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Presentation by:
,
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Clarity Project Overview Recognition at IAASB: standards need to be
understandable, clear, and capable of
consistent application To enhance the quality and uniformity of
practice worldwide
In 2004 , the IAASB began a comprehensiveprogram to enhance the clarity of ISAs
This program involved the application of new
drafting conventions to all ISAs, either:
as part of a substantive revision or;
through a limited redrafting , to reflect the newconventions and matters of clarity generally
2
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Clarity Project Overview Contd’
On February 27, 2009, the Clarity Project
reached its completion Public Interest Oversi ht Board a roved
the due process for the last several
clarified ISAs
Auditors worldwide will now have access
36 newly updated and clarified ISAs
Control (ISQC)3
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Changes Resulting from the Clarity Project
broadly comprise the following:
'
conducting an audit in accordance with ISAs; Settin an ob ective in each ISA and establishin the
auditor's obligation in relation to that objective;
Clarifying the obligations imposed on auditors by therequirements of the ISAs and the language used tocommunicate such requirements;
requirements an auditor needs to fulfill; and
understandability of the ISAs through structural anddrafting improvements 4
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Structure of the ISAs Introduction : information regarding the
purpose, scope, and subject matter of the ISA
Objective : a clear statement of the objective ofthe auditor in the audit area
Definitions : for greater understanding of the
ISAs - a licable terms
Requirements : Each objective is supported byclearl stated re uirements - alwa s ex ressedby the phrase "the auditor shall."
A lication and Other Ex lanator Material :
what a requirement means or is intended tocover, or includes examples of procedures 5
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ISAs to be coveredISAs to be covered
ISA 300 - Planning
ISA 315 - Understandin the
Entity and Its Environmentand Assessing the Risks of
ISA 330 - The Auditor’s
Procedures in Response to
-
Assessed Risks
ISA 500 - Audit Evidence
ISA 320 - Audit Materialit
6
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u y
Assertions and discussion has been shiftedfrom ISA 500 to ISA 315
Appendix to ISA 315 reduced to 2 from 3 Elaborative discussion has been included on
control components
’sampling included in ISA 500
more specifically
7
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A & C (A & C (Initial Initial Understanding the client environment and riskUnderstanding the client environment and risk assessmentassessment
AUDIT ACTIVITYAUDIT ACTIVITY SUMMARYSUMMARY
DD
CC
oo
llaann
ngagemen ngagemen
Overall auditOverall auditstrategystrategy
EntityEntityFinancialFinancialPerformancePerformance
Objectives/Objectives/
StrategiesStrategiesIndustry/Industry/RegulatoryRegulatory
InternalInternal
ControlControl
(Design/(Design/
oommmmuu
AccountinAccountin
Audit PlanAudit Plan risks)risks)
implemenimplemen
tation)tation)
PROCEDURESPROCEDURES ININ RESPONSERESPONSE TOTO ASSESSEDASSESSED RISKSRISKS
uu
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eerr
ff
controlcontrol ProceduresProcedures
to addressto addressrisk atrisk at
Sufficiency andSufficiency and
appropriatenessappropriatenessDocumentaDocumenta-- OverallOverall
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tt
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proceduresprocedures
assertionassertionlevellevel
of evidenceof evidenceaa
tt
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Completion/Completion/ReviewsReviews
Sufficient/appropriateSufficient/appropriate auditaudit evidenceevidence ii
oo
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cc
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SubsequentSubsequent
EventsEvents
vera rev ewvera rev ewof financialof financial
statementsstatements
Review/Review/
conclusionconclusion
nn
230230
ee
nntt
8
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PLANNI NGPLANNI NG ANAN AUDI TAUDI T OFOF FI NANCI ALFI NANCI AL
STATEMENTSSTATEMENTS -- I SAI SA 3 0 0 3 0 0
99
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e o e an m ng o
Pl nninOverall audit strategy/ audit plan Appropriate attention to important areas
eso u on o po en a pro ems on a me y as s
Performance in an effective and efficient manner
levels of capabilities and competence
Direction and supervision Coordination of work done by auditors of components and
experts
Continuing process not a discrete stage in audit
predictability
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Involvement of Key Engagement
of the engagement team be involved in planningthe audit
Participating in the discussion among
engagement teamAOEM
Based on ex erience
Enhancing the efficiency and effectiveness ofaudit
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re m nary ngagemen
Activities(at the beginning) ○ Procedures for the continuance of the client
○ Evaluate compliance with ethical requirements,
○ Understanding of the terms of the engagement
AOE
○ Identification of events/matters expected to adverselyaffect the planning/performance
○ No issue with : independence, management integrityand misunderstanding
○ Continuance procedures: Shortly after the previous
audit12
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Planning Activitiesee veravera uu ra egyra egy
Objectives?Objectives?
e s e scope, m ng an rec on o e au
Guides the development of the audit plan
Scoping – characteristics of the engagement
Re ortin ob ectives – timin and nature ofcommunications
Significant factors necessary to direct the engagement
eam s e or s(Materiality, high risk areas, material areas)
Ascertain the nature, timing and extent of resourcesnecessary to perform the engagement
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Planning Activities Cont’
TheThe OverallOverall AuditAudit StrategyStrategy Cont’ AOEM AOEM - - assistance assistance in in determining determining
The resources to deploy for specific audit areas - high riskareas, involvement of experts on complex matters
The amount of resources to allocate to specific audit areas:
the extent of review of other auditors’ work for group audits
the audit budget in hours to allocate to high risk areas The timing of deployment of these resources - at an interim
audit stage or at key cutoff dates
,
briefing and debriefing meetings
engagement partner and manager reviews (for example, on-site oro -s e
engagement quality control reviewsAudit Strategy for Smaller Entities needs not to be complex 14
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Planning Activities Cont’
ee veravera uu ra egyra egy Cont’
Appendix Appendix - - Considerations Considerations in in developing developing audit audit strategy strategy
arac er s cs o e engagemen : eport ng ramewor , au t
coverage, components audit , reporting currency etc.
Reporting Objectives, Timing of the Audit, and Nature ofCommunications: reporting timetable, meeting schedules with
Governance, management, communications
, ,Knowledge Gained on Other Engagements: materiality, areas
with high risk of material misstatements, need to emphasize the team
mem ers o ma n a n ques on ng m n Nature, Timing and Extent of Resources : selection of
engagement team, allocation of work between team members,engagement budgeting etc.
Above items are examples and can also affect the audit plan 15
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Planning Activities
Cont’ The Audit PlanThe Audit Plan
Ob ectives?Ob ectives?
to reduce audit risk to an acceptably low levelCoverage?Coverage?
Description of the nature, timing and extent of planned
risk assessment procedures (ISA(ISA 315315)) escr pt on o t e nature, t m ng an extent o p anne
further audit procedures at the assertion level (ISA(ISA 330330))
carried out so that the engagement complies with ISAs
Update strategy and plan as and when necessary
Necessary procedures for direction and supervision of the
engagement team members and review of their work16
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ann ng c v es
Cont’ ont’
These are more detailed than strategy
,
performed by the engagement team
Planning for risk assessment procedures is done early
Some procedures may be executed early on someaccount balances or class of transactions
With the progress of audit changes may be needed
Direction and supervision of engagement team (S ize and complexity of the entity, Area of the audit, Assessed risks of material misstatement Ca abilities an com etence of team members)
ISA 220 - further guidance on direction/supervision/review 17
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DocumentationDocumentation
Overall audit strategy
Significant changes to audit strategy/plan
(AOEM) (AOEM)
necessary for planning
an : e a e proce ures o e per orme – may be standard checklists etc
ma er en es : may e n e orm o a
memorandum 18
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Additional Considerations in Initial Audit
Procedures required by ISA 220 regarding theacceptance
Communicating with the predecessor auditor,w ere t ere as een a c ange o au tors
(AOEM) (AOEM) Planning activities may need to be expanded:
If not prohibited – review of predecessor auditor’s
Discussion on major issues with those charged withovernance
Procedures on opening balances
Firm’s other procedures–involvement of another partner19
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IDENTIFYINGIDENTIFYING AND AND ASSESSING ASSESSING THETHE RISKSRISKS OFOF
MATERIA LMATERIAL MISSTATEMENTMISSTATEMENT THROUGHTHROUGHUNDERSTANDINGUNDERSTANDING THETHE ENTITY ENTITY AND AND ITSITS ENVIRONMENTENVIRONMENT
2020
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Objective
To identify and assess the risks of material
Whether due to fraud or error
At the financial statement and assertion levels
Through understanding the entity and itsenvironment
Including the entity’s internal control
Providing a basis for designing andimplementing responses to the assessed
risks of material misstatement
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RISK ASSESSMENT PROCEDURES AND
Inquiries of management and others within theentity
Analytical procedures
Observation and inspection
Procedures performed for A & C may indicate risksPerformance of other engagements by the partner
Previous experience – changes to be reviewed to
assess relevanceDiscussions among the key engagement team –
susceptibility to material misstatements
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RELATED ACTIVITIES (AOEM) (AOEM)
’ UnderstandingUnderstanding – – Why?Why? (Frame (Frame of of reference)reference)
Assess the risk of material misstatement
Establishing materiality A ro riateness of selection and a lication of
accounting policies & disclosures
Special audit consideration areas - going concern Developing expectations - analytical procedures
Responding to risks - designing and performing
ur er au proce ures Sufficiency and appropriateness of audit evidence
sese oo pro ess onapro ess ona u gmenu gmen – – eyey ac orac or
FraudFraud considerationsconsiderations – – separatelyseparately dealtdealt withwith inin ISAISA 24024023
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RELATED ACTIVITIES (AOEM) (AOEM)
’ AdditionalAdditional proceduresprocedures maymay includeinclude::
sources such as economic journals, analysts’ reports,banks or rating agencies, regulatory or financialpublications
Making enquiries from external legal council or
InquiriesInquiries fromfrom managementmanagement andand othersothers inin entityentity::
financial reporting (charged with governance, internal auditors, responsible for complex transactions,internal legal council, marketing and sales personnel)
24
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RELATED ACTIVITIES (AOEM) (AOEM)
’ AnalyticalAnalytical proceduresprocedures::
Broad initial indication
Unusual trends, ratios etc. – indication of fraud Smaller entities – non-availability of interim data (may
perform on availability of draft financial statements)
ObservationObservation andand inspectioninspection::
, ,
InformationInformation obtainedobtained inin priorprior periodsperiods::
DiscussionDiscussion amongamong thethe engagementengagement teamteam::
Mostly from more experienced to less experienced
Not necessary to include all – key members to be included
Smaller entities – responsibility of the engagement partner25
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UNDERSTANDING THE ENTITY AND ITS
EntityEntity andand itsits environmentenvironment
Industr , re ulator , and other external factors, includin
the applicable financial reporting frameworkNature of the entity, including operations, ownership/ governance, nves men s, s s ruc ure
Entity’s process for selection and application of accounting
olicies
Objectives and strategies and the related businessbusiness risksrisksthat may result in a material misstatement of the financial
s a emen sMeasurement and review of the entity’s financialerformance
TheThe entity’sentity’s InternalInternal ControlsControls
DesignDesign andand implementationimplementation 26
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THE ENTITY AND ITS ENVIRONMENT
Industry/regulatory and other external factors Industr :
○
Competition (demand, supply, capacity, price)○ Seasonal/cyclical Industry specific risks
○
Regulatory:
○ Accounting principles/industry specific practices
relevant experience
○ Regulatory framework (Financial sector)
○ Taxation
, , , ,
environmental requirements)
Public sector entities:
○ Laws, regulations and other authorities with specific effect
Other external factors:27
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THE ENTITY AND ITS ENVIRONMENT (AOEM) (AOEM)
’ Nature of the Entity
Business operations: (few examples)
Revenue sources – manufacturing, whole sale, retail etc
Products/markets – market share, margins, competition, pricing
Conduct of operations – stages of manufacturing, segments
Alliances, joint ventures, outsourcing
Key customers (related parties)
Investments:
Acquisitions, mergers (planned or executed)
nanc ng:Group structure, debt structure, derivatives etc
Financial reporting:
Accounting practices, revenue recognition, inventories, fair value
Complex structure : risk of material misstatements 28
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THE ENTITY AND ITS ENVIRONMENT (AOEM) (AOEM)
’ Selection and application of accounting
Methods to account for significant and unusual
The effect of significant accounting policies in
controversial or emer in areas for which there isa lack of authoritative guidance or consensus
Chan es in the entit ’s accountin olicies
Financial reporting standards and laws andregulations that are new to the entity and when andhow the entity will adopt such requirements
29
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THE ENTITY AND ITS ENVIRONMENT (AOEM) (AOEM)
’ Objectives/strategies & related business risks
Industr develo ments – lack of ersonnel/ex ertise
New products and services – increased product liabilityExpansion of business – inaccurate assessment ofdemand
New accounting requirements – incomplete
Regulatory requirements – increased legal exposure
Current/ ros ective financin re uirements – loss of
financingUse of IT – incompatibility of systems and processes
Incomplete/improper implementation of a strategy
30
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THE ENTITY AND ITS ENVIRONMENT (AOEM) (AOEM)
’ easurement an ev ew o t e nt ty s nanc a Performance Internal
Key ratios and operating statistics
Key performance indicators
mp oyee per ormance measures an ncen vecompensation policies
Trends
Use of forecasts, budgets and variance analysis
External
Analyst reports and credit rating reportsCompetitor analysis
Period-on-period financial performance (revenue growth,
profitability, leverage)31
ENTITY’ INTERNAL
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ENTITY’ INTERNAL
Understanding of relevant controls
Mostly controls relevant to audit
All controls relevant to financialcontrols are relevant to audit
judgment
32
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ENTITY’S INTERNAL CONTROLS Cont’
General Nature and Characteristics of Internal Control (AOEM) (AOEM)
Purpose of Internal Control
To address identified business risks that threatenthe achievement of any of the entity’s objectivesconcerning:
e a y o nanc a repor ng
Effectiveness and efficiency of operations
Smaller entities : may use less structured means
their objectives33
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ENTITY’S INTERNAL CONTROLS Cont’
Extent of Understanding
Design
mp emen a on
(AOEM) (AOEM)
Inquiring of entity personnel
Observing the application of specific controls
nqu ry a one s not sufficient for such purposes
Inspecting documents and reports
Tracing transactions through the information system relevant tofinancial reporting
Understanding and assessing design/implementation is notexpected to give comfort on operating effectiveness – to be
In some IT based controls operating effectiveness may alsobe assess at this stage – due to consistency in application 35
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ENTITY’S INTERNAL CONTROLS Cont’
Components
Control Environment
Shall obtain an understanding of the controlenvironment
Evaluate whether:
Management, with the oversight of those charged withgovernance, has created and maintained a culture ofhonesty and ethical behavior
collectively provide an appropriate foundation for theother components of internal control
Whether those other components are not undermined by
deficiencies in the control environment 36
ENTITY’S INTERNAL CONTROLS
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ENTITY’S INTERNAL CONTROLS Cont’
Components
Elements: Communication and enforcement of integrity and ethical values
Commitment to competence
Participation by those charged with governance
’
Organizational structure
Assignment of authority and responsibility
uman resource po c es an prac ces
Procedures to obtain evidence:
In uiries
Corroboration through observation and inspection of documents
37
ENTITY’S INTERNAL CONTROLS
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ENTITY’S INTERNAL CONTROLS Cont’
omponen s on Control Environment (AOEM) (AOEM) Cont’
Misstatements: Pervasive impact on risk assessment
Control consciousness is affected by Governance
Independent and active board can influence operating philosophy
May be a positive factor – addressing fraud risk
Smaller entities :
Governance structure may not be very formal
ess segrega on o u es may e compensa e roug ownermanager
Risk of overriding may be considered
arrangements, communications may not be formal/documented
Attitude, awareness and actions of the management are moreimportant 38
ENTITY’S INTERNAL CONTROLS
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ENTITY’S INTERNAL CONTROLS Cont’
Components Cont’
Entity’s risk assessment process
The auditor shall obtain an understanding of whether theentity has a process for:
en y ng us ness r s s re evan o nanc a repor ng o ec ves
Estimating the significance of the risks
Assessing the likelihood of their occurrence Deciding about actions to address those risks
If such process exists – obtain an understanding
– the process?
If no rocess is not established – consider it is a ro riatein the circumstances
39
ENTITY’S INTERNAL CONTROLS
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ENTITY’S INTERNAL CONTROLS Cont’
omponen s on Entity’s risk assessment process Cont’ (AOEM) (AOEM)
to be managed Appropriate process assists the auditor in identifying risks
of material misstatement
Appropriateness is a matter of judgment
ma er en es :
Unlikely to be an established risk assessment process in asmall entit
Risk identification by the management will be through directpersonal involvement in the business
Inquiry about identified risks and how they are addressed
by management is still necessary 40
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ENTITY’S INTERNAL CONTROLS
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ENTITY S INTERNAL CONTROLS Cont’
omponen s on The Information System, Including Related Business Processes,
Relevant to Financial Re ortin , and Communication Cont’ (AOEM) (AOEM)
Includes the accounting system – rectifications etc
reporting framework is accumulated, recorded, processed, summarizedand appropriately reported in the financial statements.
Standard : Sales, Purchases, accounting estimates
Non-standard : acquisition, impairments
Related business process : Result in transactions to be recorded, process and reported
Understanding process will help auditor to understand reporting systemCommunication : rovidin an
Smaller entities :
Are likely to be less sophisticated
understanding of individual roles andresponsibilities pertaining to internalcontrol over financial reporting 42
ENTITY’S INTERNAL CONTROLS
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ENTITY S INTERNAL CONTROLS Cont’
Components Cont’
Control activities
Shall obtain an understanding of control activities:
Relevant to the audit
ecessary o un ers an o assess e r s s o ma er amisstatement at the assertion level
Design further audit procedures responsive to assessed risks Understanding of all the control activities related to each
significant class of transactions, account balance, anddisclosure in the financial statements or to ever assertion
relevant to them is not required Understanding of how the entity has responded to risks
ar s ng rom
43
ENTITY’S INTERNAL CONTROLS
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ENTITY S INTERNAL CONTROLS Cont’
omponen s on Control activities Cont’ (AOEM) (AOEM)
directives are carried out Examples include relating to the following:
Authorization
Performance reviews
Physical controls
Segregation of duties
e evance: Relate to significant risks
Relate to risks for which substantive rocedures alone do not rovidesufficient appropriate audit evidence
Considered to be relevant in the judgment of the auditor 44
ENTITY’S INTERNAL CONTROLS
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ENTITY S INTERNAL CONTROLS Cont’
Components Cont’
Control activities Cont’
Auditor’s judgment is influenced by risk assessment
Auditor’s emphasis has to be on higher risk areas Knowled e about resence/absence hel s to devote a ro riate
attention
Use of IT affects the operation of control activities : General and
Application controlsSmaller entities :
Conceptually similar to larger entities
Some control activities may not be needed due to involvement of themanagement – approval of credit
re e y o e re a e o ma n ransac on cyc es – purc ases, revenueor employee cost
45
ENTITY’S INTERNAL CONTROLS
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ENTITY S INTERNAL CONTROLS Cont’
Components Cont’
Monitoring of Controls
Shall obtain an understanding of the major activities that the entity uses
to monitor internal control over financial reporting Including those related to those control activities relevant to the audit
Initiation of remedial actions to deficiencies in its controls
Internal Audit Function :
The nature of the internal audit function’s res onsibilities and how theinternal audit function fits in the entity’s organizational structure
The activities performed, or to be performed, by the internal auditfunction
Sources of information : Used in the entity’s monitoring activities
sufficiently reliable for the purpose
46
ENTITY’S INTERNAL CONTROLS
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ENTITY S INTERNAL CONTROLS Cont’
Components Cont’ Monitoring of Controls Cont’ (AOEM) (AOEM)
A process to assess the effectiveness of internal control performanceover time
Involves assessing the effectiveness of controls on a timely basis andtaking necessary remedial actions
Can be accomplished through: Ongoing activities
Separate evaluations A combination of the two
Ongoing monitoring activities are built into normal recurring activitiesand include regular management and supervisory activities
Management’s monitoring activities may include using information fromcommunications from external parties such as customer complaints andregulator comments
Smaller entities :
Close involvement in operations 47
ENTITY’S INTERNAL CONTROLS
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ENTITY S INTERNAL CONTROLS Cont’
Components Cont’
Monitoring of Controls Cont’
Internal Audit Function:
May be relevant and affect nature, timing and extent of audit
procedures
Internal control
Risk management
May be limited to the review of the economy, efficiency andeffectiveness of operations, for example, and accordingly, may not
’
Sources of information:
Monitoring may be based on incorrect information Example
n un erstan ng s requ re o : The sources of the information related to the entity’s monitoring activities
The basis upon which management considers the information to be sufficiently reliable48
IDENTIFYING AND ASSESSING THE RISK OF
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MATERIAL MISSTATEMENT
RisksRisks assessmentassessment ofof materialmaterial misstatementmisstatement
At the financial statement level
At the assertion level for
classes of transactions Example
accoun a ances
and disclosures
ProcessProcess Identify risks
Relate - what can go wrong at the assertion level?
Consider magnitude - material misstatement of thefinancial statements
ons er e e oo – ma er a m ss a emen o efinancial statements
49
IDENTIFYING AND ASSESSING THE RISK OFMATERIAL MISSTATEMENT
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MATERIAL MISSTATEMENT
’ Risks Risks assessment assessment of of material material misstatement misstatement at at financial financial statement statement level level (AOEM) (AOEM)
Risks that relate pervasively to the financial statements as a whole
Potentially affect many assertions Re resent circumstances that ma increase the risks of material
misstatement at the assertion level (management override)
May derive in particular from a deficient control environment (other
factors such as declinin economic conditionsFor example: deficiencies such as management’s lack of competencemay have a more pervasive effect on the financial statements and mayre uire an overall res onse b the auditor
Understanding of internal control may raise doubts about auditability: Serious concerns on management’s integrity - risk of management
misre resentations
Concerns about the condition and reliability of an entity’s records - unlikely toobtain sufficient appropriate audit evidence
50
IDENTIFYING AND ASSESSING THE RISK OFMATERIAL MISSTATEMENT
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MATERIAL MISSTATEMENT
’
Risks Risks assessment assessment of of material material misstatement misstatement at at assert on assert on eve eve
Risks at the assertion level for classes of transactions,,
because:
Such consideration directly assists in determining thenature, timing and extent of further audit procedures at theassertion level
The identified risks may relate more pervasively to thefinancial statements as a whole and potentially affect manyassertions
51
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Use of assertions
Classes of transactions and events for the period
Occurrence
Completeness
Accuracy
Cutoff
ass ca on
Account balances at the period end
x s ence
Rights and obligations
Valuation and allocation 52
Use of assertions
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Use of assertions
Cont’
Presentation and disclosure○ Occurrence and rights and obligations
○ Completeness
○ Classification and understandability
○
Accuracy and valuationNote that auditor :
May like to use different terms/assertions but the
aspects as given above should be covered May like to merge the assertions relating to for
the period and at the end of the period
For public sector – compliance with laws 53
IDENTIFYING AND ASSESSING THE RISK OFMATERIAL MISSTATEMENT
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MATERIAL MISSTATEMENT
’ Process Process of of identifying identifying risks risks of of material material misstatement misstatement (AOEM) (AOEM)
assessment
The risk assessment determines the nature, timing and extent of further
Appendix 2 conditions and events indicative of
existence of risks of material misstatement
Related Related controls controls to to assertions assertions (AOEM) (AOEM)
Controls (prevent, detect, correct) can also be identified to specificasser ons
Controls are identified in processes – multiple control activities maycover one assertion
Controls may have specific impact – physical counting of inventories onexistence and completeness
Controls may be indirect – review by sales manager for completeness 54
INDICATORS OF RISK MATERIALMAISSTATEMENT
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MAISSTATEMENT
(Appendix 2) Operations in regions that are economically unstable
-
High degree of complex regulation
Constraints on the availability of capital and credit
Changes in the supply chain
moving into new lines of business Expanding into new locations
Changes in the entity such as large acquisitions or
reorganizations or other unusual events 55
INDICATORS OF RISK MATERIAL
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MAISSTATEMENT
(Appendix 2) Cont’
Entities or business segments likely to be sold
Complex alliances and joint ventures
Use of off-balance-sheet finance, special-purposeent t es, an ot er comp ex nanc ng arrangements
Significant transactions with related parties
ac o personne w appropr a e accoun ng anfinancial reporting skills
executives
Weaknesses in internal control es eciall those notaddressed by management
56
INDICATORS OF RISK MATERIAL
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MAISSTATEMENT(Appendix 2) Cont’
Inconsistencies between the entity’s IT strategy and itsbusiness strategies
Changes in the IT environment
nsta at on o s gn cant new systems re ate tofinancial reporting
’by regulatory or government bodies
Past misstatements histor of errors or a si nificant
amount of adjustments at period endSignificant amount of non-routine or non-systematictransactions including inter-company transactions and
large revenue transactions at period end 57
INDICATORS OF RISK MATERIAL
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MAISSTATEMENT(Appendix 2) Cont’
Transactions that are recorded based on’managemen s n en , or examp e, e
refinancing, assets to be sold and classification of
Application of new accounting pronouncements
processes
Events or transactions that involve significant
measurement uncertainty, including accountingestimates
en ng t gat on an cont ngent a t es, or
example, sales warranties, financial guarantees 58
IDENTIFYING AND ASSESSING THE RISK OFMATERIAL MISSTATEMENT
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MATERIAL MISSTATEMENT
’ Risks Risks that that require require special special audit audit consideration consideration
Auditor shall determine whether any of the risks identifiedare, in the auditor’s judgment, a significant risk
Shall exclude the effects of identified controls related to the
Significant risk – An identified and assessed riskof material misstatement that, in the auditor’s
Shall consider at least the following:
, .
Risk of fraud;
Relate to recent significant economic, accounting or other developments
The complexity of transactions
Significant transactions with related parties
Subjectivity in the measurement – wide range of measurement uncertainty
Significant transactions outside the normal course of business 59
IDENTIFYING AND ASSESSING THE RISK OFMATERIAL MISSTATEMENT
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MATERIAL MISSTATEMENT
’ Risks Risks that that require require special special audit audit consideration consideration
Significant non-routine transactions or judgmental matters- - ,
nature (infrequent)
Judgmental matters - accounting estimates with significantmeasurement uncertainty
Significant non-routine transactions:
-
Greater manual intervention for data collection and processing Complex calculations or accounting principles
Significant judgmental matters :
May be subjective or complex, or require assumptions about theeffects of future events, for example, judgment about fair value 60
IDENTIFYING AND ASSESSING THE RISK OFMATERIAL MISSTATEMENT
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’ Risks Risks that that require require special special audit audit consideration consideration AOEM AOEM
Understanding controls related to significant risks
Assess whether and how management responds to therisks. Such responses might include:
Control activities such as a review of assumptions by senior
management or experts Documented processes for estimations
Approval by those charged with governance
-
Referral to appropriate experts (such as internal or external legalcounsel)
An assessment of potential effect and proposal to disclose in thefinancial statements
Failure b mana ement to im lement such controls is an61
IDENTIFYING AND ASSESSING THE RISK OFMATERIAL MISSTATEMENT
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’ Risks for Which Substantive Procedures Alone Do Not Provide Sufficient Appropriate Audit Evidence
Automated processing with little or no manual
intervention
Audit evidence may be available only in electronicorm, an s su c ency an appropr a enessusually depend on the effectiveness of controls
The potential for improper initiation or alteration of
greater if appropriate controls are not operating
effectively 62
IDENTIFYING AND ASSESSING THE RISK OFMATERIAL MISSTATEMENT
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’ Revision of Risk Assessment
New information is inconsistent - shall revise theassessment and modify the further planned auditprocedures accordingly
(AOEM) (AOEM)
Risk assessment may be based on an expectationthat certain controls are operating effectively - testsof those controls revealed they were not operatinge ec ve y
During substantive procedures the auditor may
greater than the auditor’s risk assessments63
DOCUMENTATION
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DOCUMENTATION
significant decisions reached
Key elements of the understanding obtained regarding:
each of the aspects of the entity and its environment
each of the internal control components
obtained
the risk assessment procedures performed
at the financial statement level and at the assertion level
The risks identified, and related controls about which theauditor has obtained an understanding
64
DOCUMENTATION(AOEM)(AOEM)
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(AOEM) (AOEM) a er o pro ess ona u gmen Small entities - may be incorporated in documentation of the
overall strategy and audit plan
May be documented separately, or may be documented as part
of further procedures
the nature, size and complexity of the entity and its internal control
availability of information from the entity
audit methodology and technology used in the course of the audit
Uncomplicated businesses and processes - documentation maybe sim le in form and relativel brief.
An engagement team comprising less experienced individualsmay require more detailed documentation
,forward, updated as necessary to reflect changes in the entity’s
business or processes 65
ASSESSING THE RISK OF MATERIAL
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ScenarioScenario BusinessBusiness RiskRisk AuditAudit RiskRisk ResponseResponse
Declining
industry
Business failure
Impairment ofassets
Valuation of
assets -impairment
Apply
impairment test
Managementbenefits linked
Misreporting toincrease
Misstatementof revenue
Extensivesubstantive
performance Recoverabilityof debts
receivables revenue/ receivables
operations license if non-compliance
intangiblesGoing concern
review of statusof compliance
conditions
66
THETHE AUDITOR’SAUDITOR’S RESPONSESRESPONSES TOTO
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THETHE AUDITOR S AUDITOR S RESPONSESRESPONSES TOTO
ASSESSED ASSESSED RISKSRISKS
6767
THE AUDITOR’S RESPONSES TO
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Overall responses
Audit procedures responsive to assessedrisks of material misstatement at theassertion level
Adequacy of Presentation and Disclosure
Evaluating the sufficiency and
appropriateness of audit evidence Documentation
68
OVERALL RESPONSE
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Shall design and implemented overall responses
AOE
Emphasizing to the audit team the need to maintainprofessional skepticism
Assigning more experienced staff or those withspecial skills or using experts
rov ng more superv s on
Incorporating additional elements of unpredictability in
performed General chan es to the nature timin or extent of
audit procedures: (Performing substantive procedures at
period end instead of at an interim date) 69
OVERALL RESPONSE Cont’
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AOEM Cont’
Auditor’s understandin of control environment shallaffect the design of overall responses
Effective control environment shall increase theconfidence
Deficiencies in control environment may be
More audit procedures at the period end
More substantive rocedures
More audit locations to be selected for audit Approaches:
Substantive approach – more substantive procedures
Combined approach – combination of test of controls and 70
AUDIT PROCEDURES RESPONSIVE TO ASSESSEDRISKS OF MATERIAL MISSTATEMENT AT THE
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Design and perform procedures responsive to the
level
For designing procedures consider reasons of risksassessment:
Characteristics of relevant class of transactions, account balance or
disclosure – inherent risk Relevant controls (desire to test operating effectiveness of controls
– control risk)
risk
assessed risk and procedures to be performed
71
RISKS OF MATERIAL MISSTATEMENT AT THEASSERTION LEVEL
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ASSERTION LEVEL
Cont’
AOEM
ApproachesApproaches:: testtest ofof controlcontrol oror substantivesubstantive oror combinedcombined
NatureNature
PurposePurpose:: Tests of controls or substantive procedures
TypeType:: Inspection, Observation, Inquiry, Confirmation,
eca cu a on, e-per ormance, na y ca proce ures
TimingTiming
ExtentExtentQuantit
72
RISKS OF MATERIAL MISSTATEMENT AT THEASSERTION LEVEL
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Cont’
AOE
NatureNature
combinationcombination (high(high riskrisk ofof completenesscompleteness ofof termstermsofof contractcontract – – inspectioninspection ofof documentdocument andand directdirectconfirmation)confirmation)
ReasonsReasons areare alsoalso importantimportant::
LowerLower inherentinherent riskrisk –– substantivesubstantive analyticalanalytical proceduresprocedures LowerLower riskrisk duedue toto expectedexpected controlscontrols – – testingtesting operatingoperating
proceduresprocedures..
73
RISKS OF MATERIAL MISSTATEMENT AT THEASSERTION LEVEL
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Cont’ TimingTiming AOEM
– – substantivesubstantive proceduresprocedures atat thethe yearyear endend oror unannouncedunannounced(fraud)(fraud)
EarlyEarly performanceperformance ofof proceduresprocedures – – timelytimely identificationidentification ofofsignificantsignificant mattersmatters
, Agreeing the financial statements to the accounting records
Adjustments for preparing the financial statements
Relevant factors to decide timing of procedures : The control environment
The nature of the risk
The period or date to which the audit evidence relates 74
RISKS OF MATERIAL MISSTATEMENT AT THEASSERTION LEVEL
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Cont’ ExtentExtent AOEM
DeterminedDetermined onon thethe basisbasis ofof::
MaterialityMateriality
AssessedAssessed levellevel ofof riskrisk
HigherHigher thethe riskrisk moremore isis thethe extentextent
CAATsCAATs cancan bebe usedused forfor electronicelectronic transactionstransactions HigherHigher riskrisk – – increaseincrease quantityquantity oror obtainobtain moremore relevantrelevant
evidenceevidence (more(more testtest ofof detailsdetails oror thirdthird partyparty confirmation)confirmation)
Public Public Sector Sector
Auditor’sAuditor’s mandatemandate maymay affectaffect thethe nature,nature, timingtiming andand extentextent
Smaller Smaller entities entities
PrimarilPrimaril substantivesubstantive roceduresrocedures 75
TEST OF CONTROLS
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SufficientSufficient appropriateappropriate evidenceevidence forfor operatingoperating effectivenesseffectiveness ofof controlscontrols::
OperatingOperating effectivenesseffectiveness isis expectedexpected andand toto bebe testedtested toto carrycarry outout
SubstantiveSubstantive proceduresprocedures alonealone cannotcannot provideprovide assuranceassurance
GreaterGreater isis thethe reliancereliance toto bebe placedplaced – – moremore persuasivepersuasive evidenceevidence isis
AOEM
OnlyOnly toto bebe performedperformed onon controlscontrols expectedexpected toto prevent,prevent, detectdetect andand
correccorrec ma er ama er a m ss a emenm ss a emen aa asser onasser on eveeve
SubstantiallySubstantially differentdifferent controlscontrols inin differentdifferent periodsperiods – – considerconsiderseparatelyseparately
MayMay bebe testedtested atat thethe timetime ofof obtainingobtaining understandingunderstanding ofof designdesign andand
effectivenesseffectiveness
CertainCertain understandingunderstanding proceduresprocedures maymay provideprovide evidenceevidence forforoperatingoperating effectivenesseffectiveness alsoalso (Budgeting(Budgeting processprocess ofof anan entity)entity)
DualDual purposepurpose testtest cancan alsoalso bebe performedperformed – – concurrentconcurrent performanceperformance ofof
testtest ofof controlscontrols andand substantivesubstantive proceduresprocedures 76
TEST OF CONTROLS
Cont’ NatureNature andand extentextent ofof testtest ofof controlscontrols
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Perform other audit procedures in combination with inquiry including:
How the controls were applied at relevant times during the period
By whom or by what means they were applied
Controls to be tested depend upon other controls (indirect controls) -,
AOEM
Inquiry with inspection/re-performance is good combination instead of
–
More persuasive audit evidence is needed – increase extent of testing
Further considerations:
The frequency of the performance of the control
The length of time
The expected rate of deviation from a control
The relevance and reliability of the audit evidence to be obtained
The extent to which audit evidence is obtained from tests of other controls
IndirectIndirect controlscontrols :: useuse ofof reportreport andand accuracyaccuracy ofof inputsinputs toto reportreport 77
TEST OF CONTROLS
Cont’ TiminTimin ofof testtest ofof controlscontrols
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For a particular time or during the period
AOEM
UsingUsing auditaudit evidenceevidence duringduring anan interiminterim periodperiod
Shall:
Obtain evidence about significant changes subsequent to the interim period
Additional audit evidence to be obtained for the remaining period
AOEM
Relevant factors - for the period remaining after an interim period:
Significance of the assessed risks
The s ecific controls and si nificant chan es to them
Degree to which audit evidence for the operating effectiveness obtained
The length of the remaining period
The extent auditor intends to reduce further substantive rocedures
The control environment
Extend tests of controls over the remaining period or testing theentit ’s monitorin of controls 78
TEST OF CONTROLS
Cont’
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Factors to be considered:
Effectiveness of other elements (control environment etc.)
Risks arising from the characteristics of the control (manual or
automated) Effectiveness of general IT controls
Effectiveness of the control (application, deviations, personnelchanges)
Chan in circumstances Risks of material misstatement and the extent of reliance on the control
Establish continuing relevance - perform inquiry combinedw o serva on or nspec on:
Changes - shall test the controls in the current audit
No changes:
○ Test the controls at least once in every third audit
○ Test some controls each audit to avoid testing all controls in a single audit
period with no testing of controls in the subsequent two audit periods 79
TEST OF CONTROLS
Cont’ UsinUsin auditaudit evidenceevidence obtainedobtained durindurin reviousrevious auditsaudits Cont’
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AOEM
Controls that have changed from previous audits
differently may still have relevance while data accumulation differently
may not
Higher the risk of material misstatement, or the greater the relianceon controls, the shorter the time period elapsed, if any, is likely to be.
actors t at may ecrease t e per o or retest ng a contro :
A deficient control environment/monitoring of controls
A significant manual element to the relevant controls
Personnel changes that significantly affect the application of the control
Changing circumstances that indicate the need for changes in the control
Deficient general IT controls
Testing some of those controls in each audit provides corroboratinginformation about the continuing effectiveness of the control
environment 80
TEST OF CONTROLS
Cont’ Evaluatin the O eratin Effectiveness of Controls
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Assess! misstatements detected by substantive procedures indicatethat controls are not operating effectively
-tested are effective
Deviations ? make specific inquiries to understand matters and their,
Q 1: Tests of controls an appropriate basis for reliance on the controls
Q 2: Additional tests of controls are necessary
substantive procedures
AOEM
–
Some deviations may occur - may be caused by factors: Changes in key personnel
gn can seasona uc ua ons n vo ume o ransac ons
Human error
Detected rate of deviation with expected may indicate non-reliance 81
SUBSTANTIVE PROCEDURES
Irres ective of the assessed risks of material misstatement the auditor
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shall design and perform substantive procedures for each material classof transactions, account balance, and disclosure
Consider! external confirmation rocedures are to be erformed assubstantive audit procedures
AOEM
The auditor’s assessment of risk is judgmental and so may not identify allrisks of material misstatement
override
Nature and Extent of Substantive Procedures
,
Only substantive analytical procedures will be sufficient - support from testsof controls
Onl tests of details – directional testin for assertions
A combination of substantive analytical procedures and tests of details
Specific discussions on external confirmation in para A48 to A51.82
SUBSTANTIVE PROCEDURES Cont’
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Timing of Substantive Procedures
interim date: u v p u , w
controls for the intervening period
Unexpected misstatements - assessment ofr s an e p anne na ure, m ng o ex enof substantive procedures covering the
y
83
ADEQUACY OF PRESENTATION AND DISCLOSURE
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Perform audit procedures to evaluate whether :
The overall presentation of the financial statements
Is in accordance with the applicable financial reporting framework
AOEM
Individual financial statements are presented in a manner that reflectsthe appropriate:
Classification and description of financial information
Form
Arrangement
Content of the financial statements and their appended notes
This includes, for example:
the terminology used
the amount of detail given
the classification of items in the statements
the bases of amounts set forth
84
EVALUATING THE SUFFICIENCY AND APPROPRIATENESSOF AUDIT EVIDENCE : e assessments o t e r s s o mater a m sstatement at t e
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assertion level remain appropriate?
Q 2: Sufficient appropriate audit evidence has been obtained?
No Answer! shall attempt to obtain further audit evidence
Unable to obtain sufficient appropriate audit evidence - qualified opinionor disclaimer of an opinion on the financial statements
AOEM
Factors influencing the judgment as to what constitutes sufficient
a ro riate audit evidence : Significance of the potential misstatement in the assertion and the likelihood of its
having a material effect, individually or aggregated with other potential misstatements,on the financial statements
’
Experience gained during previous audits with respect to similar potentialmisstatements
Results of audit procedures performed, including whether such audit proceduresidentified specific instances of fraud or error
Source and reliability of the available information
Persuasiveness of the audit evidence’
85
DOCUMENTATION
e overa responses o a ress e assesse r s s o ma er a
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misstatement at the financial statement level, and the nature, timing and
extent of the further audit procedures performed
The linkage of those procedures with the assessed risks at theassertion level
The results of the audit procedures, including the conclusions wherethese are not otherwise clear
To use audit evidence about the operating effectiveness of controlsobtained in previous audits - the conclusions reached about relying onsuch controls that were tested in a previous audit
Documentation shall demonstrate that the financial statements agree orreconcile with the underlying accounting records
AOEM
The form and extent of audit documentation - matter of professional judgment, and is influenced by:
The nature, size and complexity of the entity and its internal control
Availability of information from the entity
Audit methodolo and technolo used in the audit 86
ISA 500 AUDIT EVIDENCEISA 500 AUDIT EVIDENCE
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8787
OBJECTIVE
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The ob ective of the auditor is to desi nand perform audit procedures in such a
sufficient appropriate audit evidence to
conclusions on which to base theau or s op n on.
Definitions from ISA
88
SUFFICIENT APPROPRIATE AUDIT
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The auditor shall design and perform audit procedures that areappropriate in the circumstances for the purpose of obtainingsufficient appropriate audit evidence
AOEM
performed
Accounting records are the important source of such evidence
and those which contradicts management assertions – managementrefusal to provide representations is also an evidence
Appropriateness: quality The reliability of evidence is influenced by its source (internal
/external)
89
AUDIT PROCEDURES FOR OBTAINING AUDIT
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u ev ence o raw reasona e
conclusions on which to base the auditor’sop n on s o a ne y per orm ng:
Risk assessment procedures
Further audit procedures, which comprise
○ Tests of controls, when required by the ISAs or
○ Substantive procedures, including tests of detailsand substantive anal tical rocedures
90
AUDIT PROCEDURES FOR OBTAINING AUDIT
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Inspection of Tangible Assetsservat on
Inquiry
External Confirmation
Recalculation
Re-performance
91
INFORMATION TO BE USED AS AUDIT
Consider :
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Consider : Relevance
AOEM
Relevance
With specific procedure or assertion
Reliability
Generalizations about the reliabilit of audit evidence: More reliable if obtained independent sources outside the entity
Reliability of internally generated increased with effective relevant controls
reliable than obtained indirectly or by inference (inquiry about the
application of a control)
In documentary form (paper, electronic, or other medium) more reliablethan orally (minutes vs oral presentation)
Provided by original documents more reliable than provided by
photocopies or facsimiles etc 92
INFORMATION TO BE USED AS AUDIT
Management’s expert
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Management s expert
Shall, to the extent necessary:
,
Obtain an understanding of the work of that expert
Evaluate the appropriateness of that expert’s work as audit evidence for
AOEM
Very elaborative and detailed discussion in paras A34 to A48.
Information produced by the entity
Evaluate whether the information is sufficiently reliable for theauditor’s purposes, including, as necessary in the circumstances:
Obtaining audit evidence about the accuracy and completeness
Evaluating whether the information is sufficiently precise and detailed forthe auditor’s purposes
AOEM
Very elaborative and detailed discussion in paras A49 to A51.93
SELECTING ITEMS FOR TESTING TO OBTAIN
Shall determine means of selecting items for testing that are effective
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Shall determine means of selecting items for testing that are effectivein meeting the purpose of the audit procedure
AOEM
The means available to the auditor for selecting items for testing are: Selectin all items 100% examination
Selecting specific items
Audit sampling
Is unlikely in the case of tests of controls
More common for tests of details
-
High value or key items
All items over a certain amount
Audit Sampling Discussed in ISA 530.16
94
INCONSISTENCY IN, OR DOUBTS OVER,
If:
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If:
audit evidence obtained from one source is inconsistent with that obtainedrom ano er
the auditor has doubts over the reliability of information to be used as audit
evidence
to resolve the matter
Consider the effect of the matter, if any, on other aspects of the audit
AOEM Inconsistency may raise doubts on reliability of evidence from once
source. May be the case :
Responses to inquiries of management, internal audit, and others are
inconsistent
Inconsistent responses of those charged with governance andmanagement
ISA 230: requires specific documentation for inconsistent information
from auditor’s final conclusion regarding a significant matter 95
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ues ons
96