Auditing and Assurance: Specialized
Industries
Learning Outcomes:
At the end of the chapter, the students shall be able to:
1. be acquainted with the various industries which require
special audit and assurance engagements
2. be oriented with the application of the audit standards
techniques and procedures in the risk-based audit
process in specialized industries.
Specialized Industries
Specialized industries include government agencies
(GOCC's & LGU's), banking, insurance, construction, not-for-
profit entities, hospitals, academe, hotel and restaurant,
sugar, textile and shipping and constructioncompanies.
They are considered “specialized” in that they are likely either
to have specific financial reporting standards applicable to
them, or to have distinct accounting policies which have been
developed to account for specialized transactions and
balances which are based on the normally-applied financial
reporting standards.
Key Characteristics of Auditing in
Specialized Industries
1. Industry-Specific Knowledge
- Auditors must possess a deep understanding of the
industry’s operations, regulations, and financial practices.
Key Characteristics of Auditing in
Specialized Industries
2. Regulatory Compliance
- Specialized industries often face complex regulations that
auditors need to navigate carefully.
Key Characteristics of Auditing in
Specialized Industries
3. Risk Management
- Some industries, like banking and insurance, involve
significant financial risk that requires specific audit
procedures.
Key Characteristics of Auditing in
Specialized Industries
4. Technology Integration
Industries such as telecommunications and healthcare rely
heavily on IT systems, making knowledge of information
systems audit crucial.
Specialized Industries
• Audit of specialized industries is basically the same as the
audit of other types of businesses.
• The procedures are basically similar.
• Audit firms just have to take note of the following
considerations:
Audit Considerations
• Competence
• Audit planning
• Reliance on experts
Competence
• When accepting an audit engagement involving a
specialized industry, the audit firm needs to pay close
attention to the competence of the audit firm to provide the
service.
• ISQC 1, Quality Control for Firms That Perform Audits and
Reviews of Financial Statements, and Other Assurance
and Related Services Engagements requires the audit firm
to consider whether the firm is competent to perform the
engagement and has the capabilities, including time and
resources, to do so.
Competence
• This should include consideration of whether the audit firm
personnel has knowledge of relevant industries and has
experience with relevant regulatory or reporting
requirements, or the ability to gain the necessary skills and
knowledge effectively.
Competence
• Larger audit firms are likely to meet the competence
requirement for almost any type of industry – they will
either already possess necessary skill and competence
through having existing clients in the particular industry, or
have the resource available to bring in experts and/or
provide any necessary staff training.
• Smaller firms may have to carefully consider their
competence to take on an audit client in a specialized
industry if they have not previously worked with an audit
client in the same industry.
Competence
• However, regardless of size, audit firms may choose to
specialize themselves in the audit of clients in a particular
market or sector, for example a smaller firm may specialize
in the audit of clients in the farming sector, or in not-for-
profit organizations, so it should not be assumed that just
because an audit firm is small, it would not meet the
competence requirement.
Competence
• The audit firm should also ensure that there is adequate
documentation to demonstrate that competence has been
considered, and the steps that have been taken to improve
competence where necessary, for example through
appropriate staff training.
Audit Planning
• Identification of the risk of material misstatement in a
specialized industry should be approached in the same
way as in any other audit – by obtaining appropriate
understanding of the entity and its environment.
• To assist audit team members assigned to a specialized
industry client, the audit firm is likely to have additional
resources available. There may be briefing notes or internal
technical guidance on how financial reporting standards
should be applied within the sector.
Audit Planning
• For example, in the audit of banking sector clients, an audit
firm may produce guidance on the specific application of
PFRS relating to the range of financial instruments typically
held by banks.
• Audit staff can then refer to this guidance when performing
the audit, particularly when identifying risks of material
misstatement.
Audit Planning
• It is also important to remember that while there may be
specific risks of material misstatement relating to the
industry-specific balances and transactions, there must
also be appropriate consideration of the “normal” balances
and transactions.
• For instance, in the audit of a bank, there will be plenty of
risks to consider other than those relating to bank-specific
transactions and balances, for example the depreciation of
properties, recognition of provisions and impairment of
goodwill would all still be relevant.
Reliance on Experts
• Linked to the previous matters, competence, audit planning
and the specialized nature of some transactions and
balances, the auditor may plan to use an auditor’s expert to
obtain audit evidence.
• This is quite likely in a specialized industry as despite being
competent to perform the engagement, the audit firm may
not have the necessary specific expertise in some areas.
• For instance in the audit of a bank, specialists may be
brought in to value complex financial instruments.
Reliance on Experts
• In this situation, the audit firm must adhere to the
requirements and principles of PSA 620, Using the Work of
an Auditor’s Expert which deals with matters including the
evaluation of the objectivity, competence and capabilities of
the auditor’s expert, determining and communicating the
scope and objectives of their work, and assessing their
findings.
• It is particularly important that the auditor evaluates the
relevance and adequacy of the expert’s findings or
conclusions.
Reliance on Experts
• There is a danger of over-reliance on the expert’s work; the
fact that the audit is of a specialized nature does not mean
that the auditor can pass all responsibility over to an expert.
• For instance, the auditor must consider whether the
expert’s findings are consistent with the auditor’s
understanding of the client and with the conclusions of
other audit procedures. Any inconsistencies must be
investigated.
Challenges in Auditing Specialized Industries
• Complexity of Financial Transactions
• Auditors may face difficulty in understanding and verifying financial
transactions in highly technical industries, such as banking and
telecommunications.
Challenges in Auditing Specialized Industries
• Regulatory and Compliance Issues
• Specialized industries are subject to a variety of regulations, which
can vary at the local and international levels, requiring auditors to
stay updated on relevant laws.
Challenges in Auditing Specialized Industries
• Resource and Technical Constraints
• Limited resources or inadequate technology systems in some
industries may affect the accuracy and reliability of audit
procedures.
Challenges in Auditing Specialized Industries
• Ethical Dilemmas
• In some cases, auditors may encounter ethical challenges, such as
conflicts of interest or pressure from industry stakeholders to
overlook irregularities.
The Role of Auditors in Specialized Industries
• Ensuring Financial Integrity and Transparency
• Auditors play a key role in providing assurance that financial
statements are accurate and in compliance with industry-specific
regulations.
The Role of Auditors in Specialized Industries
• Fraud Prevention and Detection
• Auditors help identify and prevent fraudulent activities by assessing
internal controls and detecting irregularities in financial reporting.
The Role of Auditors in Specialized Industries
• Risk Assessment and Management
• Specialized industries often face unique risks, and auditors help
assess these risks and recommend strategies to mitigate them.
The Role of Auditors in Specialized Industries
• Reporting and Communication
• Auditors must communicate their findings effectively to
stakeholders, providing recommendations and highlighting areas of
concern.
Is the audit of specialized industires more complex?
• The audit of a client in a specialized industry can pose some
challenges to the audit firm.
• However, with proper consideration of competence, and by
providing staff with additional support and guidance, these audits
should not necessarily be more complex or challenging to plan and
perform.
Is the audit of specialized industries more complex?
• Using experts can provide high quality audit evidence in specialized
situations, but the auditor must be careful to fully evaluate the
findings of the auditor’s expert and not to over-rely on their work.
• For audit staff, working on this type of engagement can be very
rewarding, providing exposure to sometimes unusual businesses.