PricewaterhouseCoopers - Mexico

Audit Services to Small and Medium-Size Clients, Barriers Faced and OvercomeCarlos Méndez

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Index

ContentsBackground

I. PwC Clients Segmentation – Audit Approach

II. PwC Focus Strategy

III. PwC Clients Segmentation - Approach Tools

IV. IAASB IAPS 1005 - Particular Considerations in the Audit of Small Businesses

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I. BackgroundMarket:Size of the market (National Institute of Statistics, Geography and Informatics – “INEGI”):

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I. Background - Continued

Characteristics and Barriers:a) Internally-

• Companies managed and supervised by its owners. • Limited personnel with no segregations of duties.• No formal procedures.• There are controls without a high grade of development.• Poor technology information systems development.• Unqualified and untrained employees. • Few sources of income.

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I. Background - Continued

b) Externally-• Lack of financial resources.• Lack of tax incentives.• Informal economy, disloyal competition.• Lack of reinvestment by the owners.• Companies focus in market without awareness of back office

support. • Complexity in tax compliance requirements.

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I. Background - Continued

PwC challenge is to maintain our independence for our clients while we advise them in the early stages of their growth. SMEs management relies heavily in our external advice.

We advice the clients not only in audit matters but also in the following areas,:

• Companies´ incorporation • Tax compliance• Bookkeeping• Corporate governance• Payroll

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I. B

ackg

roun

d - C

ontin

ued The financial information is used in most

cases only for the need to comply with tax requirements and it is not in the priority of company's management.

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II. PwC Clients Segmentation - Audit Approach

PIE PEPublic Interest Entities:- Subject to regulations for protecting groups of people- Generally listed in Stock Exchanges- High visibility

Private Entities:- Non PIE- Generally private proprietary- Local visibility

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SECPIE PE

II. PwC Clients Segmentation - Audit Approach - Continued

Other Stock

Exchanges

Non Significant

Entities qualified as immaterial for consolidation

reporting purposes

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SECPIE PE

Non significant

HNR

II. PwC Clients Segmentation - Audit Approach - Continued

Other Stock

Exchanges

High Network Risk:

Entities with high financial and reputation risk to the firm.

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SEC

PIE PEHNR

Integrated audits

SOX - 404

Complex systems (ERP´s): Reliance in controls, focus in systems review

and analytical procedures

Middle MarketNon complex systems:

Some reliance in controls, focus in balance validations

Non significant

II. PwC Clients Segmentation - Audit Approach - Continued

Other Stock

ExchangesMiddle Market

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SECPIE

PE

HNR

Integrated audits

SOX - 404

Complex systems (ERP´s): Reliance in

controls, focus in systems review and

analytical procedures

Middle MarketNon complex systems:

Some reliance in controls, focus in balances validations

Non significant

II. PwC Clients Segmentation - Audit Approach - Continued

VSE

MiddleMarket

Very Small EntitiesNon complex systems

or lack of them: Focus in balance

validations

Other Stock

Exchanges

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III. PwC Focus Strategy

Factors to consider a Middle Market Company:

• Non High Network Risk Entities

• Non Public Interest Entities• Non Complex• Non Financial Sector• Small audit teams

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III. PwC Focus Strategy - Continued

Strategies:• Acceptance risk analysis• Specialized group of professionals dedicated to attend this

market, with advisory vision• Same methodology worldwide adapted to the characteristics of

these clients• Access to different industries knowledge applied to this segment• Establishment of strict training programs• Development of specific audit tools for middle market and very

small entities

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SECPIE PEHN

R

Master Database

404

General Master

Database

Middle Market Database

IV. PwC Clients Segmentation Approach Tools

Other Stock

exchanges

Very Small entities

Database

Middle Market

VSE

Non significant

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V. IAASB IAPS 1005 - Particular Considerations in the Audit of Small Businesses

International Auditing Practice Statements (IAPS 1005):

“The special considerations in the audits of small entities”• The purpose of IAPS 1005 is to describe the characteristics

commonly found in small entities and indicate how they may affect the application of International Standards of Audit (ISA).

• Is a guidance on the application of ISAs to the audit of small entities.

• Does not establish any new requirement for the audit of small entities; nor does it establish any new exemptions.

• All audits of small entities are to be conducted in accordance with ISAs.

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V. IAASB IAPS 1005 - Particular Considerations in the Audit of Small Businesses - Continued

In Mexico the Commission for Supporting the Independent Professional Practice of the Mexican Institute of Public Accountants issued on December 2005 the Audit Guidance for Small and Medium-Size Businesses, with similar purposes.

PricewaterhouseCoopers Methodology follows the ISAs.