Audit and Assurance Faculty Roadshow Autumn 2015

Transcription

1 Audit and Assurance Faculty Roadshow Autumn 2015 Presented by John Selwood Deloitte began investing heavily in automation, analytics and technological innovation four years ago, explains Kakoullis. The technology now empowers his audit teams to examine 100% of the data, where previously firms might have taken a sample of say 70 out of millions. Auditors can now quickly discover if there are any material issues. 1

2 Before it could be like looking for a needle in a haystack - now we can simply blow away the hay to reveal the needle Today s presenter, John Selwood John Selwood Chartered accountant Independent training consultant Lectures for the major training accountancy companies and publishers Member of the Audit and Assurance Faculty s Practitioner Services Committee Previously been the technical partner for a top thirty firm of accountants and Head of CharterGroup, the accountancy network 2

3 Take a hard copy Take an electronic copy HANDOUTS Handouts Copy of these slides 3

4 Highlights The latest thoughts on auditing new UK GAAP accounts The audit implication of the changes to the Companies Act FRC Thematic Reviews Other hot issues 4

5 Handouts TECH 13/14AAF New New UK GAAP overview 5

6 Visit our website /newukgaap Factsheets faculty members only 6

7 FAQs available to all Download our their app Financial Reporting Faculty iphone, ipad and Android App free to download 7

8 Latest plans PC 1 Jan 2016 IFRS FRS 101 Reduced Disclosure Framework FRS 102 The Financial Reporting Standard EU-adopted IFRS and consolidated financial statements of listed companies and AIM companies Qualifying parents and subsidiaries in IFRS (or equivalent) adopting groups Not small not listed Separate reduced disclosure regime for groups FRS 102 with reduced disclosure in Section 1A Small entities FRS 105 Financial Reporting Standard for Micro Entities Micro companies regime Small entities (not micro) Earlier periods FRSSE 2008 UK GAAP PC 1 Jan 2015 FRSSE 2015 FRS 102 PC 1 Jan 2016 FRS 102 8

9 FRED 58 FRS 105 The Financial Reporting Standard applicable to the Microentities Regime Deemed to show a true & Fair view FRED 59 Amendments to FRS The Financial Reporting Standard applicable in the UK and Republic of Ireland Must show a true & Fair view The audit implications of FRS 105 and Section 1A of FRS 102 9

10 Small company audit - FRS 102 A Ltd has material uncertainties re going concern Directors do not include GC disclosure The auditors have asked nicely Modified opinion! Handouts FRS 102 July

11 Handouts FRS 102 Aug 2014 Audit - FRS 105 (Micro regime) A Ltd has material uncertainties re going concern Directors do not include GC disclosure The auditors have asked nicely? 11

12 Auditing financial instruments Financial instruments hot topics Inter company loans Evidence of derivative valuations Investments in shares Hedge accounting Disregard! 12

13 Handouts Article: Auditing financial instruments Helpsheet: How do I account for intercompany loans? Intercompany loans? 13

14 Intercompany loans Measured at amortised PV of the future cashflows discounted using EIR 14

15 P Ltd S Ltd Loans 5M interest free repayable in 4 years Borrow s 5M etc Initial recognition debtor of 4,442,435 Discounted at 3% 15

16 P Ltd S Ltd Loans 5M interest free repayable in 4 years Borrow s 5M etc Initial recognition debtor of 4,442,435 Discounted at 3% P Ltd Loans 5M repayable on demand Initial recognition debtor of 5M S Ltd Borrow s 5M etc Creditor < 1 year! 16

17 Bloomberg screens (other services are available!) Valuation from in-house team 3 rd party auditors expert Evidence of derivative valuations Bloomberg screens (other services are available!) Valuation from in-house team 3 rd party auditors expert Evidence of derivative valuations 17

18 Bloomberg screens (other services are available!) Valuation from in-house team 3 rd party auditors expert Evidence of derivative valuations The audit firm shall not undertake an engagement to provide a valuation to: (b) any other audited entity, where the valuation would both involve a significant degree of subjective judgment and have a material effect on the financial statements either separately or in aggregate with other valuations provided. ES5 para 77 18

19 How it should work Management value the financial instrument Auditors compare to their own model Auditors make recommendations to management This should not be a work round, ES5! How it should work Management value the financial instrument Auditors compare to their own model Auditors make recommendations to management Could auditors advise management on how to? 19

20 Investments in private company shares at FVTP&L the next big issue? Active market Quoted market price Price of recent transactions of identical assets No active market Still should normally be possible to estimate fair value of ordinary shares or preference shares Valuation techniques eg, discounted cash flows If can t reliably estimate, measure at cost less impairments Why this should not be an issue FVTP&L is optional for investments in subsidiaries, associates and JCEs Businesses tend to invest in marketable investments and know what they are worth If the investment cannot be reliably valued show at impaired cost 20

21 Hedge Accounting? Hedged item Forecast sale Bank loan Hedging instrument Forex contract Interest rate swap 21

22 Hedge accounting conditions Para (a) the hedging relationship consists only of a hedging instrument and a hedged item as described in paragraphs to 12.17C; (b) the hedging relationship is consistent with the entity s risk management objectives for undertaking hedges; (c) there is an economic relationship between the hedged item and the hedging instrument; (d) the entity has documented the hedging relationship so that the risk being hedged, the hedged item and the hedging instrument are clearly identified; and (e) the entity has determined and documented causes of hedge ineffectiveness. Example Floating for fixed interest rate swap On 1 January 2015, A Ltd received a 2m bank loan. Interest is payable at a variable rate of 3% over the Bank of England base rate. On the same day, in order to hedge against variability of future cash flows, the entity enters into an interest rate swap with the same bank over a notional amount of 2m, to pay 4% fixed and receive the same variable rate as applies to the loan, for a period of 10 years, which is the term of the loan. The entity will effectively be paying a fixed rate on the debt rather than variable. The Bank of England base rate is 0.5%, throughout the accounting period. The settlement value of the swap at 31 December 2015, is 85,000 (liability). 22

23 Summary Loan Derivative P&L OCI Cash 1 January 2015 Initial recognition (2,000,000) ,000, December 2015 Change in FV of swap (85,000) 85,000 Interest paid 80,000 (80,000) TOTAL (2,000,000) (85,000) 80,000 85,000 1,920,000 Without hedge accounting Loan Derivative P&L OCI Cash 1 January 2015 Initial recognition (2,000,000) ,000, December 2015 Change in FV of swap (85,000) 85,000 Interest paid 80,000 (80,000) TOTAL (2,000,000) (85,000) 165,000 1,920,000 23

24 Hedge accounting and the auditor Has it been done properly? Is the gain/loss recycled at the right time? Evidence that the conditions are met? Is it dis-applied at the right time? Documentation? Disclosure? MANAGEMENT/SELF REVIEW THREATS for NAS? 24

25 Example Sale in foreign currency B Ltd enters into discussions to sell goods for 1,000 on 31 July In preparation for this expected sale, on 1 May 2016 the company sells forward 1,000 at a contract rate of 1.20: 1, using 31 July as the settlement date. Company A s year end is on 30 June Predicted sale no hedge accounting SSAP 20 FRS 102 Profit & loss account 1 May 2016 Sales June 2016 Fx loss on debtor Gain on derivative July 2016 Sale FX loss on debtor Gain on derivative TOTAL

26 Solution With hedge accounting SSAP 20 FRS 102 Profit & loss account 1 May 2016 Sales June 2016 Fx loss on debtor Gain on derivative July 2016 Sale FX loss on debtor Gain on derivative Transfer from cash flow hedge reserve TOTAL Hedge accounting and the auditor Real world problems Have the predicted sales and forex contracts been matched in the documentation? Has the effect of tax been properly dealt with i.e. Real tax or deferred tax 26

27 Disregard regulations in a nutshell Section 9A Applies to entries in the cash flow hedge reserve No election is required as it is automatically disregarded and taxed when realised Sections 7 8 & 9 Opt in election required for all three sections or can be on a section by section basis. Within 12 months of year end for most entities, except those required to appoint a SAO UEL of goodwill 27

28 What FRS 102 says about determining UEL For the purpose of this FRS, all intangible assets shall be considered to have a finite useful life. The useful life of an intangible asset that arises from contractual or other legal rights shall not exceed the period of the contractual or other legal rights, but may be shorter depending on the period over which the entity expects to use the asset. If the contractual or other legal rights are conveyed for a limited term that can be renewed, the useful life of the intangible asset shall include the renewal period(s) only if there is evidence to support renewal by the entity without significant cost. What FRS 102 said about determining UEL If an entity is unable to make a reliable estimate of the useful life of an intangible asset, the life shall not exceed five years. 28

29 What FRS 102 says about determining UEL If, in exceptional cases, an entity is unable to make a reliable estimate of the useful life of an intangible asset, the life shall not exceed five 10 years. July Useful economic life? 29

30 Example Goodwill C Ltd made an acquisition in 2010 giving rise to goodwill of 2M. Management set an UEL of 20 years. On transition what do they need to do? Handouts A&B Q&A: Goodwill EUL 30

31 Scenario 1 management set the right life 20 years remains the appropriate UEL and there is sufficient evidence to support it Scenario 2 20 years was used as a default The 20 year life is unsupported and on closer inspection is unsupportable Scenario 3 20 was right but things have changed There was sufficient information to support the 20 year life on acquisition but circumstances have changed since then and a shorter life is now thought to be more appropriate Scenario 4 20 was right but not reliable There was sufficient information to support the 20 year life on acquisition and circumstances have not changed since then but the evidence to support the 20 year UEL is insufficient so the FRS 102, 5 year maximum applies 31

32 UEL of Goodwill on transition 4. Transition adj 3. New UEL 1. UEL unchanged 2. Correction of error Deferred tax assets 32

33 Deferred tax assets tax losses Unrelieved tax losses and other deferred tax assets shall be recognised only to the extent that it is probable that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits (the very existence of unrelieved tax losses is strong evidence that there may not be other future taxable profits against which the losses will be relieved). Changes to Companies Act 2006 SI 2015/980 33

34 Changes to the Companies Act 2006 Implementation PC 1 January 2016 Early adoption from 1 January 2015 permitted with exceptions! The audit report must state whether, in his opinion, based on the work undertaken in the course of the audit: the information given in the strategic report (if any) and the directors' report for the financial year for which the accounts are prepared is consistent with those accounts, and any such strategic report and the directors' report have been prepared in accordance with applicable legal requirements, whether, in the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, he has identified material misstatements in the strategic report (if any) and the directors' report, and if applicable, give an indication of the nature of each of the misstatements. 34

35 Small company regime exemption Total assets 5.1m Turnover 10.2m Employees 50 Small company audit exemption Total assets 3.26m Turnover 6.5m Employees 50 35

36 X Ltd formed 1 July Dec Dec Dec Dec 2016 Turnover 3.8M 8M 10M 12M Balance Sheet Total 3M 4M 5M 6M Employees The new filing regime and the auditor Filing of financial statements Legislation allowing abbreviated accounts withdrawn Members financial statements New Abridged Income Statement and Statement of financial position Option to file under S444 Option to file under S444 36

37 Replaced with: Special auditors report on abbreviated accounts? Replaced with: Special auditors report on abbreviated accounts - S444 nothing, but directors make disclosures about the audit. - Otherwise full audit report 37

38 The auditors responsibilities in relation to distributions 38

39 Handouts FRF: UK Distributable profits TECH 02/10 39

40 Is it distributable? Companies Act principles Golden rule follow accounting treatment Realised v unrealised? Prudence readily convertible into cash If you bring in the gains then bring in the losses New small charity audit exemption thresholds in England and Wales 40

41 Small charities audit exemption Total assets 3.26m Income 1m Small charities audit exemption Total assets > 3.26m Income 250k 41

42 The Charities Accounts and Audit Order 2015 PE 31 March 2015 Effective before SORP 2015 applies Issues for charities New SORP(s?) due Concessionary loans, grants, revenue recognition etc ICAEW guidance on gift aid payments to parent charity 42

43 Fraud risk 43

44 Handouts FRC AQTR: Fraud risks How the review was done Large firms 26 files reviewed Mostly listed Narrow scope 44

45 Fraud good practice Use of CAATs on all audits to test journal entries Management override is always treated as a significant risk and a conclusion is documented Results of audit work over accounting estimates in one place considering bias The directors are also the shareholders, so fraud risk is low Risk assessment 45

46 We do not plan to place reliance on any internal controls Risk assessment We do not expect there to be any threats relating to the management override of controls Risk assessment 46

47 Management's attitude to internal controls is very positive. Risk assessment Management's attitude to internal controls is very positive. Risk assessment 47

48 Fraud risk Risk factors, as well as: How, and where 48

49 ISA 240 Para 15 adoption The discussion shall occur setting aside beliefs that the engagement team members may have that management and those charged with governance are honest and have integrity. Led by engagement partner 12/26! 49

50 3 files No record of who attended team discussion 2 files Engagement partner met senior staff who briefed the rest of the team 9 files The engagement partner attended the meeting but there was no record of who led it 50

51 51

52 Management override Response (incl testing journals) Respond to the level of risk Do not automatically just do the minimum required 4 files No testing of journals! Covered by testing of line items? 52

53 4 files No testing of journals! Substantive analytical review procedures are unlikely to identify journals that have been posted by management to manipulate the amounts reported in order to meet expectations. Substantive audit testing is only required for material financial statement line items. Journals may be posted to accounts with immaterial or nil balances and these should also be considered for testing. Materiality 53

54 Handouts FRC AQTR: Materiality 54

55 55

56 56

57 Determining materiality Explanation and justification Problems reported by FRC Tendency to gravitate towards maximum No revision for actuals Failure to report material item! Failure to report nontrivial items 57

58 Materiality 5 out of 6 firms? 58

59 Performance materiality the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole Area specific materiality Not risk sensitive Impact on the user of the accounts is the issue 59

60 Materiality Materiality 100,000 Performance materiality 80,000 Prepayments 90,000 Materiality Materiality 100,000 Performance materiality 80,000 Prepayments 70,000 60

61 Disclaimers 61

62 Handouts A&B Article: Barclays v GT Disclaimers Bannerman worked The Judge said he would have decided differently without it! 62

63 63