Audit - authenticity of audit confirmations sent to customers or suppliers

For all audit, auditors request for debtors' confirmations, creditors' confirmations when the balances are material for the purpose of the audit.


Upon receipt of confirmations, if the counter-parties do reply - what would you do if the following circumstances happen:
- replies via email to auditors' email account
- replies to audit client, who then pass the confirmations to the auditors
- replies via email to client's email then the email was forwarded by audit client to auditors


Strictly speaking, the original confirmations should be mailed to the auditor with original stamp. This is the procedures / protocol to be reiterated to all audit client, so that they are on the same page from the beginning.

Nevertheless, after noting the above scenarios - what should auditors do ? Is auditor "ok" to accept the above confirmations? We suggest the auditor to carry out some procedures to test the authenticity of this confirmations, by:
- giving a call to counterparties who have replied to confirm that they have replied the amount stated on the confirmation (note down the phone number, name of counterparties);
- test check the email account of the sender by sending an email to them to request for confirmation
- do a high level reasonableness test on the sales or purchase trend with this particular customer or supplier


From an audit perspective, some additional procedures need to be carried out to gain more comfort on the confirmations received. Maintain professional skepticism throughout the audit.

Overview of component auditors' audit working papers - International Standard of Auditing 600 ("ISA 600")

ISA 600 dealt with the work of related auditors and other auditors in the audit of group financial statement - to elaborate, if your audit client is a holding company, who has a subsidiary audited by another auditor, then you have to consider this ISA 600.


For instance, audit client A is audited by your audit firm. Audit Client A has a material subsidiary in China, i.e. subsidiary B, which is audited by another auditor. If you are required to sign-off consolidated account of Audit Client A then you are required to consider ISA 600 when audit / consider the financial of subsidiary B.


ISA 600 requires the auditor of the parent company to be proactive in participating in the audit of subsidiary B - as, ultimately, the consolidated account will be signed off by the auditor of parent company. Auditor for audit client A should not solely rely on the work carried out by the auditor of subsidiary B.


Hence, the auditor of the holding company should consider ISA 600 seriously and in detail when planning the group audit. The following key factors should be considered:


- significant risk of the Group and subsidiary
- significant accounts of the subsidiary
- audit materiality and methodology for the audit of subsidiary B
- communication protocol
- timeline of the audit
- deliverables by auditor of subsidiary B


The above matters must be considered by the auditor of Client A in planning its group audit - it's also important to go through the above with corporate management to identify if there's any other matters to be emphasized.

Audit manager - managing uncertainty - attitude of stay cool

This post is not about how to prevent uncertainty or surprises in audit, as the trick boils down to proper planning and timely communication with the stakeholder. The post will be focusing more on - when surprises happen , what should an audit manager do / react/ behave?


Based on our experience: stay cool and calm - no matter how serious the matters are , stay cool and calm - audit manager is the leader of the audit team and the audit manager would have direct contact with the audit team -  being emotionally stable and react calmly would ensure that the emotions of the audit team would not be affected so severely.


Imagine yourselves , if you behaved negatively - what would be the impact on the audit team / audit client / audit partner? Would they be more tensed in the surprised situation?


Emotionally stable and capability of taking everything at a stride is a must-have attitude of an audit manager, who should continue to drive the audit through any big waves.


Audit manager, no matter how life is tough, please put on a smile.:)

Audit - impairment assessment - identification of cash-generating units within a legal entity

Recently, we came across a interesting observations relating to impairment assessment when we audit a legal entity. The entity, which consist of 3 business divisions, is profit-making from an overall perspective. By looking at the surface, one might conclude that there's no indication of impairment. Is this appropriate and sufficient?


When we dealt with the audit further (which is a new audit client), we noted that one of the three business division is in loss-making and in gross loss position. The assets are not generating return that is within management's expectation. Is this considered an indication of impairment? Yes.


Question: when carrying out impairment assessment , do we have to consider 3 business divisions or just 1 legal entity?


Looking at IAS 36, a principle of identifying a CGU is to identifying the lowest level of cash generating unit that generate independent cash flow. We noted that the cash flow of this loss-making business division is independent of other 2 business divisions (i.e. non-interdependent) and there's a separate management team dealing with this business division.


As a result, we have proposed management to reconsider the impairment assessment and request management to estimate the recoverable amount of CGU for the loss-making business division. A impairment was provided subsequent to management's re-assessment.


Morale of the story: look into details.