ISA 200 - Objectives of the Auditor Flashcards
ISA 200
ISA 200
Overall Objective of the Independent Auditor & the Conduct of an Audit in Accordance with ISAs
- REQUIREMENTS FOR AUDIT
- DIFFERENCES BETWEEN AUDIT RISK & ROMM
- SIGNIFICANT RISK
ISA 200
General REQUIREMENTS for conducting the audit
EARS
E - ETHICAL REQUIREMENTS (Ethical issues)
A - AUDIT STANDARDS (Professional issues)
R - REASONABLE CARE to be exercised (Professional issues)
S- SKEPTICISM to be maintained (Professional issues)
ISA 200
General REQUIREMENTS for conducting the audit
Ethical Requirements (1)
‘The auditor SHALL comply with
RELEVANT ethical requirements,
including those pertaining to
INDEPENDENCE, related to FS audit engagements.
* IESBA CODE OF ETHICS & CONDUCT
* CODE IN LOCAL JURISDICTION
ISA 200
General REQUIREMENTS for conducting the audit
Audit Standards (2)
‘The auditor SHALL comply with all ISAs RELEVANT to the audit.’
Not all ISAs will be relevant for all clients. Some ISAs may only
be relevant for certain clients.
ISAs that are not relevant need not be applied during that audit.
ISA 200
General REQUIREMENTS for conducting the audit
Reasonable Care (3)
‘The auditor SHALL obtain sufficient appropriate audit evidence to reduce audit risk
to an acceptably low level.
The auditor SHALL exercise
professional judgment in planning & performing an audit of FS.
The application of relevant training, knowledge & experience, within the context
provided by auditing, accounting and ethical standards, in making informed decisions about the
courses of action that are appropriate in the circumstances of the audit engagement
ISA 200
General REQUIREMENTS for conducting the audit
SKEPTICISM (4)
The auditor SHALL plan and perform an audit with professional skepticism recognizing that circumstances may exist that cause the FS to be materially misstated
Skepticism is defined as:
- Having a Questioning mind (Questioning contradictory information & the reliability of documents)
-
Being alert to CIRCUMSTANCES that might indicate the
possibility of fraud & error. -
Critical assessment of evidence (Including considering
responses to inquiries & other information obtained from management & TCWG)
Q B C
ISA 200
Audit Risk
Audit Risk = Risks of Material Misstatement X Detection Risk
Audit Risk = Inherent Risk X Control Risk X Detection Risk
ISA 200
INHERENT RISK
INHERENT RISK is described as the susceptibility of an assertion about a class of Transaction, Account balance & Disclosure
to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.
Inherent risk may be higher for some assertions and related classes of transactions, account balances and disclosures than for others.
For example, IR may be higher for complex calculations or for accounts consisting of amounts derived from accounting estimates that are subject to significant estimation uncertainty.
External circumstances giving rise to BUSINESS RISKS may also influence inherent risk. For example, technological developments might make a particular product obsolete, thereby causing inventory to be more susceptible to overstatement.
Factors in the entity and its environment that relate to several or all of the classes of transactions, account balances, or disclosures may also influence the inherent risk related to a specific assertion. Such factors may include, for example, a lack of sufficient working capital to continue operations or a declining industry characterized by a large number of business failures. (Inadequate disclosures when company has going concern problems OR FS being prepared using inappropriate basis when entity is a non - going concern.)
ISA 200
Spectrum of inherent risk
SUCCS-R+R
The degree to which inherent risk varies is referred to in ISA 315 as the ‘spectrum of inherent risk.’
Subjectivity
Uncertainty
Complexity
Change
Susceptibility to misstatement due to management bias
Related party transactions
Revenue
ISA 200
CONTROL RISK
CONTROL RISK is described as the risk that a misstatement that could occur in an assertion about a class of Transaction, Account balance & Disclosure
and that could be material, either individually or when aggregated with other misstatements,
will not be prevented, or detected and corrected, on a timely basis by the entity’s system of internal control.
(as a result of POORLY DESIGNED or TOTAL LACK OF ICs in that area of business)
ISA 200
DETECTION RISK
DETECTION RISK
Detection Risk is the risk that the procedures performed by the auditor WILL NOT detect a misstatement which exists which could be material.
Detection risk is affected by sampling and non-sampling risk.
SAMPLING RISK is the risk that the auditors’ conclusions based on a sample may be different from the conclusion that would be reached if the entire population were subjected to the same audit procedures
NON SAMPLING RISK is the risk that the auditor reaches an ERRONEOUS CONCLUSION for any reason not related to sampling risk.
ISA 200
Examples of non-sampling risk (NSR)
− Use of inappropriate audit procedures
(including using inappropriate sample selection methods)
− Misinterpretation of audit evidence
− Failure to recognize a misstatement or deviation
− Tight deadline
− Client has many locations where inventory is held & auditor has insufficient resources to attend all of the inventory counts in all the locations.
− Failure to understand the business, accounting policies of a NEW CLIENT
How to reduce NSR?
1. Adequate planning
2. Assignment of appropriate caliber staff to the engagement team
3. The application of professional skepticism, and
4. Supervision and review of the audit work performed.
ISA 200
Why is it important to understand the DIFFERENCE between audit risk & ROMM for AAA?
New audit client
Basset is a new client; our firm having been
appointed as Group auditor in February 20X5
RISK (detection risk) that audit team may not be
familiar with the accounting policies, transactions &
balances of the company as our firm does not have
prior experience with this client.
Consequently, the audit team may not be able to
detect financial statement items that may be
materially misstated.
However, this risk can be mitigated through rigorous
audit planning, including obtaining a thorough
understanding of the business of the entity.
Opening balances & comparatives
RISK that that opening balances may be
misstated as the prior year figures were not audited
by Whippet & Co.
Consequently, closing balances may also be
misstated.
As such, we should plan to audit the opening
balances carefully, in accordance with ISA 510
Initial Audit Engagements – Opening Balances, to
ensure that opening balances and comparative
information are both free from material
misstatement
