Auditors Please Take Note

Auditors Please Take Note

It is timely to draw auditor’s attention to two important developments that have taken place in the audit arena since the beginning of the year.

Updated Audit Programmes

The first of these are the updated Audit Programmes available from the various, well-known sources. Audit Programmes needed to be updated for important changes made to two audit standards in particular, ISA 315 ‘Identifying and Assessing the Risks of Material Misstatementand ISA 240 on ‘The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements’.

Both standards became effective for the audits of accounting periods commencing 15 December 2021 or in practical terms, years ended 31 December 2022.

The audits of these periods have already concluded in many cases, but many are still in progress. Auditors please take note that there are significant additional requirements/changes in emphasis in these standards, especially in ISA 315, which has grown to 106 pages (regardless of the size of entity involved)!  Therefore, the need to implement new audit programmes for these audits is imperative. The same applies to specialist audit assignments like charities, multi-unit developments and Central Bank regulated entities, like insurance brokers.

We will be writing more blogs on these changes in the coming months.

ISA 315 IT Controls

One of the significant changes in emphasis in ISA 315 is the additional detail in documentation of IT systems and controls. All audit files, regardless of the size of the audit, need to have sufficient/appropriate evidence on file of testing their internal IT and accounting controls in action.

Where weaknesses are found the implications need to be assessed – for example, weaknesses identified could trigger additional/wider scope audit testing.

Also, management need to be informed, in writing, of significant weaknesses identified and the severity/implications of these weaknesses  – see more in ISA 265.

The purpose is to identify areas where there may be a risk of misstatement due to error or fraud.

This will influence the sample sizes and tailoring of the audit programmes.

So the results of controls testing needs to be assessed before progressing to do substantive testing. This is because the results of substantive tests cannot be used, as the scope and extent of these tests cannot be determined until the risk assessment process is complete.

For an easy to implement additional (two page) IT Controls Questionnaire  to help document the above process, please click on this link to download immediately for only €60 + VAT.

Please go to our website to see our:

  • letters of engagement and similar templates. Please visit our site here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items if bought together.
  • ISQM TOOLKIT or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please contact John McCarthy FCA by e-mail at john@jmcc.ie.

We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. The ISQM TOOLKIT 2022 is available to purchase here.

The Dangers of Using Blended Materiality

The Dangers of Using Blended Materiality

Sometimes it’s worthwhile learning from significant audit disciplinary cases held by the Financial Reporting Council and in this particular case we are looking at the use of ‘blended’ or ‘average’ materiality as a benchmark. This is especially relevant for all auditors carrying out audits right now.

Using an average of benchmarks, such as

  • Turnover;
  • Profit before tax; or
  • Assets

does not produce an appropriate materiality figure.

The detail of the case is reported here, involving the audit of the Laura Ashley Group for the YE 30 June 2016.

The level set for materiality in this audit, was more than three times the level that the FRC believed was appropriate under the circumstances. Group materiality was calculated by taking an average of:

  • 5% of profit before tax (PBT) and
  • 5% of revenue (later increased to 2%).

Unfortunately, the benchmark chosen was not appropriate. Revenue was chosen, but, as the Financial Reporting Council commented, ‘It would be extremely unusual for an auditor to use revenue as a materiality benchmark for a retailer’. This is because Laura Ashley was a profit-oriented entity, especially a high-volume low-margin business, and therefore revenue wasn’t the best choice of benchmark.

The calculations carried out produced an initial materiality of £3.5m (13.2% of estimated PBT) which was later increased to £4.3m (16.2% of estimated PBT) during the audit.

This error was compounded by the key matters in the auditors’ report then incorrectly stating both the materiality and the way in which it had been calculated, as a percentage of revenue.

Calculation of materiality can sometimes cause an issue in audits, especially when averages are used to find the figure.

Another problem is where materiality is changed during the audit without clear documentation or justification.

One needs to consider which the important figure is for the client and how the different levels interact. So, for instance here, the turnover figure is far too big to be used to calculate materiality, as errors of below materiality would have a big effect on profit (up to 16.2%) which would clearly be material.

Also relevant here is the (still very relevant) December 2017 Financial Reporting Council Audit Quality Thematic Review on Materiality and ISA (Ireland) 320.

Please go to our website to see our:

  • letters of engagement and similar templates. Please visit our site here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items if bought together.
  • ISQM TOOLKIT or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please contact John McCarthy FCA by e-mail at john@jmcc.ie.

We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. The ISQM TOOLKIT 2022 is available to purchase here.

 

Proposals to Change the Audit Exemption Rules

Proposals to Change the Audit Exemption Rules

 

The public consultation by the Department of Enterprise, Trade and Employment on proposals to enhance the Companies Act 2014 officially closes this week at 5:00 PM on Friday 9 June 2023. Submissions are invited from stakeholders and interested parties no later than this date.

There are several areas being consulted upon, which are too many to cover in this blog, but some of them include the:

  • Companies (Miscellaneous Provisions) (COVID-19) Act, 2020;
  • Corporate Governance;
  • Obligations on examiners and interim examiners;
  • Provisions to do with enhancing company law administration;
  • Investigation of companies affairs by court appointed inspectors on the application of the company;
  • Miscellaneous Company law administration matters to do with the Companies Registration Office.

Change the Audit Exemption Rules

In this blog, we want to concentrate on the proposals to change the audit exemption rules.

The proposal is that the audit exemption regime for small and micro companies should be amended to provide for a two-step graduated regime to deal with late filing, rather than automatic loss of audit exemption for two years, under the current rules.

The two step regime would operate as follows:

On the occasion of the first instance of late filing, and there would be no loss of audit exemption.

If there was a further instance of late filing within the following five years, late filing fees would be incurred and the entitlement to audit exemption would be lost for the following two financial years, with the company required to file audited financial statements for these years.

The consultation also includes a potential provision to enhance the deterrent effect for failure to deliver an annual return in time to allow that the court can request a contribution to a charity be made.

Another proposal allows for a strike off a company for failure to file details of the company secretary with the CRO.

There’s also provision to provide additional grounds for involuntary strike-off of companies by permitting the RBO Registrar to request that the CRO strike off a company for its ‘failure to comply with its obligation to file its beneficial owner details with the RBO

Make your voice heard and send your submissions. to the Department by 5:00 PM on 9 June 2023.

Please go to our website to see our:

  • Letters of Engagement and similar templates. Please visit our site here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items if bought together.
  • ISQM TOOLKIT or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please contact John McCarthy FCA by e-mail at john@jmcc.ie.

We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. The ISQM TOOLKIT 2022 is available to purchase here.

Potential Changes to the Audit Exemption

Potential Changes to the Audit Exemption

According to a recent Government press release, a consultation will soon commence on proposals to enhance the Companies Act 2014.

Among the issues to be considered are:

  • Amend the audit exemption regime for small/micro companies, to remove automatic loss of audit exemption and put in place a two-step, graduated procedure to deal with late filing;
  • Provide companies and industrial and provident societies with the option to hold physical/hybrid and virtual meetings including AGMs and general meetings;
  • Make amendments to the regulation of receivers;
  • Extend certain reporting obligations to examiners, interim examiners and process advisors;
  • Enhance certain powers for the Corporate Enforcement Authority, the Irish Auditing and Accounting Supervisory Authority and the Companies Registration Office to help investigate and prosecute alleged breaches of company law.

Please go to our website to see our new ISQM TOOLKIT or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please contact John McCarthy FCA by e-mail at john@jmcc.ie.

We typically tailor training and brainstorming sessions to suit your firm’s unique requirements.

Publications and AML webinars:

  • The ISQM TOOLKIT 2022 is available to purchase here.
  • See our latest Anti-Money Laundering Policies Controls & Procedures Manual (March 2022) – View the Table of Contents click here.
  • Also we have an updated AML webinar (March 2022) available here, which accompanies the AML Manual. It explains the current legal AML reporting position for accountancy firms and includes a quiz. Upon completion, you receive a CPD Certificate of attendance in your inbox.
  • To ensure your letters of engagement and similar templates are up to date visit our site here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items if bought together.

 

Money Transfer Business Hit with Large AML Fine

Money Transfer Business Hit with Large AML Fine

Abiding by money laundering regulations is a serious business to say the least. Early last month a money service business (MSB), based in Luton, UK was fined £23.8 million by the UK HMRC (the supervisor for MSBs) for ‘significant breaches’ of AML legislation. There are no rights of appeal.

The offences occurred between July 2017 and December 2019 relating to:

  • carrying out risk assessments;
  • incorrect policies, controls and procedures;
  • conducting due diligence; and
  • record keeping.

Money service businesses offer customers the ability to remit cash, exchange currencies and cash cheques quickly and easily without the need to rely on banking facilities. They would be deemed to high risk operations.

A quick examination of the company’s latest accounts to 30 November 2019 shows balance sheet net assets of £154,824 and cash at bank of over £680,000, so the ability to pay this fine is not that obvious.

Watch out for our 2021 update to the AML Policies & Procedures Manual coming soon.

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.