Top Tips for Preparing for an Audit Quality Review
– Over reliance on financial statements presentation software without verifying the disclosures are correct in accordance with the Companies Act 2014 and FRS 102. Chartered Accountants Ireland has some very useful toolkits to help check the financial statements disclosure references. For more details see https://www.charteredaccountants.ie/en/Site/Shop/Publications/Practice-Toolkits/.
– Note on the audit file any critical judgements or assessments made as others reading the file may not come to the same conclusion. These notes should be written clearly to justify the audit treatment adopted.
– Answering “Y”, ‘N’, or ‘N/A’ to questions in an audit programme or checklist must have some supporting corroborative evidence of why this is the correct answer. Just because it was the right answer last year, does not always make it the right answer this year (even allowing for a change in accounting standards).
– Related parties and beneficial owners – the audit team need well briefed in advance of the audit commencing. If someone can influence the company, irrespective of whether they have entered into any transactions with the party or there is any required disclosure, the audit team must be briefed about them e.g. premises rented from a related party landlord at a zero-rental charge, is still a related party ‘transaction’ and disclosable if the market rent that would have been charged by a third party, would have been material. The audit team, including juniors need properly briefed, if they are to flag up otherwise undisclosed related party transactions.
– Often, a free quick search on the CRO website, will highlight other directorships previously unreported. Directors’ spouses, parents, children and business interests can be incorrectly omitted from the relevant financial statements disclosures.
– With the new requirement on Irish corporates from 15 November, 2016, to keep a register of ‘beneficial owners’ for anti-money laundering legislative purposes, auditors will need to check that the ultimate beneficial owners, as disclosed on that register, correspond to those disclosed in the company’s financial statements.
– Going concern evidence is another frequent bugbear on audit files. If the company is planning to stop trading in the next year, it is not a going concern. It is therefore important to ascertain and document the future business plans of the directors and shareholders, (e.g. to inject more working capital or file for liquidation). It is not enough to say that there is a positive balance sheet. If the sole director/employee, is planning to retire, then the business may not be a going concern and the financial statements need to reflect this. As a result, the financial statements may need prepared on a ‘break-up’ basis.
– Always follow up bank enquiry responses and get them back before the audit is signed off. Watch for related party information contained in the replies such as directors’ personal guarantees and life assurance policies given as security for borrowings.
– Note the difference between ‘immaterial errors’ and ‘trivial errors’. Immaterial errors need to be noted down for consideration while, trivial ones don’t. See Practice Note 26 (PN26) Guidance on Smaller Entity Audit Documentation.
– Where stock is material, the auditor is not absolved from stock take attendance even if there are expert stocktakes present. Expert stocktakers tend to be more prevalent in supermarket and pharmacy audits. Their presence is a useful addition to the audit evidence available to the external auditors, but the statutory auditor is still responsible for attending the stocktake (PN25 Attendance at Stocktaking and ISA (Ireland) 501 Audit Evidence – Specific Considerations for Selected Items) and assessing the work of the expert stocktakers under ISA (Ireland) 620 Using the Work of an Auditor’s Expert.
– FRS 102 has lots of useful exemptions with which to become well acquainted: Section 35.10 which can only be used once on transition, paragraph 1.8 for subsidiary company accounts, and Section 33.1a for related party transactions in wholly owned groups.
– Once FRS 102.1A is triggered for ‘small’ companies, upon the signing into law of the delayed Companies (Accounting) Bill, 2016, it will open up many other useful exemptions for certain ‘small; entities including the exemption from presenting the statement of cash flows.
– FRS 101 has some useful disclosure exemptions for Irish/UK subsidiary companies preparing IFRS financial statements and already includes the exemption from presenting the statement of cash flows.
– Audit report signatures must use the label ‘Statutory Auditor’ or ‘Statutory Audit Firm’. The term ‘Registered Auditor’ no longer exists under company law.
To read more details about how to prepare for an Audit Quality Review continue reading below.
This article attempts to give some tips on the ‘good’ and the ‘not so good’ aspects of audit quality review visits to small and medium practices. I hope to highlight some of the more common issues that can arise and how to ensure that your firm does not fall into the ‘not so good’ category.
A Quality Review visit from the Professional Standards Department (formerly CARB) of the Institute, assesses the firm’s compliance with the Audit Regulations 2017, Anti-Money Laundering, Insolvency and Investment Business Regulations (September 2016) and compliance with the Professional Practice Regulations (amended October 2015) (which include the Clients’ Money requirements and Continuing Professional Development Regulations). This article does not deal with insolvency and investment business reviews.
During the review the preparation of statutory financial statements and compliance with FRS 102 and the Companies Act, 2014 disclosure requirements will also be assessed.
The Professional Standards Department also verifies compliance with the Code of Ethics (January 2014) and the IAASA Ethical Standard for Auditors (Ireland) 2016 (effective from 17 June 2016) and is the primary means by which CARB checks the quality of the professional work within practising firms of chartered accountants. For accounting periods commencing on/after 17 June 2016, the IAASA International Standards on Auditing (Ireland)will apply, while the ISAs (UK and Ireland) issued by the Financial Reporting Council applied to audits of financial statements for periods commencing before that date.
The key to a successful quality review visit, is always preparation. This preparation will involve having a detailed knowledge of the audit issues around the new accounting framework in Ireland, FRS 102, effective for accounting periods from 1 January 2015 for medium and large private companies and for ‘small’ entities for accounting periods commencing on 1 January 2016.
The implementation of FRS 102 (August 2014 version, as amended in February 2015) has, with some exceptions, been straightforward. Where there are transition adjustments, findings to date show that these are not always well supported with proper audit evidence, especially regarding the independent verification of the fair values obtained.
The audit standards require the auditor to display a sufficient degree of scepticism in their work. For example, one should not assume that just because the directors claim that a company is dormant but requires an audit, that it really is dormant. One cannot be said to have carried out an effective audit without doing the corroborative research and obtaining appropriate written representations. Not preparing a proper audit file to support the audit opinion, is like not warming up properly before a race.
Reference should be made within the Audit Planning Memorandum (APM) to connect specific significant risks on the audit with the actual tests carried out e.g. for a supermarket audit it may be turnover and stock completeness, while for an audit of a quarry, it might be the restoration provision.
There should be a link between the audit assertion (e.g. completeness, cut-off, existence etc.) and the individual tests executed. It must be clear what assertions are being audited and the outcome of each test should be properly documented (e.g. whether the result is satisfactory or unsatisfactory, and if the latter, there should be a file note explaining the nature of the further work carried out).
Analytical review (ISA (Ireland) 520 Analytical Procedures) documentation needs to contain plenty of appropriate explanatory text to show why the numbers have or have not changed year on year, taking into account matters such as consideration of different revenue lines, expectations based on activity etc.
A compulsory part of ‘ISA (Ireland) 315 Identifying and Assessing the Risks of Material Misstatement Through Understanding of the Entity and Its Environment’ is the requirement that audit files show clearer evidence of testing journal entries (paragraph 18 (f)). This is because many frauds have been perpetrated using seemingly innocuous journals to cover them up. Some auditors are now using audit data analytics tools like IDEA (Information Data Extraction and Analysis) to isolate outliers like unusual journals that merit further audit scrutiny.
Sample size selection often needs better explanation in the planning section of the audit file as well as more detail about the sampling method used e.g. selected top 20 items, then 10 random above performance materiality.
Quite often, too much testing is done on trade creditors e.g. when a supplier statement is available, it is unnecessary to check post year end payments as well.
On prepayments, there is no need to recalculate very figure and no need to place a copy of the supporting invoice on file to support every figure, especially when they are below materiality.
With trade debtors’ verification to post year end cash receipts, audit files often neglect to show that the recorded remittances post year-end, actually relate to pre-year-end sales.
Some of the most critical things to double check, has your firm:
1. Carried out its whole firm annual compliance quality control review and documented the action plan arising as a result?
2. Carried out the required number of audit, clients’ money and investment business cold file reviews (usually one file per partner) and documented the key action points arising?
3. Communicated and documented the findings of these internal reviews to relevant audit staff and partners?
4. Updated its professional indemnity cover?
5. Had the annual independence, fit and proper and confidentiality declarations completed by all relevant partners and staff including sole proprietors making the declarations for themselves?
6. Got the clients’ money five weekly bank reconciliations and bank letter of trust (for the Clients’ Money Bank Accounts) in place?
7. Up to date employment contracts with all staff and documented staff appraisals for all audit personnel?
8. Checked that, where the firm has recently incorporated its audit service, it has made the necessary arrangements for any student trainee contracts to be registered with the Institute Education Department, in the new entity’s name.
9. Got up to date CPD records for all relevant partners (recorded on the output model since 1 July 2016 under International Education Standard 8 (IES 8)) and updated CPD records for all other audit personnel?
10. Written audit quality control procedures in place to deal with the ‘International Standard on Quality Control for firms that perform audits and reviews of historical financial information and other assurance and related engagements’ (ISQC 1)?
If you have answered ‘no’ to any of the above questions or you are unsure of the answer, please start doing your homework now. These are some of the many items examined during a review.
1. The Professional Standards Department newsletter called the ‘Professional Standards Regulatory Bulletin’, publication of which is flagged in the Institute’s weekly E-News e-mailed to members on Friday afternoons. The archive of back issues of the newsletter is available on the Professional Standards Department website at www.carb.ie and is well worth a look. The latest edition is number 21, dated March 2017.
2. The May 2016 edition of the Bulletin is also a must read as it contains a link to an updated feedback paper from the Quality Assurance Team alerting firms to common matters arising on audit and money laundering inspections to help them identify possible areas of improvement for firms.
3. ‘Guidance on Quality Review Visits’ (updated December 2014) is also on the Professional Standards Department website and gives further information on how the review process operates.
This is an edited version of an article that appeared in the April 2017 of Accountancy Ireland, the journal of Chartered Accountants Ireland.