Auditing Finance Costs: A Comprehensive Guide for Hong Kong Auditors
As a Hong Kong auditor, it is vital to understand the nuances involved in auditing finance costs. This financial statement line item can be complex, particularly within the context of Hong Kong Financial Reporting Standards (HKFRS). This blog post will delve into the key considerations when auditing this specific financial statement line item and will focus on risk assessment, internal controls, and audit procedures. Additionally, we will introduce our powerful Audit Program 3.0, which can effectively help CPA firms reduce time costs by 99.99% as all illustrative documentation is generated and customized.
1. Assessing Assertion Level Risks, Inherent Risks, and Control Risks
The first step in auditing finance costs is to assess the assertion level risks, inherent risks, and control risks associated with this financial statement line item. When applying the guidance set forth in HKSA 315 (revised) for identifying and evaluating the risks of material misstatement, auditors should consider factors such as the complexity of the client’s business and industry, the occurrence and accuracy of finance costs, and the potential for management override.
To justify the risk levels assigned to each type of risk, auditors should document the client’s specific risk factors and the potential impact on finance costs. It’s important to stay informed about the economic and regulatory environment, as changes in these areas could significantly influence the risk assessment.
The following is a sample of illustrative documentation of the risk assessment process extracted directly from our Audit Program 3.0:
“Assertion Level risk assessment for Finance Costs
Assertion 1: Occurrence
The recorded finance costs represent actual interest and other financing costs incurred during the period. The company has a stable level of borrowings and financing requirements. The finance costs have been consistent over time. The risk for the occurrence assertion is assessed as low risk.
Assertion 2: Completeness
All required finance costs have been recorded. The company has controls over loan transactions and periodic expense reconciliations. No issues with unrecorded finance costs have been identified in previous periods. The risk for the completeness assertion is assessed as low risk.
Assertion 3: Accuracy
The finance costs recorded are materially accurate. The interest rates and other terms are defined in loan agreements and calculated systematically. Relevant inputs into expense calculations are independently reviewed. The risk for the accuracy assertion is assessed as low risk.
In summary, the overall risk for finance costs is assessed as low risk. The company has stable borrowings and financing needs. Controls over recording, checking and reconciling finance costs should ensure they are complete and accurate. The risk assessment has been documented in compliance with relevant auditing standards and is sufficiently justified to allow another auditor to reach the same conclusion. The overall risk level for this class of transaction is low risk.”
2. Understanding the Design and Implementation of Internal Controls
As part of the requirements set forth in HKSA 315 (revised), auditors must gain a deep understanding of the client’s internal controls surrounding finance costs. This involves evaluating the design and implementation of control activities, as well as the frequency, type of control, and personnel responsible for each activity.
When documenting internal controls, it’s important to provide a clear, step-by-step description of the business process for finance costs. This should include details on the initiation, authorization, and recording of transactions, as well as the periodic review and reconciliation of finance costs. Moreover, auditors should scrutinize the segregation of duties and consider how the client’s IT systems and applications contribute to an effective control environment.
3. Designing Audit Responses and Procedures
After identifying and assessing the risks and understanding the client’s internal controls, the next step is to design audit responses that address each assertion level risk. To achieve this, auditors must carefully consider the factors influencing finance costs and develop appropriate audit procedures.
In documenting these procedures, it’s crucial to provide a comprehensive explanation of the steps involved, the documents to be checked, and any necessary confirmations or discussions with management. For example, auditors may need to test the accuracy and completeness of finance costs, verify the appropriateness of the interest rate and loan terms used, and assess the reasonableness of management’s assumptions and judgments related to finance costs.
The following is a sample of illustrative documentation of the design of audit procedures extracted directly from our Audit Program 3.0:
“Assertion 1: Occurrence
Audit Procedure 1: Inquiries and Analytical Procedures – Perform inquiries of management and other personnel involved in the recording of finance costs to gain an understanding of the process. Compare the finance costs with prior year figures and expectations, investigating unusual fluctuations or trends.
Audit Procedure 2: Review of Loan Agreements and Financing Documents – Examine loan agreements and other financing documents to ensure the interest expense and other finance charges recorded actually relate to the client’s existing obligations.
Audit Procedure 3: Vouching – Select a sample of finance costs transactions and vouch them to supporting documents such as loan statements, interest payment receipts, and bank statements, to verify the occurrence of the transactions.
Assertion 2: Completeness
Audit Procedure 4: Reconciliation – Reconcile the finance costs reported in the financial statements with the underlying records of loan agreements, bank statements, and other financing documents to ensure all finance costs have been recorded.
Audit Procedure 5: Review of Subsequent Payments – Review subsequent payments related to finance costs for any indication that finance costs have been omitted or recorded in the incorrect accounting period.
Assertion 3: Accuracy
Audit Procedure 6: Recalculation – Recalculate the finance costs based on the terms of loan agreements and other financing documents, ensuring accuracy in amounts recorded.
Audit Procedure 7: External Confirmation – Obtain confirmation from lenders, where possible, of the finance costs charged during the period to verify the accuracy of the reported amounts.”
Conclusion
The audit procedures designed above are in response to the low risk level identified for the occurrence, completeness, and accuracy assertions related to finance costs. By performing these procedures, we can gather sufficient and appropriate audit evidence to support our conclusion that the overall risk level for finance costs is low. This documentation has been prepared in compliance with Hong Kong Standards on Auditing (HKSA) 230 Audit Documentation and HKSA 220 Quality Management for an Audit of Financial Statements.
Revolutionizing the Audit Process with Audit Program 3.0
Navigating the complexities of auditing finance costs under HKFRS can be challenging. However, with our innovative Audit Program 3.0, CPA firms can significantly reduce time costs by 99.99%. Our automated program generates customized, illustrative audit programs, risk assessments, and documentation of internal controls relevant to any client industry and principal activity. By streamlining the audit process, Audit Program 3.0 allows auditors to focus on ensuring the highest level of audit quality and compliance.
In conclusion, auditing finance costs under HKFRS requires a thorough understanding of risks, internal controls, and audit procedures. By following the guidelines set out in this blog post, auditors can navigate the intricacies of this financial statement line item and uphold the rigorous standards set by the AFRC. Moreover, with the unparalleled efficiency of Audit Program 3.0, CPA firms can confidently tackle even the most challenging audits and deliver exceptional results.