Going Concern ISA 570

Auditors, in conducting their annual audits, to consider an entity's ability to continue as a going concern. The auditor will normally reach substantial doubt that an entity can continue as a going concern if the entity is unable to meet its obligations as they become due without:
1. substantial disposition of assets outside the ordinary course of business,
2. restructuring of debt,
3. externally forced revisions of its operations or similar actions.
Before disclosing the auditor's substantial doubt concerning the entity's ability to continue as a going concern, the auditor is required to consider management's plans over the next year to meet its obligations as they become due.
Today discussion is on going concern where ISA 570 state that:
Going concern basis

• Presumes that the entity will continue in operational existence for the forseeable future.
• Requires Financial statements(FS) to be prepared on going concern basis (IAS 1).
• ISA 570 requires auditor to consider entity ability to continue as a going concern and appropriate disclosure in FS.
• If going concern inappropriate? - need assess different values in FS (break-up value)
• Asset (write-down) to Recoverable amount.
• Additional liabiities for losses arise.

Auditor responsibilities.

• Required consider going concern status of company and disclosure to going concern in arriving audit opinion.
• Required assess adequacy (process) used by directors have satisfied themselves the going concern basis and adequate discloure made.
• Make enquiries of directors and examine document in support company going concern status (Cash flows and budget forecast)
• Consider director have paid particular attention the period is adequate(12month from date of balance sheet), others is enquire management knowledge,in terms of events and conditions that may affect entity ability to continue going concern.
• Need to obtain management representation and adequancy disclosure in FS
• Indicators of going concern ( e.g impairment assets,trading losses,net liabilities,etc)

Report:

• Significant concern Going concern - But DO NOT disagree but adequate disclosure -> UNQUALIFIED - "Emphasis of matter"
• Inadequate disclosure->Qualified - "Adverse opinion"
• Director attention period less 12 month from date of Balance sheet -> modify report - Qualified Report as "LIMITATION OF SCOPE"
• Auditor disagree of preparation of FS on Going concern - Qualified as "Adverse opinion"
• Auditor unable to form opinion on Going concern- Limitation on scope -> Qualified "Except For" if material, "Disclaimer" if pervasive.

Additional audit procedures:
Event - condition when auditor identified significant doubt entitiy ability to continue as going concern should:

• Review management plan for future action based on going concern assessment,
• Gather sufficient audit evidence to confirm it is material uncertainty exists and any plan to mitigate those factors,
• Seek written representation form management for future action,
• Analyse and discuss Cash flow with management,
• Read minutes of meetings between shareholder and board of directors,
• Enquire entity lawyer to identify any litigation or claims?,
• Review events after period end where any items affects the entity going concern.

Some articles and references are taken from audit resources including ISA and also book titled A going concern:

Audit of small entities/company

The main area of this topic discuss on the audit of small entities which concern on:

• Day-to-day of Owner-managers
• Few sources of income and uncomplete activities
• Simple record keeping(fewer ledgers,daybooks)
  
• Limited Internal control

Common ownership and management:

1. Existence of owner-manager actively involved in the day-to-day running of the business.
2. Audit risk increases as both easily override any internal control.
3. However; audit risk might be decrease as presence day-to-day substitute to formal internal control.
4. Risk assessment based on auditors knowledge of integrity and competencies of owner-manger.
5. Small entities have more going concern problem as they often vulnerable to cash flow problem, in addition bad debts.
6. Related parties:Owner-manager confuse business affair with own affair.
   

**ADVISE on 3.1 AAS Success**

1. Read examiner's student accountant articles

2. read through recent examiner's comments.

3. pass paper 2.6 before attempting paper 3.1 (ideally).

4. practise pass year questions n note down the points you didnt get from the model answer.

5. get some practical biz experience (if possible) n keep up to date by reading a quality newspaper.

6. in your answer, try to go that one step further to bring out the implication, but dont stress about trying to find it for every point.

7. dont be scared of the discussion question: the marking scheme is generous.

8. make sure u take a calculator.

Tips: www.nik-tips.blogspot.com

some questions and answers that candidates might need put some attention to:

1) Can you please explain the meaning of followings.

1. Hot Review
2. Cold Review
3. Peer Review

A: all of the reviews are part of Quality Control.
A hot review would be carried out prior to the issuing of the audit opinion, and could include a detailed technical review, a second partner review, as well as the normal hierarchical review that takes place of all work performed by the audit team.

A cold review is carried out after the audit opinion has been issues, and is usually conducted to look for audit efficiency matters, e.g. were any areas over audited, or were there any problems in gathering evidence. The efficiency points would then be carried down to next years audit.

A peer review is where audit firms review each others work. It is common in the USA, but less in the UK

2) Audit work ","matters to consider" and audit procedure.

What is the difference?i can not distinguish the three. Audit work I believe is what the auditor will do but what about the other two

A: 'Matters to consider' the requirement for Q3 means considering the following according to the examiner:

- calculating the materiality of the issue referred to in the scenario to assess its relevance in the context of the company.

You must calculate the specfic materiality of the issue in the context of the general information given about the company. Use the general rule of thumb that for an item to be material the following ranges apply: 0.5-1% of turnover, 5-10% of PBT and 1-2% of total assets. But you must relate it to the facts in the scenario to earn marks

- consider the applicable GAAP. Have the rules been complied with or not, as is usually the case. If not, comment on the changes that would be expecte3d to correct the situation and thus allow for an unqualified audit report

- consider the implications for audit reports if the client does not process the recommended changes suggested by the auditor.

'Audit work' simply requires a description of the work done by the auditor to gather the necessary evidence to support the conclusions reached

'Audit procedure' simply describes the procedures used by auditors i.e the work done, once again to provide sufficient relevant audit evidence to support the conclusions on which the audit report is based.

3) In this exam How miuch do you have to right to get a MARK?

A:The easiest answer to this question is to suggest you look at the examiner's answer - every block of writing is usually a potential mark.
In general, any well explained point (2-4 lines of writing) should be enough.So, "discuss with directors" will score zero, whereas "seek wriiten confirmation from directors that all related part transactions have been disclosed" is the level you are looking for.


4) What is current issue in the tips?

A:Q6 is usually referred to as the 'current issue' question, and is sometimes but not always preceeded by an examiners article. There is no published current issues article for this sitting. The current issues will be based on issues being discussed in the profession at the moment, and in the last 18 months. Students are advised by the examiner and the tutors to read more widey than just the student newsletter to get an understanding of topical issues.

I would recommend that you practice some of the recent Q6s from past papers to see the style of question and type of topic covered, e,g money laundering, earnings management, new ethical standards etc. You should practice some questions as it is a shame to go into the exam only being able to attempt Q4 and Q5 from section B.
-thanks to Lisa Weaver FTC 3.1 Tutor-

-ALL THE BEST-
hOPe this helps~~

Professional Ethics - Independence

I just browse through some rather old question,which i handpicked from ICAEW exam on audit paper. I just found this question quite interesting under the topic of Professional rules and counduct, well here goes; Relevant to Paper 2.6 and 3.1(Q.3)
The following situations have arisen in your audit firm:

1) The directors of Howley plc have approached your firm and requested that it tender for the audit of Howley plc. The directors have indicated that there will be additional consultancy work which is likely to be on-going.

2) The directors of Gibs Ltd, an existing audit client, have requested that an employee of your firm, who has been involved in the audit of Gibs Ltd in previous years, is seconded to the company to assist with the preparation of the monthly management accounts and the annual financial statements while the company accountant is on maternity leave.

3) The Directors of Jenkins plc, a listed company, wish to outsource the company payroll function and have requested that the business services department of your firm processes the payroll and one of the partners assumes cheque signing and payroll authorisation powers on the company behalf.

Requirement:

a)Explain the significance of the concept of independence to auditing. (5 marks)

b)Identify the potential threats to independence and suggest how the firm might deal with them. (7 marks)

c) Identify the benefits to a client of having non-audit services provided by its auditor. (3 marks)

Answers to above:

a) Significance of the concept of independence to auditing:

-S/holders are interested in F/S that potray as closely as possible the true financial position, result of operations and cash flow of the company.

- Management, knowing that it is being evaluated by the s/holder on the basis of F/S , desires to show the results of its stewardship in the most favourable light.

-Companies Act & Guide to Prof. Ethics require auditors to be independent in order to protect the s/holder.

- Auditors need to be free from prejudicial influences to maintain an :

• Obejctives(unbiased) state of mind (be independent) or should i say "independent in fact"


• Appearance (be seen to be independent)

- If users do not perceive auditor to be independent there will be a :

• Lack of credibility of financial information


• Loss in confidence in the audit process/function.

b) - Howley plc

Threat

• Self-interest/ fee dependency


• Fear of losing fee may make auditor reluctant to report adversely


• Self review in the future - may be reluctant to challenge any product or judgement of consultancy work.

Dealt with: only accept if

• Fees do not exceed recommended threshold and


• Different teams available.

- Gibbs Ltd

Threat

• self review


• Familiarity


• Too trusting of colleague and less rigorous in testing

Dealt with : Accept, as a private company but ,

• Person seconded to the company must not be a member of the audit team


• Careful consideration as to separate audit procedures.

- Jenkins plc.

Threat

• Self review - too trusting of colleagues resulting in less rigorous testing


• Payroll preparation- as a public/listed company threat may be considered too great


• Cheque signing and authorisation functions is a management function.

Dealt with: If wish to act as auditor

• Do not assume responsibility for cheque signing and authorisation function and


• If threat considered too great do not accept payroll preparation.

c) Benefit to a client having non audit services provided by its auditor

• Auditor has greater insight into clients operations and can provide a higher quality service.


• Greater degree of comfort having service provided by a trusted party


• Provide services at lower overall costs as the background information is available.

-sorry for any grammar/spelling mistakes, sleepy- :)

For Paper 3.1 June 2007:

Accounting problems/issues (the usual Q3) - Important areas include leases,
deferred tax, related parties, earnings per share, provision, government grants,
impairment, investment property, going concern.

new tips for 3.1 www.nik-tips.blogspot.com

Outsourcing internal audit

Below are the topics regarding issues of outsourcing,which for me a grey area in the syllabus, but a worth while to read it!!

Procedures to outsource internal audit

In some cases the company will outsource most of the function but retain the head of internal audit as employee.This leaves high level of responsibility within the company. The company and service provider should draw up a written contract or terms of reference covering issues as:

• What services will be provided?


• What does the service provider report to?


• What form will reports take?


• What action will be taken if problem occur?


• How will fees be determined and charged?

Benefits to the company

There are number of advantages to the company of outsourcing their internal audit function.

1.Independence

-contracting out increases independence as an in-house department can never be truly independent. Staff from an external firm will be subject to the same ethical guidelines as for external audit,and the firm should have mechanisms to ensure compliance. In addition contracting out facilitates the rotation of staff, so close relationship do not build up between auditor and auditee.

2. Skills.

-contracting out internal audit allow the company to bring in new skills. The external provider will have a range wider experience gained by auditing other companies.

3.Costs.

-A company with an in-house internal audit service must pay salaries,training and overheads. Whilist the contractors' fees will also be set to cover these there may be economies of scale. The company would only be paying resources when required and so overall the total cost may be cheaper.

4. New techniques.

-The audit market, both internal and external is very competitive. This encourages firms to develop new techniques which are more efficient and effective. I.e; E&Y have recently invested $150m to develop internal auditing methodologies. Contracting out the internal audit services gives the company access to these techniques without a high level of investment.

5. Management time.

-If internal audit is outsourced it frees management time and resources to focus on core areas of the business.

Disadvantages to the company of outsourcing

1. Constraints on service.

-The service provider will need to act in accordance with the terms of reference. This may mean they are unable to follow up suspicious circumstances outside their duties without first seeking permission from the cpmpany and re-negotiating the terms of reference.

2.Corporate culture.

-Contracting out any service involves a change to corporate culture. The change needs sensitive management to avoid a loss of morale or from other areas,who may fear for their job or resent an 'outsider' questioning them.

3. Flexibility.

-An inhouse department will provide a permanent presence whilist contracted out sevicees may only be at company discrete periods. In-house staff may also have more royalty and commitment to the company. Outsourcing may result in reduced staff availability and flexibility as an external provider may not have staff available at short notice, i.e a problem suddenly arises.

4. Skills

-An external contractor may lack the specialist skills relevant to a particular company which an in house service will possess.Once a contactor is brought in these skills may be lost forever.

Issues for provider of service.

a) Independence

• There is danger that an external provider could become dependent on client, particularly where they are also the external auditor. The ethical guidelines do not specifically deal with external auditor providing internal audit services but there are some general guidelines which are relevant.


• An auditor should not accept an audit appointment from a company which regularly provides him with unduly large proportion of his gross practice income.

b) Care must be taken so that external audit does not perform management functions or make management decisions.

c) Providing internal audit services may gives rise to the need for self review. For example the internal auditor may have recommendations regarding the system of internal controls. The external audit team,when reviewing the system,must ensure that their judgements are objective.

d) Skills - The auditor ensure he has appropriate skills and expertise to undertake the internal audit roles. For example, they may need to carry out environmental or social audits.Does the external auditor have relevant experience for this type of audit?

e) Effect on external audit - Internal audit and external audit, currently performs different roles. If both roles are performed by the same firm,the distinction could become blurred. This could lead to a reduced level of service overall and a lower level of credibility being attached to the external audit report.

Measures to be taken.

They are number of measures which the external auditor can introduced to help overcome these problems:

• Separate department which deals with internal and external audit services.


• Proper client acceptance procedures for internal audit work


• training staff to ensure they are aware of the issues involves.


• Separate audit manuals and documentation for internal and external audit work.


• regular review by independent partner to ensure independence.

Business Risk

yep..its business risk

In recent years, larger firms have extended the concepts of risk analysis as an approach to auditing.The new more and embracing is that of business risk.A definition of business risk is "The threat that an event or action will adversely affect a business's ability to achieve its ongoing objectives and can be split between external and internal factors"

External risks

Risks arising from outside the company include: (may embedded in audit case study in Q's)

• Changing legislation (e.g. the use of genetically modified foods).


• Changing interest rates(especially with highly geared companies).


• Changing exchange rates (e.g strong £ and the high price of British exports).


• Public opinion, attitudes, fashions.


• Price wars initiated by competitiors (e.g. Giant vs Tesco)


• Enviromental matters

Internal risks Risks arising from inside the company include:

• Failure to modernise products, processes,labour relations, marketing


• Employees


• Board Members


• Cash flow including overtrading


• Gearing


• Inappropriate acquisitions


• Internal controls


• Fraud


• Computer systems failures


• Lack of R&D

The client's approach to risk

The potential effect of the risks on the financial statements depends on how the client deals with risk. Possible actions are:

1. Do nothing and hope for the best.


2. Develop internal controls.There is much emphasis on internal controls in the corporate governance and management of risk is a large part of it.


3. Develop quality controls over production of goods, production of services, staff recruitment.


4. Diversify. acquisitio, new products, multiple sourcing.


5. Train staff


6. Risk reduction. raising staff awareness of risk, tighter discipline in all areas.


7. Transfer risk. by insurance, subcontracting, outsourcing


8. Avoidance. e.g. manufacturing in countries where the market is, instead of exporting, and thus avoiding exchange rate risks and government import restrictions.

Question for such approach to risks can be found in December 2002 Question 6 of ACCA 2.6

Designing the audit

• Agree the assignment in a letter of engagement


• Discuss and review the business risks with directors/management


• Plan the audit accordingly


• Carry out audit


• At final review stage of the audit, consider business risks and any possible impact on misstatements in the financial statements.


• Report.

IN the exam:

When devising substantive tests, think about the financial statement assertions that need to be met (CODRACE / PERMCOV / COMPARE). Also think about the audit procedures you can perform (AEIOU).

Examples for receivables

Cutoff - test a sample of GDN's immediately before and after year end and ensure that the receivable and sale has been recorded in the correct period. Also ensure that the inventory is not included.

Existence - circularise a sample of receivables to confirm the amount owed to the client.

Analytical Procedures - calculate receivable days for the year and compare to the credit terms given to customers. You could also compare with prior year or industry average.

Receivables provision - review the aged receivables listing and compare the amount of receivables > say 90 days to the provision to see if adequate.

Payables examples:

Cutoff - test a sample of GRN's immediately before and after year end and ensure that the payable and purchase has been recorded in the correct period. Also ensure that the inventory has been included.

Completeness - test a sample of after date payments, trace to GRN & Invoice, if it relates to a purchase before year end ensure it is included in the payables listing.

Analytical Procedures - calculate payables days and compare to the average terms given by suppliers or to prior year.

Test supplier statement reconciliations by comparing the balance on the supplier statement to the payables balance on the payables listing and if any discrepancies exist ensure there is a valid explanation from the client (eg cash in transit).

Audit Q's that need some attention..Relevant to ACCA 2.6

surf in the cinema 14 june 2007.. after exam phew~...

Working papers

a)List and explain the criteria which you would use to judge the quality of audit working papers.

(i) Evidence of review -

-All working papers prepared by each member of audit team must be reviewed by a more

senior member. Such a review must be evidenced on the working paper,detailing who has

performed it and when, to ensure that sufficient work has been performed and that the

finding support the audit conclusions.

(ii) Evidence of procedures followed and the tests performed.

- Working papers must indicate the client's name, acctg period, a file reference, the areas of

the audit being covered and the details of who performed the work and when.In the

interest of clarity, detailed explanatory information should provided on supporting

schedules which should be suitably referenced and cross-referenced.

(iii) Record of information received, problem encountered and conclusion reached.

- Documenting details of all findings furing the audit encourages the auditor to adopt a

methodical approach and ensures the problem are not overlooked. The working papers

should summarie any significant matters, and highlights any judgemental aspects together

with the auditor's conclusions thereon.

(iv) Usefulness in future years.

- Working paper should provide sufficient details to enable members of the audit team to

familiarise themselves with the assignment from year to year and to plan subsequent

audits.

(v) Evidence of adherence to ISA's and guidelines.

- In the event of auditor opinion being challenged,the working paper will provide supporting

evidence that the auditor followed the basic principles prescribed by the Auditing std as

well as the approriate application of Auditing Guidelines.

b)* Explain why working papers are prepared. (ACCA level 2 Auditing Dec 1989)

(i) allow the person who is conducting the audit to approach their work in a methodical way, thus omission will be prevented, and the successive chains of command, senior, supervisor, manager and partner able to maintain control over the audit by carrying out review procedures.

(ii) allows the partner to know the adequate work has been performed, before ascertaining whether the accounts show a true and fair view or not.

(iii) preparation of working papers in any one year will also form a basis for succeeding audits since there will be record of problems encountered for future guidance.

c) Give the main categories of items that would be included in a complete set of working papers. (ACCA level 2 Auditing December 1989 sitting)

- information of continuing importance e.g; constitutional documents.

- audit planning information.

- the auditor's assessment of the accounting system and, if applicable the internal control in

operations.

- the detailed audit work undertaken together with all the conclusion drawn therefrom

- evidence that the work performed by audit staff has been reviewed by more senior

personnel.

- analyse and summaries supporting the balances and revenue items in the financial

statements, and

- a summary of significant points affecting the audit, the financial statements and the auditor's

reports and how these were dealt with.

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*might be the area that need some attention on..