Auditing Share-based Payment Expenses under Hong Kong Financial Reporting Standards: A Comprehensive Guide for Hong Kong Auditors
As a professional auditor in Hong Kong, you are well aware of the challenges posed by the ever-changing landscape of financial reporting and regulations. One such challenge is the auditing of share-based payment expenses, a complex and often misunderstood financial statement line item. In today’s blog post, we will delve deep into this topic, providing you with invaluable insights and guidance on how to tackle this crucial aspect of your audit engagements. Additionally, we will introduce you to our cutting-edge Audit Program 3.0, a powerful tool that can dramatically streamline your audit process and save you time and resources.
Assessing Assertion Level Risks, Inherent Risks, and Control Risks Surrounding Share-based Payment Expenses
When auditing share-based payment expenses, it is vital to identify and assess assertion level risks, inherent risks, and control risks in accordance with HKSA 315 (revised). To do this, consider factors such as:
- The complexity of the share-based payment arrangements, including the types of instruments granted and their terms and conditions.
- The frequency and magnitude of share-based payment transactions.
- The competence and objectivity of management and personnel responsible for determining share-based payment expenses.
- The potential for management bias in the estimation of fair values and the impact of assumptions on the expense calculation.
- The susceptibility of the line item to fraud, errors, or both.
Your risk assessment documentation should clearly outline the identified risks, their potential impact on the financial statements, and the justifications for the risk levels assigned.
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 Share-based Payment Expenses
As this is a class of transaction, I will focus on the assertions of Occurrence, Completeness, Accuracy and Cutoff.
Assertion 1: Occurrence
Low Risk
Share-based payment expenses are properly authorized and approved in accordance with the company’s established policies and procedures. The expenses appear to relate to the appropriate period based on review of management’s supporting documentation.
Assertion 2: Completeness
Low Risk
Share-based payment expenses processed appear to be approved and processed in the appropriate period based on management’s review of the share option grants and vesting.
Assertion 3: Accuracy
Low Risk
Supported by the approved share option documentation specifying the terms and conditions which determine the fair value of the options granted. Management’s calculation of the share-based payment expense appears accurate based on review of a sample calculation.
Assertion 4: Cutoff
Low Risk
According to management, all share options granted and vested during the period have been properly recorded. No cutoff issues were noted based on review of supporting documentation.
Overall, based on the above assertion level risk assessments, the risk level for share-based payment expenses is assessed as Low Risk. The risks related to this class of transaction appear to be properly mitigated by management controls.”
Understanding the Design and Implementation of Internal Controls over Share-based Payment Expenses
As part of your audit engagement, you must understand the design and implementation of internal controls related to share-based payment expenses. This involves examining the business processes, control activities, and monitoring mechanisms that are in place to ensure the accuracy and completeness of the recorded expenses.
To effectively document internal controls, you should:
- Describe the step-by-step process involved in the initiation, authorization, recording, and reporting of share-based payment transactions.
- Identify the type of control (preventive or detective) and the frequency of each control activity.
- Specify the persons responsible for each control activity and their roles in the process.
By thoroughly understanding and documenting the internal controls in place, you can better assess the risk of material misstatement and design appropriate audit procedures.
The following is a sample of illustrative documentation of the design of audit procedures extracted directly from our Audit Program 3.0:
“Designing Audit Responses to Risks Identified for Share-based Payment Expenses
Once you have assessed risks and internal controls, you must design audit responses that address the identified risks for each assertion. This involves tailoring your audit procedures to specifically target areas where the risk of material misstatement is the highest.
To effectively document audit procedures for share-based payment expenses, consider:
- The nature, timing, and extent of the audit procedures to be performed.
- The types of evidence to be obtained, such as confirmations, analytical procedures, or inspection of documents.
- The involvement of specialists, if necessary, to assess complex valuation models or assumptions.
By meticulously planning and documenting your audit procedures, you can more efficiently and effectively address the risks surrounding share-based payment expenses.
Assertion 1: Occurrence
Audit Procedure 1.1: Inspect a sample of share-based payment transactions during the period to ensure that they have been properly authorized by the appropriate personnel, in accordance with the company’s policies and procedures.
Audit Procedure 1.2: Review board minutes, and relevant contracts or agreements to verify the existence of the share-based payment arrangements, and to ensure that they have been approved by the company’s board of directors.
Audit Procedure 1.3: Perform analytical procedures on the share-based payment expenses to identify any unusual or unexpected trends that may indicate potential misstatements in the occurrence assertion.
Assertion 2: Completeness
Audit Procedure 2.1: Obtain a listing of all employees who participated in the share-based payment arrangements during the period. Reconcile the list to the payroll records to ensure completeness of the transactions.
Audit Procedure 2.2: Test a sample of share-based payment transactions from source documents, such as grant agreements or share option contracts, to the general ledger to ensure that all transactions have been recorded.
Audit Procedure 2.3: Review the reconciliation between the share-based payment expense account and the related liability account to ensure that all share-based payment transactions have been properly recorded and included in the financial statements.
Assertion 3: Accuracy
Audit Procedure 3.1: Verify the accuracy of the calculations for share-based payment expenses by re-performing the calculations using the company’s valuation model, input data, and assumptions. Compare the results to the recorded amounts in the general ledger.
Audit Procedure 3.2: Review the reasonableness of the company’s assumptions and inputs used in the valuation model by comparing them to industry benchmarks, historical data, and other relevant information.
Audit Procedure 3.3: Examine a sample of share-based payment transactions to ensure that the correct grant date, grant price, vesting period, and other relevant terms and conditions have been applied in the calculation of share-based payment expenses.
Conclusion:
The audit procedures designed above are in response to the low risk-level identified for the assertions of occurrence, completeness, and accuracy related to the share-based payment expenses. By performing these procedures, we aim to obtain sufficient appropriate audit evidence to support our conclusion that the overall risk level for the assertions related to share-based payment expenses is low.”
Introducing Audit Program 3.0: Revolutionizing the Audit Process
Now that we have discussed the key considerations for auditing share-based payment expenses, allow us to introduce our groundbreaking Audit Program 3.0. This innovative tool can help you reduce time costs by an astounding 99.99% by automating the generation and customization of illustrative documentation for your audit engagements.
With Audit Program 3.0, you can effortlessly generate risk assessments, internal control documentation, and audit procedures tailored to your client’s specific financial reporting framework and line items. This powerful tool will revolutionize your audit practice, allowing you to focus on providing the highest quality service to your clients.
In conclusion, auditing share-based payment expenses can be a complex and challenging task. However, by carefully assessing risks, understanding internal controls, and designing targeted audit procedures, you can successfully navigate this critical aspect of your audit engagements. With the help of our cutting-edge Audit Program 3.0, you can streamline your audit process.