Training Session International Accounting

1
Training SessionInternational Accounting
Auditing FrameworkThe established standards for
accounting and auditSession 4 5

• Presenter
• Altaf Noor Ali
• Chartered Accountant

2
2nd Session11.30 -1 pm 90 minInternational
Accounting and Auditing Standards Framework

• Session Objective
• International Accounting Standards Board
• International Federation of Accountants
• International Auditing and Assurance Standards
  Board
• Review of Selected Auditing Standards
• Additional Learning Internet Resources

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Session Objective

1. Learn about International Accounting Standards
   Board and International Federation of Accountants
   and its bodies
2. Relationship between accounting and auditing
3. Accounting Standards Main Features
4. Auditing Standards - Main features

4
International Accounting Standards Board

• Mission and Functions

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International Accounting Standards Board iasb

• The iasb, based in London, began operations in
  2001
• The nineteen Trustees of the IASC Foundation
  select, oversee and fund the iasb
• The iasb has sole responsibility for setting
  accounting standards
• The iasb issues International Financial Reporting
  Standards. The earlier version International
  Accounting Standards are still applicable

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International Federation of Accountants

• Mission and Functions

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International Federation of Accountants

• Mission
• To serve the public interest, IFAC will continue
  to strengthen the worldwide accountancy
  profession and contribute to the development of
  strong international economies by establishing
  and promoting adherence to high-quality
  professional standards, furthering the
  international convergence of such standards and
  speaking out on public interest issues where the
  professions expertise is most relevant.

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International Federation of Accountants

1. Founded in 1977, member bodies 163
2. Standard-setting Initiatives
3. Auditing and Assurance Services through
   International Auditing and Assurance Board
4. Ethics Committee
5. Public sector Accounting through International
   Public Sector Accounting Standards Board
6. Education Committee

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IAASB Objectives

• The IAASB achieves its objective by
• Establishing high quality auditing standards and
  guidance for financial statement audits that are
  generally accepted and recognized by investors,
  auditors, governments, banking regulators,
  securities regulators and other key stakeholders
  across the world
• Establishing high quality standards and guidance
  for other types of assurance services on both
  financial and non-financial matters
• Establishing high quality standards and guidance
  for other related services
• Establishing high quality standards for quality
  control covering the scope of services addressed
  by the IAASB and
• Publishing other pronouncements on auditing and
  assurance matters, thereby advancing public
  understanding of the roles and responsibility of
  professional auditors and assurance service
  providers.

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International Audit and Assurance Standards
BoardissuesInternational Standards on Auditing
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IAASB Pronouncements

1. These are published in the Handbook of
   International Auditing, Assurance, and Ethics
   Pronouncements.
2. The latest edition of this Handbook is that of
   1-1-06 comprises 1098 pages.
3. About 200 pages are devoted to the Code of Ethics
   for Professional Accountants Standards on 900
   pages.

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Ground Rules

• International Standards on Auditing (ISAs) are to
  be applied in the audit of historical financial
  information.
• International Standards on Review Engagements
  (ISREs) are to be applied in the review of
  historical financial information.
• International Standards on Assurance Engagements
  (ISAEs) are to be applied in assurance
  engagements dealing with subject matters other
  than historical financial information.

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gtgtGround Rules

• International Standards on Related Services
  (ISRSs) are to be applied to compilation
  engagements, engagements to apply agreed upon
  procedures to information and other related
  services engagements as specified by the IAASB.
• ISAs, ISREs, ISAEs and ISRSs are collectively
  referred to as the IAASBs Engagement Standards.
• International Standards on Quality Control
  (ISQCs) are to be applied for all services
  falling under the IAASBs Engagement Standards.

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ISA Highlightsgt1

1. Objectives and general principles governing an
   audit of financial statements 200
2. Terms of audit engagements 210
3. Quality controls for Audits of Historical
   Financial Information 220
4. Audit Documentation 230
5. The Auditors Responsibility to Consider Fraud
   in an Audit of Financial Statements 240
6. Planning an audit of Financial Statements 300

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gtgtISA Highlights 2

1. Audit evidence 500
2. Analytical procedures 520
3. Subsequent events 560
4. Going concern 570
5. Management representations 580
6. Using the work of another auditor 600
7. Considering the work of an internal auditing 610
8. The independent auditors report on a complete
   set of general purpose financial statements 700

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Objectives and general principles governing an
audit of financial statements 200

1. The objective of an audit of financial statements
   is to enable the auditor to express an opinion
   whether the financial statements are prepared, in
   all material respects, in accordance with an
   identified financial reporting framework.
2. The auditor should conduct an audit in accordance
   with ISAs.

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Terms of audit engagements 210

• The auditor and the client should agree on the
  terms of the engagement.
• The form and content of audit engagement letters
  would generally include the objective of audit,
  managements responsibility, limitations of
  audit, unrestricted access to records.

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Quality controls for Audits of Historical
Financial Information 220

1. The engagement team should implement quality
   control procedures that are applicable to the
   individual audit assignment.
2. The engagement partner should take overall
   responsibility for the overall quality on each
   audit engagement to which that partner is
   assigned.
3. The engagement partner should consider whether
   members of the engagement team have complied with
   ethical requirements.

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Audit Documentation 230

• 1. The auditor should prepare, on a timely basis,
  audit documentation that provides
• (a) A sufficient and appropriate record of the
  basis for the auditors report and
• (b) Evidence that the audit was performed in
  accordance with ISAs and applicable legal and
  regulatory requirements.
• 2. The auditor should prepare the audit
  documentation so as to enable an experienced
  auditor, having no previous connection with the
  audit, to understand
• (a) The nature, timing, and extent of the audit
  procedures performed
• to comply with ISAs and applicable legal and
  regulatory requirements
• (b) The results of the audit procedures and the
  audit evidence
• obtained and
• (c) Significant matters arising during the audit
  and the conclusions
• reached thereon.

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The Auditors Responsibility to Consider Fraud in
an Audit of Financial Statements 240

1. In planning and performing the audit to reduce
   audit risk to an acceptably low level, the
   auditor should consider the risks of material
   misstatements in the financial statements due to
   fraud.
2. The auditor should maintain an attitude of
   professional skepticism throughout the audit,
   recognizing the possibility that a material
   misstatement due to fraud could exist,
   notwithstanding the auditors past experience
   with the entity about the honesty and integrity
   of management and those charged with governance.

21
Planning an audit of Financial Statements 300

1. The auditor should plan the audit so that the
   engagement will be performed in an effective
   manner.
2. The auditor should establish the overall audit
   strategy for the audit.
3. The auditor should develop an audit plan for the
   audit in order to reduce audit risk to an
   acceptably low level.
4. The overall audit strategy and the audit plan
   should be updated and changed as necessary during
   the course of the audit.

22
Audit evidence 500

• The auditor should obtain sufficient appropriate
  audit evidence to be able to draw reasonable
  conclusions on which to base the audit opinion.
• When information produced by the entity is used
  by the auditor to perform audit procedures, the
  auditor should obtain audit evidence about the
  accuracy and completeness of the information.

23
Analytical procedures 520

• The auditor should apply analytical procedures as
  risk assessment procedures to obtain an
  understanding of the entity and its environment
  and in the overall review at the end of the
  audit.
• The auditor should apply analytical procedures as
  risk assessment procedures to obtain an
  understanding of the entity and its environment.

24
Subsequent events 560

• The auditor should consider the effect of
  subsequent events on the financial statements and
  on the auditors report.
• The auditor should perform audit procedures
  designed to obtain sufficient appropriate audit
  evidence that all events up to the date of the
  auditors report that may require adjustment of,
  or disclosure in, the financial statements have
  been identified.

25
Going concern 570

• When planning and performing audit procedures and
  in evaluating the results thereof, the auditor
  should consider the appropriateness of
  managements use of the going concern assumption
  in the preparation of the financial statements.
• In obtaining an understanding of the entity, the
  auditor should consider whether there are events
  or conditions and related business risks which
  may cast significant doubt on the entitys
  ability to continue as a going concern.
• The auditor should remain alert for audit
  evidence of events or conditions and related
  business risks which may cast significant doubt
  on the entitys ability to continue as a going
  concern in performing audit procedures throughout
  the audit. If such events or conditions are
  identified, the auditor should, in addition to
  performing the procedures in paragraph 26,
  consider whether they affect the auditors
  assessment of the risks of material misstatement.

26
Management representations 580

• The auditor should obtain appropriate
  representations from management.
• The auditor should obtain audit evidence that
  management acknowledges its responsibility for
  the fair presentation of the financial statements
  in accordance with the applicable financial
  reporting framework, and has approved the
  financial statements.
• The auditor should obtain written representations
  from management on matters material to the
  financial statements when other sufficient
  appropriate audit evidence cannot reasonably be
  expected to exist.

27
Using the work of another auditor 600

• When the principal auditor uses the work of
  another auditor, the principal auditor should
  determine how the work of the other auditor will
  affect the audit.
• The auditor should consider whether the auditors
  own participation is sufficient to be able to act
  as the principal auditor.

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Considering the work of an internal auditing 610

• The external auditor should consider the
  activities of internal auditing and their effect,
  if any, on external audit procedures.
• The external auditor should obtain a sufficient
  understanding of internal audit activities to
  identify and assess the risks of material
  misstatement of the financial statements and to
  design and perform further audit procedures.

29
The independent auditors report on a complete
set of general purpose financial statements 700

• The auditors report should contain a clear
  expression of the auditors opinion on the
  financial statements.
• The auditor should evaluate the conclusions drawn
  from the audit evidence obtained as the basis for
  forming an opinion on the financial statements.

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Further Study Internet Resources

1. Anyone can become a member of website of
   International Federation of Accountants at
   www.ifac.org
2. A lot of material including the Handbook
   (containing ISAs) and Annual Report of IFAC and
   IAASB can be downloaded free of cost.

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End of Session 4 5

• Thank You

32
Training SessionRisk Based AuditingHow to
assess audit risk and respond to itSession 6

• Presenter
• Altaf Noor Ali
• Chartered Accountant

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Risk Assessment in Audits

1. Session objectives
2. Understanding the entity and its environment
3. Industry conditions
4. Regulatory environment
5. Nature of entity
6. Business Operations
7. Investments
8. Financing
9. Financial Reporting
10. Assessing the risks of material misstatement
    Examples

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Session Objective

• Why is it important to assess the risk before
  conducting audit in light of ISA 315?
• Examples of matters an auditor may consider while
  assessing risk
• Examples of conditions and events that may
  indicate risks of material misstatement

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Isa315 Highlights

• 1. The auditor should perform the following risk
  assessment procedures to obtain an understanding
  of the entity and its environment, including its
  internal control
• (a) Inquiries of management and others within the
  entity
• (b) Analytical procedures and
• (c) Observation and inspection.
• 2. Members of the engagement team should discuss
  the susceptibility of the entitys financial
  statements to material misstatements.
• 3. The auditor should obtain an understanding of
  relevant industry, regulatory, and other external
  factors including the applicable financial
  reporting framework.

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Industry conditions

1. The market and competition, including demand,
   capacity, and price competition
2. Cyclical or seasonal activity
3. Product technology relating to the entitys
   products
4. Energy supply and cost

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Regulatory environment

• Accounting principles and industry specific
  practices
• Regulatory framework for a regulated industry
• Legislation and regulation that significantly
  affect the entitys operations
• Regulatory requirements
• Direct supervisory activities
• Taxation (corporate and other)
• Government policies currently affecting the
  conduct of the entitys business
• Monetary, including foreign exchange controls
• Fiscal
• Financial incentives (for example, government aid
  programs)
• Tariffs, trade restrictions
• Environmental requirements affecting the industry
  and the entitys business
• Other external factors currently affecting the
  entitys business
• General level of economic activity (for example,
  recession, growth)
• Interest rates and availability of financing
• Inflation, currency revaluation

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Business Operations 1

1. Nature of revenue sources (for example,
   manufacturer, wholesaler, banking, insurance or
   other financial services, import/export trading,
   utility, transportation, and technology products
   and services)
2. Products or services and markets (for example,
   major customers and contracts, terms of payment,
   profit margins, market share, competitors,
   exports, pricing policies, reputation of
   products, warranties, order book, trends,
   marketing strategy and objectives, manufacturing
   processes)
3. Conduct of operations (for example, stages and
   methods of production, business segments,
   delivery or products and services, details of
   declining or expanding
4. Alliances, joint ventures, and outsourcing
   activities
5. Involvement in electronic commerce, including
   Internet sales and marketing
6. Geographic dispersion and industry segmentation

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Business Operations 2

• Location of production facilities, warehouses,
  and offices
• Key customers
• Important suppliers of goods and services (for
  example, long-term contracts, stability of
  supply, terms of payment, imports, methods of
  delivery such as just-intime)
• Employment (for example, by location, supply,
  wage levels, union contracts, pension and other
  post employment benefits, stock option or
  incentive bonus arrangements, and government
  regulation related to employment matters)
• Research and development activities and
  expenditures
• Transactions with related parties

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Investments

• Acquisitions, mergers or disposals of business
  activities (planned or recently Investments and
  dispositions of securities and loans
• Capital investment activities, including
  investments in plant and equipment and
  technology, and any recent or planned changes
• Investments in non-consolidated entities,
  including partnerships, joint ventures and
  special-purpose entities

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Financing

1. Group structure major subsidiaries and
   associated entities, including consolidated and
   non-consolidated structures
2. Debt structure, including covenants,
   restrictions, guarantees, and off-balance-sheet
   financing arrangements
3. Leasing of property, plant or equipment for use
   in the business
4. Beneficial owners (local, foreign, business
   reputation and experience)
5. Related parties
6. Use of derivative financial instruments

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Financial Reporting

1. Accounting principles and industry specific
   practices
2. Revenue recognition practices
3. Accounting for fair values
4. Inventories (for example, locations, quantities)
5. Foreign currency assets, liabilities and
   transactions
6. Industry-specific significant categories (for
   example, loans and investments for banks,
   accounts receivable and inventory for
   manufacturers, research and development for
   pharmaceuticals)
7. Accounting for unusual or complex transactions
   including those in controversial or emerging
   areas (for example, accounting for stock-based
   compensation)
8. Financial statement presentation and disclosure

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Objectives and Strategies and Related Business
Risks

• Industry developments (a potential related
  business risk might be, for example, that the
  entity does not have the personnel or expertise
  to deal with the changes in the industry)
  products and services (a potential related
  business risk might be, for example, that there
  is increased product liability)
• Expansion of the business (a potential related
  business risk might be, for example, that the
  demand has not been accurately estimated)
• New accounting requirements (a potential related
  business risk might be, for example, incomplete
  or improper implementation, or increased costs)
• Regulatory requirements (a potential related
  business risk might be, for example, that there
  is increased legal exposure)
• Current and prospective financing requirements (a
  potential related business risk might be, for
  example, the loss of financing due to the
  entitys inability to meet requirements)
• Use of IT (a potential related business risk
  might be, for example, that systems and processes
  are incompatible)

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Measurement and Review of the Entitys Financial
Performance

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

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Internal Control Components

• 1. Internal control consists of the following
  components
• (a) The control environment
• (b) The entitys risk assessment process
• (c) The information system, including the related
  business processes, relevant to financial
  reporting, and communication
• (d) Control activities and
• (e) Monitoring of controls.

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Conditions and Events that may Indicate Risks of
Material Misstatement 1

1. Operations in regions that are economically
   unstable, for example, countries with significant
   currency devaluation or highly inflationary
   economies.
2. Operations exposed to volatile markets, for
   example, futures trading.
3. High degree of complex regulation.
4. Going concern and liquidity issues including loss
   of significant customers.
5. Constraints on the availability of capital and
   credit.

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Conditions and Events that may Indicate Risks of
Material Misstatement 2

1. Changes in the industry in which the entity
   operates.
2. Changes in the supply chain.
3. Developing or offering new products or services,
   or moving into new lines of business.
4. Expanding into new locations.
5. Changes in the entity such as large acquisitions
   or reorganizations or other unusual events.

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Conditions and Events that may Indicate Risks of
Material Misstatement 3

1. Entities or business segments likely to be sold.
2. Complex alliances and joint ventures.
3. Use of off-balance-sheet finance, special-purpose
   entities, and other complex financing
   arrangements.
4. Significant transactions with related parties.
5. Lack of personnel with appropriate accounting and
   financial reporting skills.

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Conditions and Events that may Indicate Risks of
Material Misstatement 4

• Changes in key personnel including departure of
  key executives.
• Weaknesses in internal control, especially those
  not addressed by management.
• Inconsistencies between the entitys IT strategy
  and its business strategies.
• Changes in the IT environment.
• Installation of significant new IT systems
  related to financial reporting.

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Conditions and Events that may Indicate Risks of
Material Misstatement 5

1. Inquiries into the entitys operations or
   financial results by regulatory or government
   bodies.
2. Past misstatements, history of errors or a
   significant amount of adjustments at period end.
3. Significant amount of non-routine or
   non-systematic transactions including
   intercompany transactions and large revenue
   transactions at period end.
4. Transactions that are recorded based on
   managements intent, for example, debt
   refinancing, assets to be sold and classification
   of marketable securities.
5. Application of new accounting pronouncements.

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Conditions and Events that may Indicate Risks of
Material Misstatement 6

• Accounting measurements that involve complex
  processes.
• Events or transactions that involve significant
  measurement uncertainty, including accounting
  estimates.
• Pending litigation and contingent liabilities,
  for example, sales warranties, financial
  guarantees and environmental remediation.

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End of Session

• Thank You