Tag: Compliance

Audit Working Paper

ICAI Audit Working Papers: The Ultimate Guide for Effective Usage

In July 2023, the Institute of Chartered Accountants of India (ICAI) introduced noteworthy additions to the audit working paper templates. These ICAI audit working papers particularly focuses on the third-party confirmation and its documentation. Today, we aim to summarize the key aspects regarding this recent development and help auditors realize the relevance of these new audit working paper templates for third party confirmation.

Introduction

As we know, audit working papers are a critical component of the audit process, serving as written records of audit procedures, findings, and conclusions reached by the auditor. The ICAI audit working papers play a crucial role in complying with the Standard on Auditing (SA) 230, Audit Documentation. It requires auditors to prepare sufficient and appropriate audit documentation to support their audit opinion.

Third-Party Confirmation

Third-party confirmations play a crucial role in validating the accuracy of financial records, as they provide an independent and objective assessment of the information presented in the audited entity’s books.

Benefits of ICAI’s Third-Party Confirmation Templates

  • ICAI’s introduction of third-party confirmation and documentation templates marks a significant step towards ensuring consistency and efficiency in the audit process.
  • These templates help auditors structure and format their work papers consistently, simplifying the organization and documentation of procedures performed.
  • Financial aspects covered include accounts receivables, accounts payables, related party transactions, communication with those charged with governance (TCWG) in the audit working paper templates.
  • ICAI has drafted the working papers in accordance with the Standards on Auditing. It ensures that auditors adhere to globally accepted practices while performing their engagements.

Why Use ICAI Working Papers Appropriately:

  • Provide Adequate Evidence for Audit Opinion
    First and foremost, they serve as evidence of the work carried out and form the basis for the auditor’s opinion. By maintaining records of audit procedures followed, auditors and reviewers gain confidence in the quality of the audit.
  • Act as Future Audit Reference
    ICAI’s audit working papers serve as a valuable reference point for future audits. They document the audit plan, procedures performed, and the results obtained, making it easier for auditors to build on previous engagements and carry forward best practices.
  • Promote Enhanced Team Communication
    Effective communication among the engagement team members is crucial during an audit. Audit work papers play a vital role in facilitating this communication by providing a common reference point to discuss findings, conclusions, and any issues encountered during the audit. This fosters collaboration and ensures that the team is on the same page throughout the engagement.
  • Enable Efficient Work Approach
    ICAI audit working papers aim to enhance the efficiency of audit processes. Auditors can save time and effort by using these templates, which offer a clear framework for documenting procedures and evidence. This streamlined approach helps auditors be more productive in their work.

Conclusion

By leveraging ICAI’s audit working papers, auditors can enhance the quality of their work, save time, and maintain a structured record of their audit procedures, ultimately promoting transparency, credibility, and reliability in financial reporting. As businesses face ever-evolving challenges in financial reporting, the use of ICAI’s third-party confirmation and documentation templates will prove invaluable in establishing trust and confidence among stakeholders and investors. For a comprehensive and integrated solution, consider exploring Firmway, a leading provider in audit management software, to further streamline and optimize your audit processes.

External Confirmations In Audits: Best Practices For Success

External Confirmations In Audits: Best Practices For Success

Consequences of Non-Compliance with SAs

Members of The Institute of Chartered Accountants of India (ICAI) must conduct financial audits following Standards on Auditing (SAs) when fulfilling their attestation function. These standards include procedures for external confirmations. These standards represent widely accepted audit procedures. Deviation from SAs, especially in matters related to external confirmations, necessitates a formal declaration by the member. Failure to do so may lead to disciplinary proceedings under The Chartered Accountants Act, 1949

One such standard is SA 505: External Confirmations. It discusses the use of external confirmations and procedures to obtain direct evidence from third parties as required in SA 330: The Auditor’s Responses to Assessed Risks and SA 500: Audit Evidence

External Confirmation is necessary to provide a true and fair view of a company’s financials. It serves as an extremely crucial piece of the puzzle when determining whether such financials are free from material misstatements or not.

External confirmations

External Confirmations is a substantive procedure used to obtain audit evidence as a direct written response from a third party (customer/ vendor/bank) to the auditor in a paper, electronic or any other form.  Generally, auditors use it to determine account balances, status, or terms of agreements. There are primarily three types of confirmation requests:

1. Positive Confirmation Request:

It requires the confirming party to directly respond to the auditor whether it agrees or disagrees with the information provided in the request. Positive confirmations provide reliable audit evidence.

2. Negative Confirmation Request:

It asks the confirming party to respond directly to the auditor only if the confirming party disagrees with the information provided in the request. They provide less persuasive audit evidence than positive confirmations.

3. Blank Confirmation Request:

It is a type of positive confirmation request where the third party (confirming party) is asked to fill in the amount or provide certain information. It provides persuasive audit evidence since the confirming party must verify the information before responding.

Why external confirmations is needed?

For instance, in Mahavir Jain vs. Disciplinary Committee (Appellate Authority), the auditor formed his opinion without obtaining and examining external confirmations of all bank balances as required by SA 505. Consequently, the Chartered Accountant Act of 1949 held him guilty under Part 1 of the Second Schedule. This was due to his failure to exercise the due diligence expected of him and not obtaining sufficient information to form an opinion.

Further, SA 505 is the 3rd most non-compliant standard as per Quality Review Board in Financial Year (FY) 2020-21.

Process of external confirmations

As we know, obtaining confirmations manually via letters or even e-mails is a cumbersome procedure. One needs to maintain records and follow up continuously. External confirmations involve repetition of the following steps for every audit:

  1. Determine the information to be confirmed;
  2. Choose the appropriate parties;
  3. Design the confirmation requests, properly addressed with a request to send responses directly to the auditor;
  4.  Send and follow-up requests.

To simplify and streamline this process, major firms are adopting automated confirmation procedures. This enables audit teams to concentrate on analyzing results and identifying exceptions rather than investing time in evidence collection.

A team of Chartered Accountants started Firmway, a web-based SaaS software company, to help auditors automate the confirmation process in compliance with auditing standards. They digitized the entire confirmation process. Auditors benefit from automating the time-consuming external confirmation process in the following way:

  • Save 90 % man-days by automating the process of sending, receiving, and tracking confirmations using our portal
  • Complete audit documentation as highlighted in peer review process 
  • Increase response rate by 2x
  • Send 1000+ confirmation requests in compliance with standards on auditing
Automating MSME Vendor Identification in Chemical Industry

Identifying MSME Vendors – How a Chemical Giant Automated the Process?

Ensuring Timely Payments and MSME Vendor Identification

The government has established explicit provisions to protect and reduce the credit risk of MSME vendors, including the crucial aspect of MSME Vendor Identification. To ensure that payments to MSMEs are not delayed beyond a specified period, the government mandates that companies disclose details when payments remain outstanding for over 45 days to MSME vendors. This provision necessitates accurate MSME Vendor Identification by companies.

What is an MSME?

Micro, Small and Medium Enterprises, also known as MSMEs, are defined under the Micro, Small and Medium Enterprise Development Act, 2006. The organizations that fulfill the following criteria are classified as MSME organizations:

Type of Enterprise Investment in plant & machinery or equipment should not be more than Turnover should not be more than
Micro Enterprise Rs. 1 crore Rs. 5 crores
Small Enterprise Rs. 10 crores Rs. 50 crores
Medium Enterprise Rs. 50 crores Rs. 250 crores

Thus, vendors who fulfill the above criteria will be classified as MSME vendors and consequently, the companies are required to ensure that their payments are completed within 45 days beyond which penal interest will be levied for micro and small companies. This necessitates them to verify which of their vendors are MSME vendors.

This becomes a tedious task especially when the company is dealing with thousands of vendors. Further, the MSME status keeps on changing each year. It is not necessary that a vendor who is an MSME vendor today will be an MSME vendor next year as well. Companies faced huge difficulties in verifying the MSME status of their vendors each year and automating this task was the need of the hour.

How A Ltd Automated MSME Confirmations?

A Ltd. is one of the giants in the chemical industry. Being one of the largest chemical companies, it dealt with 3 lakh vendors out of which 30,000 were active vendors. Its total annual purchases were Rs. 18,626.25 crores out of which it identified that only Rs. 110 crores were outstanding to the MSME vendors in the year end. Consequently, the huge gap in the figures raised concerns over the accuracy of the database. Clearly, automation was the need of the hour for getting MSME confirmations from such a huge number of vendors.

Earlier at A Ltd., the process for obtaining MSME confirmations was not systemised. A Ltd. obtained MSME confirmations 3 years before and the same confirmations were used each year to determine whether a particular vendor is an MSME or not. This led to inaccuracies in MSME identification and there were no updates as to whether an enterprise is still an MSME enterprise or not.

An automated solution was the need of the hour. That’s when they implemented Firmway’s MSME confirmation solution. Being a statutory compliance, it was important to ensure the accuracy of data. Due to non-accurate and untimely compliance led to penal interest @ 3 times of the bank rate notified by the RBI compounded with monthly rests. Consequently, this led to huge outflows in terms of penal interest which was a direct loss for the business.

How Firmway Helped A Ltd. Automate MSME Confirmations?

Firmway’s MSME confirmation tool allowed A Ltd. to automate its MSME confirmations. Following were the results that they witnessed after implementing Firmway’s MSME confirmation solution:

  • 30,000 MSME confirmations sent in a single click
  • 35% of the confirmations received in the first confirmation request itself
  • Overall, 80% response rate achieved. Earlier, it was just 15%-20%.
  • Nil error in detecting the MSME vendors.
  • 90% OCR verification success rate
  • 15,000 man-hours saved

Streamlining MSME Vendor Identification and Compliance

Earlier, they used to invest 100+ man-hours behind this confirmation exercise which eventually dropped to Zero after implementing the solution. Further, vendor education played an important role here. Firmway helped vendors understand the importance of MSME confirmations and why they were asked for their MSME status. Consequently, this led to a significant increase in their response rate.

Efficiently Managing MSME Vendor Data

Further, the solution auto-rejected old vendors from the system who claimed themselves as MSMEs earlier but were not MSMEs now. In fact, it identified that 40% of vendors were no more MSMEs. Further, the company had 3,000 new MSME vendors in the database and Firmway’s solution was able to identify MSME vendors with a 0% error rate.

Successful Implementation of Technology for MSME Compliance

A Ltd. was able to avoid penal interest rates as well as future ROC and CARO non-compliances. Identifying MSME vendors is posing significant difficulties for many such companies. However, by implementing technology, it is possible to automate the confirmations and ensure timely and accurate compliance. 

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