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Top ten regulatory review complaints

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28th Jul 2010
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Steve Collings outlines the most common weaknesses picked up during file reviews for both audit and non-audit assignments.

My last article, Accountants Facing Regulation Overload looked at the increasingly burdensome level of legislation facing practitioners, particularly those who also undertake audit work. The article also looked at the criticisms cited by professional regulators, such as ICAEW QAD officers and ACCA monitoring officers.

This article will look at the top ten common weaknesses firms appear to be criticised for during file reviews for both audit and non-audit assignments with the objective of helping practitioners overcome some of these issues.

1. Inadequate working papers
There is no mandatory requirement to document the work that has been carried out on a non-audit assignment. However, there may be occasions where the accountant’s work is subsequently challenged and documenting the work carried out by the accountant may help towards demonstrating the adequacy of the work performed as well as confirming that the engagement was carried out in accordance with the terms of the engagement.

Regulators would expect to see adequate working papers to support the amounts in the accounts (such as control accounts).

2. Disclosure checklists
Where a disclosure checklist is not deemed necessary for an audit assignment, auditors should ensure they document the reasons why such a checklist is not deemed necessary. Regulators would otherwise expect to see a completed disclosure checklist on file. ‘We have not subscribed to a disclosure checklist this year’ would not be considered a genuine excuse.

3. Insufficient planning

All audit assignments must be planned beforehand. Planning involves, amongst other things, identifying areas where the financial statements may contain material misstatement (risk assessment), discussions amongst the audit team and developing the audit strategy and subsequent audit plan. Two auditing standards exist in the area of audit planning: ISA 300 ‘Planning an Audit of Financial Statements’ and ISA 315 ‘Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement’, and audit firms need to ensure they familiarise themselves with the requirements of these two mandatory standards.

Regulators are frequently critical of audit firms because of the lack of planning involved.

4. Letters of engagement
Letters of engagement for both audit and non-audit assignments should be reviewed and updated at least annually. In some cases practitioners have not issued a letter of engagement to their client. Conversely, where a firm ceases to act for a client, whether an audit or non-audit assignment, the firm should ensure that disengagement letters are issued to the client.

5. ‘Vanity’ PLCs
There are companies who choose to use the letters ‘PLC’ after their name for vanity purposes. Some of these companies may also meet the eligibility to be considered small under ss. 382(3) and 465(3) of Companies Act 2006. Any company, regardless of whether they meet the small companies qualifying conditions, who use the letters PLC after their name (even for vanity purposes) must be subject to statutory audit.

Some practitioners and directors of vanity PLCs are often ‘in the dark’ about this requirement so if the directors wish to take advantage of audit exemption, they must change their name accordingly so as not to use PLC.

6. Incorrect and/or missing disclosures
This article will not consider the common disclosure errors as these have been covered in previous articles. However, the use of reputable disclosure checklists will help to alleviate the problems in this area. Disclosure issues are always a ‘hot spot’ with regulators and the Professional Oversights Board.

7. Turnover and abbreviated financial statements
Companies Act 2006 now requires turnover to be disclosed in the abbreviated financial statements of medium-sized companies. Regulators would therefore expect to see abbreviated financial statements prepared in accordance with SI 2008 No. 410 to contain turnover. It is to be noted that an analysis of this turnover or the derivatives of gross profit may be omitted in the abbreviated financial statements.

8. Leasing
A dispute which has become commonplace among practitioners who ask me questions after lectures concerns regulators who challenge practitioners’ and auditors’ treatments of leases within the financial statements. Leases that meet the definition of ‘finance’ leases in SSAP 21 (IAS 17) must be capitalised and a corresponding liability recognised in the balance sheet (statement of financial position). Operating leases that meet the definitions of such are charged to the profit and loss account (income statement) on a straight-line basis over the life of the lease, unless another systematic method is more appropriate. Be sure to check whether ‘risks and rewards’ of ownership have passed to the lessee (indicative of a finance lease) or remain with the lessor (indicative of an operating lease). Such indicators are considered in SSAP 21 (IAS 17).

9. Solicitor clients
Failing to check the client bank account reconciliations for two dates throughout the period is a common issue. This is a requirement of the Solicitors Accounts Rules. The checks should be to:

  • Compare the reconciled bank balance with that of the client ledger account listing.
  • Reconcile the balance on the bank statement/confirmation from the bank to the client ledger account listing.

Solicitors are regulated by the Solicitors Regulation Authority (SRA), and the person signing the accountants’ report owes a duty of care to the SRA. If firms are not familiar with the Solicitors’ Accounts Rules then it would be reckless of them to accept appointment as reporting accountants. Reporting accountants also need to be familiar with guidelines published from time to time by the SRA in respect of accounting procedures and systems to assist solicitors to comply with parts A-D of the rules.

The reporting accountant is not required to carry out a detailed check for compliance with the guidelines, but under Rule 29 the reporting accountant has a duty to report on any substantial departures from the guidelines.

Firms who act as reporting accountants should consult the current guidelines in Appendix 3 to the rules.

10. No use of audit programmes
Some people subscribe to the notion that it is acceptable undertake a statutory audit without using an audit programme. Indeed, some CPD lecturers have cited the same. However, the use of an audit programme to undertake statutory audit work is generally considered to be essential because not to make the use of an audit programme would make the auditor more susceptible to failing to apply the requirements of the ISAs (UK and Ireland) and therefore be criticised by the regulators. The use of audit programmes will become extremely important when the Clarified ISAs become effective to ensure correct application of the requirements in all relevant ISAs.

Conclusion

In many situations, a common sense approach to dealing with such technical compliance issues is often enough. For example, it would be impractical to have reams of working papers for an extremely small owner-managed business, though some working papers would be expected to be retained on file. Conversely, planning an audit for a multi-million turnover client with a complex structure will require much more planning and risk assessment being undertaken than a smaller audit with relatively simple internal controls.

Steve Collings FMAAT FCCA DipIFRS is the audit and technical director at Leavitt Walmsley Associates Ltd and a partner in AccountancyStudents.co.uk. He is also the author of 'The Core Aspects of IFRS and IAS' and lectures on financial reporting and auditing issues.
 

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Replies (4)

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By Mr.M
28th Jul 2010 13:15

Welldone

Very good article. Would be great to see similar article for small companies; covering issues such as directors loan account disclosure and related party transactions.

 

 

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Adrian Pearson
By Adrian Pearson
28th Jul 2010 16:22

+1 for Very Good Article

Excellent information.

I see an issue for the future, regarding working papers.  Where clients are increasingly using accounting software, firms will wonder what is the point of creating lots of schedules and summaries when the information is already accessible via the software.

Evidencing the work done in reviewing the accounting data, without having to re-create it all in Excel for instance, is a challenge for the accountant, as is the issue of retaining the clients data backup for future reference.  They soon clog up the server!

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By Ayesha Bham
28th Jul 2010 19:37

Good Article
Another good article which will help us. Thanks for this.

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By James Hellyer
29th Jul 2010 12:53

Audit Programmes

The use of most commercially available audit programmes will lead to over-auditing. My preferred approach would be to use the planning and completion sections of a standard commerical package such as PCAs, and then prepare bespoke audit programmes (or even have them pulled into the highlights memo). That way you know you've covered all the requirements of the ISA, but can apply your own professional judgement more closely to decide the level of risk and work at the assertion level.

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