Article Presentation

Sainsburys changes auditor of

20 years
Kadhim Shubber
January 16, 2015

Article Presentation
Summary
http://www.ft.com/cms/s/0/08e1924c-9d81-11e4-9
b22-00144feabdc0.html#axzz3PlEmGvuH
Sainsburys is the third largest grocer, in terms or
market share, in the UK. (Largest is Tesco)
Last year Tesco admitted overstating profits. PwC
gave them an unqualified opinion prior to this
announcement.
Sainsbury changing auditors to E&Y

How it relates to auditing

How long should an auditor stay?

Article Presentation
Background research
Price fixing (2007 fixing the price of milk)
New rotation rules
EU. Mandatory rotation. 10 years or tender. 20 years
manatory

Why I chose this.

New rotation rules in the EU
Why did they change?
PwC claims it is due to the new rules
Sainsburys said its intention to change its auditor
followed a recommendation by the audit committee to
the board following a formal tender process.
Sainsburys announced the tender process in June 2014,
before it had emerged Tesco overstated its profits by
263m.
PwC is currently being investigated bythe Financial
Reporting Council (FRC)for its role in the overstating
ofTescoprofits.

Are these good rules?

Homework #1

Look through comments

2--25. Client acceptance. Most did not mention
the failure of due diligence before even accepting
the client
3--30. Look at the assertions on page 12.
3--31. the net income was too low of a balance to
start with.
Present finding of researching the audit report

Homework #1

Look through comments

2--25. Client acceptance. Most did not mention
the failure of due diligence before even accepting
the client
3--30. Look at the assertions on page 12.
3--31. the net income was too low of a balance to
start with.
Present finding of researching the audit report

Practice problem
1. With respect to the concept of materiality,
which one of the following statements is
correct?
a) Materiality depends only on the dollar amount of
an item relative to other items in the financial
statements.
b) Materiality depends on the nature of a
transaction rather than the dollar amount of the
transaction
c) Materiality is determined by reference to AICPA
guidelines
d) Materiality is a matter of professional judgment

Chapter 4
Risk
Assessment

Chapter 4
Risk
Assessment

sk
i
tR
n
e
m
e
g
ga
n
E

Risks

Client

Auditor

Risk of Material
Misstatement

Business
Risk
Financial
Statements

Business Risk
Threats to managements ability to achieve its
objectives

4-10

Engagement Risk
Litigation

An auditors exposure
to financial loss and
damage to
professional reputation.
Adverse
publicity
4-11

Audit Risk
The
The risk
risk that
that an
an auditor
auditor expresses
expresses
an
an inappropriate
inappropriate audit
audit opinion
opinion when
when
the
the financial
financial statements
statements are
are
materially
materially misstated.
misstated.
Applied
Applied at
at the
the assertion
assertion level
level because
because
this
this directly
directly assists
assists the
the auditor
auditor in
in
planning
planning the
the appropriate
appropriate audit
audit
procedures
procedures for
for the
the accounts,
accounts,
transactions,
transactions, or
or disclosures
disclosures

4-12

Audit Risk Model

(AU-C

200.A36-.48)

Goal: Audit standards require auditors to design audits to reduce audit risk to an acceptably low level
http://pcaobus.org/Pages/default.aspx
AS 8

INHERENT RISK CONTROL RISK

DETECTION
AUDIT RISK
The likelihood that, The likelihood that a
RISK
The likelihood that a
in the absence of material error or fraud The likelihood that
material error or
internal controls,
a material error
fraud will occur,
will not be caught
material error or by the clients internal or fraud will not be and not get caught
fraud will enter
caught by the
by either the
controls.
the accounting
auditors
internal controls or
information system
procedures.
auditors procedures.

Audit Risk Model

Goal: Audit standards require auditors to design audits
to reduce audit risk to an acceptably low level
Internal
Controls
Accounting
Information
System

Events,
Transactions

Financial
Statements

Substantive
Procedures

INHERENT RISK CONTROL RISK

DETECTION
AUDIT RISK
The likelihood that, The likelihood that a
RISK
The likelihood that a
in the absence of material error or fraud The likelihood that material error or fraud
internal controls,
will not be caught by a material error will occur, and not get
a material error or
caught by either the
the clients internal or fraud will not
fraud will
be caught by
internal controls or
controls.
enter the accounting
the auditors
auditors procedures.
information system
procedures.

Likelihood
clients
controls
miss it

Likelihood
misstatement
occurs

Internal
Controls
Accounting
Information
System

Events,
Transactions

Overall likelihood
misstatement
doesnt
get caught

Likelihood
auditor
misses it

Financial
Statements

Substantive
Procedures

INHERENT RISK CONTROL RISK

DETECTION
AUDIT RISK
The likelihood that, The likelihood that a
RISK
The likelihood that a
in the absence of material error or fraud The likelihood that material error or fraud
internal controls,
will not be caught by a material error will occur, and not get
a material error or
caught by either the
the clients internal or fraud will not
fraud will
be caught by
internal controls or
controls.
enter the accounting
the auditors
auditors procedures.
information system
procedures.

The auditor
can only
assess this

The auditor
can only
assess this

Events,

Internal
Controls
Accounting
Information
System

Transactions

The only
way the
auditor can
affect audit
risk

Needs to be
acceptably
low

Financial
Statements

Substantive
Procedures

INHERENT RISK CONTROL RISK

DETECTION
AUDIT RISK
The likelihood that, The likelihood that a
RISK
The likelihood that a
in the absence of material error or fraud The likelihood that material error or fraud
internal controls,
will not be caught by a material error will occur, and not get
a material error or
caught by either the
the clients internal or fraud will not
fraud will
be caught by
internal controls or
controls.
enter the accounting
the auditors
auditors procedures.
information system
procedures.

Risk of Material
Misstatement

Inherent Risk * Control Risk

RMM is the risk that a material
misstatement exists in the financial
statements before auditors apply their
substantive procedures

Assessing IR

Events,
Transactions
INHERENT RISK
The likelihood that,
in the absence of
internal controls,
a material error or
fraud will enter
the accounting
information system

Factors affecting overall inherent risk:

Prior problems
Overall business risk
Factors affecting account inherent risk include:
Dollar size of the account
Liquidity
Volume of transactions
Complexity of the transactions
New accounting pronouncements
Subjective estimates

Assessing CR
Internal
Controls
Accounting
Information
System

CONTROL RISK
The likelihood that a
material error or fraud
will not be caught by
the clients internal
controls.

Test internal controls

Design
Operating effectiveness

Factors affecting CR
The environment in which the company
operates (its control environment).
The existence (or lack thereof) and
effectiveness of control activities.
Monitoring activities (audit committee, internal
audit function, etc.).

More on this in later chapters

Factors Affecting DR
Substantive
Procedures

Nature, timing, and extent of audit

procedures
Sampling risk

Risk of choosing an unrepresentative sample.

Nonsampling risk
DETECTION
RISK
The likelihood that
a material error
or fraud will not
be caught by
the auditors
procedures.

Risk that the auditor may reach inappropriate

conclusions based upon available evidence

Detection Risk and

the Nature, Timing,
and Extent of Audit
Lower Detection
Higher
Procedures
Risk
Detection Risk
Nature
Timing

Extent

More effective
Less effective
tests.
tests.
Testing performed Testing can be
at year-end.
performed at
Interim.
More tests.

Fewer tests.

Assess

Events,

Assess

Do
you
Transactions

Determine /
Solve for

Internal
Controls
doAccounting
more
or less
Information
System

Result

work in this situation?

Financial
Substantive
Procedures

Statements

INHERENT RISK CONTROL RISK

DETECTION
AUDIT RISK
The likelihood that, The likelihood that a
RISK
The likelihood that a
in the absence of material error or fraud The likelihood that material error or fraud
internal controls,
will not be caught by a material error will occur, and not get
a material error or
caught by either the
the clients internal or fraud will not
fraud will
be caught by
internal controls or
controls.
enter the accounting
the auditors
auditors procedures.
information system
procedures.

Assess

Events,

Assess

Do
you
Transactions

Determine /
Solve for

Internal
Controls
doAccounting
more
or less
Information
System

Result

work in this situation?

Financial
Substantive
Procedures

Statements

INHERENT RISK CONTROL RISK

DETECTION
AUDIT RISK
The likelihood that, The likelihood that a
RISK
The likelihood that a
in the absence of material error or fraud The likelihood that material error or fraud
internal controls,
will not be caught by a material error will occur, and not get
a material error or
caught by either the
the clients internal or fraud will not
fraud will
be caught by
internal controls or
controls.
enter the accounting
the auditors
auditors procedures.
information system
procedures.

Pop Quiz: All else held equal, would the following imply more
work for the auditor or less work for the auditor?

1.
2.
3.
4.

Higher control risk

Higher inherent risk
Higher detection risk
Higher audit risk

INHERENT RISK CONTROL RISK

DETECTION
AUDIT RISK
The likelihood that, The likelihood that a
RISK
The likelihood that a
in the absence of material error or fraud The likelihood that material error or fraud
internal controls,
will not be caught by a material error will occur, and not get
a material error or
caught by either the
the clients internal or fraud will not
fraud will
be caught by
internal controls or
controls.
enter the accounting
the auditors
auditors procedures.
information system
procedures.

Using the Audit Risk Model

Set
Set aa planned
planned level
level of
of audit
audit risk
risk such
such that
that an
an opinion
opinion
can
can be
be issued
issued on
on the
the financial
financial statements.
statements.

Assess
Assess the
the risk
risk of
of material
material misstatement
misstatement (IR
(IR xx CR).
CR).

Use
Use the
the audit
audit risk
risk equation
equation to
to solve
solve for
for the
the appropriate
appropriate
level
level of
of detection
detection risk:
risk:

AR = IR CR DR

AR
DR =
IR CR
Auditors use this level of detection risk to design audit
procedures that will reduce audit risk to an acceptable level.
4-25

Relationship of Misstatement and

Risk
Acceptable
audit risk
Inherent
risk

D
I

Planned
detection risk
I

Control
risk
DR =
D = Direct relationship; I = Inverse relationship

AAR
IR x CR

Relationship of Misstatement and

Risk
Acceptable
audit risk
Inherent
risk

D
I

Planned
detection risk
I

Control
risk

D = Direct relationship; I = Inverse relationship

D
I

Planned
audit evidence
D

LO# 3

Using the Audit Risk Model

Qualitative terms may also be used in the audit risk model.
Case
Case
11
22
33

AR
AR
Very
Verylow
low
Low
Low
Low
Low

RMM
RMM
High
High
Moderate
Moderate
Low
Low

DR
DR
Low
Low
Moderate
Moderate
High
High

4-28