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:Airlinebanking and insuranceagriculture, andoil 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