping that COVID will have abated by then?
Government health guidelines and restrictions take priority over any inventory audit. If Coronavirus (COVID-19) restrictions are in place, it may be necessary to cancel or delay attendance at inventory counts to prioritise staff wellbeing and safeguard staff at the client entity and third parties.
Where management will conduct the inventory count, examine their plans in advance and consider how they are going to conduct the count and whether the measures are likely to be effective.
Will COVID restrictions lessen significantly in the near future? This is far from certain. Conditions could worsen or remain the same. Delaying stock counts may not improve the ability of management or auditors to perform appropriate procedures. This may in the end cause the audit opinion to be a ‘limitation in the scope of the audit’ which may also raise questions about the adequacy or otherwise of the company’s accounting records under the Companies Act, 2014.
Another solution is that management perform a count after the year-end, and the auditors perform a roll-back i.e. perform testing procedures after the year-end and audit the intervening management reconciliation of the inventory counted, with the year-end inventory.
Long time lags can give an opportunity for conditions to improve, but the longer the delay, the less likely it is that a roll-back reconciliation will be sufficiently accurate. The extent of inventory movements will have a big influence on the accuracy of roll-backs. There could be a limit on stock movements because of Covid restrictions, but this depends on the industry.
Another matter to consider is whether inventory can be accessed during the intervening period, i.e. are warehouses and other relevant premises going to remain open?
Plan how stock movements can be reconciled to the accounting system, taking account of:
- the types of inventory and
- the volume of transactions, and
- how stock conditions can be assessed post year-end. This will often depend on the typical life of the inventory.
Stock turnover – this will have an influence on the reconciliation so that a large volume of transactions may make a roll-back difficult e.g. for manufacturers with raw materials, WIP and finished goods, a reconciliation may not be so straightforward.
Onward intrepid auditors!
For more on this topic visit the ICAEW website Coronavirus (COVID-19): Considerations for inventory audit testing.
For a complete list of our time-saving engagement letter templates for audit, non-audit, tax, grant claims, forensic services visit our store here. We have other templates like letters of representation dealing with Brexit and Covid-19.
Want to catch up on your CPD before the end of 2020 see our suite of webinars here.
For the latest technical resources on Covid-19 please visit the
- Chartered Accountants Ireland Covid hub here
- ICAEW Covid-19 hub here
by John McCarthy Consulting Ltd. | Nov 10, 2020 | Blog, News
When the Coronavirus (COVID-19) first broke in Ireland we wrote about the issue of carrying out remote stocktakes as part of remote audits.
While it’s a possibility that the lockdown restrictions may be lifted in early December, there may still be some reluctance among audit personnel and among staff in client entities, meeting in person, thereby making remote stocktaking of prime consideration.
Five things to consider in planning for remote inventory counts are:
- Drones or remotely controlled robots, might help with your inventory testing in some cases, but the cooperation of client personnel and safety restrictions on flying of drones need to be taken into account and will be heavily influenced by the geography and physical surroundings of where the stock is located.
- Control of the drone footage and who is in control of how and where the cameras are directed needs discussed with clients in advance. If the auditor is not in control, then there is a risk that the recorded footage could be manipulated.
- Completeness is one of the main audit assertions and the auditor needs to consider this when planning a remote stocktake. Assess whether the cameras will allow you to see all of the inventory at any one point in time and also consider the risk that certain items could be kept out of view or are moved around behind the camera’s view and might be omitted from the stock count.
- Assessing the condition of the inventory is another critical matter. Video cameras with strong resolution are necessary so that inventory damage can be better assessed. In some cases, photographic images of stock may be more accurate in assessing damaged or obsolete inventory.
- Selecting samples for testing is another critical matter including the consideration of increasing sample sizes for the added risks mentioned here. Selecting items only during the count itself (with no advance notification ) and then identifying the items to be tested from floor to sheet and sheet to floor can help to reduce the risk of manipulation
Given these technology constraints, staff with prior experience of inventory counts will be better able to handle the unexpected, and ideally should be accompanied by other experienced personnel.
For a complete list of our time-saving engagement letter templates for audit, non-audit, tax, grant claims, forensic services and other templates like letters of representation dealing with Brexit and Covid-19, visit our store here.
We also have a suite of 19 webinars if you want to catch up on your CPD before the end of 2020 here.
For the latest technical resources on Covid-19 please visit the
- Chartered Accountants Ireland Covid hub here
- ICAEW Covid-19 hub here
by John McCarthy Consulting Ltd. | Nov 3, 2020 | Blog, News
Come 31 December 2020, many external auditors will be planning for the audit busy season and the issue of remote stocktakes (more on this in a future blog) and carrying out remote audits.
31 December is the most common company year end in Ireland. Because the pandemic struck after 31 December 2019, the Coronavirus (Covid-19) was deemed, in most cases, to be a non-adjusting post balance sheet event. For 31 December 2020 period ends, auditors no longer have that luxury and will need to take even greater care with events taking place in their audit clients since the advent of the Coronavirus (Covid-19) in March 2020.
One UK firm I have come across is having partner consultations on every audit report they issue. Obviously, this approach may not be appropriate for all audits, as some client sectors are more affected by Covid-19 than others. It is very important that attention be give to the following key items:
- Transparent and logical documentation of any revised audit approach;
- Direct lines of communication within the firm and
- Written evidence of compliance.
Many of the issues faced by the management and staff of client entities are also faced by auditors. In both cases, where we come in and out of lockdown, there is a need to manage younger staff, staff with small children/dependents and staff working in less than ideal home environments. Auditors will need to include in their 2020 audit plans the potential risk and/or impact of secondary outbreaks that may lead to the reintroduction of restrictions in early 2021.
Five matters that are critical to consider:
- Consider accuracy, completeness, relevance, and reliability. These are the four critical audit evidence components. You have to use your judgment as to what is reliable, relevant evidence that you can use in an electronic environment.
- Beware of the potential for cyberattacks. There seems to be increased risk related to hackers trying to take advantage of Covid-19 using various scams related to the Pandemic.
- Use laptop cameras effectively for client and team meetings. Video discussions and interviews with clients are going to be essential in the remote audit process.
- Flexible schedules. Clients as well as audit team members will welcome this. Flexibility is called for here so everyone is willing to adjust timetables to make it convenient and more accessible for clients. Some people may work better from 7 a.m. to 9 a.m. Or 6 p.m. to 8 p.m., depending on daily routines.
- Be prepared for change. Post Covid-19 business will be done differently. By now technology has taught us that there are more ways of getting things done, than we had allowed, prior to Covid. Firms will need to plan for the short, medium, and long-term as to how remote working is going to impact.
For a complete list of our time-saving engagement letter templates for audit, non-audit, tax, grant claims, forensic services and other templates like letters of representation dealing with Brexit and Covid-19, visit our store here.
We also have a suite of 19 webinars if you want to catch up on your CPD before the end of 2020 here.
For the latest technical resources on Covid-19 please visit the
- Chartered Accountants Ireland Covid hub here
- ICAEW Covid-19 hub here
by John McCarthy Consulting Ltd. | Oct 20, 2020 | Blog, News
Our blog two weeks ago highlighted the main pieces of legislation that go into an audit letter of engagement, while last week we looked at the fundamentals of tax engagement letters.
This week we show you a checklist that covers worthwhile clauses for all types of letters of engagement:
- Exclusion clause. Because tax services can be broad, an exclusion clause that identifies what services will not be provided can be invaluable. For example, a payroll taxes preparation engagement might exclude subcontractor tax, personal or corporate tax compliance, and Forms P11D preparation.
- Deadline for submitting return information. Establishing a date by which the client must provide the information needed to prepare the return is essential.
- Limitation on use of the returns. Clients may submit tax returns and/or supporting data (like rental income computations) to third parties in lieu of a financial statement, for which potential liability can be addressed through a clause limiting the circulation of tax returns, supporting data and distribution and/or requiring advance written permission before allowing the client circulate the information to named third parties.
- Tax position clauses. Many times, what the client thinks is acceptable will conflict with professional standards. Establish language stating that tax positions taken must satisfy professional standards.
- Supporting documentation. Because a Revenue audit or investigation is always a possibility, remind clients of their responsibility to maintain adequate records to support the deductions claimed on the return. Include in the letter a reminder of the length of time for which the records should be maintained.
- Revenue Audit. Representing a client in a Revenue Audit may be more involved than the tax return preparation itself, for which many accountants may want to deal in a different manner to the main tax assignment e.g. by allowing for the use of specialist advice. The engagement letter should state that in the event of a Revenue Audit the assignment will be covered by the terms of a separately signed engagement letter.
- Outcome or results. The engagement letter is not a marketing device. Never guarantee the outcome or results.
- Limitation of liability. Ensure such clauses are used appropriately.
- Complaints/best service. Make it clear what the lines of communication are in the event of a dispute or claim (give the contact name for the Partner/Director in your organisation that will primarily handle client complaints) and in the event of failure to reach a satisfactory outcome, give the contact details of your professional body.
For a complete list of our time-saving engagement letter templates for audit, non-audit, tax, grant claims, forensic services and other templates like letters of representation dealing with Brexit and Covid-19, visit our store here.
We also have a suite of 19 webinars if you want to catch up on your CPD before the end of 2020 here.
by John McCarthy Consulting Ltd. | Oct 19, 2020 | Blog, News
Tax engagement letter fundamentals
Here we outline the fundamentals of good tax engagement letter content and suggest provisions that will help minimize legal liability faced by accountants in practice. The advice here will work for most other types of engagement letter also.
Tightening the language used in letters of engagement will help limit your professional liability.
Insurers and solicitors specialising in professional negligence claims will often agree that well drafted letters of engagement are one of the first lines of defence in a professional negligence claim against an accountant. They form the basis of an enforceable contract and should contain:
- caveats that are unique to the scope of the service provided (e.g. for services outside the scope of the assignment);
- the amount of risk inherent in the engagement; and
- references to ethical and professional standards.
Here are some of the fundamental objectives of a well-crafted tax letter of engagement:
- Address the letter to the appropriate parties in a formal introductory paragraph. Exclude any taxes not within the scope of the tax return and exclude children of the client or other entities owned by the individual tax client and include the appropriate year or years that are being prepared.
- Identify which returns are being prepared, and do not combine multiple returns. (For example, do not include a gift tax return service with an income tax return unless the proper disclaimer language for a gift tax return is included.) The following language is highly recommended.
‘We will prepare your [Year] income tax return. This engagement pertains only to the [Year] tax year, and our responsibilities do not include preparation of any other tax returns that may be due to any tax authority, If we receive specific instructions from you about other taxes or other tax years, these assignments will be the subject of separate engagement letters.’
- Deal with the price of the service, payment terms, retainers, additional charges for information received late, additional fees. Clarity and diligence must be adhered to, as many professional liability lawsuits, professional body ethical complaints, and loss of clients have resulted from misunderstanding these provisions.
Too often, vague phrases like the following is used in a standard letter:
‘Our fee for services will be at our standard hourly rate for the personnel assigned to this engagement [or fixed fees to cover other than hourly fee arrangements]. Payment is expected when our services are complete.’’
- Consider the following enhancements to the typical clause above:
- Specify the payment terms more clearly;
- If you wish, stipulate that a retainer will be required and will be applied toward the final fee and that the retainer is not an estimate of the fee charged for services;
- Identify when payment is expected;
- Provide for a termination of services if the fee is not paid in full;
- Use an additional charge clause for services not originally contemplated; and
- Include a provision for reimbursement for out-of-pocket expenses such as travel, recorded delivery, etc.
- Use a tax checklist for clients to complete and return.
The value of a tax checklist in defending a professional liability claim cannot be overstated. However, many tax advisers complain that their clients do not complete the checklist and often return it unopened. Accountants and tax advisers need to get the client to take responsibility for completing the checklist.
The language used in the engagement letter should establish this responsibility:
‘We will prepare the returns from information which you will furnish to us. It is your responsibility to provide all the information required for the preparation of complete and accurate returns. We will furnish you with questionnaires and/or worksheets as needed to guide you in gathering the necessary information. Your use of such forms will assist us in keeping our fee to a minimum. To the extent we render any accounting and/or bookkeeping assistance, it will be limited to those tasks we deem necessary for preparation of your tax returns’.
For a complete list of our time-saving engagement letter templates for audit, non-audit, tax, grant claims, forensic services and other templates like letters of representation dealing with Brexit and Covid-19, visit our store here.
We also have a suite of 19 webinars if you want to catch up on your CPD before the end of 2020 here.
