International Auditing and AssuranceStandards Board

The Clarified ISAs, Audit Documentation, and SME Audit

Considerations

ISA Implementation Support Module Prepared by IAASB Staff

October 2009

• Understanding an ISA Audit

• The Clarified ISAs

– Elements of the Clarified ISAs, SME audit considerations, and additional aspects of ISA 200

• Audit documentation

– Objective, SME audit considerations, and additional aspects of ISA 230

Overview

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Understanding an ISA Audit

• Starting point in understanding an ISA audit; umbrella standard to all ISAs

• Purpose, nature, and scope of an ISA audit

• Overall objectives of auditor

– To obtain reasonable assurance, and

– To report in accordance with auditor findings

Failure to achieve carries reporting or withdrawal implications

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

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Understanding an ISA Audit

• Requirements addressing auditor’s general responsibilities

• Concepts relevant to an audit

• Scope, authority, and structure of ISAs

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

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Clarified ISAs

• Four distinct sections

– Introduction; Objectives; Requirements; and Application & Other Explanatory Material

– Definitions section as well, in most cases

• Together all sections comprise the Standard

• Required to have understanding of entire text to understand objective stated in an ISA and to apply requirements properly

Elements

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Elements of Clarified ISAs

• Scope of ISA

– E.g., relationship to other ISAs, any specific limitations of the applicability of the ISA, etc.

• Essential contextual information

– E.g., context in which the ISA is set, respective responsibilities of auditor and others, etc.

• Effective date

– Early application permitted unless otherwise stated

Introduction

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Elements of Clarified ISAs

• Underpin ISA’s principles-based approach

• Set out aim of auditor and what needs to be accomplished

• Provide linkage between ISA requirements and auditor’s overall objectives

• Proper application of requirements expected to provide a sufficient basis for achievement of objectives; however, ISA requirements cannot anticipate all circumstances

Objectives

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Elements of Clarified ISAs

• To be used in planning and performing the audit to

– Determine need for additional audit procedures

– Evaluate whether sufficient appropriate evidence has been obtained

• To be understood in context of the overall objectives of the auditor and having regard to interrelationships amongst ISAs

Objectives

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Elements of Clarified ISAs

• If an objective in a relevant ISA cannot be achieved, evaluate whether this prevents achievement of auditor’s overall objectives

– Represents a significant matter requiring documentation

• Circumstances that may give rise to failure, e.g.,

– Unable to comply with a requirement(s)

– Not practicable or possible to carry out additional procedures auditor judges necessary

Objectives

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Elements of Clarified ISAs

• Designed to enable achievement of objectives

• Compliance with ISAs claimed only when auditor has complied with all relevant ISAs

• In exceptional circumstance, departure from a relevant requirement permitted

– Where the requirement is for specific procedure and that procedure would be ineffective

– Perform alternative audit procedures to achieve aim of the requirement

Requirements

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Elements of Clarified ISAs

• Integral part of the standard providing

– Background information on matters addressed

– Further explanation of a requirement, e.g., what it means or is intended to cover

– Guidance for carrying out requirements, e.g., examples of procedures

• Does not impose a requirement, but is relevant to proper application of the requirements

Application & Other Explanatory Material

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Clarified ISAs

• Structure of Clarified ISAs heavily influenced by need to ensure applicability of ISAs to audits of entities of all sizes, in particular SMEs

– Separate section for requirements to help readability and clarification of conditional requirements

– Requirements capable of being applied proportionately

– Additional guidance specific to SME audits

Considerations Specific to SME Audits

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SME Audit Considerations

• New guidance in application material of the ISAs providing considerations specific to audits of smaller entities

– Typical qualitative characteristics of SMEs described in ISA 200

– Guidance developed primarily with unlisted entities in mind; some considerations, however, may be helpful in audits of smaller listed entities

– Considerations do not limit responsibility to comply with ISA requirements

Considerations Specific to SME Audits

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SME Audit Considerations

• ISAs designed to be able to be applied proportionately with size/complexity of an entity

– Proportionality ≠ modification of requirements

• Not every audit to be performed the same way

– Audit approaches may vary with circumstances (simpler/more complex)

• Professional judgment needed regarding audit procedures to meet the ISA requirements and gather audit evidence

Proportionality of Application of ISAs

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SME Audit Considerations

• Demonstrated in requirements, e.g.,

– ISA 260.13, where management = those charged with governance

– ISA 315.17, absence of formal risk assessment process

– ISA 540.13, choice of responses to assessed risks

• Demonstrated in application material, e.g., guidance on aspects of the audit which vary with size, complexity, and nature of an entity

Proportionality of Application of ISAs

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SME Audit Considerations

• Basic obligation in the ISAs is to comply with all ISAs relevant to the audit

• However, not all ISAs may be relevant in an SME audit, e.g.,

– ISA 402, if SME does not use a service organization

– ISA 600, if SME audit is not a group audit

– ISA 610, if SME has no internal audit function

Application in an SME Context

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SME Audit Considerations

• Even if an ISA is relevant, not all its requirements may be relevant

– Conditional requirements need not be applied if conditions do not exist

• Examples

– Engagement team discussion (ISA 315.10)

– Determining whether material uncertainty exists in context of going concern (ISA 570.16)

Application in an SME Context

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Clarified ISAs

• Concepts relevant to an ISA audit

– Amplification of existing guidance, e.g., on sufficiency and appropriateness of audit evidence, inherent limitations of an audit, etc.

– No change to definition of reasonable assurance and underlying audit risk model

• Professional judgment

• Professional skepticism

Additional Features of ISA 200

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Additional Features of ISA 200

• Essential to proper conduct of an audit

• New definition and requirement

– Better articulates IAASB’s expectations regarding exercise of professional judgment in an audit

– Helps stress auditor’s professional responsibility for the exercise of judgment in a sound, consistent, and justifiable manner

Professional Judgment

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Additional Features of ISA 200

• New guidance

– Addresses how judgment may be evaluated

– Reminds auditor of need to consult on difficult or contentious matters and for significant judgments to be evidenced

– Makes clear that judgment is not to be used as the justification for decisions that are not supported by the facts and circumstances or sufficient appropriate audit evidence

Professional Judgment

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Audit Documentation

• Objective

– Sufficient appropriate record of the basis for auditor’s report

– Evidence that audit planned and performed in accordance with ISAs

• Benefits, e.g.,

– Facilitates supervision and review, evaluation of evidence obtained and conclusions reached, internal and external inspections, etc.

ISA 230, Audit Documentation

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Audit Documentation

• Sufficient to enable an experienced auditor, having no previous connection with the audit, to understand

– Nature, timing, and extent of the audit procedures

– Results of audit procedures , and the audit evidence obtained

– Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions

Benchmark

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SME Audit Considerations

• Appropriate documentation need not be burdensome

• Application designed to be proportionate, efficient, and effective

– For SMEs, likely simple in form and relatively brief

– ISAs explicitly encourage exercise of professional judgment in determining form and extent of documentation that make most sense

Proportionate Documentation in an SME Context

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SME Audit Considerations

• Focus is on meaningful documentation

– “… it is neither necessary nor practicable for the auditor to document every matter considered, or professional judgment made, in an audit. …”

– “it is unnecessary for the auditor to document separately … compliance with matters for which compliance is demonstrated by documents included within the audit file….” (ISA 230.A7)

• Many illustrations of how documentation can be done in efficient and effective manner (see ISAs 230, 300, 315, etc.) 24

Audit Documentation

• Documentation of items/matters tested, who performed the audit work, reviewer, and dates

• Documentation of discussions of significant matters with management, those charged with governance, and others

• Documentation of departure from a relevant requirement

– How alternative procedures achieve aim of the requirement and reasons for departure

Additional features of ISA 230

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Audit Documentation

• Requirements addressing matters arising after date of auditor’s report and assembly of final audit file

– Assembly of final audit file expected <= 60 days of audit report date

• Clarifies relationship between ISA 230 and documentation requirements in other ISAs

Additional features of ISA 230

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Note

This set of support slides does not amend or override the ISAs, the texts of which alone are authoritative. Reading the slides is not a substitute for reading the ISAs. The slides 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.

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