1. QUALITY CORPORATE REPORTING
Thank you Anupama
Before the break we had an overview of Corporate Reporting from the presentation of Miss Mohoni
We saw the various stakeholders in the chain of corporate reporting
Among the important stakeholders in the chain of CR are Management and the auditor
Today we are glad to have for the workshop both Management and the auditors.
It is the first time that FRC have brought together both the management and auditors
And I hope that such a networking will be beneficial for enhancing QCR
To start with
AUDIT PERSPECTIVE
Mr Viswajithsing Tuhobol
Date: 27 August 2014
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2. CONTENTS INTRODUCTION FINANCIAL STATEMENTS - FAIR PRESENTATION
ROLE OF AUDITORS
QUALITY AUDIT
INPUT
PROCESS
OUTPUT
AUDITORS INTERACTION
CONCLUSION
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3. 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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4. 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.
Why this may be the case?
Why the Financial Report is not showing the true picture?
Why the company failed despite there was no alarm bell in the FS?
Huge assets, net current position, ?
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5. 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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6. 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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7. 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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8. Financial Statements: Present Fairly in Conformity with IFRS
Why might financial statements NOT present fairly?
Two main reasons:
ERROR.
FRAUD.
Auditor’s role is to look for misstatements caused by either reason.
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
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9. 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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10. 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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11. 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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12. ANNUAL REPORT REVIEWED DURING SEPT to DEC 2013
Types of PIEs
Full Review
Follow-up Review
Total
Grade 1
Grade 2A
Grade 2B
Listed on SEM 3 4 7 2 1 18
Financial institutions regulated by BOM (excluding cash dealers) -  - - 
Financial institutions regulated by FSC 12 13
Other PIEs 20 33 53
KEY:
1 - Satisfactory
2A - Acceptable with minor improvements
2B - Acceptable with significant improvements
3 - Unsatisfactory
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13. DATA ON ENGAGEMENT FILES GRADING
YEAR
GRADING OF ENGAGEMENT FILES
2013
2014 – TO DATE 1 9 2 2A 10 6 2B % % 3 7 4
TOTAL 32 21
Key:
Satisfactory
2A - Acceptable with minor improvements
2B - Acceptable with significant improvements
Unsatisfactory
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14. Quality Audit
A quality audit is likely to have been achieved by an engagement team that:
Exhibited appropriate values, ethics and attitudes;
Was sufficiently knowledgeable, skilled, and experienced and had sufficient time allocated to perform the audit work;
Applied a rigorous audit process and quality control procedures that complied with law, regulation and applicable standards;
Provided useful and timely reports; and
Interacted appropriately with relevant stakeholders.
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15. Audit Quality Key Elements: • Inputs • Process • Outputs
• Interactions
• Contextual Factors
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16. 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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17. INPUTS: VALUES, ETHICS & ATTITUDES
ENGAGEMENT LEVEL
FIRM LEVEL
Audit – Wider public interest
Comply with ethical requirements
Objectivity and Integrity
Independent
Professional Competence and due care
Professional skepticism
The engagement team recognizes: that the audit is
performed in the wider public interest; and the importance
of complying with ethical requirements
• The engagement team exhibits objectivity and integrity
• The engagement team is independent
• The engagement team exhibits professional competence
and due care
The engagement team exhibits professional skepticism
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18. INPUTS: VALUES, ETHICS & ATTITUDES
ENGAGEMENT LEVEL
FIRM LEVEL
Audit – Wider public interest
Comply with ethical requirements
Objectivity and Integrity
Independent
Professional Competence and due care
Professional skepticism
Tone at the top
Safeguard independence
Appraisal + Reward System
Financial considerations not impair audit quality
CPD
Promote consultation
Robust system for client acceptance + continuance
Governance arrangements are in place that establish the appropriate “tone at the top”, and which aim to safeguard the firm’s independence
• Necessary personal characteristics are promoted through appraisal and reward systems supporting audit quality
• Financial considerations do not drive actions and decisions that impair audit quality
• The firm emphasizes the importance of providing partners and staff with continuing professional development opportunities and access to high-quality technical support
• The firm promotes a culture of consultation on difficult issues
Robust systems exist for making client acceptance and continuance decisions
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19. INPUTS: VALUES, ETHICS & ATTITUDES
ENGAGEMENT LEVEL
FIRM LEVEL
NATIONAL LEVEL
Audit – Wider public interest
Comply with ethical requirements
Objectivity and Integrity
Independent
Professional Competence and due care
Professional skepticism
Tone at the top
Safeguard independence
Appraisal + Reward system
Financial consideration not impair audit quality
CPD
Promote consultation
Robust system for client acceptance and continuance
Ethics requirements are promulgated
Ensure ethics principle s are understood and consistently applied
Information relevant to client acceptance decisions is shared between audit firms
• Ethics requirements are promulgated that make clear both
the underlying ethics principles and the specific
requirements that apply
• Regulators, national standards setters and professional
accountancy organizations are active in ensuring that the
ethics principles are understood and the requirements are
consistently applied
• Information relevant to client acceptance decisions is
shared between audit firms
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20. INPUTS: Knowledge, Skills, Experience and Time
ENGAGEMENT LEVEL
FIRM 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
Partners and staff have the necessary competences
• Partners and staff understand the entity’s business
• Partners and staff make reasonable judgments
• The audit engagement partner is actively involved in risk assessment, planning, supervising, and reviewing the work performed
• Staff performing detailed “on-site” audit work have sufficient experience, their work is appropriately directed, supervised and reviewed, and there is a reasonable degree of staff continuity
• Partners and staff have sufficient time to undertake the audit in an effective
manner
• The audit engagement partner and other experienced members of the engagement team are accessible to management and those charged with governance
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21. INPUTS: Knowledge, Skills, Experience and Time
ENGAGEMENT LEVEL
FIRM 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
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
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22. INPUTS: Knowledge, Skills, Experience and Time
ENGAGEMENT LEVEL
FIRM LEVEL
NATIONAL 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
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
Licensing audit firms/individual auditors
Education requirements are clearly defined and training is adequately resourced and effective
Arrangements exist for updating auditors
The auditing profession is well-positioned to attract and retain individuals with appropriate qualities
Robust arrangements exist for licensing audit firms/individual auditors
• Education requirements are clearly defined and training is adequately resourced and effective
• Arrangements exist for updating auditors on current issues and for providing training to them in new accounting, auditing or regulatory requirements
• The auditing profession is well-positioned to attract and retain individuals with appropriate qualities
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23. 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
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
The engagement team complies with auditing standards, relevant laws and regulations, and the audit firm’s quality control procedures
• The engagement team makes appropriate use of information technology
• There is effective interaction with others involved in the audit
• There are appropriate arrangements with management so as to achieve an effective and efficient audit process
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24. 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
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
The AM is adapted to developments in standards and to findings from IQC reviews and external inspections
The AM encourages to apply professional skepticism and exercise appropriate professional judgment
The AM requires effective supervision and review of audit work
Audit documentation
Monitoring
EQCRs
The audit methodology is adapted to developments in professional standards and to findings from internal quality control reviews and external inspections
• The audit methodology encourages individual team members to apply professional skepticism and exercise appropriate professional judgment
• The methodology requires effective supervision and review of audit work
• The methodology requires appropriate audit documentation
• Rigorous quality control procedures are established and audit quality is monitored and appropriate consequential action is taken
• Where required, effective engagement quality control reviews (EQCRs)
are undertaken
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25. Process: Audit Process and Quality Control Procedures
ENGAGEMENT LEVEL
FIRM LEVEL
NATIONAL 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
The AM is adapted to developments in standards and to findings from IQC reviews and external inspections
The AM encourages to apply professional skepticism and exercise appropriate professional judgment
The AM requires effective supervision and review of audit work
Audit documentation
Monitoring
EQCRs
Auditing and other standards are promulgated that make clear the underlying objectives as well as the specific requirements that apply
Bodies responsible for external audit inspections consider relevant attributes of audit quality, both within audit firms and on individual audit engagements
Effective systems exist for investigating allegations of audit failure and taking disciplinary action when appropriate
Auditing and other standards are promulgated that make
clear the underlying objectives as well as the specific
requirements that apply
• Bodies responsible for external audit inspections consider
relevant attributes of audit quality, both within audit firms
and on individual audit engagements
• Effective systems exist for investigating allegations of audit
failure and taking disciplinary action when appropriate
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26. 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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27. AUDIT QUALITY Possible perception of audit quality through
an audit committee member’s lens
Possible perception of audit quality
through an investor’s lens
Auditor Reputation
Auditor Reporting
Expectations of the audit
Relevance/
Investor
Perspective
of Quality of the Audit Process
Assessment
Assessment of Quality of
the Auditor
and Interactions
Communications
Auditor
Audit
Committee
Member
Perspective
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28. 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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29. 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.”
In its 2008 report Financial Reporting Supply Chain: Current Perspectives and Directions, 9 the International Federation of Accountants
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30. Interactions
AUDITORS
MANAGEMENT
TCWG
USERS
REGULATORS
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31. 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.
Management is responsible for:
The preparation of the financial statement
Internal control
Ensuring that FS comply with the applicable financial reporting framework
Fair presentation.
An open and constructive relationship between the auditor and management needs to be
distinguished from one of over-familiarity, which may occur when auditors spend extended periods during the year at the same audit client. It is vital for audit quality that auditors remain skeptical and objective and are prepared to challenge the reliability of the information they are given.
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32. 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.
An open and constructive relationship between the auditor and management needs to be
distinguished from one of over-familiarity, which may occur when auditors spend extended periods during the year at the same audit client. It is vital for audit quality that auditors remain skeptical and objective and are prepared to challenge the reliability of the information they are given.
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33. 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.
In listed companies and other large entities, much of the work related to overseeing the
entity’s financial reporting process is often undertaken by an audit committee.
Effective two-way communication with auditors can assist those charged with governance in
fulfilling these responsibilities
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34. 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.
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.
In listed companies and other large entities, much of the work related to overseeing the
entity’s financial reporting process is often undertaken by an audit committee.
Effective two-way communication with auditors can assist those charged with governance in
fulfilling these responsibilities
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35. 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.
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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36. 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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37. CONCLUSION FEEDBACK Qcr MGT + Qcr TCWG + Qcr AUDITOR + Qcr REGULATOR
= QUALITY CORPORATE
REPORT
FEEDBACK
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38. THANK YOU
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