27 Oct Standards on practical issues on analysis of companies on news in audit

What’s up word it fans welcome back to Amanda loves ordered for 2020 my goal is here is to make content every single week for you on standards on practical issues on analysis of companies on news in audit and also recreating some of my basics videos to refresh them and update them with some new technology now what we’re going to kick off with today is is a three one five the new revised version and the reason that you see me sitting here behind this new green screen in my little home studio is that we’re going to try something different with some of the explainer videos so that you can sort of see me and the explainer video at the same time so let’s get into it [Music] so I’m really excited today to be talking about is a three one five which used to be called understanding the client so that you can identify risks and is now called identifying and assessing the risks of material misstatement so gone is the little section about understanding the client we’re really focusing on identifying risks now the standard still does require us to identify the client understand them understand a whole lot of different components of the client but it’s really with that focus on identifying risks now why is identifying risks important this is really important  because identifying risks is the foundation for conducting the audit at the beginning at the planning stage we identify where there are greater risks of misstatement and because an audit is risk based we’re going to focus and spend more effort on those parts of the audit where they think we think there’s a greater risk of Mis statements or errors just like if you’re studying for a subject if there are 12 units you know eight of the unit’s really well four of the units you’re a little bit worried about well of course when you study you’re not going to spend equal time on every single unit instead you’re going to spend more time where there’s more risk and the audit is just like that it’s a risk based process so we need to be able to identify those risks those risks will drive our ability to plan out the audit what parts are the audits do we need to spend more time on do we need more people power more audit effort more technology if I get this part wrong then I may not detect a material misstatement I know it may not set the right audit strategy and as a result I might give the wrong audit opinion so it’s really really important that I identify these risks well so that I can have an effective and an efficient audit now what does is a three one five now say about this process like a lot of my standards explain videos I’m going to walk through the parts of the standard that I think are going to be most important and you’ll see me annotating here on my tablet so if we go into the standard one thing you’ll notice that new is that the objective is really clear the objective of the auditor is to identify and assess risks of material misstatement because remember I mentioned earlier it’s going to be the basis for designing and implementing our responses to the assess risks of misstatement really what that is saying here is that all of this is going to go into our audit plan what do we look at so what parts of the audit how much evidence all right so those sorts of questions are going to be driven by our risk analysis so that objective is really important you’ll see down here there’s all this information about definitions I’m not going to go through definitions you can download is a three one five free of charge I will talk about some definitions as we go through the standard though so let’s get into their requirements and if you’ve not looked at an audit standard before the requirements is the part that is legally required in Australia those requirements are legal legally enforceable components of the audit so we have to do these things and really there are two parts of your auditing standards you’ll have your requirements which the things that the auditor must do and then there is some advice or explanatory notes oops explanatory notes at the very end of the standard and that’s just to give you more guidance and remember the explanatory notes are where all the really important gems are about how to do something so their requirements say this is what you must do and then often the explanatory material will give you more guidance on exactly how to do it so if you’re a junior out there on an audit you’re doing part of the audit you’re really confused then the explanatory guidance is where you should go for more direct information on exactly what to do if your senior or the person managing you hasn’t given you a lot of instructions and sometimes that happens I found a lot of times on what it’s as a junior they just say do this and you might not understand you have to do it or in enough detail so the audit standards are your friend now if we go into the standard it actually says I should design and perform risk assessment procedures to obtain audit evidence that means that we can give an appropriate basis for our opinion so we need to identify whether there are risks due to fraud or error so remember fraud is intentional manipulation and misstatement error is when you make a mistake you add one extra zero you get two numbers around the wrong way remember that errors happen because accounting is often performed by humans as much as we see a lot of technology involved in order now a lot of processing in some circumstances they’re still done by humans algorithms and technology could even make a mistake where it might automatically scan an invoice it could pick up the wrong number as the total for that invoice so we have to identify these risks and there’s an important line here that says we need to look at the financial statement and the assertion level so that means I need to be able to identify accounts that are really going to be incorrect and I also need to be able to identify the specific assertion and what are assertions that’s going to be in next week’s video where I dig into assertions in a lot more detail so it’s quite a complicated area a new part two is a three one five is this bit here paragraph 14 where it says my risk assessment should include the following inquiries of management and other individuals analytical procedures observed observation and inspection now in the past it said we just had to gather evidence and gain an understanding now it says exactly what we should do so we should talk to managers we should talk to people within the firm we should do analytics that’s how ratio analysis to our ratios tell us that something is wrong and we should observe and look at documents watch people do their jobs to gather this information quite often the very first part you’ll do of an order is just understanding the process go for a tour ask people what do they do how do things work because you can’t order it effectively and efficiently unless you have this understanding of how the business operates another new section two three one five is this here about Engagement Team discussion it says hey key team members should talk about this and this is really important we’ve had some brainstorming discussion type standards in the US for a while in there sa s’s but this is the first time it’s really come to the auditing standards and it says well everyone on the team should talk about the risks brainstorm the risks consider risks from different people’s perspectives different people’s backgrounds even the junior staff can get involved in this process it’s not just something for managers directors or partners to do it’s something that we should encourage our junior staff to do to help them develop the skills in professional judgment in identifying what is going to be a risk and what is not going to be a risk and that we can disregard and you’re only going to get that by practice so this section on having discussion is really really important so that we’re all learning and we’re all working together remember people work on different parts of the audits and that allows people to talk about I saw this I found this and it could be related and if we didn’t have those discussions we would never find that out now the next section from paragraph 19 is about understanding the entity and it really is saying you need to know your client you just can’t make a best guess you need to understand the client so that your audit can be customized alright remember that an order is a service that is custom designed for that particular client even a client two different years in a row could have different risks come out as part of the audit so understanding the client is really important and it gives us a list of things we need to do we need to understand the entity what does the client do how do they do it what’s their business structure their environment what is the industry that they’re operating in what is that industry like and they’re applicable financial reporting framework so what are the accounting standards they have to use are they listed in multiple jurisdictions and have to worry about multiple sets of accounting standards so paragraph 19 says that we need to understand everything about the company and if you go into the explanatory material there’s lists of hundreds of things that you need to know and you can go back and look at them but imagine that really what you need to do is you need to build a mind map of the company you need to understand how all of the different components of the company fit together so that you can build an idea of what the company’s model looks like so this is really important it’s a lot of information to take in for an auditor but the longer that you practice doing this and building your mental picture of what does the firm look like and if you’re trying to figure out do I know enough you might ask yourself is there something I don’t know how do they get their mind their financing oh I’ve got two conflicting pieces of evidence let me search if there is some conflict so paragraph 19 is really about understanding a client and what they do paragraph 20 really gets into understanding the entity’s accounting policies so this is where knowing about your accounting standards comes into play it’s not just audit standards its accounting standards as well because we know that some that most accounting standards will require some professional judgment because those accounting standards require them to make accounting policy choices are they making the right choice do they meet the criteria now after we go to paragraph 20 our next phase is paragraph 21 and on which which says understand the entity’s internal controls remember the internal controls are really the policies procedures systems that govern how the business runs how its sales process and its purchase process and it’s HR processes work and these internal control systems really are the first line of defense to make sure that accounting information is correct so we need to investigate those and I’ll make a future video about what exactly goes into the internal control systems to keep an eye out for that so then we come to the section which is really the meaty part why the so now we come to the section that is the real goal of the standard identifying and assessing the risks of material misstatement and so it says you need to identify these risks and risks could be at the financial statement level we need to understand assertions like I said if you don’t understand assertions keep your eye out for a following video that’s coming on that or look at one of my old ones but I need to be able to identify these risks now what exactly goes into these risks well is a three one five says that really we should brainstorm what we think the risks of material misstatement what does the mm could be what could go into the risks where could things go wrong where could mistakes be made where could there be more complexity and more judgment which means that we might disagree with what management have decided when it comes to the accounting so I need to try and identify the risks and this is a new section here where it says I need to evaluate the nature and extent of their pervasive effect on the financial statements so I need to evaluate the risks and essentially it’s saying the nature and extent I’m sort of using like a graph so what I would suggest that happens in practice is that we look at the probability or the likelihood of a risk occurring and then we look at the potential dollar value impact all right so you might have some risks when we do the risks in blue here that are highly likely but low impact right this is an increasing scale up here on the side there that’s going up and that’s increasing that should hopefully make sense I have some other ones that are unlikely but have a low impact I might have some that are very unlikely but could be catastrophic to the business I might have some that have a high probability but a moderate impact high probability at a high impact so you would go out and you would assess you’d come up with your list up here of your risks of material misstatement by brainstorming and understanding the client then you would put them on this sort of evaluation scale of the name are they likely what could happen and the extent which is how big could it be that means from a practical perspective you’re not necessarily looking for every risk of material misstatement in this particular standard you’re probably looking for your top maybe five seven ten risks the standard doesn’t put a number on it but the previous standard and talking to the I double ASB board members who were involved in that they were sort of thinking that five to seven is the number these are the big showstopper items they’re going to change order planning that’s the key things that are going to change audit planning so I might say that these ones here could be my most significant risks and what I’m gonna do is I will label those a little bit later on in the standard as the ones I deem to be significant ones that I’m going to need to plan and change my audit planning for now the standard also says when you’re assessing these risks you’re going to consider whether they might be inherent risks things that are inherent to the business I’ve got a previous video on differentiating between business risks and inherent risks that I’ll link up in the top and down in the description that’s really useful and helping you try and figure out is this a business risk or inherent risk sometimes as junior auditors that’s a really really common problem there are also risks that the standard says come from the internal controls so when you look at the policies and procedures you’re actually going to rate the inherent risk and the control risk on a scale of low medium or high and that scale will then feed into the audit risk model but we’ll talk about that another day because that’s quite a very other complicated topic so you need to make sure that you understand the client look at all the things you need to know work as a team to brainstorm your risks map them out to then identify the significant ones and then the very last step is always to document your work this is really important because if something ever happens and you ever have to go to court or you’re being sued then this is your proof that you’ve done everything correctly and appropriately remember always go back to the explanatory material you can see the explanatory material right here it goes into even more detail on the definitions that come earlier every single paragraph in the standard has more paragraphs in the explanatory material to help you understand the concepts more easily and apply them better in practice so that’s it for my first video back of 2020 I’ll be making plenty more videos during the year my goal is one a week I already have a list of about 15 videos that I want to make but if there is something specific that you’d like to see please drop it in the comments if you have any really tricky questions about identifying significant risks and you want some advice also pop those questions in the comments you thought the video was useful as usual I’d appreciate a thumbs up if you haven’t already consider subscribing and see you next time bye