AUDIT QUALITY REGULATORY FOCUS AREAS Andrew Hoffmann, Noemi Cohn, Mohammed Yaqoob Audit Forum, Barcelona October 2014

Introduction Roles in audit quality - Partner lead Quality and adequacy of audit evidence -regulator hot spots Results of Nexia peer reviews – improving our quality

Focus on Audit Quality Video

Roles in Audit Quality Audit quality improvements through a Partner lead approach. The role of culture and accountability . The Partner needs to be accountable. Firm focus – communication on quality is regular and is a consistent Partner/staff agenda item. Resourcing – senior resources to promote quality are funded and promoted (smaller firms can consider external arrangements for relevant resources).

Roles in Audit Quality The role of experience and expertise Training – Partners run training or knowledge sharing sessions with staff (share experiences). Training - focus on relevant levels of seniority. Resourcing – all staff have access to standards etc. Encourage centres of excellence. Time – prepare a time budget and have it approved (by a Partner). Remediation – adopt a root cause analysis of why there are quality issues.

Roles in Audit Quality The role of supervision and review Focus – make sure time for Partner review is included. Focus – allow for hot reviews by someone external to the engagement. Tools – an agreed format for reviewing files. Skills – training is provided to all staff on: Effective supervison techniques How to undertake a critical review of work. How to review and assess reports of experts or specialists How to assess management’s use of accounting policies, key areas of estimation and judgement.

Quality and Adequacy of Audit Evidence Noemi Cohn

Quality and adequacy of Audit Evidence Impairment Going Concern Work of Experts Sampling Journal Entries Test Completion of Audit Files Practical Tips

Quality and adequacy of Audit Evidence Impairment (Technical matters covered in a later audit forum session). Importance of documentation related to: Identification of assets subject to impairment test Appropriateness of the methodology applied and assumptions used Review of proper disclosure in the Financial Statements related to impairment matters

Quality and adequacy of Audit Evidence Going Concern Documentation of the audit work performed and the basis for conclusions regarding the going concern assumption. Document the auditor’s assessment of the reasonableness of cash flow forecasts and underlying assumptions supporting going concern Evidence of professional scepticism – challenging management’s representations

Quality and adequacy of Audit Evidence Use of work of expert Work of experts should be used satisfying all the requirements of ISAs Where reliance has been placed on the use of an expert, consideration should be given to their qualifications and independence from the client review the terms of reference with the expert and consider whether they were appropriate The appropriateness of assumptions used by the expert should be reviewed and referenced to other evidence

Quality and adequacy of Audit Evidence Sampling The following documents have to be considered in respect of sampling: Explanation on how the sample size was determined; Discussion about the nature and composition of the population, including number of items and total value; Discussion of the method of selection of the sample; Indication as to what percentage of the population was included in the sample with reference to the number of items or value; and Explanation why items over X were included in the sample

Quality and adequacy of Audit Evidence General Journal Testing Documentation regarding the review of general journal entries, and discussion in the audit plan regarding the nature, timing and extent of journal testing. ISAs require the auditor to test the appropriateness of journal entries and other adjustments irrespective of the auditor’s assessment of the risk of management override of controls. Audit procedures should be performed and documented to consider the appropriateness of general journal entries throughout the reporting period and at year end.

Quality and adequacy of Audit Evidence Completion of Audit Files Permanent, current year and correspondence files, appropriate index and section dividers Planning – KYC, risk assessment, audit approach, planned testing, Audit Planning Memo – APM - (record of meetings (client, audit team) and approval by engagement partner), Engagement Quality Control Review – EQCR - Work conducted – link to planning, all working papers to record objectives, methodology/sampling, detailed results of detailed tests and conclusions Review & completion – Audit Completion Memo – ACM - , supervisor, manager, partner reviews, EQCR File lockdown within 60 days or terms determined by applicable regulation

Practical Tips How to improve quality without adding significant additional costs QCR Questionary: Applicable Tool for auto-test

Results of peer reviews Areas to Improve Mohammed Yaqoob

Result of peer reviews The following QCRs have been completed during the 8 months to June 2014: 2 advanced FSR QCRs – 1 now being mentored 4 pre-admittance FSR QCRs – all satisfactory 6 routine FSRs QCRs – all satisfactory but with some improvements required 2 pre-admittance LSRs QCRs – all satisfactory 4 routine LSR QCRs – all satisfactory but 2 did have some recommendations

Result of peer reviews The most occurring issues were as follows: Documentation lapses (41/66 = 62%); 8 significant lapses, 3 planning meeting, 3 independence, 3 communications with those charged with governance, 3 related parties, 3 going concern reviews QC lapses (11/66 = 17%); 5 whole firm/cold file reviews, 3 EQCR Annual survey not completed (4/66 = 6%)

Result of peer reviews The mentoring methodology was implemented in 2012. 7 members firms are being mentored at present. The Committee has completed it’s detailed review of the mentoring methodology and decided that based on experience during 2014 the process had worked well and there was no need at present to make any changes.

Completion of audit files In some instances: audit files have not been locked down within 60 days as required by ISAs work papers and completion programs were completed after the date of the audit report. There is a risk that some audit procedures may not have been performed prior to the date of the audit opinion. Firms to lockdown all audit files within 60 days after the audit Partner has signed the audit report. Planning is the key to an effective and efficient audit

© 2014 Nexia International Limited. All rights reserved © 2014 Nexia International Limited. All rights reserved. The trade marks NEXIA INTERNATIONAL, NEXIA and the NEXIA logo are owned by Nexia International Limited. Nexia International and its member firms are not part of a worldwide partnership. Member firms of Nexia International are independently owned and operated. Nexia International does not accept any responsibility for the commission of any act, or omission to act by, or the liabilities of, any of its members.