AUDITING IN SPECIALIZED INDUSTRIES

• Auditing and Assurance: Specialized Industries

  Covers approaches to problems and situations normally encountered in the independent examination of financial statements of entities engaged in special industries
• Financial statements are the representation of the reporting entity's management
• To lend credibility to the entity's prepared financial statements, they have to be examined by an independent certified public accountant, who expresses an opinion as to the fairness by which such financial statements are presented
• As future certified public accountants performing engagement services, learners must be exposed to the transaction cycles of specialized industries, so that they can formulate audit plans and audit procedures accordingly
• Audit


  A systematic review and assessment of information or documents
• Assurance


  A professional service with the aim of improving the quality and transparency of information, to reduce the chance of problems occurring from incorrect information
• Specialized industry


  Industries that either have specific financial reporting standards applicable to them, or have distinct accounting policies which have been developed to account for specialized transactions and balances which are based on the normally-applied financial reporting standards
• IAS® 41, Agriculture is clearly relevant specifically to the agriculture sector and IFRS®, 7 Financial Instruments: Disclosure will need specific application by companies operating in the banking sector
• Reasons for auditing and assurance

  • Protect public interest
  • Compliance (Securities and Exchange Commission, Bureau of Internal Revenue, Government biddings)
  • Usually annually (Calendar and Fiscal)
• Enron: Company/Client, Arthur Andersen: Auditor, Faked profits (Overstatement), Hide debts, Cooked books, Auditor signed off despite fraudulent practice
• Andersen guilty of obstruction of justice for shredding the thousands of documents and deleting e-mails and company files that tied the firm to its audit of Enron
• The price of Enron's shares went from $90.75 at its peak to $0.26 at bankruptcy

  
• Consequences of Enron scandal

  • Loss of money/investments ($67 billion)
  • Loss of pensions
  • Loss of jobs
  • Loss of trust
  • Convictions
  • Suicides
  • Stricter auditing rules
• Audit


  A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic action and events to ascertain the degree of correspondence between these assertions and established criteria and communicating the results to interested users
• Major types of audit

  • Financial statement audit
  • Compliance audit
  • Operational audit
• Types of auditors


  • External auditors
  • Internal auditors
  • Government auditors
• Management's responsibility


  Responsible for preparing and presenting the FS in accordance with the financial reporting framework. It adopts and implements adequate accounting and internal control systems to ensure the preparations of a reliable financial statements
• Auditor's responsibility


  Conduct an audit in accordance with the PSA (Phil. Standards on Auditing) to provide only REASONABLE ASSURANCE (not absolute assurance) that the FS taken as a whole are free from material misstatements
• Limitations affecting the auditor's ability to detect material misstatements

  • Use of testing/sampling
  • Error in application of judgement
  • Reliance on management's representation
  • Inherent limitation of the client's accounting and internal control systems
• General principles governing the audit of F/S

  • Ethical requirements
  • Conduct of an audit
  • Scope of an audit of financial statements
  • Professional skepticism
  • Reasonable assurance
  • Audit risk
• Competence


  When accepting an audit engagement involving a specialist industry, the audit firm needs to pay close attention to the competence of the audit firm to provide the service
• Audit planning


  Identification of the risk of material misstatement in a specialized industry should be approached in the same was as in any other audit – by obtaining appropriate understanding of the business and its environment
• Reliance on experts


  The auditor may plan to use an auditor's expert to obtain audit evidence, particularly in a specialized industry where the audit firm may not have the necessary specific expertise in some areas
• The audit of a client in a specialized industry can pose some challenges to the audit firm, but with proper consideration of competence, and by providing staff with additional support and guidance, these audits should not necessarily be more complex or challenging to plan and perform
• The audit of a client in a specialized industry can pose some challenges to the audit firm
• With proper consideration of competence, and by providing staff with additional support and guidance, these audits should not necessarily be more complex or challenging to plan and perform
• Using experts can provide high quality audit evidence in specialist situations, but the auditor must be careful to fully evaluate the findings of the auditor's expert and not to over-rely on their work
• For audit staff, working on this type of engagement can be very rewarding, providing exposure to sometimes unusual businesses
• Construction Industry Categories


  • Building Construction Industry
  • Heavy Construction Industry
  • Special Trade Construction Industry
• Contractors


  • Perform the construction work in accordance with the plans and specifications provided by the owner and are required to be licensed by state law
• Construction Managers


  • Do not perform construction work on projects, but are an agent for the owner
  • Coordinate the construction project, but have no contractual relationship with the subcontractors
  • Only provide services, do not perform any construction work
  • Not liable for defects in the construction, but may be liable for design defects
• General or Prime Contractors

  • Their principal business is the performance of the construction work in accordance with the plans and specifications of the owner
  • Take full responsibility for the completion of the project
  • Normally subcontract out a substantial part of the work, while maintaining overall control through project managers and onsite supervision
  • May utilize specialty subcontractors, but can perform any portion of the work
  • Generally licensed
• Commercial Contractors


  • Specialize in commercial construction projects
  • May include the construction of a single building or any number of buildings
  • Projects include retail, rental facilities, business locations, municipal buildings, and special projects
• Commercial Project Owners


  • May be an individual, corporation, partnership, or government body
  • Evaluate whether a project is feasible and will provide the future benefits desired
  • Normally secure the necessary financing for the project for both the construction period and permanent financing upon completion
  • The general contractor may or may not have an ownership interest in the project
• Residential Construction Developer


  • Generally the owner and the builder of the residential development
  • Acquires land, obtains approval, secures construction financing, and begins construction of the residential development in stages or phases
• Subcontractors


  • Distinguished from the general contractor by the limited scope of their work, which usually involves a special skill, knowledge, or ability
  • Include specialists such as plumbers, electricians, framers, and concrete workers
  • Generally enter into contracts with the general contractors, and may provide the raw materials used in their specialty areas
  • The general contractor, not the owner of the property, will usually pay the subcontractors
  • Materials purchased by the subcontractors are generally delivered directly to the job site
  • Their work may be completed in stages, or it may be continuous
• Highway Contractors


  • Require specialized equipment and techniques such as bulldozers, graders, dump trucks, and rollers
  • Examples of highway construction include city streets, freeways, country roads, highway bridges, and tunnels
• Heavy Construction Contractors


  • Require large and complex mechanized equipment, such as cranes, bulldozers, pile drivers, dredges, and pipe-laying devices
  • Examples of projects include dams, large bridges, refineries, petrochemical plants, nuclear and fossil fuel power plants, pipelines, and offshore platforms
  • Most industrial plants are classified in this category because of the complexity of the work
  • The largest engineering and construction firms are included in the heavy construction classification
• Architects and Engineers


  • Design the plans to be used by the construction contractors
  • Provide the necessary detail (dimensions, materials to be used, location of fixtures, etc.) to the contractors
  • May monitor the contractor's progress and often approve progress payments to the contractors
  • Make modifications (change orders) in the plans as needed
• Change orders


  Written revisions to the contract, which increase or decrease the total contract price paid to the construction contractors