#83 - Auditing Body: PCAOB

In audit career, it is always useful to know what can be improved further in order to deliver an efficient, effective and satisfactory audit.

The Public Company Accounting Oversight Board ("PCAOB")is a non-profit corporation, created by Sarbanes-Oxley Act 2002. PCAOB oversee the auditors of public companies in order to protect overall public interest. PCAOB has a unit, called "Inspection unit". This unit is responsible in inpecting the audit works of registered public accouting firms who met certain criterias.

There's one particular section you might find interesting: PCAOB prepare and release inspection report on their website. The report written would briefly describe the audit deficiencies, departures from accounting/ auditing standard they have identified after conducting review. Audit works of Big 4 (PWC, E&Y, KPMG, Deloitte) are inspected too!

The reports are resourceful and provide a guide on what can be done further to improve our audit.

The website of Public Company Accounting Oversight Board ("PCAOB")is as follows:
http://www.pcaobus.org

You can view the inspection report by:
> Go to "Inspection" section
> Click on "Inspection Reports"

#82- Auditing: Annual Budget vs Actual Results

Company prepare budget and use budget as a performance benchmark and monitoring tools. For instance, senior management can question sales department if their actual yeat-to-date entertainment has exceeded the budget before the end of the year. Budget is , usually, prepared and approved at the beginning of the year or before that.

Budget has incorporated management's forecast, estimation and outlook of the business in the coming times.

Is management's budget useful to auditor?

The answer is yes. Budget, which represents management's expectation, should be compared against the actual results. Significant variances should be investigated. Apparently, management would have to explain the variances. It's important for auditor to find out the reason of the variances to identify potential changes in business operation, significant developments during the year.

Understanding how management view the business (by looking at the budget) is a crucial stage in audit planning, it enhance our knowledge and understanding on the business, the industry and the overall economy as a whole.

Accounting principle- Accrual Basis

Figures generated / kept in accordance to accounting principle is prepared on accrual basis. For instance, accountant record the provision for warranty ( based on estimate) even though there's no actual cash/ economic outflow yet.

In finance, cash basis figures are more relatively more valuable , as compared to accrual basis ( advocated by accounting principle), in order to value a business.

What do you think ? You prefer a an accrual method or cash method in valuing a business?

#71- Automotive Giant, General Motor- Going Concern Issue

America automotive giant, General Motor has highlighted in its earning release section that the Company anticipates receiving a “going concern” opinion from its auditor, Deloitte & Touche. The General Motor’s management has to determine whether there is substantial doubt about General Motor’s ability to continue as a going concern.

IAS 1 states that: “when preparing financial statements, management shall make an assessment of an entity’s ability to continue as a going concern. Financial statements shall be prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. When management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, those uncertainties shall be disclosed. When financial statements are not prepared on a going concern basis, that fact shall be disclosed, together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern.”

General Motor's businesses are severely affected by the recent market downturn and its financial results have dropped drastically. The outlook for the global automotive industry remains gloomy and pessimistic. The Company is actively looking for funding, including request for additional fund from Treasury department of United States.

IAS 1 further required that: “In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the balance sheet date. The degree of consideration depends on the facts in each case. When an entity has a history of profitable operations and ready access to financial resources, a conclusion that the going concern basis of accounting is appropriate may be reached without detailed analysis. In other cases, management may need to consider a wide range of factors relating to current and expected profitability, debt repayment schedules and potential sources of replacement financing before it can satisfy itself that the going concern basis is appropriate.”

#66 Audit Evidence- Company's Minutes & Resolutions

Reviewing Company's Annual General Meeting minutes & resolutions, Directors' Meeting minutes & resolutions, Audit Committee Meeting minutes & resolutions is part of the audit work steps.

By reviewing the Company's minutes & resolutions, the auditor will be able to know the latest development / recent changes to the Company's financial and operational positions. Changes in business directions will be discussed over the Company's meetings and documented accordingly.

Hence, the Company's minutes & resolutions serve as a good audit evidence for auditor to gain understanding of the Company's business and it should be filed in appropriately.

The auditors, usually, will visit the Company's corporate secretary office to obtain the Company's minutes & resolutions.

#64 Introduction to Auditing

What is auditing? More specifically, what is financial auditing?

In big corporate entities ( Multinational- Companies, listed companies), small-to-meidum businesses, sole proprietor,etc, the entities are, required by law, to keep accounting records of the business on a timely basis. Hence, the entities hire accountants to keep the accounting records, that reflect the day-to-day business acitivities of the Company, as well as financial position of the Company.

The financial results are summarized and presented in what we called: Statutory Account ( Financial Statements/ Annual report for listed Company). How do we ensure that the financial results presented are accurate?

The auditors, independent party, are engaged to audit the financial results prepared by the entities. The auditors provide an independent check on the accounting policies, method of estimation, mathematical accuracy on the financial results presented.

The tasks are not as easy as other people would thought, as auditing involve a lot of professional judgement to ensure that the accounting policies adopted are not materially deviated from the local financial reporting standard.

In short, auditing provide and independent check on the financial results, and publish an opinion on the financial results of the entity: to give opinion on if the financial results are fairly stated.

# Auditing Tools

Someone ask me a question over the tea-break:

" What are the common software used by auditors?"

No doubts, the answer is spreadsheet ( e.g. Microsoft Excel) and text documents ( e.g. Microsoft Words). Thanks to the fabulous spreadsheet function contructed by the programmers. If not, I can't imagine the time you need to spend when you need to cast more than 100 balances.

To illustrate further, some of the audit firms have developed their own auditing software, which was used for their audit engagements. Everything was properly linked up (e.g. associate risk to an account assertion) in the software application. In our opinion, the software helps to develop and strengthen the auditing concept if efforts have been spent on understand the audit concept.

For instance, Ernst & Young has developed its auditing & assurance tools, GAMx for its audit engagement, as described in Ernst & Young Website

http://www.ey.com/global/content.nsf/International/Assurance_-_Tools_and_Resources

#20 Practical audit tips- Insurance Coverage

Insurane policies is a way of the company to mitigate/ minimize certain aspect of risks exposed by the company, for instance natural disasters, flood.

Auditors could check the amount insured by the insurance policies bought by the companies against the respective assets. For instance, the companies might have few fire insurance policies amounted to $2 million for its buildings.

Auditors could ensure that the fixed assets are while covered by examing the Net Book Value of the buildings. Assuming the NBV of the buildings are $3.5 million, and this signaled that additional insurance should be entered to ensure that the risk is monitored cautiously.

#16 No Material Misstatement vs Accurate

To emphasize:

What auditors do is to ensure that there is no material misstatement in the financial statement. Auditors are not confirming that the financial statement is accurate.

No material misstatement vs Accurate

The key word " No material misstate" allowed a certain level of tolerable error in the financial statements. (i.e. a certain level amount of acceptable errors, which are not going to affect financial statements users' decision-making)

The key word " accurate" required one to ensure that the financial statements are 100% or 99% correct. Higher level of responsibility and associated risk would be exposed by the auditors, if they are using the word, " accurate".

#15- Can auditors draft Financial Statements for client?

Can auditors draft (i.e. prepare) the financial statements for clients ?

The answer is No.

As mentioned in post #10, the nature & the responsibility of an auditor is to check, to scrutinize the financial statement prepared by the clients is not materially misstated. Auditors are the investigators.

Self-review threat to auditors' independency would be created if auditors are checking on what the auditors themselves are preparing. Auditors are supposingly to exercise its professional due care ( in ensuring integrity) & competence to ensure the accuracy of the Financial Statements.

#10 Difference between Accounting and Auditing ( from Financial Perspective)

Back to a fundamental question, what is the difference between accounting and auditing from a financial perspective?

A quick answer is: Accounting is a process of preparing the works, Auditing is a process of evaluating & scrutinizing of the work prepared.

In other words, accountants are in charged of the day-to-day duties of maintaing the accounts, implementing the board financial strategy, if any. At the end of the period, accountant would produce Financial Statement, a summary report of the financial performance throughout the period. Whereas, auditor conduct a check on the accuracy of the financial statements, to ensure that there is no material misstatement of the financial statement prepared.

#1 Introduction to "Auditing & Accounting Blog"

This blog is dedicated to describe normal accounting & auditing practices in place on:

1. accounting treatments of certain issues (e.g. prepayment)
2. common audit issues
3. any other accounting & auditing related topics.
4. auditing & accounting career