Nigel Penny 3, Forming of audit opinions, SIGMA, Ankara, 26 October 2013
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Presentation by Nigel Penny from the United Kingdom, on forming audit opinions on financial statements in UK's National Audit Office, made during the workshop co-organised by SIGMA and the Turkish Court of Accounts on Forming of audit opinions, held in Ankara on 26-27 October 2016.
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Nigel Penny 3, Forming of audit opinions, SIGMA, Ankara, 26 October 2013
- 1. © OECD AjointinitiativeoftheOECDandtheEuropeanUnion, principallyfinancedbytheEU Workshop on the forming of Audit Opinions Forming Audit Opinions On Financial Statements in UK NAO: Processes and Requirements incl. Quality Control Nigel Penny Ankara, 26-27 October 2016
- 2. AjointinitiativeoftheOECDandtheEuropeanUnion, principallyfinancedbytheEU Contents The Importance Methodology Flow and AUDIT JUDGEMENT Audit Assurance Model Generating the Audit Opinion Role of Quality Control 2
- 3. AjointinitiativeoftheOECDandtheEuropeanUnion, principallyfinancedbytheEU The Importance of Audit Opinions in UK NAO’s Values (“underpin everything we do”): INDEPENDENT: objective, highest professional & personal standards AUTHORITATIVE: work of the highest quality, based on evidence and practice COLLABORATIVE: with colleagues and with stakeholders to achieve NAO goals FAIR: our work & how we treat people is fair and just The (relevant) Strategic Risks to NAO are: NAO reputation: * NAO is seen not to ‘practice what we preach’ * Stakeholders do not see NAO as independent or authoritative Quality: * Poor quality undermines: accuracy, fairness and insight; : impact on public service delivery Resilience: * Resource/Capacity constraints lead to undelivered plans 3
- 4. © OECD AjointinitiativeoftheOECDandtheEuropeanUnion, principallyfinancedbytheEU Preliminary Engagement Activities Preliminary Engagement Activities Client & engagement acceptance/ reacceptance Evaluation of compliance with ethical standards Letter of Understanding /Engagement Agree terms of engagement Engagement Risk 4
- 5. © OECD AjointinitiativeoftheOECDandtheEuropeanUnion, principallyfinancedbytheEU Establish overall audit strategy Minutes of client planning meeting Perform preliminary analytical procedures * Set materiality and performance materiality Materiality form Overall audit strategy Identify significant risks from existing knowledge & plan responses Plan approach to audit areas without significant risks Confirm we have appropriate team skills, knowledge & experience Plan the further planning & risk assessment needed to confirm knowledge & identify any potential additional risks Team discussion on fraud & risk * Minute of team discussion Audit Planning Report * (external strategy) Audit Planning Report STOP Director has established overall strategy Prelim AP work paper Client planning meeting 5
- 6. © OECD AjointinitiativeoftheOECDandtheEuropeanUnion, principallyfinancedbytheEU Perform Risk Assessment Procedures… Prelim Analytical Procedures Prelim AP work paper Confirm/ update standing info on Understanding the Entity & its Environment Understanding the Entity & its environment Confirm/ update standing info on understanding the entity’s Internal Control Understanding the Entity’s Internal Control Systems notes on each control cycle Evaluate relevant controls design & implementation Document D & I Testing Inc evaluation of other relevant controls D&I Identify significant classes of transactions, account balances & disclosures Will be Reflected in the Testing Plan Make Int. Standards required inquiries of management Minute of discussion 6
- 7. © OECD AjointinitiativeoftheOECDandtheEuropeanUnion, principallyfinancedbytheEU … and develop the Plan From ‘Perform Risk Assessment Procedures...’ Design audit procedures Significant risks testing plan Audit areas testing plan Linked to procedure steps Identify & assess risks of material misstatement Overall audit strategy Fraud risk assessment IT Scope assessment form STOP Director confirm overall strategy and sign-off of Audit Plan. Establish overall audit strategy 7
- 8. © OECD AjointinitiativeoftheOECDandtheEuropeanUnion, principallyfinancedbytheEU Performing the Audit Plan Responding to Specific Risks • Evaluating design & implementatio n of controls • Testing controls • Substantive procedures Responding to Pervasive Risks • Evaluating design & implementatio n of controls • Testing controls • Overall responses to the audit Auditing the financial statements & disclosures Inc. Financial Statement level regularity, laws & regulations, related parties, going concern, review of GC Documentation of work performed in Significant Risks folder Documentation of work performed in folder for financial statements & disclosures Testing Audit Areas (excl. significant risk) • Evaluating design & implementatio n of controls • Testing controls • Substantive procedures Documentation of work performed in folders for each audit area 8
- 9. © OECD AjointinitiativeoftheOECDandtheEuropeanUnion, principallyfinancedbytheEU Conclude and Report… Evaluate results of procedures & misstatements identified Accumulation & Evaluation of Misstatements form Communication with those charged with governance ISA 260 report (incl. significant deficiencies in internal control) Communicating deficiencies in internal control Management letter (may be post-certification) 9
- 10. © OECD AjointinitiativeoftheOECDandtheEuropeanUnion, principallyfinancedbytheEU … Conclude and Report Subsequent events review Summary of work in procedure step/memo Forming an Audit Opinion Concluding analytical procedures Documentation of conclusions Draft certificate Obtain written representations Management representation letter Completion Signed Certificate Final assembled file 10
- 11. AjointinitiativeoftheOECDandtheEuropeanUnion, principallyfinancedbytheEU Audit Assurance Model YES NO YES NO NO YES NO NO 11 Controls Assurance 2.3 Successful? Are there risks of material misstatement? Inherent Assurance 0.0 Inherent Assurance 1.0 Have controls been tested? Successful? Controls Assurance 1.3 Have controls mitigating risks been tested? Maximum substantive procedures 3.0 Minimum substantive procedures 0.7 Standard substantive procedures 2.0 Minimum substantive procedures 0.7
- 12. AjointinitiativeoftheOECDandtheEuropeanUnion, principallyfinancedbytheEU Generating the Audit Opinion (1) NB: IF QUANTITATIVE DIFFERENCES WITHIN 5% OF MATERIALITY SHOULD YOU PERFORM ADDITIONAL TESTING? 12 Evaluate controls testing Evaluate quantitative audit differences Evaluate qualitative audit differences Review Overall Financial Statements Professional Audit Judgement and Materiality AUDIT OPINION(S)/ AUDIT REPORT
- 13. AjointinitiativeoftheOECDandtheEuropeanUnion, principallyfinancedbytheEU Generating the Audit Opinion (2) Yes No Yes No Yes No Yes No 13 Risk of material misstatement? Sufficient appropriate audit evidence? Need to draw attention to matters fundamental to users’ understanding of audit report or financial statements? pervasive pervasive Adverse Audit Opinion Qualified Audit Opinion Disclaimer Qualified Audit Opinion Unqualified Audit Opinion Emphasis of matter
- 14. AjointinitiativeoftheOECDandtheEuropeanUnion, principallyfinancedbytheEU Quality Control Adopted Financial Reporting Council’s (FRC) Engagement & Quality Standards These standards are included in NAO’s Code of Conduct. Leadership Responsibilities * Comptroller & Auditor General has overall responsibility * Chief Operating Officer nominated as Board Member responsible for quality * Director General (Quality) overall operational responsibility * Audit Practice & Quality Committee has an oversight role * Each Audit Team member has a personal responsibility for Quality Engagements * Two-stage Reviews * Support of central Compliance & Quality Unit (CQU) * Appoint Engagement Quality Control Reviewer for high risk audits * A progamme of CQU reviews in addition to the two-stage review providing assurance directly to the C&AG and Leadership Team * ‘ Hot’ & ‘Cold’ reviews * Client Feedback * EXTERNAL review by the FRC’s Audit Quality Review team ALL TO REDUCE THE RISK OF ISSUING AN INCORRECT AUDIT OPINION 14
- 15. AjointinitiativeoftheOECDandtheEuropeanUnion, principallyfinancedbytheEU Thank you for your attention WELCOME YOUR QUESTIONS Please see UK NAO public website: www.nao.org.uk for outputs, guidance, toolkits and NAO’s mandate, governance & performance 15