Euro Audit Process Risks Analysis

1. THE EURO & THE AUDIT PROCESSRISK ANALYSIS, MATERIALITYAND CERTIFICATIONNovember 14, 2000Christian Perrier

2. Agenda • Introduction • Business risks involved by the introduction of the euro • Impact of euro-related risks on the audit process • Incidence on auditor's opinion of inadequate preparation for the euro • Euro implementation: the top priority for auditors in France

3. A new business environment • Implications of the euro are likely to be profound for companies with business transactions in Europe • Need for all companies to adapt their financial and other operating systems • Additional longer term implications as the euro will increase competition within a larger market • The importance of the economic event requires that every company addresses the issues arising from the introduction of the euro

4. Progress of the changeover to the euro • During the transitional period, the principle of "no compulsion, no prohibition" applies • However, public awareness of the euro is still very limited according to a recent poll • It is therefore the management's responsibility to identify the impact of the euro and to make adequate preparations

5. Size of company 0 employee Total from 1 to 499 employees 1 to 9 employees 10 to 49 employees 50 to 249 employees 250 to 499 employees 0% 20% 40% 60% 80% 100% % of preparation 66% 34% 60% 40% 43% 57% 75% 25% 84% 16% 94% 6% Yes No Progress of the changeover to the euro Question: Have you already started preparations for the changeover to the euro in your company ? Source: Survey by the French Ministry of Finance - September 2000

6. Business risks involved in the introduction of the euro PricewaterhouseCoopers

7. Business risks involved in the introduction of the euro • Key euro-related business risks include: • adverse impact on company's activity • inadequate preparation • inappropriate systems and control process

8. Adverse impact on company's activity • The use of euro will increase competition • Transparency of prices across the eurozone will lead to pressure for less price discrimination • Reductions in the price of goods and services sold could lead to significant decreases in revenues and profitability

9. Adverse impact on company's activity • In order to prevent such risks a company must: • Compare its prices with those of competitors • Determine the maximum discrimination acceptable • Assess the financial impact of alignment • Revise commercial and industrial strategies accordingly

10. Inadequate preparation • No commitment by top management • Inappropriate planning of the euro project • Inadequate arrangements for identifying and implementing necessary changes • Inadequate resources allocated to the changeover process • Inappropriate staff training • Non-compliance with the project plan

11. Inappropriate systems and control process • Inadequate identification of key operating systems / software requiring adaptation or replacement • Absence of procedures for handling both national currency and euro during the transitional period • Loss of reference points for employees • Internal control risks

12. Inappropriate systems and control process • Inappropriate controls to prevent fraudulent activities and errors • No identification of key customers / suppliers that will require transactions in euro during the transitional period • Non compliance with tax and legal regulations (as regards conversion method, rounding, tracking …)

13. Impact of euro-relatedriskson the audit process PricewaterhouseCoopers

14. Impact of euro-related risks on the audit process • Statutory auditor's responsibilities are not changed by the introduction of the euro • However, the statutory auditor needs to: • have an adequate understanding of the issues that could arise from the euro • consider the company's plans and preparations • identify any significant euro-related risks not yet addressed which could impact the going concern principle

15. Impact of euro-related risks on the audit process • Depending on euro-related risks identified, the auditor should plan appropriate audit procedures (limited or extended) • Auditors have a range of audit techniques and must adapt them to the changeover to the euro: • analytical review of balances expressed both in euros and in francs • external confirmations to be requested in euros, francs or both units • substantive tests on conversion…

16. Impact of euro-related risks on the audit process • A specific testing program should be implemented after the changeover date: • review of the conversion method used • detailed controls on conversion and roundings • conversion of management reporting schedules

17. Incidence on auditor'sopinion of inadequatepreparation for the euro PricewaterhouseCoopers

18. Incidence on auditor's opinion of inadequate preparation for the euro • If the statutory auditor considers that the company has not made adequate preparation for the euro: • this situation casts doubts over the ability to remain a going concern • this situation is not addressed adequately in the financial statements • his report will need to reflect the inadequacy of any such disclosure

19. Incidence on auditor's opinion of inadequate preparation for the euro • In the French context, the CNCC requires the statutory auditor to: • highlight in his report, during the transitional period, scope limitations deriving from: • inadequate implementation of procedures designed to prevent risks and errors • inappropriate adaptation of information systems to the euro • qualify his report for uncertainty it there is a going concern issue due to: • inadequate preparation for the euro • inappropriate information systems • loss in substance of the business

20. Euro implementation:top priority forauditors in France PricewaterhouseCoopers

21. Euro implementation: top priority for auditorsin France • In order to be the driving force in the changeover to the euro, the OEC (Ordre des Experts-Comptables) has made several tools available to its professionals • Tools have been developed to assist companies in preparing the changeover: • website dedicated to the euro (www.euro-expert.com) • dedicated web site that comprises software suppliers' details of euro compliance • euro diagnostic website (www.euro-diagnostic.com) to stimulate management awareness of what's at stake

22. Euro implementation: top priority for auditorsin France • Regular information about the introduction of the euro has been provided in magazines published by the OEC (SIC, …) • A survey will be carried out on selected chartered accountants to measure the progress of the changeover to the euro among their clients • The CD-rom "Euro start" will assist professionals in managing the changeover to the euro of their audit files

23. Euro implementation: top priority for auditorsin France • In March 1998, the CNCC (Compagnie Nationale des Commissaires aux Comptes) issued a practical guide on the euro organised in three parts: • the stakes, mechanisms and implementation of the euro • the technical consequences of the changeover to the euro • the impact of the euro on the audit process • This guide, updated twice since its first publication, has been distributed to all French auditors

24. Euro implementation: top priority for auditorsin France • In addition to their audit engagement, statutory auditors must endeavour to inform and encourage their clients to prepare the changeover to the euro through: • awareness leaflets • seminar presentations • training sessions

25. Euro implementation: top priority for auditorsin France • Specific assignments can also be conducted: • analysis of euro-related impacts and risks • assistance in the implementation of euro strategies • assistance with the management of euro project • adaptation of procedures and internal controls to the euro • staff training