Auditing & Assurance: Spec.

Industries

Introduction

1. What is Audit?
An audit is the examination or inspection of various books of accounts by an
auditor, followed by a physical inventory check to ensure that all departments are
complying to a defined method of recording transactions. It is done to ensure the
correctness of the organization's financial accounts. The main purpose of auditing is to
verify that financial statements have been prepared in accordance with accounting
standards and to determine whether the financial statements prepared in accordance
with accounting standards reflect a true and fair view of the state of affairs of a business.

2. What is Assurance?
Assurance is an arrangement in which a practitioner offers a judgment that
increases the users' trust in a subject matter supplied by a "responsible party" after
comparing and measuring the subject matter against set standards. Assurance refers to a
professional's assessment on the correctness and completeness of what is analyzed. For
example, an accountant ensuring the accuracy and validity of financial statements claims
that they have evaluated the records in accordance with approved accounting standards
and principles. Assurance is based on crucial components such as a review of the
methods used throughout a company's financial operations. As a result, the assurance
team keeps a close eye on the operations and procedures. The assurance specifies that a
given method needs to be followed for getting maximum outcomes. Furthermore,
assurance is a method of observing and analyzing a process, procedure, or operation. It
guarantees that the quality of information provided to a firm is enhanced. As a result,
stakeholders may make outstanding judgments for a company's success. This approach
also works effectively in a variety of settings, including consumer feedback, employee
feedback, and financial information.
3. What is a Specialized Industry?
A specialized industry is a distinct market with its own method of recording
transactions and reporting financial results. These distinctions are permissible under the
appropriate accounting system, such as IFRS or GAAP.

4. What makes these industries special?

These industries are specialized because they are likely to have particular
financial reporting standards that apply to them, or separate accounting policies that
have been devised to account for specialized transactions and balances that are based
on commonly-applied financial reporting standards.
5. Give examples of Specialized Industries.
➢ Airlines
➢ Banking
➢ Public utilities
➢ Insurance
➢ Agriculture
➢ Oil extraction

6. What are the Characteristics of Specialized Industries? Explain each one.

➢ High Risk (Publicly-listed or with Public Accountability)
- High-risk because they provide greater potential problems for all parties
in the process. The firm deals with a significant number of transactions.
They work in an industry with a potentially high chargeback ratio. Banks,
for example, may consider spending too many resources on maintaining
your account and, as a result, are obliged to disconnect you, regardless of
whether you violate chargeback criteria.

➢ Strict and several compliance to laws and government agencies and its
regulations
 - Considering specialized industries are high-risk industries, it is vital to
limit or eliminate that risk through tight and varied regulatory
compliance. Specialized industries are prone to a high number of business
conflicts and legal restrictions.

➢ Complex accounting (revenue recognition)

- Accounting for specialized industries is thought to be more complex due
to the many unique regulations and requirements. Since the industry is
specialized, revenue recognition becomes complex. In these industries,
revenue is often contract-driven and determined on a
customer-by-customer, if not contract-by-contract basis. Revenue from
contract accounting, in particular, may be subject to the revenue
recognition requirements of multiple deliverable agreements. Revenue
may not be recognized in a systematic manner during the life of a
contract under this set of criteria; rather, contract revenue may be
divided up into segments and recognized when specified milestones or
deliverables are met.

7. What are the Audit Considerations in auditing specialized industries? Explain each one.
➢ Competence
- The audit firm must consider if the specialized industry is competent to
perform the engagement and has the necessary capabilities, including
time and resources. The audit firm should also verify that suitable
documentation exists to indicate that competence was considered, as
well as the measures taken to improve competence when necessary, such
as through proper employee training.

➢ Audit Planning
 - Identifying the risk of material misstatement in a specialized industry
should be addressed in the same way as any other audit - by gaining a
thorough understanding of the firm and its surroundings. Assuming that
the personnel have the necessary expertise, as discussed above, this
should not be a problem. The audit firm will most likely have additional
resources available to assist audit team members assigned to a
specialized industry client. There may be briefing notes or internal
technical guidance on how to apply financial reporting standards within
the sector.

➢ Reliance on Experts
- In this case, the audit firm must follow the requirements and principles of
ISA 620, Using the Work of an Auditor's Expert, which addresses issues
such as assessing 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 critical that the
auditor assesses the relevance and appropriateness of the expert's
findings or conclusions. There is a risk of over-reliance on the expert's
work; just because the audit is specialized does not mean that the auditor
may delegate the entire duty to an expert. The auditor, for instance, must
assess if the expert's conclusions are compatible with the auditor's
understanding of the client and other audit processes' results. Any
discrepancies must be investigated.