BULLETIN on Audit Practice Review for the six months ended 31 December 2012
1.0
Introduction
This bulletin relates to Audit Practice Reviews (APR) conducted by the FRC for the six
months ending 31 December 2012.
For the six months ending 31 December 2012, 9 Audit Practice Reviews were performed
where 11 licensed auditors were assessed. Two of the licensed auditors assessed were
sole practitioners; three were from 2-partner firms and six from large firms.
1.1
Audit Engagement files reviewed
FRC reviewed 19 engagement files from different industries as follows:
No of Audit
No of Files from:
Engagement
Industry
files reviewed
Statutory
PIE Listed
PIE Not
audit
Listed
< Rs
Offshore
Exempt
Company
200m
2.0
Commerce
6
2
1
3
Services
3
1
1
Investment
6
Agriculture
2
Real Estate
1
1
Health
1
1
Total
19
1
6
1
3
1
5
4
6
1
Findings from the reviews
The key findings from the APR are illustrated below under the following headings,
Licensing Rules, Firm’s system of Quality Control-ISQC1 and Review of Audit
Engagement Files.
1
2.1
Licensing Rules
In general, FRC has observed that the licensing rules are being adhered to by the
licensed auditors.
The only non-compliance observed under licensing rules is with regards to continuity of
practice arrangements. Two of the eleven auditors reviewed did not have formal
arrangements for continuity of practice. These two auditors were requested to have
this condition formalized and to inform the FRC accordingly.
2.2
Firm’s system of quality control- ISQC1
All the audit practices reviewed had a documented quality control system.
The
implementation of the quality systems of five of the nine firms reviewed was
satisfactory. Adequate resources and proper organization structure at these five firms
contributed towards the satisfactory implementation of the quality system.
The other four firms reviewed were one partner firms, having a range of staff employed
from 0 to 10. These firms had their documented quality control system, which however,
requires improvements in the areas of:
i. Monitoring the quality system,
ii. assembly and archiving of files within the prescribed number of days after the
completion of the audit,
iii. Procedures for acceptance and continuance of client relationships and
iv. independence assessment.
Comprehensive checklists are being used where various relevant criteria are being
assessed. However, after the completion of the checklist by the audit engagement
teams, there is no indication of the results of the assessment. Thus, in the absence of a
2
concluding remark it cannot be ascertained whether the engagement should have been
accepted and whether the audit engagement team members are independent.
2.3 Review of audit engagement files
The engagement files selected for reviews were assessed with respect to the following
stages of an audit:
(a) Preliminary engagement activities;
(b) Planning and assessing risk;
(c) Gathering audit evidence;
(d) Audit finalisation;
(e) Reporting; and
2.3.1 Preliminary Engagement Activities
As per the requirements of ISA 300, preliminary engagement activities shall include the
following:

Assessment
of
continuance
of
client
relationships
and
audit
engagements

Assessment of ethics and independence

Agreeing Terms of the audit engagement
The above preliminary engagement activities were properly done and clearly documented in
twelve of the engagement files reviewed.
From the other files FRC has noted non-
compliances whereby:

In two files the independence assessment exercise was perceived by the FRC as being
a copy paste exercise, to which the auditor agreed to take appropriation action.

In another two files independence assessment were carried out but same were not
reviewed by the partner nor was there any conclusion on the assessment.
3

In two other cases the procedure for acceptance and continuance of client
relationships were not performed.

In one engagement file the acceptance and continuance procedure was performed
after the engagement letter was issued.
2.3.2 Planning and Assessing Risk (ISA 315, 330, 240)
Planning helps to ensure that appropriate attention is devoted to important areas of the
audit and the auditor has to consider among others the following aspects at planning and
assessing risks stage:
1. Understanding the entity and its environment
2. Risk Assessment Analysis
3. Fraud risk assessment
4. Laws and regulations
5. Related parties
6. Going concern
7. Setting Materiality level
8. Develop Audit Strategy
9. Devise Detailed audit plan
10. Identification of risks of material misstatements
FRC observed that the above aspects at the planning and assessing risk stage were not
considered by the auditors in three of the engagement files reviewed. One of these
engagement file was for a public interest entity. In two other engagement files it was
noted that the auditor has not considered relevant laws and regulations affecting the
entity. In fact the auditor had no audit procedure to ensure that laws and regulations
affecting an entity were being complied with.
2.3.3 Gathering Audit Evidence
The most common problem encountered by the FRC with the auditors (mostly sole
practitioners) was lack of documentation on audit work.
4
As per ISA 230 paragraph 7, preparing sufficient and appropriate audit documentation
on a timely basis helps to enhance the quality of the audit and facilitates the effective
review and evaluation of the audit evidence obtained and conclusions reached before
the auditor’s report is finalized.
As such, in the absence of audit documentation on relevant important areas of an audit,
the FRC would be in a position to ascertain that the audit opinion in the specific
circumstance is appropriate and this leads to adverse reports by the FRC on the auditor.
FRC came across lack of audit documentation on important areas of the audit in ten
engagement files. Consequently, the reports on practice reviews issued by the FRC
concluded that the auditor’s opinion might not be appropriate, whereby the auditor is
required to explain in writing to justify the auditor’s opinion for the relevant
engagement.
FRC has come across some areas where at the planning stage the auditor rated certain
items as risky and which were in fact risky items. However, the auditor had not
documented any audit work done on these items that could demonstrates that the risk
of any material misstatement have been reduced to an acceptable level although
unqualified audit reports were issued. Some of the items that were rated as risky and
where there were no audit evidence on audit work done were:

Cash and cash equivalents

Inventories

Trade receivables

Sales

Related parties

Disclosures as per IFRS

Going Concern
5

Consolidation workings
At the closing meeting these non-compliances were raised with the signing partners.
Through discussion, FRC noted that adequate audit work has been performed, but there
were inadequate documentation to verify same.
2.3.4 Audit Finalisation
Audit finalisation procedures include:

a final analytical review (ISA 520) of the financial statements as a whole;

a review of events occurring after the end of the financial year that might
require adjustment of, or disclosure in, the financial statements (subsequent
events) (ISA 560);

consideration of the appropriateness of the going concern assumption in
preparing the financial statements (ISA 570) and

obtaining management representations where relevant and applicable (ISA 580).
From six of the nineteen engagement files reviewed FRC observed that the above
procedures were not being followed in some respect.
FRC advised the audit firm to ensure that audit procedures for finalizing an audit and to
comply with the above Audit Standards.
Adhering to the requirements of the above standards would no doubt ascertain
completeness of the audit.
Financial Reporting Council
January 2013
6