by John McCarthy Consulting Ltd. | Aug 30, 2023 | News
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 Misstatement’ and 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.
by John McCarthy Consulting Ltd. | Jun 19, 2023 | News
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.
by John McCarthy Consulting Ltd. | Apr 29, 2019 | Blog, News
Tax advocacy is now banned for all audit clients. True or False?
The answer is ‘False’.
To hear why this is false and find out what exactly are the rules surrounding an auditor helping an audit client argue a case with the Revenue Commissioners, go see our online webinar entitled Audit Update where you may download the slides and support materials, all for just €45. On successful completion, receive a CPD certificate for your newly acquired knowledge. Well done!
The webinar, which may be viewed anytime for up to a year from date of purchase, covers the following areas:
- IAASA Audit and Ethical Standards April 2017;
- Planning and independence;
- Fraud;
- Materiality;
- Analytical review and sampling;
- Fixed assets, Debtors, Stock, Bank and Creditors;
- Financial statements review;
- Law and regulations;
- PBSE, Going Concern;
- Audit report;
- The ‘Bannerman’ paragraph;
- Issues on PSD visits; and
- International Education Standard 8 (IES 8).
There are 18 other webinars on various topics – also for €45 each, or you may purchase two at the same time for €80 or five for €190.
All our webinars are accessible at any time (for 12 months from date of purchase) here.
We have also prepared, ready to use, audit engagement and representation letter templates (in Word format) for a company audit assignments, available to purchase online (bulk purchases of 5 or more templates attract a 20% discount), please click on the relevant links.
