Audit - What s new? Michael Cain Principal Cain Consulting

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1 Audit - What s new? Michael Cain Principal Cain Consulting

2 Agenda Overview of changes to Auditing Standards for Dec 2016 Assertions Materiality Sampling and selecting items for testing New Auditor Reporting Standards CaseWare What have we done?

3 Auditing Standard Changes Dec standards amended ASA revised and reissued standards ASA 700s, 260, and new standard ASA 701 Reporting Key Audit Matters All reflected in Caseware Audit System template

4 Assertions Changes to ASA 315.A128-.A129 CaseWare Australia and New Zealand Audit System Assertions C - Completeness Classes of transactions and events, and related disclosures Completeness - all transactions and events that should have been recorded have been recorded, and all related disclosures that should have been included in the financial report have been included. Account balances and related disclosures Completeness - all assets, liabilities and equity interests that should have been recorded have been recorded, and all related disclosures that should have been included in the financial report have been included. E - Existence Occurrence - transactions and events that have been recorded or disclosed, have occurred and such transactions and events pertain to the entity. Existence - assets, liabilities, and equity interests exist. A - Accuracy and cut-off Accuracy - amounts and other data relating to recorded transactions and events have been recorded appropriately, and related disclosures have been appropriately measured and described. Cut-off - transactions and events have been recorded in the correct accounting period. Classification - transactions and events have been recorded in the proper accounts. Rights and obligations - the entity holds or controls the rights to assets, and liabilities are the obligations of the entity. Classification - assets, liabilities and equity interests have been recorded in the proper accounts. V - Valuation Presentation - transactions and events are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework. Accuracy, valuation and allocation - assets, liabilities, and equity interests have been included in the financial report at appropriate amounts and any resulting valuation or allocation adjustments have been appropriately recorded, and related disclosures have been appropriately measured and described. Presentation - assets, liabilities and equity interests are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework

5 Materiality When establishing the overall audit strategy, the auditor shall determine materiality for the financial report as a whole. If, in the specific circumstances of the entity, there is one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than materiality for the financial report as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report, the auditor shall also determine the materiality level or levels to be applied to those particular classes of transactions, account balances or disclosures.

6 Audit Evidence ASA 500 Selecting all items (100% examination) Selecting specific items for testing Audit Sampling (go to ASA 530)

7 Examine the entire population of items that make up a class of transactions or account balance (or a stratum within that population). 100% examination is unlikely in the case of tests of controls Appropriate when, for example: Selecting All Items The population constitutes a small number of large value items; There is a significant risk and other means do not provide sufficient appropriate audit evidence; or The repetitive nature of a calculation or other process performed automatically by an information system makes a 100% examination cost effective.

8 The judgemental selection of specific items is subject to non-sampling risk. Specific items selected may include: High value or key items. All items over a certain amount. Items to obtain information. Selecting Specific Items Does not constitute audit sampling. The results of audit procedures applied to items selected in this way cannot be projected to the entire population Selective examination of specific items does not provide audit evidence concerning the remainder of the population need to address this!!

9 Audit Sampling Audit sampling is designed to enable conclusions to be drawn about an entire population on the basis of testing a sample drawn from it. Audit sampling is discussed in ASA 530.

10 Some Quick Comments Sampling is the last resort Sampling is not mandatory Sampling does not have to be statistical or mathematical Different sampling methods can be adopted in the same engagement file Determining sample sizes is generally not influenced by population size

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12 New and Revised Standards Overarching Standard for Auditor Reporting ASA 700 (Revised) New Key Audit Matters section ASA 701 Modifications to auditor s opinions ASA 705 (Revised) Enhanced auditor reporting related to going concern ASA 570 (Revised) New other information section ASA 720 (Revised) Revisions to ASA 260 and 706 as a result of ASA 701, and related conforming amendments to ASA 210, 220, 230, 510, 540, 600, 710

13 Change to audit reports: 15 Dec 2016 Opinion Basis of opinion Material uncertainty on Going Concern Basis of Accounting Emphasis of Matter Key Audit Matters Audit comment on Other information Respective responsibilities Report on Regulatory / Other Matters Australia: KAM for listed entities only? Wider application to be reviewed later Judged by auditor to be most significant in the audit (why) Where located in financial report Audit approach Governance responsibility / auditor reads Nothing to report / Material misstatement Can disclose some auditor responsibilities in an Appendix, or hyperlink to AUASB ebsite

14 Expected Benefits Enhanced communicative value to users More robust interactions and communication among users, auditors and those charged with governance (TCWG) Increased attention by management and TCWG to the disclosures referred to in the KAM section of the auditor s report Increased professional scepticism in areas where KAM are identified Increased audit quality or users perception of audit quality

15 Application which audit reports? International Australia NZ Key audit matters Listed entities Listed entities + where required by regulator Listed issuer + some public benefit entities Others - voluntary Others voluntary Others - voluntary Disclosure of engagement partners name Listed entities Where required by law or regulation All auditor reports Disclosure reporting to TCWG of independence Listed entities All auditor reports Other features All audit reports All audit reports All audit reports

16 KAM: What took significant auditor attention? Key Audit Matters are those matters that, in the auditor s judgement, were of most significance in the audit of the current-period financial statements Item Mgt TWCG Significant auditor attention Key audit matter Opinion Always consider: - Areas of higher assessed risk of material misstatement or significant risks identified under ASA 315 Significant auditor judgements relating to areas of significant management judgement e.g. estimates, subjective elements of statements The effect on the audit of significant events or transactions during the year

17 Item Mgt TWCG Significant auditor attention Matters of Most Significance Key audit matter Opinion Auditor considers: Nature and extent of communication with TCWG Importance to intended users understanding Nature and extent of audit effort required Nature, complexity, subjectivity of the related accounting policy Nature and materiality of corrected and uncorrected misstatements Severity of relevant identified control deficiencies Difficulties in applying audit procedure, evaluating results, and obtaining relevant and reliable evidence

18 Transactions Business acquisition Complex contracts Examples of KAMs Financial reporting judgements Impairment Revenue: estimation process Actuarial assumptions Provisions Higher assessed risk Controls & IT systems Tax Incentives Financial instruments

19 Documentation of Professional Judgements Item Mgt TCWG Significant auditor attention Key audit matter Opinion Don t have to Must document Must document: Why a matter that required significant auditor attention is or is not a KAM If no KAMs, why If a KAM is not communicated, why (e.g. precluding law) Don t have to document: Why matters communicated to

20 Report on Key Audit Matters For each KAM: Why was it one of the most significant matters? How was it addressed in the audit? Where are the related disclosures? Descriptions of matters Must not include opinions on elements of the financial statements Must be specific to a reported matter, without generalisation If no KAM to communicate, state so May still need to report under KAM when an item is in an Emphasis of Matter or Other Matter KAM is not a substitute for opinion

21 How are KAMs identified? What constitutes significant auditor attention? Significant time/resources effort by audit team Challenges in obtaining or interpreting audit evidence Multiple meetings/interaction Significant judgement Greater risk of misstatement Higher estimation uncertainty Involvement of others (experts) or consultations on difficult or contentious matters Significant events or transactions at the client Matters discussed with those charged with governance Matters that required significant auditor attention KAM

22 Are KAM Always Communicated in the Auditor s Report? Auditor is required to include each KAM unless Law or regulation precludes disclosure In extremely rare circumstances, the auditor determines that the matter should not be communicated Adverse consequences of communicating the KAM would reasonably be expected to outweigh the public interest benefits of such communication KAM is prohibited for a disclaimer of opinion, but required for a qualified or adverse opinion In certain limited circumstances, there may be no KAM to be communicated

23 Considerations in Describing KAM KAM should be entity-specific and avoid standardised or overly technical language Description of a KAM should not: Imply that the matter has not been appropriately resolved by the auditor in forming the opinion on the financial statements Contain or imply discrete opinions on separate elements of the financial statements (a piecemeal opinion )

24 Example KAMS - Cochlear

25 Example KAMS Downer EDI 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights 25 reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.

26 KAM Relationship to Emphasis of Matter (EOM) and Other Matter (OM) Paragraphs and Modified Opinions Concepts of EOM and OM paragraphs are retained EOM and OM paragraphs cannot be used as a substitute for communicating a matter determined to be a KAM New requirement to use the term Emphasis of Matter in the heading in the auditor s report when an EOM paragraph is included Matters that give rise to a modified opinion are, by their nature, KAM

27 Enhanced Auditor Reporting on GC Changes to ASAs and the auditor's report to focus more on Going Concern Explicit description of the respective responsibilities of management and the auditor in all auditor s reports Separate going concern section required when material uncertainty exists, as it is by nature a KAM, with a heading Material Uncertainty Related to Going Concern New requirement to challenge adequacy of disclosures for going concern close calls

28 Practical Issues for KAMs Readiness Practitioner time and effort Skills gap plain English Client understanding, agreement regarding timing and involvement (legal? Board members? Management?), client may want to refine their own disclosures on matters discussed in KAMs Fees Scheduling during the year end audit Role and up skilling of EQCRs Development of independent internal review/escalation protocols Source available guidance (CAANZ etc.)

29 Actions Test Systems Client Monitor Client reaction Assess time Develop judgement Develop capacity to explain/apply QA policies KAMs on which clients? Hot reviews Programs Explain Discuss client role Timetables KAMs in plan Document exchange Revise terms Revise fees Interpretation by firms User responses (e.g. AGM questions) Responses of insurers Consistency across firm

30 CaseWare What have we done? Tim Lew Product Manager - Audit CaseWare Australia & New Zealand

31 CaseWare What has CaseWare done...? Three new workpapers ASA Program - Communicating KAMs in the Auditor s Report KRPT - Key Audit Matters Documentation Auditor s Report (KAMs)

32 CaseWare KRPT - Key Audit Matters Documentation

33 CaseWare Amended workpapers ASA Program - Going Concern ASA Program - Forming an Opinion and Reporting Considerations ASA Program - Comparative Information (ASA 710) ASA Program - Other Information (ASA 720) ASA Program - Modifications to the Opinion (ASA 705)

34 Thanks from Tim Lew and Michael Cain

35 Audit System Tim Lew and Michael Cain CaseWare Tips and Points

36 Q and A Agenda (Morning) What s new? Audit report and associated documents Assertion changes (ASA 315.A128) Materiality FSA - Are you using it? Sampling and the most appropriate method of testing? Completion memo