Author: Clive McKegg

27 August 2020

Following on from part 1, in this article, we again use the Q & A format to explore service performance reporting. This time we specifically address this in terms of preparing for an audit.

Q. What do I need to know about the new audit standard?

In December 2015 the XRB issued EG Au9 “Guidance on the audit or review of the performance report of Tier 3 not-for-profit public benefit entities”. But it was clear that a new standard applying to a wider field than just Tier 3 entities and addressing service performance information more specifically was needed:

To meet this need, the NZ Auditing and Assurance Board (NZAASB) released NZ AS 1 “The Audit of Service Performance Information”. It provides much more clarity. Adoption has been deferred to periods beginning on or after 1 Jan 2023 (early adoption permitted). However, we have added this to our templates and would highly recommend that auditors use it for auditing Tier 1 and 2 PBE service performance information.

EG Au9 provided limited help through a simple set of prescriptive guidelines referencing ISAE (NZ) 3000, whereas NZ AS 1 provides clear objectives, principles, requirements, and application material. NZ AS 1 applies to a much broader range of potential service performance reporting (including Tier 1 and 2 PBE as per PBE FRS 48) .

The new standard better addresses problems such as:

  • Changes made to information presented year on year to present the organisation in the best possible light
  • Reporting the “easy” results and omitting the important ones
  • Reporting outcomes and outputs which are often unsubstantiated and with little evidence to support the claims made
  • Inconsistent reporting year to year

Q. What are the key objectives of the new audit standard?

NZ AS 1 paragraph 6 outlines five objectives that need to be satisfied for the auditor to express an unmodified opinion on service performance (SP) information. These are summarised as follows:

  • To understand the process applied by the entity to select what and how to report on its service performance;
  • To evaluate whether the entity’s service performance criteria are suitable (per the financial reporting framework);
  • To obtain reasonable assurance about whether the service performance information is free from material misstatement;
  • To report whether the service performance information is prepared, in accordance with the applicable financial reporting framework; and
  • To communicate further as required by the ISAs (NZ) and NZ AS 1, in accordance with the auditor’s findings.

Q. What does NZ AS-1 expect to see in performance reports?

Although the specific term “outcome” or “output” is not used in As-1 the requirements of paragraph 15 (below) do equate to the mission statement (in the Equity Information) and the Outcomes and Outputs of Tier 3 and 4 standards.

Para 15 says: “An entity’s service performance information shall:

(a) Provide users with sufficient contextual information to understand why the entity exists, what it intends to achieve in broad terms over the medium to long term, and how it goes about this; and

(b) Provide users with information about what the entity has done during the reporting period in working towards its broader aims and objectives, as described in (a) above.”

There is no requirement to use any specific language in NZ AS-1, or in PBE FRS-48, however, the Tier 3 and 4 standards do specify the use of specific descriptions for reporting elements’ wording.

Note that the term “impacts” was also considered, but this concept was also excluded from the final reporting and audit standard.

Q. What will auditors be looking for in our Service Performance Report?

For “outcomes” (what it intends to achieve in broad terms over the medium to long term, and how it goes about this) they will be asking questions like:

  • Is it relevant to organisation?
  • Is the information complete?
  • Is it clearly and understandably presented?
  • Is it consistent with prior year reporting?
  • Does it agree to founding documents and to published information?
  • Is it consistent with the rest of the financial statements?

For “outputs” (what the entity has done during the reporting period in working towards its broader aims and objectives) they will be asking:

  • Is it relevant to the organisation?
  • Is the information complete?
  • Is the cutoff accurate?
  • Is it measurable?
  • Is it clearly and understandably presented?
  • Is it comparable to the prior year’s reporting?
  • Are allocation methods accurate?
  • Does it agree to underlying financial records?
  • Does it agree with other supporting documentation?
  • Is cross-referencing to other parts of the financial statements accurate?
  • Is it consistent with the rest of the financial statements?
  • Is the treatment consistent with the relevant reporting standard?

Q. What can we expect auditors to ask?

They will ask for evidence to back up the assertions made in the report, just as they do for financial information. You should also have clear written information about:

  • Why the specific items were chosen to be in the report
  • What consideration was given to other items that could have been included and why they were not
  • What criteria were used to make these choices and who decided on the criteria
  • How the entity identifies the intended users and the decisions that may be influenced by the service performance information
  • How laws and regulations that apply specifically to the service performance information are identified and how compliance with these is monitored
  • Whether the entity uses any significant service organisations relating to reporting service performance information (e.g. outsourcing of satisfaction surveys)
  • What judgements are made in deciding when to provide comparative narrative and descriptive information (where quantitative information is used the prior year should always be disclosed)
  • Where the data comes from and how it was calculated
  • What systems are in place to generate the reported data (the auditors may test the system to see if the data produced is likely to be reliable)

They will also be considering the risk of bias – is the report neutral or are we just reporting what makes the entity look good (say to secure funding)? So consider in the choice of what to report that a balanced view is taken.

As part of the process, they will also request written representations from governance, that they have fulfilled their responsibility:

(a) For the preparation of service performance information in accordance with the applicable financial reporting framework.

(b) To select service performance criteria that are suitable in order to prepare service performance information in accordance with the applicable financial reporting framework.

Q. How accurate is the service performance information expected to be?

For example, in relation to volunteer hours, what supporting documentation is expected to be provided?

Auditors always consider materiality. ISA 320 says that: “Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.”

For non-financial but quantitative they may express this as something like “a 5% variance would not be regarded as material”. While one item may not be material alone, in combination with other small misstatements the reporting may be materially misstated.

The auditor will always identify risks – what factors could contribute to the entity creating a materially unrealistic picture of its achievements and how could this be done?

Volunteer hours are always going to be difficult to audit because there are often no defined “edges” to where volunteer work starts and stops. Entities should make a good attempt to record events, count numbers, estimate hours and perhaps have someone else sign this off as a good record. File these reports away for the auditor.

Where there are a few people doing significant work voluntarily perhaps a job description or contract that specifies the hours volunteered would be useful. This will then make the auditor’s work easier. They may also choose to confirm directly with a sample of volunteers that they actually did do this work.

Q. Does the auditor need to check comparative information?

PBE FRS 48 (37) says: “An entity shall report comparative information in respect of the preceding period. … An entity shall report comparative information for all amounts reported in the current period and, where relevant, for the narrative and descriptive information reported in the current period. Explanations for major variances shall be given.”

There is a provision for these amounts to be excluded from the scope of the audit, particularly if they were prepared prior to the mandatory application of PBE FRS-48 (see above). ISA 710 (14) says. “If the prior period financial statements were not audited, the auditor shall state in an Other Matter paragraph in the auditor’s report that the corresponding figures are unaudited.”

So the best option in many cases would be to agree with the auditors to include this in their report as an Other Matter. Note that narrative and description information from a prior period may not be required to be included – just for amounts.

Q. Can I exclude service performance information from the scope of the audit?

From the time that PBE FRS 48 is mandatory service performance information will need to be audited (as noted, now from periods beginning 1 Jan 2022, with early adoption permitted).

In the meantime, if service performance is reported (as a “practice run”) it may be excluded from the scope of the audit and treated as “Other Information” i.e. part of the reporting package but excluded from the scope of the audit.

Many smaller charities do this when they are not required to be audited as they are under statutory limits but do so voluntarily. The auditor must read the “other information” to make sure that nothing contradicts the audited content.

Q. Will service reporting increase the cost of the audit work?

Unfortunately yes. However, from the evidence of Tier 3 and 4 entity reporting, I would argue there have been clear benefits to audit quality as the auditor must look at the charity as a whole.

They are then likely to have a broader view of the entity and its environment and more understanding of the financial results through looking at the service performance results.

The best way to keep increases to a minimum is to talk to your auditors early, agreeing from the outset on the process for gathering information for the service information reporting, talking about systems, criteria for what to report, and potential pitfalls.

NOTE: This article is designed to give accurate but general information, however, Audit Assistant Ltd accepts no liability in any way to any person arising out of reliance on the contents for any purpose. Talk to your auditor or accountant for more information.

20 August 2020

I recently participated in a panel discussion on the topic of Preparing Audit-ready Performance Reports. From the questions submitted and the types of participants, it was clear that larger charities are becoming seriously focussed on preparing service information in a way that is meaningful, compliant with the standards, and able to be audited without too much drama.

It is important that charities see this task, not as an onerous burden but as a positive experience that enables them to tell their wider story. In most cases charities are contributing primarily in ways that cannot be measured in financial terms, so we could say that service performance is their real reporting. Charities aren’t about making money, but about achieving ends, so to just report finances is missing the point. The financial information is just the engine room out the back – necessary but not actually the purpose of the entity.

This article uses a Q & A format to address some of the issues facing preparers of performance report information in New Zealand. It will also be relevant however to preparers in other jurisdictions and to auditors of performance information.

We start with some of the basics and then skip through to more technical matters. In part 2 we look at specific audit issues.

Q. Who are the key players?

The Government, via the Charities Act 2005 determines who is required to report (i.e. registered charities). The XRB (NZ External Reporting Board) is responsible for what these entities are required to report, (XRB standards). And Charities Services monitors and enforces compliance with XRB standards by registered charities.

Q. What are the audit requirements for charities?

Currently registered charities with operating expenses of over $1.1 m per annum in the prior two financial years must be audited, but charities with expenses between $550,000 and $ 1.1 m in the prior two financial years may opt for a Review Engagement rather than an Audit (see Charities Act 2005 Sections 42C & 42D).

Registered charities with total operating expenditure of less than $550,000 are not required by law to have an audit or a review.

Of course, any charity not required to have an audit or a review may opt to do so if they wish or if it is required by funders or by their founding document. Audits and Reviews of charities are required to be carried out by a qualified auditor.

Q. What are the reporting requirements for charities?

In New Zealand, there are four reporting tiers, relating to entity size and level of public accountability.

Note that entities are not obliged to report in the Tier that they fit into. They may opt for more complex reporting if they wish (but not for less complex of course).

If the governing body has opted to adopt Tier 3 or 4 (special purpose reporting) over the default General Purpose reporting (compliance with PBE IFRS standards that apply to both Tier 1 and 2) they should document this decision. Under both Tier 3 and 4 reporting a note must be added specifying that the entity is permitted to apply the standard and has elected to do so.

Q. How are Tier 1 and 2 entities required to report?

For Tier 1 and 2 PBE entities, the applicable reporting standard is PBE FRS 48. This was to be effective for reporting periods beginning on or after 1 Jan 2021, with early adoption permitted. However, it has been agreed to delay adoption for one year in light of COVID-19. [edit – now effective for reporting periods beginning on or after 1 Jan 2023]

Q. What are the main principles of PBE FRS 48?

Paragraph 15 says:

An entity’s service performance information shall:

(a) Provide users with sufficient contextual information to understand why the entity exists, what it intends to achieve in broad terms over the medium to long term, and how it goes about this; and

(b) Provide users with information about what the entity has done during the reporting period in working towards its broader aims and objectives, as described in (a) above. (15)

It is important to note that PBE FRS 48 does not follow the standard terminology of “outcomes” and “outputs” as per the Tier 3 and 4 standards. The descriptions above however cover these and equate to the entity information (“sufficient contextual information to understand why the entity exists,“) outcomes (“what it intends to achieve in broad terms over the medium to long term, and how it goes about this“), and outputs (“what the entity has done during the reporting period in working towards its broader aims and objectives“) of Tier 3 and 4 standards. Nor is the term “impacts” used.

This leaves quite a bit of flexibility in how the service performance information may be reported.

Addressing this in a slightly different way, paragraph 19 says that the reporting entity should consider:

  • What it is accountable/responsible for.
  • What it intended to achieve during the reporting period.
  • How it went about achieving its service performance objectives.

Q. What are the qualitative characteristics and how do they relate together?

Paragraph 7 states that preparers must “…apply the qualitative characteristics of information and the pervasive constraints on information identified in the Public Benefit Entities’ Conceptual Framework (PBE Conceptual Framework)”.

This means “…balancing of the constraints on information results in service performance information that is appropriate and meaningful to the users of general purpose financial reports.”

The qualitative characteristics identified in the PBE Conceptual Framework are relevance, faithful representation, understandability, timeliness, comparability, and verifiability (para 8). Paragraph 9 elaborates on these. Some of these are obvious, some are less so.

The standard acknowledges that “… in practice, all qualitative characteristics may not be fully achieved, and a balance or trade-off between certain of them may be necessary” (para 8).

The pervasive constraints on information materiality, cost-benefit and balance between qualitative characteristics are identified in the PBE Conceptual Framework (3.32–3.42). This acknowledges that preparers cannot be expected to compile all possible service performance information. And doing so would actually be counterproductive. No one would bother to read it all.

Even if they were to include every possible item, this would create issues such as the inclusion of immaterial information, high compliance costs, and it would be more difficult for users to discern what is essential due to each qualitative characteristic given equal value of importance.

The selection process is as important as the reporting itself. Paragraph 44 states that the entity must: “…disclose those judgements that have the most significant effect on the selection, measurement, aggregation and presentation of service performance information reported …”

As we shall see, the auditor will be looking carefully at the selection criteria to ensure that it results in unbiased and relevant information being presented.

Q. What kinds of measures of information may be reported?

Paragraph 20 states that preparers must use:”…an appropriate and meaningful mix of performance measures and/or descriptions for the reporting period. The performance measures and/or descriptions used by an entity to communicate its service performance may be:

(a) Quantitative measures: Examples of quantitative measures are the quantity of goods and services, the cost of goods and services, the time taken to provide goods and services, levels of satisfaction using a rating scale on a questionnaire or survey, and numerical measures for service performance objectives or goals;

(b) Qualitative measures: Examples of qualitative measures are descriptors such as compliance or non-compliance with a quality standard, ratings such as high, medium or low, or ratings assigned by experts; or

(c) Qualitative descriptions: Examples of qualitative descriptions are those based on participant observations, open-ended questions on interviews and surveys and case studies. For example, how did an entity’s service performance activities change the well-being and circumstances of a client group?

Some service performance reports tend to be just a restating of financial results. This is not the point, although in some cases it may be appropriate. A good report will choose a mix of appropriate measures that flow down from the purpose of the organisation, what it set out to achieve and how, and what it did achieve. The measures used will reflect the result being measured.

See part two for what an auditor will be looking for in Service Performance Reporting.

NOTE: This article is designed to give accurate but general information, however, Audit Assistant Ltd accepts no liability in any way to any person arising out of reliance on the contents for any purpose. Talk to your auditor or accountant for more information.

17 July 2020

For someone whose main task is to audit financial information, auditing mainly non-financial service performance information can be challenging. A deliberate shift of perspective is required – like putting on a different kind of auditing hat.

NOTE: This article has had to be updated a couple of times because of deferrals to the standards, resulting in a mismatch of application dates. We suggest that if PBE FRS 48 has been adopted that NZ AS1 be used to audit it as there is a clear line between the two standards. For the XRB’s reasoning see here.

In December 2015 the XRB issued EG Au9 “Guidance on the audit or review of the performance report of Tier 3 not-for-profit public benefit entities”. This helped us all get started, but it was clear that a new standard applying to a wider field than just Tier 3 entities and addressing service performance information more specifically was needed.

To meet this need, the NZ Auditing and Assurance Board (NZAASB) released NZ As1 “The Audit of Service Performance Information”. Now effective from 1st of January 2023 (but with early adoption permitted), this provides much more clarity. We have now released audit templates to help apply this standard (see below).

EG Au9 provided limited help through a simple set of prescriptive guidelines referencing ISAE (NZ) 3000, whereas NZ AS 1 provides clear objectives, principles, requirements, and application material. NZ AS 1 applies to a much broader range of potential service performance reporting (including Tier 1 and 2 PBE as per PBE FRS 48 – see below).

Problems addressed by the new standard

Since reporting on service performance information is relatively new, many reporting entities are still coming to grips with the objectives and requirements of service performance reporting. This has resulted in problems such as:

  • Changes made to information presented year after year to present the organisation in the best possible light
  • Reporting the “easy” results and omitting the important ones
  • Reporting outcomes and outputs which are often unsubstantiated and with little evidence to support the claims made
  • Inconsistent reporting year to year

Even when an entity provides an SSP with outputs and outcomes that could be substantiated it was often difficult to understand the audit risks. More application guidance was needed especially concerning:

  • Materiality levels
  • What constitutes a misstatement in service performance information
  • How the outcomes and outputs relate to the assertions

What are the features of the new standard?

The complexity and confusion around the production and audit of service performance information highlighted the need for clearer direction for auditors. NZ AS 1, therefore, addresses a very specific type of financial statement with very different reporting goals from conventional reporting.

NZ AS 1 relates closely to ISA 200, “Overall Objectives of the Independent Auditor and Conduct of an Audit in Accordance with the International Standards on Auditing”, and should be read in conjunction with this standard. Remember that service performance auditing is still auditing, but the information being audited is new and unfamiliar. So NZ AS1 incorporates familiar key audit principles into planning, performing, evaluation procedures, and reporting. It references many other auditing standards as they apply to this new mode of reporting such as:

  • Agreement on audit engagement terms
  • Laws and regulations
  • Communication with those charged with governance
  • Planning
  • Materiality
  • The auditor’s responses to assessed risks
  • Forming an opinion and reporting content.

Further analysis of NZ AS1 is included on our support website. This breaks down the key concepts of the standard.

The relationship between PBE FRS 48 and NZ AS-1

The XRB released PBE FRS 48 “Service Performance Reporting” in November 2017. This standard for Tier 1 and 2 PBEs is effective for reporting periods beginning on or after 1 Jan 2022 (early adoption permitted).

For now, most Audit Assistant users applying the new standard will be doing so in the context of a Tier 3 PBE SSP. So while they will not need to follow the requirements of PBE FRS 48, we recommend that they familiarise themselves with the principles within this standard. It will help them to understand concepts like qualitative characteristics and pervasive constraints. It will also help to identify what constitutes service performance information, what information can be verified, which information faithfully represents the entity, what makes information understandable to users, and whether the information is comparable to either the prior year or comparable entities.

Note that we have a PBE FRS 48 compliance checklist within our Tier 1 and 2 PBE reporting checklists and audit templates.

Audit Assistant Service Performance Audit Template

Our new Audit Assistant NZ AS1 template is currently available in a stand-alone format, so that it may be used alongside other audit work (including for firms not using Audit Assistant for their audit work – contact us for a custom signup).

The content is also incorporated into our new LCE Tier 3 and 4 PBE templates. In these templates, amendments have been made to reports to include changes in audit opinions related to the statement of service performance, written representations in the client representation letter and the audit report, including specific reference to NZ AS1. The new content has been designed to reach the key objectives that have been set out in the new standard. It consists of seven sections:

• Acceptance of engagement
• Checklist shared with the client to gather service performance information
• Internal Controls Assessment
• Materiality assessment
• Risk analysis
• Detailed testing
• Reporting

We are committed to improving the quality of our products so we welcome any feedback on this new template.

Your new service performance auditing hat may feel uncomfortable at first, but after a while, there will be certain comfort and familiarity!

15 July 2020

For many auditors of smaller entities (small charities and clubs for example), a major difficulty is how to adhere to auditing standards which are designed primarily for larger entities.

Given the time and budget constraints that auditors face this can cause some auditors to go into autopilot and tick-off checklists rather than clearly identifying, assessing, and addressing audit risks. We have identified these issues in previous articles, and although at a global level nothing has yet emerged to tackle this problem, we have designed a new series of audit templates specifically addressing this.

With our templates for less complicated entities (LCEs), we have set out to reduce the compliance burden that the current ISAs create and to focus on what is relevant to smaller organisations. We have done this in part by referencing the suggested application material for small entities within the existing standards, and leaving out the content that will only be relevant in larger entities (e.g. internal audit).

We also aim to improve audit quality, evidence and documentation by reducing the number of pages and work items, and instead we ask questions that prompt qualitative answers with solid evidence, rather than ticking “yes” or “no” answers. We have also tried to reduce the heavy and complex language of the standards to use brief, plain English wherever possible to ensure auditors can understand the true essence of the requirements laid out by ISAs. To carry on the aircraft metaphor – to spend more energy on looking at the view (the client) and less time fiddling with the controls.

Use of the new LCE series templates

While many standards have specific clauses for considerations for smaller entities (we refer to these in the new LCE templates), the standards do not define what “small entities” are. This is left to the auditor’s judgement. We would suggest as a rule of thumb that in most cases in NZ non-Tier 1 and 2 entities will probably be classed as small, and so they will fit our LCE templates unless they have controls that must be tested due to non-transparent processes or have complex operations or ownership structures.

We made the templates primarily with locally owned entities in mind, however often with smaller companies, the trigger for audit is that they have some overseas ownership. When these companies themselves are small and simple, the LCE template will be entirely adequate. We will try to give some guidance around this in future articles, but it is our estimate that 80% of the jobs carried out using Audit Assistant will probably be LCE, either not-for-profit or for-profit entities.

What key changes are included in the LCE templates?

We have conducted an in-depth update of the whole audit process incorporating overall usability review and user suggestions. Based on these changes have been made that include the following.

  • Move from a checklist-style that has mainly yes/no or multi-choice answers to a narrative style that prompts descriptions and attachments of work performed to ensure that the auditor is documenting what they have done and why – designed to get the job done in a thorough but not over-the-top way.
  • Rather than including every detail of the requirements of the standards, complex and detailed points of the standards are summarised and deliberately made into plain English (we are assuming that the auditor has a good grasp of the standards, and will refer to the actual standards by hyperlink to XRB website if required).
  • ISA application material has been chosen so that the template focuses on requirements that are the most applicable to small entities.
  • Remove detailed compliance testing – templates assume a substantive-based approach, without reliance on systems testing.
  • Leave out detailed checklists for what is unlikely to apply to small entities, for example, internal auditors.
  • Make the process more transparent by bringing important work “to the top”, removing duplication and streamlining workflow.
  • Add hyperlink references to specific work performed in other parts of the workbook that is relevant to another section e.g. E1-1.2 of the Entity and Environment.

What auditing standards are not included?

  • ISA 600 – Special Considerations – Audits of Group Financial Statements (limited mention)
  • ISA 610 – Internal Auditor
  • ISA 701 – Communicating Key Audit Matters in the Independent Auditor’s Report (limited mention)
  • ISA 805  – Audits of Single Financial Statements and Specific Element, Account or Item of a Financial Statement 
  • ISA 800 – Reporting Considerations for Special Purpose Framework (no specific mention as the requirements are met by other standards)

New standards included in LCE templates

  • NZ AS1 – The Audit of Service Performance Information (although effective for periods beginning on or after 1 Jan 2021 we have included this content in the new Tier 3 and 4 PBE LCE templates)
  • ISA 540 – Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures (workpapers based on the substantially updated version are included)

Templates available

The following are available for use now, or will be released by the end of July 2020:

  • Audit – Special Purpose Reporting (LCEA-SP-2020)
  • Audit – NZICA SPFR for FPE (LCEA-NZSP-2020)
  • Audit – Tier 3 Charity (LCEA-T3-2020)
  • Audit – Tier 4 Charity (LCEA-T4-2020)

Review and feedback

As the LCE templates are new, we are welcoming feedback on the content. To create a job, go to the “new job” area and select the appropriate version. Note that jobs can be switched from existing templates, but we recommend that this is only done after the annual rollover to avoid loss of work.

We have created a dummy client (“Little and Quick Ltd”) to test the basic special-purpose version. We have been sharing this job with interested users to review. If you would like to have a copy please contact us and we can send through a PDF of the completed job, and/or attach the live job to your account. Happy flying!

3 June 2020

When help or support is needed first use the “help” icon from within Audit Assistant (bottom right of the screen):

  • This connects to relevant articles from our support hub.
  • Includes a contextual search function with a number of suggestions.
  • If the suggestions are not suitable, use the search bar to access all the content on our support hub:
  • The help topic will open in the sidebar, but clicking on the up arrow will open the full article in the support hub. 

If browsing for more information go directly to the support hub.

Support hub front page

This provides information on:

  1. What type of work can be done within Audit Assistant.
  2. Answers to frequently asked questions.
  3. Services we provide if you are seeking further training.
  4. Detailed instructions on how to use features in Audit Assistant.
  5. Articles of interest related to topics like audit principles, COVID, AML to name a few.

The site has been separated into five main categories of which category has its sub-categories. For example, the category Articles has sub-categories for current issues and technical articles for areas of focus such as:

  • Less complex entities
  • Accounting standards
  • Anti-money laundering audits
  • And other audit and technical issues

The Q&A section has answers to questions that other users have asked and we feel are beneficial to users especially frequently asked questions.

We recommend looking at all categories especially the Q&A section before contacting us directly as this will speed up the process of obtaining an answer, however, we are always just a click away if needed.

Contacting us directly

  • When using the contact option tell us as clearly as possible the specific problem.
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While the help-desk or email is the most reliable way to contact us in the first instance, if a really urgent issue has arisen and we haven’t responded on the help-desk, try calling us (in business hours) on:

  • 021 169 4097 (Clive – content, and admin); or
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29 April 2020

At Audit Assistant we are fully aware of the disruption of COVID-19 on your audit practice and like you doing are best to adjust to working remotely. We are working hard to ensure our service to you is not disrupted by this event.

The XRB website has useful information on how to incorporate COVID-19 into your audit. We recommend that if you have not done so already that you read their COVID auditing implication section and the attached link to articles and websites.

We are actively assessing our processes and remaining vigilant to any new implications arising from updated guidance from regulatory and institutional authorities with an emphasis on our checklists and reports.

If you seek assistance arising from COVID-19, please feel free to contact us through our support desk.

Upon our review of Audit Assistant’s processes, templates, reports & support infrastructure to determine how we can improve, now and into the future, we will be implementing the following:

  • COVID-19 Checklist
  • COVID-19 Emphasis of Matter paragraphs
  • Infrastructure for users working remotely with an unreliable internet connection

COVID-19 Checklist

We have reviewed the XRB Audit Implications and IAASB guidance and have developed two features to help. In the planning (D) section an optional checklist has been created to help you with prompts for identifying and assessing the effects of COVID-19 for example:

  • Effects on audit deadlines
  • Impact on control environment and planned reliance on controls
  • Inability to attend stock takes
  • Regulatory factors and the appropriateness of assumptions for accounting estimates
  • Identification of subsequent events
  • Reconsideration of the appropriateness of the use of the going concern
  • Group audits

COVID-19 Emphasis of Matter Paragraphs

Auditors should consider whether an Emphasis of Matter paragraph for COVID-19 issues is appropriate. We have added a prompt on the Audit Report page (Z section) as follows:

Screenshot of Audit Assistant showing Covid-19 entry point

Here is a simple example of a COVID-19 EOM paragraph:

We draw attention to note xxx in the Financial Report, which describes events subsequent to year-end and specifically the possible effects of the future implications of COVID-19 on ABC Limited’s future financial position and performance. In our view this issue is fundamental to users’ understanding of the Financial Report. Our opinion is not modified in respect of this matter.

We have prepared this video as part of our training programme.

Emphasis of Matter – NZ Schools (OAG) Audit

The NZ OAG has specified that an EOM paragraph must be added to school audits as follows (amended as appropriate where reports are qualified):

We have added this paragraph so that it will automatically be included in all school audit reports.

Infrastructure for users working remotely with an unreliable internet connection

With everyone working from home, issues around internet connections have been identified as not all connections were created equal especially for those living in rural areas.  

This can be an area of great frustration especially when working on a page and the internet connection is temporarily down. This can mean that data and information that you were inputting to a page may not save. We are currently working on a feature that adds a message warning users when their internet connection is unavailable. In addition, any items (comments, review notes, etc) that fail to save, will no longer be lost. Instead you will be given the opportunity to retry saving once reconnected. This feature should be in by June.

24 April 2020

Relevant or not?

When it comes to auditing estimates and related disclosures it is understandable to think that a new standard may not as relevant to small and medium practices. However, there are so many types of accounting estimates, to name a few:

  • Bad debts
  • Inventory obsolescence
  • Depreciation the fair value of financial assets or financial liabilities
  • Goodwill
  • Contingent Liability
  • Holiday & Sick pay obligations
  • Warranty estimates & obligations
  • Credit losses allowances
  • Useful life of an asset

A small entity may have complex estimates and a large entity may have estimates that are small and simple to measure. Therefore, from time to time you will need the guidance from this standard. Fortunately the IAASB has specifically designed the amendments to be scalable.

In this article we highlight how the revised ISA 540 will affect how you audit accounting estimates and related disclosures and what we are doing to assist you in this regard.

What are the key changes to the amended standard?

The objectives:

The objective of the auditor in the old standard was to obtain sufficient audit evidence in the financial statements that accounting estimates were reasonable and related disclosures were adequate.

Under the new standard auditors will need to obtain reasonable assurance for both accounting estimates and disclosures.

What is the concept of reasonable?

An entity’s Accounting Estimates and related disclosures are reasonable when:

  • They fit within the context of the applicable financial reporting framework
  • They reflect judgements that are consistent with each other and with those used in other accounting estimates or areas of the entity’s business activities
  • They not only comply with the requirements of the applicable financial reporting framework but, in doing so, reflect judgements that are consistent with the objective of the measurement basis in that framework.

Essentially, reasonable assurance means that when auditing we can no longer work under the assumption of trust but verify. We must be professionally sceptical and assess whether management assertions around estimates agree to our expectations, collated audit evidence and the audit outcome.  

Key Concepts and requirements within the standard:

The revised standard now requires a separation of assessment of inherent and control risks. There are three main inherent risks:

  • Subjectivity – They arise from inherent limitations in knowledge or data reasonably available to value estimates.
  • Complexity – The complexity inherent in the process of making an accounting estimate, such as when multiple data sets or assumptions are required or when complex models are used.
  • Estimation Uncertainty – The susceptibility to an inherent lack of precision in the measurement of an accounting estimate. Estimation uncertainty influences the other inherent risk factors.

Overall, how an entity measures its estimates is highly subjective and this factor is largely interrelated with other inherent risk factors.

There is an increased emphasis on understanding the environment the entity operates in and the level of expertise it has in order to understand how management measures accounting estimates, internal procedures and controls around accounting estimates and disclosures. This means understanding:

  • The entity’s transactions and other events and conditions relating to accounting estimates to be recognised or disclosed.
  • Regulatory factors relevant to the entity’s accounting estimates, including, when applicable, regulatory frameworks related to a financial reporting framework, prudential supervision.
  • The nature of the accounting estimates and related disclosures that the auditor expects to be included in the entity’s financial statements, based on the auditor’s understanding of the matters to the above.
  • How the entity’s risk assessment process identifies and addresses risks, what methods are used by management to create estimates.
  • In relation to the methods used, the auditor should focus on how management selects or designs and applies them.

The more significant the inherent risk the greater professional scepticism is required.

When the auditor assesses the risk to have a higher estimation uncertainty, complexity, and subjectivity, the greater the scepticism needed especially if they are more susceptible to management bias or fraud.

We must stand back and ask whether what we have seen reflects the results and expectations of the entity’s accounting estimates and review them to the outcome of past estimates. A solid understanding of ISA 315 and ISA 330 helps auditors to conclude that controls are designed and implemented satisfactorily safeguard against inherent risks.

The standard also requires engaging with management and governance. When starting the audit, we must ensure that we receive the following:

  • Documented procedures on how management makes their decisions on what accounting estimates they present in their financial statements.
  • Assumptions made.
  • Data used and the internal controls over them.

Throughout the audit we must be communicating with governance and management around significant qualitative aspects of the entity’s accounting practices and significant deficiencies in internal control.

The emphasis is on the inherent risk factors and encouraging the entity to use a more statistical, historical, or reasoned approach to creating an estimate and disclosure.

Appendix 2 to the revised standard gives great examples of what you should be communicating to the entity’s governance and management.

What are Audit Assistant’s changes?

The template has been designed in three parts:

Accounting Estimates – The main page. The aim is to identify and assess the risks of material misstatement for accounting estimates and evaluate whether accounting estimates and disclosures are free from material misstatement.

Accounting Estimates Client Questionnaire – A sub-page to be shared with the client to provide the required information from the entity assists with assessing how the client makes estimates and any controls around this.

Specific Estimate – A sub-page to assist with auditing a specific accounting estimate and will help with the overall evaluation of accounting estimates – a version is created for each estimate. The goal is to:

  • Assess management’s assumptions and judgements in making the accounting estimate and ascertain whether there is management bias.
  • Assess whether controls are operating effectively on the estimate.
  • Assess whether substantive procedures alone can provide sufficient appropriate audit evidence.
  • Design tests of controls and substantive tests for the specific estimate.

NOTE: ISA (NZ) 540 (Revised) applies for periods beginning on or after 15 Dec 2019.

The standard does not say, as many do that early adoption is permitted, so for now we have provided the alternative to use the old workpapers, or the new ones based on the revised standard. We have also moved accounting estimates from the E section into the D “Other Matters” section.