Tag Archives: approach

Creating good procedures on the UFE

Continuing from yesterday, today we put the P in RAMP and cover one of the most important aspects of assurance which is creating good procedures.

Procedures

Procedures are often the most critical part of your audit planning memo and most often specifically asked for so you’ll have to get good at these. I felt like the 2010 UFE was full of procedures. With procedures you want to focus on the key risk areas in the simulation which is related to audit risk and also often related to accounting issues in the simulation. Here are some things that a good procedure will cover off.

  • Specify how to audit the risk – you’ll need to give a specific procedures to be performed (i.e. inventory count, reconciliation, send out confirmations, etc.) The more specific and non-generic the better. Include specific steps such as observing an inventory count, match x to y, and so forth. These must be very specific to your simulation and shouldn’t be generic. Specificity is the key with procedures so make sure to specify what the overall procedure is (i.e. inventory count) and then some additional detail related to the case (such as for example: by weighing a number of widgets in each crate and multiplying it against an average weight).
  • Specify why you are testing this area, why is it a key risk area? This could be covered off in audit risk as well.
  • Specify what assertion you are testing – Make sure this makes sense, doing an inventory count might be great for existence or completeness but probably poor for accuracy and occurrence. It’s important you understand the assertions and what they mean so that your procedure makes sense.

You’ll want to try and give a good procedure for each risk if possible and, again, the number of procedures to shoot for in many cases is 3-4 valid procedures, but obviously use your judgment and experience in determining how many to write.

One additional insight about what the Evaluation Board expects from procedures can be found on page 8 in the 2010 UFE Report.

Candidates are encouraged to always consider the effectiveness of the procedures they provide. Procedures should address the risk area identified. In addition, when presenting an audit plan to an audit committee or a client, candidates should explain why the procedure is necessary, in other words, how it would successfully address the client’s assurance needs.

 

Last thing: with all of the above, I want to stress that it’s important to use case facts often and clearly when discussing each element. Generic discussion or knowledge “dumps” are seldom rewarded on the UFE so get in the habit early of using lots of case facts in your discussions.

What kind of trouble are you having with procedures?

The Audit Planning Memo on the UFE

Most people will be into their UFE study period now and possibly be seeing their first UFE mock marks. If they are not what you hoped, don’t worry too much yet, most people quickly improve in the first week or two before leveling off.

Today’s topic is something you will almost definitely see on the UFE, and probably more than once so it’s good to master it from the beginning. The Audit Planning Memo.

Although there are some different approaches out there, the most common elements and approach of an Audit Planning Memo is the RAMP approach (Risk, Approach, Materiality and Procedures). For most audit planning memos you don’t need to discuss all three and often two or three is enough with a discussion of risk and procedures being the most important.

Audit Risk Discussion

It’s important, first of all, to state what the audit risk is exactly based on the case facts. Generally the risk is either high or low but it can also be medium at times. If you’ve forgotten, audit risk the risk that the financial statements are materially misstated after a clean audit opinion is given an is usually calculated as Audit Risk = Inherent Risk * Control Risk * Detection Risk.

Next, you must support your conclusion by specific evidence from your simulation. The amount of evidence depends on the simulation but a general rule of thumb is that you should support your conclusion with at least three specific risks from the case. This is only my opinion so use your own judgment and experience to determine how many is enough! If prior year risk is mentioned or the risk is changing from a prior year, it is important to be specific about what has changed to increase or decrease the audit risk this year.

Some examples of risks:

  • New management or ownership may introduce new biases to misstate
  • Complex accounting issues may be prone to error
  • Weak controls discovered or problems reported by employees with the financial information

 

Audit Approach

This is often the least discussed area because most UFE simulations don’t have significant approach issues. You have three options here and must state which you will take and support it with case facts. The three options are substantive approach (you will be reviewing transactions), controls reliance (you are relying on the controls) or a combined approach (for some areas you will rely on controls).

If there are very weak controls all around you will take a substantive approach and support it with information from the case as to why. If all controls are functioning fine you can take a controls reliance approach but this will probably never occur so you are most likely to take a combined approach which will rely on controls in some areas and take a substantive approach in the weak areas.

 

Materiality

Materiality is usually the easier to score a quick few points over audit approach. Materiality is a number which is based on the financial statements so you must calculate it and state why you are calculating it this way. Materiality is mostly linked to users of the financial statements and not risk so when discussing materiality it is important to discuss how it relates to users of the financial statements. Quick reminder: an amount is material if it could influence the decision of a user of the financial statements. Typical materiality amount go-tos are 5% of Net Income from continuing operations or 0.5-1% of total assets but obviously use your judgment at the time.

Some examples of issues around materiality:

  • New users of the financial statements – they may have a lower or higher materiality than previous users
  • Loans or covenants are involved which are based on the financial statements – amounts which breach these covenants are material
  • Whenever there is a sale or purchase of a company occurring, materiality is often a factor since the purchase price is based on the financial statements

 

Last thing: with all of the above, I want to stress that it’s important to use case facts often and clearly when discussing each element. Generic discussion or knowledge “dumps” are seldom rewarded on the UFE so get in the habit early of using lots of case facts in your discussions.

Come back tomorrow where I’ll tackle procedures, the most important part of the RAMP and a critical element of scoring well on the UFE.

Did I miss anything? What else do you include in your Audit Planning Memos and why?

Approach Tips for the UFE

Most candidates will have started at this point their final study period leading up to the UFE. UFE Blog will be covering more specific topics from here on in. Today’s post is not a comprehensive guide to case approach but just some tips in areas that candidates frequently struggle in.

Identifying Real Required and your Role

The Real Required is a direct link to a competency that is being evaluated and is what you are expected to do in your response. Your role defines the type of response you are going to present which can vary because your role determines who the “customer” of your response is. For example, if you are a CRA tax auditor you are concerned about the client following the tax rules and paying their share of tax, not about giving tax advice to the client on how to save tax. This necessarily changes the type of response you give.

UFE Cases will present you with information overload, particularly on Comps, but in the majority of cases the real required are actually clear. You’ll often find them on the first page or two in the scenario introduction section of the simulation but the odd one can also pop up later on  in the simulation (particularly in comps) so keep your eyes open, especially if it seems like not enough have been shown in the introduction given the length of the case.

The real required are usually something the client or boss asks you to do directly (they need it) while sometimes you’ll have requests that don’t seem as urgent but would be helpful which are often just secondary indicators which you should leave alone.

You should write down each real required on your outline! Since these related directly to a competency that is being evaluated, responding to these is where your marks come from and you don’t want to chance missing them or misunderstanding them. The more clearly you can write them (word for word, even) the better.

Reading Tips

Reading on UFE simulations must be active reading. Reading is where a lot of the hard work and analysis is done since when you read you’ll be

  • identifying issues;
  • finding case facts to support your analysis; and
  • forming the structure of your response on your outline.
When reading, my suggestion is that you identify the issue in the simulation paper and reference to it on your outline using a page number. Write the issue on your outline but not case facts, only a reference to the case facts. Highlight the case facts of the issue on the simulation paper with a keyword or two so that when you move from your outline to the simulation paper you can find it quickly. At the end of your reading and outlining phase, which can take around 1/3 of your total time, you should end up with an outline that forms the structure of your response and where the outline refers to each case fact to support your response. Avoid knowledge dumps! If you don’t have a case fact to support a point it is not useful and wasting your time!

Using the Exhibits

A lot of advice you hear will tell you to take a few minutes, prior to reading your whole case in detail, to flip through the exhibits and get an idea of what kind of information is in each one and the purpose each one serves in the simulation.

Here’s a few things to think about while reading the exhibits related to PMR issues:

  • Number of years presented – if more than just the previous comparative year is presented think about possible trends you need to look for and discuss
  • Dates – think about issues around the date of the financial statement (are there cutoffs, audit report date issues, a date on which the company will be sold, etc.)
  • Materiality – keep an eye on amounts which are material or above average as there may be issues around these that may need your attention
  • Year over Year Changes – always compare both years and look for year over year changes that are abnormal or may need your attention
  • Strange lines – if there is a line on the F/S that you don’t recognize consider whether is should be there or presented with something else
  • Missing lines – if there is something missing but should be there in the simulation context then it should go on your list of potential issues, where is the financial information for this buried instead?
  • Eyeball Financial Ratios – Most cases won’t actually ask your to calculate financial ratios but it’s a good idea to always eyeball or do a quick calculation of financial rations such as debt-to-equity, working capital and changes in net income and margin. This is one of those areas where you may discover something that’s a little more on the undirected side.

Thinking about these issues as you read the exhibit and analyzing them together with your simulation scenario should give you some good ground to walk on for your response.

Quants

Before starting a quant, always write down the purpose of the quant. What information will the quant provide you and how do you use it in your case? This will save you from having quants which you don’t need and badly wasting your time. This purpose should also be stated in your actual quant for the marker.

Time Allocation

You’ve probably spent around 1/3 of your time reading the case and creating the structure of your response on your outline. At this point it’s a good idea to take a moment, think, and formulate a strategy for your response. A solid outline will likely give you too much to cover in your remaining time so you must rank and allocate time to respond adequately without going over. A solid outline will also help make the actual writing part of your case go smoothly.

This is a critical step and you’ll get better each case at estimating how long it will take to cover each issue but I do recommend you write down, on your outline, how long you are giving each issue and then monitor this while writing. This will prevent you from going over your allotted time by knowing when to stop discussing an issue and moving on to the next one. Remember, each indicator is worth the same amount of points on the UFE so it’s important not to drop one indicator in order to go from RC to C in another indicator. Although technically, if you score RC on the other indicator, you get the same amount of Level 1 points, you can increase the risk of not getting enough C/RC for level 2 and 3.

Conclude and Recommend

Try to leave yourself a little bit of time at the end of each simulation for an overall conclusion and recommendation. This will be the part where you can do integrate all of the case and provide some advice overall to your client/boss. This is a great place to make a conclusion about some fraud if it exists, invest or not decisions and other pervasive issues such as long-term viability of the company, trends in the industry, etc. This could take the form of a single part of the case (one paragraph) or you could do this after each sub-heading where you’ve tackled the real required and respond to that issue directly if you haven’t already. In comprehensive simulation, an executive summary that briefly goes over everything you’ve answered in detail is pretty much a must-have.

What other approach problems are you having in your simulations? Any advice on what has worked for you?

 

Pin It on Pinterest