Hot Topics

1. Hot Topics Yvonne Lang and Michel Girbes

2. Hot topics • The sceptical auditor • Impairment testing • Going concern in the global downturn

3. The Sceptical Auditor Yvonne Lang

4. The sceptical auditor – three questions • Why is scepticism such an issue? • What should we be doing? • Can we improve?

5. Scepticism – a fundamental of auditing ISA 200 “The auditor shall plan and perform an audit with professional scepticism recognising that circumstances may exist that cause the financial statements to be materially misstated”

6. Scepticism – why is this so important Public criticism from regulators that auditors do not challenge their clients enough “Regulator fears auditors may abandon scepticism to meet deadlines” “The annual inspection of the six largest accounting firms in the UK has indicated a concern over the level of auditor scepticism in financial reports.”

7. Exercising scepticism – some of the challenges • Complexity of business models • Increased use of estimation in accounting standards • Increased use of forward looking information in accounting standards • Clients under greater financial pressure • Auditors under greater pressure

8. AUDITING IS PRIMARILY ABOUT APPLYING JUDGEMENT

9. What should we be doing? • Enquiring mind • Impartial and proportionate • Require management to provide objective evidence for their conclusions • evidence should be neutral and unbiased • Be aware of other evidence obtained during the audit • evidence could possibly be contradictory

10. Weigh the evidence carefully Where there is insufficient objective evidence - Challenge and be sensible in putting the contrary view

11. Judgement and scepticism • We are not necessarily proving a number or client assertion is right • Nor are we trying to prove that it is wrong • We are trying to prove that the client’s judgement: • Has been made on a reasonable basis • Is consistent with our understanding of the client • Does not conflict with other information we have about the client or other similar clients

12. Are we recording enough? • What has client has asserted • E.g. the entity is a going concern, goodwill is not impaired • What have we done in respect of their support for that assertion • The extent to which we have challenged the client • Overall • In respect of specific details • Other sources of evidence – supporting or conflicting • Any additional further procedures • Our final conclusions – is what the client has told us reasonable

13. An example - impairment testing • Goodwill, other intangible assets, property, plant and equipment • Frequently requires value in use calculations • Our attitude when we approach our work • Proving what the client tells us is right – or • Applying judgement to determine whether what the client tells us is reasonable

14. An example - impairment testing (continued) • Reasonableness of cash flow projections • Client’s history of accuracy • Basis of assumptions • This is one story… are their other plausible stories? • Should we ask the client to run sensitivities? • Reasonableness of economic inputs • E.g. discount rates • Record discussions with client and our considerations • Do not place undue reliance on management representations

15. Over to you ……… • How do you engender scepticism in the cultures of your firms? • What, if any, are the barriers to your being able to demonstrate scepticism? • How do you ensure your files reflect how you have applied professional scepticism?

16. Going concern in the global downturn Michel Girbes

17. Going concern in the global downturn • Overview • IFRS and ISA • Audit reports

18. Going concern in the global downturn • 1) Overview IFRS ISA Going concern Local regulations Practical issues

19. Going concern in the global downturn • 2) IFRS & ISA • Key IFRS/IAS • What IFRS standards govern going concern? • No specific IFRS • IAS 1 “Presentation of financial statements” • IAS 10 “Events after the balance sheet date” • Key ISA • ISA 570 “Going concern”

20. IAS 1 Presentation of financial statements • IAS 1 outlines key concepts • Fair presentation • Going concern • Accruals • Materiality • Offsetting • Reporting frequency • Comparatives • Consistency

21. IAS 1 Presentation of financial statements • Automatic assumption of going concern basis • Still need to state it • Twelve months from period end (minimum) • Disclose uncertainties where exist • If not going concern, disclose fact, basis of preparation and reason why • Very limited guidance – only 2 paragraphs

22. IAS 10 Events after the balance sheet date • Not going concern if • Intends to liquidate • Intends to cease trading • No realistic alternative but to liquidate • Normal IAS 10 rules • Adjusting event • Non adjusting event • Watch for • Voluntary/solvent liquidations • Transfers within groups

23. ISA 570 Going Concern • Requirement to consider: • Appropriateness of assumption • Material uncertainties • Adequate disclosure • Possible warning signs include: • Financial • Operational • General • > Understanding the business

24. Going concern in the global downturn • 3) Audit reports • Covered by ISA 570 • Decision tree approach • Range of opinions for going concern issues • Can refer to notes elsewhere to avoid repetition • Tough conditions do not equal uncertainty • Conditions increase risk

25. Audit reports • If audit work suggests: • Going concern basis is appropriate • Adequate disclosures have been made under IFRS • No material uncertainties exist on going concern • Unqualified opinion

26. Audit reports Audit reports

27. Audit reports • If audit work suggests: • Going concern basis is appropriate • Material uncertainties do exist on going concern • Adequate disclosures have been made of these material uncertainties under IFRS • Emphasis of matter paragraph

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29. Audit reports • If audit work suggests: • Going concern basis is believed to be appropriate • Management have not considered a sufficiently long enough period post year end • Limitation of scope

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31. Audit reports • If audit work suggests: • Going concern basis is believed to be appropriate • Multiple uncertainties over going concern • Directors refuse to address issues • Disclaimer of opinion

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33. Audit reports • If audit work suggests: • Going concern basis appropriate • Significant doubt on going concern assumption • Adequate disclosure not made in accounts • Qualified opinion

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35. Audit reports • If audit work suggests: • Going concern basis used but auditor believes not appropriate • Adverse opinion

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37. Audit reports • If audit work suggests: • Going concern basis not appropriate • Accounts prepared on a break up basis • Adequate disclosure given • Unqualified but emphasis of matter recommended

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39. Any questions?