a revision on audit practice. classification of entities divide into three class of entities –high...

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 HK$50 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• Bank transaction test on receipt and payment


(1) Perform preliminary engagement activities

(2) Perform audit planning(3) Perform the audit plan (annual

audit)(4) Perform post engagement

activities


(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


(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 firm’s 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


(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

(D&I)• 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


(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


(2b) Review internal control• Perform D&I 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 (D&I)

- Sales cycle- Purchase / Expenditure cycle- Inventory cycle- Fixed asset cycle- Payroll cycle

• Perform walk through test on sales and purchase (D&I)• 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


(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


(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


(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 entity’s business and its environment– Consider the risk of fraud– Understand the entity’s 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


(2f) Prepare audit planning memorandum• Content included

– Client’s 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


(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


(3a) Perform financial statement review• Preparation of financial statement is client’s

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 Company’s B/S in “note to FS” if the holding

company is not incorporated in HK• Retain all the manager and partner’s review mark-up• Sign off the report record once review finished


(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– File outdated annual returns– File individual company’s working papers related to disclosure notes in consolidation

file


(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


(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


(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


(3f) Prepare audit summary memorandum• Content included

– Summary of client’s 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


(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


(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


(4a) Archive working papers• Assembling of working papers should be

completed within 60 days after date of the auditor’s 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


(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

• Monitor’s 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 auditor’s conclusion

Questions

a revision on audit practice. classification of entities divide into three class of entities –high...

Documents

engagement risk

audit practice slide

audit plan annual audit

engagement partner

engagement letter

term of engagement

audit planning memorandum

classification of entities