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INTRODUCTION TO AUDIT AND ASSURANCE IN SPECIALIZED INDUSTRIES

The Nature of Specialized Industries (Association of Certified Accountants [ACCA], 2021)

A specialized industry is a distinct market with a unique way of accounting for transactions and reporting its
financial results. In other words, what makes an industry specialized is that it is likely to either have specific
financial reporting standards applicable to it or has distinct accounting policies developed to account for
specialized transactions and balances based on the normally applied financial reporting standards. For
example, Philippine Accounting Standard (PAS) 41 – Agriculture is relevant specifically to agriculture. On the
other hand, Philippine Financial Reporting Standard (IFRS) 9 – Financial Instruments will need specific
applications by companies operating in the banking sector (Association of Certified Accountants [ACCA],
2021).

Examples of Specialized Industries

Given below are an overview of some examples of specialized industries that will be tackled in this course:

 Banking. It is a network of financial institutions whose principal activity is taking deposits and borrowing
for lending and investing. These financial institutions are regulated by the Bangko Sentral ng Pilipinas
(BSP). Thus, the compliance of the banks with the reportorial requirements of the BSP must be
considered in auditing the financial statements of the banks. Some of the relevant standards for
companies in the banking industry are PFRS 7 – Financial Instruments: Disclosure, PFRS 9 – Financial
Instruments, and Philippine Auditing Practice Statements (PAPS) 1006 – Audits of the Financial
Statements of Banks. Examples of companies in the banking industries are Bank of the Philippine Islands
(BPI), Banco De Oro (BDO) Unibank, Philippine National Bank (PNB), and Asian Development Bank (ADB).

 Mining. It includes companies that are involved in the extraction of precious minerals and other
geological materials. The extracted materials are transformed into a mineralized form that serves an
economic benefit to the prospector or miner. The typical activities in the mining industry include metals
production, metals investing, and metals trading. Some of the relevant standards for companies in the
mining industry are PAS 16 – Property, Plant, and Equipment (PPE), PFRS 16 – Leases, and PFRS 6 –
Exploration for and Evaluation of Mineral Resources. Examples of mining companies in the Philippines
are the Republic Cement and Building Materials, Inc.; Agata Mining Ventures, Inc.; Coral Bay Nickel
Corporation; and Holcim Mining and Development Corp.

 Construction and Real Estates. It encompasses many facets of property, including development,
appraisal, marketing, selling, leasing, and management of commercial, industrial, residential, and
agricultural properties. This industry can fluctuate depending on the national and local economies,
although it remains consistent because people always need homes, and businesses always need office
space. The relevant standards for companies in the construction and real estate industry are PAS 16 –
Property, Plant, and Equipment (PPE), PFRS 15 – Revenue from Contracts with Customers, and PAS 11 –
Construction Contracts. Examples of domestic companies in this industry are Ayala Land, Inc.;
Megaworld Corporation; SM Prime Holdings; Filinvest Land; and Rockwell Land.

 Oil and Gas. It includes companies that extract, refine, and sell oil and gas, refined products, and related
products. The oil and gas industry is divided into three (3) segments:
o Upstream, the business of oil and gas exploration and production;
o Midstream, the transportation and storage of the oil and gas; and
o Downstream, which includes refining and marketing of oil and gas.

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One of the relevant accounting standards for companies in the oil and gas industries is IFRS 6 –
Exploration for and Evaluation of Mineral Resources. Examples of domestic companies in this industry
are Energy World Corporation Limited, Asia Oil Corporation, and Petroline Resources Inc.

 Utilities and Power. This industry includes companies that provide basic amenities, such as water and
electricity. Although utilities are private and for-profit companies, they are part of the public service
landscape and heavily regulated. Investors typically treat utilities as long-term holdings and use them to
generate a steady income for their portfolios. The electric companies in the Philippines are regulated by
the Energy Regulatory Commission (ERC). Examples of electric distribution utilities in the Philippines are
the Manila Electric Company (MERALCO), Malvar Enerzone Corporation, and Visayan Electric Company.

 Telecommunications. It is made up of companies that make communication possible globally, whether

through the phone or the Internet, through airwaves or cables, through wires, or wirelessly. These
companies created the infrastructure that allows data in words, voice, audio, or video to be sent
anywhere in the world. The largest companies in the sector are telephone (both wired and wireless)
operators, satellite companies, cable companies, and internet service providers. Some of the relevant
accounting standards for telecommunication companies are PFRS 9 – Financial Instruments, PFRS 15 –
Revenue from Contracts with Customers, and PFRS 16 – Leases. Examples of domestic
telecommunication companies are the Philippine Long-Distance Telephone (PLDT) Company, Globe
Telecom, Smart Communications, Inc., and DITO Telecommunity Corporation.

 Not-for-profit Entities. These organizations do not earn profits for their owners. All of the money earned
by or donated to a not-for-profit entity is used to pursue the organization's objectives and keep it
running. Typically, organizations in this industry are tax-exempt charities or other types of public service
organizations, and as such, they are not required to pay most taxes. Moreover, their income is not
distributed to the group's members, directors, or officers. Examples of not-for-profit entities in the
Philippines are the Haribon Foundation, Tahanang Walang Hagdanan, Inc., and the Philippine Red Cross.

 Insurance. It is made up of companies that offer risk management in the form of insurance contracts.
The basic concept of insurance is that one party, the insurer, will guarantee payment for an uncertain
future event. Meanwhile, another party, the insured or the policyholder, pays a smaller premium to the
insurer in exchange for that protection on that uncertain future occurrence. The most relevant
accounting standard for insurance companies is IFRS 17 – Insurance Contracts. Examples of insurance
companies in the Philippines are the AXA Philippines, Sunlife GREPA Financial, Inc., Manufacturers Life
Insurance Co. (Phils.) Inc., PRU Life Insurance Corporation of U.K., and Insular Life Assurance Company,
Limited.

 Retail and E-Commerce. Retail refers to the sale of goods and services to the public for
consumption. Retailing involves all activities required to market consumer goods and services to
consumers purchasing for individual or family needs through a point of purchase. On the other hand, e-
commerce refers to buying or selling products or services over the internet. Examples of retail
companies in the Philippines are SM Retail Inc.; Robinsons Retail Holdings, Inc.; and Puregold Price Club
Inc. On the other hand, the examples of retail companies in the Philippines are Shopee Philippines,
Lazada Philippines, eBay Philippines, and Shopinas. The most relevant accounting standard for retail is
the IFRS 15 – Revenue from Contracts with Customers. On the other hand, the most relevant auditing
practice statement for companies in the e-commerce industry is the PAPS 1013 – Electronic Commerce:
Effect on the Audit of Financial Statements.

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 Education. According to the United Nations Educational, Scientific, and Cultural Organization (2016), the
education sector is comprised of many institutions (ministries of education, local educational
authorities, teacher training institutions, schools, universities, etc.). It involves a wide range of people
(curriculum developers, inspectors, school principals, teachers, school nurses, students, etc.). These
institutions can vary according to different contexts. Examples of institutions in the educational sector
are the STI Education Services, Group, Inc., Far Eastern University, Incorporated, Centro Escolar
University (CEU), and PHINMA Corporation. Some of the most relevant accounting standards for
educational institutions are IFRS 9 – Financial Instruments and IFRS 15 - Revenue from Contracts with
Customers.

Audit Considerations in Specialized Industries (Association of Certified Accountants [ACCA], 2021)

In auditing the entities in specialized industries, the following must be considered:

 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. International Standard
on Quality Control (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 effectively gain the necessary skills and knowledge.

Larger audit firms are likely to meet the competence requirement for almost any type of industry. They
either already possess the 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 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 auditor 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. It is by obtaining an appropriate understanding of the
business and its environment. Assuming that staff has the necessary competence, as discussed above,
this should not be a problem.

To assist the 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
sector clients, an audit firm may produce guidance on the specific application of Philippine Financial
Reporting Standards (PFRs) relating to the range of financial instruments typically held by banks. Audit
staff can refer to this guidance when performing the audit, particularly when identifying risks of material
misstatement.

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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. Examples of them are the
depreciation of properties, recognition of provisions, and impairment of goodwill would all still be
relevant. These “normal” types of risk must not be overlooked because the client operates in a
specialized industry.

 Reliance on experts. In connection with the considerations above, the auditor may plan to use an
auditor’s expert to obtain audit evidence. This is quite likely in a specialized industry because despite
being competent to perform the engagement, the audit firm may not have the necessary specific
expertise in some areas. For instance, in a bank audit, specialists may be brought in to value complex
financial instruments.

In this situation, the auditor must adhere to the requirements and principles of Philippine Standard on
Auditing (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. The auditor must
evaluate the relevance and adequacy of the expert’s findings or conclusions. There is a danger of over-
reliance on the expert’s work; 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 other audit procedures'
conclusions. Any inconsistencies must be investigated.

 Laws and Regulations. There are many laws and regulations that a reporting entity may have to comply
with to continue in business. For example, mining companies must observe the provisions of the
Republic Act (R.A) 1942, otherwise known as the Philippine Mining Act; the oil companies must follow
the provisions of Presidential Decree (P.D.) 87 which is also known as The Oil Exploration and
Development Act of 1972, and financial institutions must comply with the BSP’s regulations. Such laws
and regulations will have both a direct and indirect effect on the financial statements.

PAS 250, Consideration of Laws and Regulations in an Audit of Financial Statements, provides that for
those laws and regulations that directly affect the financial statements, the auditor will be concerned
about gathering sufficient and appropriate audit evidence that the entity has complied with such laws
and regulations. For example, the auditor will be concerned with gathering adequate and appropriate
audit evidence if the bank has complied with the capital adequacy ratio requirement set by the BSP. If
not, there is the risk that the entity could be fined for non-compliance, and the fines could be material,
either in isolation or when aggregated with other misstatements. In addition, amounts within the
financial statements may also be misstated due to non-compliance with laws and regulations.

For those laws and regulations that indirectly affect the financial statements, the auditor will undertake
procedures to identify non-compliance with such laws and regulations.

Reference:
Association of Certified Accountants [ACCA]. (2021). Auditing in specialized industries. Retrieved from ACCA Global:
https://www.accaglobal.com/in/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-
articles/specialised-industries.html

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