top 10 deficiencies in assurance engagements

Top10DeficienciesinAssuranceEngagements

Tipsforaddressingandcorrectingthesedeficienciesinyourfiledocumentation

TOP10DEFICIENCIESINASSURANCEENGAGEMENTSASPE&ASNFPO

1. Recognition&Measurement2. Presentation&Disclosure

EngagementPerformance&Documentation3. UnderstandingoftheEntity4. FileDocumentation&UseofChecklists5. Inquiry&Discussion6. AnalyticalProcedures7. Inventory8. ReportDating

QualityControl9. Independence&EQCR10. Monitoring

ASPE&ASNFPO

ASPE&ASNFPO- RECOGNITION

• RevenueRecognition• Accountingvs.GAAPcompliant• Revenuerecognitionpolicy

• Investments- whatisit?• Businesscombination• Subsidiaries• Jointarrangements• Investments• Financialinstrument

• Futureincometaxes• Internallygeneratedassets

ASPE&ASNFPO- MEASUREMENT

• Measurement• Relatedpartytransactions• Portfolios– FVoramortizedcost

ASPE&ASNFPO- PRESENTATION

• Presentation• Assetsundercapitallease• Preferredsharesissuedintaxplanningarrangement• Currentvs.long-termdebt**• Cash

**EIC122wasissuedOctober31,2001

ASPE&ASNFPO- DISCLOSURE

• Disclosures• Natureofoperations• Significantaccountingpolicies• Carryingamountofassetspledgedascollateral• Allowancefordoubtfulaccounts• Measurementuncertainty• Riskdisclosures• Taxespayablemethodratereconciliation• Guarantees

AccountingPolicies

CPACanadaModelFinancialStatements• ASPE• ASNFPO• IFRS

IndependentFSreview

ADDRESSINGFINANCIALSTATEMENTDEFICIENCIES

EngagementPerformance&Documentation

UNDERSTANDINGOFTHEENTITY

• Theunderstandingoftheentityanditsenvironmentisfundamentalinanassuranceengagement• Includesunderstandingofthekeyprocessesoftheentityandwhoperformsthem• Forauditengagementsthedocumentationoftherelevantcontrolsandthedesignandimplementation

UNDERSTANDINGOFTHEENTITY

KeyAreastoaddress:• Cash/bankreconciliationprocess• A/RandRevenuecut-offandprocessforidentifyingAFDA• Inventorycountprocedures,howtheclientdeterminescostandhowslowmoving/obsoleteinventoryisidentifiedandwrittendown/off.• ProcessforrecordingPP&Eadditions,disposalsandamortization• A/P,Inventoryandexpenseprocessesandcut-offprocedures• Payroll

USEOFCHECKLISTSANDFILEDOCUMENATION• Purposeofchecklists:

• Toremindtheengagementteamastowhatprocedureswereselectedand/orarecompulsoryforcompletionoftheengagement

• Toprovidefilereviewerswitharoadmapofwheretheycanfindthedocumentationtosupporttheproceduresperformed

• TypicallyY/Nanswerstochecklistquestionsdonotprovidesufficientfiledocumentation• Yourdocumentationmustsummarizetheproceduresperformed,theresultsandprovideaconclusionsothatafilereviewercanperformthesameanalysisandcometothesameconclusion

DOCUMENTATIONOFCUT-OFFPROCEDURESFortherelevantfinancialstatementareasthereshouldbedocumentationofthediscussionwithmanagementaboutcut-off.Typically,whatfinancialstatementareaswouldrequirecut-offwork:• Cash• AccountsReceivable• Inventory• AccountsPayableandAccruedLiabilities

USEOFCHECKLISTSANDFILEDOCUMENATION- EXAMPLE

Procedure:Inquireanddocument whetherthesales,receiptsandotheraccountsreceivabletransactionswerecutoffappropriatelyattheyearend.

Response:

• Engagementteammember(TRG)madeinquiriesoftheBookkeeper(Mary)on02/22/16regardingrevenueandA/Rcutoffproceduresperformed

• Shenotedthatsheconfirmedwiththewarehousesupervisorthatthelastshipmentdeliveredtoclientswasforinvoice#17823whichwasincludedinrevenue.Allshipmentsmadesubsequenttothiswereexcludedandrecognizedinthesubsequentperiod.HerworkpapersupportingthisisincludedatW/PC.2-1whichwasexaminedwithnoissuesnoted

• BasedontheaboverevenueandA/Rcutoffappearstohavebeenmaintained

Response:

• Engagementteammember (TRG)madeinquiriesoftheBookkeeper(Mary)on02/22/16 regardingrevenueandA/Rcutoffproceduresperformed

• Shenotedthatsheconfirmedwiththewarehousesupervisorthatthelastshipmentdeliveredtoclientswasforinvoice#17823whichwasincludedinrevenue.Allshipmentsmadesubsequenttothiswereexcludedandrecognizedinthesubsequentperiod.HerworkpapersupportingthisisincludedatW/PC.2-1 whichwasexaminedwithnoissuesnoted

• BasedontheaboverevenueandA/Rcutoffappearstohavebeenmaintained

INQUIRIES&DISCUSSION

• Inauditengagements,inquiresanddiscussionaretypicallyariskassessmentprocedureoracomponentofanauditprocedure• Inreviewengagements,inquiriesanddiscussionareanintegralpartoftheprocedures• Bothtypesofengagementsrequiretheapplicationofprofessionalskepticism

INQUIRIES&DISCUSSIONDOCUMENTATIONDocumentationrelatedtoinquiriesanddiscussionshouldinclude:• Thedateoftheinquiry;• Thename(s)ofthepersonsinvolved;• Themattersdiscussed;and• Conclusionsreachedandanyfollowupproceduresrequired.

ANALYTICALPROCEDURES

• Inauditengagements:• Preliminaryanalyticsarerequiredandusedasariskassessmenttool• Substantiveanalyticalproceduresarenotrequiredbutareoftenamoreeffectiveandefficientmethodoftestingascomparedtotestofdetail/samplingalone• Finalanalyticsarerequiredandareusedtoensurethattherearenooutstandingauditrisksthatneedtobeaddressed

• Inreviewengagementsanalyticalproceduresareanintegralpartoftheprocedures

DOCUMENTATIONOFANALYTICALPROCEDURESAnalyticalproceduresareaqualitativeanalysisofinformationthatisusuallyquantitativeinnature.Documentationrelatedtoanalyticalproceduresshouldinclude:• Documentationofyourexpectationsbasedontheinformationprovidedintheknowledgeofbusiness;• Performanceofratioanalysis,trendanalysis,comparisonofinter-relatedbalancesheetandincomestatementaccounts;• Comparisonoftheresultsagainsttheexpectation;and• Furtherreviewprocedureswheretheresultdiffersfromtheexpectation.

ANALYTICALPROCEDURES- AUDITS

• Preliminaryanalyticsusinginplanningarenotmeanttoexplainvariancestheyaremeanttoidentifypotentialrisks• Substantiveanalyticalproceduresareauditevidenceandassuchtheyshouldbemuchmorethoroughandprecisethanotheranalyticalprocedures(i.e.proof-in-totalcalculationsanddisaggregatedtrendanalysis)• Finalanalyticsareafinalassessmenttoensurenooutstandingissues/risksexist

ANALYTICALPROCEDURES– REVIEWS

• Inreviewengagementsanalyticalproceduresareaprimarymethodofassessingplausibility.• Deficientanalyticalproceduresareoftenredundantoraddlittlevalue:• Revenueincreasedbecausesalesvolumes

increased.• Revenuedecreasedbecausesalesfromamajor

clientdecreased.• Accountsreceivableincreasedby72%overlast

year.Thisincreaseisreasonablegiventheincreaseinsalesovertheprioryear.

BETTEREXAMPLESOFANALYTICALPROCEDURES

• TheincreaseinA/Rof$55Kisduetoseveralmajorinvoicesthatwereissuedtoanewcustomerbeforeyearend.Perdiscussionwithcontrollertheserviceswereprovidedbeforeyearend.

• Perthemarketingmanagersalesvolumehasincreased7%whichwastheresultofsignificantpricediscountingresultinginannetincreaseinsalesof4%.Thiswascorroboratedviaadiscussionwiththeowner.

• RetailsalesinBChaveincreasedby2.1%thisyearaccordingtomarketresearch.Perthesalesmanagertrafficincreaseonthenewupgradedroadhashelpedsales.Increaseinsalesof2.8%appearsplausible.

INVENTORY

• Whatassertionsaretypicallyrelevantforinventory?• Existence• Completeness• Accuracyand• Valuation

• Whatisthelikelihoodofmaterialmisstatementforinventory?• Typicallyitisamaterialbalanceandthelikelihoodofmaterialmisstatementishigh

INVENTORY

Whatproceduresshouldbeperformed?• Existence – Ensureacountisperformed,inquire&document,who,what,where,when,andobtainresultsofcount

• Completeness – Inquire&documenthowcompleteness(purchasescut-off)wasmaintained

• Accuracy – Inquire&documenthowtheyrecordandmeasureinventory(FOFI,WAC,SpecificItems)andwhatisincludedininventory?(Directcosts,freight,labour,etc.)

• Valuation – Inquire&documenthowtheyevaluateinventoryforobsolescenceandwriteitoff

• Documentyourevaluationofwhetherornottheaboveissufficientorwhetheryouwillneedtoundertakeadditionalprocedures

EXTENTOFWORKONREVENUE,COSTOFSALESANDOTHEREXPENSES• Obtainingsufficientappropriateevidence• Betterunderstandingofrecognitionprocessesandcut-off• Improvementinanalyticalprocedures

REPORTDATING

Eng.proceduressubstantiallycompleted

Feb.25,201X

TCWGhaveapprovedthe

FSMar.5,201X

Subsequentevents

inquiresandproceduresfinalized

Mar.8,201X

EQCRFinalizedMar.9,201X

Rep.letterobtainedfromtheclient

Mar.10,201X

FSandreportareissued

Mar.15,201X

RequirementunderCASandCSRE2400

REPORTDATING

Issues:• Nodocumentationtosubstantiatereportdate• NodocumentationofwhenTCWGapprovedandacceptedresponsibilityforthefinancialstatements• Reportdateisbeforethecompletionofsignificantportionsofthefiledocumentationand/orpartnerorEQCRreviewofthefile• Reportdateisbeforethedateofthesignedrepresentationletter• Subsequenteventshavenotbeenupdatedto/nearthereportdate

REPORTDATINGPROCESS

FileCompletion

• Completefiledocumentation

• Partner/EQCRreview

• Preparerepresentationletter

• PreparedraftreportandFS

IssueDraftReport

• Obtainsignedrepresentationletter;and

• ApprovalofthedraftFS/AJE

• ConductSubsequenteventsupdate

IssueFinalReport

• Issueenclosure/transmittalletter

PostReportIssuance

• Finalfileassembled/lockdownwithin60daysofthereportdate

QualityControl

INDEPENDENCE

• Documentationofthreatsandsafeguards• Potentialsafeguards• Segregatebookkeepingfunctionsfromassuranceengagement• FormalizedprocessforapprovalofAJEsandFS• Involvingaspecialistinareasofcomplexity• Rotatekeyteammembersafterxyears• Internalorexternalreviews

• 2nd partner,EQCR,FSreview

LEVELSOFREVIEW

• Detailedfilereview• Generalreview• Financialstatementreview• 2nd Partnerreview• Engagementqualitycontrolreview(EQCR)• Monitoring• Practicereview

EQCRTEMPLATEDRESPONSE

• 25ormorestakeholders• Feesover$15,000or10%ofbillings• 3ormorerisksidentifiedonEQCRworksheet

EQCRTAILOREDRESPONSE

• Considerfirmexposurevs.insurancecoverage• Setperiodoftimeforallnewpartners• 100%ofthefilesforyour‘tax’partner• Riskprofiledevelopedbythefirm• Litigation• Fraud• Etc.

• Anynewtypeofindustry/client/accountingframework(MIC,FirstNation/Municipalities)• Atpartnersdiscretion– trustyourgut

MONITORING

• Twoparts• Ongoing/annualmonitoring• Completedfile/cyclicalmonitoring

• Separatefrom• Practiceinspection• EQCRs• 2nd partnerreviews

CLEARLINECONSULTINGRESOURCES

Visitourresourcespageforfreespecialreportsat:www.clearlineconsulting.ca/resources

ThankYou!BridgetNoonan,CPA,CATomGillespie,CPA,CA

Visitusatwww.clearlineconsulting.ca