xbrl how is it affecting auditing financial statements

Presented by

Vinod Kashyap

NextGen Knowledge Solutions Private Ltd.

Date : October 18, 2012

2012 © NextGen Knowledge Solutions Private Ltd.

XBRL & Financial Reporting

Risks in XBRL Environment

Internal Controls

Assurance over XBRL Instance Document

Q & A

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2012 © NextGen Knowledge Solutions Private Ltd. 3


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The computer language for the electronic communication of internal and external business report information

International supply chain standardization effort backed by over 1000+ being adopted by regulators/companies across the world

Cross-platform, software-agonistic, Internet-friendly global standard based on XML (eXtensible Mark-up Language)

Improves data accuracy by reducing manual efforts and subjectivity

Available to all type of business information: Financial, Non-financial, rules, formulas, summarized, detailed

<in-gaap:Inventories =”contextRef=I2012” unitRef =“INR” decimal=“0”>6,12,962<in-gaap:Inventories>

Balance Sheet (Audited)

March 31, 2012 (Rs.)

March 31, 2011 (Rs.)

Inventories 6,12,962 5,57,111

Trade Receivables 4,49,173 3,77,347


Balance Sheet

(Audited) March 31, 2012

(Rs. in Thousands) March 31, 2011

(Rs. in Thousands)

Inventories 612 557

Trade Receivables 449 377

Numeric Unit INR

Time Period March 31, 2012

Accounting Concept Inventories

Accounting Standard Indian GAAP

Precision Thousands

Label Inventories

Indian GAAP Taxonomy

Commercial & Industrial <in-gaap: Inventories contextRef=I2012” unitRef

=“INR” decimal=“-3”>612000<in-gaap: Inventories>


Mapping • Identify base taxonomy.

• Map financial facts to XBRL elements.

• Identify financials facts that do not match to base taxonomy elements.

From Traditional Financial Reporting

Process

Tagging • Create an instance document by:

associating the fact values being reported in a given filing with specific elements in the taxonomies.

defining periods, units of measures, and other aspects specific to that report.

Reviewing Validate the instance document against the

regulatory requirements.

Rendering the instance document.

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XBRL is based on XML, which facilitates data exchange

XBRL can not be read by human eye

- Data is filtered through rendering applications or viewers to visually present tagged

data

- “How do we trust the tagged data which is in computer readable form?” phenomena

Certain formatting and stylistic features are not coded in XBRL

- Presentation data will NOT be identical to traditional format document

Presentation varies from one rendered version to the next

Rendering is a necessary evil

- Tagged data needs to be rendered in order to see it

- Focus / emphasis on presentation Vs. Regulator-compliant XBRL and use for financial

analysis

- Contrary to original purpose of XBRL creation

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XBRL Format Machine Readable

Traditional Format Human Readable


Potential to replace traditional format and electronic version (PDF &

HTML) of financial statements

Attestation of financial statements doesn’t apply to XBRL Reports

Misconception about XBRL

Auditor’s Conservatism

XBRL is a new risk

Challenges in audit of XBRL: Resources, Software & Standards

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Audit and Examination Engagements - Reasonable Reliance

Review Engagements – Limited Reliance

Agreed-upon-procedures (AUP) – No Reliance

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As per current Standards on Audit issued by ICAI:-

Audit of financial statements doesn’t cover audit of XBRL data

XBRL data doesn’t construe “Other Information” as defined in

Standard of Audit (SA) 720

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AICPA – "Performing Agreed Upon Procedures Engagements That

Address The Completeness, Accuracy, or Consistency of XBRL Tagged

Data“

AICPA – “Principles and Criteria for XBRL Formatted Information”

ICAEW – "Guidance For Performing Agreed Upon Procedures That

Address XBRL Tagged Data Included Within Financial Statements

Prepared in iXBRL Format"

JICPA – "Agreed Upon Procedures Engagements of XBRL Data"

ICAI – "Guidance Note on Certification of XBRL Financial Statements"

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Information on Identity of reporting entity

Nature of financial data

Information on reporting period

Currency

Precision or Scaling

Segment information

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Technical reference information

Base reference information

XBRL Validation

Selection of wrong tags

Reporting wrong data

Failing to mark-up a concept

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Closed taxonomy risks

Accuracy of data

Alterations in taxonomy

Taxonomy version

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Open taxonomy risks

Duplicate taxonomy element

Taxonomy elements not making true representation

Misleading Labels

Extensions not compliant with XBRL specifications

Prohibited names

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Source : ISACA, COBIT 4.1, USA, 2007


Regardless of which implementation strategy an organization selects controls across three major areas are necessary to manage the risk:

Selecting, maintaining & testing taxonomies and extension taxonomies

Accurately mapping and tagging data elements to XBRL Reports

Enforcing change management procedures for XBRL process

Source : ISACA

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Completeness

Mapping

- Identification of base taxonomy - Mapping of facts with taxonomy elements - Mapping of facts with residuary tags

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Tagging

Reviewing

- Defining Contexts - Associating fact values with specific taxonomy elements

- Validation for Technical Specifications - Validation on regulator’s Validation Tool - Rendering


Completeness

Mapping

Accuracy

Structure

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All required information & data as required by the entity’s reporting requirement is formatted in the XBRL Instance Document & is complete in all respect

Completeness

Solution Requirements

Mapping

Accuracy

Structure

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All facts that are required to be formatted are formatted

Existence of facts or presentation or calculation relationships in source

documents

Other required information


Completeness Solution Requirements

Mapping

Mapping

Structure

The elements Viz. : line items, domain members & axis selected in the XBRL file are consistent with the associated concepts in the source document

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Taxonomy referenced in the Instance document is correct

Element Attributes are consistent with source information

Selected element is consistent with the concept in source information

Most specific element is used for Other required information

Same element is used for facts appearing multiple times

Same element is used for each period

New element is created only when no suitable element exist in

taxonomy


Completeness

Mapping

Accuracy

Structure

The amount, date & other attributes e.g. monetary units are consistent with the source information

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Contextual information is consistent with the source information

- Reporting Period

- Decimal Values

- Units

- Entity Identifier

Formatted amounts have appropriate sign

Rendered text block information is consistent with source information


Completeness

Mapping

Accuracy

Structure


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Labels are consistent with the captions in the source information

Calculations reflected in the source information are included in

Calculation Linkbase

All formatted data is consistent with the underlying source information

Extension elements for accounting concepts with debit or credit balance

include balance attribute


Completeness

Mapping

Accuracy

Structure


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Extension elements for currency amounts for non-accounting concepts

include :-

(i) a debit or credit balance attribute; or

(ii) a documentation label for meaning of positive or negative value


Completeness

Structure XBRL files are structured in accordance with the requirements of the entity’s reporting environment

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All information is organized using required presentation groupings

Entity Identifier & Scheme for each context is identical

Instance document should pass Validation Test on regulator’s Validation

Tool e.g. MCA Validation Tool

New Table structure are only created when no suitable table structure

exists in standard taxonomy

Name of extension elements do not contain prohibited information


Control tests

on the effectiveness of XBRL Software

on the effectiveness of the Validation Software

Substantive procedures

All major line items need to be traced and compared

Each line item is a separate test unit; not appropriate for statistical

sampling

However, on certain attribute one would be tempted to perform

sampling but the size of the population is too small to use sampling

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Two kinds of materiality

o Materiality for the entire Financial Statement

o Materiality for each line item in the instance document

Since the materiality concept used in the Financial Statements audit is

at the aggregate level, the implied materiality in the instance document

is also at the aggregate level.

However, since users are going to use each line item separately in their

decisions, they will perceive each line item to be accurate in isolation.

This would lead to erroneous decisions.

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Practitioners' Independence

Management Assertions

Agreement on Procedures

Responsibility for sufficiency of procedures

Criteria for determination of findings

Evidential matter

Materiality limit

Restriction on use of report

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"The focal point of XBRL Assurance is the evaluation of the accuracy

and validity of the XBRL tags applied to the line items in the financial

statements of reporting entity. In order to perform these evaluation,

the auditor needs to have the knowledge of what constitutes an error,

what is the risk in XBRL Instance document, how control tests &

substantive tests should be applied in XBRL environment and how

materiality should be conceived and applied to XBRL Instance

document."

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“No matter how complex things are,

basically everything is simple.”

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Vinod Kashyap

[email protected]

http://www.nextgenknowledge.com

NextGen Knowledge Solutions Private Ltd.

http://www.br-ag.eu/

xbrl how is it affecting auditing financial statements

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