ISA 620, Using the Work of an Auditors Expert ISA Implementation Support Module Notes for Select Slides

The following supporting notes accompany the PowerPoint slides for this module and do not amend or override the ISAs, the texts of which alone are authoritative. Reading these notes is not a substitute for reading the ISAs. The notes are not meant to be exhaustive and reference to the ISAs themselves should always be made. In conducting an audit in accordance with ISAs, the auditor is required to comply with all the ISAs that are relevant to the engagement.

Slide 4 Notes Who is an Auditors Expert? o The experts field of expertise should be other than accounting or auditing because auditors are accounting and auditing experts. In many cases, distinguishing between expertise in accounting or auditing, and expertise in another field, will be straightforward, even when this involves a specialized area of accounting or auditing. For example, an individual with expertise in applying methods of accounting for deferred income tax can often be easily distinguished from an expert in taxation law. The former is not an expert for the purposes of this ISA as this constitutes accounting expertise; the latter is an expert for the purposes of this ISA as this constitutes legal expertise. Similar distinctions may also be able to be made in other areas, for example, between expertise in methods of accounting for financial instruments, and expertise in complex modeling for the purpose of valuing financial instruments. In some cases, however, particularly those involving an emerging area of accounting or auditing expertise, distinguishing between specialized areas of accounting or auditing, and expertise in another field, will be a matter of professional judgment. Applicable professional rules and standards regarding education and competency requirements for accountants and auditors may assist the auditor in exercising that judgment (for example, International Education Standard (IES) 8,1 may be of assistance). o Consulting someone with expertise in a specialized area of accounting or auditing

IES 8, Competence Requirements for Audit Professionals

Module ISA 620 Notes for Select Slides

is dealt with in ISA 220,2 not ISA 620. o The types of expertise that may be needed include, for example: Valuation of complex financial instruments, land and buildings, assets that may have been impaired, environmental liabilities, site clean-up costs, etc. Actuarial calculation of liabilities, e.g., insurance contracts or employee benefit plans. Estimation of oil and gas reserves. Interpretation of contracts, laws and regulations. Analysis of complex or unusual tax compliance issues. Obtaining an understanding of the entity. Identifying and assessing risks of material misstatement.

o Stages of the audit when an auditors expert may be used include:

Determining and implementing overall responses to assessed of risks material misstatement. Slide 6 Notes Has management used an expert? o If so, it is more likely that the auditor will also need the services of an auditors expert, although this may not always be the case. Consider the following questions further: Is the expert employed by the entity or external? Is the expert subject to professional standards? What controls have been applied within the entity relative to the experts work? Designing and performing further audit procedures. Evaluating the sufficiency and appropriateness of audit evidence obtained.

In some cases, the auditor, although not an expert, may have enough understanding of a field to perform the audit without an auditors expert o That understanding may have been developed through, for example: Audits of entities for which similar expertise was required. Education or professional development. Discussion with relevant experts. Discussion with other auditors.

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Module ISA 620 Notes for Select Slides

Slide 9 Notes Auditors internal experts are subject to the firms quality control policies and procedures o Even for these internal experts, the auditor still needs to consider matters such as: Whether the experts expertise is appropriate to the particular needs of the engagement. Whether the experts actual work is adequate for the auditors purposes. Reliance on firms QC may reduce extent of work needed o If the auditor is unable to rely on the firms quality control system with regard to the internal expert, it would be the auditors responsibility to take the necessary steps to be satisfied regarding such matters as the internal experts competence and independence. Slide 10 Notes Evaluating Competence, Capabilities & Objectivity o Competence relates to nature and level of expertise that the expert possesses. o Capabilities are about whether the expert can exercise the experts competence in the engagement circumstances. For example, an expert may have knowledge of the field but no relevant practical experience in the field. o Objectivity relates to the possible effects that bias, conflict of interest, or influence of others may have on experts professional or business judgment. Is the auditors experts work subject to professional or industry requirements? o These requirements include technical or ethical standards imposed by the experts membership of a relevant professional body or by law. Is the experts competence relevant to the matter at hand? o For example, are there areas of specialty within the experts general field and, if so, is the experts specialty appropriate to the auditors needs? Various sources of information may be used o Auditors personal experience with the experts previous work. o Discussions with the expert, other auditors or others who are familiar with the experts work. o Knowledge of the experts qualifications, membership of a relevant professional body or industry association, license to practice, etc. o Published papers or books written by the expert. o QC policies and procedures for internal experts.

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Slide 11 Notes Use threats and safeguards approach to evaluate objectivity o Objectivity is about the possible effects that bias, conflict of interest, or influence of others may have on the experts professional or business judgment it is these important, substantive elements that the auditor needs to evaluate when considering whether and how to use a particular experts work. A number of procedures may be performed to evaluate objectivity o Inquiry of the entity about any known interests of the auditors expert in the entity, or relationships of the expert with the entity. o Discussion with the expert regarding, for example, the experts financial interests in the entity, business and personal relationships with the entity, and other services provided to the entity. o Written representation from the auditors expert. o Inquiry is a requirement for external experts. Slide 12 Notes Understand relevant aspects of the experts field o Applicable standards, legal requirements and the like. o Relevant assumption and methods to be used and whether they are generally accepted and appropriate for financial reporting purposes. o Nature of the data the expert will use. Slide 13 Notes Agreement is always needed o For both internal and external experts o An Appendix to the ISA includes a helpful list of matters for consideration. Respective roles and responsibilities of the auditor and the expert o E.g., who will test source data, appropriate consents, and access to and retention of working papers. Communication between the auditor and the expert o Effective two-way communication facilitates integration of the experts work. Use a sliding scale approach o Considerations include, for example:

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Whether the auditors expert will have access to sensitive or confidential entity information. Whether the respective roles or responsibilities of the auditor and the expert are unusual. Whether multi-jurisdictional legal requirements apply. Whether the matter is highly complex. Whether the auditor has not previously used that expert. The extent and significance of the experts work.

Agreement need not always be formally in writing o Evidence of the agreement may be included in, for example: Planning memoranda, or related working papers such as the audit program. In the case of an auditors internal expert, the policies and procedures of the auditors firm. The extent of documentation in the auditors working papers depends on the nature of these policies and procedures. Slide 14 Notes Evaluate for the auditors purposes o For the auditors purposes: the auditor is not expected to have the same level of understanding of the experts field as the expert, nor is the auditor expected to be able to evaluate all facets of the experts work to the same level as another expert. o The nature, timing and extent of audit procedures to evaluate the adequacy of the experts work for the auditors purposes is affected by, for example: The auditors evaluation of the experts competence, capabilities and objectivity (e.g., if the expert is highly competent and objective, less work may be required to evaluate the experts work). The auditors familiarity with the experts field of expertise (if the auditor is very familiar with the experts field, then less work may be required). The nature of the work performed by the expert (if the work is relatively minor and/or straightforward, less work may be required). The experts findings or conclusions o Inquire of the expert, review working papers, discuss with other experts and management, etc. o Are these findings or conclusions relevant and reasonable, and are they consistent with other audit evidence? The experts assumptions and methods (when significant to the experts work) o Evaluate the experts assumptions and methods directly, or evaluate whether the
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expert has adequately reviewed managements assumptions and methods. o Consider, for example, whether the assumptions and methods are generally accepted, consistent with the financial reporting framework, dependent on specialized models. The source data used by the expert (when significant to the experts work) o Test the data used by the expert. o If the nature of the data is highly technical, inquire of the expert, or supervise or review the experts tests of the data. Slide 15 Notes No reference to the auditors expert in unmodified auditors report o Underlying principle: The auditor has sole responsibility for the audit opinion expressed, and that responsibility is not reduced by the auditors use of the work of an auditors expert. Nonetheless, if the auditor using the work of an auditors expert, having followed this ISA, concludes that the work of that expert is adequate for the auditors purposes, the auditor may accept that experts findings or conclusions in the experts field as appropriate audit evidence. If reference is needed in relation to a modification o Reference to the experts work is permitted in a modified report only if that reference is relevant to understanding of the modification.

Copyright October 2010 by the International Federation of Accountants (IFAC). All rights reserved. Permission is granted to make copies of this work provided that such copies are for use in academic classrooms or for personal use and are not sold or disseminated and provided that each copy bears the following credit line: Copyright October 2010 by the International Federation of Accountants (IFAC). All rights reserved. Used with permission of IFAC. Contact permissions@ifac.org for permission to reproduce, store, or transmit this work. Otherwise, written permission from IFAC is required to reproduce, store, or transmit, or to make other similar uses of, this work, except as permitted by law. Contact permissions@ifac.org. ISBN: ISBN 978-1-60815-074-8

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