Introduction

• Auditing


  A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users
• Assurance


  An engagement whereby a practitioner expresses a conclusion that enhances the degree of confidence of the users on a subject matter prepared by a "responsible party" when the subject matter is compared and measured against established criteria
• Levels of Assurance


  • Reasonable Assurance (Audit)
  • Limited Assurance (Review)
• Reasonable Assurance (Audit)


  • Aimed at "Reducing Engagement Risk" to an acceptably low level in the light of the given circumstance. A positive expression is thereby included in a practitioner's report
• Limited Assurance (Review)


  • Aimed at "Reducing Engagement Risk" to an acceptable level, but that, there is a higher engagement risk than that when a reasonable assurance is promised, since less extensive procedures are performed by the practitioner
• Elements of Assurance Engagement

  • Three Party Relationship
  • Subject Matter
  • Suitable Criteria
  • Sufficient Appropriate Evidence
  • Written Report
• Understanding the Entity and Its Environment

  Responsibility to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels, through understanding the entity and its environment, including the entity's internal control, thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement
• Aspects of Understanding the Entity and Its Environment

  • Relevant industry, regulatory, and other external factors including the applicable financial reporting framework
  • The nature of the entity, including its operations, ownership and governance structures, types of investments, and how it is structured and financed
  • The entity's selection and application of accounting policies
  • The entity's objectives and strategies, and those related business risks
  • The measurement and review of the entity's financial performance
• Industry, Regulatory and Other External Factors, Including the Applicable Financial Reporting Framework

  • Industry conditions such as competitive environment, supplier and customer relationships, and technological developments
  • Regulatory environment encompassing legal and political environment, and environmental requirements
  • Other external factors such as general economic conditions
• Nature of the Entity

  • Entity's operations
  • Ownership and governance
  • Types of investments that it is making and plans to make
  • The way the entity is structured and financed
• Objectives and Strategies and Related Business Risks

  • Objectives are the overall plans for the entity defined by the entity's management or those charged with governance
  • Strategies are the operational approaches by which management intends to achieve its objectives
  • Business risks result from significant conditions, events, circumstances, actions or inactions that could adversely affect the entity's ability to achieve its objectives and execute its strategies, or through the setting of inappropriate objectives and strategies
• Measurement and Review of the Entity's Financial Performance

  • The methods of measuring and reviewing performance are important to the auditors in determining the incentives of management and other employees because their compensations is often tied to the measures
  • Obtaining an understanding of the entity's performance measures assists the auditor in considering whether such pressures result in management actions that may have increased the risks of material misstatements
• Examples of Matters an Auditor May Consider Regarding Measurement and Review of the Entity's Financial Performance


  • Key ratios and operating statistics
  • Key performance indicators
  • Employee performance measures
• Auditor's understanding of the measurement and review of the entity's financial performance


  Important in determining the incentives of management and other employees as their compensation is often tied to the measures, which may create pressure to misstate the financial statements or engage in fraud. Auditors may also use these measures in designing analytical procedures to provide evidence about the fairness of the financial statements.
• Matters an auditor may consider in understanding the entity's performance measures

  • Key ratios and operating statistics
  • Key performance indicators
  • Employee performance measures and incentive compensation policies
  • Trends
  • Use of forecasts, budgets and variance analysis
  • Analyst reports and credit rating reports
  • Competitor analysis
  • Period-on-period financial performance (revenue growth, profitability, leverage)
• Internal control


  Designed to provide reasonable assurance of achieving objectives related to reliable financial reporting, efficiency and effectiveness of operations, and compliance with laws and regulations
• The nature and extent of the audit work to be performed depend largely upon the effectiveness of the client's internal control in preventing or detecting material misstatements in the financial statements
• Before auditors can evaluate the effectiveness of internal control, they need a knowledge and understanding of how it works; what controls exist and who performs them, how various types of transactions are processed and recorded, and what accounting records and supporting documentation exist
• Specialized industry


  A distinct market that has a unique way of accounting for transactions and reporting its financial results, which are allowed under the applicable accounting framework
• Examples of specialized industries

  • Airline companies
  • Insurance companies
  • Banking and financial institutions
  • Real estate
  • Business process outsourcing (BPO) entities
  • Construction on contracting companies
  • Health maintenance organizations (HMO)
  • Holding entities
  • Logging and mining entities
  • Agriculture
  • Power distributor/power generating companies
  • Telecommunications
  • Nonprofit or Not-for-profit Organizations
• Characteristics of Specialized Industries

  • High risk (Publicly listed or with Public Accountability)
  • Strict and several compliances to laws and government agencies and its regulations
  • Complex accounting (revenue recognition)
• Audit Considerations


  • Competence
  • Audit Planning
  • Reliance on experts
• 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, including whether the firm personnel has knowledge of relevant industries and has experience with relevant regulatory or reporting requirements, or the ability to gain the necessary skills and knowledge effectively
• Larger audit firms are likely to meet the competence requirement for almost any type of industry, while smaller firms may have to carefully consider their competence to take on an audit client in a specialized industry if they have not previously worked with an audit client in the same industry
• The audit firm should ensure that there is adequate documentation to demonstrate that competence has been considered, and the steps that have been taken to improve competence where necessary, for example through appropriate staff training
• Audit planning


  Identification of the risk of material misstatement in a specialized industry should be approached in the same way as in any other audit - by obtaining appropriate understanding of the business and its environment. The audit firm is likely to have additional resources available, such as briefing notes or internal technical guidance on how financial reporting standards should be applied within the sector, to assist audit team members assigned to a specialized industry client.
• While there may be specific risks of material misstatement relating to the industry-specific balances and transactions, there must also be appropriate consideration of the "normal" balances and transactions
• 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 firm must adhere to the requirements and principles of ISA 620, Using the Work of an Auditor's Expert, including evaluating the relevance and adequacy of the expert's findings or conclusions, and not over-relying on the expert's work.
• 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