Auditing Update & New Auditor’s Report - Nelson · PDF fileAuditing Update & New Auditor’s Report (ADF and SCAA Joint Seminar) 8 May 2017 ... HKSA 210, Agreeing the Terms of Audit

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©2017 Nelson Lam, Kenneth Lau, Webster Ng and Gary Poon 1

Auditing Update & New Auditor’s Report(ADF and SCAA Joint Seminar) 8 May 2017

Nelson LAM ● Kenneth LAU Webster NG ● Gary POON


Introduction

Today’s Agenda

Auditing Update for 2016/17

Other Information (HKSA 720) and Code of Ethics

Key Audit Matters (HKSA 701)and Other Selected Update


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Today’s Agenda

Introduction

Nelson LAM


SFS Page 4

Auditing Update: Sample Auditor’s Report in SFS 2016/17

• Sample auditor’s report adapted from Illustration 3 of Appendix to HKSA 700 (Revised)

• Opinion section comes first

• “Other information” section added if directors’ report, management accounts and/or etc are enclosed with the financial statements

• “Responsibilities of Directors and Those Charged with Governance” section

− Consider implication from different cases, say audit committee established

• “the directors’ report and financial statements” (or “annual report” commonly used by listed entities) refer to whole set of documents

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SFS Page 5

Auditing Update: Sample Auditor’s Report in SFS 2016/17

• “Auditor’s responsibilities for the audit of the financial statements” section

− It can be located in an Appendix to the auditor’s report

− Reference can be made to a website of an appropriate authority, for example the HKICPA provides:

• http://www.hkicpa.org.hk/en/standards‐and‐regulations/standards/auditing‐assurance/auditre/

− The revised (or additional) paragraph is based on the recommendation found in Professional Risk Management Bulletin issued in May 2003

− An additional point is needed for the consolidated financial statements



• The HKSAs and other pronouncements effective for the year mainly include in:

– HKICPA Update no. 172 – IAASB’s project on auditor reporting and clarification of auditor’s involvement with “other information”

– HKICPA Update no. 180 – IAASB’s disclosures project

– HKICPA Update no. 188 – Local changes on HKSA and IAASB’s finalization on changes for auditor reporting on special purpose financial statements

– HKICPA Update no. 190 – PN updated as a result of IAASB’s project on auditor reporting

– HKICPA Update no. 192 – Code of Ethics: Responding to Non‐Compliance with Laws and Regulations (NOCLAR)

– HKICPA Update no. 197 – Update of PN 730

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Auditing Update

• Except for NOCLAR (HKICPA Update no. 192) is effective on 15 July 2017 and other format changes, all the above new and revised pronouncements are effective for audits of financial statements for periods ending on or after 15 December 2016


Today’s Agenda


Webster NG

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Webster’s Agenda

• Update of general Hong Kong Standards on Auditing (HKSAs)

changes

• New/Revised HKSAs arising from International Auditing and

Assurance Board’s (IAASB) project – SMPs’ concern

• Detailed presentation on specific

standards with case


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New/Revised HKSAs arising from IAASB project

To enhance auditor’s report for investors and other users of

financial statements (5+1):

HKSA 260 (Revised) – “Communication with Those Charged with Governance”

HKSA 570 (Revised) – “Going Concern”

HKSA 700 (Revised) – “Forming an Opinion and Reporting on Financial

Statements”

New HKSA 701 – “Communicating Key Audit Matters in the Independent

Auditor's Report”

HKSA 705 (Revised) – “Modifications to the Opinion in

the Independent Auditor's Report”

HKSA 706 (Revised) – “Emphasis of Matter Paragraphs and

Other Matter Paragraphs in the Independent Auditor's Report”

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Upon new/revised HKSAs, 8 amendments issued to conforming:

HKSA 210, Agreeing the Terms of Audit Engagements

HKSA 220, Quality Control for an Audit of Financial Statements

HKSA 230, Audit Documentation

HKSA 510, Initial Audit Engagements—Opening Balances

HKSA 540, Auditing Accounting Estimates, Including Fair Value Accounting

Estimates, and Related Disclosures

HKSA 580, Written Representations

HKSA 600, Special Considerations—Audits of Group Financial Statements

(Including the Work of Component Auditors)

HKSA 710, Comparative Information—Corresponding Figures and Comparative

Financial Statements



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Revision in HKSA 720 (Revised) aim to clarify and increase the auditor's involvement with "other

information“

“Other information” – defined as financial and non‐financial information, other than the audited financial statements in the standards

i.e. those included in entities' annual reports


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16 HKSAs issued to accompanying release of HKSA 720 (Revised) HKSA 210, Agreeing the Terms of Audit Engagements

HKSA 230, Audit Documentation

HKSA 260, (Revised) Communication with Those Charged with Governance

HKSA 450, Evaluation of Misstatements Identified during the Audit

HKSA 500, Audit Evidence

HKSA 510, Initial Audit Engagements—Opening Balances

HKSA 560, Subsequent Events

HKSA 570, (Revised) Going Concern

HKSA 580, Written Representations



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16 HKSAs issued to accompanying release of HKSA 720 (Revised)

HKSA 600, Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors)

HKSA 700, (Revised), Forming an Opinion and Reporting on Financial Statements

HKSA 701, Communicating Key Audit Matters in the Independent Auditor's Report

HKSA 705, (Revised), Modifications to the Opinion in the Independent Auditor's Report

HKSA 706, (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report

HKSA 710, Comparative Information—Corresponding Figures and Comparative Financial Statements

HKSA 810, Engagements to Report on Summary Financial Statements


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In summary, 18 revised HKSAs and 1 new HKSA

New HKSA 701 HKSA 570 (Revised)

HKSA 210 HKSA 580

HKSA 220 HKSA 600

HKSA 230 HKSA 700 (Revised)

HKSA 260 (Revised) HKSA 705 (Revised)


HKSA 500 HKSA 710


HKSA 540 HKSA 810

HKSA 560

Standards effective for audits of financial statements

for periods ending on or after 15 December 2016



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HKSA 210, Agreeing the Terms of Audit Engagements [A11]

An audit in accordance with HKSAs is conducted on the premise that management has

acknowledged and understands that it has the responsibilities set out in paragraph 6(b). In

certain jurisdictions, such responsibilities may be specified in law or regulation. In others,

there may be little or no legal or regulatory definition of such responsibilities.

HKSAs do not override law or regulation in such matters. However, the concept of an

independent audit requires that the auditor's role does not involve taking responsibility for

the preparation of the financial statements or for the entity's related internal control, and

that the auditor has a reasonable expectation of obtaining the information necessary for the

audit (including information obtained from outside of the general and subsidiary ledgers) in

so far as management is able to provide or procure it.

Accordingly, the premise is fundamental to the conduct of an independent audit.

To avoid misunderstanding, agreement is reached with management that it

acknowledges and understands that it has such responsibilities as part of

agreeing and recording the terms of the audit engagement in

paragraphs 9‐12.


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HKSA 210, Agreeing the Terms of Audit Engagements [A19a]

Additional information that the auditor may request from management for the purpose of

the audit may include when applicable, matters related to other information in accordance

with HKSA 720 (Revised).

When the auditor expects to obtain other information after the date of the auditor's report,

the terms of the audit engagement may also acknowledge the auditor's responsibilities

relating to such other information including, if applicable, the actions that may be

appropriate or necessary if the auditor concludes that a material misstatement of the other

information exists in other information obtained after the date of the auditor's report.



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HKSA 210, Agreeing the Terms of Audit Engagements [A23a]

When the auditor is not required to communicate key audit matters, it may be helpful for the

auditor to make reference in the terms of the audit engagement to the possibility of

communicating key audit matters in the auditor's report and, in certain jurisdictions, it may

be necessary for the auditor to include a reference to such possibility in order to retain the

ability to do so.


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Yet up‐to‐date audit engagement?

Change of wordings in your engagement letter may required

Scope of audit – modification or review carried out

Our audit will be conducted in accordance with Hong Kong Standards on Auditing ("HKSAs")

issued by the Hong Kong Institute of Certified Public Accountants. Those standards require

that we comply with ethical requirements. As part of an audit in accordance with HKSAs,

we exercise professional judgment and maintain professional skepticism throughout and

plan and perform the audit to obtain reasonable assurance about whether the

(consolidated)* financial statements are free

from material misstatement. An audit involves We also:



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a) Identify and assess the risks of material misstatement of the (consolidated)*

financial statements, whether due to fraud or error, design and perform audit

procedures responsive to those risks, and obtain audit evidence that is sufficient

and appropriate to provide a basis for our opinion. The risk of not detecting a

material misstatement resulting from fraud is higher than for one resulting from

error, as fraud may involve collusion, forgery, intentional omissions,

misrepresentations, or the override of internal control.


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b) Obtain an understanding of internal control relevant to the audit in order to

design audit procedures that are appropriate in the circumstances, but not for the

purpose of expressing an opinion on the effectiveness of the entity's internal

control. However, we will communicate to you in writing concerning any

significant deficiencies in internal control relevant to the audit of the

(consolidated)* financial statements that we have identified during the audit. Any

such report may not be provided to third parties without our prior written

consent. Such consent will be granted only on the basis that such reports are not

prepared with the interests of anyone other than the Company in mind and that

we accept no duty or responsibility to any other party as concerns the reports.



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c) Evaluate the appropriateness of accounting policies used and the reasonableness of

accounting estimates and related disclosures made by you.

d) Conclude on the appropriateness of your use of the going concern basis of accounting

and, based on the audit evidence obtained, whether a material uncertainty exists

related to events or conditions that may cast significant doubt on the Company's

ability to continue as a going concern. If we conclude that a material uncertainty

exists, we are required to draw attention in our auditor's report to the related

disclosures in the financial statements or, if such disclosures are inadequate, to

modify our opinion. Our conclusions are based on the audit evidence obtained up to

the date of our auditor's report. However, future events or conditions may cause the

Company to cease to continue as a going concern.


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e) Evaluate the overall presentation, structure and content of the (consolidated)*

financial statements, including the disclosures, and whether the (consolidated)*

financial statements represent the underlying transactions and events in a manner

that achieves fair presentation.



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4.3) In making our risk assessments, we consider internal control relevant to the

entity's preparation of the (consolidated)* financial statements in order to design

audit procedures that are appropriate in the circumstances, but not for the

purpose of expressing an opinion on the effectiveness of the entity's internal

control. However, we will communicate to you in writing concerning any

significant deficiencies in internal control relevant to the audit of the

(consolidated)* financial statements that we have identified during the audit. Any

such report may not be provided to third parties without our prior written consent.

Such consent will be granted only on the basis that such reports are not prepared

with the interests of anyone other than the Company in mind and that we accept

no duty or responsibility to any other party as concerns the reports.


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HKSA 260 (Revised), Communication with Those Charged with

Governance

• The auditor's planned approach to addressing the implications on the individual

statements and the disclosures of any significant changes within the applicable

financial reporting framework or in the entity's environment, financial condition

or activities.

• The actions of those charged with governance in response to developments in

accounting standards, corporate governance practices , exchange listing rules,

and related matters, and the effect of such developments on, for example, the

overall presentation, structure and content of the financial statements, including:

The relevance, reliability, comparability and understandability of the

information presented in the financial statements; and

Considering whether the financial statements are undermined by the

inclusion of information that is not relevant or that obscures a proper

understanding of the matters disclosed.



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HKSA 700 (Revised), Forming an Opinion and Reporting on Financial

Statements [A3a, A3b, A4a‐A4c]

• In making this evaluation, the auditor shall consider the relevance of the

accounting policies to the entity, and whether they have been presented in an

understandable manner

• In making this evaluation, the auditor shall consider whether: ‐

The information that should have been included has been included, and

whether such information is appropriately classified, aggregated or

disaggregated, and characterized

The overall presentation of the financial statements has been undermined

by including information that is not relevant or that obscures a proper

understanding of the matters disclosed.



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In evaluating whether the financial statements appropriately disclose the significant accounting

policies selected and applied, the auditor's consideration includes matters such as:

Whether all disclosures related to the significant accounting policies that are required to

be included by the applicable financial reporting framework have been disclosed;

Whether the information about the significant accounting policies that has been

disclosed is relevant and therefore reflects how the recognition, measurement and

presentation criteria in the applicable financial reporting framework have been applied to

classes of transactions, account balances and disclosures in the financial statements in

the particular circumstances of the entity's operations and its environment; and

The clarity with which the significant accounting policies have been presented.




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Accounting Policies Appropriately Disclosed in the Financial Statements

In evaluating whether the financial statements appropriately disclose the significant accounting

policies selected and applied, the auditor's consideration includes matters such as:

Whether all disclosures related to the significant accounting policies that are required to be

included by the applicable financial reporting framework have been disclosed;

Whether the information about the significant accounting policies that has been disclosed

is relevant and therefore reflects how the recognition, measurement and presentation

criteria in the applicable financial reporting framework have been applied to classes of

transactions, account balances and disclosures in the financial statements in the particular

circumstances of the entity's operations and its environment; and

The clarity with which the significant accounting policies have been presented.



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Information Presented in the Financial Statements is Relevant, Reliable, Comparable and

Understandable

Evaluating the understandability of the financial statements includes consideration of such

matters as whether:

The information in the financial statements is presented in a clear and concise

manner.

The placement of significant disclosures gives appropriate prominence to them (e.g.,

when there is perceived value of entity‐specific information to users), and whether

the disclosures are appropriately cross‐referenced in a manner that would not give

rise to significant challenges for users in identifying necessary information.



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Opinion comes first

Financial statements to be affected – how many different formats you

encountered?

Relevance of signing documentations

Up‐to‐date Audit program – if you have one!


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The IAASB's Disclosure Project

• The IAASB’s disclosures project (HKICPA Update no. 180)

– Changes are made to various HKSAs as a result of the Disclosures project (Addressing Disclosures in the Audit of Financial Statements) developed the IAASB.

– These changes are effective for audits of financial statements for periods ending on or after 15 December 2016.



• As a result of the IAASB’s disclosures project, changes to HKSAs:– HKSA 200 Overall Objectives of the Independent Auditor and the Conduct of

an Audit in Accordance with Hong Kong Standards on Auditing

– HKSA 210 Agreeing the Terms of Audit Engagements

– HKSA 240 The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements

– HKSA 260 (Revised) Communication with Those Charged with Governance

– HKSA 300 Planning an Audit of Financial Statements

– HKSA 315 (Revised 2016) Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment

– HKSA 320 Materiality in Planning and Performing an Audit

– HKSA 330 The Auditor’s Responses to Assessed Risks

– HKSA 450 Evaluation of Misstatements Identified during the Audit

– HKSA 700 (Revised) Forming an Opinion and Reporting on Financial Statements

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• As a result of the IAASB’s disclosures project, conforming amendments to HKSAs:– HKSA 540 Auditing Accounting Estimates, Including Fair Value Accounting

Estimates, and Related Disclosures

– HKSA 580 Written Representations

– HKSA 705 (Revised) Modifications to the Opinion in the Independent Auditor's Report



• HKSA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with HKSAs– The definition of “financial statements” (HKSA 200.13f) is revised as

• A structured representation of historical financial information, including disclosures, intended to communicate an entity's economic resources or obligations at a point in time, or the changes therein for a period of time, in accordance with a financial reporting framework.

• The term "financial statements" ordinarily refers to a complete set of financial statements as determined by the requirements of the applicable financial reporting framework, but can also refer to a single financial statement.

• Disclosures comprise explanatory or descriptive information, set out as required, expressly permitted or otherwise allowed by the applicable financial reporting framework, on the face of a financial statement, or in the notes, or incorporated therein by cross‐reference. (Ref: Para. A1‐A1a)

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• HKSA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with HKSAs– Explanatory or descriptive information required to be included in the

financial statements by the applicable financial reporting framework may be incorporated therein by cross‐reference to information in another document, such as a management report or a risk report.

– "Incorporated therein by cross‐reference" means cross‐referenced from the financial statements to the other document, but not from the other document to the financial statements.

– Where the applicable financial reporting framework does not expressly prohibit the cross‐referencing of where explanatory or descriptive information may be found, and the information has been appropriately cross‐referenced, the information will form part of the financial statements. (HKSA 200.A1a)



• HKSA 240 The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements– Fraudulent financial reporting often involves management override of

controls that otherwise may appear to be operating effectively. Fraud can be committed by management overriding controls using such techniques as intentionally:

• ……

• Omitting, obscuring or misstating disclosures required by the applicable financial reporting framework, or disclosures that are necessary to achieve fair presentation.

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• HKSA 240 The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements– Discussing the susceptibility of the entity's financial statements to material

misstatement due to fraud with the engagement team may include such matters as:

• ……

• A consideration of the risk that management may attempt to present disclosures in a manner that may obscure a proper understanding of the matters disclosed (for example, by including too much immaterial information or by using unclear or ambiguous language).



• HKSA 300 Planning an Audit of Financial Statements– Newly added:

• Determining the nature, timing and extent of planned risk assessment procedures, and the further audit procedures, as they relate to disclosures is important in light of both the wide range of information and the level of detail that may be encompassed in those disclosures. (HKSA 300.A12a)

• Further, certain disclosures may contain information that is obtained from outside of the general and subsidiary ledgers, which may also affect the assessed risks and the nature, timing and extent of audit procedures to address them. (HKSA 300.A12a)

• Consideration of disclosures early in the audit assists the auditor in giving appropriate attention to, and planning adequate time for, addressing disclosures in the same way as classes of transactions, events and account balances. (HKSA 300.A12b)

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• HKSA 300 Planning an Audit of Financial Statements– Newly added:

• Early consideration may also help the auditor to determine the effects on the audit of:

– Significant new or revised disclosures required as a result of changes in the entity's environment, financial condition or activities (for example, a change in the required identification of segments and reporting of segment information arising from a significant business combination);

– Significant new or revised disclosures arising from changes in the applicable financial reporting framework;

– The need for the involvement of an auditor's expert to assist with audit procedures related to particular disclosures (for example, disclosures related to pension or other retirement benefit obligations); and

– Matters relating to disclosures that the auditor may wish to discuss with those charged with governance. (HKSA 300.A12b)



• HKSA 315 (Revised 2016) Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment– Newly added:

• This understanding of the information system relevant to financial reporting shall include relevant aspects of that system relating to information disclosed in the financial statements that is obtained from within or outside of the general and subsidiary ledgers. (HKSA 315.18)

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• As part of the discussion among the engagement team required by HKSA315.10, consideration of the disclosure requirements of the applicable financial reporting framework assists in identifying early in the audit where there may be risks of material misstatement in relation to disclosures. (HKSA 315.A21a)




• Examples of matters the engagement team may discuss include:

– Changes in financial reporting requirements that may result in significant new or revised disclosures;

– Changes in the entity's environment, financial condition or activities that may result in significant new or revised disclosures, for example, a significant business combination in the period under audit;

– Disclosures for which obtaining sufficient appropriate audit evidence may have been difficult in the past; and

– Disclosures about complex matters, including those involving significant management judgment as to what information to disclose. (HKSA 315.A21a)

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• Financial statements may contain information that is obtained from outside of the general and subsidiary ledgers. Examples of such information may include:

– Information obtained from lease agreements disclosed in the financial statements, such as renewal options or future lease payments.

– Information disclosed in the financial statements that is produced by an entity's risk management system.

– Fair value information produced by management's experts and disclosed in the financial statements. (HKSA 315.A89a)




• Examples of such information may include:

– Information disclosed in the financial statements that has been obtained from models, or from other calculations used to develop estimates recognized or disclosed in the financial statements, including information relating to the underlying data and assumptions used in those models, such as:

» Assumptions developed internally that may affect an asset's useful life; or

» Data such as interest rates that are affected by factors outside the control of the entity. (HKSA 315.A89a)

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• Examples of such information may include:

– Information disclosed in the financial statements about sensitivity analyses derived from financial models that demonstrates that management has considered alternative assumptions.

– Information recognized or disclosed in the financial statements that has been obtained from an entity's tax returns and records.

– Information disclosed in the financial statements that has been obtained from analyses prepared to support management's assessment of the entity's ability to continue as a going concern, such as disclosures, if any, related to events or conditions that have been identified that may cast significant doubt on the entity's ability to continue as a going concern. (HKSA 315.A89a)



• HKSA 320 Materiality in Planning and Performing an Audit– Newly added “Materiality in the Context of an Audit (Ref: Para. 6)”

• Identifying and assessing the risks of material misstatement involves the use of professional judgment to identify those classes of transactions, account balances and disclosures, including qualitative disclosures, the misstatement of which could be material (i.e., in general, misstatements are considered to be material if they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements as a whole).

• When considering whether misstatements in qualitative disclosures could be material, the auditor may identify relevant factors such as:

– The circumstances of the entity for the period (for example, the entity may have undertaken a significant business combination during the period).

– The applicable financial reporting framework, including changes therein (for example, a new financial reporting standard may require new qualitative disclosures that are significant to the entity). (HKSA 320.A1a)

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• HKSA 320 Materiality in Planning and Performing an Audit– Newly added “Materiality in the Context of an Audit (Ref: Para. 6)”

• Qualitative disclosures that are important to users of the financial statements because of the nature of an entity (for example, liquidity risk disclosures may be important to users of the financial statements for a financial institution). (HKSA 320.A1a)



• HKSA 330 The Auditor’s Responses to Assessed Risks– Adequacy of Presentation of the Financial Statements

• The auditor shall perform audit procedures to evaluate whether the overall presentation of the financial statements is in accordance with the applicable financial reporting framework.

• In making this evaluation, the auditor shall consider whether the financial statements are presented in a manner that reflects the appropriate:

– Classification and description of financial information and the underlying transactions, events and conditions; and

– Presentation, structure and content of the financial statements. (HKSA 330.24)

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• HKSA 330 The Auditor’s Responses to Assessed Risks– Documentation

• The auditor’s documentation shall demonstrate that information in the financial statements agrees or reconciles with the underlying accounting records, including agreeing or reconciling disclosures, whether such information is obtained from within or outside of the general and subsidiary ledgers. (HKSA 330.30)



• HKSA 450 Evaluation of Misstatements Identified during the Audit– Misstatements may result from:

(b) An omission of an amount or disclosure, including inadequate or incomplete disclosures, and those disclosures required to meet disclosure objectives of certain financial reporting frameworks as applicable;

(e) An inappropriate classification, aggregation or disaggregation, of information; and

(f) For financial statements prepared in accordance with a fair presentation framework, the omission of a disclosure necessary for the financial statements to achieve fair presentation beyond disclosures specifically required by the framework. (HKSA 450.A1)

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• HKSA 450 Evaluation of Misstatements Identified during the Audit– This HKSA (HKSA 450) requires the auditor to accumulate misstatements

identified during the audit other than those that are clearly trivial.

– "Clearly trivial" is not another expression for "not material.“

– Misstatements that are clearly trivial will be of a wholly different (smaller) order of magnitude, or of a wholly different nature than those that would be determined to be material, and will be misstatements that are clearly inconsequential, whether taken individually or in aggregate and whether judged by any criteria of size, nature or circumstances.

– When there is any uncertainty about whether one or more items are clearly trivial, the misstatement is considered not to be clearly trivial. (HKSA 450.A2)



• HKSA 450 Evaluation of Misstatements Identified during the Audit– Newly added: Misstatements in Individual Statements

• The auditor may designate an amount below which misstatements of amounts in the individual statements would be clearly trivial, and would not need to be accumulated because the auditor expects that the accumulation of such amounts clearly would not have a material effect on the financial statements.

• However, misstatements of amounts that are above the designated amount are accumulated as required by paragraph 5 of this HKSA (HKSA 450).

• In addition, misstatements relating to amounts may not be clearly trivial when judged on criteria of nature or circumstances, and, if not, are accumulated as required by paragraph 5 of this HKSA (HKSA 450). (HKSA 450.A2a)

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• HKSA 450 Evaluation of Misstatements Identified during the Audit– Newly added: Misstatements in Disclosures

• Misstatements in disclosures may also be clearly trivial whether taken individually or in aggregate, and whether judged by any criteria of size, nature or circumstances.

• Misstatements in disclosures that are not clearly trivial are also accumulated to assist the auditor in evaluating the effect of such misstatements on the relevant disclosures and the financial statements as a whole.

• Paragraph A13a of this HKSA (HKSA 450) provides examples of where misstatements in qualitative disclosures may be material. (HKSA 450.A2b)



• HKSA 450 Evaluation of Misstatements Identified during the Audit– Newly added: Accumulation of Misstatements

• Misstatements by nature or circumstances, accumulated as described in paragraphs A2a‐A2b, cannot be added together as is possible in the case of misstatements of amounts.

• Nevertheless, the auditor is required by paragraph 11 of this HKSA (HKSA 450) to evaluate those misstatements individually and in aggregate (i.e., collectively with other misstatements) to determine whether they are material. (HKSA 450.A2c)

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• HKSA 450 Evaluation of Misstatements Identified during the Audit– Newly added:

• In addition, each individual misstatement of a qualitative disclosure is considered to evaluate its effect on the relevant disclosure(s), as well as its overall effect on the financial statements as a whole.

• The determination of whether a misstatement(s) in a qualitative disclosure is material, in the context of the applicable financial reporting framework and the specific circumstances of the entity, is a matter that involves the exercise of professional judgment. (HKSA 450.A13a)



• HKSA 450 Evaluation of Misstatements Identified during the Audit– Newly added: Examples where such misstatements may be material

include:

• Inaccurate or incomplete descriptions of information about the objectives, policies and processes for managing capital for entities with insurance and banking activities.

• The omission of information about the events or circumstances that have led to an impairment loss (e.g., a significant long‐term decline in the demand for a metal or commodity) in an entity with mining operations.

• The incorrect description of an accounting policy relating to a significant item in the statement of financial position, the statement of comprehensive income, the statement of changes in equity or the statement of cash flows.

• The inadequate description of the sensitivity of an exchange rate in an entity that undertakes international trading activities. (HKSA 450.A13a)

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• In determining whether uncorrected misstatements by nature are material as required by paragraph 11 of this HKSA (HKSA 450), the auditor considers uncorrected misstatements in amounts and disclosures.

• Such misstatements may be considered material either individually, or when taken in combination with other misstatements. (HKSA 450.A13b)




• For example, depending on the misstatements identified in disclosures, the auditor may consider whether:

a) Identified errors are persistent or pervasive; or

b) A number of identified misstatements are relevant to the same matter, and considered collectively may affect the users' understanding of that matter.

• This consideration of accumulated misstatements is also helpful when evaluating the financial statements in accordance with paragraph 13(d) of HKSA 700 (Revised), which requires the auditor to consider whether the overall presentation of the financial statements has been undermined by including information that is not relevant or that obscures a proper understanding of the matters disclosed. (HKSA 450.A13b)

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• Depending on the circumstances, misstatements in disclosures could also be indicative of fraud, and, for example, may arise from:

– Misleading disclosures that have resulted from bias in management's judgments; or

– Extensive duplicative or uninformative disclosures that are intended to obscure a proper understanding of matters in the financial statements.

• When considering the implications of misstatements in classes of transactions, account balances and disclosures, the auditor exercises professional skepticism in accordance with HKSA 200.17. (HKSA 450.A17)


Today’s Agenda

Other Information (HKSA 720) and Code of Ethics

Gary POON

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Gary’s Agenda

1. The Auditor’s Responsibilities Relating to Other Information (“HKSA 720(Revised)”)

2. Responding to Non‐Compliance with Laws and Regulations (“NOCLAR”)


Part 1. The Auditor’s Responsibilities Relating to Other Information

1. Objectives

2. Effective date

3. Definitions

4. New key requirements

5. Conforming amendments to other auditing standards

6. Illustrations of auditor’s reports, management representation letter and audit engagement letter

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1. Objectives:

• The objectives of the auditor, having read the other information, are:

• To consider whether there is a material inconsistency between the other information and the financial statements;

• To consider whether there is a material inconsistency between the other information and the auditor's knowledge obtained in the audit;

• To respond appropriately when the auditor identifies that such material inconsistencies appear to exist, or when the auditor otherwise becomes aware that other information appears to be materially misstated; and

• To report in accordance with this HKSA. (HKSA720(Revised).11)



2. Effective date:

• For audits of financial statements for periods ending on or after 15 December 2016

• Early adoption is permitted

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3. Definitions:

• Other information – Financial or non‐financial information (other than financial statements and the auditor's report thereon) included in an entity's annual report.

• Annual report – A document, or combination of documents, prepared typically on an annual basis by management or those charged with governance in accordance with law, regulation or custom, the purpose of which is to provide owners (or similar stakeholders) with information on the entity's operations and the entity's financial results and financial position as set out in the financial statements. An annual report contains or accompanies the financial statements and the auditor's report thereon and usually includes information about the entity's developments, its future outlook and risks and uncertainties, a statement by the entity's governing body, and reports covering governance matters.



3. Definitions:

• Misstatement of the other information – A misstatement of the other information exists when the other information is incorrectly stated or otherwise misleading (including because it omits or obscures information necessary for a proper understanding of a matter disclosed in the other information). (HKSA 720 (Revised).12)

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4. New key requirements:

• New definition for other information

• More conforming requirements on agreeing the terms of audit engagements, management representation, etc.

• New requirement to consider if there is a material inconsistency between the other information and the auditor's knowledge obtained in the audit

• New requirement to be alert for indications that the other information not related to the financial statements or auditor’s knowledge obtained in the audit appears to be materially misstated



4. New key requirements:

• New requirement to include an "Other information" section in the an auditor's report except for one with a disclaimer of opinion

• New requirement to identify other information obtained prior to date of audit report for all reporting entities and other information expected to be obtained after the audit report date for only listed entities

• New requirement to report whether there is an uncorrected material misstatement of the other information

• Enhance guidance on i) materiality, ii) implications of a qualified or adverse opinion in accordance with HKSA 705 (Revised) that give rise to the modification of the statement on uncorrected material misstatement of the other information and iii) documentation

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5. Conforming amendments to other auditing standards:

• HKSA 260 (Revised), Communication with Those Charged with Governance

• HKSA 450, Evaluation of Misstatements Identified during the Audit

• HKSA 500, Audit Evidence

• HKSA 560, Subsequent Events

• HKSA 570 (Revised), Going Concern

• HKSA 700 (Revised), Forming an Opinion and Reporting on Financial Statements

• HKSA 701, Communicating Key Audit Matters in the Independent Auditor's Report

• HKSA 705 (Revised), Modifications to the Opinion in the Independent Auditor's Report

• HKSA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report

• HKSA 710, Comparative Information – Corresponding Figures and Comparative Financial Statements

• HKSA 810, Engagements to Report on Summary Financial Statements



6. Illustrations of auditor’s reports, management representation letter and audit engagement letter:

HKSA 720 (Revised)

• Illustration 1: An auditor's report of any entity, whether listed or other than listed, containing an unmodified opinion when the auditor has obtained all of the other information prior to the date of the auditor's report and has not identified a material misstatement of the other information

• Illustration 5: An auditor's report of any entity, whether listed or other than listed, containing an unmodified opinion when the auditor has obtained all of the other information prior to the date of the auditor's report and has concluded that a material misstatement of the other information exists

• Illustration 6: An auditor's report of any entity, whether listed or other than listed, containing a qualified opinion when the auditor has obtained all of the other information prior to the date of the auditor's report and there is a limitation of scope with respect to a material item in the consolidated financial statements which also affects the other information

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6. Illustrations of auditor’s reports, management representation letter and audit engagement letter:

HKSA 720 (Revised)

• Illustration 8: An auditor's report of any entity incorporated in Hong Kong, whether listed or other than listed, containing an unmodified opinion when the auditor has obtained all of the other information prior to the date of the auditor's report and has concluded that a material misstatement of the other information exists and has identified an inconsistency between the information in the directors' report and the financial statements

HKSA 580

• Appendix 2: Illustrative representation letter

HKSA 210

• Appendix 1: Example of an Audit Engagement Letter


Part 2. Responding to Non‐Compliance with Laws and Regulations

1. Why was the project started?

2. What is it?

3. Effective date

4. Summary of requirements for four different categories of professional accountants (“PAs”)

5. Responsibility to public interest in introduction of the Code of Ethics (“COE”)

6. Determining whether further action is needed and whether to disclose the matter to an appropriate authority for auditors

7. Useful resources

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1. Why was the project started?

The project was started to address concerns from the regulatory community and other stakeholders about:

• The duty of confidentiality under the COE acting as a barrier to timely disclosure by auditors of fraud and other NOCLAR to regulatory and enforcement authorities in the public interest

• Auditors simply resigning from the client relationship because of identified or suspected NOCLAR without the matter being appropriately addressed

• A lack of guidance in the Code about the thought process and relevant factors to take into account in determining an appropriate course of action in responding to the matter in the public interest

The scope of the project was subsequently broadened to cover not just auditors but also other PAs in public practice and professional accountants in business.



2. What is it?

a) Overall framework:

• Sets out the responsibilities of PAs when encountering or being made aware of non‐compliance or suspected non‐compliance with laws and regulations and guide them in assessing the implications of the matter and possible courses of action when responding to it

• Issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) following the International Ethics Standards Board for Accountants (“IEBSA”), a standard setting board established by the International Federation of Accountants (”IFAC”)

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2. What is it?

b) Definition of NOCLAR:

• NOCLAR is defined as any act of omission or commission, intentional or unintentional, committed by a client or employer, or by those charged with governance (TCWG), by management or by other individuals working for or under the direction of a client or employer which is contrary to the prevailing laws or regulations.



2. What is it?

c) Scope of laws and regulations:

• Laws and regulations that have a direct effect on the determination of material amounts and disclosures in the financial statements

• Other laws and regulations, compliance with which may be fundamental to the entity’s business and operations, or to avoid material penalties

• Not to address i) matters that are clearly inconsequential, ii) personal misconduct unrelated to the business activities of the client or employer and iii) non‐compliance other than by the client or employer, or TCWG, management or other individuals working for or under the direction of the client or employer

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2. What is it?

d) Applicability on entities:

• Section 225 of COE for professional accountants in public practice (“PAIPs”) applies regardless of the nature of the client, including whether or not it is a public interest entity.

• Section 360 of COE for professional accountants in business (“PAIBs”) applies regardless of the nature of the employing organization, including whether or not it is a public interest entity.



3. Effective date:

• 15 July 2017

• Early adoption is permitted

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4. Summary of requirements for four different categories of professional accountants:

• Pages 4 to 6 of IESBA’s At a Glance July 2016



5. Responsibility to public interest in introduction of the COE

• A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. Therefore, a professional accountant’s responsibility is not exclusively to satisfy the needs of an individual client or employer. In acting in the public interest, a professional accountant shall observe and comply with this Code. (100.1 of COE)

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a) Determining whether further action is needed for auditors

• Assess the appropriateness of the response of management and, where applicable, TCWG

• Determine if further action is needed in the public interest

• Exercise professional judgement and take into account whether a reasonable and informed third party would likely conclude that the PA has acted appropriately in the public interest weighing all the specific facts and circumstances available to the PA at the time

• Withdrawing would not be a substitute for taking other actions that may be needed

• Consider consulting internally, obtain legal advice or consult with regulator or professional body




b) Determining whether to disclose the matter to an appropriate authority for auditors

• Precluded if doing so would be contrary to law or regulation

• Depend in particular on the nature and extent of the actual or potential harm that is or may be caused by the matter to investors, creditors, employees or the general public

• Depend on external factors such as i) whether an appropriate authority is able to receive the information and cause the matter to be investigated and action to be taken, ii) whether there exists robust and credible protection from civil, criminal or professional liability or retaliation afforded by legislation or regulation, such as under whistle‐blowing legislation or regulation and iii) whether there are actual or potential threats to the physical safety of the PA or other individuals

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b) Determining whether to disclose the matter to an appropriate authority for auditors

• Disclosure of non‐compliance or suspected non‐compliance to an appropriate authority that is an appropriate course of action in the circumstances will not be considered a breach of confidentiality

• Consider whether it is appropriate to inform the client of the PA’s intentions before disclosing the matter

• In exceptional circumstances, exercise professional judgment and may immediately disclose the matter to an appropriate authority if it constitutes an imminent breach of law or regulation that the PA has reason to believe that such would cause substantial harm to investors, creditors, employees or the general public



7. Useful resources:

• HKICPA’s New and Major Standards Resource Centre: Responding to Non‐Compliance with Laws and Regulations (NOCLAR)http://www.hkicpa.org.hk/en/standards‐and‐regulations/technical‐resources/newmajor/noclar/

• IESBA’s web page on Responding to Non‐Compliance with Laws and Regulations (NOCLAR)http://www.ethicsboard.org/responding‐non‐compliance‐laws‐and‐regulations

• HKICPA’s dedicated email for questions on the new standard or responses to NOCLAR: [email protected]

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Today’s Agenda

Key Audit Matters (HKSA 701)and Other Selected Update

Kenneth LAU


Kenneth’s Agenda

Key audit matters (“KAM”)

• What are KAM

• Determining KAM

• Communicating KAM

• Illustrative examples

• Implementation

Selected auditing updates

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What are KAM

• KAM section - one of the key changes to the new auditor’s report

• Compulsory section for listed entities

• HKSA 701 - Communicating Key Audit Matters in the Independent Auditor’s Report

• Effective for audits of financial statements for periods ending on or after 15 December 2016


What are KAM

• HKSA 700 (Revised) “ Forming an Opinion and Reporting on Financial Statements” :

Key Audit Matters • For audits of complete sets of general purpose financial statements of listed entities, the auditor shall communicate key audit matters in the auditor's report in accordance with HKSA 701.

• When the auditor is otherwise required by law or regulation or decides to communicate key audit matters in the auditor's report, the auditor shall do so in accordance with HKSA 701.

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What are KAM

(Extract from Illustration 1 of HKSA 700 (Revised))


What are KAM


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What are KAM

• KAM are those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. KAM are selected from matters communicated with those charged with governance (“TCWG”).


Determining KAM

Matters communicated with TCWG

Matters require significant auditor attention

KAM : Most significant matters in audit

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Determining KAM

Consider

• Areas of higher assessed risk of material misstatement

• Significant risks identified

• Areas that involved significant management judgment and having high estimation uncertainty

• Significant events or transactions that occurred during the period

Matters require significant auditor attention


Determining KAM

Consider• Importance of the matter to intended users’

understanding of the financial statements• Nature of underlying accounting policy• Nature of materiality , quantitatively and qualitatively, of

corrected and accumulated uncorrected misstatements• Nature and extent of audit efforts needed to address the

matters• Nature and severity of difficulties in applying audit

procedures, etc.

KAM : Most significant matters in audit

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Determining KAM

Report of UK FRC on extended auditor’s reports


Determining KAM Common KAM in UK

Goodwill Impairment

Revenue

Assets impairment (PPE, intangible assets, Loans

and receivables)Taxation

Valuation of inventories

Financial Instruments

Acquisition / Disposals

Provisions

Pension accounting

Management override of control

Going Concern

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Determining KAM

Revenue recognition and Management override

HKSA 701 A21.“……. For example, HKSA 240 presumes that there are risks of fraud in revenue recognition and requires the auditor to treat those assessed risks of material misstatement due to fraud as significant risks. In addition, HKSA 240 indicates that, due to the unpredictable way in which management override of controls could occur, it is a risk of material misstatement due to fraud and thus a significant risk.”

“Depending on their nature, these risks may not require significant auditor attention, and therefore would not be considered in the auditor's determination of key audit matters in accordance with paragraph 10”


Determining KAMCommon KAM in UK

Extract from report on extended auditor’s report by UK FRC issued in January

2016

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Communicating KAM

KAM section in auditor’s report shall:

• Describe each KAM and Include a referenceto the related disclosure(s)

• Disclose why the matter was considered to be one of the most significance in the audit

• Disclose how the matter was addressed in the audit


Communicating KAM

Should describe each key audit matter unless:

• Law or regulation precludes public disclosure; or• Adverse consequences on disclosing KAM

Should note that :• Auditors do not provide separate opinion on KAM• KAM not a substitute for expressing a modified

opinion

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Communicating KAM Number of KAM disclosure …………..

Number of reported risks of misstatement

Extract from report on extended auditor’s report by UK FRC issued in January 2016


Communicating KAM Number of KAM disclosure…………..


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Communicating KAM Number of KAM disclosure…………..



Communicating KAM How KAM was addressed

Auditor may describe:• Aspects of the auditor’s response or approach that

were most relevant to the matter• A brief overview of procedures performed• An indication of the outcome of the auditor’s

procedures, or• Key observations with respect to the matterOr some combination of these elements.

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Communicating KAM Report outcome of auditor’s procedures ??

11. of HKSA 701”“…. The introductory language in this section of the

auditor’s report shall state that these matters were addressed in the context of the audit of financial statements as a whole, and in forming the auditor’s opinion thereon, the auditor does not provide a separate opinion on these matters.”

A47 of HKSA 701:“.... care must be necessary so that language used in the

description of a KAM does not contain or imply discrete opinions on separate elements of the financial statements.”




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KAM are :• Prohibited for disclaimer of opinion• Required for qualified or adverse opinion• Required for going concern

However matters giving rise to qualified or adverse opinion or going concern should not be described in Key Audit Matters section but rather (1) to report these matters in accordance with the applicable HKSAs and (2) include a reference in KAM section to the basis of modified opinion or material uncertainty related to going concern section.

Communicating KAM Interaction between KAM , Modified Opinions and Going Concern

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Qualified opinion

(extract from HKSA 705 illustration 1)



Going concern

(extract from HKSA 570 illustration 1)


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If auditors determines that:• there are no KAM; or • the only KAM are those matters address already

in modified opinion paragraph, material uncertainty paragraph or going concern paragraph

Auditors shall include a statement to this effect in the KAM section.


No KAM or no other KAM

(extract from HKSA 701 A58)


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Illustrative examples of KAM

(Swire Properties – Annual report 2016)

Reference to related disclosures

Why the matter is

considered as KAM

Brief overview of procedures

performed

Outcome of procedures, or any key

observations

Description of KAM



(Cathay Pacific - annual report 2016)

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(Grafton Group PLC – Annual report 2015)



Implementation

• Communicate with TCWG on timely basis both on planning stage and reporting stage (with documentation)

• Consider concerns of TCWG and management

• Involve and communicate earlier with EQCR at planning stage

• Draft auditor’s report earlier

• Consider sensitive information

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PN 730 (Revised) – “Guidance for Auditors Regarding Preliminary Announcements of Annual Results”

• Updated for the FAQ issued by The Stock Exchange of Hong Kong (FAQ 001-2017 to 003-2017)

• Effective for audits of financial statements for the periods ended on or after 15 December 2016



FAQ 001-2017

• relate to the audit terminology used in the listing rules with reference to the New Auditors Reporting Standards

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FAQ 002-2017 • There is no specific requirement under Main Board

Listing Rules or the GEM Listing Rules to provide KAM in issuer’s preliminary announcement of results

• It is considered more appropriate that KAM should be read and considered together with the full audit report and complete set of financial statements

• Issuer is recommended to publish its full annual reports as soon as practicable after preliminary results announcement



FAQ 003-2017

• Issuer needs to provide details in the preliminary results announcement for the following situations:– Where the audit opinion in the auditors’ report is a

“modified opinion”

– Where auditors’ report contains “an emphasis of matter paragraph”, “Material Uncertainty Related to Going Concern” without modifying the audit opinion

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PN 810.2 (Revised 2016) - “The Duties of the Auditor of an Insurer authorized under the Insurance Companies Ordinance”

PN 820 (Revised 2016) – “The Audit of Licensed Corporations and Associated Entities of Intermediaries”

PN 860.1 (Revised 2016) – “The Audit of Retirement Schemes”

• Effective for audits of financial statements with period ending on or after 15 December 2016

• The above practice notes are updated for changes resulting from the new and revised Auditor Reporting standards (“New Standards”):– Updated the references to the New Standards

– Amended the format of the example auditor’s reports to align with requirements of the New Standards


Auditing Update & New Auditor’s Report(ADF and SCAA Joint Seminar) 8 May 2017


Thank You !Q&A Session

Documents

Auditing Update & New Auditor’s Report - Nelson · PDF fileAuditing Update & New Auditor’s Report (ADF and SCAA Joint Seminar) 8 May 2017 ... HKSA 210, Agreeing the Terms of Audit