Series of International Standards on Auditing (ISA) are professional standards for the performance of financial audit of financial information some of the series are as follows.
Series of International Standards on Auditing
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 a reasonable time and at a reasonable cost.
ISA 210 Agreeing to 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
The 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 the use of deception to obtain an unjust/illegal advantage.
Two types of fraud:
- Fraudulent financial reporting.
- Misappropriation of assets.
Professional scepticism: an attitude of a questioning mind; a critical assessment of audit evidence.
Audit procedures to identify:
- Appropriateness of journal entries.
- Review of accounting estimates.
- Identify significant transactions outside the 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
- Obtain general understanding of legal/regulatory framework applicable to the 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 the audit.
- Auditor’s independence (listed companies).
ISA 265 Communicating deficiencies in internal control
- 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.
- The volume of activity in the 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.
The content of audit strategy:
- The 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:
- Ownership and governance; and
- Accounting policies.
- Objectives and strategy.
- 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: the risk that audit procedures do not detect material misstatements.
IT controls, risks:
- Unauthorized changes to data in master files.
- Unauthorized access to programs.
- Inappropriate manual intervention.
Assessing whether a control is relevant to audit:
- The significance of related risk.
- Applicable legal / regulatory requirements.
- Nature of entity’s business.
ISA 320 Materiality
Materiality: Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements
Performance materiality: an amount set at less than materiality for the FS as a whole, to reduce to an appropriately low-level the probability that the FS as a whole is materially misstated.
Tolerable error: A monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual 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 risks of material misstatement.
Test of controls: to evaluate operating effectiveness of controls in preventing, or detecting and correcting material misstatements 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 amounts, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud.
- Accumulate identified misstatements.
- Determine whether audit strategy needs to be revised.
- Communicate misstatements to the appropriate level of management on a timely basis.
- Evaluate the effect of uncorrected misstatements on FS.
- Request management wrote representation that uncorrected misstatements are not material.
500 series: Evidence
ISA 500 Audit evidence
- Appropriateness: quality, linked to relevance and reliability.
- Sufficiency: quantity, linked to quality and to a risk of material misstatement.
Relevance: linked to assertions.
- SFP: Completeness, rights and obligations, valuation, existence.
- IS Occurrence, completeness, accuracy, cut-off.
- 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
- Evaluation of financial information.
- By analyzing plausible relationships.
- Among financial and non-financial data.
ISA 530 Audit Sampling
- Audit sampling: application of audit procedures to less than 100% of the population to provide the auditor with a reasonable basis to draw conclusions on the entire population.
- Sampling risk: of an unrepresentative sample.
- Non-sampling risk: of erroneous conclusion from a 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 intolerable misstatement.
- Increase in expected misstatement.
ISA 540 Auditing accounting estimates
- 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 An entity viewed as continuing in business for the foreseeable future.
ISA 580 Written representations
- 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 to evaluate 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
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
The content of audit report:
- Title: reference to an independent auditor.
- Addressee: shareholders/members.
- Introductory paragraph:
- Financial Statements.
- Reporting date.
- Management’s responsibility for preparation of FS.
- Auditor’s responsibility:
- To express an opinion on FS.
- An audit conducted in accordance with ISAs.
- Description of the audit.
- Audit opinion:
- FS prepared in accordance with IFRS.
- FS give a true and fair view.
ISA 705 Modifications to the audit opinion
- Modified: qualified, adverse or disclaimer.
- Pervasive: not confined to specific elements or representing a substantial proportion of a single element.
- 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 on matter paragraphs
The definition refers to a 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 on amounts presented in FS.
- Consistent accounting policies.
ISA 720 Auditor’s responsibility relating to other information in documents containing audited Financial Statements
- Read other information to identify material inconsistencies with FS
- If inconsistencies identified:
- If FS is wrong, propose an adjustment. If refused consider modifying audit opinion.
- If other information is wrong, propose an adjustment. If refused consider:
- referring to the matter in the audit report.
- withholding audit report.