chapter 1 – the demand for audit and other assurance...

Developing local guide on minimum documentation requirements for SME Audits

in line with IFAC Guide on Using ISAs in SME audits

Albania Case

Prof. Dr. Hysen CELA

President of IEKA 12/7/2015

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1- Few words on the Audit profession in Albania

Organization of Audit profession in Albania (1997) - was followed by other development in accountancy profession (certified accountants, internal auditors, etc.)

Lack of prior tradition;

Initially very limited range of services covered (audit and verification of financial information)

Initially the Auditors role – To help with providing assurance on the company financial statement and especially on financial information related with:

transformation of state owned enterprises in private entities

restructuring of the state owned enterprises/organizations

privatization of state owned companies, etc.

Requested by

Commercial Company law (1994/95),(2008),(2014)

Accounting law (1993) (2004), Accounting Financial Reporting Standards (2008), (2014) 12/7/2015

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2- Auditing standards used by the Audit profession in Albania

1997 – IEKA (Albanian Institute of Statutory Auditors established)

2000 - 2005

• Small Company Audit Procedures (SCAP) developed with CNCC France and ICAS support)

1995 - 2000

• Training, auditors preparation

• CNCC Model on FS audits

2014 – on

• Clarified ISAs

• IFAC Guide on ISAs for SME, parts 1 and 2

• Local simplified guide on auditing SMEs

• Modified QA on SME Audits based on the local Guide

2006 - 2014

• ISAs

• IFAC Handbooks on ISAs, Ethics and other PronouncementsTranslated in Albanian

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3 – A simplified Guide on SME Audits (basically Small Audits) –Why?

Clarified ISAs issued by IAASB allow proportional application of ISAs ISAs designed to be applied proportionately with size/complexity of an

entity Proportionality ≠ modification of requirements Audit approaches may vary with circumstances (simpler/more complex) Professional judgment needed regarding audit procedures to meet the ISA

requirements and gather audit evidence

Guidance developed by IFAC primarily had considered unlisted entities; included SME audits

Guide considerations do not limit responsibility to comply with ISA requirements

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Basic obligation in the ISAs is to comply with all ISAs relevant to the audit

However,

Not all ISAs are relevant in an SME audit: Some SME does not use a service organization (ISA 402) What, if SME audit is not a group audit (ISA 600) What, if SME has no internal audit function (ISA 610) Etc..

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Albania

Majority of Audits are SME Audits (a significant number are out of statutory

audit scope)

SMEs are not complex

In most cases SMEs are family owned businesses (Small compared to EU

thresholds)

The owner is managing day to day activities

No formal internal procedures at all

Financial reporting realized by the owner or a limited number of staff or

provided by external service providers

The main users of FSs – tax administration, Banks, Owner

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Decision taken by IEKA and included in the Audit law (2009) to apply ISAs on FS Audits was followed by:

Translations and Publication in Albanian

Clarified ISAs

Guide to Using International Standards on Auditing in the Audits of Small and Medium-Sized Entities, Third Edition (Volume 1 and Volume2)

Guide to Quality Control for Small- and Medium-Sized Practices

Several trainings during CPD sessions

the IFAC Guide was very useful and served as an incentive for IEKA to develop a more straightforward approach on listing the procedures at required at each stages on SME audits in a specific format.


• IEKA management decided to prepare a local audit guide to be used by our members (sole practitioners and small audit firms) for carrying out audits for small and medium size entities.

• A working group was set up with members of the Institute which worked on the preparation of the guide for one year.

• The guide is based on the proportional application of the ISAs.

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Why is the guide useful?

• Help in training and educating of auditors

• Unify the practice in terms of performing the audit

• Protect public interest

• Protect licensed auditors interest as their files will be more structured and will “tell better the story of the audit”


It is not an exhaustive guide – further reference to ISAs as well as industry

practices is required to ensure full application of ISAs in various situations.

However, it can be used for the audit of a SME under the assumptions

provided in the guide.

The assumptions underpinning the guide are as follows:

Small to medium business engaged in the trade of goods

Family owned business

control risk is high as the nature of the entity provides for a weak control

environment – assurance must come from substantive testing

No reliance on the accounting software as it is one simple off-the-shelf software

which provides super user access rights to the finance manager – additional

procedures suggested to mitigate the risk

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The guide focuses the auditors on the proper planning process

Timely planning and identifications of risks will ensure ISA compliant audit and

ensure effective and efficient audit.

The guide consists in a checklist of procedures to be carried out at each

stage of the audit

The guide has been divided into the following main stages:

Planning

Audit response

End of period/process procedures

Completion

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Topics covered by the simplified Guide

• Acceptance and Continuance of Engagement and Engagement Leter• Independence of the engagement team and the audit firm• Undertanding and assessment of Client internal control components• Identifying and Assessing the risks of material misstatements and audit planning• Materiality• Audit Strategy and Approach –Table of Risks and Strategy• Risk response and obtaining Audit evidence

• Test of controls and Substantive procedures.• Audit procedures by the end of audit• Audit evidence

• Audit Conclusions and Reporting• Sumarized steps on Audit file

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• The guide is enriched with templates which are provided to members to assist them in

executing the audit such as:

• Acceptance/reacceptance questionnaires

• Contract template

• Independence confirmation templates

• AR/AP confirmation letters

• Bank confirmation letter

• Lawyer confirmation letter

• Summary of assessed risk and strategy

• More to be done on automating audit procedures and documentation

• Developing Electronic models of Audit files

• PACK PE – French model on SME audits

• Developing Software or promoting them to auditors

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4 – Guide on SME Audits help on developing a proper QA system

• Within the framework of the 1st phase of REPARIS project, IEKA improved its QA system for Non PIEs

• QA consist on periodic review every 4 years for all Statutory Auditors and AUDIT FIRMS

• It is carried out by group of statutory auditors (at least two), selected by IEKA council and trained specifically on QC and Quality Assurance procedures

• Main steps:

• A notification letter for periodic review is sent to statutory auditor and Audit firm subject to QA;

• Parallel with, a questionnaire to be completed by statutory auditors and audit firm subject to QA, is sent

• Completed questionnaire is sent back to the reviewers – and a date for on site inspection is fixed

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Focus of Site inspection - Audit Engagements and Audit firm Quality Control Procedures

(a) Audit Firm Quality Control system inspection and assessment

• Further knowing about the audit practice of the firm and its internal quality control system

• Assessment of all elements of the firm quality control system• Conclusions

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(b) Selecting audit engagements from the list declared by auditors to be reviewed on:

Compliance with audit approach selected based on ISAs risks assessed and documentation procedures applied by the auditor Risk responses procedures applied and results documentation results Audit evidence collected, its sufficiency and appropriateness for the audit engagement Conclusions reached at the end of the audit engagement selected etc.

At the end of review process a conclusion is given by the reviewers – communicated with statutory auditor first and then submitted to IEKA QC committee for further actions

Local guide on SME audits is used as a model

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12/7/2015

IEKA QC Committee

review draft report of reviewers

A final report on all QA reports is

issued by IEKA QC Committee

Final QA Report od IEKA QC Committee is approved by IEKA council

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Follow up

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THANK YOU FOR YOUR ATTENTION !

chapter 1 – the demand for audit and other assurance...

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