Importance of Suppliers' Evaluation Process

One of the key emphasis of internal audit is to evaluate whether your audit client has appropriate process in place to evaluate the suppliers.

Unfavorable event in any part of the supply chain will causes disruption to the distriubtion of products to end-customers successfully. It is important to evaluate the suppliers to ensure that they have the capability and stability to conduct sustainable business with your audit client on a long term basis.

On an ideal basis, management/ procurement of your audit client should have a formal policy on the entire process of evaluating suppliers. The evaluation has to be developed and documented in a proper format.

For instance, a background check on the suppliers is required (e.g. is the supplier a subsidiary of any congolmerates, is the supplier financially sounds). Another key document is the financial statement of the supplier. This is to ensure that supplier is financially stable to operate on a going concern basis.

Please let us know if you would like a detailed format of Suppliers' Evaluation Form. This is available in our Accounting & Auditing blog. Please drop us an email at myauditing@gmail.com.

Value of external audit to retail investors

This is an interesting article with regard to the value of external audit to retail investors in Singapore. Please refer to the link:

http://bizdaily.com.sg/newsite/most-singapore-retail-investors-find-value-in-external-audit-survey/

A survey was conducted by the Association of Chartered Certified Accountants (ACCA) and Securities Investors Association (Singapore) (SIAS), who sent out survenys to their own 390 members. As evient from the link above, 80% of the respondents opined that audited financial statement is important sources of information to guide their investment decisions.

In addition, the respondents also commented that the scope of audit should be extended, especially for two main areas:specific assurance on a company’s internal controls and a report on the adequacy and effectiveness of a company’s risk management programme.

In our opinion, the internal controls and risk management programme is especially important to prevent future unfavorable against the entity, and minimise the risks that the entity is been exposed to. Retail investor may feel more comfortable with their own investment if the investee has a strong internal controls in-place and effective risk management assessment programme.

For instance, the investee ( i.e. a entity listed on a stock exchange) may find an opportunity to invest in certain projects. A stringent risk assessment programme may help to evaluate the risks involved in the projects to ensure that all risks are been considered while making investment decisions.

If you have any comments, please feel free to contact us at myauditing@gmail.com

Olympus scandal: hid investment losses in the past 20 years

Japanese company, Olympus Corp has finally admitted that they used inflated acquisition costs ( specifically: advisory fees) to hide investment losses incurred in the past 20 years.

Earlier on, the market was vigorously discussing on the scandalous US$687 million payment for financial advice and expensive acquisition of companies unrelated to its mainstream businesses.

Olympus issued a statement saying that an independent panel investigating the allegations had found that the acquisitions were used to cover up losses on investments dating to the 1990s. During that time in Japan known as the "Lost Decade," many Japanese companies took to making speculative investments in securities to offset sluggish sales following the bursting of Japan's economic bubble.

Olympus Corp's president, Takayama also confessed that the corporation needed higher level of corporate governance to ensure that similar things will not happen in the future.

Statement on Auditing Standards Consistency of Financial Statements
1. SAS Consistency of Financial Statements supersedes
a) SAS No. 1, section 420, Consistency of Application of Generally Accepted Accounting Principles, as amended (AICPA, Professional Standards, vol. 1, AU sec. 420), and
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b) SAS No. 58, Reports on Audited Financial Statements, paragraphs .16–.17 and .53–.57 (AICPA, Professional Standards, vol. 1, AU sec. 508).
2. Scope
a) This SAS addresses the auditor‘s evaluation of the consistency of the financial statements between periods, including:
(1) Changes to previously issued financial statements and
(2) The effect of that evaluation on the auditor‘s report on the financial statements.
3. Effective Date
This SAS is effective for audits of financial statements for periods ending on or after December 15, 2012.
4. Objectives of the Auditor – The objectives of the auditor are to
a) Evaluate the consistency of the financial statements for the periods presented and
b) Communicate appropriately in the auditor‘s report when the comparability of financial statements between periods has been materially affected by a change in accounting principle or by adjustments to correct a material misstatement in previously issued financial statements.
5. Requirements — This SAS covers the following areas:
a) Evaluating Consistency—The auditor should evaluate whether the comparability of the financial statements between periods has been materially affected by a change in accounting principle or by adjustments to correct a material misstatement in previously issued financial statements. The periods included in the auditor‘s evaluation of consistency depend on the periods covered by the auditor‘s opinion on the financial statements and include the year prior to the reporting period.
b) Change in Accounting Principle—The auditor should evaluate a change in accounting principle to determine whether the newly adopted accounting principle is in accordance with the applicable financial reporting framework, the method of accounting for the effect of the change is in accordance with the applicable financial reporting framework, the disclosures related to the accounting change are appropriate and adequate, and the entity has justified that the alternative accounting principle is preferable.
(1) If the auditor concludes that the criteria above has been met, and the change in accounting principle has a material effect on the financial statements, the auditor should include an
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emphasis-of-matter paragraph in the auditor‘s report that describes the change in accounting principle and provides a reference to the entity‘s disclosure.
(2) If the criteria above are not met, the auditor should evaluate whether the accounting change results in a material misstatement and whether the auditor should modify the opinion accordingly.
c) Correction of a Material Misstatement in Previously Issued Financial Statements—The auditor should include an emphasis-of-matter paragraph in the auditor‘s report when there are adjustments to correct a material misstatement in previously issued financial statements. The auditor should include this type of emphasis-of-matter paragraph in their report when the related financial statements are restated to correct the prior material misstatement. The paragraph need not be repeated in subsequent periods. The emphasis-of-matter paragraph should include
(1) A statement that the previously issued financial statements have been restated for the correction of a material misstatement in the respective period and
(2) A reference to the entity‘s disclosure of the correction of the material misstatement.
d) Change in Classification—The auditor should evaluate a material change in financial statement classification and the related disclosure to determine whether such a change is also either a change in accounting principle or an adjustment to correct a material misstatement in previously issued financial statements. If so, the requirements of the paragraphs above apply.

SAS Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report

(1) Addresses circumstances when the auditor considers it necessary or is required to include additional communications in the auditor’s report that are not modifications to the auditor’s opinion.

(2) Uses the terms emphasis of matter and other matter paragraphs in the auditor’s report. The SAS describes an emphasis of matter as a paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements.

(3) Describes an other matter paragraph as a paragraph included in the auditor’s report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities, or the auditor’s report.

(4) Change from current practice

(a) The number and nature of paragraphs included in the auditor’s report that address matters appropriately presented or disclosed in the financial statements (emphasis of matters) and matters other than those presented or disclosed in the financial statements (other matters) is not expected to change from current practice.

2. Changes from Existing Standards

a) Forming an Opinion and Reporting on Financial Statements

(1) Most significant changes to extant standards:

(a) A requirement to describe management’s responsibility for the preparation and fair presentation of the financial statements in more detail than what was required in extant AU section 508.

(b) The description includes an explanation that management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework, and that this responsibility includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

(c) The ASB believes that this addition to the auditor’s report will communicate more clearly the responsibilities of management for the preparation of the financial statements.

(d) The SAS requires the use of headings throughout the auditor’s report to clearly distinguish each section of the report.

b) Modifications to the Opinion in the Independent Auditor’s Report

No significant changes exist from extant standards.

c) Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report

(1) Most significant changes to extant standards if the proposed standard was issued.

(a) Paragraph .11 of extant AU section 508 indicates that certain circumstances, although not affecting the auditor's unqualified opinion, may require that the auditor add an explanatory paragraph (or other explanatory language) to the standard report. The auditor may add an explanatory paragraph to emphasize a matter regarding the financial statements. As described in paragraph .19 of AU section 508, emphasis paragraphs are never required; they may be added solely at the auditor's discretion.

(b) Uses the terms emphasis of matter and other matter paragraphs.

(i) The SAS describes an emphasis of matter as a paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements. The SAS describes an other matter paragraph as a paragraph included in the auditor’s report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities, or the auditor’s report.

(ii) Under the SAS, an emphasis of matter paragraph would refer to any paragraph added to the auditor’s report that relates to a matter that is appropriately presented or disclosed in the financial statements. Some of these paragraphs would be required by certain SASs, whereas others would be added at the discretion of the auditor, consistent with current practice.

(iii) All such paragraphs would be considered emphasis of matter paragraphs because they are intended to draw users’ attention to a particular matter.

(iv) The concept of an “explanatory paragraph” would no longer be included in U.S. generally accepted auditing standards (GAAS). Instead, additional communications in the auditor’s report would be labeled as either “emphasis of matter” or “other matter” paragraphs.

(c) The SAS, consistent with ISA 706, requires an emphasis of matter or other matter paragraph to always follow the opinion paragraph and be included in a separate section of the auditor’s report under the section heading “Emphasis of Matter” or “Other Matter.”

SAS Modifications to the Opinion in the Independent Auditor’s Report

SAS Modifications to the Opinion in the Independent Auditor’s Report

(1) Addresses the auditor’s responsibility to issue an appropriate report in circumstances when, in forming an opinion in accordance with proposed SAS Forming an Opinion and Reporting on Financial Statements, the auditor concludes that a modification to the auditor’s opinion on the financial statements is necessary.

(2) The SAS defines a modified report to include a qualified or adverse opinion or a disclaimer of opinion.

(3) Addresses the issuance of a qualified, adverse, or disclaimer of opinion using the auditor’s judgment about the materiality of the matters giving rise to the modification and the pervasiveness of their effects or possible effects on the financial statements.

(4) The ASB believes that the terms material and pervasive, although not explicitly stated in extant AU section 508, are consistent with the concepts embedded in the extant standards and, therefore, will not change, but will, rather, support current practice.

(5) The ASB also believes that the framework, as discussed in the text and in the application material to the proposed SAS, will help auditors better apply the concepts in determining whether a modification to the opinion in the auditor’s report is appropriate.

(6) Consistency of Accounting Principles

(a) Extant standards (AU sec. 508 par. 16–.18 and AU section 420 par. .01–.05) require the auditor to include an explanatory paragraph in the auditor’s report if there has been a change in accounting principles or in the method of their application that has a material effect on the comparability of the company's financial statements. PCAOB Auditing Standard No. 6, Evaluating Consistency of Financial Statements, (AICPA, PCAOB Standards and Related Rules, Rules of the Board, “Standards”), contains the same requirement.

(b) The ISAs do not include a requirement for the auditor to include an emphasis of matter paragraph in the auditor’s report if there has been a change in accounting principles, provided that the nature and magnitude of the change is disclosed in the financial statements under audit.

(c) ISA 705 discusses consistency of application of accounting policies in the context of evaluating whether a material misstatement of the financial statements exists that would give rise to the need for a modified opinion. The proposed SAS Modifications to the Opinion in the Independent Auditor’s Report also contains this requirement.

(d) The ASB has determined that the auditing standards in the United States should retain the extant requirement and include an emphasis of matter paragraph in the auditor’s report if there has been a change in accounting principles or in the method of their application that has a material effect on the comparability of the entity’s financial statements. The redrafted, SAS (AU section 420), Consistency of Application of Generally Accepted Accounting Principles (AICPA, Professional Standards, vol. 1), requires the inclusion of an “emphasis of matter” paragraph in the auditor’s report.

SAS Forming an Opinion and Reporting on Financial Statements

a) SAS Forming an Opinion and Reporting on Financial Statements

(1) Addresses the auditor’s responsibility to form an opinion on the financial statements as a whole.

(2) Addresses the form and content of the auditor’s report issued as a result of an audit of financial statements and is written in the context of a complete set of general purpose financial statements, prepared in accordance with a fair presentation framework.

(3) Specifically addresses situations when the auditor would be expressing an unmodified opinion on the financial statements and establishes the basic form of the auditor’s report. This proposed SAS also includes requirements and application material related to auditing and reporting on comparative financial statements.

(4) Comparative Financial Statements

(a) Extant AU section 508 includes guidance on comparative financial statements, which are common in the United States.

(b) The ISAs address comparative information in a separate standard—ISA 710.

(c) ISA 710 addresses reporting circumstances in other jurisdictions that are not relevant in the United States, including corresponding figures that are not covered by the auditor’s report.

(d) The ASB decided to include the requirements and guidance for comparative financial statements in this proposed SAS rather than have a separate SAS.

(e) The ASB believes that combining the guidance related to comparative financial statements and the guidance for issuing an auditor’s report in connection with an audit of financial statements will assist auditors when reporting in the United States.

(5) Auditor’s Signature

(a) Paragraph 37 of the SAS Forming an Opinion and Reporting on Financial Statements, consistent with ISA 700, Forming an Opinion and Reporting on Financial Statements, requires the auditor’s report to include the manual or printed signature of the auditor’s firm.

(b) In regard to this requirement, the ASB discussed the U.S. Treasury Department’s Advisory Committee on the Auditing Profession report, “Final Report of the Advisory Committee on the Auditing Profession to the U.S. Department of the Treasury” (Treasury Report) that was issued on October 6, 2008.

(c) This report urged the Public Company Accounting Oversight Board (PCAOB) to “undertake a standard-setting initiative to consider mandating the engagement partner’s signature on the auditor’s report.”

(d) The ASB discussed the recommendations in the Treasury Report and decided that it would not be appropriate for auditors of nonpublic companies to include the engagement partner’s signature in the auditor’s report.

(e) The SAS retains the requirement, consistent with ISA 700 and extant AU section 508 paragraph .08(i) to include the manual or printed signature of the auditor’s firm in the auditor’s report.