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How to Avoid QAD Imposing Conditions

By Julia Penny

The ICAEW issued their latest audit monitoring report in mid June. Whilst 76% of the reviews needed no regulatory action, that means that 24% of the reviews did require further action and of these 8% of the audits reviewed required significant improvement. This meant that firms were put into special measures or in a couple of cases had their audit registration withdrawn. Careful consideration of the ICAEW report can help to ensure you don’t find yourself among the list of firms having to get a hot review of every audit they do, or other enhanced monitoring measures.

So let’s look at a summary of the findings, though bear in mind there is much more detail in the full report.

IES 8

Although not directly related to individual audits the reviewers found a lack of attention to the requirements of IES 8, which deals with the education standard for responsible individuals. This is a topic which I covered in an article that you can read here, so if you haven’t yet implemented IES 8 procedures, then put it on your to-do list.

Audit Shortcomings

The areas of audit work in which problems were found were, in particular, with regard to compliance with:

  • ISA 500 audit evidence;
  • ISA 230 audit documentation; and
  • ISA 315 Identifying and assessing the risk of material misstatements through understanding the entity and its environment.

This is no surprise, as of course these are the standards that have the most significant impact on every audit. However, drilling down a little further, audit evidence problems were regularly around:

  • Completeness of revenue;
  • Ownership;
  • Rights and obligations relating to fixed assets; 
  • Stock/WIP valuation; and
  • Areas of professional judgement, such as goodwill and intangibles.

Mistakes are also still found with the use of sampling, for example taking a sample from only a restricted population (such as looking at old debtors to consider a doubtful debt provision, rather than all debtors).

A lack of consideration of going concern, or sufficient robustness of this, was also sometimes a problem. The auditor must be able to demonstrate that it has challenged management’s forecasts especially when the assumptions contradict other evidence, such as recent losses not being expected in the future.

Ethics

Whilst it was too early to look fully at the implementation of the new ethical standard, some issues were identified and there were still problems seen in complying with the previous rules. These centred around trustee ownership, where a partner for example, holds shares in an audit client through a trust. Careful consideration of the precise situation must be made, as often there will be no independence of the firm where this happens. The report also points out that the new definition of “covered person” sometimes results in what might have been acceptable under the old rule now not being permitted. We suggest that you carry out a robust review of all trustee interests and check that they are permitted in relation to audits you hold.

Eligibility of people/firms to audit is also key and some findings indicated that firms had not considered the impact of changes to their structure, for instance non-ICAEW principals being appointed, in determining their eligibility.

If you need a better understanding or reminder of the new ethical standard then you may find our webinar helpful.

FRS 102 Issues

Although we are one year on from the initial report done by ICAEW on FRS 102, the reviews undertaken showed that many similar issues are still being found. This is particularly worrying, as once an error becomes embedded in a set of accounts it is much more likely to remain for many years. It is vital that you keep a very open mind on FRS 102 accounts for the first few years, to ensure that nothing got missed or dealt with incorrectly in the early years of application and is now just “slipping through”.

Issues were especially found in the following areas:

  • group accounts were not prepared when required;
  • business combinations did not seem to follow the requirements of FRS 102;
  • disclosures on goodwill/intangibles and useful life were lacking;
  • deferred tax was often missing on PPE and Investment property;
  • some accounts were still prepared under old UK GAAP when they should have transitioned to FRS 102.

The report suggests that more CPD and not being overly reliant on software, plus implementing rigorous enough quality control should help deal with these issues.

SWAT have a range of on demand webinars and you may find the following particularly useful:

Consequences

The consequences of being referred for failures in audit work and/or ethics are costly, time-consuming and potentially can result in the withdrawal of audit registration for the firm. It makes sense to ensure that your audit work is of a good standard on an ongoing basis and not wait to hear there is a problem when QAD turn up.

As many of you know ,SWAT can provide quality control reviews, or hot file reviews, as well as training to help you understand how to audit efficiently and effectively. If you need help working out what is best for you and your firm, please get in touch. 

June 2018 

 

Disclaimer
This article is published with the understanding that SWAT UK Limited is not engaged in rendering legal or professional services. The material contained in this article neither purports, nor is intended to be, advice on any particular matter. This article is an aid and cannot be expected to replace professional judgment. SWAT UK accepts no responsibility or liability to any person in respect of anything done or omitted to be done by any such person in reliance, whether sole or partial, upon the whole or any part of the contents of this article.