AUDITING AND

ASSURANCE:
SPECIALIZED INDUSTRY
WHAT IS A SPECIALIZED INDUSTRY?

Perhaps it is easiest to start by explaining that a specialized industry is

not necessarily rare or even unusual. Examples of specialized industries
include:
• airline
• banking and insurance
• agriculture, and
• oil extraction.
WHAT IS A SPECIALIZED INDUSTRY?

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. For instance, IAS 41, Agriculture is
clearly relevant specifically to the agriculture sector and IFRS 7, Financial
Instruments: Disclosure will need specific application by companies
operating in the banking sector.
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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. ISQC 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.
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Competence
• 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.
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Competence
• 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.
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Competence
• 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, for example a smaller firm may
specialize in the audit of clients in the farming sector, or in not-for-
profit organizations, so it should not be assumed that just because an
audit firm is small, it would not meet the competence requirement.
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Competence
• 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.
BREAK TIME !
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Audit planning
• Identification of the risk of material misstatement in a specialized
industry should be approached in the same was as in any other audit –
by obtaining appropriate understanding of the business and its
environment. Assuming that staff have the necessary competence, as
discussed above, this should not be problematical.
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Audit planning
• 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. For example, in
the audit of banking sector clients, an audit firm may produce guidance
on the specific application of IFRS Standards relating to the range of
financial instruments typically held by banks. Audit staff can then refer
to this guidance when performing the audit, particularly when
identifying risks of material misstatement.
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Audit planning
• 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. For instance, in the audit of a bank, there will be
plenty of risks to consider other than those relating to bank-specific
transactions and balances, for example the depreciation of properties,
recognition of provisions and impairment of goodwill would all still be relevant.
These 'normal' types of risk must not be forgotten, just because the client
operates in a specialized industry.
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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. For instance, in the audit of a bank, specialists
may be brought in to value complex financial instruments.
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Reliance on experts
• In this situation, the audit firm must adhere to the requirements and
principles of ISA 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.
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Reliance on experts
• 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. For instance, the auditor must
consider whether the expert’s findings are consistent with the auditor’s
understanding of the client and with the conclusions of other audit
procedures. Any inconsistencies must be investigated.
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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.