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(a) Discuss the pros and cons of having mandatory financial statement audits for private companies in
Singapore.
Pros
Provides assurance that management has presented a true and fair view of a companys financial
performance and position.
An independent audit is crucial to good corporate governance and essential to an effective internal financial
control function.
Greater confidence and trust by the various stakeholders in the financial information provided.
Lowers information asymmetry risk which translates to higher returns. (Ability to secure higher loan or cheaper
debt pricing)
Cons
Loss of signaling benefit from allowing audits to be voluntary where theory predicts that the companys
decision on whether to be audited conveys valuable information to outsiders about its borrowing
characteristics
Increases fixed costs to the company to comply with regulatory requirements
(b) Explain the proposed change in the requirement for mandatory financial statement audits in Singapore.
Discuss how does the new audit exemptions compare to the audit requirements in other countries.
Past
Proposed
Exempted from having
small company concept
its accounts audited if
To be exempted, a company must be a private company that fulfils at least 2
it is an exempt private
of the following 3 quantitative criteria:
company with annual
(a) Total annual revenue < $10 million;
revenue of < $5 million
(b) Total assets < $10 million
(c) Total number of employees < 50
Proposed change
Notably, company no longer needs to be an EPC to be exempted from audit.
A company qualifies as a small company in a particular financial year if it is a private company and meets at
least 2 of the 3 quantitative criteria in each of the previous 2 FY.
Rationale
Regulatory burden on small companies is reduced 25,000 companies will benefit.
Maintain consistency with existing IFRS standards for SMEs (same criteria)
Move further towards a risk-based approach
Existing safeguards
All companies to keep proper accounting records
Shareholders with >5% voting rights can require a company to prepare audited accounts
Singapore
UK
Australia
Hong Kong
Revenue
< S$10m
< 6.5m
< AUD25m
< HK100m
Assets
< S$10m
< 3.26m
< AUD12.5m
< HK100m
Employees
< 50
< 50
< 50
< 100
Must meet at least 2 out of the 3 requirements
Notes
Need to meet criteria As of 24 Oct 2014,
Cannot be owned by
If company is a
in each of the
proposing to change
foreign entities
standalone entity, no
preceding 2 years
to 10.2m and 5.1m
size requirements
(c) Discuss how the change will impact the audit profession.
A company no longer needs to be an Exempt Private company to be exempted from audit
o Implications to the Audit Profession
o For existing external auditors of the benefitting companies: Loss of clients when they qualify for audit
exemption
o For potential external auditors of the benefitting companies: Smaller pool of prospective private
companies for consideration as clients
Under the Small Companies regime, a private company with a corporate S/H may qualify for exemption, even
if it is a member of a group
o Implications to the Audit Profession
o Where the parent company of a group is required to be audited, complications may arise in the
absence of audited financial statements of the subsidiaries if the subsidiaries are exempted
Requirement for the entire group, to which a Small Company (thats also a subsidiary) belongs, to qualify on a
consolidated basis for audit exemption under the small company criteria for that Small Company to qualify for
audit
o Implications to the Audit Profession
For existing external auditors of the benefitting companies: Cascading effect of the exemption results
in significant losses in clients when the entire group qualifies for audit exemption and the auditor
renders audit services for multiple members in the group under the current regime
Small Companies concept in Companies Act consistent with Small Companies concept introduced in the
SFRS for Small Entities. Private Companies qualifying as Small Companies will be motivated to prescribe to
SFRS for Small Entities for financial reporting
o Implications to the Audit Profession
o In the Voluntary audit of a Small Company using SFRS for Small Entities, the relevant criteria guiding
the preparation of the financial statements would be different from the commonly used SFRS
o Auditors must become professionally competent in the understanding and application of the criteria
provided for in the SFRS for Small Entities for the purpose of audit
(d) Briefly explain the key differences between an audit and a review engagement
Audit
Review
Guiding standards
Singapore Standards on Auditing (SSA)
Singapore Standards on Review Engagements (SSRE)
Level of assurance and opinion
SSA 200. 5
SSRE 2400. 5
Reasonable level of assurance
Limited level of assurance
High level of assurance obtained when auditor
Risk is greater than that of a reasonable
has obtained sufficient appropriate audit evidence
assurance engagement
to reduce audit risk to an acceptably low level
SSA 200. 5
SSRE 2400. 17(f)
Reasonable assurance that financial info and statements, The combination of nature, timing and extent of evidence
as a whole, gives a true and fair view, or is presented
gathering procedures is at least sufficient for practitioner
fairly, in all material respects, in accordance with an
to obtain a meaningful level of assurance in order to
applicable financial reporting framework
enhance intended users confidence about financial
statements
Materiality calculation
SSA 200. 6
SSRE 2400. 43
Financial statements as a whole
The practitioner shall determine materiality for the
financial statements as a whole, and apply this materiality
in designing the procedures and in evaluating the results
obtained from those procedures.
SSA 320. A12
Performance materiality
Performance materiality is set to reduce to an
appropriately low level the probability that the aggregate
of uncorrected and undetected misstatements in the
financial statements exceeds materiality for the financial
statements as a whole
Understanding of entity
SSA 200. A50
SSRE 2400.45
Sufficient to identify and assess the risk of material
Sufficient to identify areas in the financial statements
misstatement at the financial statement and assertion
where material misstatements are likely to arise
levels
identify areas in the financial statements where
Have a basis for the identification and assessment of
material misstatements are likely to arise and thereby
risks of material misstatement at the financial statement
provide a basis for designing procedures to address
and assertion levels by performing risk assessment
those areas.
procedures and related activities
SSA 200. 7
SSRE 2400. A26
Obtain understanding of entitys internal control and
Understanding information systems and the role and
assess fraud risk
limitations of internal control
Work effort
SSA 200. A48
SSRE 2400. 8
there is an expectation by users.. auditor will form an
If the practitioner becomes aware of a matter that
opinion within a reasonable period of time and at a
causes the practitioner to believe the financial statements
reasonable cost, recognizing that it is impracticable to
may be materially misstated, the practitioner designs and
address all information
performs additional procedures, as the practitioner
that may exist or to pursue every matter exhaustively on
considers necessary in the circumstances, to be able to
the assumption that information is in error or fraudulent
conclude on the financial statements in accordance with
until proved otherwise.
this SSRE.
Standard establishes work effort based on components
significance:
o Size
o Specific risks
o
SSRE 2400. 47
In obtaining sufficient appropriate evidence as the basis
for a conclusion on the financial statements as a whole,
the practitioner shall design and perform inquiry and
analytical procedures:
(a) To address all material items in the financial
statements, including disclosures; and
(b) To focus on addressing areas in the financial
statements where material misstatements are likely to
arise.
SSRE 2400. 49
In designing analytical procedures, the practitioner shall
consider whether the data from the entitys accounting
system and accounting records are adequate...
SSRE 2400. 7
... performs primarily inquiry and analytical procedures to
obtain sufficient appropriate evidence as the basis for a
conclusion on the financial statements as a whole...
SSRE 2400. 8
Additional procedures if deemed necessary under the
circumstances.
SSRE 2400. 70
The practitioner shall consider the impact of: (a)
Uncorrected misstatements identified during the review,
and in the previous years review of the entitys financial
statements, on the financial statements as a whole
Management Responsibilities
New section introduced in the code (291.141-291.145)
Clear prohibitions on firms assuming management responsibilities for an audit or review client
Corporate Finance Services
Enhanced discussion of nature of Corporate Finance Services, the threats created, factors to consider and
potential safeguards.
Introduced prohibition where the effectiveness of corporate finance advice depends upon a particular
accounting treatment or presentation and there is a reasonable doubt thereon, and the effect on the financial
statements is material.
Taxation Services
2009 SG Code
2015 SG Code
290.180 Taxation services ... are generally not seen to
290.179 Performing certain tax services creates selfcreate threats to independence.
review and advocacy threats
Practical Challenge:
o Audit firms may lose clientele/revenue stream when they have to cease the performance of these
taxation services
Changes that apply to PIEs
Prohibited under revised code:
o Recruiting services
o Tax calculations for purpose of preparing accounting entries material to FS (except in emergency
situations)
o Valuation services
Challenge: Firms may lose revenue streams
Internal Audit services
2009 SG Code
2015 SG Code
290.180A A public
290.197 ... a firm shall not provide internal audit services that relate to:
accountant, firm or network (a) A significant part of the internal controls over financial reporting;
firm must not provide
(b) Financial accounting systems that generate information that is, separately or in the
internal audit services to a
aggregate, significant to the clients accounting records or financial statements on which
financial statement audit
the firm will express an opinion; or
client that is a listed entity
(c) Amounts or disclosures that are, separately or in the aggregate, material to the
or public company.
financial statements on which the firm will express an opinion.
Practical challenge:
o Exercising same level of professional skepticism when the internal audit work is used
o Difficulty in determining the significance and materiality of the service provided
Accounting and bookkeeping services
2009 SG Code
2015 SG Code
290.172 ...would not be seen as
290.170 may provide accounting and bookkeeping servicesif the personnel
impairing independence
providing the services are not members of the audit team and:
provided that :
(a) The divisions or related entities for which the service is provided are
(c) The fees to the firm, or
collectively immaterial to the financial statements on which the firm will express
network firm, from such services
an opinion; or
are collectively clearly
(b) The services relate to matters that are collectively immaterial to the financial
insignificant.
statements of the division or related entity.
Practical challenge to auditors:
o Managing self interest threat arising from financial interests
o Difficulty in interpreting provision and determining if service is collectively immaterial
Design/ Implement IT systems
2009 SG Code
2015 SG Code
SG290.186A must not provide services
290.203 shall not provide services involving the design or
that involve:
implementation of IT systems that
(a) design and implementation ; or
(a) form a significant part of the internal control over financial
(b) either the design or the implementation of
reporting or
financial IT systems used to generate
(b) generate information that is significant to the clients accounting
information forming part of a clients FS.
records or FS on which the firm will express an opinion.
Practical challenge:
o Confining IT systems to areas which do not impact the FS due to pervasiveness of IT systems
o Difficulty in interpreting the provision and determining how much constitutes a significant part of
internal controls and financial statements.
Long association with audit clients
First key change: Expanding the coverage of additional provision from Listed Entities to include all Public
Interest Entities (PIEs)
o Additional provision is a set of stricter guidelines to maintain a higher level of independence
Change is made to recognise the need for higher level of public confidence in the financial statements
of all PIEs
Definition of PIE
IESBA
A) All listed Entities
B) Any entities----i) Defined by regulations or legislation as a public
interest entity
2015 SG Code
Reason
Removed SG290.210A
290.223
Threshold
Complete ban on contingent fee
Non-assurance service is
More developed concept of
basis
allowed (Subject to factors for
materiality
(Listed/public companies)
significance of independence
Concerns: Self-Interest threat
threat)
(c) An auditor cannot be truly independent when payment of audit fees is dependent on the management of
the client. Suggest ways to reduce this perceived lack of independence.
Set fixed fees
Set by outside of management
Have regulators appoint auditors
Rotation of audit firms
Section
2009 SG Code
SG290.210A
Disagree
Partner Rotation & Cooling Off Period
Smaller audit firms with insufficient headcount may have difficulty fulfilling the rotation requirements
Non-PIEs still have the discretion to ascertain if familiarity threat exists and the cooling period
Restrictions on the type of activities by KAP
Audit quality may be compromised as knowledge and expertise on the client may be lost due to the extended
cooling period
May have an overall adverse effect on firms
Overall: Agree
Overall beneficial for the industry
The perceived negatives are outweighed by anticipated improvement in the perception of independence from
stakeholders as a whole, including investors and regulators.
Proposed changes will have positive impacts for clients, investors and public confidence in that it creates a
further check and balance on decision making within the audit process.
(c) Discuss the pros and cons of mandatory rotation of audit firms
Pros
Improve independence
o Auditor can get too familiar with client auditor losing its professional skepticism and become less
observant
o Financially rewarding to maintain a long term relationship with a client
o Mandatory rotation: Improve appearance of independence
Improve audit quality
o Close relation and familiarity with client reduce the quality of audit
o Auditors might become less rigorous because they trust their client and rely too much on previously
done work
o A new auditor will have a new/fresh point of view
Cons
Reduce audit quality
o Quality is low during the first few years of engagement as auditor need time to develop specific
knowledge about the company greater problem in specialised industries
o Auditors are generally more dependent and influenced by their clients in the first few years
Increased costs
o For auditors: Cost increase to gain good knowledge of the client
o For clients:
Have to provide resources, assistance and material resources e.g. spend more time to
orientate its new audit team.
Extra costs when selecting the new auditor (research cost)
Increased risk of audit failure in the first few years of working with a new auditor
o For shareholders: an investor might not be able to distinguish a voluntary change of the audit firm
(due to, for example opinion shopping of management) from a compulsory rotation
o Increasing the cost of information
Decreased competition
o Argument: mandatory rotation might provide smaller audit firms the opportunity to grow
o However, it is equally likely that mandatory firm rotation will lead to higher market concentration
because large corporations tend to choose one of the Big 4 auditors when switching their audit firm
o Companies with specialised activities: limited in their freedom of choose
(d) How does mandatory audit firm rotation affect an auditors assessment of the clients business risk, the
auditors business risk and acceptable audit risk?
Client Business Risk
Auditors may not be able to assess the changes in business risks as well
Auditors put less effort in assessing the business environment
Information not relayed to succeeding auditors properly (as they are competitors)
May assess business risk to be lower if missed out on pertinent changes
Auditor Business Risk
Auditors will see an increase in number of new clients due to need to release old clients
Rotation after a few years = less due diligence
Client selection lowers engagement risk
Less stringent selection increases auditors business risk
Higher chance of client involvement in litigation or controversy
Acceptable Audit Risk
New auditors start out not proficient on the job
Higher minimal detection risk (can only perform up to a % of transactions, beyond that it becomes
uneconomical)
Minimal audit risk auditors can accept is higher
Removing the terms significant and generally creates an absolute line on what constitutes management
responsibilities
The increasingly clear-cut definition leaves little room for potential arguments and debates.
Auditors who abided by the well-explained provisions would be able to better maintain independency
Further Clarification Routine or Mechanical
Improve understanding for the term Routine or Mechanical
To a certain degree, better distinguishes between routine and non-routine work
By including more examples, the code provides a clearer guidance that is to be followed by the auditors.
o Example: of a routine nature such as utility bill
Disagree
Removal of Emergency Exception Provision
Purpose: Converge varying views, pertaining to the provision, among the many jurisdictions and IESBA
towards a single consensus
Some jurisdictions, however, still do not have regulations or regulatory processes to deal with possible
breaches of the code. In those cases, discretion remains in the hands of the audit firms and clients
Therefore, the code still does not address the practical challenges faced by those jurisdictions in applying the
provision as intended by the code.
Further Clarification Management Responsibility
Comprises of all related actions performed for each type of activity.
o Example: Non-Assurance Service (Corporate Taxation):
Directing employees of the client to assist in miscellaneous tasks, such as gathering
information required to perform the service.
Deployment of human Management Responsibility?
Other Considerations
The underlying concepts for the affected terms remain somewhat the same.
o Feedback from various jurisdictions through comments on the exposure draft reflects that the
understanding on what the code intends to regulate is not affected, with or without the proposed
changes.
o Necessary?
More examples are added to improve the clarity of the provisions.
o Principle-based Code of Ethics gradually taking a Rule-based approach instead. Code of Ethics
becoming a check-list of do and dont for the auditors, rather then leaving room for professional
judgment
o Akin to Illustrative Examples for FRS
o More appropriate to provide FAQs and other supporting guidance materials instead?
(c) How does the approach of IESBA in respect of provisions of non-assurance services for audit clients
compare to that of Section 201of the Sarbanes-Oxley Act of 2002?
IESBA 290
SOA s201
Use of conceptual framework
Public law
Principle based
Rule based
Application based on circumstance
Absolute in nature
Activities affected are defined
A list of prohibited activities
Permitted under emergency situations
Exemption authority allows Board to permit non-assurance service.
Permitted if preapproved by audit committee
(d) Discuss the pros and cons of allowing external auditors to provide non-audit services to their audit
clients.
Pros
Knowledge spill over
o Overlap of information required in both audit and non-audit services
o Exchange of knowledge between auditors and other departments
o Enhanced Audit Quality
Increase technical competence of auditors
Providing NAS lead to greater understanding of the clients business and financial
transactions
Increases auditors knowledge base
Example: Audit of systems requires help of specialists
Greater likelihood of identifying key issues and undetected misstatements during the audit
process
o Better quality of NAS provided
Auditors have extensive knowledge of the client
Systems, personnel, activities, industry
Experience in dealing with challenges unique to client
Best position to provide advice to clients on their operations and systems
Greater Efficiency
Services in which information required is a by-product of the audit process
Example: Tax calculations most information derived from financial records
Communication with experts within the same firm may be faster compared to consulting from
other firms during audit process
o Reduction in total cost
Resulting from economy of scope
Overlap of information and resources required for auditing and in other services
Joint use of information (knowledge spill over) in audit and NAS
Lower total cost compared to engaging different firms for each service
Financial Benefits to Audit Firm
o Additional income stream from providing profitable NAS
Indirect Benefits
o Auditors gain additional skills and knowledge from working with skilled colleagues in other
departments.
o
Cons
Threats to Independence
Financial Interest threats
o Auditor could benefit from financial interest in client
o High dependence on fees from audit client to the extent that maintaining objectivity is impossible
SelfReview threats
o Auditor in position of reviewing work they have been previously responsible for
o Possibility of ignoring errors made previously
o E.g. Valuation service where the resulting valuations have material effect on financial statements
Familiarity threats
o Auditor develops too close of a relationship with client due to multiple services
o Sympathetic to clients interest
o Reduce in professional skepticism
Advocacy threats
o Auditor promotes or perceives to promote clients position or opinion to the point that professional
objective is compromised
o E.g. Promoter of clients shares or securities
Tendency to accept risker clients
o Riskier clients have higher potential to obtain high profit through non-audit services e.g. Michael
Jackson
o Auditors may fail to adequately respond to increased risk
Perception of auditors independence
o Reliability of financial statements perceived as uncertain by investors
o Increased perceived risk may deter investors from investing in the company
o Loss of confidence in auditors by society
Presentation 5- EP200 Anti-money Laundering and Countering Financing of Terrorism
(a) Outline the key requirements in EP 200
Section 1 Introduction and Scope
Designated high risk service: Buying and selling of real estate; Managing of client money, securities or other assets;
Management of bank, savings or securities accounts; Organisation of contributions for the creation, operation or
management of companies; Creation, operation or management of legal persons or arrangements, and buying and
selling of business entities.
Section 2 Reporting and Tipping-off
Required under the Singapore law to lodge a suspicious transaction report with the Suspicious Transaction
Reporting Office, Commercial Affairs Department of the Singapore Police Force (STRO) if he knows or has
reasonable grounds to suspect that transactions are related to ML/TF, and if such knowledge or suspicion
arose in the course of his trade, profession, business or employment
Regardless of the amount of transaction
Failure to report is a crime
Where a professional accountant knows or suspects that investigations by the authorities are underway, the
professional accountant should exercise caution not to disclose related information to the alleged perpetrator
(or any other parties) so as to avoid tipping off
Will be an offence if it is likely to prejudice an investigation/impending investigation
The statutory obligation to report suspicious transactions to the authorities overrides any duty of confidentiality
to a client
Section 3 Systems and Controls
Establishing policies, procedures and controls
Risk-based approach
Professional firms would be able to ensure that measures to prevent or mitigate ML/FT are comparable with
the risks identified, and would enable them to make decisions on how to allocate their own resources in the
most effective way.
Section 4 Customer Due Diligence & Records Keeping
What kind of CDD measures to take
When CDD should be performed
o CDD measures apply to all new clients
o CDD measures shall also be applied to existing clients on the basis of risk, at appropriate times,
taking into account whether and when CDD measures have previously been undertaken and the
adequacy of data obtained.
How to conduct CDD
Non-compliance with CDD measures
Risk-based approach to CDD
Records keeping
Section 5 Reporting, Training, Compliance, Hiring and Audit
Reporting Procedures
Implement appropriate internal policies, procedures and controls to meet its reporting obligations under the
law
A single reference point (appointment of a Money Laundering Reporting Officer MLRO) should be
established for employees to refer all suspicious transactions to
Ongoing Training
Training programs tailored to the firms size, nature and complexity
Staff should be reminded of their responsibilities and kept informed of related new developments through
refresher training or internal communication
Refresher training should be held at least once every 2 years or more regularly if new regulatory requirements
are imposed
Compliance Management
Develop appropriate compliance management arrangements to monitor the professional firms compliance
with its AML/CFT policy and procedures
Appointment of a compliance officer at the management level who would report to senior management on
compliance and address any identified deficiencies
Hiring
Have adequate screening procedures in place to ensure high hiring standards
Independent Audit Function
Adequately resourced and independent to regularly assess the effectiveness of the professional firms internal
policies, procedures and controls, and its compliance with AML/CFT requirements
(b) Discuss the impact of the enhanced mandatory requirements on implementing controls and procedures
for anti-money laundering (AML) and countering the financing of terrorism (CFT) on auditors client
acceptance, audit procedures and quality control over audit.
Client Acceptance
When auditors are screening engagements, CDD requirements may either be integrated with existing client
acceptance procedures or addressed separately.
More work for the firm prior to client acceptance
Risk 2
Misappropriation of Cash
Susceptible to theft by employees when they make dollar bill changes for patrons, since the act
cannot be traced by the cashier counter.
Controls
Internal Controls:
Install CCTV cameras as deterrence for theft and allows for detection of theft
Restrict staff access to cashier counter, prepare a standard amount of petty cash/loose change for
each wait staff (which they are individually accountable for)
Stringent personnel selection process and impose clear rules and penalties against theft
Issue: Accounting of Dollar Holler Dollars, Dollars accounted for as Cash in B/S and Gain in P/L (part of net
income), Valuation of balances determined via estimation
Risk 3
Misrepresentation (Under/Overstatement) of Financial Standings for Cash Balance and Income
No way of reliably estimating how many bills put up annually at each location within US.
Unreliable financial information for company to assess its performance
Also, may inadvertently understate net income and get into trouble with the US tax authorities for
underpaying tax
Controls
Internal Controls:
Require customers to inform staff before putting the bills up so that staff can holler while recording
amount at the same time.
Periodic counting and safe-keeping of dollar bills to ascertain amount of Dollar Holler account
Issue: Accounting of Dollar Holler Dollars, Dollars accounted for as Cash in B/S and Gain in P/L (part of net
income), Classification of dollars contentious
Risk 4
Misrepresentation (Overstatement) of Financial Standings for Cash Balance and Income
Dollar bills would not be utilised by the company in its operations like normal cash, since the
companys practice is to not remove the bills
Dollar bills cannot be reinvested or paid out as dividend like net income
Controls
Internal Controls:
Obtain the advice of professionals (eg accountants and lawyers) on how to more faithfully represent
dollar bills in the financial statements
o E.g. reclassify dollar bills as part of OCI instead of net income; record as Dollar Holler Dollars asset instead of Cash
(d) Explain how you could use analytical procedures to develop an expected value for theGainDollar Holler
account balance.
Audit firms culture is important in determining how its partners and staff function in the public interest
while achieving firms commercial goals
Governance arrangement to establish appropriate tone at the top
Promote necessary personal characteristics
Financial considerations do not drive actions and decisions
Providing partners and staff with continuing professional development and high-quality
technical support
Culture of consultation on difficult issues
Robust systems for making client acceptance and continuance decisions
At National level
o National audit regulatory activities have an important influence
Ethics requirements are promulgated
Regulators, national standards setters and professional accountancy organizations are active
in ensuring ethics principles are understood and requirements are consistently applied
Information relevant to client acceptance decisions shared between audit firms
Contribution of audit quality
o 3-tier effort to ensure auditors display values, ethics and attitude for quality audit
Identifies the key stakeholders that can contribute to audit quality
Emphasizes on importance of individuals in terms of objectivity, integrity, independence and
professionalism
Highlights the importance of an audit firms culture on individuals
National level organizations can help by creating greater clarifications on standards and
increasing enforcement
Knowledge, Skills, Experience and Time
At audit engagement level
o Audit engagement partner has the responsibility to ensure the engagement team has appropriate
competences
Understand the entitys business
Make reasonable judgments
Partner actively involved in risk assessment, planning, supervising, and reviewing the work
performed
Detailed on-site audit work has sufficient experience: Work is appropriately directed,
supervised and reviewed
Sufficient time to undertake the audit in an effective manner
Accessible to management and those charged with governance
At audit firm level
o Audit firms policies and procedures will impact the required knowledge and experience
Sufficient time to deal with difficult issues as they arise
Engagement teams are properly structured
Less experienced staff receive timely appraisals and appropriate coaching
Sufficient training is given to audit partners and staff on audit, accounting and specialized
industry issues
At National level
o National activities can impact the competences of auditors
Robust arrangements for licensing audit firms/individual auditors
Education requirements are clearly defined
Training is adequately resourced and effective
Update auditors on current issues and provide training to new requirements
Auditing profession is well-positioned to attract and retain individuals with appropriate
qualities
Contribution of audit quality
o 3-tier effort to ensure audit teams have the necessary knowledge, skills, experience and time
Identifies the key stakeholders that can contribute to audit quality
Each individual engagement team has a good balance of staff for the necessary knowledge
and experience required, while also ensuring staff continuity
National level guidance to the education of current and future auditors
Process factors
Audit Process and Quality Control Procedures
Contribution of audit quality
o 3-tier effort to ensure auditors apply a rigorous audit process and quality control procedures
Generally refers to the close compliance to auditing standards and relevant laws and
regulations
o
Similarly require national level bodies to monitor and enforce that the standards are being
complied
Output Factors & Key Interactions
Contribution of audit quality
o Output factors and Key Interactions with stakeholders can help improve audit quality
Providing greater insights to the outputs produced
Making improvements on entitys financial reporting and internal control through observations
Knowledge of the expectations of end users to provide more useful information in future
audits
Work with financial and prudential regulators to uncover material breaches in laws and
regulations
Contextual Factors
Environment in which financial reporting and audit takes place varies between countries
o In some countries, business practices relatively informal and commercial law less well developed.
External financing reporting may be limited, and user expectations related to it, low.
o As these countries develop (and as businesses grow in size and need to obtain financing from capital
markets), the environment becomes more complex
o Financial reporting becomes more important and user expectations of the speed and reliability
continuously grow
o In response, law, financial reporting requirements and corporate governance processes are constantly
evolving
o Environment factors (or contextual factors) collectively have the potential to impact the nature and
quality of financial reporting
o When appropriate, auditors respond to these factors when determining how best to obtain sufficient
appropriate audit evidence
Factors: Business Practices & Commercial Law; Laws and Regulations Relating to Financial Reporting;
Applicable Financial Reporting Framework; Information Systems; Corporate Governance; Broader Cultural
Factors; Audit Regulation; Litigation Environment; Attracting Talent; Financial Reporting Timetable
In light of proposed ISA 701, amendments to the required auditor communications with those charged with
governance,
for example, to include communication about the significant risks identified by the auditor
4. Proposed ISA 570 (Revised), Going Concern
Amendments to establish auditor reporting requirements relating to going concern, and to illustrate this
reporting within the auditors report in different circumstances
5. Proposed ISA 705 (Revised), Modifications to the Opinion in the Independent Auditors Report
Amendments to clarify how the new required reporting elements of proposed ISA 700 (Revised) are affected
when the auditor expresses a modified opinion, and to update the illustrative auditors reports accordingly
6. Proposed ISA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent
Auditors Report
Amendments to clarify the relationship between Emphasis of Matter paragraphs, Other Matter paragraphs and
the Key Audit Matters section of the auditors report
7. Proposed Conforming Amendments to Other ISAs
Conforming amendments related to communicating key audit matters
ISA 701: Communicating Key Audit Matters in the Independent Auditors Report
The New Auditors Report has included a new section to communicate key audit matters (KAM).
KAM = matters that, in the auditors professional judgment, were of most significance in the audit of the
financial statements of the current period.
KAM are selected from matters communicated with TCWG
What to include in KAM: aspects of auditors response that were most relevant, brief over of procedures
performed, indication of outcome of auditors procedures, key observations
Objective & purpose
o To determine KAM and, having formed an opinion on the FS, communicate those matters by
describing them in the auditors report
o To provide greater transparency about the audit performed enhance the communicative value of
auditors report
o Provides additional information to intended users to assist them in understanding KAM, the entity and
areas of significant management judgment in the audited FS
Not a substitute for
o disclosures in the financial statements
o a modified opinion when required by the circumstances of a specific audit engagement in accordance
with ISA 705
o reporting in accordance with ISA 570 (Revised) when a material uncertainty exists relating to events
or conditions that may cast significant doubt on an entitys ability to continue as a going concern
Not a separate opinion on individual matters.
Describe each KAM using appropriate subheading in a separate section under the heading Key Audit
Matters. The introduction of this paragraph should state:
o KAM are those matters that, in the auditors professional judgment, were of most significance in the
audit of the financial statements [of the current period]; and
o These matters were addressed in the context of the audit of the FS as a whole, and in forming the
auditors opinion thereon, and the auditor does not provide a separate opinion on these matters.
o Placed in close proximity to the auditors opinion give prominence
o Order of presentation of individual matters is a matter of professional judgment. E.g.: relative
importance based on the auditors judgment, or correspond to the manner in which matters are
disclosed in the FS.
o If comparative financial information is presented, the introductory language is tailored to draw
attention to the fact that the KAM described relate to only the audit of the FS of the current period
Circumstances in which a matter determined to be a KAM is not communicated in the auditors report
o (a) Law or regulation precludes public disclosure by either management or the auditor about the
matter (e.g.: matters that are or appear to be related to money laundering) or
o (b) When the adverse consequences would reasonably be expected to outweigh the public interest
benefits of such communication.
Understand managements views about the significance of adverse consequences by
communicating with management and TCWG
o Other concerns: Relevant ethical requirement? Required law or regulation?
When the auditor expresses a qualified or adverse opinion, communicating other KAM would still be relevant
to enhancing intended users understanding of the audit, and therefore the requirements to determine KAM
apply.
3 circumstances
o No key audit matters to communicate
o KAM will not be communicated in the auditors report and no other matters have been determined to
be key audit matters
The only key audit matters communicated are those matters addressed by Basis for
Qualified/Adverse Opinion section
(b) Outline the audit procedures that you would perform on the cash flow forecast to assess the going
concern basis for preparing the financial statements. You should justify your answers by stating the purpose
of each audit procedures that you would perform
Audit Procedures
Justifications
Inspect the list of existing customers and study the past trends of
Existence and valuation of the existing
aging reports on members
members - potential cash inflow
Study the past trends of the growth of new members and the
Assessment of the future revenue
retention rate of existing members
Study the past trends of the growth of subscription fees
Assessment for feasibility of increased in fees
Check for subsequent payments to determine if members are willing
Assessment of the future revenue
to pay increased fees
Review of employees list and send confirmation to all employees
Ensure all employees are included in the
current staff to ensure they are still working with the company
forecast of salaries and also completeness of
the cash outflow for salaries
Send external confirmation to current employees on the outstanding
Ensure completeness and accuracy of the
salaries
cash outflows of salaries
Check subsequent payments made to instructors or other staff
Completenesss & Accuracy of the salaries
Review of documents for any long term commitments made to rent
Completeness of all cash outflows with
studio space/ gym equipments
regards to the studio
Check for subsequent cash inflow from new investors
To ensure cash inflow from new capital
Review minutes of board meetings (method for raising new capital)
Evaluate the feasibility of the plan
Study past trends of collectibility of members fees
Determine possibility of bad debts
Check for subsequent payments received from members
Ensure fees payments received from
members
Review loan agreement with the bank, re-perform loan interest and
To ensure completeness of interest payments
repayment amount
- Cash outflow
Examine correspondence from lawyers to check if there are any
Completeness of potential litigations - possible
pending or threatened lawsuits from defaulting payments
cash outflow
Obtain a written representation from management that all litigations,
Completeness of all potential cash inflows and
asserted and unasserted claims and assessments have been
outflows
disclosed in accordance with applicable financial reporting
framework
Presentation 10- component auditor
(a) Discuss deficiencies relating to the group audit under case study 7 10 in Section 3 of PMP. Explain the
relevant SSA600 requirements and provide further illustrations.
Case Study 7: Determining & Communicating Component Materiality
Deficiencies
Relevant Paragraphs (SSA600)
1) failed to determine &
Para 21 (c) (Ref: Para A44)
assign a component
- Group engagement team shall determine. component materiality for those
materiality for Subsi C
components where component auditors will perform an audit/review for purposes of
group audit
2) component materiality
Para 21 (c) (Ref: Para A43)
should be lower than
- To reduce to an appropriately low level the probability that the aggregate of
materiality for the group
uncorrected & undetected misstatements in the group F/S > materiality for group F/S as
F/S as whole
a whole, component materiality shall be lower than materiality for group F/S as a whole
3) did not access whether
Para 22 (Ref: Para A46)
materiality used by
- Where component auditors will perform an audit for purposes of group audit, the
component auditor was
group engagement team shall evaluate the appropriateness of perf. materiality
appropriate
determined at the component level.
Case Study 8: Assessing the Professional Competence & Objectivity of Component Auditor
Deficiencies
Relevant Paragraphs (SSA600)
1) Although component auditor was a large size firm &
Para 19 (b) (Ref: Para A38)
affiliated with international network, it should not be sole
If the group engagement team plans to request a
justification for placing reliance.
component auditor to perform work on financial info.
of a component, the group engagement team shall
obtain an understanding of:
In evaluating the professional competence & objectivity of
component auditor, they had not considered the experience & component auditors professional competence
(Ref: Para A38)
qualification of engagement partner& team.
2) Given that it was the partners 1st year on engagement, the Para 19 (b) (Ref: Para A38)
group engagement team had not enquired further on the
Para A38:
profile of engagement partner, such as the partners past audit Possesses an understanding of audit & fin.
experience in similar industries (ie: subject to audit
reporting framework applicable to group audit
regulatory/internal inspections)
Possesses the special skills (ie: industry specific
Para A61: What parts of the audit documentation will be relevant may vary
depending on the circumstances. Often the focus is on audit documentation that is
relevant to the significant risks of material misstatement of the Group FS.
Para 43: If the group engagement team concludes that the work of the component
auditor is insufficient, the group engagement team shall determine:
What additional procedures to be performed
Whether they are to be performed by component auditor or by the group
engagement team
Para 35: If the financial information of a component has not been prepared in
accordance with the same accounting policies applied to the Group FS, the group
engagement team shall evaluate whether the financial information has been
appropriately adjusted.
Para A29: Discussion [among Group Engagement Team members and Component
Auditors] provide an opportunity to consider whether uniform accounting policies are
used and where not, how differences are identified and adjusted.
Case Study 10: Assessing The Work Of Component Auditor
Deficiencies
Relevant Paragraphs (SSA600)
Had not performed a
Para 9(m): Significant component- a component identified that is
sufficiently robust
(i) Of Individual financial significance to the group, or
assessment in determining
whether Subsidiary D is
Para A5: The group engagement team may apply a % to a chosen benchmark as an
significant component:
aid.
(a) Quantitative: Used only
a single benchmark
Identifying a benchmark and determining a %... involves the exercise of professional
judgment.
(b) Qualitative: Had not
Para 9(m): Significant component- a component identified that is
considered factors like
(ii) due to its specific nature or circumstances, is likely to include significant risks of
market acceptance and
material misstatements to Group FS
how that boosted
Subsidiary Ds significance
Para A6: The group engagement team may also identify a component as likely to
in contribution
include significant risks of material misstatements of the Group FS due to its specific
nature or circumstances.
SSA 315 Para 28(b): whether the risk is related to recent significant developments
and, therefore, requires special attention.
Para 31: If significant risks of material misstatement of Group FS have been
identified, the group engagement team shall evaluate the appropriateness of the
further audit procedures to be performed to respond to the identified significant risks....
(b) Using the narrative description and the flow chart provided, identify TWO internal controls in the
purchasing and receiving function. For each internal control identified: Describe the test of controls to be
performed. Explain the risk of misstatements that could be addressed by the internal controls.
IR
Match between approved PO, supplier delivery note and the physical goods received
RMM
Completeness of inventory
Occurrence of inventory
Note: Its not existence of inventory because goods received may not end up in the year-end inventory
Test of
Control
IR
RMM
Test of
Control
Note
balance
Observe the receiving process
o Is the matching process performed?
o Is the inspection of goods carried out?
Examine samples of approved PO and GRN
o Is matching done correctly?
o If there is any unmatched document, it is flagged out properly?
Examine how they provide evidence that internal control was performed and examine those
evidence/documentations
AP clerk match the supplier pro-forma invoice against approved PO and GRN before processing
payments
Completeness of Accounts Payable
Accuracy of Accounts Payable
Observe the AP clerk to see if matching is done
Test samples from the paid file to see whether matching is done correctly
Select payment samples and redo the matching process yourself
Payables are recorded after payments are madeWRONG
Cut-off issue
(c) As the Group auditor, you have concluded that the audit procedures, i.e. the test of control in (b) above
and additional audit procedures, are necessary. Discuss with reference to Singapore Standards on Auditing,
whether these audit procedures should be performed by your audit engagement team (i.e. Group auditor) or
the local audit firm (i.e. the component auditor).
SSA 600 Paragraph 9
Component An entity or business activity for which group or component management prepares financial
information that should be included in the group financial statements.
Component auditor An auditor who, at the request of the group engagement team, performs work on
financial information related to a component for the group audit.
SSA 600 Paragraph 11
The group engagement partner is responsible for the direction, supervision and performance of the group
audit engagement in compliance with professional standards and applicable legal and regulatory
requirements
(any reference to a component auditor) does not diminish the group engagement partners or the group
engagement partners firms responsibility for the group audit opinion.
SSA 600 Paragraph 19
If the group engagement team plans to request a component auditor to perform work on the financial
information of a component, the group engagement team shall obtain an understanding of the following:
(a) Whether the component auditor understands and will comply with the ethical requirements that are relevant to
the group audit and, in particular, is independent;
(b) The component auditors professional competence;
(c) Whether the group engagement team will be able to be involved in the work of the component auditor to the
extent necessary to obtain sufficient appropriate audit evidence.
(d) Whether the component auditor operates in a regulatory environment that actively oversees auditors.
SSA 600 Paragraph 20
If a component auditor does not meet the independence requirements that are relevant to the group audit, or
the group engagement team has serious concerns about the other matters listed in paragraph 19(a)-(c), the
group engagement team shall obtain sufficient appropriate audit evidence relating to the financial information
of the component without requesting that component auditor to perform work on the financial information of
that component.