March 30, 2021

Regulatory environment  Money laundering  Code of ethics and conduct  Professional responsibilities and liability  Quality control  Practice management  Planning, materiality and assessing the risk of misstatement Group and transnational audits Evidence Completion and review Reporting Audit-related services Review of interim financial information Prospective financial information Due diligence Forensic audits Audit of social, environmental and integrated reporting INT syllabus only: Audit of performance information in the public sector UK syllabus only: Auditing aspects of insolvency  Financial reporting revision  Additional practise questions 

Test your understanding 1   You are the audit manager in charge of the audit of Hydrasports for the year ending 31 December 20X4.   Hydrasports, a limited liability company and national leisure group, has sixteen centres around the country and a head office. Facilities at each centre are of a standard design which incorporates a heated swimming pool, sauna, air-conditioned gym and fitness studio with supervised childcare. Each centre is managed on a day-to-day basis, by a centre manager, in accordance with company policies. The centre manager is also responsible for preparing and submitting monthly accounting returns to head office.   Each centre is required to have a licence from the local authority to operate. Licences are granted for periods between two and five years and are renewable subject to satisfactory reports from local authority inspectors. The average annual cost of a licence is $900.   Members pay a $100 joining fee, plus either $50 per month for ‘peak’ membership or $30 per month for ‘off-peak’, payable quarterly in advance. All fees are stated to be non-refundable.   The centre at Verne was closed from July to September after a chemical spill in the sauna caused a serious accident. Although the centre was reopened, Hydrasports has recommended to all centre managers that sauna facilities be suspended until further notice.   In response to complaints to the local authorities about its childcare facilities, Hydrasports has issued centre managers with revised guidelines for minimum levels of supervision. Centre managers are finding it difficult to meet the new guidelines and have suggested that childcare facilities should be withdrawn.   Staff lateness is a recurring problem and a major cause of ‘early bird’ customer dissatisfaction with sessions which are scheduled to start at 07.00. New employees are generally attracted to the industry in the short-term for its non-cash benefits, including free use of the facilities – but leave when they require increased financial rewards. Training staff to be qualified lifeguards is costly and time-consuming and retention rates are poor. Turnover of centre managers is also high, due to the constraints imposed on them by company policy.   Three of the centres are expected to have run at a loss for the year to 31 December 20X4 due to falling membership. Hydrasports has invested heavily in a hydrotherapy pool at one of these centres, with the aim of attracting retired members with more leisure time. The building contractor has already billed twice as much and taken three times as long as budgeted for the work. The pool is now expected to open 2 months after the year-end.   Cash flow difficulties in the current year have put back the planned replacement of gym equipment for most of the centres.   Insurance premiums for liability to employees and the public have increased by nearly 45%. Hydrasports has met the additional expense by reducing its insurance cover on its plant and equipment from a replacement cost basis to a net realisable value basis.   Required:   Prepare briefing notes for the audit engagement partner which:   (a)    Evaluate the business risks faced by Hydrasports.            (12 marks)   Evaluate the risks of material misstatement to be considered when planning the audit of Hydrasports.                                                                                                                     (10 marks)   Describe the audit procedures to be performed in respect of the carrying amount of the following items in the statement of financial position of Hydrasports as at 31 December 20X4:     (i)     Deferred income, and     (4 marks)       (ii)    Hydrotherapy pool.   (5 marks)     Suggest performance indicators that could be set to increase the centre managers’ awareness of Hydrasports’ social and environmental responsibilities and the     which should be   available to provide assurance on their accuracy.                                                                                                                        (5 marks)   Professional marks will be awarded for the presentation, logical flow and clarity of explanation of the briefing notes.                                                                                                                                   (4 marks)   (Total: 40 marks)     Test your understanding 2   You are the audit manager in charge of the audit of Cerise for the year ending 31 December 20X4.   Cerise, a limited liability company, manufactures computer controlled equipment for production-line industries such as cars, washing machines, cookers, etc. On 1 September 20X4 the shareholder-managers decided, unanimously, to accept a lucrative offer from a multinational corporation to buy the company’s patented technology and manufacturing equipment.   By 10 September 20X4 management had notified all the employees, suppliers and customers that Cerise would cease all manufacturing activities on 31 October 20X4. The 200-strong factory workforce and the majority of the accounts department and support staff were made redundant with effect from that date, when the sale was duly completed.   The marketing, human resources and production managers will cease to be employed by the company at 31 December 20X4. However, the chief executive, sales manager, finance manager, accountant and a small number of accounting and other support staff expect to be employed until the company is wound down completely.   Cerise’s operations extend to fourteen premises, nine of which were put on the market on 1 November 20X4. Cerise accounts for all tangible, non-current assets under the cost model (i.e. at depreciated cost). Four premises are held on leases that expire in the next two to seven years and cannot be sold or sub-let under the lease terms. The small head office premises will continue to be occupied until the lease expires in 20X7. No new lease agreements were entered into during 20X4.   All Cerise’s computer controlled products carry a one-year warranty. Extended warranties of three and five years, previously available at the time of purchase, have not been offered on sales of remaining inventory from 1 November onwards.   Cerise has three-year agreements with its national and international distributors for the sale of equipment. It also has annual contracts with its major suppliers for the purchase of components. So far, none of these parties have lodged any legal claim against Cerise. However, the distributors are withholding payment of their account balances pending

IAS 1 Presentation of Financial Statements   This standard provides formats for the statement of profit or loss and other comprehensive income, statement of financial position, and statement of changes in equity.   Accounting policies should be selected so that the financial statements comply with all international standards and interpretations.   IAS 1 requires that other comprehensive income is presented in two categories, namely items that:   will not be reclassified to profit or loss, and   may be reclassified to profit or loss in future     periods.     IAS 2 Inventories   Inventories should be valued ‘at the lower of cost and net realisable value’ (IAS 2, para 9).   IAS 2 says that the cost of inventory includes:   Purchase price including import duties, transport and handling costs Direct production costs e.g. direct labour Direct expenses and subcontracted work   Production overheads (based on the normal levels of activity)   Other overheads, if attributable to bringing the product or service to its present location and condition.   IAS 2 specifies that cost excludes:   Abnormal waste   Storage costs   Indirect administrative overheads   Selling costs.   Some entities can identify individual units of inventory (e.g. vehicles can be identified by a chassis number). Those that cannot should keep track of costs using either the first in, first out (FIFO) or the weighted average cost (AVCO) assumption.   Some entities may use standard costing for valuing inventory. Standard costs may be used for convenience if it is a close approximation to actual cost, and is regularly reviewed and revised.   IAS 7 Statement of Cash Flows   IAS 7 requires a statement of cash flow that shows cash flows generated from:   Operating activities Investing activities Financing activities.   IAS 8 Accounting Policies, Changes in accounting estimates and errors IAS 8 covers the following issues:   Selection of accounting policies   Changes in accounting policies   Changes in accounting estimates Correction of prior period errors. Accounting policies   Accounting policies are the ‘principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements’ (IAS 8, para 5).   Changes in accounting policies   Accounting policies should remain the same from period to period in order to allow for consistency of treatment.   A change in accounting policy must be dealt with retrospectively. The opening balance on retained earnings is recalculated on the basis that the new policy had always been in force. The resulting change in the retained earnings brought forward will be shown as a prior period adjustment in the statement of changes in equity and comparatives will be restated as if the new policy had been in force during the previous period.   The change and its effects must be described in the notes to the accounts.   Accounting estimates   Changes in accounting estimates, such as depreciation rates, are recognised in the statement of profit or loss in the same period as the change. If the change is material then it should be disclosed in the notes to the financial statements.   Prior period errors   Prior period errors are ‘omissions from, and misstatements in, the financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information’ (IAS 8, para 5).   IAS 8 requires that prior period errors are dealt with by:   Restating the opening balance of assets, liabilities and equity as if the error had never occurred, and presenting the necessary adjustment to the opening balance of retained earnings in the statement of changes in equity   Restating the comparative figures presented, as if the error had never occurred.   These adjustments should also be disclosed in the notes.     IAS 10 Events After the     Period Definitions Events after the     period are ‘those events, favourable and unfavourable, that occur between the statement of financial position date and the date when the financial statements are authorised for issue‘ (IAS 10, para 3).   Adjusting events after the     period are those that ‘provide     of conditions that existed at the     date’ (IAS10, para 3a).   Non-adjusting events after the     period are ‘those that are indicative of conditions that arose after the     period’ (IAS 10, para 3b).   Accounting treatment   Adjusting events affect the amounts stated in the financial statements so they must be adjusted.   Non-adjusting events do not concern the position as at the     date so the financial statements are not adjusted. If the event is material then the nature and its financial effect must be disclosed.   IAS 12 Income Taxes   Scope of standard   IAS 12 covers both current and deferred tax, but deferred tax is the most examinable and will be reviewed here.   Deferred tax   Deferred tax is recognised on temporary differences between the carrying amount of an asset or liability and its tax base.   Tax base is the ‘amount attributed to an asset or liability for tax purposes’ (IAS 12, para 5).   Temporary differences can be either:   Taxable temporary differences. This is when the carrying amount of an asset exceeds its tax base, giving rise to a deferred tax liability.   Deductible temporary differences. This is when the tax base of an asset exceeds the carrying amount of that asset, giving rise to a deferred tax asset.   Deferred tax should be measured by applying the applicable tax rate to the temporary difference. The applicable tax rate is the rates expected to be in force when the temporary differences reverse. This is usually the current tax rate.   Sources of taxable temporary differences   Depreciation of an asset is accelerated for tax purposes.   Development costs that were capitalised and amortised in the accounts, but deducted as incurred for tax purposes.   A revaluation surplus on non-current assets as the carrying amount of the asset increases but the tax base of the asset does not change. Deferred tax is provided on the revaluation.   Interest revenue received in

Exam focus   This    is relevant to students taking the UK variant of the exam only.   Insolvency will not appear in every exam.   The Insolvency Act 1986 has been updated by the Insolvency Rules 2016. The rules apply in England and Wales and a parallel project to modernise the Scottish insolvency rules is in progress.   The regulations are not significantly different. The rules have been updated to reflect modern business practice and to make the insolvency process more efficient. Changes include:   Enabling electronic communications with creditors   Removing the automatic requirement to hold physical creditors meetings, although creditors will be able to request meetings   Enabling creditors to opt out of further correspondence and for small dividends to be paid by the office holder without requiring a formal claim from creditors   As a result of the slight differences, the examining team will accept answers based on both sets of guidance.   This    reflects the requirements of the Insolvency Act 1986.      Insolvency   There are two tests for insolvency:   If assets are exceeded by liabilities, or   If a company is failing to discharge its debts as and when they fall due. If a company meets either criteria then it is technically insolvent.   1         Voluntary liquidation   Introduction   Liquidation is the process of terminating a company, thus ending its life. The assets of the company are physically liquidated, i.e. they are sold, so that cash can be used to pay off company creditors and equity holders.   There are two forms of voluntary liquidation:   Members’ voluntary liquidation Creditors’ voluntary liquidation.   Members’ voluntary liquidation   This form of liquidation is used when a company is solvent (i.e. has assets greater than its liabilities). In order to facilitate this, the members must pass one of two resolutions:   An ordinary resolution, where the articles provide for liquidation on the expiry of a fixed date or a specific event, or   A special resolution, for any other reason.   Once this has been passed the directors must make a declaration of solvency stating that they are of the opinion that the company will be able to pay its debts within twelve months. A false declaration would constitute a criminal offence.   The company will then appoint a named insolvency practitioner to act as the liquidator. They will realise the company’s assets and distribute the proceeds accordingly.   Once the liquidation process is complete the liquidator presents a report at the final meeting of the members, which is then submitted to the registrar of companies. The company will be dissolved three months later.   Creditor’s voluntary liquidation   This form of liquidation is used if a company intends to liquidate voluntarily but is insolvent. Once again a resolution of members must be passed (as with a members’ voluntary liquidation). However, no declaration of solvency can be made.   Instead a meeting of creditors must be held within fourteen days of passing the resolution. At least seven days written notice must be given for this meeting. During the meeting the directors must present a full statement of the company’s affairs and a list of all creditors and amounts owed to them.   Both the members and the creditors are entitled to appoint a liquidator. However, the creditors’ choice must prevail over the members’ choice. In addition the creditors may appoint up to five people to sit on a liquidation committee.   The liquidator will realise the company’s assets and distribute the proceeds accordingly. Once the liquidation process is complete the liquidator presents a report at the final meeting of the members, which is then submitted to the registrar of companies. The company will then be dissolved.   2      Compulsory liquidation   Introduction   Companies may be obliged to liquidate if a winding up order is presented to a court, usually by a creditor or member. Such a petition may be made for a number of reasons, which include:   The company being unable to pay its debts   It is just and equitable to wind up the company.   If a member petitions on the latter basis this will only be considered if the company is solvent and the member has been a registered shareholder for at least six of the prior eighteen months.   Consequences   If successful, the court will appoint an official receiver (an officer of the courts) as liquidator. They may be replaced by a practitioner at a later date. The receiver investigates the company’s affairs and the cause of its failure. The petition also has the following effects:   All actions for the recovery of debt against the company are stopped.   Any floating charges crystallise.   All legal proceedings against the company are halted and none may start unless the courts grant permission.   The company must cease trading activity, unless it is necessary to complete the liquidation, e.g. completing work-in-progress.   The directors relinquish power and authority to the liquidator, although they may remain in office.   Employees are automatically made redundant. The liquidator may choose to re-employ them to help complete the liquidation process.   Procedures   Within twelve weeks of being appointed the official receiver will call a meeting of creditors in order to agree the appointment of a licensed insolvency practitioner and to appoint a liquidation committee.   The liquidator will realise the company’s assets and distribute the proceeds accordingly. Once the liquidation process is complete the liquidator presents a report at the final meeting of the members, which is then submitted to the registrar of companies. The company will then be dissolved.   3         Allocation of company assets   Liquidators in a compulsory liquidation must pay debts in the following order:   Fixed charge holders   Expenses of liquidation, including liquidator’s remuneration   Preferential creditors, including employee’s wages and accrued holiday pay   Prescribed part set aside for unsecured creditors* Floating charge holders Unsecured creditors (ranked equally)   Preference shareholders   Members.

 Exam focus   This syllabus area is only relevant to students sitting the International variant of the syllabus. The concepts covered in this    are very similar to the concepts covered in the    on social and environmental    .   1      Public sector audit requirements   Public sector audit requirements   Public sector organisations are subject to greater regulation and     requirements than profit making organisations due to the fact that they are funded by taxpayer money.   There are 2 types of audit that must be performed for public sector organisations:   Financial statement audit   Performance audit.      2         Performance audit   Performance audits aim to provide management with assurance and advice regarding the effective functioning of its operational activities.   A performance audit uses auditing skills (planning & risk assessment, gathering sufficient appropriate    ,    ) and applying them to activities of the organisation that an external auditor of the financial statements wouldn’t normally consider.   Performance audits may include   Performance information   Value for money – economy, efficiency and effectiveness of operations   Operational audits.      3      Performance information   Performance information is information published by public sector bodies regarding their objectives and the achievement of those objectives.   This information should have the same qualitative characteristics of general purpose financial reports such as relevance, completeness, reliability, neutrality, understandability, timeliness, validity and accuracy.   The external auditor may have a responsibility to report on this information to the users of such information.     Performance measures for public sector bodies   Hospital Performance Measures   Reduce number of medical errors   Reduce number of cases of MRSA (a bacterium responsible for causing infections particularly prevalent in hospitals)   Reduce waiting times for operations   Improve satisfaction with hospital food Decrease mortality rates.   Local Council Performance Indicators   % of streets that have unacceptable levels of litter on them to be 7% or less   % residents satisfied with the local environment to be 79% or above   At least 200 dwellings improved by the actions of the council   To have no more than 45 households living in temporary accommodation   At least 57% of bids for external finance/grant applications to be approved.   Police Performance Measures   Reduce number of priority crimes e.g. burglary, theft of cars by 18%   Increase serious violence detection rates by 68%   Reduce number of anti-social behaviour incidents by 40% Reduce reoffending rates by 50% Increase public satisfaction to 80%.   Performance measures such as these are important to various stakeholder groups for example:   The government who want to see that the money they provide to the relevant departments is being used effectively.   The users of the services to assess how well their police force/hospital/council is performing in comparison with others.   Potential users of the services e.g. where there is a choice of hospital to use, the patient may look at this information to decide which hospital at which to have their treatment.   4      Planning an audit of performance information   At the planning stage the auditor will:   Obtain an understanding of the information to be reported on including how it is collected, aggregated,     processes, systems and controls.   Make enquiries with management and staff to obtain an understanding of the data and how it is processed and reported.   Establish materiality (see below).   Examine the processes, systems and controls in place to collect, aggregate and report the performance information.   Materiality for non-financial information   Materiality for non-financial information is just as important as for financial information. For example if the entity is     that a target has been met when it hasn’t this will affect the penalties faced.   For performance information such as mortality rates for a hospital, the indicator is highly sensitive and therefore material.   Setting materiality for non-financial information is more difficult to apply as compared with financial information and there is a risk that different assurance providers would reach different conclusions. As a result, this will undermine the credibility of the report.   One way of overcoming this issue is to disclose the materiality level used in the assurance report. Where performance measures apply across a variety of public bodies, a consistent approach should be adopted.   5         Procedures   Procedures to gather     will be the same as for a normal audit:   Inspection of the supporting documentation for the information.   Enquiry of management and other personnel within the organisation.   Perform analytical procedures on the information such as comparison with prior year or other organisations of a similar size.   Obtain written representation from management regarding the accuracy and completeness of the information.   Recalculation of amounts included in the performance information.     Audit procedures   Following on from the illustration above, below are some procedures that could be performed to obtain     over the hospital performance measures.     Hospital performance   measure     Procedures     Reduce number of medical errors   Enquire of hospital management what the definition of a medical error is.     Inspect Department of Health publication to confirm management’s   understanding of the definition.   Inspect hospital records and board minutes to confirm the number of   medical errors.     Reduce number of cases of MRSA and C-Diff     Inspect hospital records of the number of cases of MRSA/C-Diff.     Compare with prior years and re-   calculate the % change.     Improve satisfaction with hospital food     Review patient feedback questionnaires regarding hospital food.     Recalculate the average score generated from the feedback and   compare with prior years.     Decrease mortality rates     Inspect hospital records of the number of deaths.     Review board minutes for     of   any unrecorded deaths.   Compare with prior year and re-   calculate the % change.   Reports on performance information may be in the form of reasonable assurance or limited assurance.   A reasonable assurance report would

Exam focus   Social and environmental     has been examined several times in past exams. Any part of the engagement process could be examined from acceptance through to    . You may also be asked to give examples of performance measures and sustainability indicators for a company.   1      The need for social and environmental     and assurance   The need for social and environmental       Many companies develop and maintain social, ethical and environmental policies that can vary from highly generalised statements of ethical intention to more detailed corporate guidelines.   Today’s heightened interest in the role of businesses in society has been promoted by increased sensitivity to, and awareness of environmental and ethical issues. In addition, businesses are now expected to account for their impact on the social and natural environment.   Integrated     is now common where other performance measures are included such as targets in relation to corporate and social responsibility matters.   Performance in this area is often a factor affecting the decision of employees, customers, and suppliers to engage with an organisation.   Key performance indicators (KPIs)   KPIs or business performance measures are financial and non-financial statistical measures that are chosen and monitored to determine the strategic performance of an organisation, including those factors of performance that are critical for the continued success of the organisation.   Monitoring of KPIs enables performance to be evaluated in comparison to benchmark performance criteria or progress to be compared to the results of competitors.   To generate KPIs for the company, management need to:   Identify the goals of the organisation in relation to social and environmental matters e.g. reduction of electricity and water usage.   Measure the performance e.g. taking meter readings of electricity and water usage.   Assess whether the goal has been achieved e.g. compare usage to the prior year to see if it has reduced.   In the exam you may be asked to suggest KPIs for a company. Make sure your suggestions are measurable, whether this is in:   $ (e.g. $ spent on charitable activities).   % (e.g. % of waste that is recycled).   Number (e.g. number of serious accidents in the workplace). Hours/days (e.g. hours/days given to volunteering). You may also be asked how the assurance provider can verify the validity of the KPI i.e. what     would be obtained.   The need for assurance reports on social and environmental reports   Many companies now publish social and environmental reports within their annual report.   Auditors may be engaged to report on the fairness and validity of KPIs.   This independent review will add credibility to the social and environmental data published and give assurance to external users that the progress claimed by a company’s management is in fact real progress.   This type of review is an example of an attestation engagement and is often referred to as an environmental audit.   Attestation engagements are explained in    12.     The importance of social and environmental policies   Issues like environmental damage, improper treatment of workers, and faulty production that inconveniences or endangers customers or staff are highlighted in the media.   In some countries, government regulation regarding environmental and social issues has increased.   Some investors and investment fund managers have begun to take account of a corporation’s social and environmental policies in making investment decisions.   Some consumers have become increasingly sensitive to the social and environmental performance of the companies from which they buy their goods and services.   These trends have contributed to the pressure on companies to operate in an economically, socially, and environmentally sustainable way.     The need for social and environmental       Sometimes there is a marked difference between a company’s code of ethics and their actual practices, giving rise to the opinion that such policies may be more of a marketing tool than a serious statement of intent.   In addition, environmental and social     is normally voluntary although stakeholder pressure demands it in many industries and organisations in some industries are required to report on specific targets by law, therefore the extent and selection of     measures varies significantly from company to company.   Each company is likely to have differing views on what to measure and how to measure it, making comparisons very difficult. For these reasons environmental and social     can be a controversial area.   Generally an organisation will set an overall goal with specific targets to meet in relation to that goal.   There is obviously a great deal of skill and experience required to derive measures for social and environmental responsibility.   Two possible approaches can be used (which are not mutually exclusive):   Comply with an externally defined set of standards, and/or   Define one’s own set of relevant targets and indicators and monitor progress towards achieving these.   Many companies adopt a benchmarking approach where they work with a market leader in order to derive performance standards that will lead to improvement.   Common accreditations   Fair Trade Foundation   Fairtrade products include coffee, tea, bananas, sugar, cotton, flowers and gold. Consumers of Fairtrade products can be assured that products have been acquired from producers who have been paid a fair price, or where workers have been provided with fair pay and conditions.   Carbon Trust   A company issued with the Carbon Trust Standard must have demonstrated improvements in reducing carbon emissions, water usage or waste. Accreditation can be awarded individually or for all three aspects.   Forest Stewardship Council (FSC)   The FSC promotes responsible management of forests. Consumers purchasing timber or paper products containing the FSC ecolabel can be assured that the trees used have come from sustainable sources, as well as other ethical considerations.     McDonald’s Sustainability Report   International fast food chain McDonald’s publishes a Sustainability Report which covers:   Food – aiming to improve nutrition of its products and increase the amount of fruit, vegetables and wholegrains served to customers.   Sourcing – working with suppliers who are

Exam focus   The field of forensic accounting is a specialist branch of the profession carried out by forensic accountants encompassing forensic auditing and investigation.   Forensic engagements require a much broader range of skills than other typical non-audit engagements. However, they still require the application of traditional auditing skills and techniques.   Two articles have been published on this syllabus area by the examining team: ‘Forensic Auditing’ (September 2008) and ‘Massaging the Figures’ (April 2009). These can be downloaded from the ACCA website.   1      What is a forensic audit?    Definitions Forensic audit This refers to the specific procedures within a forensic investigation in order to obtain    .   This could include the use of traditional financial auditing techniques such   as analytical procedures and substantive procedures, for example to quantify a fraud or to determine the amount of an insurance claim.   Some of the major applications of forensic auditing are shown below:   Application Examples Type of work performed       Fraud Theft of company funds, Funds tracing, asset investigations tax evasion, insider identification and recovery,   dealing. forensic intelligence     gathering, due diligence     reviews, interviews, detailed     review of documentary        .                                         Insurance claims Business interruptions, Detailed review of the policy       property losses, motor from either an insured or       vehicle incidents, insurer’s perspective to       personal liability claims, investigate coverage issues,       cases of medical identification of appropriate       malpractice, wrongful method of calculating the       dismissal. loss, quantification of         losses.               Professional Loss suffered as a result Advising on merits of a case     negligence of placing reliance on in regards to liability,       professional adviser. quantifying losses.               As part of the assignment a forensic accountant will:   Communicate their findings in the form of reports, exhibits and collections of documents.   Assist in legal proceedings, including testifying in court as an expert witness and preparing visual aids to support trial    .   The forensic accountant may be used as an expert witness where:   They have experience, expertise, and training appropriate to the value, complexity, and importance of the case.   They have the expertise relevant to the issue on which an opinion is sought.   It is a reasonable requirement to resolve proceedings.     Examples   Tesco   In 2014, Tesco, Britain’s biggest retailer revealed that it had overstated estimated profits by £263 million by overestimating revenues paid to it by suppliers. Tesco was struggling to maintain market share due to pressure from competitors Aldi and Lidl.   Toshiba   In 2015, the electronics company Toshiba admitted that it had overstated its earnings by nearly $2 billion over seven years. An independent investigation found that “Toshiba had a corporate culture in which management decisions could not be challenged” and “Employees were pressured into inappropriate accounting by postponing loss reports or moving certain costs into later years.   Sainsbury’s   In June 2012, three men were jailed after defrauding the supermarket Sainsbury’s. 2 directors at potato supplier, Greenvale, were found to have overcharged Sainsbury’s £8.7 million in agreement with Sainsbury’s potato buyer, John Maylam. £4.9 million was paid to Maylam as his share and he also received excessive gifts and hospitality. The Sainsbury’s contract was worth £40 million to Greenvale and the directors did not want to risk losing that amount of business and hence bribed Maylam to ensure the contract remained in place.   2      Acceptance considerations   As with any assignment, the practitioner must only take on work of acceptable level of risk. The acceptance matters given in    6 must be considered.   Most importantly for forensic audits, the practitioner must ensure they can comply with the fundamental ethical principles.   Professional competence and due care   Forensic investigations involve very specialist skills, including:   Detailed knowledge of the relevant legal framework.   An understanding of how to gather specialist    .   Skills in the safe custody of    , including maintaining a clear chain of    .   Strong personal skills: interview techniques, presentation of material in court.   Confidentiality   During legal proceedings the court will require the practitioner to reveal information discovered during the investigation. There is an overriding requirement to disclose all of the information deemed necessary by the court.   Outside of the court, the practitioner must maintain confidentiality, especially because much of the information they have access to will be highly sensitive.   Objectivity   The practitioner must always be, and be perceived to be, independent.   This is particularly important if the forensic report is going to be submitted to a court of law. Any threat to objectivity could undermine the credibility of the     provided. To assess independence, the expert should consider whether the opinion would be the same if they were engaged by the opposing party.   In particular the accountant must safeguard against self-review and advocacy threats.   An advocacy threat arises because the firm may feel pressured into promoting the interests and point of view of their fee paying client, which breaches the concept of objectivity in court proceedings. In particular, the forensic expert has a duty to provide     to the court which overrides any obligation to the client paying them. The practitioner must communicate this duty to the client to prevent any misunderstanding.   A self-review threat arises when an auditor also becomes involved in some form of forensic work because the investigation is likely to involve fraud or potential misstatement within the financial statements. Separate teams must be used for the different engagements.   Integrity   Given the nature of their work, forensic professionals are likely to deal frequently with individuals who lack integrity or may be involved

Due diligence   Due diligence is a fact finding exercise and is usually conducted to reduce the risk of poor investment decisions.   Purpose of due diligence   An advisor is engaged by the acquirer of a company to gather information on the target company. This information may:   Reveal potential problems before an acquisition decision is made and enable the potential acquirer to enter into the transaction with open eyes.   Provide the client with the information they need to decide   –    whether or not to go ahead with an acquisition   –    when to go ahead with the acquisition   –    how much should be paid for the target company.   Increase stakeholder confidence in the acquisition decision, for example, if the acquisition is to be financed by a bank loan. The bank will have greater confidence that the investment is sound and the loan is more likely to be repaid.   The due diligence provider will need to look at:   Current issues affecting the company which could result in additional time and cost to resolve.   Prospects for the future to ascertain whether the investment is likely to generate the desired rate of return on investment.   Past performance to establish how successful the company has been and may be able to continue that success into the future.     The main purpose of due diligence is to ensure the acquirer has full knowledge of the target company such as:   Financial performance and position   Analysing and validating the target’s revenue, future cash flows and financial position including identification and valuation of contingent liabilities and key assets.   Operational matters   Investigation of the operational risks, capex requirements, quality of information systems; key customers and suppliers.   Market position and commercial matters   A comprehensive review of the target’s business plan in the context of the industry and market conditions; including the industry life cycle.   Legal matters   Whether the company has been compliant with the relevant legal and regulatory framework, whether any legal cases are in progress and what the likely outcome might be.   Tax matters   Whether the company is up to date with its tax returns and tax payments. Whether any tax investigations have been performed and whether any issues are still to be resolved.   HR matters   Whether there are any HR issues affecting the company such as industrial action, staff on long term sick leave, low morale and productivity, contractual disputes, etc.   The acquiring company may decide the issues and risks identified are so significant they do not want to go ahead with the acquisition. They may use the issues to negotiate a reduced price, or require the vendor to resolve the issues before the acquisition completes.   Level of assurance   Depending on the client’s requirements, due diligence may either be conducted as:   an assurance assignment (where a professional conclusion is expressed), or   an agreed upon procedures assignment (where the accountant presents the client with factual information they have requested about the target company).     Benefits of engaging an advisor to carry out due diligence   Decrease management time spent assessing the acquisition decision Due diligence reviews can be performed internally, by the management of an acquiring company. However, this can be time consuming and the directors may lack the knowledge and experience necessary to perform the review adequately. Engaging an external advisor to carry out the review allows management to focus on strategic matters and running the existing group as well as ensuring an impartial review.   Identification of operational issues and risk assessment of the target company   For example:   –    possible contractual disputes following a takeover   –    potential breaches of covenants attached to any finance   – the adequacy of the skills and experience of key management within the target company   – operational issues such as high staff turnover; issues with supplies/suppliers, quality issues with products or the retention of key customers.   Liabilities evaluated and identified   It is particularly important that the potential acquirer identifies contingent liabilities that may crystallise in the future, and considers the likelihood of them crystallising and the potential financial consequences. These will affect the price the acquirer wishes to pay for the target.   Identify assets not capitalised   Internally generated intangibles, such as internal brands, will not be included on the statement of financial position but are vital to purchasing decisions as they increase the value of the business.   Gathering information   The external advisor will gather any other relevant information that could influence the decision of the client.   Enhance the credibility of the investment decision   Engaging an external advisor to carry out the due diligence will ensure an independent, objective view is obtained on the investment decision, including the price to be paid.   Planning the acquisition   The due diligence provider can advise on change management following the acquisition, including integrating the new company into the group, which key staff to retain, help with any restructuring as well as the more immediate issues of determining an appropriate price and reviewing the terms of the sale and purchase agreement.   Claims made by the vendor can be substantiated   For example, future order levels and current finance agreements.   Evaluation of possible post-acquisition synergies and economies of scale and potential further costs   The advisor will investigate and advise on post-acquisition issues such as consideration of staffing requirements, including identification of management and key personnel who should be retained post-acquisition. The advisor should identify potential synergies. The combined entity may be able to utilise distributions systems, staff and noncurrent assets allowing for surplus assets to be sold and duplicate roles and processes to be made redundant.   Comparison of due diligence to external audit     Due diligence External audit           Objective To provide the acquirer with To form an opinion as to     sufficient information to

Exam focus   Examination of projections and forecasts feature regularly in the exam. This is usually in the context of supporting a loan application, or as part of a going concern assessment for an audit. As the transactions haven’t happened yet, procedures will focus on testing the reasonableness of the assumptions management have used when preparing the forecast.   1      What is prospective financial information (PFI)?   A     accountant may be asked to give an assurance opinion on prospective (i.e. future) financial information. Guidance on examining PFI is given in ISAE 3400 The Examination of Prospective Financial Information.    Definitions   Prospective financial information means financial information based on assumptions about events that may occur in the future and possible actions by an entity. It may be in the form of a forecast or a projection, or a combination of both. [ISAE 3400, 3]   Forecast   PFI prepared on the basis of assumptions as to future events that management expects to take place and the actions management expects to take (best-estimate assumptions). [ISAE 3400, 4]   Projection   PFI prepared on the basis of hypothetical assumptions about future events and management actions that are not necessarily expected to take place, or a mixture of best estimate and hypothetical assumptions. [ISAE 3400, 5]   A hypothetical illustration is a depiction of anticipated outcomes based on uncertain future events and actions.   Types of forecast Profit forecast Shows expected revenues and costs prepared on an accruals basis in the same way as a statement of profit or loss.   Forecast revenues will include amounts for sales expected to be made during the forecast period regardless of whether the customer is expected to pay for the goods during the forecast period.   Depreciation will be included based on the expected level of assets held during the forecast period calculated using the company’s usual depreciation rate.   Cash flow forecast   Shows expected cash payments and receipts reflecting the amount and timing of the expected cash flows.   Forecast receipts will take into consideration payment terms given to customers and expected bad debts (a bad debt will not result in a cash inflow).   Depreciation is not a cash expense therefore will not appear in the forecast. Instead a payment to acquire an asset will be included as a cash outflow and proceeds from the disposal of an asset will be included as a cash inflow.   Principles of useful PFI   PFI can be issued:   As an internal management tool, e.g. to support a possible capital investment, or   For distribution to third parties in, for example:   –    In a prospectus   –    In an annual report   – To inform lenders or to support an application for finance. [ISAE 3400, 6]   Ultimately the usefulness of PFI depends on the requirements of the end user. Consider, for example, the different decisions and information needs of a prospective lender and shareholder. The unifying qualities of good PFI are that reports must:   Address the specific needs of the user   Be prepared on a timely basis to enable decisions to be taken.   2      Acceptance considerations   In general, like an audit engagement, the     accountant must consider the risk of involvement with the PFI. The greater the risk of giving an inappropriate report, the greater the risk of legal claims and loss of reputation. Ultimately, if the risk is too high the engagement should be politely declined.   ISAE 3400, 10 requires the     accountant to consider the following:   Matter under consideration Reason     The intended use of the information, Information for external use will be relied such as internal management or upon by third parties, potentially for external users. making investment decisions.   This makes it riskier for the accountant   because the consequences of issuing an   inappropriate report will be more severe.     Whether the information will be for Information for general distribution will general or limited distribution. result in the assignment being potentially   more risky as a larger audience will be   relying on it.                  14                   The nature of the assumptions (e.g. Forecasts and projections cannot be     best- estimate or hypothetical). verified with any certainty because the       outcome is unknown, however:         If information is best-estimate, it         should be a reasonable         approximation as to what might         actually happen.         Where the assumptions are         hypothetical, they will be much more         difficult to validate as there is likely         to be little to support them and         therefore the assignment holds         higher risk.       The engagement should not be accepted       if the assumptions are clearly unrealistic       or if it is expected that the PFI will be       inappropriate for its intended use.             The elements to be included in the The engagement will be higher risk if the     information. PFI includes elements of which the       accountant has little knowledge or that       are extremely complex or highly       subjective.             The period covered by the Short-term forecasts are likely to be more     information. easily verified than projections looking out       over a longer period.                 The terms of engagement   An engagement to report on PFI does not constitute an audit. However, the prospective client may not appreciate this fact. Agreeing the terms of engagement is therefore critical to avoid misunderstandings with the client. Typically the engagement letter should specify the following terms:   The nature

In many countries, listed companies are required to publish a half-yearly interim report containing a summarised statement of profit or loss for the first six months of the financial year as well as certain statement of financial position information and notes.   Companies may choose to, or be required to, have this report reviewed by the company’s auditors.   Objective of a  Review of interim financial information     ISRE 2410     Performed by the   Independent Auditor of the Entity states that:   ‘The objective of an engagement to review interim financial information is to enable the auditor to express a conclusion whether, on the basis of the review, anything has come to the auditor’s attention that causes the auditor to believe that the interim financial information is not prepared, in all material respects, in accordance with an applicable financial     framework.’ [para 7]   2      Acceptance considerations   In order to express a conclusion on the interim financial information the assurance provider will require a good understanding of the company.   The external auditor is likely to have the greatest understanding of the entity therefore would be best placed to provide this service. Therefore if the company approaches a different firm to provide this service the firm should consider reasons for this.   The engagement is likely to be a recurring engagement. Therefore the engagement fees will need to be considered when assessing fee dependency.   The acceptance matters covered in    6 should also be considered.   3      Planning and performing the engagement   Main principles of the review engagement   To ensure an appropriate standard of work is performed, practitioners should:   Comply with the ethical requirements of ACCA’s code of conduct. Implement appropriate   procedures. Consider whether the engagement should be accepted such as whether the practitioner has the necessary competence and available resources.   Plan and perform the review with an attitude of professional scepticism. [ISRE 2410, 4 – 6]   Procedures   The accountant must carry out sufficient work to enable them to express limited assurance on the interim financial information.   This involves:   Identifying the types of potential material misstatements and the likelihood of them occurring.   Performing procedures such as:   –    Enquiries of relevant parties (usually management)   –    Analytical procedures   – Other review procedures to obtain sufficient appropriate    . [ISRE 2410, 12]   Analytical procedures should be designed to identify relationships and individual items that appear unusual. Such procedures might include:   Comparison of the current financial statements vs. prior periods.   Comparison of the current financial statements vs. forecasts or budgets.   Review for any relationships within the financial statements that would be expected to conform to a predictable pattern based on previous patterns for the entity or industry norms:   –    Gross profit margin   –    Net profit margin   –    Interest cover   –    Receivables days   –    Payables days   –    Inventory days.   ISRE 2410 Detailed procedures   ISRE 2410 procedures:   Reading prior year files relating to the audit and interim financial statement review to enable the auditor to identify matters that may affect the current period interim financial information.   Considering any significant risks, including the risk of management override of controls that were identified in the audit of the prior year’s financial statements.   Reading the most recent annual and comparable prior period interim financial information.   Considering materiality with reference to the applicable financial     framework as it relates to interim financial information to assist in determining the nature and extent of the procedures to be performed and evaluating the effect of misstatements.   Considering the nature of any corrected material misstatements and any identified uncorrected immaterial misstatements in the prior year’s financial statements.   Considering significant financial accounting and     matters that may be of continuing significance such as significant deficiencies in internal control.   Considering the results of any audit procedures performed with respect to the current year’s financial statements.   Considering the results of any internal audit performed and the subsequent actions taken by management.   Enquiring of management about the results of management’s assessment of the risk that the interim financial information may be materially misstated as a result of fraud.   Enquiring of management about the effect of changes in the entity’s business activities.   Enquiring of management about any significant changes in internal control and the potential effect of any such changes on the preparation of interim financial information.   Enquiring of management of the process by which the interim financial information has been prepared and the reliability of the underlying accounting records to which the interim financial information is agreed or reconciled.   [ISRE 2410, para 15]   Written representations   A written representation should be obtained which confirms management:   Is responsible for internal control to prevent and detect fraud and error.   Have prepared the interim financial information in accordance with the applicable financial     framework.   Believe that the uncorrected misstatements are immaterial. Has disclosed to the auditor: –    all significant facts relating to fraud or suspected fraud to the auditor.   – results of its assessment of risk of material misstatement of the interim financial information.   –    any known or possible non-compliance with laws and regulations.   – all significant subsequent events that may require adjustment or disclosure.   [ISRE 2410, para 34]   Illustration 1 – Example of an unmodified review report   Report on       (Appropriate addressee)   Introduction   We have reviewed the accompanying balance sheet of ABC Entity as of March 31, 20X1 and the related statements of income, changes in equity and cash flows for the three-month period then ended, and a summary of significant accounting policies and other explanatory notes.   Management is responsible for the preparation and fair presentation of this interim financial information in accordance with International Financial     Standards. Our responsibility is to express a conclusion on this interim financial information based on our review.   Scope of review   We conducted our

Exam focus   There will usually be one question in the exam that will test your ability to apply your knowledge to a non-audit engagement. The question could cover any area of the engagement process – acceptance, planning, procedures or    .   Audit-related services   Audit-related services are those services that professional accountants offer which are not statutory audits, although they are conceptually related and use similar skills.   An assurance engagement is an engagement in which a practitioner obtains sufficient appropriate     in order to express a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria.   [International Framework for Assurance Engagements, 10]   Agreed upon procedures require the accountant to report on factual findings based upon the procedure agreed with the client and any appropriate third parties, hence no assurance (conclusion) is expressed. [International Framework for Assurance Engagements, 37]   Non-audit engagements include:   Assurance engagements   Review of interim financial statements Due diligence review Examination of prospective financial information   Social and environmental information review.   Agreed upon procedures   Forensic audit: Fraud investigation   Forensic audit: Verifying an insurance claim Due diligence. Differences between an audit and audit-related services     Audit Audit-related Services       Level of assurance Reasonable assurance Either limited or no assurance       Scope of work Established by the Established in consultation with   auditor in accordance client, in accordance with   with auditing standards assurance and related services     standards       Wording of Positive assurance Negative or no assurance assurance/other     reports           Required by Law in many countries Usually not required by law The elements of an assurance engagement   The five elements of an assurance engagement are:   A 3 party relationship between the practitioner (i.e. accountant), the responsible party (usually the directors) and the users of the report.   A subject matter (the items about which assurance is being sought, e.g. the financial statements).   Suitable criteria (the benchmarks against which the subject matter is being evaluated, e.g. compliance with International Financial     Standards).   Sufficient appropriate    . A written assurance report.   [International Framework for Assurance Engagements, 26]   The engagement process usually involves:   Agreeing the terms of the engagement in an engagement letter.   Deciding on a methodology for     gathering to support a conclusion.   Agreeing on the type of report to be produced at the end of the engagement and expressing the opinion in the written report.     Professional standards for audit-related services   IAASB issues specific guidance for other services:   International Standards on Review Engagements (ISREs)   International Standards on Related Services (ISRSs)   International Standards on Assurance Engagements (ISAEs) Specific examples include: ISRE 2400 (Revised) Engagements to Review Historical Financial Statements.   ISRE 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity.   ISAE 3000 (Revised) Assurance Engagements Other than Audits or Reviews of Historical Financial Statements.   ISAE 3420 Assurance Engagements to Report on the Compilation   of Pro Forma Financial Information Included in a Prospectus.   ISRS 4400 Engagements to Perform Agreed-Upon Procedures Regarding Financial Information.   ISRS 4410 (Revised) Compilation Engagements.   Attestation and direct engagements   The framework also permits assurance engagements to be performed as either an attestation engagement or a direct engagement.   In an attestation engagement, the accountant’s conclusion relates to an assertion made by the party who is responsible for the subject matter. The accountant can either express a conclusion about this assertion, or can provide a conclusion about the subject matter.   In a direct engagement , the accountant expresses a conclusion on the subject matter based on identified criteria, regardless of whether the responsible party has made a written assertion on the subject matter. [ISAE 3000 (Revised), 2]   For example: a professional accountant may be engaged to report on a company’s internal financial controls.   Attestation engagement Direct engagement         Management would first The accountant would simply   make a written assertion report directly on the effectiveness   about the effectiveness of of the control structure in   the company’s control accordance with predetermined   structure. performance criteria.   The accountant would then     give an opinion on     management’s assertion.           Care must be taken to ensure that management’s assertion is clearly understandable and is not subjective. For example, an assertion that the control structure is ‘very effective’ would be unacceptable since this is a subjective opinion.   2      Levels of assurance   The Framework provides the overall guidance for carrying out assurance engagements such as audits and reviews. It permits only two types of assurance engagement to be performed: either a ‘reasonable assurance’ or a ‘limited assurance’ engagement.   Reasonable assurance   The objective of a reasonable assurance engagement is where the practitioner reduces engagement risk to an acceptably low level to conclude that the subject matter conforms in all material respects with identified suitable criteria.   The accountant expresses their conclusion in a positive form, giving an opinion on whether the subject matter is free from material misstatement, e.g. statutory audit.   Limited assurance   The objective of a limited assurance engagement is to obtain sufficient appropriate     to be able to state whether anything has come to the practitioner’s attention that causes them to believe the subject matter is materially misstated.   In other words the subject matter ‘appears plausible’ in the circumstances.   The accountant expresses their conclusion in a negative form, stating that their procedures have not identified any material misstatement of the subject matter, e.g. a review engagement.   The procedures for a limited assurance engagement are therefore less comprehensive than for a reasonable assurance engagement.   No assurance (agreed upon procedures)   The objective of an agreed upon procedures engagement is to perform the procedures requested

Exam focus   One of the questions in the exam will focus on completion and reporting. may be examined in several ways. You may be asked to:   Describe the implications for the auditor’s report if issues identified during the audit are not resolved.   Critically evaluate extracts of a draft report i.e. say what is wrong with it and explain why.   Explain the matters the auditor should communicate to those charged with governance.   1      The objectives of the auditor   The objectives of the auditor are:   To form an opinion on the financial statements based on an evaluation of the conclusions drawn from the audit     obtained, and   To express clearly that opinion through a written report.   [ISA 700 Forming an Opinion and     on Financial Statements, 6]   When the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial     framework they issue an unmodified opinion in the auditor’s report.   [ISA 700, 16]   If there are no other matters which the auditor wishes to draw to the attention of the users, they will issue an unmodified report.   2         The independent auditor’s report   ISA 700 and ISA (UK) 700 prescribe the following structures for the auditor’s report:   INT syllabus UK syllabus ISA 700 ISA (UK) 700 Para 21 – 49 Para 21 – 49 1 Title 1 Title 2 Addressee 2 Addressee 3 Auditor’s opinion 3 Auditor’s opinion 4 Basis for opinion 4 Basis for opinion 5 [Material uncertainty related to 5 Conclusions relating to going going concern] (if applicable) concern/[Material uncertainty related to going concern] 6 [Emphasis of matter] (if applicable) 6 [Emphasis of matter] (if applicable) 7 Listed entities: 7 Listed entities: Key audit matters Key audit matters Our application of materiality An overview of the scope of our audit 8 Other information 8 Other information 9 Responsibilities of management 9 Opinions on other matters prescribed by the Companies Act 2006 10 Auditor’s responsibilities 10 Matters on which we are required to report by exception 11 Report on other legal and regulatory 11 Responsibilities of directors requirements 12 [Other matter] (if applicable in 12 Auditor’s responsibilities accordance with ISA 706) 13 Name of the engagement partner 13 [Other matter] (if applicable in Signature accordance with ISA (UK) 706) 14 Auditor’s address 14 Signature 15 Date 15 Auditor’s address 16 Date   The expectation gap   Over time the wording of the auditor’s report has grown longer in an attempt to counteract the expectation gap, i.e. the difference between what an auditor’s responsibility actually is and what the public perceives the auditor’s responsibility to be.   The auditor’s report is not:   a certificate of the accuracy of the contents of financial statements   a guarantee against fraud   confirmation that an entity is being run in accordance with the principles of good corporate governance.   The wording of the auditor’s report is intended to ensure that users of the financial statements understand what level of assurance they are being given and how much reliance they may place on a set of audited financial statements.     INT syllabus: Illustrative auditor’s report   INDEPENDENT AUDITOR’S REPORT   To the Shareholders of XYZ Company   Report on the Audit of the Financial Statements [sub-title is not included if there is no separate Report on Other Legal and Regulatory Requirements]   Opinion   We have audited the financial statements of the XYZ Company (the Company), which comprise the statement of financial position as at 31 December, 20X4, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.   In our opinion, the accompanying financial statements present fairly, in all material respects, (or give a true and fair view of) the financial position of the Company as at December 31, 20X4, and its performance and its cash flows for the year then ended in accordance with International Financial     Standards.   Basis for Opinion   We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in [jurisdiction], and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit     we have obtained is sufficient and appropriate to provide a basis for our opinion.   Key Audit Matters [listed companies only]   Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.   [Description of each key audit matter in accordance with ISA 701] Other information   Management is responsible for the other information. The other information comprises the [description of other information, for example] Chairman’s statement, but does not include the financial statements and the auditor’s report thereon.   Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.   In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If based on the work we have performed, we conclude that there is a material misstatement of this information, we are required to report that fact. We have nothing to report in this regard.   Responsibilities of Management