Does the audit risk in auditing specialized industries considered higher than a normal audit?

OVERVIEWA specialized industry is a distinct market that has a unique way of accounting fortransactionsandreporting its financial results. These differences are allowed under the applicableaccounting framework,such asIFRSorGAAP. Examples of specialized industries are airlines, banking, and insurance.()AUDITING AND ASSURANCE: SPECIALIZED INDUSTRIESFinancial statements are the representation of the reporting entity’s management. To lend credibility to the entity’sprepared financial statement; they have to be examined by an independent certified public accountant, whoexpresses an opinion as to the fairness by which such financial statements are presented. As certified publicaccountants performing engagement services, learners must be exposed to the transaction cycles of specializedindustries, so that they can formulate audit plans and audit procedures accordingly. This course covers detailedapproaches to problems and situations normally encountered in the independent examination of financialstatements of entities engaged in special industries such as banking and financial institutions, real estate, businessprocess outsourcing (BPO) entities, health maintenance organizations (HMO), holding entities, logging and miningentities. Learners must be able to identify the audit procedures, prepare audit adjustments and complete workingpapers to serve as bases for the preparation of audit reports for entities belonging to special industries.(counting_Information)What is a specialised industry?Perhaps it is easiest to start by explaining that a specialised industry is not necessarily rare or evenunusual. Examples of specialised industries include:Airlinebanking and insuranceagriculture, andoil extraction.What makes these industries specialised is that they are likely either to have specific financialreporting standards applicable to them, or to have distinct accounting policies which have beendeveloped to account for specialised transactions and balances which are based on the normally-applied financial reporting standards. For instance, IAS® 41,Agricultureis clearly relevant specificallyto the agriculture sector and IFRS®, 7Financial Instruments: Disclosurewill need specific applicationby companies operating in the banking sector.Audit considerationsCompetenceWhen accepting an audit engagement involving a specialist industry, the audit firm needs to pay closeattention to the competence of the audit firm to provide the service. ISQC 1,Quality Control for FirmsThat Perform Audits and Reviews of Financial Statements, and Other Assurance and Related ServicesEngagementsrequires the audit firm to consider whether the firm is competent to perform the

1.1 Specialized Industry

What is a specialized industry?

Perhaps it is easiest to start by explaining that a specialized industry is not necessarily rare or even

unusual. Examples of specialized industries include:

airline

banking and insurance

agriculture, and

oil extraction.

What makes these industries specialized is 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. For instance, IAS® 41, Agriculture is clearly relevant specifically to the agriculture

sector and IFRS®, 7 Financial Instruments: Disclosure will need specific application by companies

operating in the banking sector.

1.1 Audit Considerations

Competence

When accepting an audit engagement involving a specialist 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. 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.

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. 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.

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 was as in any other audit – by obtaining appropriate understanding of the business and its

environment. Assuming that staff have the necessary competence, as discussed above, this should not

be problematical.

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. For example, in the audit of banking

What is the main relevance in auditing a specialized industry?

What makes audit risk high?

Does auditor industry specialization improve audit quality?

How is auditor specialization industry measured?