SSA 315 – Identifying and Assessing ROMM through Understanding Entity and the Environment

Auditor needs to perform risk assessment procedures (includes inquiries of management (those charged with governance, employees etc), analytical procedures, observation and inspection of documents and reports) for the identification and assessment of ROMM at the FS and assertion levels.

Audit partner needs to discuss the susceptibility of the entity’s FS to MM and communicate with the team members not involved in the discussion.

Understanding the entity includes operations, governance structures, type of investments and how the entity is structured. For relevant controls relating to financial reporting, the auditor needs to evaluate the design and effectiveness of these controls. For the control environment, determine whether management has a culture of honest and ethical behaviour. If possible, auditor should obtain management assessment of business risks etc.

Basically, matters relating to financial reporting must be examined. In addition, it is important to understand risks relating to IT.

The auditor needs to understand the nature of IA function’s responsibilities, organisational status and the activities performed. If necessary, audit reports relating to findings on financial reporting should be read and understood. However, some IA do not focus on controls over financial reporting and hence, their reports may not be directly relevant. If IA looks at financial reporting areas, the auditor may want to modify the nature and timing and extent of their testing. If so, please apply SSA 610.

The auditor needs to identify risks and evaluate whether they concern the FS level or affect many assertions. The auditor needs to assess which are significant risks as well. There is a need to include planning matters as audit documentation.

The auditor might want to perform substantive procedures or test of controls to assess ROMM.

Analytical procedures can also be performed to examine trends between financial and non-financial information. However, such broad evidence may be inconclusive and the auditor might need to collaborate with other information.

Auditor needs to understand the information from prior audit periods and see whether it’s still applicable in the current period. By performing walkthroughs, one can get a better sense of whether there are any changes.

It Is necessary to understand industry factors like suppliers, the competitive environment, suppliers and customer relationships etc. The auditor can understand regulatory factors as well.

Understanding the entity includes understanding the business operations, investment activities, financing activities, financial reporting practices etc, entity’s selection and application of accounting policies.

Not all business risks give rise to material misstatements, but business risks might have financial consequences and increase the likelihood of identifying ROMM. This FRS covers issues and events that may indicate ROMM. Understanding the financial performance indicators can help the auditor understand the pressure management faces. Industry related information might also serve as useful trends.

There are limitations to internal control, which the auditor needs to understand. Controls can be override by management as well. The SSA divides internal control into 5 components: control environment (influence the effectiveness of internal controls and the auditor’s assessment of ROMM); risk assessment process; information system and related business process; control activities and monitoring of controls.

There are both manual and automated controls. However, the use of IT automated controls present risks such as inaccurate processing of data, unauthorised access to data, changes to master files, failure to make changes. Manuals controls are more suitable when judgment is involved. They are less suitable for voluminous transactions etc.

Some information required in the FS may not be stored in IT systems. Non-standard journal entries must be examined by the auditor. The auditor should understand how transactions are originated.

It is possible for the auditor to test the operating effectiveness of the control in determining the extent of substantive testing required. The auditor could focus activities for areas with higher ROMM. Main transaction cycle could include things like revenue, purchases and employment expenses.

Auditors need to understand both general and application controls in relation to financial systems for financial reporting. They also need to question the source of information from control monitoring activities and whether they are accurate.

SSA 705 talks about the issuance of a qualified opinion.

Some assertions for transactions could be occurrence, completeness, accuracy, cut-off, classification, presentation etc.

Some assertions for balances are existence, rights and obligations, completeness, accuracy valuation and allocation, classification, and presentation.

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SSA 300 – Planning an Audit of Financial Statements

Good planning can really help to focus the audit and make it more efficient and effective.

The objective of the auditor is to plan the audit so that it will be performed in an effective manner.

Engagement partner and key members of the engagement shall plan and discuss the planning with the team.

The auditor needs to perform procedures on client relationship and engagement, evaluate compliance with ethical requirements and understand the terms of the engagement.

The audit plan shall include the nature, extent, timing of planned audit procedures and also the resources required to complete the audit. The audit strategy can be modified as the audit progresses. The extent of supervision also needs to be planned.

The audit plan and strategy must be part of audit documentation (can be memorandum form, checklists etc). Significant changes to the audit plan needs to be explained. Planning needs to consider things like analytical procedures, understanding of legal framework, materiality, involvement of experts etc.

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SSA 265 – Communicating Deficiencies in Internal Control to those Charged with Governance and Management

SSA 265 Summary

The auditor is required to obtain an understanding of internal control relevant to the audit when identifying and assessing the risks of material misstatement. Auditor can consider internal control when developing audit procedures, but there is no need to express opinion on internal control effectiveness.

The auditor needs to communicate appropriately with those charged with governance (CWG) on any deficiencies (must explain potential effects) in internal control identified during the audit. This must be done in writing. However, it is okay if there is earlier communication orally. The level of detail in the communication depends on auditor’s professional judgment.

Auditor should clarify with appropriate level of management (one that has authority to evaluate deficiencies and take necessary remedial action) if one or more deficiencies in internal control are identified. If the finding calls into question management’s integrity/competence, it may not be appropriate to discuss it directly with management.

This SSA also indicates examples and indications of significant deficiencies in internal control.

If the significant deficiency is not rectified in prior years, the auditor can communicate the same deficiency in the current year.

The communication of other deficiencies (not significant) may be communicated to management orally only. Communication of this to those CWG is also optional and dependent on the auditor’s professional judgment.

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SSA 260 – Communication with Those Charged with Governance

SSA 260 – Communication with Those Charged with Governance

This SSA 260 concerns auditor’s responsibility to communicate with those charged with governance (CWG) in an audit of Financial Statements.

SSA 265 talks about the requirements to communicate (in writing), in a timely manner, significant deficiencies to those CWG.

There is a need for two-way communication between the auditor and those CWG.

Management also needs to communicate important matters to those CWG.

Some of the things to be communicated by the auditor are auditor’s responsibilities (express opinion on the FS, significant risks etc), scope and timing of the audit. In additions, matters like accounting policies, accounting estimates and financial statement disclosures should be communicated. Other things include whether the firm has complied with relevant ethical requirements regarding independence, safeguards to eliminate threats of independence. Significant difficulties faced in the audit should also be highlighted.

A subgroup of those CWG could be the audit committee. Auditor must assess whether this must also be highlighted to the Board.

Good governance principles highlight that (i) Auditor will be invited to attend meetings of the AC; (ii) Chair of the AC and other members will liaise with the auditor periodically; (iii) AC will meet the auditor without management’s presence.

Often, critical accounting estimates and critical accounting policies or practices are required to be disclosed in the FS.

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SSA 250 – Consideration of Laws and Regulations in an Audit of FS

This SSA is for periods after 15 Dec 2009.

This SSA concerns auditor’s responsibility to consider laws and regulations in an audit of FS.

There are many sorts of possible laws and regulations: regulated industries, OSH, equal employment opportunity. However, not all will affect the FS.

It is management’s responsibility, with the oversight of those charged with governance, to ensure entity’s operations are conducted in accordance with the provisions of laws and regulations.

This SSA will help the auditor to identify material misstatements of the FS due to non-compliance with laws and regulations. There is an inherent risk that auditor may not uncover all of them due to (i) many laws and regulations that affect operations and do not affect the FS; (ii) collusion or management override of controls; (iii) whether an act is a non-compliance should be determined by a court of law.

Generally, the auditor should be concerned with those laws/regulations that have a direct determination of material amounts and disclosures in the FS, like tax laws etc. For other laws/regulations, auditor only needs to consider those non-compliance that has material effect on FS.

Auditor is expected to maintain professional skepticism throughout the audit.

Auditor needs to obtain audit evidence regarding laws/regulations that have an impact on the FS.

Auditor needs to understand the entity and the environment and the legal regulatory framework for the entity/industry and how is the entity complying.

Written representations from management on compliance/non-compliance should be obtained.

If auditor suspects non-compliance, investigation into the effect on the FS must be performed. If insufficient evidence is obtained or management cannot demonstrate compliance, the auditor shall consider modifying the audit opinion.

There must be audit documentation on identified or suspected non-compliance and relevant correspondences.

Management can institute controls like monitoring of legal requirements, internal controls for systems, develop a code of conduct, ensuring employees are trained, monitor compliance with the code of conduct, engage legal advisors etc, in order to ensure compliance with laws and regulations.

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SSA 240 Auditors’ Responsibilities Relating to Fraud

This SSA concerns auditor’s responsibilities relating to fraud in an audit of FS.

Misstatements can be either due to error or fraud. If it’s fraud, there are 2 kinds, namely, fraudulent financial reporting or misappropriation of assets.

Management and those charged with governance are responsible for the prevention and detection of fraud. There should be a strong culture of honesty and ethical behaviour.

The auditor is responsible for providing reasonable assurance that the FS as a whole is free of material misstatement, whether caused by fraud or error. Frauds are often concealed and hence, the inherent limitations are larger. It is difficult to determine whether misstatements are due to fraud or error. Management fraud is even harder to detect due to management override of controls.

Auditor needs to assess ROMM due to fraud and also to respond to fraud/suspected fraud during the audit. Auditors need to be aware of the fraud risk factors that can be perpetuated by management. They need to maintain professional scepticism throughout the audit.

There needs to be a discussion among engagement team on how the FS can be susceptible to ROMM due to fraud, and how fraud might occur.

The auditor should question the management on what is management’s assessment of fraud risks. They should understand management’s fraud risk assessment, and the escalation process. Auditor should ask whether management has knowledge about any suspected fraud etc. It is also possible to ask the IA team about it. It is also good to understand how those charged with governance maintain oversight of fraud risk management.

Unusual relationships using analytical procedures for revenue accounts should be identified and assessed. The auditor should also examine fraud risk indicators as these are potential ROMM.

There is a presumed risk of fraud in revenue recognition and the auditor needs to investigate further. The auditor should incorporate elements of unpredictability in the testing (use different sampling methods etc, surprise audit etc) and see whether the accounting policies are subject to subjective measurements etc.

There is also a presumed risk of management override of controls. As such, the auditor needs to test appropriateness of the journal entries in the GL and adjustments made. They need to select JE near the end of the reporting period and may test JE/adjustments throughout the audit period. There is a need to review estimates for biases and determine whether they are reasonable.

Analytical procedures should be performed and an assessment must be made on whether it is in line with normal business practices/trends.

If auditor is unable to carry on the engagement, he may withdraw or report to the relevant authorities.

The auditor needs to obtain written representations from management that they acknowledge the responsibility for the design, implementation and maintenance of internal controls to prevent and detect fraud. They also need to disclose potential fraud cases and management’s assessment of the risk of fraud.

If auditor suspects fraud, this must be disclosed to those charged with governance. The auditor can also consider reporting it to the regulatory authorities.

Auditor needs to keep documentation on the understanding of entity’s environment and assessment of ROMM.

The fraud triangle: incentive (eg earning management so that can get more bonus. The auditor should analyse incentives that relate to the entity’s environment); opportunity (poor internal controls); rationalisation (sufficient pressure, poor character etc)

The SSA also goes into detail about how fraud may be perpetuated in relation to financial reporting and misappropriation of assets.

Management is often in the best position to perpetuate fraud.  

There is a need to understand oversight exercised by those charged with governance. Fraud risks cannot be ranked easily.

It is possible to rebut the risk of fraud in revenue recognition if the revenue stream is simple and straightforward.

Management may not implement every control to combat fraud due to the cost-benefit analysis. Therefore, it is important for the auditor to understand which such controls are.

For accounting estimates, auditor needs to perform a retrospective review of management judgments and assumptions related to significant accounting estimates in the prior year. This is also required under SSA540. The auditor needs to look out and question complex transactions.

The SSA describes many other procedures the auditor can perform.

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SSA 230 – Audit Documentation

SSA230 Summary (Nov 2015)

This SSA concerns the auditor’s responsibility to prepare audit documentation for an audit of financial statements.

The objective of documentation is to have a sufficient record of the basis of auditor’s report. Documentation serves as evidence that audit was planned in accordance with SSAs, applicable legal and regulatory requirements.

Audit documentation shall be prepared on a timely basis.

The documentation should be sufficient to enable an experienced auditor to understand. It shall include nature, timing and extent of audit procedures (including identifying characteristics of specific items tested, who performed the work and when, who reviewed the work and when), results of audit procedures, audit evidence obtained and significant matters arising during the audit.

Auditor should document discussions of significant matters with management and the nature of matters discussed, and the venue, personnel involved and timing of discussion.

Auditor shall assemble the audit documentation in an audit file and assemble the final audit file after date of audit report. Any modifications subsequently must be explained and by when/whom they were made.

Audit documentation should include things like audit program, analyses, issues memoranda, summaries of significant matters, letters of confirmation and representation, checklists, correspondences concerning significant matters.

Superseded/draft documents or audit reports need not be included in the audit file. It is not necessary to have a checklist for compliance with matters if compliance is already demonstrated by documents within the audit file.

Ultimately, the form/content/extent of audit documentation of significant matters is a matter of professional judgment.

There is no requirement per se to have every specific working paper to have evidence of review, but there needs to be documenting of what audit work was reviewed, who reviewed such work and when it was reviewed.

SSQC1 stipulates that the appropriate time limit to complete assembly of final audit file is not more than 60 days after date of auditor’s report. Companies need to establish P&P for retention of engagement documentation. Retention period is no shorter than 5 years from date of auditor’s report.

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