Page 1 | Confidential and Proprietary Information
Examining Audit Quality, Common
Engagement Deficiencies and the
Importan...
Page 2 | Confidential and Proprietary Information
In the Beginning………
• ISQC1, Quality Control for Firms that Perform Audi...
Page 3 | Confidential and Proprietary Information
How the Profession Is Responding
In the News
• IAASB Staff Q&A publicati...
Page 4 | Confidential and Proprietary Information
How the Profession Is Responding
In the News
• IAASB project to enhance ...
Page 5 | Confidential and Proprietary Information
Why Should We Care?
• The public appears to be increasingly concerned ab...
Page 6 | Confidential and Proprietary Information
Looking to Real Life Examples
Table 4: Alleged Auditor Involvement by Au...
Page 7 | Confidential and Proprietary Information
Looking to Real Life Examples
Table 7: Primary Deficiencies in Actual Au...
Page 8 | Confidential and Proprietary Information
Inspection Findings
Consistent findings include concerns about:
• Profes...
Page 9 | Confidential and Proprietary Information
Root Causes of Audit Failure
• Misapplication or misinterpretation of ge...
Page 10 | Confidential and Proprietary Information
Leadership Responsibilities for Quality Within Firm
Page 11 | Confidential and Proprietary Information
Back to Basics—Examining ISQC 1 Requirements
7 Key Actions
1. Always wr...
Page 12 | Confidential and Proprietary Information
Back to Basics—Examining ISQC 1 Requirements
7 Key Actions
5. Maintain ...
Page 13 | Confidential and Proprietary Information
• Completeness and accuracy
• Clarity and understanding
• Pertinence
• ...
Page 14 | Confidential and Proprietary Information
• At a minimum, all working paper files should include:
– Planning
– Re...
Page 15 | Confidential and Proprietary Information
• Documentation of information obtained about the
component of the file...
Page 16 | Confidential and Proprietary Information
• Partner involvement in planning
• Customizing working paper forms and...
Page 17 | Confidential and Proprietary Information
• Undistracted time between the engagement partner and
key engagement p...
Page 18 | Confidential and Proprietary Information
• Include identifying characteristics of the specific items or
matters ...
Page 19 | Confidential and Proprietary Information
• Necessary for quality control purposes
• Provides assurance that the ...
Page 20 | Confidential and Proprietary Information
• Has a clear objective (i.e., in the case of an audit provides the
aud...
Page 21 | Confidential and Proprietary Information
• Summary of the results of work performed (could
someone retrace your ...
Page 22 | Confidential and Proprietary Information
• Audit documentation
– Assists the engagement team in planning and per...
Page 23 | Confidential and Proprietary Information
• Audit evidence
– Requirement is to design and perform audit procedure...
Page 24 | Confidential and Proprietary Information
• Audit evidence—specific considerations for selected
items, including:...
Page 25 | Confidential and Proprietary Information
• Inventory
– If material, sufficient appropriate audit evidence must
b...
Page 26 | Confidential and Proprietary Information
• Inventory
– If the physical count is conducted at a date other than t...
Page 27 | Confidential and Proprietary Information
• Inventory
– If inventory under the custody and control of a third
par...
Page 28 | Confidential and Proprietary Information
• Litigation and Claims
– The auditor must design and perform audit pro...
Page 29 | Confidential and Proprietary Information
• Communication with external legal counsel includes:
– A list of litig...
Page 30 | Confidential and Proprietary Information
• Segment Information
– Obtain an understanding of the methods used by
...
Page 31 | Confidential and Proprietary Information
Professional Skepticism
Academic research suggests there are 6 characte...
Page 32 | Confidential and Proprietary Information
More than ever, the need to maintain professional
scepticism is critica...
Page 33 | Confidential and Proprietary Information
Improve training
• Strengthen inquiry techniques
• Challenge management...
Page 34 | Confidential and Proprietary Information
Increase awareness of standards
• Ensure staff have an understanding of...
Page 35 | Confidential and Proprietary Information
Strengthen documentation procedures
• Ensure that documentation include...
Page 36 | Confidential and Proprietary Information
• Revise the file index, if required;
• Consider how file information c...
Page 37 | Confidential and Proprietary Information
• Any time it is necessary to modify existing working paper
file docume...
Page 38 | Confidential and Proprietary Information
Document
• Circumstances encountered
• New or additional procedures per...
www.ifac.org/SMP
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Examining Audit Quality, Common Engagement Deficiencies and the Importance of Documentation

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Presentation by Dawn McGeachy, BAccS, FCUIC, ACUIC, FCGA, LPA
Member, IFAC SMP Committee at the International Federation of Accountants & Institute of Chartered Accountants of Jamaica Business Development Conference, March 18, 2014


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Examining Audit Quality, Common Engagement Deficiencies and the Importance of Documentation

  1. 1. Page 1 | Confidential and Proprietary Information Examining Audit Quality, Common Engagement Deficiencies and the Importance of Documentation Dawn McGeachy, BAccS, FCUIC, ACUIC, FCGA, LPA Member, IFAC SMP Committee International Federation of Accountants & Institute of Chartered Accountants of Jamaica Business Development Conference Jamaica Conference Centre March 18, 2014
  2. 2. Page 2 | Confidential and Proprietary Information In the Beginning……… • ISQC1, Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information and Other Assurance and Related Service Engagements became effective as of December 15, 2009 (firm level) • ISA 220, Quality Control for an Audit of Financial Statements, effective for audits of financial statements for periods beginning on or after December 15, 2009 (engagement level)
  3. 3. Page 3 | Confidential and Proprietary Information How the Profession Is Responding In the News • IAASB Staff Q&A publication, Applying ISQC 1 Proportionately with the Nature and Size of a Firm • Forum of Firms Information Paper, Engagement Quality Control Reviews: Practical Considerations • CPA Canada release, Enhancing Audit Quality: Canadian Perspectives, Conclusions and Recommendations • European Commission proposals on specific requirements regarding statutory audits of public-interest entities
  4. 4. Page 4 | Confidential and Proprietary Information How the Profession Is Responding In the News • IAASB project to enhance auditor reporting • US Public Company Accounting Oversight Board (PCAOB) concept releases dealing with the form and content of reports on audited financial statements and with ways to enhance auditor independence, objectivity, and professional skepticism • UK Financial Reporting Council proposals for effective company stewardship • Financial Stability Board’s thematic review on risk governance • Takes stock of risk governance practices at both national authorities and firms, notes progress made since the financial crisis, identifies sound practices, and offers recommendations to support further improvements • And more …
  5. 5. Page 5 | Confidential and Proprietary Information Why Should We Care? • The public appears to be increasingly concerned about audit failures. • There are gaps—in both expectations and information • Firms are being sanctioned more frequently with greater punishment being meted out. • The profession is struggling to demonstrate it has heard these concerns and is doing something about it.
  6. 6. Page 6 | Confidential and Proprietary Information Looking to Real Life Examples Table 4: Alleged Auditor Involvement by Auditor Type (n = 87 companies) Type of Case Number of Cases Naming National Firm Auditors Number of Cases Naming Non- National Firm Auditors Total Bogus Audit 0 6 6 Actual audit, but audit was deficient 35 46 81 Total 35 52 87
  7. 7. Page 7 | Confidential and Proprietary Information Looking to Real Life Examples Table 7: Primary Deficiencies in Actual Audits (n = 81 companies) Problem Area Percentage (Number) of Cases 1. Failure to gather sufficient competent audit evidence 73% (59 cases) 2. Failure to exercise due professional care 67% (54) 3. Insufficient level of professional skepticism 60% (49) 4. Failure to obtain adequate evidence related to management representations 54% (44) 5. Failure to express an appropriate audit opinion 47% (38) 6. Incorrect/inconsistent interpretation or application or requirements of GAAP 37% (30) 7. Inadequate consideration of fraud risks 33% (27) 8. Inadequate planning and supervision 31% (25) 9. Failure to adequately address audit risk and materiality 21% (17) 10. Inadequate preparation and maintenance of audit documentation 20% (16) 11. Failure to adequately communicate with the audit committee 17% (14) 12. Failure to recognize/ensure disclosure of key related parties 15% (12) 13. Failure to adequately perform audit procedures in response to assessed risks 15% (12) 14. Inappropriate confirmation procedures 15% (12) 15. Failure to evaluate adequacy of disclosure 15% (12) 16. Internal control-related issues including over-reliance on internal controls, failure to obtain an understanding of internal control, and failure to obtain an understanding of the entity and its environment. 14% (11)
  8. 8. Page 8 | Confidential and Proprietary Information Inspection Findings Consistent findings include concerns about: • Professional skepticism • Supervision and review • Substantive analytical procedures (predicted results compared to actual results) • The quality of audit evidence in audit files
  9. 9. Page 9 | Confidential and Proprietary Information Root Causes of Audit Failure • Misapplication or misinterpretation of generally accepted auditing standards; • The auditor commits fraud by knowingly issuing a more favorable audit report than is warranted; • The auditor is unduly influenced by having direct or indirect financial interest in the client; and • The auditor is unduly influenced because of some personal relationship with the client beyond what is expected in a normal audit between independent parties.
  10. 10. Page 10 | Confidential and Proprietary Information Leadership Responsibilities for Quality Within Firm
  11. 11. Page 11 | Confidential and Proprietary Information Back to Basics—Examining ISQC 1 Requirements 7 Key Actions 1. Always write it down – document, document, document (ISQC 1.57) 2. Lead from the front giving consistent messages on the importance of quality control (ISQC 1.18) 3. Always act ethically in accordance with the IESBA Code of Ethics for Professional Accountants (ISQC 1.20) 4. Focus on the right clients being matched by the right skills with an emphasis on integrity and competencies (ISQC 1.31)
  12. 12. Page 12 | Confidential and Proprietary Information Back to Basics—Examining ISQC 1 Requirements 7 Key Actions 5. Maintain capable and competent personnel giving due attention to the firm’s human resources policies and procedures (ISQC 1.29) 6. Delivery quality audits, consulting when needed and meeting requirements for engagement quality control review (ISQC 34 -35) 7. Monitor the firm’s system of quality control and carry out a periodic objective inspection of a selection of competed audit engagements (ISQC 1.48)
  13. 13. Page 13 | Confidential and Proprietary Information • Completeness and accuracy • Clarity and understanding • Pertinence • Logical arrangement • Legibility and neatness General Guidelines
  14. 14. Page 14 | Confidential and Proprietary Information • At a minimum, all working paper files should include: – Planning – Review/examination or evaluation of adequacy and effectiveness of the system of internal control (if applicable) – Procedures performed, information obtained, and conclusions reached – File review – Reporting – Any follow-up Organization of Working Papers
  15. 15. Page 15 | Confidential and Proprietary Information • Documentation of information obtained about the component of the file being reviewed • Authoritative support for findings/recommendations contained in the accountants/auditor communication • Means of evaluation • Provides a guide for how to complete subsequent engagements for the client Telling the Story
  16. 16. Page 16 | Confidential and Proprietary Information • Partner involvement in planning • Customizing working paper forms and checklists (scalable for different sizes and complexity, particular industries, and particular engagement risks) • Ongoing staff communication and file reviews • Engagement productivity • Identify areas where staff training is required • Determine what to include or exclude • Identify how to address the risk of fraud (if applicable) • Efficient allocation of staff and other resources Planning
  17. 17. Page 17 | Confidential and Proprietary Information • Undistracted time between the engagement partner and key engagement personnel • Willingness to make key decisions based on appropriate professional judgment • Inform engagement team what the entity is all about • What has changed since last year and the implications of these changes so that they are in a position to focus on where documentation changes might be required • Ensure engagement team understands what they are required to do and why Ingredients for Effective Planning
  18. 18. Page 18 | Confidential and Proprietary Information • Include identifying characteristics of the specific items or matters tested or reviewed • Document discussions of significant matters with management • Identify how you addressed information discovered that contradicts or is inconsistent with your previous understanding or representations made by management • Any departures from a basic principle or essential procedure, and the alternative procedure performed Adequate Documentation
  19. 19. Page 19 | Confidential and Proprietary Information • Necessary for quality control purposes • Provides assurance that the work delegated by the partner has been properly completed • Provides evidence that an effective engagement has been carried out • Increases the economy, efficiency, and effectiveness of the engagement • Provides sufficient details and up-to-date facts which justify the reasonableness of the accountant/auditor’s conclusions • Retains a record of matters of continuing significance to the client Importance of Documentation
  20. 20. Page 20 | Confidential and Proprietary Information • Has a clear objective (i.e., in the case of an audit provides the audit assertion tested) • States the year/period end (so that it cannot be confused with a different time frame) • Details the full extent of the test (i.e. number of items tested and how this number was determined) • When reference is made to another WP, the full reference to the other WP • States the results of the procedure/testing, without bias, based on documented facts • Conclusions reached that are consistent with the results of the procedures/testing (and that will withstand independent scrutiny) • Clear index referencing • Initialed and dated by preparer and reviewer(s) “Good” Documentation
  21. 21. Page 21 | Confidential and Proprietary Information • Summary of the results of work performed (could someone retrace your steps?) • If the file contains internal control and workflow evaluations, conclusions on the adequacy of the system or process • Testing conclusions Each Step Along the Way
  22. 22. Page 22 | Confidential and Proprietary Information • Audit documentation – Assists the engagement team in planning and performing the audit – Assists supervisory engagement team members in directing and supervising the work – Enables accountability – Provides a record of matters of continuing significance; – Enables the conduct of quality control reviews and practice inspections • ISA 230 also includes an Appendix which details specific audit documentation requirements in other CASs • This provides easy reference for DOCUMENTATION that is required to be included within each audit working paper file ISA Requirements—ISA 230
  23. 23. Page 23 | Confidential and Proprietary Information • Audit evidence – Requirement is to design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion • Consider – Relevance and reliability of the information – Accuracy and completeness of the information – Is the information detailed AND sufficiently precise for audit purposes? ISA Requirements—ISA 500
  24. 24. Page 24 | Confidential and Proprietary Information • Audit evidence—specific considerations for selected items, including: – Inventory – Litigation and Claims – Segment Information ISA Requirements—ISA 501
  25. 25. Page 25 | Confidential and Proprietary Information • Inventory – If material, sufficient appropriate audit evidence must be obtained regarding the existence and condition of inventory by: • Attendance at the physical inventory counting (unless impracticable); and • Performing audit procedures over the entity’s final inventory records to determine whether it accurately reflects actual inventory count results. ISA Requirements—ISA 501
  26. 26. Page 26 | Confidential and Proprietary Information • Inventory – If the physical count is conducted at a date other than the date of the financial statements, the auditor MUST perform audit procedures to obtain evidence about whether changes in inventory between the count date and the date of the financial statements are properly recorded. – If the physical count has been scheduled for the year/period-end date and the auditor is unable to attend due to unforeseen circumstances the auditor MUST make or observe some physical counts on an alternative date, and perform audit procedures on intervening transactions. ISA Requirements—ISA 501
  27. 27. Page 27 | Confidential and Proprietary Information • Inventory – If inventory under the custody and control of a third party is MATERIAL to the financial statements, the auditor MUST obtain evidence regarding its existence and condition by: • Requesting confirmation from the third party as to the quantities and condition of inventory held on behalf of the entity; and • Performing an inspection or other audit procedures appropriate in the circumstances. ISA Requirements—ISA 501
  28. 28. Page 28 | Confidential and Proprietary Information • Litigation and Claims – The auditor must design and perform audit procedures that make it possible to identify litigation and claims. – If RMM has been identified, or when audit procedures indicate that other material litigation or claims may exist, the auditor shall seek DIRECT communication with the entity’s EXTERNAL legal counsel. – Material litigations and claims MUST be disclosed and accounted for in the financial statements. – Other relevant procedures may have been identified through the RMM procedures during the planning phase of the audit. ISA Requirements—ISA 501
  29. 29. Page 29 | Confidential and Proprietary Information • Communication with external legal counsel includes: – A list of litigation and claims; – Management’s assessment of the outcome of each of the identified litigation and claims and its estimate of the financial implications, including costs involved; and – A request that legal counsel confirm the reasonableness of management’s assertions and provide further information if the list is considered to be incomplete or incorrect. ISA Requirements—ISA 501
  30. 30. Page 30 | Confidential and Proprietary Information • Segment Information – Obtain an understanding of the methods used by management in determining segment information; and – Perform analytical procedures and other audit procedures (as appropriate). ISA Requirements—ISA 501
  31. 31. Page 31 | Confidential and Proprietary Information Professional Skepticism Academic research suggests there are 6 characteristics of skepticism: 1. Questioning mindset 2. Suspension of judgement 3. Search for knowledge 4. Interpersonal understanding 5. Autonomy 6. Self-esteem
  32. 32. Page 32 | Confidential and Proprietary Information More than ever, the need to maintain professional scepticism is critical: • Over-reliance on management representations • Acceptance of unreliable information or evidence • Inconsistent or contradictory information and evidence • Tendency to look for corroborating information or evidence rather than challenging management’s assertions Professional Skepticism
  33. 33. Page 33 | Confidential and Proprietary Information Improve training • Strengthen inquiry techniques • Challenge management’s assertions • Consider different alternatives • Seek reliable information/evidence • Respond to inconsistencies and contradictions Professional Skepticism—What Can You Do?
  34. 34. Page 34 | Confidential and Proprietary Information Increase awareness of standards • Ensure staff have an understanding of the reason for required procedures • Promote a questioning mind Professional Skepticism—What Can You Do?
  35. 35. Page 35 | Confidential and Proprietary Information Strengthen documentation procedures • Ensure that documentation includes the thought process, NOT just conclusions from the work done • Must provide a roadmap of the engagement and how conclusions were reached Professional Skepticism—What Can You Do?
  36. 36. Page 36 | Confidential and Proprietary Information • Revise the file index, if required; • Consider how file information can best be reviewed— current year and next year: – Document all risks identified, and their assessment, in one place – Standardize how internal controls will be documented (if applicable) – Record engagement issues, the resolution, and any related communications to management and TCWG in one place Continual Improvement
  37. 37. Page 37 | Confidential and Proprietary Information • Any time it is necessary to modify existing working paper file documentation regardless of the nature of the modifications or additions, document: – When and by whom they were made, and reviewed; – The specific reasons for making them; and – The effect, if any, on the accountant/auditor report issued. After Final Assembly
  38. 38. Page 38 | Confidential and Proprietary Information Document • Circumstances encountered • New or additional procedures performed • Evidence obtained • Conclusions reached • When and by whom the resulting changes to documentation were made and reviewed Exceptional Circumstances
  39. 39. www.ifac.org/SMP

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