Auditing & Assurance:
Specialized Industries
Course Description
This course builds on the knowledge base from Auditing and Assurance Principles,
Concepts and Applications (PrE 1 to PrE 3) Auditing, to provide students with an in depth
understanding of professional standards, as well as applications on the audit process,
advanced auditing techniques, and the auditor’s role in ensuring that financial
statements are fairly presented.
Students will apply auditing procedures to financial statement transaction cycles, and
conduct audit sampling and testing techniques using specialized data analysis software
on specialized industries in the region, e.g. agri-based industry, mining industry,
business process outsourcing, and the like. The course will be a seminar-type and to be
complemented with hands on exposure in a chosen industry.
Auditing (PSA)
PSA 200 defines auditing by stating the objective of a financial statement audit, that is, to
enable the auditor to express an opinion whether the financial statements are prepared,
in all material respects, in accordance with the applicable financial reporting framework.
Other Definition
A more comprehensive definition of auditing is given by the American Accounting
Association:
An audit is a systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events to ascertain the degree of
correspondence between these assertions and established criteria and communicating
the results to interested users.
Assurance
An engagement whereby a practitioner expresses a conclusion that enhances the degree of
confidence of the users on a subject matter prepared by a responsible party when the
subject matter is compared and measured against established criteria.
Levels of assurance
1. Reasonable Assurance (Audit)
- are aimed at reducing engagement risk to an acceptably low level in the light of the given
circumstance. A positive expression is thereby included in a practitioner’s report.
2. Limited Assurance (Review)
- also aimed at reducing engagement risk to an acceptably low level, but that there is a
higher engagement risk than that when a reasonable assurance is promised, since less
extensive procedures are performed by the practitioner.
Audit vs Assurance
The key difference between an Audit and Assurance is that an audit is the systematic
examination of the books of accounts and the other documents of the company to know
whether the statement shows a true and fair view of the organization.
In contrast, assurance is how the different processes, procedures, and operations are
analyzed.
Specialized Industries
 Specialized industry is not necessarily rare or even unusual.
 What makes these industries specialized is that:
o have specific financial reporting standards applicable to them, or
o have distinct accounting policies which have been developed to account for
specialized transactions and balances which are based on the normally-applied
financial reporting standards.
Examples:
 IAS/PAS 41 - Agriculture (for Agricultural Sector)
IFRS 6/PFRS 6 - Exploration of Evaluation of Mineral Resources (for
Mining Sector)
IFRS 9/PFRS 9 and IFRS 7 - Financial Instruments and Financial
Instruments: Disclosures (for Banking and other financial institutions)
IFRS 17/PFRS 17 – Insurance Contracts (for Insurance Companies)
Examples of Specialized Industries:
 Airline companies
 Educational Institution
 Banking, Insurance and other Financial Institutions
 Petroleum Companies
 Mining
 Agriculture
 Power Distributor/Power Generating Co.
 Manufacturing (Aircraft, Medicine and the likes)
 Telecommunications
 Nonprofit or Not for Profit Organizations (such as Civic Organizations)
Characteristics of Specialized Industries
 High Risk (Publicly-listed or with Public Accountability)
 Strict and several compliance to laws and government
agencies and its regulations
 Complex accounting (revenue recognition)
Audit Considerations
 Competence
 Audit Planning
 Reliance on Experts
Competence
-Audit Firm
-Audit partner and Audit team to handle the audit engagement
-Independent Audit Partner
Needed Competence of Audit Firm Personnel
1. Knowledge of relevant industries and;
2. Has experience with relevant regulatory or reporting requirements or
3. The ability to gain the necessary skills and knowledge effectively.
Competence
Prior to accepting an audit engagement involving a specialist industry, there are a
number of relevant auditing standards which the audit firm needs to pay close attention.
ISQC/PSQC 1 – Quality control for firms that perform audits and reviews of financial
statements and other assurance and related services engagements
- Requires the audit firm to consider whether the firm is competent to perform the engagement
and has the capabilities, including time and resources to do so.
The audit firm should also ensure that there is adequate documentation to demonstrate that
competence has been considered, and the steps that have been taken to improve competence
where necessary, for example through appropriate staff training.
Audit Planning
Identification of the risk of material misstatement in a specialized industry should be
approached in the same was as in any other audit – by obtaining appropriate
understanding of the business and its environment.
To assist audit team members assigned to a specialized industry client, the audit firm is
likely to have additional resources available. There may be:
-Briefing notes or
-Internal technical guidance on how financial reporting standards should be applied within the
sector.
For example, in the audit of banking sector clients, an audit firm may produce guidance on the specific
application of IFRS® Standards relating to the range of financial instruments typically held by banks. Audit staff
can then refer to this guidance when performing the audit, particularly when identifying risks of material
misstatement.
Audit Planning
It is also important to remember that while there may be specific risks of material
misstatement relating to the industry-specific balances and transactions, there must also
be appropriate consideration of the “normal” balances and transactions.
For instance, in the audit of a bank, there will be plenty of risks to consider other than
those relating to bank-specific transactions and balances, for example the depreciation of
properties, recognition of provisions and impairment of goodwill would all still be relevant.
These 'normal' types of risk must not be forgotten, just because the client operates in a
specialized industry.
Reliance on experts
Linked to the previous matters, competence, audit planning and the specialized nature of
some transactions and balances, the auditor may plan to use an auditor’s expert to obtain
audit evidence.
This is quite likely in a specialized industry as despite being competent to perform the
engagement, the audit firm may not have the necessary specific expertise in some areas.
For instance, in the audit of a bank, specialists may be brought into value complex
financial instruments or actuaries to review a defined benefit pension scheme.
Reliance on experts
In this situation, the audit firm must adhere to the requirements and principles of PSA
620, Using the Work of an Auditor’s Expert which deals with matters including the
evaluation of the objectivity, competence and capabilities of the auditor’s expert,
determining and communicating the scope and objectives of their work, and assessing
their findings.
It is particularly important that the auditor evaluates the relevance and adequacy of the
expert’s findings or conclusions. There is a danger of over-reliance on the expert’s work;
the fact that the audit is of a specialized nature does not mean that the auditor can pass
all responsibility over to an expert.
For instance, the auditor must consider whether the expert’s findings are consistent with
the auditor’s understanding of the client and with the conclusions of other audit
procedures. Any inconsistencies must be investigated.
Summary
 The audit of a client in a specialized industry can pose some challenges to the audit
firm. However, with proper consideration of competence, and by providing staff with
additional support and guidance, these audits should not necessarily be more complex
or challenging to plan and perform.
 Using experts can provide high quality audit evidence in specialist situations, but the
auditor must be careful to fully evaluate the findings of the auditor’s expert and not to
over-rely on their work.
 For audit staff, working on this type of engagement can be very rewarding, providing
exposure to sometimes unusual businesses.