CMA Firms

ICMAP QCD History QCR Requirements QCR Objectives Features of Quality Audit ICMAP QCR Program Audit Practice Manual Start-up Approach to QCR

Today’s Topics Are:

Recommendations of Practicing Members (09-08-2009) Approval by NC (17-04-2010) Market Search & Meeting with ICAP Framework Approval Formation of Quality Assurance Committee (QAC) Conversion of QAC into QA Board (14 Members) QCR Checklist Approval Hiring of QCR Team Audit Practice Manual Road Map Approval by QAB

Brief History:

Regulatory Compliance - Circular 07 / 2016 Professional Development / Market Competition International Affiliations Business Development Opportunities

Statutory Audit Cost Audit Tax Audit SBP Panel of Auditors COCG Compliance Reviews Internal Audit Performance Audit INGOs Assignments

Enhanced performance Staff Training and Market Credibility

Negotiation with the relevant authorities subject to successful

implementation of Quality Control Framework

Need for QCR:

Objectives of the QCR Program

• Ensure that the CMA Firms

carry out the audit and assurance engagements in accordance with applicable professional standards

• Establish appropriate quality

control review and monitoring mechanism

• Ensure compliance with Statement of Membership Obligation (SMO-1) on Quality Control issued by IFAC

• Quality Working

• Integral Quality Documentation

• Improved Organizational

Structure

• Sources of Competitive Advantage

• Regulated Practice Environment

• Maintenance of High Standards in Practice

Audit objectives are properly identified Risk Assessment is made at appropriate stages Audit Planning is done Audit Procedures (TOC or SAP/TOD) are detailed Roles are definition Audit Evidence (Sufficient Appropriate) Related Parties are identified and checked Subsequent Events are accounted for EQAR is done Management Representations are obtained Communication to those charged with Governance is made, when

required

Features of Quality Audit

Purpose and Scope

Purpose: Provide guidelines and describe the procedures for awarding QCR rating to the Cost and Management Accountants (CMA) Firms.

Scope: • Financial Statement Audits • Cost Audits • Special Statutory Audits • Tax Audit • Public Sector Audit • Review of Historical

Information • Assurance and Related

Services Engagements

CMA Firm to apply to Chairman QAB for QCR Firm to submit list of clients (Audit and related services) QCD shall select number of clients to be reviewed QCD prepares the schedule of review Intimate the concerned firm about schedule Firm shall prepare the records ready for review QCD Director and Reviewer shall visit the Firm for briefing Reviewer shall conduct a detailed review of the selected

client files

Review Procedures

Reviewer shall check compliance with: International Standards on Auditing SMO-1 ICMAP Guidelines (Audit Practice Manual) Firm’s Internal Policies and Procedures (Manuals)

Reviewer shall prepare and finalize QCR Report Draft Report be discussed with Firm’s Engagement Partner Report presented to QAB without any identification Approved report and QCR Rating be shared with Firm

Review Procedures

Review Components

Engagement Review Review of the Firm

• Detailed Review of Working Papers

• Selected engagements • Clients with substantial

operations or public interest • Correspondence files review • Preferred at Firms’ premises • Use QCR Checklist to fill • Whether or not the audit report

issued was supported by sufficient appropriate audit evidence

• Firm’s System of Quality Control (Policies on): • Leadership responsibilities • Ethical requirements • Client Acceptance / Continuance • Human Resource • Engagement Performance • Monitoring

• Documentation/communication of policies to staff

• Assessment of system and review of working papers for evidence of procedures implementation

• Interview firms staff, group discussions, attend sessions etc

Review Finalization

After completion of the review, the reviewer shall prepare review report, which will include issues and weaknesses identified during the review, and recommendations for improvement.

The reviewer shall discuss all issues identified during the review with the engagement partner.

In cases where major weaknesses are found, a draft report shall be sent to the firm requiring comments in writing within four weeks from the date of the draft report.

The comments received shall be analyzed, in certain cases a second opinion may be obtained, before presenting both the report and the comments to the QAB.

Review Finalization

All reports shall be presented before the QAB for approval, except for urgent cases, where the report may be finalized and approved by circulation to all the members.

At least five members of QAB including the Chairperson and / or Vice Chairperson shall approve the report for finalization.

Reports approved by circulation shall be ratified in the immediate next QAB meeting.

Report shall be issued to the firm covering the following:

Conclusion stating whether the audit report issued by the

firm in respect of reviewed client(s), was supported or not supported by appropriate audit evidence;

Conclusion stating whether or not appropriate evidence was available in the files as to the compliance of requirements for:

Firm’s system of quality control has been designed to meet the audit

requirements; Firm has complied with its system of quality control during the review

period; Reasons for negative conclusions on the above; and Recommendations for improvements at both firm wide and engagement

level.

Review Report

In case where the conclusion of any audit engagement is assessed as “not supported by appropriate audit evidence” by the QAB, then except for cases falling under “Reference to Investigation Committee”, the reviewer shall select more audit engagements performed by the firm.

The overall conclusion of the firm shall be supported by appropriate audit evidence” if 75% or more of the selected audit engagements are found as “supported by appropriate audit evidence”.

Selecting More Engagements Review Report

QCR Rating

Report to QAB +

Recommendations

Reviewer

QAB Review & Approval Rating

Satisfactory

No Rating

Apply to QAB for Revisit

Complete the Records

Next Time Review Rating

QCR Revisit

Included in list of QCR Rated Firms

Review Committee No Rating

Firm apply to QCD (20 days of report)

Submission to QCD Chairman

(07 days of appeal)

Chairman + 02 members review submissions of firm

If required, personal hearing to the

partner or representatives

Submit Findings and suggestions to QAB (60 days of appeal)

QAB take appropriate action

Withdrawal of Satisfactory Rating

Once a firm is included in the list of firms with satisfactory QCR rating, it shall get all its office locations reviewed after every three years.

Where a firm fails to get all its office locations reviewed after the expiry of aforementioned period, the name of the firm shall be removed from the list of firms with satisfactory rating.

If a firm is already on the list of firms with satisfactory QCR rating receives a “not supported by appropriate audit evidence” conclusion in a subsequent review, the firm’s name shall be immediately withdrawn from the list

Exception for genuine reasons for 6 months

Reference to Investigation Committee

The QAB may refer a firm to Investigation Committee, constituted by it, if it finds that the firm is prima facie grossly negligent in issuing an audit report or performance of an audit.

The Investigation Committee shall submit its report to the QAB within 60 days of such referral. The QAB shall issue a notice to

the firm within two weeks of constitution of investigation committee.

Objective of the Manual

The objective of the Audit Practice Manual is to provide guidance to the practicing members through all the stages of an audit (financial as well as cost audit) from planning audit to assessment of risk and materiality, analytical reviews, detailed audit programs and finally the reporting.

Process Adopted for Preparation of Manual

Self Initiative Reviewed by

TSPD Committee

Sent to all members & uploaded on

website

No Comments Received

Approval by TSPD

Committee

No Comments Received

except One

Reviewed by Reviewer

Approved by Sub-Committee

Approved by NC

Formation of Sub-Committee

Resent to Practicing Members

Basis of Audit Manual

International Standard on Quality Control

(ISQC – 1)

International Standard on Auditing

Audit Practice Manual of ICAP

ICMAP Audit Practiced Manual

Salient Features Provides good practice guidance in support of audit assignments,

with the objective of providing a description of the processes and issues to be considered during the planning, conduct and management of audit assignments.

This Manual has been prepared primarily to support the conduct of assurance assignments, which contribute to the annual audit opinion, but the generic principles are applicable to all assignments likely to be conducted by Audit firms.

This Manual also provides good practice guidance to improve the likelihood of successful delivery of audit objectives through awareness and management of risks specific to audits and, as a consequence, is addressed primarily to firms that undertake audit assignments.

Salient Features Provides samples of Forms to be filled during various stages of

audit assignments

The Manual is not intended to be a substitute for the ISAs themselves. The Audit manual is merely a guide and does not replace the need to refer to the ISAs.

Activities Covered

Pre-engagement Planning of Audit Execution Reporting

• Client Acceptance • Client Continuance • Agree on Terms of

Engagement • Change Terms of

Engagement

• Audit Sampling • Sampling Risk • Non Sampling Risk • Sampling Methods • Model Audit

Programs • Evaluation of Going

Concern & Related Parties

• Compliance with Laws & Regulations

• Confirmations and Inquiries

• Understand Entity • Risk Assessment • Understand Control

Environment • Control Activities • Materiality • Audit Procedures • Assessment of fraud

risk • CIS • Evaluation of

Internal Audit • Staff Planning

• Auditors’ Report • Forms of Audit

Opinion • Draft Audit Report • Audit Completion

Checklist • Subsequent Events • Communication to

Board

Client Evaluation Background Checks Ethical Considerations Independence Requirements Code of Ethics of ICMAP Para 26 of ISQC-1 ISA – 220 Communication with Predecessor

Auditor

Periodic Reviews for Existing Clients

Lack of Knowledge of Business No Previous Experience with

Management Transactions and Associated

Risks affecting the statements

New Client (Associated Risks)

Pre-engagement Activities

Client Acceptance / Continuance

(Form 001 & 002 at Appendices)

Pre-engagement Activities

Engagement Terms

Key Contents Objective and Scope of Audit Responsibilities of Auditor Responsibilities of Management Applicable Reporting Framework Expected Deliverables Timeline and Fee Management Acknowledgement for Preparation of

Statements Management Acknowledgement for Internal Controls Access to Records

Formal Contract / Engagement Letter

(ISA – 210)

Consider not accepting engagement in case of limitation on scope

For Recurring engagements, evaluation circumstance for revision in engagement terms

Change Request by Client or by Auditor Evaluate the Changes for Acceptance / Rejection Bring in Writing Due to Circumstance Affecting the Entity’s Environment Due to Misunderstanding Concerning the Nature of Service Originally Requested Not Justified if relating to Information being Incorrect / Unsatisfactory

Pre-engagement Activities

Change in Engagement Terms

Auditor rejects a change of terms and the management does not continue with the original engagement: • Withdraw from audit engagement where possible under applicable laws; and

• Determine whether there is any obligation to report the circumstances to stakeholders, such as regulators or executive management.

Planning of Audit

Successful Execution and Completion of Engagement Proper Organization and Management of Engagement Selection of Team Members with Required Capabilities Efficient and Complete Delivery of Professional Responsibilities

Importance and Purpose

Purpose is to Ensure and Document

Understanding of Entity’s Business, Industry & Environment Understanding of Accounting Policies and Practices / Financial Performance Assessment of Risk of Material Misstatement Formulate Overall Audit Strategy Planned Audit Approach for Significant Account Balances and Disclosures Determine Materiality Plan Staff

Planning of Audit Overall Audit Strategy - Contents

Kick of Meeting with Client Management Define and Agree Scope of Engagement Ascertain Reporting Objectives Decide Timing of Activities Assess Nature and Timing of Communication Required with Client Select Team, Team Meetings and Communication Apply Risk Assessment Procedures Use Knowledge from Preliminary Assessment Determine Involvement on Other Other Significant Matters

Planning of Audit Risk Assessment Procedures

Inquiries about the entity’s business and control environment from:

Those Charged with Governance and Management Internal Audit Key Staff Involved in Transaction Initiating and Processing In-house Legal Council, if any Internal Tax Staff

Analytical Procedures to Identify Unusual Transactions / Events Observations of Entity Environment Inspection of Documents and Management Reports Information from Prior Period Audits - Corrections / Adjustments Discussion among Team Members Use SWOT and PEST Analysis

Document the procedures and results

(Form 003 at Appendices)

Planning of Audit Key Information About Client

Nature of Business and History Product and Services Client Profile

Major Customer Major Suppliers Employees Investments Financing Related Parties Litigations and Claims

Corporate Structure and Conduct of Operations Objectives of Business Entity’s Industrial Environment Legal and Regulatory Environment

Planning of Audit Meetings with Client

The meetings shall be conducted by the appropriate member of the engagement team depending upon the nature of queries / agenda item.

To Resolve Queries Making Decisions or Deliberating on difference of opinion between auditor

and management

Agenda of significant meeting is prepared and agreed upon in writing.

Prepare Minutes of Meeting

Planning of Audit Business Control Environment

Legal and Operating Structure Culture of the Client’s Entity Ethics Adapted by Entity Corporate Governance Environment Remuneration of Management Personal Profile of Management

Planning of Audit Computer Information System

Level of Dependence on CIS CIS Personnel Structure and Skills Security and Access Controls Back-ups and Recovery Procedures Reliability of CIS Data Integrity Data Processing and Reporting Controls

Obtain an Understanding of:

(Complete Checklist given at Form 007 of Appendices

Planning of Audit Financial / Management Reporting

Applicable Reporting Framework Approved Management Reporting Guidelines Selection and Application of Accounting Policies Critical Accounting Policies Impact of Policies on Specific Aspects of Statements Reconciliation of Cost / Management Reports with Financial

Records

Reporting Environment

Keys Issues are:

• New Accounting Pronouncements • Going Concern • Legal and Regulatory Changes • Financial / Cost Analysis and Results

Planning of Audit Critical Areas and Expert Opinion

Identify Critical Areas Significant Estimates – Decommissioning etc Property Valuations Employee Benefits – Actuaries Nature of Inventory Investment Valuations

(Form 004 at Appendices “for Critical Areas “)

Planning of Audit Control Overview

(Form 005 at Appendices

Planning of Audit Audit Materiality

Use Professional Judgment Consider Both Qualitative and Quantitative Aspects Calculate using Quantitative Approach (%) Example are:

Financial Statement Level Account Balance Level Transaction Level Performance Based

Information is Material if it influences the decision of user of statements.

Obtain Guidance

(ISA – 320)

Planning of Audit Fraud Risk Assessment

Professional Skepticism Identify Risk of Material Misstatement Use Analytical Procedures for Risk Assessment Obtain Appropriate Audit Evidence Discussion among Engagement Partner and Team Discussion with Management Obtain Written Representations for:

Responsibility for design and implementation of internal controls Disclosure to Auditor of result of their assessments Disclosure about their knowledge of fraud Disclosure about their knowledge of any allegations for fraud

Adhere to ISA – 240, 315 and 330

(Form 006 and 008 in Appendices

Planning of Audit Other Considerations

Evaluate Internal Audit Function

(Use Form 009)

Review Points Brought Forward

(Use Form 011)

Plan Staff and Allocate Time

(Use Form 012)

Planning is an Ongoing Process throughout Engagement

Execution Selection of Items for testing

Selecting All Items (100%) Selection of Specific Items

Higher Value or Key Items Items above Certain Amount Items Needed for Further Information

Audit Sampling Conduct Audit of Less than 100% items Apply Approach on Entire Population All Units have Equal Chances of Selection

Non-Sampling Risk

Sampling Risk

Execution Selection of Items - Risks

Sampling risk is the risk that the auditor’s conclusion, in case the entire population is subject to same audit procedures as are selected samples, could be different from the conclusion drawn from audit procedures performed to selected samples.

Non-Sampling Risk

Sampling Risk

Component of detection risk, which is not due to examining any portion of the data is called, “non-sampling risk”. Non-sampling risk is due to inappropriate audit procedures, misinterpretation of audit evidence and failure to recognize the misstatements.

Execution Planning Sample Selection

Consider the Following: Materiality and Number of Items in Population Inherent Risk Cost and Time Required Relevance and Reliability of Evidence

Steps for Planning the Sample are: Determine the Objective of the Test Define Errors and Deviations being Sought Decide Sample Size Identify the Population and Sampling Unit

Execution Sampling Selection and Testing

Statistical Random Selection Systematic Selection Monitory Unit Sampling

Non-Statistical Haphazard Selection Block Selection

Sampling Approaches Types of Tests

Test of Controls Substantive Tests

Test of Details of Balances Substantive Tests of Transactions Substantive Analytical Procedures

Evaluate Results of Tests

Execution Tests of Controls

Execution Sample Audit Programs

Cash and Bank Balance Investment in Properties Investment in Subsidiaries Deposits and Advance Loans and Allowances Inventories Trade Deposits Fixed Assets Accrued Expenses

Balance Sheet

Deferred Liabilities Taxation Contingencies and Commitments Payables Short Term Borrowings Finance Lease Liabilities Long Term Liabilities Dividend Payable Equity

(Refer Form 013 – 030)

Execution Sample Audit Programs

Sales Cost of Sales Admin Expenses Financial Charges Other Income

Profit and Loss / Others

Workers’ Welfare Funds / WPPF Laws and Regulations

(Refer Form 031 – 037)

Audit Programs are Sample Only… Make Changes as Required

Execution

Evaluate Going Concern – ISA 570 (Form 038) Check Compliance with Regulatory Framework (Form 039) Circulate Confirmation to Bank (Form 040) Circulate Confirmation to Legal Advisors, if any (Form 041) Physically Count Inventories Check Related Party Transactions in Detail (Form 043) Check Compliance with Labor Laws (Form 044) Calculation and Provisioning of Income / Deferred Tax (Form 045)

Other Considerations

Reporting

Title – Independent Auditors Report Addressee Introductory Paragraph

Company Name Statements are Audited Title of Each Statement Reference to Policy Note Date or Period Covered

Management Responsibility for Statements Auditor’s Responsibility Auditor’s Opinion Other Reporting Responsibilities Signature of Auditor Date of Report Auditor’s Address – Location

Contents of Auditor’s Report

Reporting

Formats of Audit Report

International Standards on Auditing Companies Ordinance, 1984 The Banking Companies Ordinance, 1962 Insurance Act, 1938 Other Applicable Guidelines (NGOs etc)

Forms of Audit Opinion Clean or Unqualified Clean or Unqualified but with an Emphasis of Matter Adverse Opinion Disclaimer of Opinion

Form of Audit Report / Opinions

Reporting

Referencing of Financial Statements (Form 046) Fill Audit Completion Checklist (Form 047) Check for Subsequent Events (Form 048)

Events after date of Audit Report but before Financial Statements are Issued

Events after the Financial Statements are issued Write Cover Letter to Board of Directors (Form 049)

Auditors Responsibility Management Responsibility Outstanding Information, if any Matters for Specific Attention, if any

Steps before Final Audit Report

Phase - I

For Last Year Audits

• Assist in Compliance for Last Year Audits

• Conduct Review

• Rating with Comments

• Repeat Review within 6 Months or Year

(Immediate after Audits)

Phase - II Continues Movement

Firm Approach to QCD

Assistance Where Needed

Conduct Review

Rating Every Year for 1st Three

Years

Three Years Thereafter

Achievement is….

20 – 25 QCR Rated Firms

Over 3 years

Periodic Trainings on ISAs and Audit Manual

Required……?