august 24, 2018 empowering practitioners’ seminar …ifac/pm... · 2018-08-24 · annual report...

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Future Ready SMPs

Johnny YongTechnical Manager – GAPS

EMPOWERING PRACTITIONERS’ SEMINAR

August 24, 2018


Agenda

• ISA Guide – 4th Edition• Practice Management Guide – 4th Edition• IR For SME + Related Article(s)• Brochure : Choosing The Right Service• Others (Review engagements, Compilations & AUPs)


Future Ready SMPs

ISA Guide (for audit of SMEs)


ISA Guide (2018) : Useful Facts

• A non authoritative guide• No of downloads : 100,000 by

end of 2017 (and more)• Now going into the 4th edition• Comes in two volume• Download at :

www.ifac.org/smp

http://www.ifac.org/smp


ISA Guide (2018) : Objective

• To develop a deeper understanding of an audit conducted in compliance with ISA through explanation & illustrative examples.

• A practical “how to” audit approach in a risk-based audit of an SME

Important to read the sister publication

“Guide to Quality Control for SMPs,

3rd Edition”


• ISA 540 (Revised): Auditing of accounting estimates (including fair value estimates)

• ISA 315 (2nd Revision): Identifying & assessing the risks of material misstatement through understanding the entity & its environment [The ED has just been released]

ISA Guide (2018) : What It doesn’t Cover


ISA Guide (2018) : 2 Case Studies

• Dephta Furniture: family owned manufacturing co., no formal governance structure, has a full time staff of 15 employees & uses off-the-shelf accounting packages

• Kumar & Co: An owner manager co with 4 personnel (including a part time book-keeper), produces furniture parts for Dephta Furniture above. Have recently obtained bank financing that come with certain covenants.


ISA Guide (2018) : Areas Updated in The 4th Edition

Significant conforming amendments as a result of the Disclosures Project :ISA 210ISA 260ISA 300ISA 315ISA 320ISA 330ISA 450

ISA No. (New or Revised)

Title

ISA 250 Consideration of Laws and Regulations

ISA 570 Going concern

ISA 610 Using the work of internal auditors

ISA 700/705/706 Auditor Reporting

ISA 701 Key audit matters (KAM)

ISA 720 Auditor’s responsibilities relating to other info


ISA Guide : ISA 250 Consideration of Laws and Regulations in a Financial Statement Audit

Risk Assessment Risk Response ReportingUnderstand: - legal/regulatory framework and its industry/sector - how entity is complying with framework’s laws/regulations

Obtain evidence regarding compliance with laws/regulations that have a direct effect on material amounts in the F/S

Report identified/suspected non compliance to: - management and TCWG unless prohibited by law or regulation - appropriate outside authority, when required

Inquire whether entity is in compliance with laws/regulations

Remain alert to instances of non compliance fundamental to business operations or committed by TCWG or management

Consider impact on the audit opinion of: - inability to obtain sufficient evidence - inadequate disclosures in the F/S

Review relevant documents, reports and correspondence with licensing and regulatory authorities

Where non compliance is identified/suspected: - understand the nature of the act and circumstances of occurrence - evaluate effect on F/S - discuss with management and TCWG unless prohibited by law or regulation - evaluate implications on audit work/opinion

Obtain management representations


ISA Guide : ISA 570 Going Concern (New)


ISA Guide (2011) : ISA 570 Going Concern [Old]


ISA Guide : ISA 610 Work of Internal Auditors


ISA Guide : ISA 700/ 705/ 706 (I)

Auditors’ Reporting


Nature of Matter Giving Rise to the Modification

Auditor’s Judgment About the Pervasiveness of the Effects or Possible Effects on the Financial Statements

Material BUT NOT Pervasive

Material AND Pervasive

Financial Statements Are Materially Misstated Qualified opinion Adverse opinion

Inability to Obtain Sufficient Appropriate Audit Evidence Qualified opinion Disclaimer of opinion

ISA Guide : ISA 700/ 705/ 706 (II)


ISA Guide : ISA 700/ 705/ 706 (III)

Type Applicability WordingQualified Opinion When the effect is material but not pervasive to

the financial statements . This applies where:

• Sufficient appropriate audit evidence is obtained but the auditor concludes that misstatements exist, individually or in the aggregate, that are material but not pervasive to the financial statements; OR

• The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion. The auditor concludes that the possible effects of undetected misstatements, if any, on the financial statements could be material but not pervasive.

“In our opinion, except for the effects (or the possible effects) of the matter described in the Basis for Qualified Opinion section of our report, the accompanying financial statements present fairly ...”


ISA Guide : ISA 700/ 705/ 706 (IV)

Type Applicability WordingAdverse Opinion When the effects of misstatements are both

material and pervasive. This applies where sufficient appropriate audit evidence is obtained but the auditor concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.

“In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion section of our report... the accompanying financial statements do not present fairly ...”


ISA Guide : ISA 700/ 705/ 706 (V)

Type Applicability WordingDisclaimer of Opinion When the possible effect of undetected

misstatements, if any, could be both material and pervasive. This applies where the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion and concludes that the possible effects of undetected misstatements, if any, could be both material and pervasive. This also applies to extremely rare circumstances where it is not possible to form an opinion due to the potential interaction of multiple uncertainties and their possible cumulative effect on the financial statements. This applies even where the auditor obtains sufficient audit evidence regarding each of the individual uncertainties.

“We do not express an opinion on the accompanying financial statement. Because of the significance of the matter described in the Basis for Disclaimer of Opinion section of our report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these financial statements..”


ISA Guide : ISA 700/ 705/ 706 (VI)

Type of Paragraph

Applicability Examples

Emphasis of Matter

Attention is drawn to important matters already PROPERLY disclosed in the financial statements.Matters presented/disclosed in the financial statements that are of such importance that they are fundamental to the user’s understanding of the financial statements.

Uncertainty relating to exceptional litigation or regulatory action, subsequent events, a major catastrophe, other significant uncertainties and inconsistencies, and early application (where permitted) of a new accounting standard.


ISA Guide : ISA 700/ 705/ 706 (VII)

Type of Paragraph

Applicability Examples

Other Matter Matters relevant to the user’s understanding of the audit function but NOT disclosed in the financial statements.Any matters (other than those presented or disclosed in the financial statements) that are relevant to the user’s understanding of the audit, the auditor’s responsibilities and/or the auditor’s report.

• Inability of the auditor to withdraw from the engagement even though the possible effect of the inability to obtain sufficient appropriate audit evidence is because of a scope limitation imposed by management is pervasive.

• Law, regulation or generally accepted practice may require or permit the auditor to elaborate on additional matters.

• Restrictions on the distribution of the auditor’s report where the auditor’s report is intended for specific users.


New and Revised Auditor ReportingStandards – Key Features [In Summary]

Audit OpinionRequired to be presented first

Key Audit MattersRequired for listed entities

Going ConcernAdditional focus

Other InformationNew section

Auditor Report


Resources – Auditor Reporting Toolkit

• Dedicated web page:www.iaasb.org/auditor-reporting

• Easy access to new and revised standards and other resources– Fact Sheet – “At a Glance”– Basis for Conclusions– Publications, illustrative examples on

Going Concern and Key Audit Matters – Additional content planned - webcasts,

podcasts, & others

http://www.iaasb.org/auditor-reporting


ISA Guide : ISA 701 Key Audit Matters (I)


ISA Guide : ISA 701 Key Audit Matters (II)

Some of the resources available:▪ The New Auditor’s Report:

Questions and Answers (Nov 30, 2016)

▪ Determining and Communicating Key Audit Matters (Jul 6, 2016)

▪ The New Auditor’s Report: A Comparison between the ISAs and the PCAOB Reproposal (May 23, 2016)

▪ Download diagram https://www.ifac.org/system/files/publications/files/IAASB-KAM-Overview-Diagram.pdf

http://www.ifac.org/publications-resources/new-auditor-s-report-comparison-between-isas-and-pcaob-reproposal



https://www.ifac.org/system/files/publications/files/IAASB-KAM-Overview-Diagram.pdf




ISA Guide : ISA 701 Key Audit Matters (III)


ISA Guide : ISA 720 Responsibilities On Other Info (I)

ISA 720(Revised) includes the following definitions for the annual report and other information:

Annual Report {Para 12(a)} Other Information {Para 12(c)}A document, or combination of documents, prepared typically on an annual basis in accordance with law, regulation or custom, the purpose of which is to provide owners (or similar stakeholders) with information on the entity’s operations and the entity’s financial results and financial position.

An annual report contains or accompanies the financial statements and the auditor’s report thereon and usually includes information about the entity’s developments, its future outlook and risks and uncertainties, a statement by the entity’s governing body, and reports covering governance matters. (Ref: Para. A1–A5)

Other information—Financial or non-financial information (other than financial statements and the auditor’s report thereon) included in an entity’s annual report. (Ref: Para. A8–A10)


If the financial statements are accompanied by an annual report or other information, ISA 720 (Revised) outlines the auditor’s responsibilities in relation to this other information, including:

∙ Obtaining the information;

∙ Reading and considering the information;

∙ Responding when a material inconsistency appears to exist or the other information appears to be materially misstated;

∙ Responding when the auditor concludes that a material misstatement of the other information exists;

∙ Responding when a material misstatement in the financial statements exists or the auditor’s understanding of the entity and its environment needs to be updated; and

∙ Reporting.(and also, documentation)

ISA Guide : ISA 720 Responsibilities On Other Info (II)


ISA Guide : ISA 720 Responsibilities On Other Info (III)


ISA Guide : ISA 315 Identifying & Assessing Risks (At the Planning Stage)

Important Reminder:

Even when adopting a purely substantive approach, an understanding (and documenting) of the control environment is required. This is under Para 11 (Entity & Environment), 12-14 (Internal Control), 15-19 (Risk Assessment Process), 20-21 (Control Activities) & 22-24 (Monitoring of Controls) of the said ISA.


Control Activities in Smaller Entities (ISA 315) – (I)

Informal and Limited Documentation

Many controls may operate informally and may not be well documented. For example, granting credit to a customer may be more reliant on the judgment and knowledge of the manager than on a pre-established credit limit.

Limited Scope Control activities (to the extent they exist) are likely to relate to the main transaction cycles such as revenues, purchases, and employment expenses.


Control Activities in Smaller Entities (ISA 315) – (II)

Risks May be Mitigated by the Control Environment

Certain types of control activities may not be relevant because of controls applied by senior management. For example, management's approval of significant transactions can provide strong control over important account balances and transactions, lessening or removing the need for more detailed control activities. Some transactional misstatements (usually addressed by control activities in larger entities) could be mitigated by:

• A corporate culture that emphasizes the importance of control;

• Employing highly competent staff;

• Monitoring revenues and expenditures against an established budget;

• Requiring senior management’s approval of all major transactions;

• Monitoring of key performance indicators; and

• Assigning responsibilities among staff so as to maximize the segregation of duties.


Control Activities in Smaller Entities (ISA 315) – (III)

Financial Statement Disclosures Auditors are required to understand management’s internal control as it relates to financial statement disclosures. However, disclosures in smaller entities may be less detailed or less complex (e.g., some financial reporting frameworks allow smaller entities to provide fewer disclosures in the financial statements).


Communication to TCWG [ISA 260 (Revised)]

There are more extensive communication requirements with TCWG (and, this trend will be growing).

So, important to be familiar with the Appendix under ISA 260 (Revised)


Major ISAs Coming Up

• ISQC 1 and 2• ISA 220 (at the engagement level)• ISA 315• ISA 540 (approved; to be effective end of 2019)• Data-analytics (will you need software going forward?)

Please keep your eyes on these …..!!!


Future Ready SMPs

Practice Management (PM) Guide


Practice Management Guide – 4th Edition

• 3rd edition issued in Dec 2012• Objectives

– To share the best practice in management of practices

– Getting firms to be Future Ready

• 8 Chapters • Can be downloaded at

www.ifac.org/smp



Practice Management Guide – 4th Edition

The 8 Chapters:1. Planning for your Firm2. Practice models, associations and networks3. Building and growing your Firm4. People power5. Leveraging technology6. Clients Relationship Management7. Risk management8. Succession planning


Practice Management Guide – Practice Models, Associations and Networks (Chapter 2)

Includes:

• Advantages and Disadvantages of Network Alliances• Referral Network• Professional Network• Management Support Network• Knowledge Networks


Practice Management Guide – Leveraging Technology (Chapter 5)

ContentsIntroduction

New and Emerging Technologies • Cloud computing and hosted applications• Social networking/Online communities• Communications technologies• Wikis – collaborative knowledge• Multimedia and video sharing• Blogs• Freeware and open source applications• Business intelligence software• Data analytics• Artificial intelligence• Development, customization, or off-the-shelf

software• XBRL and standard business reporting



Contents

Developing a Technology Strategy • Snapshot of current position• Update knowledge and summarize opportunities• Alignment with the firm’s strategy• Summarize the projects• Identifying suitable products• Selecting a supplier• Review the underlying technologies• Review the training and support options• Understand the costs and contract conditions• Seek testimonials and references

Hardware Options • Choosing a hardware/operating system platform• Terminal services/Citrix (thin client computing) versus

traditional local area network (PC-based or fat client computing)

• Other hardware/infrastructure considerations



Contents

Software Options • Operating systems• Backup• Personal productivity• Firm management• Compliance services• Accountants production software• Tax return preparation• Company statutory records maintenance and form lodgment• Trust and/or pension fund administration and reporting• Audit automation• Statistical sampling• Insolvency management and reporting• Advisory services software• Enhanced reporting• Benchmarking• Budgeting• Scenario planning



ContentsSoftware Options (contd.) • Business planning

• Business valuations• Tax planning• Wealth management tools• Data analytics tools• Communications• Firm websites• Intranet/Knowledge management systems• Document management, workflow, and scanning• Integrated suites and bolt-on apps

Leveraging Technology for Practice Innovation

• The role of technology in the modern accounting firm• Mobile working• The virtual office



ContentsTechnology Risks • Disaster recovery and business continuity plans

• Cybersecurity• Hardware maintenance plans• People and documentation• Policies and procedures• Insurance

Conclusion

Further Reading and IFAC Resources

Appendix • Website/intranet/extranet software evaluation• Document management/Workflow evaluation• Cloud computing evaluation checklist


Practice Management Guide – Risk Management (Chapter 7)


Future Ready SMPs

Other Guides & Materials


Brochure : IR For SME (I)

▪ Basically, an awareness piece▪ Explaining what is integrated thinking and

how it create value for the SME▪ Looking into strategy, business model &

specific opportunities and risks (how all these are link together)

▪ Prompt the SME to consider the effects of connectivity between the capital it uses and their critical inter-dependencies (including trade-off). Capital = financial, manufactured, intellectual, human, social & relationship, natural.


Brochure : IR For SME (II)

<IR> includes eight content elements in the form of some simple questions. A deep understanding of the answers to these questions is the backbone of the <IR> approach to understanding and communicating how the SME creates value over time. • Organizational overview and external environment: What does your SME do

and what are the circumstances under which it operates?• Governance: How does your SME’s governance structure support its ability to

create value in the short, medium and long term?• Business model: What is your SME’s business model?• Risks and opportunities: What are the specific risks and opportunities that

affect your SME’s ability to create value over the short, medium and long term, and how is it dealing with them?

• Strategy and resource allocation: Where does your SME want to go and how does it intend to get there?


Brochure : IR For SME (III)

(Continuation)

• Performance: To what extent has your SME achieved its strategic objectives for the period and what are its outcomes in terms of effects on the capitals?

• Outlook: What challenges and uncertainties is your SME likely to encounter in pursuing its strategy, and what are the potential implications for its business model and future performance?

• Basis of presentation: How does your SME determine what matters to include in its report and how are they quantified or evaluated?


Brochure : Choosing The Right Service

• SMPC’s Resources and Tools• Brochure – Choosing the Right

Service: Comparing Audit, Review, Compilation and Agreed-Upon Procedures Services

• Launched September 2016


Comparison of the Four Engagements


Other Resources & Tools


AUPs GUIDE

1. Asking the right questions:❖ What?❖ When are AUPs appropriate?❖ What are the benefits of AUPs?

2. Include a sample report from ISRS 4400

3. Contain 5 case studies (some are real examples)


• IFAC SMP Committee: www.ifac.org/SMP

• Follow us on Twitter: IFAC_SMP

• IFAC Global SMP Survey www.ifac.org/smp

• Join us on LinkedIn: IFAC SMP Community

• Global Knowledge Gateway www.ifac.org/Gateway

IFAC Resources

http://www.ifac.org/SMP

https://twitter.com/IFAC_SMP


http://www.linkedin.com/groups?home=&gid=4542841&trk=anet_ug_hm

http://www.ifac.org/Gateway

www.ifac.org

http://www.ifac.org/

august 24, 2018 empowering practitioners’ seminar …ifac/pm... · 2018-08-24 · annual report...

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