audit & beyond - icaew

ISSUE 222OCTOBER 2017

ICAEW.COM/AAFAUDIT & ASSURANCE FACULTY PUBLICATION

Audit & BeyondGOING CONCERNJOHN SELWOOD ON NEW-STYLE AUDIT REPORTS

NEW AGE OF DATATHE RISKS OF USING DATA ANALYTICS IN INTERNAL AUDIT

DRAMA LESSONSUSING ICAEW’S FILM TO HELP IMPROVE AUDIT QUALITY

Countdown to changeAre you ready for the implementation and impact of four new IFRS?

Official fuel consumption figures in mpg (l/100km) for the All-New Ford Fiesta range: urban 40.9-80.7 (6.9-3.5),extra urban 67.3-94.2 (4.2-3.0), combined 54.3-88.3 (5.2-3.2). Official CO2 emissions 118-82g/km. The mpg fi gures quoted are sourced from offi cial EU-regulated test results (EU Directive and Regulation 692/2008), are provided for comparability purposesand may not refl ect your actual driving experience.

SEARCH: ALL-NEW FORD FIESTA

M OV IN G YO U R FL EE T F O RWA RDW I T H T H E U K’ S M OS T T E C H N O LO G I C A L LY A DVA N C ED SM A L L C A R

P11D BIK C02 COMBINED MPG

£21,070 - £12,520 22%-18% 118-82g/km 54.3-88.3

Let’s look ahead

© ICAEW 2017. All rights reserved. The views expressed in this publication are those of the contributors; ICAEW does not necessarily share their views. ICAEW and the author(s) will not be liable for any reliance you place on information in this publication. If you want to reproduce or redistribute any of the material in this publication, you should first get ICAEW’s permission in writing. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by ICAEW, the publishers or the author(s). Whilst every care is taken to ensure accuracy, ICAEW, the publishers and author(s) cannot accept liability for errors or omissions. Details correct at time of going to press.

To comment on your magazine, please email [email protected]

Henry IrvingHead of faculty

Adequate planning and preparation are vital if auditors are to attain and sustain the highest standards of audit quality. As we note on page 6 in Look and learn, audit quality is a journey not a destination – and this is reflected throughout this edition of Audit & Beyond.

In Look and learn we consider some of the benefits of interactive training aids, such as the ICAEW film False Assurance. Using it can offer

fresh ways to facilitate discussions around some of the situations that can create audit quality challenges – and which are often cited as areas of weakness by the Financial Reporting Council (FRC) and reviewers from the ICAEW Quality Assurance Department.

Our Audit clinic looks at some emerging audit issues that members are experiencing around new style audit reports and additional auditor reporting responsibilities that are required by recent changes to laws and standards. John Selwood tackles some thorny questions about the strategic report, reporting by exception on going concern, plus illustrative audit reports from the FRC.

Our cover article focuses on four new International Financial Reporting Standards, with effective dates from 2018 onwards and early application permitted. Some sectors and audit firms will feel the impact more than others. However, these standards will bring fundamental changes to financial reporting requirements, presenting challenges and considerations for many stakeholders.

In the latest of a series of faculty reports on data analytics we focus on some emerging issues for internal audit. On page 11 we highlight the growing need for strong governance frameworks around data analytics, audit strategy and risk, to help internal audit teams tackle the associated challenges and exploit the benefits and opportunities.

As usual, we are doing our utmost to keep members informed on existing and emerging challenges and to offer help and support that will enable you to plan and prepare for them as efficiently and effectively as possible.

04 News and events Audit and assurance news from the faculty

06 Look and learnLouise Sharp explains how focusing on your weaknesses can improve your practice, including ICAEW’s film drama False Assurance

11 In a world of dataExamining the faculty’s new report, Internal audit in the era of data analytics

12 Audit clinic John Selwood tackles some topical issues

15 Technical updates A summary of the legal and regulatory changes affecting the profession

18 From the facultiesOur roundup of articles from across ICAEW faculty titles

COVER STORY08

Time is tickingWith the introduction of four new IFRS, Sophie Campkin details how best to prepare for implementation

CONTENTS

3ICAEW.COM/AAF

4 OCTOBER 2017 AUDIT & BEYOND

Audit & Assurance FacultyHenry IrvingHead of Audit & Assurance Faculty+44 (0)20 7920 8450 [email protected]

Sophie Campkin Technical manager, Audit and Assurance+44 (0)20 7920 [email protected]

Chris Cantwell Technical manager, Practice Regulation+44 (0)20 7920 8742 [email protected] Ruth WardTechnical manager, Assurance+44 (0)20 7920 [email protected]

Peter MandichManager, Audit and Assurance+44 (0)20 7920 8900 [email protected]

Louise ThorntonSenior services executive+44 (0)20 7920 [email protected]

Lesley MeallEditor+44 (0)20 7920 [email protected]

Contact detailsAudit & Assurance FacultyChartered Accountants’ Hall, Moorgate Place, London EC2R 6EA

+44 (0)20 7920 8493 +44 (0)20 7920 8754 [email protected]

icaew.com/aaf

RISK-BASED APPROACH TO QAD VISITSA focus on continuously improving audit quality may, quite understandably, mean that you hone in on the audit monitoring review findings of the Quality Assurance Department (QAD) when it publishes its annual Audit Essentials.

If so, you may have overlooked some important information elsewhere in the report – such as the revised approach that QAD is taking to selecting firms for monitoring visits.

From 2017, firms will be selected for monitoring visits depending on their risk profile and there will be varying patterns of visits including every year; every three years; every six years; with some visits taking place more frequently and at intervals outside of these cycles.

ICAEW is developing the use of the annual return and access to data

from other sources to identify potential risks and decide when a visit is needed.

You will find a more detailed explanation of this more risk-based approach in the overview and recent developments section near the start of Audit Essentials 2017 (pictured above).

The publication is free to download and can be found at tinyurl.com/AB-AudEss2017

Audit & Beyond is produced by Progressive Content71-73 Carter LaneLondon EC4V 5EQ

Advertising enquiries to [email protected]

ISSN 1748-5789 TECPLM15334

Printed in the UK by Sterling Solutions

Audit Essentials

ICAEWAUDIT MONITORING

icaew.com/audit

2017

NEWS & EVENTS

ILLUSTRATIVE AUDIT REPORTSChanges to laws and International Standards on Auditing (UK) (ISAs (UK)) have affected the wordings of audit reports. In response, the faculty and its volunteers have created a number of helpsheets to help firms prepare their audit reports for certain specific types of entity. These helpsheets have been adapted from the company examples in the Financial Reporting Council (FRC) Compendium of illustrative audit reports (available at tinyurl.com/AB-FRC-comp1016).

These helpsheets cover the main changes that need to be made to the examples in the FRC Compendium for these entities. They include: charities; group audits – combined for group and

parent; group audits – separate for group and parent; limited partnerships (LP); limited liability partnerships (LLPs); LPs which are qualifying partnerships (QPs); non-statutory audit; plus occupational pension schemes.

They can be downloaded at tinyurl.com/AB-Audit-HS

5ICAEW.COM/AAF

EVENTS UPDATE

AUTUMN ROADSHOWAuditors face existing and emerging challenges around responsibilities relating to: the adequacy of strategic reports (see pages 10-12); audits of FRS 102 section 1A financial statements; new style audit reports for all entities; the FRC Ethical Standard; plus topics ranging from accounting estimates to root cause analysis. Our autumn roadshow will cover all of this and more, with a particular focus on the audit of smaller audit entities and unlisted groups by small and medium practices.

For more information visit icaew.com/practitionersessentials

MOD CYBER SAFE SUPPLY CHAIN WEBINAR If global instability and high-profile cyber attacks have left you concerned about how well-protected the cyber defence supply chain of the UK Ministry of Defence (MoD) and your own organisation are, this webinar will either put your mind at rest or give you sleepless nights.

On 12 October the Audit & Assurance Faculty and the IT Faculty will jointly host a webinar explaining the cyber security model established by the Defence Cyber Protection Partnership and its industry partners, to improve the protection of the defence supply chain – in particular, MoD Identifiable Information.

The webinar will outline this cyber security model; the methodology used and the benefits gained; cyber controls and risk assessment processes for suppliers; how these could easily be transferred to another enterprise; plus key documents that are freely available from GOV.UK websites.

For more information and to book a place, visit tinyurl.com/AB-MODwebinar

Shortly after the event a recording will become available in the faculty webinar library at icaew.com/aafwebinars

The Financial Reporting Council (FRC) has recently launched a new website following extensive feedback from stakeholders. One aim of the redesign is to provide more accessible functionality by making it easier for users to navigate their way to relevant reports and information. However, as a result of this, it is no longer possible to use some of the direct links that previously worked.

Readers may want to update affected links if they have included them in information they make available online or in printed form. It may also be helpful to update any affected FRC website links that are included in the list of favourites in

FILING AUDITED MICRO-ENTITY ACCOUNTSSince a new small companies regime was introduced by SI 2015/980, ICAEW has received a number of queries on the filing requirements for an audited micro-entity, specifically in relation to the audit report and the filing of what are referred to as filleted accounts.

Some readers may recall coverage in earlier editions of Audit & Beyond and be aware that some companies have had filings of audited, filleted, financial statements rejected by Companies House.

The Financial Reporting Faculty (FRF) has also responded to ongoing queries about whether or not a micro-entity should include its audit report with the financial statements

filed at Companies House. In an ICAEW blog (available at tinyurl.com/AB-MEA-filing), the FRF shares recent

clarification from Companies House on its interpretation of the filing requirements for the audit report of a micro-entity and steps to ensure that Companies House examination policies are up-to-date.

Auditors will also find a detailed Q&A with John Selwood about the filing with Companies House of audited, filleted financial statements at tinyurl.com/AB-JS-QA-1116 – this also includes links to earlier related Q&As in Audit & Beyond.

BIG CHANGES ARE COMING TO THE FRC WEBSITE

ICAEW and other members of the Consultative Committee of Accountancy Bodies (CCAB) have updated their joint anti-money laundering (AML) guidance to reflect new UK legislation. This legislation transposes the European Fourth Anti-Money Laundering Directive into UK law with effect from 26 June 2017.

ICAEW has published this information in the seventh web issue of AML – the essentials: September 2017, which includes new AML guidance for the accountancy sector

UPDATED GUIDANCE ON MONEY LAUNDERING

and updated sanctions guidance, resulting in new reporting obligations.

The updated ICAEW guidance, for which Treasury approval is being sought, is at tinyurl.com/AB-AML-V7

your browser. Readers may find that some links to material on the FRC website that come up in the results of search engines may be out of date – as will some direct links to FRC material included in past editions of Audit & Beyond.

NEWS & EVENTS


The ICAEW film False Assurance can help firms to focus on aspects of audit quality where there are weaknesses, as Louise Sharp explains

Related parties will always pose a potential risk because of the possibility that these relationships and transactions might mask a fraud

Audit quality is a journey, not a destination, so there are always opportunities for improvement. When the ICAEW Quality Assurance Department (QAD) recently published Audit Essentials 2017 (tinyurl.com/ICAEW-AudEss), a large part of it focused on the audit of financial statements prepared using FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, but some of the areas of weakness it highlighted are not new.

Finding new ways to draw attention to some of the areas where the quality of audits raises key concerns can be challenging, for regulators, for QAD reviewers, for those responsible for audit quality in firms and for those working in audit. So it is helpful to explore what can be achieved when a training aid such as the ICAEW film drama False Assurance (tinyurl.com/ICAEW-FalAs) is used to facilitate discussions around some of the situations that may create audit quality challenges.

False Assurance provides a fresh – and interactive – way of looking at some of the areas where audit quality still requires improvement. When John Selwood used it in presentations during the faculty’s spring roadshow, the film provoked much discussion among delegates about the good – but mainly bad – behaviours evidenced by the board of directors, the audit committee and the auditors, alongside recognition that it could be all too easy for auditors to find themselves facing similar issues or being in similar situations.

To set the scene: the story revolves around the audit over a two year period of a listed company, D-Merton, which designs radar systems. The audit is performed by a small audit team

LOOK AND LEARN

(partner, senior audit manager and two juniors) at TYSL Accountants. The film is fast paced as there is a lot to cover in 45 minutes and it is broken down into four sections to help aid discussion and consideration of the issues.

The film is packed full of issues – too many to discuss in detail in this article, and we wouldn’t want to spoil it for those who are going to see the film – but here are a few of the key areas where it highlights issues related to audit quality.

RISK ASSESSMENTThe importance of risk assessment on audits cannot be underestimated. In the case of D-Merton, the auditors struggle with a number of key risks covering:

related party transactions (and fraud risk);

accounting estimates, in this case, valuation of the radar technology;

going concern; management incentives; cyber security and the upgrade of

information technology (IT) systems; and

independence threats through partner rotation.

Related parties will always pose a potential risk because of the possibility that these relationships and transactions might mask a fraud. All known related parties should therefore be recorded at the planning stage of an audit and a fraud risk assessment performed. At the fieldwork stage auditors should keep in mind that there may be other unrecorded related parties.

By their very nature, accounting estimates are a particular area of risk on audits. D-Merton designs the technology for the radar systems it sells and the auditors need audit evidence to support the valuation of this asset. In these circumstances, you might expect auditors

7ICAEW.COM/AAF

AR

ON

VE

LL

EK

OO

P L

EO

N/I

KO

N

ICAEW film drama False Assurance provides a fresh – and interactive – way of looking at some of the areas where audit quality requires improvement

Louise Sharp, manager, international standards, ICAEW

to be thinking about whether there might be a need for external expertise in valuing the technology and whether reliance can be placed on internal experts within the client company about its continuing value. Other considerations might include the potential impact that an impairment might have on the going concern of the company and any incentives management have to deliver healthy results.

The film highlights the potential impact that IT weaknesses and cyber risks might have in relation to the risk of material misstatement in the financial statements of the business. It also explores how audit partner rotation might pose an independence risk. In the film, we see the audit partner being rotated and a more junior partner, the protégée of the client’s existing audit partner, take on the role. The film highlights how important it is for audit firms to ensure that where there is audit partner rotation, objectivity and independence aren’t compromised.

AUDIT EVIDENCEObtaining reliable audit evidence is vital. After assessing the key risks, auditors need to ensure that they get sufficient, appropriate audit evidence on them. The film raises key issues in relation to the

OTHER POINTERSThe film also offers some helpful takeaways for auditors.Audit team discussions: make sure you involve all the key members of the audit team in the planning of an audit and give them an opportunity to participate in the discussions and share knowledge and experience.Communication with those charged with governance: consider how, as an auditor partner, you handle audit committee meetings. This is a mechanism for you to challenge the audit committee and raise questions on aspects of the audit of the company’s financial statements that you have concerns about. The audit committee should be knowledgeable about the audited entity and be seen to be holding management to account. Staffing and training: make sure you have the right expertise within the audit team. The film conveys some very powerful messages about the importance of supervision and review within the audit team.

As well as highlighting areas of weakness where audit quality can be improved, the film includes some very positive messages. One of the juniors on the audit team in the film displays professional scepticism and judgement throughout the entire performance and has, therefore, the potential to be a very good audit partner.

need for professional scepticism and the use of judgement when gathering audit evidence; the emphasis placed on management’s oral assurances as opposed to third party or written corroborative evidence; and the impact audit evidence might have on reassessing audit planning, risk and materiality.

FRAUDAlong with emphasising the importance of assessing fraud risk on audits, the need for scepticism and the value of seeking an understanding of an entity from broad sources, the film also highlights key considerations for auditors when handling a potential fraud at a client. For example, auditors need to think carefully about who is the best person to approach at the client, and how they have gathered the evidence to share their concerns. Attention also needs to be paid to their money laundering responsibilities, and in particular the risk of tipping off.

When in doubt about the best course of action, auditors should seek internal advice and support from within their audit firm. Audit firms are likely to have established procedures and practices to help them to deal with these situations.

PROFESSIONAL DEVELOPMENT


COUNTDOWN TO CHANGEAuditors will have plenty of issues to consider as they and their clients prepare for the implementation and impact of four new IFRS, as Sophie Campkin outlines

With the constant evolution of International Financial Reporting Standards (IFRS), auditors, as well as their clients, face significant challenges staying up to date with the new requirements. Over the past few years, the International Accounting Standards Board (IASB) has issued four major new standards: IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers, IFRS 16 Leases and IFRS 17 Insurance Contracts – and they may bring fundamental changes to financial reporting requirements.

IFRS 15 AND IFRS 9IFRS 15 and IFRS 9 were published in 2014 and are effective for accounting periods beginning on or after 1 January 2018. Early application of both standards is allowed, subject to local endorsements. IFRS 15 may change the amount and timing of revenue recognition and is expected to have the greatest impact for companies with long-term contracts or multiple-element arrangements. IFRS 9 introduces new

classification requirements for financial assets based on the business model for managing the asset and the asset’s contractual cash flow characteristics, new impairment requirements based on expected rather than incurred credit losses and new hedge accounting requirements. It is expected primarily to have an impact on financial institutions.

IFRS 16The new IFRS on leases was issued in January 2016 and it is effective for accounting periods beginning on or after 1 January 2019. Early application is permitted, but only if the entity is also applying IFRS 15. IFRS 16 introduces a new definition of a lease and makes substantial changes for lessees by bringing most leases on to the balance sheet.

Our Audit & Assurance Faculty publication Audit insights: retail – are you ready for a radical change? discusses the impact of IFRS 16 on retailers. This includes changes to financial ratios and traditional performance measures,

IFRS 15 AND IFRS 9 – KEY DISCLOSURES

The European Securities and Markets Authority has published Public Statements on the implementation of IFRS 15 and 9. Its aim is to promote the consistent application of European securities and markets legislation and related IFRS during their implementation, and when disclosing and auditing their (expected) effects in IFRS financial statements.

Annual financial statements for the year ended 31 December 2016

Disclosure of implementation project, including differences and timeline

Disclosure of estimated or expected impact of new IFRS

Interim financial statements for the period ended 31 June 2017

Disclosure of impact updated for any significant developments in period

Annual financial statements for the year ended31 December 2017

Disclosure of implementation project updated for actual implementation in year

Disclosure of actual impact of new IFRS as at 1 January 2018

9

ILL

US

TR

AT

ION

CR

ED

IT/H

ER

E

ICAEW.COM/AAF

and presents key challenges and considerations for their management, audit committees and other stakeholders.

The impact of IFRS 16 is also likely to be pronounced in other business sectors – such as transportation, real estate, mining and construction – where there may have typically been a significant number of material off-balance sheet leases. Our Financial Reporting Faculty (FRF) has issued materials to assist with understanding the key principles of IFRS 16 in a hub (see ICAEW resources box, page 10). It contains articles and other resources, such as IFRS 16 Leases: Putting theory into practice (which was distributed with the July/August edition of Audit & Beyond) and information on a joint ICAEW and IFRS Foundation virtual conference, IFRS 16 Leases, taking place on 10 October (see ICAEW resources box on page 10).

IFRS 17The new IFRS on insurance contracts was published in in May 2017. It is effective for periods beginning on or after 1 January 2021, with early adoption possible as long as IFRS 9 and 15 are also applied. IFRS 17 introduces a single approach for different insurance contracts (including reinsurance), rather than the myriad complex arrangements required by the standard it will supersede, IFRS 4. Implementing IFRS 17 will take substantial effort and entail major changes to insurance companies’ actuarial and finance reporting processes, systems and data – with all of the associated costs. ICAEW is holding a webinar outlining the new standards key requirements on 20 October (see ICAEW resources box).

All four new standards present significant implementation challenges. A range of further information to assist with understanding the key changes introduced by the new standards has been produced by the FRF and is available on its dedicated IFRS webpages (see ICAEW resources box, page 10).

KEY DISCLOSURESIn addition to the challenges of applying the new IFRS, there are increasingly specific disclosure requirements in the approach to their application date.

The European Securities and Markets Authority (ESMA) has taken the unusual step of publishing Public Statements on the implementation of IFRS 15 and 9 (see ESMA resources box, overleaf ). Issues for consideration in implementing IFRS 15: Revenue from Contracts with Customers

IFRS


in 2014 to assist with the transition of the majority of large and medium-sized entities to FRS 102 in 2015. Both of these technical releases contain advice which may be useful here.

One issue auditors will face is in relation to assistance with implementing the new IFRS. The

auditors’ experience and expertise, as well as their understanding of a client’s business, mean that clients may request services such as:

assessing the impact of the new IFRS on the accounting and disclosure requirements and the accounting policies and transition options available;

analysing the changes to financial ratios and traditional performance measures;

providing technical advice or opinions on the interpretation of specific requirements; and

advising on the implications for staff and systems and processes and providing support for the implementation team.

Auditors will have to consider the threats to their independence in relation to the provision of such services.

As their clients are implementing these

new standards, auditors will also need to consider issues across various other areas.

IMPLEMENTATIONClients are responsible for implementing the new IFRS, but auditors will need to assess the implementation project. The project should include an assessment of the impact of the new standards on the business as a whole, as well as:

a timeline for the implementation, which has been agreed with auditors and other key stakeholders;

an assessment of the changes to the accounting and disclosure requirements and the choice of accounting policies and transition options;

a consideration of the need for training of staff and adjustments to systems and processes, as well as the need to request assistance from external advisers;

an assessment of the implications on tax, distributable reserves and loan agreements; and

timely communications to auditors and other key stakeholders on implementation progress.

SKILLS AND RESOURCESAuditors will need to ensure that audit teams have the necessary skills and resources. There may be a need to provide training for staff, revise work programmes and ensure that audit teams are able to access technical specialists and experts.

PROJECT MANAGEMENTAuditors will need to agree the nature and timing of their involvement with their clients over the course of the implementation project. This will include agreeing engagement terms and communicating specific considerationsin relation to the impact of the new requirements on the engagement.

RISK ASSESSMENTThe implementation of the new IFRS may give rise to a range of risks. Changes to staff and systems and processes may necessitate an updated understanding of the business and revised assessment of the risks. Additionally, some of the new requirements involve the use of accounting estimates and may present significant risks. Auditors and their clients should prepare carefully for the changes in these new IFRS in order to successfully complete the transition.

ICAEW RESOURCES

Auditors and their clients will need to prepare carefully for the incoming changes in IFRS. The following materials will help.

AAF 03/04 Auditing Implications of IFRS Transition – tinyurl.com/AB-AAF0304

TECH 13/14AAF Issues for auditors arising from the implementation of FRS 102 – tinyurl.com/AB-T1314

Audit insights: retail – are you ready for a radical change? – tinyurl.com/AB-RadChange

The Financial Reporting Faculty (FRF) webpages have a section dedicated to IFRS, which includes factsheets, a standards tracker add other practical resources at tinyurl.com/AB-FRF-IFRS

An FRF hub with a suite of articles and other resources covering IFRS 16, setting out the principles that both lessees and lessors apply to provide relevant information about leases is at tinyurl.com/AB-IFRShub

A global virtual conference, ‘IFRS 16 Leases’, jointly organised by ICAEW and the IFRS Foundation, will take place on 10 October 2017. For further details on content and speakers and to book a place visit tinyurl.com/AB-VC-IFRS16

An introduction to IFRS 17 Insurance Contracts webinar will be hosted by the FRF on 20 October 2017. For further details on content and speakers and to book a place please visit tinyurl.com/AB-IFRS17webinar

ESMA RESOURCES

The European Securities and Markets Authority (ESMA) has published Public Statements on the implementation of IFRS 15 and 9: Issues for consideration in implementing IFRS 15: Revenue from Contracts with Customers (ESMA/2016/1148) – tinyurl.com/AB-PS-IFRS15; and Issues for consideration in implementing IFRS 9: Financial Instruments (ESMA/2016/1563) – tinyurl.com/AB-PS-IFRS9 Sophie Campkin, technical manager,

Audit & Assurance Faculty

(published July 2016) and Issues for consideration in implementing IFRS 9: Financial Instruments (published November 2016) are addressed to auditors, as well as issuers, and present a timeline of best practice disclosures of both the implementation and impact of the new IFRS.

ESMA suggests some key disclosures, and these are shown in the table on page 8. Similar disclosures will also be expected around IFRS 16 and there will be a focus on the current operating lease disclosures.

IMPLICATIONS FOR AUDITORSThe are numerous issues that auditors will have to consider when their clients are implementing these new standards.

Situations which are analogous are referenced in some of our guidance. Auditing Implications of IFRS Transition (see ICAEW resources box) was published in 2004 to assist with the conversion of listed companies to IFRS in 2005, and Issues for auditors arising from the implementation of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (see ICAEW resources box) was published

RO

BE

RT

HA

NS

ON

/IK

ON

IFRS

11ICAEW.COM/AAF

GE

TT

Y

chairman of ICAEW’s internal audit panel. Internal auditors need to maintain their independence when using analytics, especially where the source and tools are shared with other business functions. He says: “To do this, data received must not be taken at face value, but should be checked for quality and completeness.”

Effective analysis of data must lie at the heart of internal audits if they are to remain relevant to stakeholders, but this calls for strong governance frameworks. “The roles of data analytics and internal auditors must be separate and clear in order for auditors to take an objective view on whether the data received is a true reflection of the business, and not corrupted or compromised,” says Scrivens.

AUDIT RISKSIn making the most of data analytics, internal audit departments face increased risks, such as conflicts in independence, misinterpretation of data, and challenges around data privacy and security. In our Internal audit in the age of data analytics report, we highlight the need for strong governance frameworks on data analytics, covering four key areas: independence, quality, talent and security.

Briefly, use of data analytics must preserve the internal auditor’s independence and objectivity; testing and quality assurance procedures should ensure data quality, verify code and validate output; there should be close engagement between internal auditors and data analysts to share knowledge, with clearly defined roles that balance responsibility and collaboration; and risks around data security and privacy must be managed.

Data analytics can be beneficial, but it exposes the internal audit team to the same risks around data security and privacy that it examines for its stakeholders. Managing the risks is vital if they are not to limit effectiveness or expose the department to reputational damage. Scriven says: “The starting point should be the careful review and development of a governance framework that addresses the use of analytics, audit strategy and risk.”

Members can access the full report and explore other material in our internal audit resource centre at tinyurl.com/ICAEW-IntAud

More data was created in the past two years than the previous 5,000 years. In 2017 we will surpass this in one year alone. As the volume and variety of structured and unstructured data increases, so does its role in business decision-making, the use of data analytics and its importance to audit and assurance professionals. In the latest of our reports exploring this, we focus on Internal audit in the era of data analytics.

Combining data and analytics tools can add a new dimension to internal audit. It can automate processes and improve efficiency, support compliance with existing policies, offer more valuable and comprehensive insights into organisations, help them to anticipate what’s on the horizon and provide higher levels of assurance. However, organisations should consider the potential influence of analytics on the relationship between internal audit and business.

“Data analytics has the power to transform internal audit, but it brings its own particular risks that need to be managed,” says Martyn Scrivens,

THE AGEOF DATAData analytics is becoming indispensable in internal audit. Our new report considers the risks and governance challenges this creates

INTERNAL AUDIT


QUESTIONThis morning I reviewed a draft audit report for a 30 June 2017 year end and it included a going concern paragraph. There are no going concern issues, but the software supplier tells me that the paragraph is now mandatory and cannot be removed. Is this true?

ANSWERYou will not be the last auditor to be surprised by this major change to the audit report. The inclusion of the new going concern paragraph – which has not been as talked about as I would have expected – is required by revised International Standards on Auditing (UK) (ISAs (UK)), which apply for periods commencing 17 June 2016.

Typically June 2017 year ends will be the first time that these requirements are applied, although I have already seen a few examples in audits of short periods.

Arguably, the most major change to the audit report is that auditors now report by exception on going concern. If there are no significant

This month John deals with questions on the new-style audit reports that many auditors have started to use for periods commencing 17 June 2016 onwards

JOHN SELWOOD’S AUDIT CLINIC

uncertainties and no other issues relating to going concern the audit report will include the following:

Conclusions relating to going concernWe have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where:

the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or

the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the company’s ability to continue to adopt the going concern basis of accounting for a period of at least 12 months from the date when the financial statements are authorised for issue.

This going concern paragraph is presented between the ‘Basis for opinion’ and the ‘Other information’. These might be unfamiliar headings to some auditors – which underlines

John Selwood is a member of the faculty’s Practitioner Services Committee

13ICAEW.COM/AAF

The inclusion of the new going concernparagraph – which has not been as talked about as I would have expected – is required by revised ISAs (UK)

the magnitude of the changes inthe new audit report.

For the avoidance of doubt, this reporting by exception is required for all audits, unless of course there were material uncertainties, or the entity is not a going concern. For a material uncertainty, rather than use that paragraph, the auditor would include something like this:

Material uncertainty related to going concern We draw attention to note 2 in the financial statements, which indicates that the company’s bank borrowing facilities expire within six months and are in the process of being renegotiated. As stated in note 2, these events or conditions, along with the other matters as set out in note 2, indicate that a material uncertainty exists that may cast significant doubt on the company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.

This looks very similar to the previous emphasis of matter paragraph, although it is not referred to as an emphasis of matter under the new ISAs.

The ISAs (UK) revised by the Financial Reporting Council (FRC) in June 2016 can be found (along with more recently revised ISAs (UK) and the latest International Standards on Quality Control (UK) on the FRC website at tinyurl.com/AB-AS-2016

are included. The helpsheets address how to compile new-style audit reports for many different entities and groups not covered in the most recent FRC bulletin.

I am also in the unusual position of being able to share even better news with you on the matter of your charity audit reports. You probably won’t need to compile your own charity audit reports, because training companies and accounts preparation software companies will be using the ICAEW helpsheets to produce their standard reports.

However this good news must be tempered with some words of caution.

Warning! Do not be tempted to accept whatever audit report is produced by your software, assuming that it must be right. When there are wide scale changes like the new audit reporting regime there are always teething problems.

In the latest feedback from audit monitoring reviews, Audit Essentials 2017 (tinyurl.com/ICAEW-AudReg), which focused on the first year of FRS 102 implementation, the ICAEW Quality Assurance Department noted that some firms place too much reliance on their software and are quick to blame it for not picking up errors and omissions.

So, I strongly recommend that you perform a detailed comparison of your audit reports with the helpsheets from ICAEW, until you become familiar enough with the new format to proof read it yourself.

Members will find more information on the ICAEW helpsheets on new-style audit reports on page 4 in this edition of Audit & Beyond and can download them at tinyurl.com/AB-Helpsheet

QUESTIONI audit a number of charities. The FRC bulletin of example audit reports no longer includes an example charity audit report. Where should I get examples of audit reports under the new regime? Should I seek out copies produced by other auditors?

ANSWERThe bulletin that you are referring to is the FRC’s Compendium of illustrative auditor’s reports on United Kingdom private sector financial statements for periods commencing on or after 17 June 2016 (October 2016), which is available with other historical FRC bulletins on its website (at tinyurl.com/FRC-Bulletins).

When this bulletin was published in October 2016 I personally found it something of a disappointment, because it only contained eight examples, including listed company examples that many auditors do not use. The compendium that it replaced had 47 examples – and these included charities.

Please do not use other auditors’ reports as models. This can be a disaster. First, it is possible that you might select the wrong example and use a correct report but in inappropriate circumstances. Also, rather depressingly, errors are commonplace in audit reports. You could choose a wrong’un for an example.

If my answer so far has left you also feeling (like me) a little disappointed with the lack of model auditors’ reports, take heart. I have some good news for you.

ICAEW has produced a series of helpsheets on the new-style audit reports and charity audit reports

Q&A


QUESTION I am auditing a large company and I am unhappy with the strategic report. The company has two divisions, one is a very successful motor dealer, the other is a consumer electronics retailer which has made losses for several years. The strategic report puts much more emphasis on the motor dealer and while it mentions the loss-making electronics division, there is considerably less detail. I am struggling to decide whether I need to qualify my audit report. Help!

ANSWERThis is one of the most challenging audit issues for many years and is proving to be a very big headache for auditors.

Just in case anybody has been living in a cave for the last few years (although I worry that the cave might have been quite full), I will recap the issue.

For periods commencing 1 January 2016 (1 January 2015 for early adopters) the auditors’ responsibilities under the Companies Act 2006 have been extended in relation to the directors’ report and, much more importantly, the strategic report. Auditors need to report positively whether or not these reports have been prepared in accordance with applicable legal requirements.

The requirements relating to the content of the strategic report are in s414C of the Companies Act 2006. The Act is fairly brief and lacks detail, so auditors will have to exercise their professional judgement.

Returning to directly address your question, it sounds to me as if the review of the business in the strategic report is not balanced. I also worry that it might not be comprehensive as the review might lack detail in an important area of business. Forgive me for not regurgitating the whole s414C here, but ‘balanced’ and ‘comprehensive’ are terms used in the requirements of the Act.

If your judgement is the same as mine, the first step is to talk to management in order to agree

amendments to the strategic report. I would hope that this would solve the problem. If management refuse to make the changes that you think are necessary, then you might be forced to consider qualifying the audit report. I imagine that this will be unusual in practice. However, you might need to show management the consequences of non-compliance in the audit report. So here is an example of how you might word a qualified opinion on other matters in a scenario where the strategic report does not comply with legal requirements (ie Companies Act 2006) but is nonetheless consistent with the financial statements:

Qualified opinion on other matters prescribed by the Companies Act 2006In our opinion, based on the work undertaken in the course of the audit:

the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements;

except for the matter described in the basis for qualified opinion on other matters prescribed by the Companies Act 2006 section of our report, the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements…

Auditors’ responsibilities under the Companies Act 2006 have been extended in relation to the directors’ report and, much more importantly, the strategic report

Basis for qualified opinion on other matters prescribed by the Companies Act 2006 Based on the work undertaken … in our opinion the strategic report has not been prepared in accordance with applicable legal requirements within s414C of the Companies Act 2006 to show a balanced and comprehensive analysis of development and performance during the year and the position at the end of it.

In relation to your specific question and the companies it relates to, it may be helpful to also provide some detail – in your basis for qualified opinion on other matters prescribed by the Companies Act 2006 – on why you think that the strategic report is not balanced and comprehensive. For example, because it does not put sufficient emphasis on the performance of the loss-making electronics division.

After reading my response to this question, readers of Audit & Beyond may also want to refer back to the September edition (at tinyurl.com/AB-Sep-2017). In The same, but different on pages 10 and 11 of the September edition, you will find an article about additional auditor reporting responsibilities relating to the adequacy (or otherwise) of strategic reports and directors’ reports. It outlines some of the challenges these additional responsibilities are creating for auditors and suggests some practical steps that auditors may take to address them.

The next faculty roadshow will also offer practical support on these new auditor reporting responsibilities. For more information on dates, content and venues, see page 5 in this edition of Audit & Beyond and visit icaew.com/practitionersessentials

Q&A

15ICAEW.COM/AAF

AUDITING AND ASSURANCE UK & IRELAND

DEVELOPMENTS IN AUDITJuly 2017

The second annual Developments in Audit report from the Financial Reporting Council (FRC) notes improving audit quality and a commitment to continuous improvement, based on evidence from its own audit monitoring activity and thematic reviews, audit quality reviews delegated to recognised supervisory bodies, plus feedback from audit committees and investors.

The focus of audit firms on investing in and improving audit quality, together with promoting a continuous improvement culture, is starting to pay off, particularly for audits of larger companies where the FRC has targeted improvement.

However, the picture is not consistent across all firms, market sectors and audit procedures. High-profile accounting failures, as well as the results of audit monitoring, continue to highlight cases where auditors have not met expectations. While there is evidence of greater professional scepticism, this is

TECHNICAL UPDATES

The Audit & Assurance Faculty roundup of new and updated legal and regulatory changes and guidance

also the area where the FRC finds the greatest number of issues.

Setting out what is being done to drive improvements to audit quality, the report includes an overview of the FRC’s work in setting auditing policy and standards, how the FRC is working to enhance the effectiveness of audit committees, its oversight of the profession, and its audit monitoring and enforcement activity.

The audit market and confidence in it in the UK is changing significantly, with the impact of audit tendering and rotation requirements seeing greater competition on quality between the biggest firms. Greater transparency of audit has been achieved through extended reporting, now being rolled out for more audits. Broadened perspectives on audit quality through the challenge and support of independent non-executives at the larger audit firms ensure a focus on sustained improvement.

The FRC notes that investor and public confidence in audit quality remains vulnerable where circumstances indicate a failure by auditors to be sufficiently independent or provide robust challenge. The FRC has enhanced its enforcement procedures and is working to improve the speed of action. The FRC has issued more

TECHNICAL UPDATES


than £14.2m of sanctions on auditors and audit firms in 2016/17 and sets out the outcomes and lessons to be learned from concluded investigations.

Moving forward the FRC will focus on promoting scepticism through standards and practice; quality control standards; auditors adherence to the spirit and letter of independence requirements; impact of mandatory rotation on quality and fees as it is adopted across the market; harnessing technology; and the culture of the audit firms in support of audit quality.

See tinyurl.com/FRC-DevAud

The regulations apply to companies and qualifying partnerships with financial years beginning on or after 1 January 2017.

See tinyurl.com/FRC-NonFin

AMENDMENTS TO FRS 101July 2017

The FRC has issued Amendments to FRS 101 Reduced Disclosure Framework – 2016/17 cycle, which brings to a close the latest annual review of FRS 101.

These amendments provide certain disclosure exemptions in relation to IFRS 16 Leases.

Amendments to FRS 101, an impact assessment and a feedback statement are at tinyurl.com/FRC-AmendImp

AUDIT AND ASSURANCEINTERNATIONAL

TOWARD ENHANCED PROFESSIONAL SCEPTICISMAugust 2017

Three global standard-setting boards for auditing, accounting ethics and accounting education have released a new publication, Toward Enhanced Professional Skepticism, showcasing observations and potential ways to enhance professional scepticism.

Toward Enhanced Professional Skepticism is the first publication to be jointly produced by a working group comprising representatives from the International Auditing and Assurance Standards Board (IAASB), International Ethics Standards Board for Accountants (IESBA) and the International Accounting Education Standards Board (IAESB).

The importance of professional scepticism is underscored by the increasing complexity of business and financial reporting, including the greater use of estimates and management judgement, business model changes due to technological developments, and the fundamental reliance of the public on dependable financial reporting. It lies at the heart of a quality audit. This publication outlines observations about the current environment and sets out actions the global standard-setting boards will take, as well as the role that other stakeholders can play, in enhancing professional scepticism.

Towards Enhanced Professional Skepticism is at tinyurl.com/IFAC-Skep

KEY FACTS AND TRENDS IN THE PROFESSIONJuly 2017

The FRC publication Key Facts and Trends in the Accountancy Profession, now in its 15th year, collates data on accountancy bodies’ membership and regulatory activities, as well as data on audit and audit firms.

The key facts and trends in audit that the report notes are as follows.

The number of registered audit firms continues to decline. At the end of 2016 there were 6,010 registered audit firms in the UK and Ireland. The number of members holding audit qualifications also dropped (129,509 in 2016 compared with 140,135 in 2014).

There was an increase in the number of approved training offices in the UK and Ireland, with an upward trend in the number of students choosing audit as a route to qualification.

The total fee income of the firms which audit Public Interest Entities (PIEs) has grown. There has been a decrease in the growth rate of audit fee income for the Big Four firms. However, firms outside the Big Four have experienced an increase in the growth rate.

Fee income from non-audit work to audit clients saw the greatest percentage increases for audit firms outside the Big Four (19.5%) in 2015/16, compared with 13.2% in 2014/15, while the Big Four experienced a slower growth rate in this area (2.6%) in 2015/16 compared with 5.5% in 2014/15.

The full report can found at tinyurl.com/FRC-KeyFacts

FINANCIAL REPORTING UK & IRELAND

FRC CONSULTS ON STRATEGIC REPORTAugust 2017

The FRC is consulting on amendments to its Guidance on the Strategic Report, encouraging businesses to consider the interests of stakeholders.

These proposals reflect the FRC’s desire to improve the effectiveness of section 172 of the Companies Act 2006. This section requires a director to have regard to a number of matters including the long term impact of any decisions, the interests of stakeholders, plus non-financial matters, in pursuing their duty to promote the long term success of the company. The FRC is encouraging companies to provide better information on how companies have fulfilled this duty to improve accountability to shareholders and other stakeholders.

The proposals reflect the enhanced disclosures that large companies are required to provide in relation to the environment, employees, social matters, respect for human rights and anti-corruption and anti-bribery matters. The guidance also encourages all companies to disclose information on how boards have considered broader stakeholders when taking decisions to promote the long term success of the company.

The Guidance on the Strategic Report was first issued in 2014, following the introduction of the requirement for companies to produce a strategic report. It is being amended to take account of the new regulations for non-financial reporting that are effective for financial periods beginning on or after 1 January 2017.

The consultation closes on 24 October 2017.

The invitation to comment and staff guidance on the strategic report are at tinyurl.com/ConsultNon

NON-FINANCIAL REPORTING FACTSHEETJuly 2017

The FRC has published a factsheet on non-financial reporting that provides an overview of the new regulations implementing the EU Directive on non-financial and diversity information.

17ICAEW.COM/AAF

Peter Mandich produces Technical Updates. He is a manager in the Audit & Assurance Faculty

COMPARISON OF IAASB AND PCAOB AUDITOR REPORTING STANDARDSAugust 2017

The IAASB has welcomed the adoption by the US Public Company Accounting Oversight Board (PCAOB) of a new auditing standard to enhance auditor’s reports by providing additional, relevant information to users, including critical audit matters.

The PCAOB’s new standard is comparable with the IAASB’s new and revised auditor reporting standards, which require the communication of key audit matters in auditor’s reports of listed entities and became effective for December 2016 year-end audits.

To assist users in understanding key similarities and differences, two new publications comparing the IAASB and PCAOB standards have been developed by the IAASB’s Auditor Reporting Implementation Working Group.

They are available at tinyurl.com/IFAC-Stand

FINANCIAL REPORTINGINTERNATIONAL

IFRS FOUNDATION WEBINAR ON IFRS 17August 2017

IFRS Foundation staff have recorded a webinar on the optional simplified accounting permitted in IFRS 17 Insurance Contracts for insurance contracts with short coverage periods, called the premium allocation approach.

The webinar is recorded in two parts and covers optional simplified measurement, presentation and disclosure requirements.

This webinar is part of a series of webinars that the International Accounting Standards Board is providing to support the implementation of IFRS 17.

All of this material issued to support IFRS 17 implementation can be found at tinyurl.com/IFRS-17Imp

THE PUBLIC COMPANY ACCOUNTING OVERSIGHTS BOARD

PCAOB ADOPTS ENHANCED AUDITOR REPORTING STANDARDJuly 2017

The PCAOB has adopted a new auditing standard, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, to enhance the relevance and usefulness of the auditor’s report by providing additional and important information to investors.

The new standard and its related amendments require auditors to include in the auditor’s report a discussion of the critical audit matters (CAMs) which are matters that have been communicated to the audit committee, are related to accounts or disclosures that are material to the financial statements, and involved especially challenging, subjective or complex auditor judgement.

The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion will replace portions of AS 3101 Reports on Audited Financial Statements. The remaining portions of AS 3101 will be redesignated as AS 3105 Departures from Unqualified Opinions and Other Reporting Circumstances. The board is also adopting related amendments to other PCAOB standards.

More information is available at tinyurl.com/AB-PCAOB-Aud

ICAEW

AUDIT NEWS 60July 2017

The latest regulatory updates on audit and assurance have been published in Audit News 60. It covers: undertakings given to ICAEW during monitoring visits; changes to regulations governing the use of the descriptions chartered accountants and ICAEW general affiliates; amendments to regulations and guidance on professional indemnity insurance; plus new guidance on materiality.

Audit News 60 is available online at tinyurl.com/ICAEW-RegAud

LATEST QAD FINDINGSJuly 2017

Audit Essentials 2017 reports on findings from the 2016 audit monitoring activities of ICAEW’s Quality Assurance Department. It outlines matters including: adjustments to selecting firms for visits, areas where audits most commonly require improvement, such as revenue, stock and asset valuations. It also focuses on first time audits of financial statements prepared under FRS 102.

It is available at tinyurl.com/ICAEW-QAD

TECHNICAL UPDATES


FROM THE FACULTIESKeep up to date with what is going on in our selection of other faculty magazines

BUILDING RESILIENCEBusiness & Management

There has been a steady growth in the number of organisations of all sizes and in all sectors investing more resources in business continuity (BC). A complete BC strategy must protect and improve the resilience of an organisation’s operations by identifying and managing the risks that could cause the most disruption.

In some organisations it may be the CFO or FD that plays an important role in driving the BC agenda, partly as they have a clear idea of the impact from a prolonged interruption on business.

Begin by identifying processes and interdependencies within the business and with other organisations that enable normal operations. The organisation needs to examine how these could be affected by risks. This can be achieved by undertaking business impact analysis and by considering the likelihood of specific risks becoming reality.

Visit the Business & Management Faculty page at icaew.com/bam

ONE FOR ALL, ALL FOR ONEFS Focus

In an interview with FS Focus about his career to date and new role as the chief executive of UK Finance, Stephen Jones acknowledges the challenge ahead with amalgamating six trade bodies under one roof. “Mergers tend to fail in the corporate world,” he says. “But we’re trying to buck that trend and make a six-way merger work for staff and members.”

One area that Jones concedes needs improving is the SME space: “We need to rebuild the relationship between the industry and small businesses, particularly in the commercial banking sector.”

Equally, Jones is keen to see financial service firms take a more sustainable approach to their practices. “If the industry can do that then it will have a happier workforce and customer base, and a more stable outlook, rather than a boom and bust, cyclical approach,” he says.

For more from the Financial Services Faculty, visit icaew.com/fsf

PHISHING CONTESTChartech

IT Faculty member Vicki Gavin of the Economist Group opens her article on cyber security with the following puzzle: why are cyber attacks increasing despite growing investment in security technologies? The answer is that 90% of successful cyber attacks rely on human error.

Cyber criminals are succeeding because they offer the recipient a kind of reward and are focused on a single objective – click that link. To achieve this, phishers vary their approach, trying multiple times with varying sales pitches. They also often require the recipient to make several clicks to get to the prize.

In contrast, corporate cyber training is not nearly as appealing. Most annual e-learning can best be described as required, wholesome, familiar and repetitive. And there is usually a penalty for failing to complete the training.

So how can companies make awareness learning at least as exciting as a phishing email? Gavin’s solution is a five-step plan that she describes as DOVE-C.

Desirable: People learn because they want to, not because they must. Make sure there is something in your training for the learner and make sure they know what it is. One focus: People can only learn one thing at a time. A campaign that sets out to teach more than one thing is highly likely to fail. Vary the method: Everyone has different learning styles and preferences. If you use the same method to relay your message, you are likely to appeal to only a small percentage of the learners. Engage the learner: Make sure your events involve the learner in their own learning.Compel: There needs to be a bit of theatre to grab the learner’s imagination and draw them in.

Gavin explains running security campaigns based on these tenets has been highly successful: during a recent phishing attack only 3% of staff opened the phishing email and only one person (0.1%) was tricked into clicking on the link.

Visit the IT Faculty page at icaew.com/itfac

PORTFOLIO

A WELL-DESERVEDOPPORTUNITY

You worked hard to become a chartered accountant.

If you buy a new Volvo car, we’ll return your commitment

with a range of exclusive benefi ts just for members like

you. We call this our Affi nity Programme, and we’re glad

to have you on board.

VISIT ICAEW.COM/VOLVO OR CALL

THE VOLVO CAR BUSINESS CENTRE

ON 03333 204 147

VOLVO DISCOUNTS

SERVICE OFFERS

ACCESSORY OFFERS

AFFINITY MEMBER DISCOUNTS

FREE METALLIC PAINT

FINANCE OFFERS

Offi cial fuel consumption for the Volvo Cars range in MPG (l/100km): Urban 28.0 (10.1) – 70.6 (4.0), Extra Urban 40.4

(7.0) – 85.6 (3.3), Combined 34.9 (8.1) – 155.2 (1.8). CO2 emissions 186 – 48g/km. MPG fi gures are obtained from

laboratory testing intended for comparisons between vehicles and may not refl ect real driving results.

INSURANCE OFFER

The Future Of Audit

How technology and regulation are reshaping the world of audit

audit & beyond - icaew

Documents