Introduce speakers David to start 5th year of presenting 3hrs Break at slide 24 of 49
DisclaimerStandards on Auditing
CIIPA and the presenters disclaim any responsibility or liability resulting from the use and application of this presentation.with a focus on Cayman Funds
AUDIT OBJECTIVE: Obtain Sufficient, Appropriate Audit Evidence to Reduce Risk to an Acceptable Low Level Consider: Scope of the Audit Engagement; Risks, Independence, Engagement Letter Consider: Deadlines & Audit Timetable; Fraud & Risk Assessments, Controls of the Administrator, Directors, Manager (IM and/or IA) Consider: Risk Based Audit Approach; Preliminary Analytical Review vs Expectations; Consider any Fluctuations in NAV/Share, New A&A Standards Consider: Sending an Audit Planning Letter to the client
• Fraud/Non-Compliance Risk Assessments
• Accounting Cycles Risk Assessments
• Materiality
• Expected Modification of the Audit Opinion
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Audit Planning Considerations
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Presentation Notes
IAS 1 (Revised) – Presentation of F/S – Revised with consequential amendments to other IFRS, effective for periods ending ≥ 1 Jan 2016: An entity need NOT provide a specific disclosure, even “minimum requirements” required by an IFRS if the information resulting from that disclosure is NOT material. However provide additional disclosures necessary. IAS’s revised by the IAASB Disclosures project effective for periods ≥ 15 Dec 2016: Revisions to clarify application of audit procedures and materiality to FS disclosures…. Recommend completing a FS disclosure checklist EARLY in the audit process. Exposure Draft ED/2017/6 Definition of Material – Proposed amendments to IAS 1 and IAS 8: Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of a specific reporting entity’s general purpose financial statements make on the basis of those financial statements.
Audit Planning Considerations
• Prior year audit issues
• Changes in the Fund’s operations
• Estimated values and assumptions
• Errors and restatements
• Going concern assessment
• Communication with Those Charged with
Governance7
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Any Side-Letters? = Agreement with an investor allowing preferential dealing, investment or other strategic terms. A balance between acting in the best interest of the Fund’s size and strategy, whilst not disadvantaging other investors. Any Side Pockets? = Account separating illiquid investments from the date of its creation to benefit only the investors at the date that the side pocket is created. Review Board Minutes! They can impact the audit approach.
Audit Planning Considerations
Laws & Regulations (ISA 250)
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• Is material non-compliance disclosed/reported if required?• Report to Those Charged with Governance
• Obtain management representations
• Identify any non-compliance• Discuss with management, if
appropriate• Evaluate impact
• Legal & regulatory framework for funds
• How entity is complying?• Inquire about compliance• Review regulatory
correspondence
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Audit Planning Considerations
Laws & Regulations
• IAASB Handbook of International Quality Control…• Companies Law• Mutual Funds Law & Annual Returns Regulations• Proceeds of Crime Law• Anti-Money Laundering Regulations• Confidential Information Disclosure Law• www.cima.ky/investment-funds-regulatory-measures• https://www.ciipa.ky/page-18225
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IAASB Handbook of International Quality Control, Auditing, Review, Other Assurance and Related Services Pronouncements (2016-2017 edition) 1690 pages (3 volumes) – keep a copy accessible Mutual Fund Law - paragraph 35 contains obligations for Auditors to report to CIMA… Ref. CIIPA Practitioner Supplement Confidential Information Disclosure Law – Consider updating Engagement Letters to permit the sharing of confidential information with relevant 3rd parties CIMA SoG – Corporate Governance for Regulated Mutual Funds – Fund’s Governing Body to meet ≥ TWICE a YEAR – ensure the auditor has copies of the minutes CIMA SoG (New) Nature, Accessibility and Retention of Records – specific requirements; AICPA, Audit & Accounting Guide, Investment Companies (July 1, 2017)
• Has sufficient appropriate evidence been obtained?
• Does a material misstatement exist?
• Is financial statement disclosure adequate?
• Obtain management representations. Report on any findings
• Any indication of undisclosed related parties?
• Obtain support for management’s assertions about the nature, extent, and purpose of transactions
• If consider significance, measurement and recognition of transactions, as well as any fraud risk
• Identify related parties, including and any changes
• Understand nature, extent, & purpose of transactions
• Consider potential for fraud
• Remain alert for undisclosed related-party transactions
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RTP transactions can be one of the most susceptible to misstatement Consider the structure of the Fund
Audit Planning Considerations
• Involves different Audit Practitioners at
different locations:
Cayman “Principal Auditor” signs
audit report, where the Fund is
domiciled;
“Other Auditor” in different jurisdiction
where management or records based.
• Cayman Practitioner:
Sign the Engagement Letter
Supervises Other Auditor
Review Other Auditor’s work
• Cayman auditor involvement in audit
planning, risk assessment and review:
Which auditor is responsible for
communication to the Directors?
Can the auditors effectively
collaborate to meet the client
deadline?
Does the “Other auditor” have
adequate funds audit experience?
Working with other Auditors
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Presentation Notes
Principal Auditor’s review of the Other Auditor’s work s/b correlated to: (i) Degree of Risk, & (ii) % Total Work, performed by the Other Auditor Specific procedures generally might be: Seek to review regulatory & peer review reports of the Other Auditor, including ISQC 1 compliance. Cayman issues LoE, performs take-on, issues inter-firm agreement & inter-firm instructions, reviews planning. Review full file, results, conclusions, FS, ACM, FAR, Shadow opinion/Comfort letter? Regulators seem to be favouring a model whereby the Principal Auditor uses the Other Auditor as if part of their own firm, with staff working on secondment. Proposed ISA 221: Working With Other Auditors… proposed to be drafted during 2018… likely to have a substantial impact in the offshore fund’s industry.
If placing reliance on an internal controls assurance report:
• What is the nature of the report?• Consider the report’s findings• Are the critical controls being relied upon by the auditor sufficiently
tested and are these free from findings?• Document the audit risk assessment and resultant audit approach
AND/OR: Perform controls reliance testing.
REMEMBER: Consider prior year audit adjustments and any other significant deficiencies.
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ISAE 3402 International Standard on Assurance Engagements no. 3402: assurance reports on controls at a service organization US GAAS: SSAE 16: SOC 1 Type I: report on policies and procedures and design effectiveness at Date Type II: includes operating effectiveness over time period Consider obtaining a bridging letter For all audits, understand design and implementation of controls for assessment of RISKS
Internal Control & Risk Assessment
Only rely on documented controls that are evidenced to work
• May we rely on controls?
• Service auditor’s report?
• Risks of fraud?
• Risks of errors?
• Substantive analytical review?
• Walkthroughs
• Tests of control
• Substantive procedures
• Confirmations
• Proof-in-total roll-forward calculations
• Substantive analytical review procedures
• Tests of detail
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For all audits, understand design and implementation of controls for assessment of RISKS
Internal Control & Risk Assessment
Management Override
Procedures to Address Management Override RiskExamine:
Management override and fraudulent revenue recognition are presumed to be significant risks and as a result, there are certain audit procedures that would be performed in every audit.
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Presentation Notes
Esp. “Top‐SIDE’ entries outside GL Eg. FV of Level 3 investments with unobservable inputs Related party transaction Inv’s/ Legal expenses/ expenses outside OM/IM/Admin bank/ Broker/ Custodian agreements Revenue recognition is less of a risk for Funds at FV
We are required as auditors to document our understanding of internal controls. This is quicker with internal control assurance reports for relevant service organisations. Allows for assessment of audit risk. It’s an easy mistake not to review and place reliance inappropriately. Would be wise to note exceptions identified to keep in mind when auditing specific accounting cycles. Speaking of auditing specific accounting cycles:
This section is in line with ISA 500 – Audit Evidence OBJECTIVE – to design and perform audit procedures to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw REASONABLE conclusions on which to base the auditor’s opinion Sufficient – defined at enough, enough to meet the needs Appropriate – especially suitable or compatible Reasonable – being in accordance with reason CAN THIS STAND UP IN COURT!!
Auditing Specific Accounting Cycles
Agree Review Evaluate
Opening Balances
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OBJECTIVE – Are there any misstatements that materially affect the current period AND are the accounting policies being consistently applied AGREE – prior year closing balances to current year opening balances REVIEW – the prior years financial statements to determine (i) Are the accounting policies being consistently applied AND (ii) Are there any modifications to the PY AFS that need to be considered EVALUATE – evaluate the impact of the results of your Agree and Review procedures If you have identified a modification we need to consider the impact on our current year audit, does this modification need to be mentioned in our current year audit report If there is a change in accounting policies we need to evaluate the impact and we need to consider these in the context of the governing accounting standard so under IFRS – IAS 8 Changes in accounting policies or under US GAAP ASC 250 – Accounting Changes and Error Corrections
Auditing Specific Accounting Cycles
Cash and Cash EquivalentsDue from/ to Brokers
Recalculate cash flow statement workings
• ?
Review post year end statements
• ?
Review any offsetting disclosures for validity
and transparency• ?
DOCUMENT WHETHER
ADDITIONAL WORK IS
REQUIRED
Justify any reliance on controls• ?
Reconcile balances to Lead schedules, Audit Confirmations and
Financial Statements• ?
Investigate reconciling or unusual items
• ?
Verify credit facility limits
Are there any breaches
Look at renewal dates• ?
Verify FX rates• ?
Document an understanding of controls
• ?
Evidence any charges over assets, restricted balances, collateral &
related Financial Statement Disclosures
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AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE Risk Assessment procedures – Planning, (ii) Further audit procedures – a. Tests of controls b. Substantive procedures being either tests of details or substantive analytical review Cash – this is usually very straightforward. We all would have encountered Cash before even if we are new to auditing Funds. If audit confirmations aren’t available we can perform alternative procedures such as witnessing online access, looking at cash movements etc. Consult your engagement managers and partners to come up with the right strategy for you Why do we need to understand charges over assets, restricted, balances and collateral – before we jump into that lets have a look at the definition of each one in tern What is a charge over an asset - it is a lenders right to be paid from a borrower’s assets if debt is not paid on time What is restricted cash – monies held for a specific/ designated purpose and therefore not available to meet general operational expenditure What is collateral – assets offered by a borrower to secure a loan Why is it important to know this? This affects the Fund’s liquidity risk in that some assets may not be available to meet liquidity needs Offsetting disclosures – you would want to look at the requirements/ criteria for offsetting depending on the accounting framework being used under IFRS – IAS 32 and IFRS 7 and under US GAAP ASC 210-20 and ASC 815-10 If you are unsure as to whether the criteria is being met – always opt to disclose separately rather than offset balances Post year end cash review – a lot of people tend to overlook this but this may be able to show the auditor what the Fund’s liquidity position is looking like – if poor do we need to factor this into our going concern considerations Post year end settlements – should give us an idea if our payables seem accurate Post year end sales of Level 3 investments may give us a good indication of a suitable fair value
Auditing Specific Accounting Cycles
Investments
Audit the valuation, classification, levelling and risk disclosures
• ?
Obtained sufficient and appropriate audit
evidence for Level 3 investments especially
• ?
Consider additional procedures for
significant related party transactions
• ?
DOCUMENT WHETHER
ADDITIONAL WORK IS
REQUIRED
Review post-year end portfolio• ?
Confirm observable prices independently
Audit any valuation techniques• ?
Confirm quantities with custodian• ?
Review any breaches of restrictions/policy/strategy
Query any unusual investments or investment transactions
• ?
Assess any Management Estimates for reasonableness and related FS disclosures
• ?
Analytical review Investment roll forward
calculation• ?
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Presentation Notes
Existence – reconcile quantities. Hopefully only differences if you do encounter any may be unsettled trades which you can see cleared in the subsequent broker statements Valuation – and I will break this down by levels Level 1 – quoted prices in active market – valuation is straightforward we can get these from Bloomberg, the exchange etc. BE MINDFUL of volume trading. This tends to get overlooked quite often but you can have a difference between a Level 1 and Level 2 categorization based on trading volumes. If you happen to have 1,000,000 units in Company A, and the average daily trading volume is only 5,000 you would need to consider the fact that you would not be able to realize this quantity without influencing the market price and would probably need to consider the impact on your valuation Level 2 – other than quoted prices that are observable – lets look at an investment into a hedge fund – or FoF investments as some of us may refer to it. You’d want to seek external confirmation on the NAV per share. We can get audited financial statements if available and look to see whether we can tie the NAV per share to these. We’d want to consider the nature of the audit report and if modified we would need to determine what impact this has on our opinion in the current year, dependent on whether the position is material to your fund or not. If no AFS available we can look to obtain confirmation from the administrator of the Fund into which you are investing of the NAV per share but you will want to be sure the users of the financial statements are aware that valuation may be based on unaudited financial information. So we would want to consider disclosures within the financial statements in this regard Level 3 investments – unobservable inputs – your private equities. Usually based on management estimate may involve the use of a specialist/ expert. Now this is an area people tend to shy away from but you really can learn a lot here. Try to approach the data review here from a reasonable standpoint – do the inputs make sense based on the nature of the company, for instance, if a market multiple approach is being applied, then we certainly want to see that the comparable companies being used are aligned. You wouldn’t expect to see a restaurant multiple being used to value a manufacturing company. If we are using discounted cash flows, do these make sense in line with the future plans for the company, look at historic trends these are usually a good indicator of patterns. Some of the bigger firms may have their own in house team that reviews and makes sense of this data but I would always encourage staff to get involved in this – it really can help your understanding For those of us evaluating the work of an expert you should be referring to ISA 620 Using the Work of an Auditor’s Expert Review port year end portfolio – might be particularly useful if there is realization of a level 3 investment – this may be a good indication of fair value Review breaches of restrictions/ policy/ strategy – we want to be sure that the risk profile communicated to investors is being adhered to. Procedures for related party transactions – david covered this during the planning phase but of course be mindful as you are conducting fieldwork as you can very well identify a related party which management may have overlooked
Auditing Specific Accounting Cycles
Investments
Document, justify any reliance on controlsReconcile balances to lead schedules, FS and audit confirmationsInvestigate reconciling or unusual items and FX ratesAuditing the Statement of comprehensive income• Interest & dividend income• Other net changes in FV on financial assets and liabilities at
FVTPLAuditing the Statement of comprehensive income• Qualitative & quantitative risk disclosures• Management’s methods to monitor & mitigate risk• Offsetting disclosure requirementsSide pockets or other designated investments
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Presentation Notes
Interest and Dividend – consider whether material. Decide on your testing strategy – controls of substantive testing. C Other net changes in FV – realized gains and losses/ movement in unrealized Risk disclosures – another area which often gets overlooked. It is important that you read these carefully. The risk disclosures should make sense in the context of the operations of your fund. Often time I see a risk disclosure which is telling me my liquidity risk is high because the redemption period can be 7 business days from the request but no one has factored in that there is a lock up period on investments I have recently seen an investment portfolio with no direct correlation to a particular market and a specific market index being used to evaluate the price risk that had no real relation to the portfolio being held. �Read your OM, understand your Fund. Understand its risk management, ask questions if unsure. Maybe the first point of questioning is your engagement managers or engagement leaders but these are areas where you can stand out by showing you can analyze rather than just perform a task Side pockets – usually used to segregate illiquid assets. Can be used to satisfy an investor that has an increased appetite for risk above that of your current portfolios offering These assets are recorded on the books but returns and allocations relevant to the investment are tracked separately.
Auditing Specific Accounting Cycles
Sample:• Subs, Reds & Transfers• Signed investor
instructions• Transaction authorisation• Recalculate using
NAV/share at transaction date
• Agree bank receipt/payment/in-kind transfer
• Verification of investors?
DOCUMENT WHETHER
ADDITIONAL WORK IS
REQUIRED
Share capital roll-forward recalculation:
• Agree opening to prior year
• Agree movement and closing amounts to an audit confirmation
• Agree FS disclosures
Recalculate where applicable:• NAV/share at Y/E• Analytical review of
NAV/share per class• Financial Highlights
Document & test allocation of income/expenses between share classes.Only reply on documented controls that are evidenced to work.Review any gates, suspensions, or investor lock-in agreements.
Share Capital
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Pretty straightforward. Allocations work – bases usually set out in your OM and operating agreements. Hopefully you would have gained an understanding of how this works when you were understanding your control environment
Auditing Specific Accounting Cycles
NAV-Based Fees• Recalculate a sample or total based on the service-agreement or prospectus• Fees payable at year-end might be verified to after date settlement• Review breakdown of payments during the year and consider analytical techniques
Other Expenses• Review any significant legal fee invoices• Directors’ fees to be compared with FS disclosures, OM, directors’ service
agreements• Consider whether any expenses are contrary to the offering document
Other Payables/ReceivablesFor significant balances, obtain adequate support, e.g.:
• Any post year end settlement• Outstanding invoices• Settlement terms and consider documenting reasons for any undue delay
Disclosure of Related Party Transactions
Expenses & Other Receivables/Payables
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Related Parties – list from management, look at contractual arrangements, typically mgt and performance fees BREAK
Auditing Specific Accounting Cycles
Going concern basis of accounting
The auditor report’s now includes:
• Description of management’s responsibility and whether the use of the going concern basis of accounting is appropriate
• The auditor’s responsibilities are to conclude on the appropriateness of management’s use of the going concern basis of accounting, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern.
Going Concern – ISA 570 (Revised)
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Presentation Notes
ISA 570 (Revised) effective for periods on or after 15 Dec 2016 Also worth mentioning there is a new Statement of Auditing Standard SAS 132 effective for periods on or after 15 Dec 2017 Definition – the ability to continue operations in the foreseeable future. Appropriate when an entity is able to realize its assets and discharge its liabilities in the normal course of business Main takeaways from the revised standard – management and auditor responsibility now laid out in the audit report Separate section when a material uncertainty exists – titled material uncertainty related to going concern Requirement to challenge the adequacy of disclosure of “close calls” when events or conditions are identified that may cast significant doubt on an entity’s ability to continue as Important to remember that IAS 1 requires management to make an assessment for the entity’s ability to continue as a going concern – so this should be nothing new to management
Auditing Specific Accounting Cycles
Going Concern
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Determine:
• Does a material uncertainty exists in relation to the identified issue?
• Is the going concern basis of accounting appropriate?
• Are the FS disclosures sufficient?
Obtain management representations
For any issues identified:
• Review management’s assessment
• Remain alert for possible conditions or events
Consider management’s assessment of issues that may cast doubt on the going concern basis of accounting:
• Review management’s assessment
• Remain alert for possible conditions or events
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So now that the audit report lays out managements responsibilities we can get right into the good stuff. We can consider managements assessment. Now I just want to reiterate that the audit of going concern is continual process from start to finish. We ask about going concern in the planning phase, we should be looking at trends in our fieldwork that may indicate the possibility of going concern risk and during completion we should be evaluating what we have found, reviewing post year end data remaining alert for any going concern issues that may come to light in the data we are reviewing and we may want to obtain management representation as it relates to the going concern basis of accounting. Now ISA 570 (Revised) tells us that when we are considering managements assessment there are a couple factors we should bear in mind The degree of uncertainty associated with the outcome of an event or condition example – significant underperformance resulting in significant redemptions. Might be uncertainly as to whether the Fund can attract new investors Size and complexity of the entity most funds are fairly straightforward and the auditor knowledgeable about fund markets but what about the more complex structures or portfolios. Lets say you have one private equity investment into a Mining Company that has suffered continual losses and has poor cash flows. Valuation would be an obvious risk but are we able to accurately gauge the impact on going concern? Judgements about the future should be based on information available at the time This is KEY. We should be able to verify managements information to allow us to form our own conclusions. POSSIBLE INDICATORS Poor cash flows Illiquid investments with lock of period or suspended redemptions which can lead to liquidity problems Significant redemptions with no matching incoming capital Significant and/ or continued poor performance Non compliance with regulator requirements Board decision to wind up Closed ended fund approaching its closure date The standard also tells us there is a minimum requirement to look to at least 12 months from the date of the financial statements. If management hasn’t done so the auditor has the right to request this 12 month period It is important to bear in mind that management’s assessment involves making a judgement – much like the auditor uses professional skepticism
Auditing Specific Accounting Cycles
Going Concern
Any events that may cast significant
doubt on entity's ability to continue
as a going concern?
Ask management for a preliminary
assessment of the entity’s ability to
continue as a going concern
Conclude if a material uncertainty exists or if the going
concern basis of accounting is inappropriate
Remain alert throughout audit for evidence of
events/conditions that may cast significant doubt
on entity's ability to continue as a going
concern.
Discuss any issues with management and obtain their
response
Evaluate management’s plan
of action and supporting
documentation
Identify any events/ conditions and
obtain management’s action plans in
response
NO
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Auditing Specific Accounting Cycles
Use of Going Concern Basis of Accounting
Inappropriate
Express a qualified or adverse opinion, and
state material uncertainty exists
Do financial statements fully describe events/
conditions and disclose existence of material
uncertainty?• ?
Determine the impact of identified events/conditions on the audit report and communicate the decision to management and those charged with governance, where applicable:
Going Concern
Use of Going Concern Basis of Accounting
Appropriate but a Material Uncertainty
Exists• ?
Unmodified opinion plus “Material
Uncertainty Related to Going Concern”
• ?
Express an adverse opinion
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Auditing Specific Accounting Cycles
Risks:
• Erroneous disclosure or missing financial statement disclosures
• Incorrect valuations at year-end
Procedures to include:
• Document the date to which we have identified all material subsequent events
• Review post year end activities
• Obtain Management confirmation of no undisclosed subsequent events
Subsequent Events - Overview
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DEFINITION – event occurring after the date of the financial statements year/ period end that may result in An event that provides evidence of conditions that existed at the date of the financial statements OR An event that provides evidence of conditions that arose after the date of the financial statements OBJECTIVES – obtain sufficient & appropriate evidence about whether events occurring between date of FS and date of audit report that require adjustment or disclosure have been reflected Respond appropriately to facts that became known to the auditor after the date of the audit report that had they been known before would have resulted in the auditor amending its report. We would want to understand how management identifies subsequent events Inquire about subsequent events occurring and assess the impact Read minutes, contractual arrangements, latest interim IM reports, FS, review latest NAV etc.
Auditing Specific Accounting Cycles
Subsequent Events - Timeline
Date of Financial
Statements
Timeline
Obtain evidence about subsequent events Respond to new facts thatbecome known
Date of Management Approval of Financial
Statements
Date of Auditor’sReport on Financial
Statements
Date FinancialStatements Are
Issued
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THREE SCENARIOS – Events between date of the FS and date of audit report – we ensure adequate disclosure and amend the audit report if warranted Facts which become known after the date of the audit repot but before issue of the FS – discuss with management, determine whether amendment is needed, amend where necessary. If an amendment is done – the auditor is required to extend its review to the date of the new audit report Facts which become know after the FS have been issued – there is no obligation to perform audit procedures. If facts become known that had they been known at the point of issue and resulted in an amended report the auditor can discuss with management and look to extend its audit procedures and issue a revised report on this basis
Auditing Specific Accounting Cycles
Document a review of the FS
Test material journal entries, including “top-side” journals(ISA 330.20)
Perform a final analytical review(ISA 520.6)
Address any additional risks identified
Discuss findings
Financial Statements Review Process
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Depending on your firms internal procedures this may mean completion of a disclosure checklist, two or three tiered level reviews by “expert” staff etc. Perform analytical review – another area that gets overlooked but if you are a part of an engagement team looking at just one or two areas this is a good way to get a big picture view of your Fund Have we identified additional risk and if so have these been addressed �Discuss findings – a good way of gathering knowledge and developing critical thinking
The Directors Should Review and When Satisfied, Approve theAudited Financial Statements (SoG 6.16) & Representation Letter
• Responsibilities• Appropriate books &
records, minutes & resolutions made available
• Material transactions properly recorded
• Responsibility for establishing and maintaining adequate internal controls
• Responsibility for assessing fraud risk
Seek General Representations of:
• FS presented fairly• Reflect ownership• Investments, other
assets & liabilities, valued per prospectus, FS disclosures and accounting policies complete and correct
• Subsequent events are disclosed / adjusted for
• All related party transactions disclosed
Seek FSRepresentations that:
• Breaches of law, regulation, investment restriction or prospectus
• Investor complaints• Contingent events and
or assets / liabilities• Significant
deficiencies identified• Internal control
weaknesses• Adjusted & unadjusted
audit differences• “Other Information” to
be appended to the FS
Seek Management Representations of any:
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David Ref: CIMA SoG – Corporate Governance for Regulated Mutual Funds (2014) 6.16: The Operator should review and approve the Regulated Mutual Fund’s financial results and audited financial statements. CIMA SoG – Nature, Accessibility and Retention of Records (August 2017)
New & Revised Auditor Reporting Standards
• ISA 260 (Revised) Communication with Those Charged with Governance• ISA 570 (Revised) Going Concern• ISA 700 (Revised) Forming an Opinion and Reporting on Financial
Statements• ISA 701 Communicating Key Audit Matters in the Independent
Auditor’s Report• ISA 705 (Revised) Modifications to the Opinion in the Independent
Auditor’s Report• ISA 706 (Revised) Emphasis of Matter Paragraphs and Other Matter
Paragraphs in the Independent Auditor’s Report• ISA 720 (Revised) The Auditor’s Responsibilities Relating to Other
Information• ISA 810 (Revised) Engagements to Report on Summary FS• Conforming amendments to other ISA
ISA effective for periods ending on/after 15 December 2016
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David ISQC 1 – proposal to delineate into ISQC 1 – for engagements under ISRE 2400 ISQC 2 – for audits of non-listed entities ISQC 3 – for audits of listed entities Engagement Quality Control Review - ISQC 2 www.iaasb.org/projects/engagement-quality-control-review-isqc-2 Proposed ISA 221 – working with other auditors
New & Revised Auditor Reporting Standards
• The Auditor’s Responsibilities• Overview of the planned scope, timing and significant risks
identified• Qualitative Aspects of Accounting Practices• Significant Difficulties Encountered• Significant Matters Arising Relevant to Financial Reporting• Written Representations• Circumstances Affecting the Audit Report• Key Audit Matters, if any• Auditor Independence
ISA 260 (Revised) Communication with Those Charged With Governance
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David Qualitative Aspects of Accounting Practices – discuss Accounting Estimates and FV Disclosures Significant Difficulties Encountered – e.g. Obtaining Sufficient and Appropriate Audit Evidence to Support any Estimated Fair Values and the Going Concern Accounting Principle Written Representations – e.g. ensure any Other Information included in the FS is covered by suitable Management Representation Auditor Independence – disclose any non-audit services
New & Revised Auditor Reporting Standards
• Audit opinion is now at the start of the report.• More explicit statement on independence, other ethical responsibilities, and
which standards or code were followed by the auditor.• New section in the audit report when a material uncertainty over going concern
exists which refers to adequate disclosure in the FS.• New section to cover the auditor’s work in relation to other information in the
“basis of accounting” concept (as separate from a “solvency” definition).• Enhanced description of the responsibilities of management and the auditor,
(with an option to move text on certain responsibilities to an appendix or website).
ISA 700 (Revised) Forming an Opinion and Reporting on Financial Statements
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Presentation Notes
Etienne
New & Revised Auditor Reporting Standards
Applies to Listed Entities or Voluntary Adopters• A new section in the audit report to explain key audit matters (KAM).• A succinct description of the matter being included as a KAM, and a meaningful
summary of the audit procedures undertaken to address the matter.• KAM are those of most significance in the audit, which are a subset of matters
communicated to TCWG: With a higher risk of material misstatement Requiring significant judgement, including accounting estimates Where there was a significant event or transaction in the year Required for any reason to have modified the Opinion Replaces any Emphasis of Matter / Other Matter paragraph except the new
“Material Uncertainty Related to Going Concern” paragraph, if applicable• Wording must not imply discrete opinions on separate elements of the FS.
ISA 701 Communicating Key Audit Matters in the Independent Auditor’s Report
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Presentation Notes
3 requirements for the KAM: cross reference to disclosure explain why KAM how the KAM was addressed
Audit Finalisation Considerations
ISA 705 (Rev) Modifications to the Opinion in the Independent Auditor’s Report
QUALIFIED:Material Misstatement
QUALIFIED:Material Inability to Obtain Audit
Evidence
ADVERSE:Material & Pervasive Misstatement
DISCLAIMER:Material & Pervasive Inability to
Obtain Audit Evidence
TYPES OF MODIFICATIONS
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Presentation Notes
Etienne
New & Revised Auditor Reporting Standards
Qualified Opinion [Illustrative Extract as an Example]We have audited the financial statements…In our opinion, except for the incomplete disclosure of the information referred to in the Basis for Qualified Opinion section of our report, the accompanying financial statements present fairly (or do give a true and fair view of), the financial position of the Company as at December 31, 2017, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs).Basis for Qualified OpinionAs discussed in Note YY, the Company’s financing arrangements expire and the amounts outstanding are payable on December 31, 2017. The Company has been unable to conclude re-negotiations or obtain replacement financing. This situation indicates that a material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going concern. The financial statements do not adequately disclose this matter.
ISA 705 (Revised) & ISA 570 (Revised)
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Presenter
Presentation Notes
Etienne Quantify any material misstatement OR state not practical to quantify
Audit Finalisation Considerations
ISA 705 (Rev) Modifications to the Opinion in the Independent Auditor’s Report
QUALIFIED:Material Misstatement
QUALIFIED:Material Inability to Obtain Audit
Evidence
ADVERSE:Material & Pervasive Misstatement
DISCLAIMER:Material & Pervasive Inability to
Obtain Audit Evidence
TYPES OF MODIFICATIONS
41
Presenter
Presentation Notes
Etienne
New & Revised Auditor Reporting Standards
Adverse Opinion [Illustrative Extract as an Example]We have audited the financial statements…In our opinion, because of the omission of the information mentioned in the Basis for Adverse Opinion section of our report, the accompanying financial statements do notpresent fairly (or do not give a true and fair view of), the financial position of the Company as at December 31, 2017, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs).Basis for Adverse OpinionThe Company’s financing arrangements expired and the amount outstanding waspayable on December 31, 2017. The Company has been unable to conclude re-negotiations or obtain replacement financing and is considering filing for bankruptcy. This situation indicates that a material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going concern. The financial statements do not adequately disclose this fact.
ISA 705 (Revised) & ISA 570 (Revised)
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Presenter
Presentation Notes
Etienne Instead of incomplete disclosure Pervasive: not confined if so, substantial proportion of FS disclosure is fundamental to users understanding
Audit Finalisation Considerations
ISA 705 (Rev) Modifications to the Opinion in the Independent Auditor’s Report
QUALIFIED:Material Misstatement
QUALIFIED:Material Inability to Obtain Audit
Evidence
ADVERSE:Material & Pervasive Misstatement
DISCLAIMER:Material & Pervasive Inability to
Obtain Audit Evidence
TYPES OF MODIFICATIONS
43
Presenter
Presentation Notes
Etienne
New & Revised Auditor Reporting Standards
Disclaimer of Opinion [Illustrative Extract as an Example]We were engaged to audit the financial statements of ABC Fund…We do not express an opinion on the accompanying financial statements of the Fund. Because of the significance of the matter described in the Basis for Disclaimer of Opinion section of our report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these financial statements.Basis for Disclaimer of Opinion…Responsibilities of Management and TCWG for the FS…Auditor’s Responsibilities for the Audit of the Financial StatementsOur responsibility is to conduct an audit of the Fund’s financial statements in accordance with International Standards on Auditing and to issue an auditor’s report. However, because of the matter described in the Basis for Disclaimer of Opinion section of our report, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these financial statements.We are independent…
ISA 705 (Rev) Modifications to the Opinion in the Independent Auditor’s Report
44
Presenter
Presentation Notes
Etienne
Audit Finalisation Considerations
ISA 705 (Rev) Modifications to the Opinion in the Independent Auditor’s Report
QUALIFIED:Material Misstatement
QUALIFIED:Material Inability to Obtain Audit
Evidence
ADVERSE:Material & Pervasive Misstatement
DISCLAIMER:Material & Pervasive Inability to
Obtain Audit Evidence
TYPES OF MODIFICATIONS
45
Presenter
Presentation Notes
Etienne In a Disclaimer: no KAM or other information paragraph However there are changes to EoM and other information – next slide
New & Revised Auditor Reporting Standards
EoM can also be required by:• ISA 210, Agreeing the Terms of Audit Engagements – paragraph 19(b)
• ISA 560, Subsequent Events – paragraph 12 (b) and 16
• ISA 800, Special Considerations – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks – paragraph 14
Other Matter paragraph can also be required by:• ISA 560, Subsequent Events – paragraphs 12 (b) and 16
• ISA 710, Comparative Information – Corresponding Figures and Comparative Financial Statements – paragraphs 13-14, 16-17 and 19
• ISA 720, The Auditor’s Responsibilities Related to Other Information in Documents Containing Audited Financial Statements – paragraph 10 (a)
ISA 706 (Revised) Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report
46
Presenter
Presentation Notes
EoM = a matter, appropriately presented/disclosed that is FUNDAMENTAL to understanding the FS Other Matter = Relevant to users’ understanding of the Audit OTHER than those presented/disclosed in the FS e.g.: Explain the reason for the Reissue of the FS with specific subsequent events, and no other procedures Corresponding figures are unaudited PY was a different auditor If giving a different opinion on the PY FS from an opinion previously expressed Restriction on distribution and use (“Bannerman paragraph”)
New & Revised Auditor Reporting Standards
• Updated to reflect IESBA’s Code of Ethics for Professional Accountants addressing Non-Compliance with Laws and Regulations (NOCLAR)
• Effective for audit periods beginning on/after 15 December 2017
• Pathway for auditors/professional accountants to disclose potential non-compliance situations to appropriate public authorities without constraints of the ethical duty of confidentiality.
• Promoting compliance, preventing of non-compliance
ISA 250 (Revised) Consideration of Laws and Regulations in an Audit of FS
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Presenter
Presentation Notes
David: International Ethics Standards Board for Accountants (IESBA) – Handbook of the Code of Ethics for Professional Accountants, Handbook updated for NOCLAR effective 15/7/17 with early adoption permitted
4. Audit Completion, New & RevisedAuditor Reporting Standards
