Chapter 13: Summary of key ISAs

Chapter learning objectives

Question 2 of the exam is always a ten mark knowledge question.  Atleast one of the other questions will also contain a knowledge element. Knowing the key points from the audit standards is crucial to scoringwell in these questions.

200 series: General principles and responsibilities

ISA 200 Overall objectives of the independent auditor

Objectives of the auditor:

• To obtain reasonable assurance whether financial statements as a whole are free from material misstatement, whether due to fraud or error.
• To express an opinion on whether the financial statements are prepared, in all material respects, in accordance with a relevant financial reporting framework.
• To report on the financial statements, and communicate as required, in accordance with the auditor's findings.

Responsibilities of management:

• Preparation of the financial statements in accordance with the applicable financial reporting framework, including their fair presentation.
• Internal control necessary to enable preparation of financial statements that are free from material misstatement, whether due to fraud or error.
• To provide the auditor with:
  • access to all information relevant to the preparation of the financial statements
  • unrestricted access to persons from within the entity whom the auditor determines it necessary to obtain evidence.

Inherent limitations of audit:

Audit evidence is persuasive rather than conclusive because of:

• The nature of financial reporting;
• The nature of audit procedures; and
• The need to conduct audit a within reasonable time and at reasonable cost.

ISA 210 Agreeing the terms of audit engagements

The auditor should accept or renew an engagement only if the preconditions for an audit are present:

• An appropriate financial reporting framework is to be applied in the preparation of the financial statements; and
• Management's acknowledgement and understanding of its responsibilities.

Contents of engagement letter:

• The objective and scope of the audit;
• The responsibilities of the auditor;
• The responsibilities of management;
• The identification of an applicable financial reporting framework; and
• Reference to the expected form and content of any reports to be issued.

ISA 230 Audit documentation

Objective of documentation:

• Sufficient appropriate record of basis for audit report
• Evidence that audit planned and performed in accordance with ISAs and legal / regulatory requirements

Content - to enable an experienced independent auditor to understand:

• Nature, timing & extent of audit procedures:
  • Specific items tested.
  • Who performed work and when.
  • Who reviewed work and when.
• Results of audit procedures.
• Significant conclusions and professional judgements.

ISA 240 Responsibilities regarding fraud

Objectives of auditor:

• Identify risks of material misstatement in FS due to fraud.
• Obtain sufficient appropriate evidence regarding assessed risks.

Respond appropriately to fraud or suspected fraud identified.

Fraud: intentional act involving use of deception to obtain unjust/illegal advantage.

Two types of fraud:

• Fraudulent financial reporting.
• Misappropriation of assets.

Professional scepticism: an attitude of a questioning mind; a criticalassessment of audit evidence.

Audit procedures to identify:

• Appropriateness of journal entries.
• Review of accounting estimates.
• Identify significant transactions outside normal course of business.

Examples of fraud risk factors:

• High degree of competition.
• Need to obtain additional financing.
• Low morale amongst senior staff.
• Large amounts of cash on hand.

ISA 250 Consideration of laws and regulations

Auditor's responsibilities:

• Obtain general understanding of legal/regulatory framework applicable to entity.
• Obtain sufficient appropriate evidence regarding compliance with provisions of laws/regulations that may materially affect FS.

ISA 260 Communication with those charged with governance

Those charged with governance:

• Those with responsibility for overseeing the strategic direction of the entity.

Matters to be communicated:

• Auditor's responsibility in relation to the FS audit.
• Planned scope and timing of audit.
• Significant findings from audit.
• Auditor's independence (listed companies).

ISA 265 Communicating deficiencies in internal control

Reporting responsibilities:

• Significant deficiencies, to those charged with governance.
• Other deficiencies, to an appropriate level of management.

What makes matters significant:

• Likelihood of material misstatement in FS.
• Susceptibility to loss / fraud of related asset.
• Volume of activity in related account balance.
• Interaction of deficiency with other deficiencies.

300 & 400 series: Assessment and response to assessed risks

ISA 300 Planning

Objectives of planning:

• Help auditor to devote appropriate attention to important areas of audit.
• Help identify and resolve issues on a timely basis.
• Assist in selection of suitable audit team.
• Help direction and supervision of audit team.

Content of audit strategy:

• Scope of engagement (e.g. input of other auditors).
• Reporting objectives of assignment (e.g. reporting timetable).
• Nature/timing/extent of resources.

Content of audit plan:

• Risk assessment procedures.
• Detailed planned audit procedures.

ISA 315 Identifying and assessing risks of material misstatement

Required understanding of entity and environment:

• Industry/regulatory factors affecting FS
• Nature of entity:
  • Operations;
  • Ownership and governance; and
  • Financing.
• Accounting policies.
• Objectives and strategy.

Risk:

• Audit: risk of inappropriate opinion.
• Inherent: risk of susceptibility of an assertion about a class of transaction (e.g. sales) or account balance (e.g. receivables) to material misstatement.
• Control: risk that material misstatement not detected by entity's internal control.
• Detection: risk that audit procedures do not detect material misstatements.

IT controls, risks:

• Unauthorised changes to data in master files.
• Unauthorised access to programs.
• Inappropriate manual intervention.

Assessing whether a control is relevant to audit:

• Materiality.
• Significance of related risk.
• Applicable legal / regulatory requirements.
• Nature of entity's business.

ISA 320 Materiality

Materiality: Misstatements, including omissions, are considered tobe material if they, individually or in the aggregate, could reasonablybe expected to influence the economic decisions of users taken on thebasis of the financial statements

Performance materiality: an amount set at less than materiality forthe FS as a whole, to reduce to an appropriately low level theprobability that the FS as a whole are materially misstated.

Tolerable error: A monetary amount set by the auditor in respect ofwhich the auditor seeks to obtain an appropriate level of assurancethat the monetary amount set by the auditor is not exceeded by theactual misstatement in the population.

ISA 330 Responses to assessed risks

The auditor shall design and perform audit procedures whose nature,timing and extent are based on and are responsive to the assessed risksof material misstatement.

Test of controls: to evaluate operating effectiveness ofcontrols in preventing, or detecting and correcting materialmisstatements at the assertion level.

Substantive procedures: to detect material misstatements at assertion level, comprising tests of details and analytical procedures.

ISA 450 Evaluation of misstatements identified during audit

A misstatement is: A difference between the amount, classification,presentation, or disclosure of a reported financial statement item andthe amount, classification, presentation, or disclosure that is requiredfor the item to be in accordance with the applicable financialreporting framework. Misstatements can arise from error or fraud.

Requirements:

• Accumulate identified misstatements.
• Determine whether audit strategy needs to be revised.
• Communicate misstatements to appropriate level of management on a timely basis.
• Evaluate effect of uncorrected misstatements on FS.
• Request management written representation that uncorrected misstatements are not material.

500 series: Evidence

ISA 500 Audit evidence

Characteristics:

• Appropriateness: quality, linked to relevance and reliability.
• Sufficiency: quantity, linked to quality and to risk of material misstatement.

Relevance: linked to assertions.

• Assertions:
  • SFP: Completeness, rights and obligations, valuation, existence.
  • IS: Occurrence, completeness, accuracy, cut-off.

Reliability.

• Independent better than internal.
• Auditor generated better than indirectly obtained.
• Documentary better than oral.
• Originals better than photocopies.

ISA 510 Initial audit engagements, opening balances

Objective: to obtain sufficient appropriate evidence whether:

(1)Opening balances are misstated.

(2)Consistent accounting policies with current year

ISA 520 Analytical Procedures

Definition:

• Evaluation of financial information.
• By analysing plausible relationships.
• Among financial and non-financial data.

ISA 530 Audit Sampling

Definitions:

• Audit sampling: application of audit procedures to less than 100% of population to provide auditor with reasonable basis to draw conclusions on entire population.
• Sampling risk: of unrepresentative sample.
• Non-sampling risk: of erroneous conclusion from representative sample.
• Statistical sampling: random sampling plus use of probability theory to evaluate results.

Factors increasing sample size:

• Increase in risk of material misstatement.
• Increase in tolerable misstatement.
• Increase in expected misstatement.

ISA 540 Auditing accounting estimates

Audit approach:

• Review post balance sheet events
• Test management's estimate:
  • Appropriateness of method.
  • Reasonableness of assumptions.
• Develop an independent estimate.

ISA 560 Subsequent events

Adjusting: provide evidence of conditions existing at the balance sheet date.

Non-adjusting: provide evidence of conditions arising after the balance sheet date.

ISA 570 Going Concern

Definition – entity viewed as continuing in business for the foreseeable future.

ISA 580 Written representations

Content:

• Management responsibility for preparation of FS.
• Auditor provided with all relevant information.
• All transactions recorded in FS.
• Plans that may affect the carrying value of the assets.

600 series: Using the work of others

ISA 610 Using the work of internal audit

The external auditor must evaluate:

• the objectivity of the internal audit function;
• the technical competence of the internal audit function;
• whether the internal audit function is carried out with due professional care; and
• whether there is likely to be effective communication between the internal and external auditor.

The auditor must also review the work of the internal audit function toevaluate whether:

• the work was performed by people with adequate technical training and proficiency;
• the work was properly supervised, reviewed and documented;
• sufficient and appropriate evidence has been obtained to be able to draw reasonable conclusions;
• the conclusions reached are appropriate in the circumstances; and
• any unusual matters are properly resolved.

ISA 620 Using the work of an auditor's expert

The external auditor must assess an expert's:

• independence and objectivity; and
• competence.

The auditor must assess the expert's work including:

• the consistency of the findings with other evidence;
• the significant assumptions made; and
• the use and accuracy of source data.

700 series: Audit conclusions and reporting

ISA 700 Forming an opinion and reporting on the financial statements

Content of audit report:

• Title: reference to independent auditor.
• Addressee: shareholders/members.
• Introductory paragraph:
  • Entity.
  • Financial statements.
  • Reporting date.
• Management's responsibility for preparation of FS.
• Auditor's responsibility:
  • To express an opinion on FS.
  • Audit conducted in accordance with ISAs.
• Description of audit.
• Audit opinion:
  • FS prepared in accordance with IFRS.
  • FS give true and fair view.

ISA 705 Modifications to the audit opinion

Definitions:

• Modified: qualified, adverse or disclaimer.
• Pervasive: not confined to specific elements or representing a substantial proportion of a single element.

Modifications:

• FS as a whole not free from material misstatement
  • Material: qualified
  • Pervasive: adverse
• Unable to obtain sufficient appropriate evidence
  • Material: qualified
  • Pervasive: disclaimer

ISA 706 Emphasis of matter paragraphs

Definition: refers to matter fundamental to user's understanding ofFS. Can only be used to highlight a matter already disclosed in the FS.

ISA 710 Comparative information

Responsibilities, evaluate whether:

• Comparative information agrees to amounts presented in FS.
• Consistent accounting policies.

ISA 720 Auditor's responsibility relating to other information in documents containing audited Financial Statements

Responsibilities:

• Read other information to identify material inconsistencies with FS
• If inconsistencies identified:
  • If FS are wrong, propose adjustment. If refused consider modifying audit opinion.
  • If other information is wrong, propose adjustment. If refused consider:
    • referring to the matter in audit report.
    • withholding audit report.
    • resignation.

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