QUALITY CORPORATE
REPORTING
AUDIT PERSPECTIVE
Mr Viswajithsing Tuhobol
Date: 27 August 2014
27/08/2014
CONTENTS
•
•
•
•
INTRODUCTION
FINANCIAL STATEMENTS - FAIR PRESENTATION
ROLE OF AUDITORS
QUALITY AUDIT
• INPUT
• PROCESS
• OUTPUT
• AUDITORS INTERACTION
• CONCLUSION
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INTRODUCTION
FOLLOWING EVERY FINANCIAL CRISIS AND THE FAILURE OF A NUMBER OF GLOBAL
CORPORATE ENTITIES:
 INVESTORS
 ANALYSTS
 REGULATORS
 Wonder exactly what happened?
 What could have prevented it?
 What measures can be taken to ensure
it doesn’t happen again?
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INTRODUCTION - contd
If there is a corporate failure in circumstances where :
the financial report did not reflect the true financial position and
performance of an entity, and
the auditor did not perform adequate work or challenge the financial reports,
the role of both the directors and auditors will be rightly questioned.
With companies collapsing on the heels of financial reports that sounded no alarm bells for current or potential
investors, its understandable that the quality of financial reporting is coming under scrutiny.
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INTRODUCTION - contd
• No governance system, no matter how well designed, will fully
prevent greedy, dishonest people from putting their personal
interests ahead of the interests of the companies they manage.
• But many steps can be taken to improve corporate reporting and thereby
reduce opportunities for accounting fraud.
• The auditing profession has an important role to play.
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INTRODUCTION – contd
Focus on Internal Controls
• One reaction to corporate reporting failures has been to focus on
public companies internal controls:
• Sarbanes--Oxley Act (SOX) requires separate report on effectiveness of
internal controls
• Recent changes to ISAs place a much higher focus on the auditor
understanding internal controls as part of the audit
• Both ISAs and EU 8th Directive require reporting of material internal control
weaknesses to Audit Committee
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INTRODUCTION – contd
Reforms to ISAs
• Another reaction to the audit and corporate reporting failures is the
expected changes to ISAs dealing with:
• Group audits –– requiring the group auditor to have a more intimate
understanding of the entire group and its audit
• Related parties –– placing more responsibilities on the auditor to identify
related party relationships and transactions
• ISA 720 – The independent auditor to consider other information in the
corporate report which have relevance to the audit of the financial statements
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Financial Statements:
Present Fairly in Conformity with IFRS
• Why might financial statements NOT present fairly?
Two main reasons:
• ERROR.
• FRAUD.
Directors are responsible for:
• Preparation of FS
• Fair presentation of the FS in accordance with IFRS
• Internal Control
Auditor’s Responsibility
To express an opinion on these financial statements based on audit
Auditor’s role is to look for misstatements caused by either reason.
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Reliance on Financial Statements
People rely on financial statements to make economic decisions.
• Especially people outside the enterprise.
• Audit provides confidence.
• Audit reduces uncertainty and risk.
• Audit adds value.
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ROLE OF AUDITORS
• An audit is a rendering of independent and expert opinion on the
financial reports of an organization.
• Financial statements are management's responsibility. The auditor's
role is to render their credibility by giving a true and fair view.
• Auditors also increase the credibility of non-financial information
provided by management.
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ROLE OF AUDITORS
Audit Report
Auditor’s Responsibilities:
 Express an opinion
 Conduct audit – International Standards on Auditing
 Comply – Ethical Requirements (IFAC)
 Plan the audit (ISA 300)
 Obtain reasonable assurance – FS 3 from MM (ISA 200)
 Perform audit procedures to obtain evidence
 Professional judgements/ Scepticism
 Consider Internal Controls
 Evaluate:
• Accounting Policies
• Estimates
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ANNUAL REPORT REVIEWED DURING SEPT to
DEC 2013
Types of PIEs
Full Review
Grade Grade
Grade
1
2A
2B
Listed on SEM
3
Financial institutions
regulated by BOM
(excluding
cash
dealers)
Financial institutions
regulated by FSC
-
-
Other PIEs
Total
4
Total
7
2
1
1
18
1
-
1
-
2
1
12
-
-
-
13
-
7
13
-
-
-
20
3
12
33
2
2
1
53
KEY:
1 - Satisfactory
2A - Acceptable with minor improvements
2B - Acceptable with significant improvements
3 - Unsatisfactory
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Follow-up Review
Grade
Grade
Grade 1
2A
2B
DATA ON ENGAGEMENT FILES GRADING
YEAR
GRADING OF ENGAGEMENT FILES
2013
2014 – TO DATE
1
9
2
2A
10
6
2B
6
3
7
4
TOTAL
32
21
Key:
1 2A 2B 3-
Satisfactory
Acceptable with minor improvements
Acceptable with significant improvements
Unsatisfactory
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40%
9
61%
Quality Audit
A quality audit is likely to have been achieved by an engagement team
that:
o Exhibited appropriate values, ethics and attitudes;
o Was sufficiently knowledgeable, skilled, and experienced and had sufficient
time allocated to perform the audit work;
o Applied a rigorous audit process and quality control procedures that complied
with law, regulation and applicable standards;
o Provided useful and timely reports; and
o Interacted appropriately with relevant stakeholders.
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Audit Quality
• Key Elements:
• Inputs
• Process
• Outputs
• Interactions
• Contextual Factors
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Input, Process and Output Factors
Engagement Level
Firm Level
National Level
INPUT FACTORS
VALUES, ETHICS and ATTITUDES
√
√
√
KNOWLEDGE, SKILLS, EXPERIENCE and TIME
√
√
√
√
√
√
√
√
√
PROCESS FACTORS
AUDIT PROCESS and QUALITY CONTROL
PROCEDURES
OUTPUT
REPORTS
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INPUTS: VALUES, ETHICS & ATTITUDES
ENGAGEMENT LEVEL
• Audit – Wider public interest
•
Comply with ethical
requirements
• Objectivity and Integrity
• Independent
• Professional Competence and
due care
• Professional skepticism
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FIRM LEVEL
INPUTS: VALUES, ETHICS & ATTITUDES
ENGAGEMENT LEVEL
FIRM LEVEL
• Audit – Wider public interest
• Tone at the top
•
• Safeguard independence
Comply with ethical requirements
• Objectivity and Integrity
• Appraisal + Reward System
• Independent
• Financial considerations not impair audit quality
• Professional Competence and due care
• CPD
• Professional skepticism
• Promote consultation
• Robust system for client acceptance + continuance
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INPUTS: Knowledge, Skills, Experience and
Time
ENGAGEMENT LEVEL
• Necessary competences
• Understand entity’s business
• Reasonable judgments
• Partner active involvement
• Risk assessment
• Planning
• Supervising, reviewing
•
•
•
•
Sufficient experience
Reasonable degree of staff continuity
Sufficient time
Accessible to Mgt and TCWG
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FIRM LEVEL
INPUTS: Knowledge, Skills, Experience and
Time
ENGAGEMENT LEVEL
• Necessary competences
• Understand entity’s business
• Reasonable judgments
• Partner active involvement
• Risk assessment
• Planning
• Supervising, reviewing
•
•
•
•
Sufficient experience
Reasonable degree of staff continuity
Sufficient time
Accessible to Mgt and TCWG
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FIRM LEVEL
• Engagement teams are properly structured
• Partners and more senior staff provide less
experienced staff with timely appraisals and
appropriate coaching or “on-the-job” training
• Sufficient training is given to audit partners and
staff on audit, accounting and, where appropriate,
specialized industry issues
Process:
Audit Process and Quality Control Procedures
ENGAGEMENT LEVEL
• Compliance with auditing standards, relevant laws
and regulations, and the audit firm’s quality control
procedures
• Makes appropriate use of information technology
• There is effective interaction with others involved
in the audit
• Arrangements with management so as to achieve
an effective and efficient audit process
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FIRM LEVEL
Process:
Audit Process and Quality Control Procedures
ENGAGEMENT LEVEL
FIRM LEVEL
• Compliance with auditing standards,
relevant laws and regulations, and the
audit firm’s quality control procedures
•
The AM is adapted to developments in standards and to
findings from IQC reviews and external inspections
•
• Makes appropriate use of information
technology
The AM encourages to apply professional skepticism and
exercise appropriate professional judgment
•
• There is effective interaction with others
involved in the audit
The AM requires effective supervision and review of audit
work
•
Audit documentation
•
Monitoring
•
EQCRs
• Arrangements with management so as to
achieve an effective and efficient audit
process
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Outputs:
Reports and Information
ENGAGEMENT LEVEL
FIRM LEVEL
From the Auditor
• Auditor’s reports to users of audited financial
statements
• Auditor’s reports to those charged with governance
• Auditor’s reports to management
• Auditor’s reports to financial and prudential
regulators
From the Entity
• The audited financial statements
• Reports from those charged with governance,
including audit
committees
From Audit Regulators
• Providing information on individual audits
• Transparency reports
• Annual and other reports
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AUDIT QUALITY
Possible perception of audit quality through
an audit committee member’s lens
Possible perception of audit quality
through an investor’s lens
Assessment of
Quality of
Auditor Reporting
the Auditor
Audit
Investor
Perspective
Auditor
Reputation
Committee
Member
Assessment
of Quality of the Audit Process
Perspective
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Relevance/
Auditor
Expectations
of the audit
Communications
and Interactions
Interactions
The primary responsibility for performing quality audits rests with auditors.
• But audit quality is best achieved in an environment where there is support
from other participants in the financial reporting supply chain.
• Each stakeholder plays an important role supporting high quality financial
reporting.
• The way in which they interact impacts audit quality.
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Key Interactions within the Corporate Reporting
Supply Chain
IFAC describes the financial reporting supply chain as:
“the people and processes involved in the preparation, approval,
audit, analysis and use of financial reports.”
•
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In its 2008 report Financial Reporting Supply Chain: Current Perspectives and Directions, 9 the International Federation of
Accountants
Interactions
MANAGEMENT
REGULATORS
AUDITORS
USERS
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TCWG
Interactions between
Auditors and Management
An open and constructive relationship assists the auditor in:
• identifying, assessing and responding to the risks of material
misstatement, particularly
• with regard to complex or unusual transactions, or
• matters involving significant judgment or
• uncertainty.
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Interactions between
Auditors and Management
Management can benefit from auditors’ observations on matters such
as:
•
•
•
•
•
Possible improvements to the entity’s financial reporting practices.
Possible improvements in internal control over financial reporting
New financial reporting requirements.
Perspectives on industry issues.
Observations on legal and regulatory matters.
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Interactions between Auditors and Those Charged
with Governance
TCWG are responsible for:
• overseeing the strategic direction of the entity
• its obligations related to accountability (includes overseeing the entity’s financial reporting process).
The auditor is required to communicate with TCWG (including the audit
committee where one exists) about:
• planning matters and
• the significant findings.
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Interactions between Auditors and Those Charged
with Governance
Effective two way communications with auditors can assist TCWG in fulfilling their
responsibilities:
TCWG may benefit from:
• auditor’s views on such matters as the financial
reporting risks faced by the entity,
• the main areas of management judgment in the
financial statements, and
• insights into the quality of the entity’s financial
reporting process including weaknesses in its
internal financial controls.
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Assist TCWG to conclude on the fair
presentation of the FS especially if the auditor
has concerns which have not been acted upon
by management.
Interactions between Auditors and Those
Charged with Governance
TCWG are also in a position to influence the quality of the audit
through:
• Providing views on corporate reporting risks and areas of the business that warrant
particular audit attention;
• Considering whether sufficient audit resources will be allocated for the audit to be
effectively performed and that the audit fee fairly reflects this;
• Considering independence issues and assessing their resolution;
• Assessing how management was challenged by the auditor during the audit,
particularly with respect to the assessment of fraud risk, management’s estimates
and assumptions, and the choices of accounting policies; and
• Creating an environment in which management is not resistant to being challenged
by the auditors and is not overly defensive when discussing difficult or contentious
matters.
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Interactions between Auditors and Regulators
There are a number of different types of regulators that impact the audit:
Financial Regulators
• regulators of the financial markets,
• regulators of financial market participants,
• regulators of financial reporting
Prudential Regulators
• regulators of certain types of entities
such as banks and insurance companies
Audit Regulators
• regulators with direct oversight over some audit firms
It is beneficial for these regulators to coordinate their activities related to audit quality.
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CONCLUSION
FEEDBACK
Qcr
MGT
+ Qcr
TCWG
+ Qcr
AUDITOR
FEEDBACK
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+ Qcr
REGULATOR
=
QUALITY CORPORATE
REPORT
THANK YOU
27/08/2014