Professional Documents
Culture Documents
Assurance and Attestation Cheatsheet
Assurance and Attestation Cheatsheet
(a) inflating AR through interested party transactions, (b) hidden fraudulent activities in suspense accounts, (c) hiding losses in off-B/S accounts or SPVs, (d) disguising Ponzi
scheme with fictitious trading activities, (e) importer colludes with exporter to evade taxes by reducing the value of goods
(a) conflict of interest; fraudulent bookkeeping used to make fraudulent loan applications to obtain more money to delay any collapse of an unprofitable or mismanaged firm;
keeping the books openrecording sales in the following year as those in the preceding year-end to inflate assets and revenue
(b) fraudulent loan (borrower declares bankruptcy/disappears after borrowing moneythe loan could be a means to conceal theft); forged or fraudulent documents; fraudulent
loan applications (hiding credit history, firms overstate profits to make risky loan appear to be a sound investment)
(c) SPVisolate the firm from financial risk; hide debts, inflating profits, hide ownership and obscure relationships between entities which are related to each other
(d) perpetuation of offering of high returns requires ever-increasing flow of money from the new investors to keep the scheme going; at some point
(e) invoicing the goods/service at a price below the fair market price; invoicing the goods/service at a price above the fair market price
Red flags: alteration of documents and records, photocopies in place of originals, rubber stamp in place of originals, signature or handwriting discrepancies, transaction
initiated without the appropriate authority, unexplained fluctuations in stock account balances, inventory variances and turnover rates, subsidiary ledgers do not reconcile
with control accounts, extensive use of suspense accounts
Internal controls: Safeguard assets, check the accuracy and reliability of accounting data, promote operational efficiency, encourage adherence to prescribed administrative
policies + Control environment
Internal control elements: Segregation of duties, Accounting systems, Control Activities/Procedurescomputer controls and physical controls, Control objectives (accuracy,
authorization, classification, completeness, proper accounting, timeliness, validity)
Ratio analysis: Current ratio=2, Quick ratio>1, Inventory turnover ratio (COGS/Ave. inventory), AR turnover ratio (Sales/Ave. AR), AP turnover ratio (Cost of sales/Trade AP), D/E
ratio, GM ratio (GP/Total sales), Return on sales (Net Profit/Sales)
Damage containment: understand what has happened, modus operandi, contain the damage from expanding, Damage assessment: after the damage has been reasonably
contained, assess and quantify the damage, Damage recovery, Damage prevention
Anti-Money Laundering: Masking benefits from criminal conduct to make it appear as though it originated from a legitimate source
1)
Predicate crimes: corruption, bribery, fraud, organized crime, terrorism, drug-human trafficking etc
2)
Placement: initial introduction of criminal proceeds into the stream of commerce (most vulnerable stage)
3)
Layering: distancing the money from its criminal sourcemoving of money into different accounts/countries (increasingly difficult to detect)
4)
Integration: laundered proceeds are distributed back to the criminal, creates appearance of legitimate wealth
Combating ML: KYC, Compliance with laws, Cooperate with law enforcement agencies, Disclosure of information by banks shall be made to the Commercial Affairs Division,
adhere to the Banks policies and principles set out in the MAS Guidelines; management should ensure that staff are adequately trained and informed, Staff should adhere to the
Banks procedures for customer identification, retention of financial transaction documents, and reporting of suspicious transactions
Identification of customers that are not natural persons, i.e. non-individual, companies, Identification of beneficial owners and verification of their identities, PEPs, Crossborder wire transfer exceeding S$2,000 record who did the transfer, Suspicious transaction reporting file the report to send to CAD
Violations (Singapore):
Banks tip off the money launderer; Failing to cooperate with law enforcement agencies; Entering into or otherwise be concerned in an arrangement knowing or having
reasonable grounds to believe that by that arrangement:
it will facilitate the retention or control of benefits of ML proceeds; or the benefits of ML proceeds are used to secure funds or acquire property for another person
(whom the bank knows or has reasonable grounds to believe has been/is involved in, or has benefited from ML); conceal or disguise; or convert, transfer, or remove
from the jurisdiction, any property which, in whole or in part, directly or indirectly, represents another person's benefits of ML proceeds; or acquire any property for
no or inadequate consideration, knowing, or having reasonable grounds to believe, that the property, in whole or in part, directly or indirectly, represents another
person's benefits of ML.
Audit/Detection: Recognize Transaction Patterns of Serious Tax
Audit/Detection: Recognizing Patterns of Suspected Money Laundering Activities
Crime Activities
Large cash deposit is withdrawn or transferred out in a short period, and this pattern repeats over time
Cash is deposited in many branches or cash deposit machines (CDM) to one account
Unusually large cash deposits made by individual or company whose business activities would normally be
Substantial increase in cash deposits of any individual business without any apparent cause, especially if such
Cash deposits by means of numerous deposit slips or deposits at various inter-branches so that the total
Exchange of large quantities low denomination cash notes for those of higher denomination;
Transfer of large sums of money to or from other countries with instructions for payment in cash
Internal Auditing:
Methodology: Risk Assessment, Audit Planning, Testing Strategy, Execution,
Communicate Results
Attestation Engagements:
Attest to managements assessment of internal controls in annual reports and present an
evaluation of certain aspects of the internal control structure and procedures + Obtain audit
committee pre-approval for audit and permitted non-audit services
responsibility (assessment of the controls and identification of the framework used for the
assessment-COSO, Enterprise Resources Planning) for establishing and maintaining adequate
internal control over financial reporting for the company, attested to by the company's
auditor.
Under the old SAS 70, Management simply decided which controls to test and sometimes was
unable to properly identify key controls (no accountability or feedback to mgt about its choice
because the auditors were forbidden from choosing them). In the new standard, mgt has to
identify the risks associated with the service and financial reporting by the user and then
identify controls that can mitigate those risks the user auditor can evaluate the proper
choice of controls.
TRM Attestation: Risk Identification, Risk Assessment, Risk Treatment, Risk Monitoring and
Reporting, Risk map
Document, procedure, authorize, review, backup, change control, top management support
IPO
Multiple valuation methodassumes that a ratio comparing value to some firm-specific variable (operating margins, cash flow, etc.) is the same across similar firms
Dividend discount modelusing predicted dividends and discounting them back to present value, Discounted cash flow model, Sum-of-parts method
Return on capital employed= Earnings Before Income and Tax (EBIT)/Capital Employed
Fisher separation theorem separates management's "productive opportunities" from the entrepreneur's "market opportunities"
Discounted Payback PeriodIt is the amount of time required to cover the cost of a project (adding positive discounted cash flow from the profits of the project)
M&A Due Diligence Goal: Buyer to confirm Sellers financials, contracts, customers, and all other pertinent information
Pre-Acquisition Due Diligence
Post-Acquisition Due Diligence
o
Senior management individual should assist with management buy-in for
o
Fraudulent financial reporting and material weaknesses in internal control provide early
the due diligence process and facilitate communication of key issues.
identification of unmet initial business plan goals take corrective action before substantial
Internal audit should ensure that robust accounting and internal control
losses are incurred.
due diligence checklists exist and have been tailored to address unique
o
Critical components: a transition manager (to provide direct assistance with on-site
risks associated with a prospective subsidiary.
integration+ should not be directly involved in running the business to maintain their
o
Key issues: earnings quality, asset quality, potential for unrecorded or
objectivity+ formal training); business process and control experts (for integrating the various
understated liabilities, financial statement projection evaluations, cash
infrastructure processes such as accounting, finance, IT, procurement and contract
flow concerns and fraud due diligence.
management); an initial comprehensive business process and control review (gives
o
An efficient and effective internal control due diligence checklist (based
management of the new subsidiary a roadmap of the controls and process changes that
on the COSO Enterprise Risk Management (ERM) Cube, 2004) should
need to be implemented) and an annual rated audit (A rating of satisfactory or unsatisfactory
assess: a prospective subsidiarys control and risk mitigation posture
should be given, based on whether the roadmaps recommendations have been
relative to acquiring company expectations; whether unmitigated key
implemented).
business risks such as the absence of a repeatable financial institution;
o
An unsatisfactory rating should be examined closely. If serious process and control deficiencies
the estimated effort required to implement missing controls.
were identified from the prior review(s) that need an extended time period to fully remediate
(i.e. a new accounting system), then this should be taken into account.
Leadership and Protocol of the DD Team
Due Diligence Program
o
A senior business executive in the sellers company as the lead. This
o
Priority checklist covering the major acquisition objectives must be covered first
persons business acumen and leadership are crucial
o
Detailed DD program for items that should be covered but of lower priority
o
Control of informationsafe-keeping, dissemination, etc.
o
Improving the DD program along the way during the DD
o
Day-end meeting: each day during the DD for everyone to share what
o
Projections, reports and other documents that used by the company as opposed to those
they have observed and gathered
specifically created for the DD
o
Safety and security of the team including where they go and where they
o
Division of labor is an important factor to allow the DD team to collect as much information as
stay after work
possible within a short timeframe allowed by the seller
o
Pre-designed forms should be used by everyone in the DD team to allow fast consolidation of
information every night
o
Data analytics tools should be considered to cover broader areas in little time
Areas Should be Covered in the DD: General Corporate Matters-Financial, Accounting, and
Taxes; Technology and Intellectual Property; Product / Service Offerings; Operations; Sales and
Marketing; Human Resources and Personnel; Legal and Regulatory
What do we look out for during due diligence?
Sell-Side Due Diligence
Considerations for Cross-Border M&A DD: Do we have the interpreters and translators and business associates we trust there? Get to know the regulators, local shareholders,
the directors, the local management; DD for hostile takeover: Debt level; Liquidity; Close allies; the sentiments of major shareholders about the company; the shareholders
temptation and tolerance thresholds; their significant assets and value; vulnerabilities; strengths and defense?
Materiality and Audit Sampling
Planning materiality $= No. corresponding to total asset range + Given factor*(Total revenue Total asset excess over range number)
Performance materiality:
No control deviation => the control is operating effectively; perform test of details as planned.
Control deviation (that exceeds the allowable number of deviation) => the control is not operating effectively; control risks is now assessed to be higher than
anticipated ->increase extent of test of details.
Monetary unit sampling unit for test of details: A transaction with a larger balance would have a greater chance of being selected.
Misstatement detected (i.e. factual misstatement)/sample size=Error rateError rate*Population size=Projected misstatementsCompare with materiality
If projected misstatements exceed materiality, increase sample size and perform test of details on the extended samples (to identify full extent of misstatements). If
projected misstatements are lower than materiality, evaluate whether factual misstatements detected exceed materiality.
If factual misstatements exceed materiality => material misstatements. If factual misstatements are lower than materiality => not material individually; may be material
when aggregated with other misstatements.
Quality control: Singapore Standard on QC 1: compliance with professional standards and legal regulatory requirements, reports issued are appropriate
Elements: Leadership responsibilities for quality within the firm (tone at the top, policies for performance evaluation/compensation/promotion, commercial considerations
do not override quality of work performed, experience, ability, authority), Ethical requirements (maintain independence, communication of requirements, threats and
safeguards, evaluate, written confirmation of compliance on independence, sign declaration of confidentiality, report to authority), Acceptance and Continuation of client
relationship and specific requirements (firm should be competent, capabilities, complies with ethical requirements, integrity of client), Human resources (competence,
capabilities and commitment to ethics + professional development, performance evaluation, disciplinary actions), Engagement performance (in accordance to standards,
legal requirements, consistency in quality through specific guidance materials, specific supervisory responsibilities, addressing significant matters, review, sufficient and
appropriate evidence obtained, objectives achieved, resolve differences, engagement quality control reviewer), Monitoring (ensure policies and procedure are relevant,
adequate, operating effectively, evaluation of firms QC, inspection by someone with experience and authority, note deficiencies, corrective actions to be taken) +
Documentation and Communication
Audit of Consolidated FS
Agree amounts to legal document/cash book/bank statement/board minutes/valuation report/legal purchase agreement; Written representation from mgt about acc
treatment; Confirm values are recognised in individual company and conso B/S; Recomputed discounted values, assumptions used in projections
Audit issues: Risks (non-elimination of intragroup transactions unrealized profit), group-wide internal controlshow transactions are identified and recorded
Conso FS Audit procedures
Component Auditors
Enquire management the process used in preparing the adjustment schedules and
statements.
assess the reasonableness of the process.
3) Specified audit procedures relating to the likely significant risks of material
For components that are not significant components, the group engagement team
documentation (e.g. intercompany sales to sales invoices).
shall perform analytical procedures at group level and if necessary, the above.
Impairment of Goodwill: Recoverable Amount = Higher of (i) Market price less cost
cooperate with the group engagement team; The timetable for completing the audit; The
work to be performed by the component auditor; The ethical requirements that are
relevant to the group audit and, in particular, the independence requirements;
Component materiality and the threshold above which misstatements cannot be
regarded as clearly trivial to the group financial statements; A list of related parties
prepared by group management; A request that the component auditor communicates
on a timely basis to the group engagement team related parties not previously identified
by group management or the group engagement team; A request that the following be
reported to the group engagement team on a timely basis: (Significant accounting,
financial reporting and auditing matters, including accounting estimates and related
judgments; Matters relating to the going concern status of the component; Matters
relating to litigation and claims; Significant deficiencies in internal control that the
component auditor has identified during the performance of the work on the financial
information of the component, and information that indicates the existence of fraud)
Restructuring
A constructive obligation to restructure arises only when an enterprise: (a) has a detailed formal plan for the restructuring + (b) has raised a valid expectation in those
affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it.
A restructuring provision should include only direct expenditures arising from restructuring=(a) necessarily entailed+ (b) not associated with ongoing activities
A discontinued operation is a component of an entity that either has been disposed of, or is classified as held for sale + major line of business + clearly distinguished cash
flows and operations Restructuring by closing the business Restructuring by selling the business
Not a discontinued
Discontinued
Audit Procedures
operation
operation
Closure of
FRS 37 to recognise
FRS 37 to recognise
1) Review directors minutes of meeting, evidence on: Approval of restructuring plan + Date of approval
business, i.e.
provision
provision
2) Review announcement made (e.g. letter to employees, suppliers, customers or press) to obtain evidence on
abandonme
restructuring, if any restructuring, if any the sufficiency of details of announcement
nt, closed
3) Obtain a breakdown of provision and agree restructuring cost to supporting documentation
FRS 105 to present
during the
A list of employees being made redundant and the compensation for each of them
results and cash
year
Agree the redundancy compensation for employees to employment contract and redundancy notification
flow relating to
letters
discontinued
Lease contract terms and conditions relating to break lease to verify whether the lease becomes an onerous
operation
contract and the verify the unavoidable costs
4) Physical inspection of non-current assets to confirm the assets are being dismantled or abandoned
5) A direct confirmation with lawyer relating any legal claims from customers or suppliers for breach of contract
because of the restructuring plan
6) Review documents supporting events after financial year, e.g. actual settlement of legal claims or actual
redundancy payment to retrenched staff, to ensure provision for restricting at year end is sufficient and not
excessive.
Sale of
FRS 37 to recognise
FRS 37 to recognise
Audit procedures restructuring provision relating to selling a part of business:
business
provision for
provision for
1) Review directors minutes of meeting, evidence on: Approval of selling the part of the business + Date of
not sold yet
restructuring, only
restructuring, only
approval
at year end
if there is a binding
if there is a binding
2) Review binding contract signed with buyer
sale agreement
sale agreement
3) Review bank statement to ensure sale proceeds collected are as signed agreement
4) Obtain a breakdown of provision and agree restructuring cost to supporting documentation
FRS 105 to
FRS 105 to
A list of employees being made redundant and the compensation for each of them
reclassify, re
reclassify, re Agree the redundancy compensation for employees to employment contract and redundancy notification
measure NCA as
measure NCA as
letters
held for sale
held for sale
Lease contract terms and conditions relating to break lease to verify whether the lease becomes an onerous
FRS 105 to present
contract and the verify the unavoidable costs
results and cash
5) Review documents supporting events after financial year, e.g. actual settlement of legal claims or actual
flow relating to
redundancy payment to retrenched staff, to ensure provision for restricting at year end is sufficient and not
discontinued
excessive.
operation
Held for sale discontinued operations: Measurement => lower of carrying amount and fair value less cost to sell
Sale of
FRS 37 to recognise
FRS 37 to recognise
+ recognise an impairment loss for any writedown of the disposal group to fair value less costs to sell + shall not
business
provision for
provision for
sold during
restructuring, if any restructuring, if any depreciate (or amortise) a non-current asset while it is classified as held for sale or while it is part of a disposal
group classified as held for sale + Interest and other expenses attributable to the liabilities of a disposal group
the year
FRS 105 to present
classified as held for sale shall continue to be recognised.
results and cash
Held for sale= The disposal group must be available for immediate sale in its present condition + Its sale must
flow relating to
be highly probable:
discontinued
committed to a plan to sell the disposal group; an active programme to locate a buyer and complete the plan
operation
must have been initiated; the disposal group must be actively marketed for sale at a price that is reasonable in
relation to its current fair value;
the sale should be expected to qualify for recognition as a completed sale within one year from the date of
classification; actions required to complete the plan should indicate that it is unlikely that significant changes to
the plan will be made or that the plan will be withdrawn.
Audit
Review and file a copy of the board minutes for evidence that management are committed to the planned sale
procedures
Inspect any documents pertaining to the sale negotiations, e.g. legal correspondence with potential buyer
relating to a
Obtain managements calculations on the fair value less cost to sell of the discontinued operation and assess the validity of any assumptions used
discontinued Inspect forecasts and budgets for the next financial year to see that the discontinued operation is not included in the forecast and budgets from the intended
operation
date of sale
Review the note to the FS and ensure that separate disclosure as required by FRS 105 has been made in the statement of financial position, statement of
comprehensive income, and statement of cash flows
Review the non-current asset and for those assets included in the discontinued operations, ensure that depreciation has not been charged as required by FRS
105