Specialized Industries additional notes 4th year

PPTX on Specialized Industries - Additional Notes

1. Auditing & Assurance: Specialized Industries

2. Course Description This course builds on the knowledge base from Auditing and Assurance Principles, Concepts and Applications ( PrE 1 to PrE 3) Auditing, to provide students with an in depth understanding of professional standards, as well as applications on the audit process, advanced auditing techniques, and the auditor’s role in ensuring that financial statements are fairly presented. Students will apply auditing procedures to financial statement transaction cycles, and conduct audit sampling and testing techniques using specialized data analysis software on specialized industries in the region, e.g. agri -based industry, mining industry, business process outsourcing, and the like. The course will be a seminar-type and to be complemented with hands on exposure in a chosen industry.

3. Auditing (PSA) PSA 200 defines auditing by stating the objective of a financial statement audit, that is, to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.

4. Other Definition A more comprehensive definition of auditing is given by the American Accounting Association: An audit is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between these assertions and established criteria and communicating the results to interested users.

5. Assurance An engagement whereby a practitioner expresses a conclusion that enhances the degree of confidence of the users on a subject matter prepared by a responsible party when the subject matter is compared and measured against established criteria. Levels of assurance 1. Reasonable Assurance (Audit) - are aimed at reducing engagement risk to an acceptably low level in the light of the given circumstance. A positive expression is thereby included in a practitioner’s report. 2. Limited Assurance (Review) - also aimed at reducing engagement risk to an acceptably low level, but that there is a higher engagement risk than that when a reasonable assurance is promised, since less extensive procedures are performed by the practitioner.

6. Audit vs Assurance The key difference between an Audit and Assurance is that an audit is the systematic examination of the books of accounts and the other documents of the company to know whether the statement shows a true and fair view of the organization. In contrast, assurance is how the different processes, procedures, and operations are analyzed.

7. Specialized Industries Specialized industry is not necessarily rare or even unusual.  What makes these industries specialized is that: have  specific financial reporting standards   applicable to them, or have  distinct accounting policies   which have been developed to account for specialized transactions and balances which are based on the normally-applied financial reporting standards. 

8. Examples: IAS/PAS 41 - Agriculture (for Agricultural Sector) IFRS 6/PFRS 6 - Exploration of Evaluation of Mineral Resources (for Mining Sector) IFRS 9/PFRS 9 and IFRS 7 - Financial Instruments and Financial Instruments: Disclosures (for Banking and other financial institutions) IFRS 17/PFRS 17 – Insurance Contracts (for Insurance Companies)

9. Examples of Specialized Industries: Airline companies Educational Institution Banking, Insurance and other Financial Institutions Petroleum Companies Mining Agriculture Power Distributor/Power Generating Co. Manufacturing (Aircraft, Medicine and the likes) Telecommunications Nonprofit or Not for Profit Organizations (such as Civic Organizations)

10. Characteristics of Specialized Industries High Risk (Publicly-listed or with Public Accountability) Strict and several compliance to laws and government agencies and its regulations Complex accounting (revenue recognition)

11. Audit Considerations Competence Audit Planning Reliance on Experts

12. Competence Audit Firm Audit partner and Audit team to handle the audit engagement Independent Audit Partner Needed Competence of Audit Firm Personnel Knowledge of relevant industries and; Has experience with relevant regulatory or reporting requirements or The ability to gain the necessary skills and knowledge effectively.

13. Competence Prior to accepting an audit engagement involving a specialist industry, there are  a number of relevant auditing standards which the audit firm needs to pay close attention. ISQC/PSQC 1 – Quality control for firms that perform audits and reviews of financial statements and other assurance and related services engagements Requires the audit firm to consider whether the firm is competent to perform the engagement and has the capabilities, including tim e and resources to do so. The audit firm should also ensure that there is adequate documentation to demonstrate that competence has been considered, and the steps that have been taken to improve competence where necessary, for example through appropriate staff training.

14. Audit Planning Identification of the risk of material misstatement in a specialized industry should be approached in the same was as in any other audit – by obtaining appropriate understanding of the business and its environment.  To assist audit team members assigned to a specialized industry client, the audit firm is likely to have additional resources available. There may be: Briefing notes or Internal technical guidance on how financial reporting standards should be applied within the sector. For example, in the audit of banking sector clients , an audit firm may produce guidance on the specific application of IFRS® Standards relating to the range of financial instruments typically held by banks. Audit staff can then refer to this guidance when performing the audit, particularly when identifying risks of material misstatement.

15. Audit Planning It is also important to remember that while there may be specific risks of material misstatement relating to the industry-specific balances and transactions, there must also be appropriate consideration of the “normal” balances and transactions .  For instance, in the audit of a bank , there will be plenty of risks to consider other than those relating to bank-specific transactions and balances, for example the depreciation of properties, recognition of provisions and impairment of goodwill would all still be relevant. These 'normal' types of risk must not be forgotten, just because the client operates in a specialized industry.

16. Reliance on experts Linked to the previous matters, competence, audit planning and the specialized nature of some transactions and balances, the auditor may plan to use an auditor’s expert to obtain audit evidence.  This is quite likely in a specialized industry as despite being competent to perform the engagement, the audit firm may not have the necessary specific expertise in some areas. For instance, in the audit of a bank , specialists may be brought into value complex financial instruments or actuaries to review a defined benefit pension scheme.

17. Reliance on experts In this situation, the audit firm must adhere to the requirements and principles of P SA 620,  Using the Work of an Auditor’s Expert   which deals with matters including the evaluation of the objectivity, competence and capabilities of the auditor’s expert, determining and communicating the scope and objectives of their work, and assessing their findings. It is particularly important that the auditor evaluates the relevance and adequacy of the expert’s findings or conclusions . There is a danger of over-reliance on the expert’s work; the fact that the audit is of a specialized nature does not mean that the auditor can pass all responsibility over to an expert. For instance, the auditor must consider whether the expert’s findings are consistent with the auditor’s understanding of the client and with the conclusions of other audit procedures. Any inconsistencies must be investigated.

18. Summary The audit of a client in a specialized industry can pose some challenges to the audit firm. However, with proper consideration of competence, and by providing staff with additional support and guidance, these audits should not necessarily be more complex or challenging to plan and perform. Using experts can provide high quality audit evidence in specialist situations, but the auditor must be careful to fully evaluate the findings of the auditor’s expert and not to over-rely on their work. For audit staff, working on this type of engagement can be very rewarding , providing exposure to sometimes unusual businesses.