QUALITY CORPORATE REPORTING

AUDIT PERSPECTIVE

Mr Viswajithsing Tuhobol

Date: 27 August 2014

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CONTENTS

• INTRODUCTION

• FINANCIAL STATEMENTS - FAIR PRESENTATION

• ROLE OF AUDITORS

• QUALITY AUDIT• INPUT• PROCESS• OUTPUT

• AUDITORS INTERACTION

• CONCLUSION27/08/2014

INTRODUCTIONFOLLOWING EVERY FINANCIAL CRISIS AND THE FAILURE OF A NUMBER OF GLOBAL CORPORATE ENTITIES:

INVESTORS

ANALYSTS

REGULATORS

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Wonder exactly what happened? What could have prevented it? What measures can be taken to ensure

it doesn’t happen again?

INTRODUCTION - contd

If there is a corporate failure in circumstances where :

the financial report did not reflect the true financial position and performance of an entity, and

the auditor did not perform adequate work or challenge the financial reports,

the role of both the directors and auditors will be rightly questioned.

With companies collapsing on the heels of financial reports that sounded no alarm bells for current or potential investors, its understandable that the quality of financial reporting is coming under scrutiny.

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INTRODUCTION - contd

• No governance system, no matter how well designed, will fully prevent greedy, dishonest people from putting their personal interests ahead of the interests of the companies they manage.

• But many steps can be taken to improve corporate reporting and thereby reduce opportunities for accounting fraud.

• The auditing profession has an important role to play.

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INTRODUCTION – contdFocus on Internal Controls

• One reaction to corporate reporting failures has been to focus on public companies internal controls:

• Sarbanes--Oxley Act (SOX) requires separate report on effectiveness of internal controls • Recent changes to ISAs place a much higher focus on the auditor

understanding internal controls as part of the audit • Both ISAs and EU 8th Directive require reporting of material internal control

weaknesses to Audit Committee

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INTRODUCTION – contdReforms to ISAs

• Another reaction to the audit and corporate reporting failures is the expected changes to ISAs dealing with:

• Group audits –– requiring the group auditor to have a more intimate understanding of the entire group and its audit

• Related parties –– placing more responsibilities on the auditor to identify related party relationships and transactions

• ISA 720 – The independent auditor to consider other information in the corporate report which have relevance to the audit of the financial statements

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Financial Statements:Present Fairly in Conformity with IFRS

• Why might financial statements NOT present fairly?

Two main reasons:

• ERROR.• FRAUD.

Auditor’s role is to look for misstatements caused by either reason.

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Directors are responsible for:

• Preparation of FS• Fair presentation of the FS in accordance with IFRS• Internal Control

Auditor’s Responsibility

To express an opinion on these financial statements based on audit

Reliance on Financial Statements

People rely on financial statements to make economic decisions.• Especially people outside the enterprise.

• Audit provides confidence.• Audit reduces uncertainty and risk.• Audit adds value.

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ROLE OF AUDITORS

• An audit is a rendering of independent and expert opinion on the financial reports of an organization. • Financial statements are management's responsibility. The auditor's

role is to render their credibility by giving a true and fair view. • Auditors also increase the credibility of non-financial information

provided by management.

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ROLE OF AUDITORS Audit ReportAuditor’s Responsibilities:

Express an opinion Conduct audit – International Standards on Auditing Comply – Ethical Requirements (IFAC) Plan the audit (ISA 300) Obtain reasonable assurance – FS 3 from MM (ISA 200) Perform audit procedures to obtain evidence Professional judgements/ Scepticism Consider Internal Controls Evaluate:

• Accounting Policies• Estimates

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ANNUAL REPORT REVIEWED DURING SEPT to DEC 2013

Types of PIEs Full Review Follow-up Review TotalGrade

1Grade

2AGrade

2BGrade 1 Grade

2AGrade

2B

Listed on SEM 3 4 7 2 1 1 18

Financial institutions regulated by BOM (excluding cash dealers)

- 1 - 1 - 2

Financial institutions regulated by FSC

- 1 12 - - - 13

Other PIEs - 7 13 - - - 20

Total3 12 33 2 2 1 53

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KEY:1 - Satisfactory2A - Acceptable with minor improvements2B - Acceptable with significant improvements3 - Unsatisfactory

DATA ON ENGAGEMENT FILES GRADING

YEAR

GRADING OF ENGAGEMENT FILES 2013 2014 – TO DATE

1 9 2

2A 10 6

2B 6 40% 9 61%

3 7 4

TOTAL 32 21

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Key:1 - Satisfactory2A - Acceptable with minor improvements2B - Acceptable with significant improvements 3 - Unsatisfactory

Quality AuditA quality audit is likely to have been achieved by an engagement team that:

o Exhibited appropriate values, ethics and attitudes;oWas sufficiently knowledgeable, skilled, and experienced and had sufficient

time allocated to perform the audit work;oApplied a rigorous audit process and quality control procedures that complied

with law, regulation and applicable standards;oProvided useful and timely reports; ando Interacted appropriately with relevant stakeholders.

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Audit Quality

• Key Elements:

• Inputs• Process• Outputs• Interactions• Contextual Factors

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Input, Process and Output Factors

Engagement Level Firm Level National Level

INPUT FACTORS

VALUES, ETHICS and ATTITUDES √ √ √

KNOWLEDGE, SKILLS, EXPERIENCE and TIME √ √ √

PROCESS FACTORS

AUDIT PROCESS and QUALITY CONTROL PROCEDURES

√ √ √

OUTPUT

REPORTS √ √ √

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INPUTS: VALUES, ETHICS & ATTITUDESENGAGEMENT LEVEL FIRM LEVEL

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• Audit – Wider public interest

• Comply with ethical requirements

• Objectivity and Integrity

• Independent

• Professional Competence and due care

• Professional skepticism

INPUTS: VALUES, ETHICS & ATTITUDESENGAGEMENT LEVEL FIRM LEVEL

• Audit – Wider public interest

• Comply with ethical requirements

• Objectivity and Integrity

• Independent

• Professional Competence and due care

• Professional skepticism

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• Tone at the top

• Safeguard independence

• Appraisal + Reward System

• Financial considerations not impair audit quality

• CPD

• Promote consultation

• Robust system for client acceptance + continuance

INPUTS: Knowledge, Skills, Experience and Time ENGAGEMENT LEVEL FIRM LEVEL

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• Necessary competences• Understand entity’s business• Reasonable judgments

• Partner active involvement• Risk assessment• Planning• Supervising, reviewing

• Sufficient experience• Reasonable degree of staff continuity• Sufficient time• Accessible to Mgt and TCWG

INPUTS: Knowledge, Skills, Experience and Time ENGAGEMENT LEVEL FIRM LEVEL

• Necessary competences• Understand entity’s business• Reasonable judgments

• Partner active involvement• Risk assessment• Planning• Supervising, reviewing

• Sufficient experience• Reasonable degree of staff continuity• Sufficient time• Accessible to Mgt and TCWG

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• Engagement teams are properly structured

• Partners and more senior staff provide less experienced staff with timely appraisals and appropriate coaching or “on-the-job” training

• Sufficient training is given to audit partners and staff on audit, accounting and, where appropriate, specialized industry issues

Process:Audit Process and Quality Control Procedures

ENGAGEMENT LEVEL FIRM LEVEL

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• Compliance with auditing standards, relevant laws and regulations, and the audit firm’s quality control procedures

• Makes appropriate use of information technology

• There is effective interaction with others involved in the audit

• Arrangements with management so as to achieve an effective and efficient audit process

Process:Audit Process and Quality Control Procedures

ENGAGEMENT LEVEL FIRM LEVEL

• Compliance with auditing standards, relevant laws and regulations, and the audit firm’s quality control procedures

• Makes appropriate use of information technology

• There is effective interaction with others involved in the audit

• Arrangements with management so as to achieve an effective and efficient audit process

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• The AM is adapted to developments in standards and to findings from IQC reviews and external inspections

• The AM encourages to apply professional skepticism and exercise appropriate professional judgment

• The AM requires effective supervision and review of audit work

• Audit documentation

• Monitoring

• EQCRs

Outputs:Reports and InformationENGAGEMENT LEVEL FIRM LEVEL

From the Auditor• Auditor’s reports to users of audited financial statements• Auditor’s reports to those charged with governance• Auditor’s reports to management• Auditor’s reports to financial and prudential regulatorsFrom the Entity• The audited financial statements• Reports from those charged with governance, including auditcommitteesFrom Audit Regulators• Providing information on individual audits

• Transparency reports• Annual and other reports

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AUDIT QUALITY

Auditor Reputation

Auditor Reporting

Relevance/Expectations of the audit

InvestorPerspective

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Assessmentof Quality of the Audit Process

Assessment of Quality of

the Auditor

AuditorCommunicationsand Interactions

AuditCommittee

MemberPerspective

Possible perception of audit qualitythrough an investor’s lens

Possible perception of audit quality throughan audit committee member’s lens

Interactions

The primary responsibility for performing quality audits rests with auditors.

• But audit quality is best achieved in an environment where there is support from other participants in the financial reporting supply chain.

• Each stakeholder plays an important role supporting high quality financial reporting.

• The way in which they interact impacts audit quality.

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Key Interactions within the Corporate Reporting Supply Chain

IFAC describes the financial reporting supply chain as:

“the people and processes involved in the preparation, approval, audit, analysis and use of financial reports.”

• In its 2008 report Financial Reporting Supply Chain: Current Perspectives and Directions, 9 the International Federation of Accountants

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Interactions

AUDITORS

MANAGEMENT

TCWG

USERS

REGULATORS

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Interactions between Auditors and Management

An open and constructive relationship assists the auditor in:

• identifying, assessing and responding to the risks of material misstatement, particularly

• with regard to complex or unusual transactions, or• matters involving significant judgment or• uncertainty.

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Interactions between Auditors and Management

Management can benefit from auditors’ observations on matters such as:• Possible improvements to the entity’s financial reporting practices.• Possible improvements in internal control over financial reporting• New financial reporting requirements.• Perspectives on industry issues.• Observations on legal and regulatory matters.

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Interactions between Auditors and Those Charged with Governance

TCWG are responsible for:

• overseeing the strategic direction of the entity• its obligations related to accountability (includes overseeing the entity’s financial reporting

process).

The auditor is required to communicate with TCWG (including the auditcommittee where one exists) about:

• planning matters and• the significant findings.

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Interactions between Auditors and Those Charged with Governance

Effective two way communications with auditors can assist TCWG in fulfilling their responsibilities:

TCWG may benefit from:

• auditor’s views on such matters as the financial reporting risks faced by the entity,• the main areas of management judgment in the financial statements, and• insights into the quality of the entity’s financial reporting process including weaknesses in its internal financial controls.

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Assist TCWG to conclude on the fair presentation of the FS especially if the auditor has concerns which have not been acted upon by management.

Interactions between Auditors and Those Charged with Governance

TCWG are also in a position to influence the quality of the audit through:

• Providing views on corporate reporting risks and areas of the business that warrant particular audit attention;

• Considering whether sufficient audit resources will be allocated for the audit to be effectively performed and that the audit fee fairly reflects this;

• Considering independence issues and assessing their resolution;• Assessing how management was challenged by the auditor during the audit, particularly

with respect to the assessment of fraud risk, management’s estimates and assumptions, and the choices of accounting policies; and

• Creating an environment in which management is not resistant to being challenged by the auditors and is not overly defensive when discussing difficult or contentious matters.

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Interactions between Auditors and RegulatorsThere are a number of different types of regulators that impact the audit:

Financial Regulators• regulators of the financial markets, • regulators of financial market participants, • regulators of financial reporting

Prudential Regulators• regulators of certain types of entities such as banks and insurance companies

Audit Regulators• regulators with direct oversight over some audit firms

It is beneficial for these regulators to coordinate their activities related to audit quality.

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CONCLUSION

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Qcr MGT

+ Qcr TCWG

+ Qcr AUDITOR

+ Qcr REGULATOR

= QUALITY CORPORATE REPORT

FEEDBACK

FEEDBACK

THANK YOU

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