What is the mandatory audit firm rotation about?

- Requires European-listed companies, banks and financial institutions to appoint a

new 10 years
- A requirement that public interest entities—which include listed companies, banks, and insurance companies—change auditors after 10 years
- This period can be extended to 20 years if the audit is put out for bid, or 24 years in instances of joint audits, in which more than one firm conducts the
audit
- This can be extended if companies put their audit contract up for bid at the decade mark or appoint another audit firm to do a joint-audit
- In addition, it would also prohibit certain non-audit consulting services and cap the amount of additional fees auditors can charge clients

Should Singapore adopt mandatory rotation?

YES
- Improve quality of services
- Check on conflict of interests (financial interests to continue
engagement)
- Limit the threats to audit independence
- Correlation between the residual length of the audit
engagement, if renewable and audit quality as once engagement
is close to its end, auditors are more “willing” to accept earnings
management because they need to be re-engaged
- Increase investors’ confidence in the audit process and the audit
profession
- Fraud detection, while not the express purpose of an audit, may
also be more likely with a change in audit firms in that successor
auditors may not be as easily dissuaded from questioning long-
standing practices. ‘For fraudsters it’s all about the opportunity
to establish and maintain a trusted relationship with the
auditor's,’ notes Brian Fox, founder and chief marketing officer of
Capital Confirmation. ‘Fraudsters need the auditors to trust them
in order to get the auditor’s signature on the audit report.’
NO
- auditor rotation does not matter, as partners are rotated
- what would actually make a difference is who pays the auditor
and who has the ability to hire/fire the auditor. the current
system where the audit client pays the bill and can determine
who can stay is the real issue.
- could result in the loss of major clients and sources of revenue
for audit firms as specialized nature of certain industries often
necessitates that companies engage audit firms, which have staff
with the appropriate level of industry expertise, but audit firm
term limits may preclude companies from selecting audit firms;
thus, the company’s audit committee may have to relinquish its
role in the vetting and selection of the audit firm, thereby diluting
the committee’s impact
- increased costs needed to understand complex operations of the
new clients which requires resources and time
- may in fact increase the risk of audit failure in the first few years
of an audit

- Overall conclusion: yes, should adopt this in Singapore as it form of check and balance on the quality of the auditors and gives assurance of the quality
and service provided by the auditors
- Furthermore, Singapore’s industry is rather small and does not have a large scope, thus there would not be much costs incurred spent in understanding
the clients and their businesses.

Q4. Bank Reconciliation

 - Deposits-in-transit: 25th October 2015 & 29th Dec 2015
 25th October 2015’s record is too old (is it really still a deposit-in-transit?)
- Deduct outstanding checks: 29th March 2015 (too long ago!!)
- Balance per books, adjusted: Calculation mistake (should have been $17,000 instead of $27,000)
- Bank reconciliation reviewed in March  Review not done in a timely manner
- Unexplained old items left in the books without being dealt with

ISSUE EXPLANATION
A Reconciliation balance was not properly-agreed to the December Note B seems inappropriate since the adjustments prior to it were not made
31 general ledger balance. until 30 January. Accordingly, the balance per books before adjustments should
be agreed to the cash general ledger account.
 B Reconciliation was not reviewed in a timely manner.
C Reconciliation has unsubstantiated unrecorded items.
D Reconciliation contains aged items that should have been added
to the bank balance.
E Reconciliation was not agreed to bank statement balance at the
appropriate date.
F Reconciliation contains stale checks.
G Bank reconciliation should not be performed by cashier who has
custody over cash.
H The bank reconciliation does not foot properly.
The review by Evan Monroe on 2 March 2016 seems late given the schedule was
prepared on 10 January. This is particularly problematic if the reviewer had
identified deficiencies in the reconciliation.
No evidence is presented related to the Adjustments: bank free and unrecorded
items ($5500).
The bank should by year-end have received the 25/10/2015 deposit. The client
should investigate what has occurred relating to this deposit.
While Note A indicates the balance is agreed to the balance per bank online, it
should also be agreed to the balance on the bank statement on Dec 31.
Check #8200 is relatively old and should be added back to cash (and perhaps
established as a liability).
There is a lack of segregation of duties which may allow fraud involving cash to
remain undetected.
Balance per bank adjusted should be $17,000 instead of $27,000. This may be an
attempt to conceal shortage or theft of cash, or an unintentional error (which
suggests that there are other reconciling items that are unaccounted for).

What audit procedures should the auditor perform to further test the bank reconciliation?
(Refer to EMPG table 16.2)
- High control risk
- H: $10,000 difference (discrepancy)  follow up on investigating the discrepancy (become more suspicious, perform extended procedures by checking
every item and determine whether there are any internal control weakness over cash)

External Auditor can reply on Internal Auditor’s work Cannot

 External auditors can gain additional insights and better  Competence level of internal auditors
understanding of the entity (internal auditors may have better  Threat to independence
expertise in the particular areas)  Threat to objectivity

 Work of internal and external audit function may overlap, hence

reliance would prevent duplication of procedures -> external
auditor can thus focus on more significant audit issues

What we recommend:
 APPROPRIATE reliance
 External auditors must perform test of controls independently to obtain evidence about the effectiveness of controls to support the auditor's opinion of
the company's internal control over financial reporting.
 External auditors must also determine the nature and extent of the work that can be assigned to internal auditors

Section 404(a) of the Act requires management to assess and report on the effectiveness of internal control over financial reporting (“ICFR”).
Section 404(b) requires that an independent auditor attest to management’s assessment of the effectiveness of those internal controls.

For SOA
  Promotes shareholder confidence and attracts capital
investment: Prentice and Spence (2007) show significant
positive correlation between corporate governance and
financial performance
 Encourages companies to improve on the effectiveness of their
internal controls as they would not want a poor report to reflect
badly on their company: Hammersly and et al. (2005) found that
returns were significantly negative for firms found to have a
material internal control weakness
 Reduction of Financial Statement Fraud: Incidence of fraud has
declined relative to the pre-SOX era (Cornerstone Research,
2007)
 Implementation of SOX associated with a significant
improvement in market liquidity: Bushee and Leuz (2005) found
that enhanced mandatory disclosure improved market liquidity
by reducing information asymmetry
 Management has greater accountability as criminal penalties are
being enforced: No longer can a CEO or CFO say "that's not my
job; I was the big picture person" (Cutler, 2004)
 Cost of compliance may exceed benefits: Two-thirds of
Japanese companies and 50% of US companies saw the costs in
excess of the benefits (SAC, 2014)
 Pass administrative costs of SOX compliance onto customers by
increasing prices
- An estimate of the cumulative compliance costs for
all publicly listed companies amounted to
approximately $7 billion (Koehn & Del Vecchio,
2004)
- Less competitive in the marketplace compared to
non-listed companies
 More risk-averse and slower to seize opportunities
- Companies scrutinize their internal controls and
become more conscious of the process used to make
decisions
- 33% of companies had canceled or delayed strategic
projects due to SOX (CFO Magazine, 2003)
-

KAMS to be selected from matters communicated with TCWG

- SSA 260 will now require the public accountant to communicate all significant risks identified to TCWG as part of the planned scope and timing of the audit. 

- In the context of Singapore listed entities, these matters are typically included in the Planning Memorandum and the Summary Memorandum that are
presented by the public accountant at the Audit Committee meetings. 

Para 12: Shortlist matters that required a significant amount of attention in performing the audit Due to areas of complexity and significant management judgement
To consider areas of higher assessed risk of material misstatement, or significant 
 risks identified. 

- Significant auditor judgments relating to areas in the financial statements that involve significant management judgment, including
accounting estimates that have been identified as having high estimation uncertainty 

- The effect on the audit of significant events or transactions that occurred during the period. 

Para 14:
 - The public accountant must include these shortlisted matters in the audit
documentation
Para 15:
 - ACRA strongly recommends the public accountant to at least document his
rationale for the following
- A matter communicated with TCWG that falls under one of the categories in paragraph 12 AND 

- Has not been determined to be a matter that required significant auditor attention 

Para 16: Determine which of those shortlisted matters were of most significance in the audit of the financial statements of the current period and
therefore the KAMs

Para 17:
- Involves the public accountant making a judgement about the relative 
 significance of the matters that have been shortlisted. 

- Need to assess and compare the importance of each matter, relative to the 
 others, so as to identify those of most significance. 

- In assessing the relative significance, the public accountant should bear in mind the key principle of determining matters specific to the
audit. 

Para 18:
- From a documentation perspective, the public accountant is required to include his rationale for determining whether or not each of the matters that
required significant audit attention is a KAM.
Para 19:
 - Finally, the public accountant may use the number of KAMs identified to perform
an overall sense check.
Para 20: Description of:
- Why the matter was considered to be one of most significance in the audit and determined to be a KAM amongst those matters that
required significant auditor attention.
- How the matter was addressed in the audit.
- The reference to the related disclosures in the financial statements. Description should be supported by audit documentation.
- Avoid boilerplate and generic language. Explain the significance of the matter – KAMs and no key audit procedures. Use simple and less
technical terms.
Note: KAM reporting does not absolve public accountants of their responsibility if the
underlying audit procedures performed were deficient in the first place.

Discuss whether you believe that auditors should be allowed to provide non-assurance services to their audit clients and justify your opinion.
ISCA Code of Ethics 290.156  Before an auditor decides whether he should provide a non-assurance service, he needs to determine if such a service would create
a threat to independence that is so significant that no safeguards could reduce the threat to an acceptable level. If yes, then the auditor should not provide such
services or withdraw from the audit engagement.

Disallow Allow
 Auditors may have the tendency to not raise questions or challenges that Builds a deeper understanding of the client company, including its business
are warranted, to avoid risking the fees that they are receiving from non- model, risk, competitive position and industry. This furthers the auditor’s
audit services. insight and can enhance professional skepticism, thereby increasing audit
quality. 

Audit firms may become economically dependent on a company if the
majority of its income is derived from non-audit services. In more severe
cases, companies may become too absorbed in growing their non-audit
For certain smaller audit companies, disallowing the provision of non-
services that they will be distracted from their primary focus - audit.
assurance services may cripple the firms’ ability to generate a steady stream
of income. 

Provision of non-assurance services may impair auditors’ level of
independence in the form of independence in mind and appearance. In the
event where third parties perceive the auditors as being non- independent
as a result of over-reliance on non-assurance services, it may diminish the • With proper safeguards, the benefits can be realized without

rk of
compromising on auditors’ independence. For example, making
arrangements so that personnel providing non-assurance services do not
value of audit and affect stakeholders’ confidence in the wo
participate in the audit engagement.

auditors.

Assertion tested: Completeness

◉ Purchases cutoff tests
- Consider FOB shipping point and FOB destination point 

- Determine if goods are appropriately accounted for if titles have passed to entity 

◉ Inspection of external documents 

- Trace a sample of receiving reports and their corresponding vendor invoices and vouchers. Vouchers can be traced to the voucher register to ensure that each
voucher was recorded.
◉ External confirmations to third parties
- Sample small and zero balances as well as large balances. 

- Send blank confirmation to regular vendors regardless of the balance due at year end. 

- If they don’t tie, check to cash disbursement made after year end to see if balance has already been paid. 

◉ Inspection of disbursements made after year end 

- Check disbursements made after year end to see if they were properly recorded as payables at year end in the current accounting period

Cash disbursements cutoff test

- Test if cash disbursement and accounts payable reduction are 
 reconcilable 

- Inspect the last cheque written and trace it to accounts payable subsidiary ledger 

- Reviewing subsequent cash disbursements helps to detect items purchased before year end but not recorded (unrecorded accounts
payable)