Date post: | 14-Apr-2017 |
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Top10DeficienciesinAssuranceEngagements
Tipsforaddressingandcorrectingthesedeficienciesinyourfiledocumentation
TOP10DEFICIENCIESINASSURANCEENGAGEMENTSASPE&ASNFPO
1. Recognition&Measurement2. Presentation&Disclosure
EngagementPerformance&Documentation3. UnderstandingoftheEntity4. FileDocumentation&UseofChecklists5. Inquiry&Discussion6. AnalyticalProcedures7. Inventory8. ReportDating
QualityControl9. Independence&EQCR10. Monitoring
ASPE&ASNFPO
ASPE&ASNFPO- RECOGNITION
• RevenueRecognition• Accountingvs.GAAPcompliant• Revenuerecognitionpolicy
• Investments- whatisit?• Businesscombination• Subsidiaries• Jointarrangements• Investments• Financialinstrument
• Futureincometaxes• Internallygeneratedassets
ASPE&ASNFPO- MEASUREMENT
• Measurement• Relatedpartytransactions• Portfolios– FVoramortizedcost
ASPE&ASNFPO- PRESENTATION
• Presentation• Assetsundercapitallease• Preferredsharesissuedintaxplanningarrangement• Currentvs.long-termdebt**• Cash
**EIC122wasissuedOctober31,2001
ASPE&ASNFPO- DISCLOSURE
• Disclosures• Natureofoperations• Significantaccountingpolicies• Carryingamountofassetspledgedascollateral• Allowancefordoubtfulaccounts• Measurementuncertainty• Riskdisclosures• Taxespayablemethodratereconciliation• Guarantees
AccountingPolicies
CPACanadaModelFinancialStatements• ASPE• ASNFPO• IFRS
IndependentFSreview
ADDRESSINGFINANCIALSTATEMENTDEFICIENCIES
EngagementPerformance&Documentation
UNDERSTANDINGOFTHEENTITY
• Theunderstandingoftheentityanditsenvironmentisfundamentalinanassuranceengagement• Includesunderstandingofthekeyprocessesoftheentityandwhoperformsthem• Forauditengagementsthedocumentationoftherelevantcontrolsandthedesignandimplementation
UNDERSTANDINGOFTHEENTITY
KeyAreastoaddress:• Cash/bankreconciliationprocess• A/RandRevenuecut-offandprocessforidentifyingAFDA• Inventorycountprocedures,howtheclientdeterminescostandhowslowmoving/obsoleteinventoryisidentifiedandwrittendown/off.• ProcessforrecordingPP&Eadditions,disposalsandamortization• A/P,Inventoryandexpenseprocessesandcut-offprocedures• Payroll
USEOFCHECKLISTSANDFILEDOCUMENATION• Purposeofchecklists:
• Toremindtheengagementteamastowhatprocedureswereselectedand/orarecompulsoryforcompletionoftheengagement
• Toprovidefilereviewerswitharoadmapofwheretheycanfindthedocumentationtosupporttheproceduresperformed
• TypicallyY/Nanswerstochecklistquestionsdonotprovidesufficientfiledocumentation• Yourdocumentationmustsummarizetheproceduresperformed,theresultsandprovideaconclusionsothatafilereviewercanperformthesameanalysisandcometothesameconclusion
DOCUMENTATIONOFCUT-OFFPROCEDURESFortherelevantfinancialstatementareasthereshouldbedocumentationofthediscussionwithmanagementaboutcut-off.Typically,whatfinancialstatementareaswouldrequirecut-offwork:• Cash• AccountsReceivable• Inventory• AccountsPayableandAccruedLiabilities
USEOFCHECKLISTSANDFILEDOCUMENATION- EXAMPLE
Procedure:Inquireanddocument whetherthesales,receiptsandotheraccountsreceivabletransactionswerecutoffappropriatelyattheyearend.
Response:
• Engagementteammember(TRG)madeinquiriesoftheBookkeeper(Mary)on02/22/16regardingrevenueandA/Rcutoffproceduresperformed
• Shenotedthatsheconfirmedwiththewarehousesupervisorthatthelastshipmentdeliveredtoclientswasforinvoice#17823whichwasincludedinrevenue.Allshipmentsmadesubsequenttothiswereexcludedandrecognizedinthesubsequentperiod.HerworkpapersupportingthisisincludedatW/PC.2-1whichwasexaminedwithnoissuesnoted
• BasedontheaboverevenueandA/Rcutoffappearstohavebeenmaintained
Response:
• Engagementteammember (TRG)madeinquiriesoftheBookkeeper(Mary)on02/22/16 regardingrevenueandA/Rcutoffproceduresperformed
• Shenotedthatsheconfirmedwiththewarehousesupervisorthatthelastshipmentdeliveredtoclientswasforinvoice#17823whichwasincludedinrevenue.Allshipmentsmadesubsequenttothiswereexcludedandrecognizedinthesubsequentperiod.HerworkpapersupportingthisisincludedatW/PC.2-1 whichwasexaminedwithnoissuesnoted
• BasedontheaboverevenueandA/Rcutoffappearstohavebeenmaintained
INQUIRIES&DISCUSSION
• Inauditengagements,inquiresanddiscussionaretypicallyariskassessmentprocedureoracomponentofanauditprocedure• Inreviewengagements,inquiriesanddiscussionareanintegralpartoftheprocedures• Bothtypesofengagementsrequiretheapplicationofprofessionalskepticism
INQUIRIES&DISCUSSIONDOCUMENTATIONDocumentationrelatedtoinquiriesanddiscussionshouldinclude:• Thedateoftheinquiry;• Thename(s)ofthepersonsinvolved;• Themattersdiscussed;and• Conclusionsreachedandanyfollowupproceduresrequired.
ANALYTICALPROCEDURES
• Inauditengagements:• Preliminaryanalyticsarerequiredandusedasariskassessmenttool• Substantiveanalyticalproceduresarenotrequiredbutareoftenamoreeffectiveandefficientmethodoftestingascomparedtotestofdetail/samplingalone• Finalanalyticsarerequiredandareusedtoensurethattherearenooutstandingauditrisksthatneedtobeaddressed
• Inreviewengagementsanalyticalproceduresareanintegralpartoftheprocedures
DOCUMENTATIONOFANALYTICALPROCEDURESAnalyticalproceduresareaqualitativeanalysisofinformationthatisusuallyquantitativeinnature.Documentationrelatedtoanalyticalproceduresshouldinclude:• Documentationofyourexpectationsbasedontheinformationprovidedintheknowledgeofbusiness;• Performanceofratioanalysis,trendanalysis,comparisonofinter-relatedbalancesheetandincomestatementaccounts;• Comparisonoftheresultsagainsttheexpectation;and• Furtherreviewprocedureswheretheresultdiffersfromtheexpectation.
ANALYTICALPROCEDURES- AUDITS
• Preliminaryanalyticsusinginplanningarenotmeanttoexplainvariancestheyaremeanttoidentifypotentialrisks• Substantiveanalyticalproceduresareauditevidenceandassuchtheyshouldbemuchmorethoroughandprecisethanotheranalyticalprocedures(i.e.proof-in-totalcalculationsanddisaggregatedtrendanalysis)• Finalanalyticsareafinalassessmenttoensurenooutstandingissues/risksexist
ANALYTICALPROCEDURES– REVIEWS
• Inreviewengagementsanalyticalproceduresareaprimarymethodofassessingplausibility.• Deficientanalyticalproceduresareoftenredundantoraddlittlevalue:• Revenueincreasedbecausesalesvolumes
increased.• Revenuedecreasedbecausesalesfromamajor
clientdecreased.• Accountsreceivableincreasedby72%overlast
year.Thisincreaseisreasonablegiventheincreaseinsalesovertheprioryear.
BETTEREXAMPLESOFANALYTICALPROCEDURES
• TheincreaseinA/Rof$55Kisduetoseveralmajorinvoicesthatwereissuedtoanewcustomerbeforeyearend.Perdiscussionwithcontrollertheserviceswereprovidedbeforeyearend.
• Perthemarketingmanagersalesvolumehasincreased7%whichwastheresultofsignificantpricediscountingresultinginannetincreaseinsalesof4%.Thiswascorroboratedviaadiscussionwiththeowner.
• RetailsalesinBChaveincreasedby2.1%thisyearaccordingtomarketresearch.Perthesalesmanagertrafficincreaseonthenewupgradedroadhashelpedsales.Increaseinsalesof2.8%appearsplausible.
INVENTORY
• Whatassertionsaretypicallyrelevantforinventory?• Existence• Completeness• Accuracyand• Valuation
• Whatisthelikelihoodofmaterialmisstatementforinventory?• Typicallyitisamaterialbalanceandthelikelihoodofmaterialmisstatementishigh
INVENTORY
Whatproceduresshouldbeperformed?• Existence – Ensureacountisperformed,inquire&document,who,what,where,when,andobtainresultsofcount
• Completeness – Inquire&documenthowcompleteness(purchasescut-off)wasmaintained
• Accuracy – Inquire&documenthowtheyrecordandmeasureinventory(FOFI,WAC,SpecificItems)andwhatisincludedininventory?(Directcosts,freight,labour,etc.)
• Valuation – Inquire&documenthowtheyevaluateinventoryforobsolescenceandwriteitoff
• Documentyourevaluationofwhetherornottheaboveissufficientorwhetheryouwillneedtoundertakeadditionalprocedures
EXTENTOFWORKONREVENUE,COSTOFSALESANDOTHEREXPENSES• Obtainingsufficientappropriateevidence• Betterunderstandingofrecognitionprocessesandcut-off• Improvementinanalyticalprocedures
REPORTDATING
Eng.proceduressubstantiallycompleted
Feb.25,201X
TCWGhaveapprovedthe
FSMar.5,201X
Subsequentevents
inquiresandproceduresfinalized
Mar.8,201X
EQCRFinalizedMar.9,201X
Rep.letterobtainedfromtheclient
Mar.10,201X
FSandreportareissued
Mar.15,201X
RequirementunderCASandCSRE2400
REPORTDATING
Issues:• Nodocumentationtosubstantiatereportdate• NodocumentationofwhenTCWGapprovedandacceptedresponsibilityforthefinancialstatements• Reportdateisbeforethecompletionofsignificantportionsofthefiledocumentationand/orpartnerorEQCRreviewofthefile• Reportdateisbeforethedateofthesignedrepresentationletter• Subsequenteventshavenotbeenupdatedto/nearthereportdate
REPORTDATINGPROCESS
FileCompletion
• Completefiledocumentation
• Partner/EQCRreview
• Preparerepresentationletter
• PreparedraftreportandFS
IssueDraftReport
• Obtainsignedrepresentationletter;and
• ApprovalofthedraftFS/AJE
• ConductSubsequenteventsupdate
IssueFinalReport
• Issueenclosure/transmittalletter
PostReportIssuance
• Finalfileassembled/lockdownwithin60daysofthereportdate
QualityControl
INDEPENDENCE
• Documentationofthreatsandsafeguards• Potentialsafeguards• Segregatebookkeepingfunctionsfromassuranceengagement• FormalizedprocessforapprovalofAJEsandFS• Involvingaspecialistinareasofcomplexity• Rotatekeyteammembersafterxyears• Internalorexternalreviews
• 2nd partner,EQCR,FSreview
LEVELSOFREVIEW
• Detailedfilereview• Generalreview• Financialstatementreview• 2nd Partnerreview• Engagementqualitycontrolreview(EQCR)• Monitoring• Practicereview
EQCRTEMPLATEDRESPONSE
• 25ormorestakeholders• Feesover$15,000or10%ofbillings• 3ormorerisksidentifiedonEQCRworksheet
EQCRTAILOREDRESPONSE
• Considerfirmexposurevs.insurancecoverage• Setperiodoftimeforallnewpartners• 100%ofthefilesforyour‘tax’partner• Riskprofiledevelopedbythefirm• Litigation• Fraud• Etc.
• Anynewtypeofindustry/client/accountingframework(MIC,FirstNation/Municipalities)• Atpartnersdiscretion– trustyourgut
MONITORING
• Twoparts• Ongoing/annualmonitoring• Completedfile/cyclicalmonitoring
• Separatefrom• Practiceinspection• EQCRs• 2nd partnerreviews
CLEARLINECONSULTINGRESOURCES
Visitourresourcespageforfreespecialreportsat:www.clearlineconsulting.ca/resources
ThankYou!BridgetNoonan,CPA,CATomGillespie,CPA,CA
Visitusatwww.clearlineconsulting.ca