A Revision on Audit Practice

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A Revision on Audit Practice
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A Revision on Audit Practice

• Classification of entities
• Divide into three class of entities
• High risk entities, either listed companies or
  regulated companies
• Small entities, revenue or shareholders equity
  less than HK50 million
• Normal entities, all entities other than high
  risk or small entities
• High risk entities
• No exemption, need to complete all standard
  document, program and checklist for planning and
  annual audit
• Small entities
• Exemption to complete all standard document,
  program and checklist except for
• Client acceptance / continuance form
• Engagement independent declaration
• EQC assessment form
• Final completion memorandum in section A and
  completion memorandum in section B
• Condensed audit planning memorandum in section C
• Condensed audit summary memorandum in section B
• Going concern and subsequent review program
• Normal entities
• Need to complete all standard document, program
  and checklist except for
• Fraud risk questionnaire

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A Revision on Audit Practice

• (1) Perform preliminary engagement activities
• (2) Perform audit planning
• (3) Perform the audit plan (annual audit)
• (4) Perform post engagement activities

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A Revision on Audit Practice

• (1) Perform preliminary engagement activities
• Perform client acceptance procedure to assess the
  engagement risk
• Establish the term of engagement by preparing
  engagement letter
• Establish the engagement team by selecting
  appropriate staff

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A Revision on Audit Practice

• (1a) Perform client acceptance procedure
• Complete client acceptance/continuance form
  before start of work
• For recurring client, approved by engagement
  partner plus any one second partner
• For new client, approved by engagement partner
  plus one risk committee member (comprising
  managing partner and technical partners)
• Listed or regulated clients are presumed to be
  high risk, with following additional procedures
  required during new acceptance process
• Email conflict check circulated among all
  partners and principals
• Formal documentation on discussion among the
  engagement team and risk committee
• Commentary report must be attached which cover
• Nature of client business and change of operation
• Competence and reputation of client
• Change of management and ownership of client
• Significant matters arise from prior year audit /
  predecessor auditors
• Financial performance, tax and litigation status
• Competence and sufficiency of firms personnel
• Timeframe of reporting requirement
• Perform company search, litigation search and PRC
  credit search for major subsidiaries
• Re-acceptance process should be completed on or
  before the annual general meeting of finished
  engagement for high risk entities

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A Revision on Audit Practice

• (2) Perform audit planning
• Complete EQC assessment form except high risk
  entities
• Sign independent declaration by all engagement
  team members
• Perform fraud risk assessment
• Understand internal control and perform walk
  through test (DI)
• Perform control test (OE test)
• Determine planning materiality (PM)
• Perform preliminary analytical review (PAR)
• Identify significant events, specific risks and
  related audit responses
• Prepare audit planning memorandum (APM)
• Prepare minutes for engagement team discussion
• Prepare audit timetable and agree with client
• Provide client preparation schedule to client
• Arrange confirmations in advance
• Prepare engagement letter for preliminary
  announcement for listed client

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A Revision on Audit Practice

• (2a) Perform fraud risk assessment
• Complete the fraud risk questionnaire for high
  risk entities
• Test management override of controls, for all
  entities, by
• Testing appropriateness of journal entries
• Reviewing accounting estimates for any biases
• Making inquiries on any unusual significant
  transactions
• Rebut presumed risk on revenue, for all entities,
  by
• Discussing the possibility of fraudulent
  financial reporting
• Performing preliminary analytical review
• Updating our understanding of transaction flow
  within revenue cycle
• Pinpointing the presumed specific risk identified

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A Revision on Audit Practice

• (2b) Review internal control
• Perform DI test for all normal or high risk
  entities
• For small entities, focus to document key
  controls in condensed APM
• Perform by business nature and on group basis
• Prepare system note on following cycles (DI)
• Sales cycle
• Purchase / Expenditure cycle
• Inventory cycle
• Fixed asset cycle
• Payroll cycle
• Perform walk through test on sales and purchase
  (DI)
• Determine the need of performing control test (OE
  test)
• Select 20 walk through samples for sales and
  purchase respectively
• Limit to 30 samples for substantive testing on
  sales and purchase
• Identify any control weakness for inclusion in
  management letter

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A Revision on Audit Practice

• (2c) Determine planning materiality
• Use Revenue as primary base amount
• Apply an appropriate percentage to the base
  amount according to materiality guideline issued
  by HKICPA
• Use Shareholders equity as alternative base
  amount if the result is not stable
• Calculate on individual company if financial
  statements are required to issue, but limited to
  group materiality
• Use as a base for sample design which cover on
• Substantive test on sales
• Substantive test on purchase
• Substantive test on expenses
• Substantive test on inventory
• AR and AP confirmations
• Need to revisit throughout the annual audit and
  revise the sample numbers upon finalized
  materiality, if necessary
• Ensure all individual and aggregation of
  uncorrected misstatements do not exceed our
  finalized materiality

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A Revision on Audit Practice

• (2d) Perform preliminary analytical review
• Obtain the latest consolidated management account
  
• Compare with last year audited or reviewed
  figures
• Project to full year for profit and loss items
• Obtain preliminary breakdown for analysis
• Explanation should be focused on
• Nature of account balances
• Reason of fluctuation with prior year
• Audit work done to be performed in annual audit
  
• Any risks identified have to be summarized in
  audit planning memorandum, with proposed audit
  resolutions

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A Revision on Audit Practice

• (2e) Identify specific risk
• A specific risk is a significant risk that
  associate with a particular account balance or
  disclosure and pinpoint to one or more potential
  errors
• Risk assessment process
• Understand the entitys business and its
  environment
• Consider the risk of fraud
• Understand the entitys internal control
• Perform preliminary analytical review
• Indication of specific risk
• Numerous or non systematically process of journal
  entries
• Unusual or complex transactions or events
• Significant transactions with related parties
• Highly subjective estimates and period end
  adjustments
• No timely reconciliation or contain numerous
  long-outstanding reconciling items
• History of errors
• Material weakness or significant deficiencies in
  internal control
• Potential errors in account balance
• Liquidity problem

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A Revision on Audit Practice

• (2f) Prepare audit planning memorandum
• Content included
• Clients background
• Scope of engagement
• Overall assessment of engagement risk
• Conclusion on conflict of interest
• Conclusion on fraud risk assessment
• Conclusion about our understanding of internal
  control
• Planning materiality calculation
• Significant events and unusual transactions
• Preliminary analytical review
• Specific risks identified and their related
  potential errors as well as our planned audit
  resolutions
• Audit declaration by each staff
• All risks identified must be followed up and
  resolved in annual audit

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A Revision on Audit Practice

• (3) Perform the audit plan
• Perform financial statement review
• Perform audit work on account balances
• Design and perform substantive testing
• Complete audit programs and disclosure checklist
• Evaluate uncorrected misstatements
• Perform going concern review
• Perform subsequent event review
• Perform final analytical review (FAR)
• Prepare audit summary memorandum (ASM)
• Ensure all key manuals are filed, such as bank
  confirmations, directors confirmation, share
  confirmation, legal letter and signed valuation
  report etc
• Obtain signed management representation letter
  dated at our report date
• Consider management letter points and prepare
  audit committee report
• Complete EQC review with key documents signed
• Ensure all clearance from audit instructions, if
  applicable, are received

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A Revision on Audit Practice

• (3a) Perform financial statement review
• Preparation of financial statement is clients
  responsibility
• New financial statement pro-forma available for
  reference
• Ensure all figures are cast and tied to working
  papers
• Ensure all page numbers and note numbers are
  updated
• Ensure all date format consistent
• Double check all the comparatives with prior year
  FS
• Tailor-made accounting policies
• Not necessary to x-ref in FS for efficiency,
  instead, ensure to x-ref audited T/B to
  individual lead schedule
• Disclose Companys B/S in note to FS if the
  holding company is not incorporated in HK
• Retain all the manager and partners review
  mark-up
• Sign off the report record once review finished

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A Revision on Audit Practice

• (3b) Perform audit work on account balances
• All work done must be documented, no
  documentation, no work done!
• Ensure all working papers, including programs are
  properly indexed, x-ref and printed out
• Ensure each working papers included preparer and
  reviewer sign off
• Ensure all sign off dates are reasonable and
  should be before our report date
• Avoid correcting any sign off name and date
• Ensure to achieve satisfactory confirmation
  return rate
• Need to perform alternative for un-replied
  confirmations
• Perform unrecorded liabilities for all entities
• Avoid filing unused working papers
• For audit efficiency, no need to
• Use full audit programs and checklist for small
  entities
• File client schedule or invoices except really in
  need
• Send confirmation for inter-group balances also
  audited by us
• Check subsequent settlement for inter-group
  balances audited by us
• Prepare movement for inter-group balance audited
  by us except for RPT, which need to be x-ref
• Prepare cash flow if no FS is required to issue
• Perform additional vouching upon substantive
  testing done per sample design
• File bank statement upon bank confirmation
  received

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A Revision on Audit Practice

• (3c) Perform going concern review
• Indication of going concern
• Working capital deficiency
• Recurring losses
• Continuous negative cash outflow
• Excessive reliance on borrowings
• Default on bank covenant
• Long creditor turnover period
• Excessive stock
• Loss of key management or major market
• Pending litigation
• Substantial dependent on success of a project
• Complete the relevant audit program for all
  entities
• Ensure letter of support is obtained before
  signing of FS
• No need to obtain letter of support if no FS
  required to issue
• Solely support by director or shareholder
  required to state as Emphasis of Matter
• Review cash flow forecast if support letter is
  not applicable
• Explain under note 2 Basis for preparation in
  FS when net current liabilities or net
  liabilities position resulted

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A Revision on Audit Practice

• (3d) Perform subsequent event review
• Perform subsequent event review by
• Inquiry with management on eg. any new
  commitment, borrowings or guarantee, any
  acquisition or sales of assets, and any new issue
  of share and debenture etc.
• Read after year end minutes, announcements and
  publications
• Review latest management accounts
• Complete the relevant audit program for all
  entities
• Update subsequent review again near or up to
  reporting date
• Consider the need for adjustment or disclosure
  for significant subsequent event noted
• Adjustment required if event relate to condition
  which existed at the balance sheet date
• Consider the impact of subsequent event on
  appropriateness of going concern assumption

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A Revision on Audit Practice

• (3e) Perform final analytical review
• Useful in assisting the review of financial
  statements
• Need to prepare both at individual and group
  level, if applicable
• Explanation should be detailed and focused on
• Nature of account balances
• Reason of fluctuation with prior year
• Audit work done performed in annual audit
• Prepare table of breakdown for significant
  balances, especially other receivables and
  payables
• Ensure all figures updated with financial
  statements and working papers
• Inquiry with client to ensure all comment
  consistent
• Any risk identified have to be summarized in
  audit summary memorandum, with audit resolutions

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A Revision on Audit Practice

• (3f) Prepare audit summary memorandum
• Content included
• Summary of clients business
• Change in group structure
• Major accounting and audit issues
• Review result on subsequent events
• Conclusion on going concern review
• Evaluation of misstatement
• Litigation summary
• Conclusion on audit opinion
• Consolidated final analytical review (appendix)
• Ensure all risks identified in APM and during the
  course of audit are resolved and documented

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A Revision on Audit Practice

• (3g) EQC review
• Presumed to be required for all listed and
  regulated engagements
• For remaining engagements, to determine upon
  completion of EQC assessment form on planning
  stage
• Key document required for review
• Consolidated financial statements, with report
  record
• EQC review form
• Engagement letter
• Independent declaration
• Fraud risk program
• APM, together with PAR
• ASM, together with FAR
• AC report, including draft letter of
  representation
• Summary of uncorrected misstatements
• Financial statements disclosure checklist
• Other critical working papers, such as planning
  minutes, key contracts and agreements, referral
  instructions, valuation report and impairment
  memo etc
• Report record, EQC review form, APM, ASM and AC
  report are minimum documents to be signed off and
  should be dated on or before the date of our
  report

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A Revision on Audit Practice

• (4) Perform post engagement activities
• Archive all working papers within 60 days rule
• Complete client continuance form for finished
  engagements
• Arrange debriefing meeting and summarize points
  carried forward, if applicable
• Prepare next year budget
• Perform monitoring review

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A Revision on Audit Practice

• (4a) Archive working papers
• Assembling of working papers should be completed
  within 60 days after date of the auditors report
• Only changes that are editorial in nature or
  clarifying with respect to auditing procedures
  performed and conclusions reached before the
  dating of our audit report may be made to the
  working papers during the assembly process
• No amendment permitted if working papers are
  archived
• All archived audit files will be retained in
  filing cabinet and they are subject to be
  recalled for reference purpose only upon the
  obtaining of approval of both engagement partner
  and a second partner

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A Revision on Audit Practice

• (4b) Perform monitoring review
• Two types - Firm wise level and engagement level
  quality control review
• Select representative completed engagement from
  each of engagement partners by monitors for
  review annually
• Monitors report will be prepared by monitors to
  document the findings and conclusion, which will
  be submitted to HKICPA for compliance purpose
• Amendment to the engagement files is generally
  prohibited except under necessary circumstances.
  The engagement team, in such case, should
  document
• when and by whom the amendments were made
• the specific reason for making them
• their effect, if any, on the auditors conclusion

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Questions