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Standards (ISAs)

Summary

Quote

   

The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting

 

framework.”

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Auditor gives opinion limited to material aspects of financial statements. Therefore, NOT a certification of accuracy or management performance.

ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an

Audit risk: Per ISA 200, para 13: the risk that the auditor expresses an

Audit in Accordance with International Standards on Auditing

inappropriate audit opinion when the financial statements are materially misstated.

ISAs (UK and Ireland) require the auditor to obtain reasonable assurance (high level of assurance) about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. Reasonable assurance is a high level of assurance. It is obtained when the auditor has obtained sufficient appropriate audit evidence to reduce audit risk (that is, the risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated) to an acceptably low level.

   

Content of engagement letter (ISA 210) Standard headings:

Objectives and scope of audit True and fair view of accounts under applicable reporting framework.

o

Responsibilities of auditors Reasonable (not absolute) assurance regarding material

o

misstatements and auditing standards used.

Responsibilities of directors Preparation of accounts; maintenance of internal controls; absence of fraud and error; free access to records and staff.

o

ISA 210, Agreeing the Terms of Audit

Audit report: form and content

Engagements

Fees

o

   

Details of how fees are calculated, based on time spent by various members of the audit team, their experience, responsibility and skill. N/B: Client needs to confirm acceptance of terms, usually by returning signed copy of engagement letter.

According to ISA 210, the engagement letter should require management to acknowledge its responsibility for each of the following:

  • a) Providing access to information of which management is aware that is

relevant to the preparation of the financial statements

  • b) Preparing financial statements in accordance with the entity’s

“applicable financial reporting framework”

  • c) Internal controls that management considers necessary for the

preparation of financial statements that are free from material misstatement

ISA 220, Quality Control for an Audit of

 

Financial Statements

Audit quality: Meeting legal and regulatory requirements, reducing audit risk (more work), as prescribed by ISA 220

   

ISA 230, Audit Documentation

ISA 240, The Auditor’s Responsibilities

 

Relating to Fraud in an Audit of Financial Statements

ISA 250, Consideration of Laws and

 

Regulations in an Audit of Financial Statements

   

Communication with “those charged with governance”

ISA 260, Communication with Those Charged with Governance

ISA 260 deals with the responsibility of the auditor to communicate with “those

Part of this responsibility is (para. 9): To provide those charged with

charged with governance” (para.10)

governance with timely observations arising from the audit …

   
<a href=ISA 230 ISA 230, Audit Documentation Summary ISA 230 ISA 240, The Auditor’s Responsibilities ISA 240 Relating to Fraud in an Audit of Financial Statements Summary ISA 240 ISA 250, Consideration of Laws and ISA 250 Regulations in an Audit of Financial Statements Summary ISA 250 Communication with “those charged with governance” ISA 260, Communication with Those Charged with Governance ISA 260 Summary ISA 260 deals with the responsibility of the auditor to communicate with “those Part of this responsibility is (para. 9): To provide those charged with charged with governance” (para.10) governance with timely observations arising from the audit … ISA 265 ISA 265, Communicating Deficiencies in Internal Control to Those Charged with Governance and Management Summary " id="pdf-obj-1-76" src="pdf-obj-1-76.jpg">
<a href=ISA 265 " id="pdf-obj-1-82" src="pdf-obj-1-82.jpg">

ISA 265, Communicating Deficiencies in Internal Control to Those Charged with Governance and Management

   

Preparation of audit planning memorandum:

Paragraph of ISA 300 explains what should be included in the audit planning documentation:

 
  • (a) The overall audit strategy;

ISA 300, Planning an Audit of Financial

 
  • a. Communicate significant matters to the engagement team;

Statements

overall scope, timing and conduct of the audit

  • (b) The audit plan;

 
  • a. Planned nature, timing and extent of the risk assessment

procedures and procedures at assertion level, substantive vs controls approach

 
  • (c) Any significant changes made during the audit engagement to the overall audit strategy or the audit plan, and the reasons for such changes.

   

Therefore, to minimise business risk, auditor needs to be aware of

developments in the client’s business environment and assess possible

consequences for audit risk.

ISA 315 (para. 100) also covers assessment of broader risk environment. i.e. risk of material misstatement:

The auditor should identify and assess the risks of material misstatement at the financial statement level, and at the assertion level for classes of transactions, account balances, and disclosures. For this purpose, the auditor:

Identifies risks throughout the process of obtaining an understanding of the entity and its environment, including relevant controls … [Identify risk] Relates the identified risks to what can go wrong at the assertion level. [Accounts impact, e.g. trade receivables misstatement may also affect cash balances] Considers whether the risks are of a magnitude that could result in a material misstatement … [Potential magnitude of impact] Considers the likelihood that the risks that could result in a material misstatement … [Likelihood of impact]

Para 6: Inquiries of management within the entity

ISA 315, Identifying and Assessing the

Analytical procedures

Risks of Material Misstatement through

ISA 315

Observation and inspection

Understanding the Entity and Its Environment

Summary

Industry/commercial sector affects audit risk; technological change (greater business risk, greater inherent risk); whether the entity is a PIE; company growth; equity financing or highly geared; nature of transactions; experience of managerial personnel

The process designed, implemented and maintained by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of an entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations. The term “controls” refers to any aspects of one or more of the components of internal control.

Basic elements of control in the internal environment:

 

control environment and related components

control systems

ISA 315 deals with these elements as five components of internal control:

 
  • 1. Control environment

Per ISA 315 it “sets the tone of an organization, influencing the control

 

consciousness of its people”

 
  • 2. Entity’s risk assessment process

  • 3. Information system, including the related business processes, relevant to financial reporting and communication

  • 4. Control activities

ISA 320, Materiality in Planning and Performing an Audit ISA 330 , The Auditor’s Responses to

ISA 320, Materiality in Planning and Performing an Audit

ISA 330, The Auditor’s Responses to Assessed Risks

ISA 402, Audit Considerations Relating to an Entity Using a Service Organization

ISA 450, Evaluation of Misstatements Identified during the Audit

ISA 500, Audit Evidence

ISA 320, Materiality in Planning and Performing an Audit ISA 330 , The Auditor’s Responses to
ISA 320 Summary
ISA 320
Summary
ISA 330 Summary
ISA 330
Summary
ISA 402 Summary
ISA 402
Summary
ISA 450 Summary
ISA 450
Summary
Summary ISA 500
Summary
ISA 500
  • (d) To address identified business risks that may threaten the objectives in (a)

    • 5. Monitoring of controls

Note its aims:

  • (a) To ensure within reason that financial reports are valid and reliable

  • (b) To ensure within reason, that operations are effective and efficient

  • (c) To ensure within reason that applicable laws and regulations are adhered

to

to (c) above.

Definition of materiality per ISA 320:

Misstatements, including omissions, are considered to be material if they,

statements. Judgements about materiality are made in the light of surrounding circumstances, and are affected by the size or nature of a misstatement, or a combination of both.

individually or in the aggregate,

could reasonably be expected to influence

the economic decisions of users taken on the basis of the financial

 

Audit tests An effective audit approach involves a combination of tests of controls and substantive procedures, but per ISA 330 para.49:

Irrespective of the assessed risks of material misstatement, the auditor should design and perform substantive procedures for each material class of transactions, account balance, and disclosure.

Substantive procedures are enacted to ensure there are no material misstatements at the assertion level

Audit tests An effective audit approach involves a combination of tests of controls and substantive procedures,
ISA 402
ISA 402
ISA 450
ISA 450

ISA 500 (Audit Evidence, para. 2):

The auditor should obtain sufficient, appropriate [relevant and reliable] audit evidence to be able to draw reasonable conclusions on which to base the audit opinion.

Target “reasonable conclusions” or assurance, not guarantee of true and fair

view. As most evidence is persuasive rather than conclusive:

more evidence is required the higher the assessment of risk, and in form of better relevance/reliability or greater quantity of evidence. Has to be trustworthy to the extent that it can give us understanding of the assertion

Reliability of Audit Evidence (Grades of Audit Evidence, as per ISA 500)

  • 1. The reliability of audit evidence is increased when it is obtained from independent sources outside the entity

   
  • 2. The reliability of audit evidence that is generated internally is increased when the related control, including those over its preparation and maintenance, imposed by the entity are effective

  • 3. Evidence obtained directly by the auditor (e.g. observation) is more reliable than evidence obtained indirectly or by inference (e.g. inquiry)

  • 4. Documentary form is more reliable than evidence than evidence obtained orally

  • 5. Original documents, rather than photocopies or facsimile

  • 6. Created in the normal course of business than that specially created to satisfy the auditor

  • 7. Best-informed source will normally be management of the company but management’s lack of independence reduces its value as a source of evidence (therefore, corroborate to minutes and commentaries in financial press)

  • 8. Evidence about the future is particularly difficult to obtain and is less reliable (e.g. collectability, useful lives)

  • 9. Evidence may be upgraded by skilful use of corroborate evidence

ISA 501, Audit Evidence-Specific

ISA 501

 

Considerations for Selected Items

Summary

ISA 501

 

ISA 505

 

ISA 505, External Confirmations

Summary

ISA 505

ISA 510, Initial Audit Engagements-

 

Opening Balances

   

ISA 520, Analytical Procedures

ISA 520 (Analytical Procedures): help decide where risk areas in the company lie; may lead to specific procedures

   

ISA 530, Audit Sampling

So, overall objective of sampling (ISA 530) is:

to provide a reasonable basis for the auditor to draw conclusions

about the population from which the sample is selected

ISA 540, Auditing Accounting Estimates,

 

Including Fair Value Accounting Estimates, and Related Disclosures

 

ISA 550

 

ISA 550, Related Parties

Summary

ISA 550

 

ISA 560

 

ISA 560, Subsequent Events

Summary

ISA 560

 

ISA 570

 

ISA 570, Going Concern

Summary

ISA 570

 

ISA 580

 

ISA 580, Written Representations

Summary

ISA 580

ISA 600, Special Considerations-Audits of

ISA 600

 

Group Financial Statements (Including the Work of Component Auditors)

Summary

ISA 600

ISA 610, Using the Work of Internal

ISA 610

 

Auditors

Summary

ISA 610

ISA 620, Using the Work of an Auditor’s

 

Expert

ISA 700, Forming an Opinion and Reporting

ISA 700

 

on Financial Statements

Summary

ISA 700

ISA 705, Modifications to the Opinion in the

ISA 705

 

Independent Auditor’s Report

Summary

ISA 705

 

ISA 706

 

ISA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the

Independent Auditor’s Report

Summary

ISA 706

ISA 710, Comparative Information-

ISA 710

 

Corresponding Figures and Comparative Financial Statements

Summary

ISA 710

ISA 720, The Auditor’s Responsibilities

ISA 720

 

Relating to Other Information in Documents Containing Audited Financial Statements

Summary

ISA 720

 

ISA 800

 

ISA 800, Special Considerations-Audits of Financial Statements Prepared in

Summary

ISA 800

Accordance with Special Purpose Frameworks

   

ISA 805, Special Considerations-Audits of Single Financial Statements and Specific

ISA 805

 

Elements, Accounts or Items of a Financial Statement

Summary

ISA 805

     

ISA 810, Engagements to Report on

ISA 810

 

Summary Financial Statements

Summary