AUDITING IN SPECIALIZED INDUSTRY
Introduction and Overview
AUTHORITIES
Advanced Audit Assurance (AAA) Technical
Articles by Association of Chartered Certified Accountants (ACCA)
SPECIALIZED INDUSTRY
A specialized industry is a distinct market that has a unique way of
accounting for transactions and reporting its financial results.
These differences are allowed under the applicable accounting framework,
such as IFRS or GAAP.
Examples of specialized industries are airlines, banking, public utilities, and
insurance.
WHAT MAKES AN INDUSTRY SPECIALIZED?
What makes these industries specialized is that they are likely either
to have SPECIFIC financial reporting standards applicable to them, or
to have DISTINCT accounting policies which have been developed to account
for specialized transactions and balances which are based on the normally
applied financial reporting standards.
EXAMPLES OF STANDARDS USED BY SPECIALIZED INDUSTRIES
* PAS 41 - Agriculture (Agricultural Sector)
* PFRS 6 - Exploration for and Evaluation of Mineral Resources (Mining and Oil
Exploration Sectors)
* PFRS 9 - Financial Instruments and PFRS 7 - Financial Instruments: Disclosures
(Banking Sector)
* PFRS 17 - Insurance Contracts (Insurance Companies)
CHARACTERISTICS OF SPECIALIZED INDUSTRIES
High Inherent Risk
Requires Strict Compliance to Laws and Regulations
Has Secondary Licenses to other Government Agencies (other than BIR and
SEC)
Complex Accounting Policies and Procedures
AUDIT CONSIDERATIONS
Competence
Audit Planning
Reliance on Experts
COMPETENCE
When accepting an audit engagement involving a specialist industry, the
audit firm needs to pay close attention to the competence of the audit firm to
provide the service.
PSQC 1, Quality Control for Firms That Perform Audits and Reviews of
Financial Statements, and Other Assurance and Related Services
Engagements requires the audit firm to consider whether the firm is
competent to perform the engagement and has the capabilities, including
time and resources, to do so.
This should include consideration of whether the audit firm personnel has
knowledge of relevant industries and has experience with relevant regulatory
or reporting requirements, or the ability to gain the necessary skills and
knowledge effectively.
Larger audit firms are likely to meet the competence requirement for almost
any type of industry - they will either already possess necessary skill and
competence through having existing clients in the particular industry or have
the resource available to bring in experts and/or provide any necessary staff
training.
Smaller firms may have to carefully consider their competence to take on an
audit client in a specialized industry if they have not previously worked with
an audit client in the same industry.
However, regardless of size, audit firms may choose to specialize themselves
in the audit of clients in a particular market or sector, so it should not be
assumed that just because an audit firm is small, it would not meet the
competence requirement.
The audit firm should also ensure that there is adequate documentation to
demonstrate that competence has been considered, and the steps that have
been taken to improve competence where necessary, for example through
appropriate staff training.
AUDIT PLANNING
Identification of the risk of material misstatement in a specialized industry
should be approached in the same way as in any other audit - by obtaining
appropriate understanding of the business and its environment. If staff have
the necessary competence, as discussed previously, this should not be
problematical.
To assist audit team members assigned to a specialized industry client, the
audit firm is likely to have additional resources available.
There may be
briefing notes or
internal technical guidance
on how financial reporting standards should be applied within the sector.
It is also important to remember that while there may be specific risks of
material misstatement relating to the industry-specific balances and
transactions, there must also be appropriate consideration of the "normal"
balances and transactions.
These "normal" types of risk must not be forgotten, just because the client
operates in a specialized industry.
RELIANCE ON EXPERTS
Linked to the previous matters, competence, audit planning and the
specialized nature of some transactions and balances, the auditor may plan
to use an auditor's expert to obtain audit evidence.
This is quite likely in a specialized industry as despite being competent to
perform the engagement, the audit firm may not have the necessary specific
expertise in some areas.
In this situation, the audit firm must adhere to the requirements and
principles of PSA 620, Using the Work of an Auditor's Expert which
deals with matters including the evaluation of the objectivity, competence
and capabilities of the auditor's expert, determining and communicating the
scope and objectives of their work, and assessing their findings.
It is particularly important that the auditor evaluates the relevance and
adequacy of the expert's findings or conclusions. There is a danger of over-
reliance on the expert's work; the fact that the audit is of a specialized nature
does not mean that the auditor can pass all responsibility over to an expert.
CONCLUSION
The audit of a client in a specialized industry can pose some challenges to
the audit firm. However, with proper consideration of competence, and by
providing staff with additional support and guidance, these audits should not
necessarily be more complex or challenging to plan and perform.
Using experts can provide high quality audit evidence in specialist situations,
but the auditor must be careful to fully evaluate the findings of the auditor's
expert and not to over-rely on their work.
For audit staff, working on this type of engagement can be very rewarding,
providing exposure to sometimes unusual businesses.
