Module 2: Overall objectives

Introduction
This module is key to your understanding of what is required
of auditors under the ISAs. ISA 200 establishes the overall
objective and conduct of an audit and acts as an underpinning
for all of the other standards.

You will find that all of the concepts introduced in this module
are revisited in greater depth as you study the other more
detailed standards, each of which sets requirements for a
particular stage of the audit or for a particular procedure.

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Overall objectives - ISA 200
Audit
ISA 200:
“Overall objectives of the independent auditor and
the conduct of an audit in accordance with
international standards on auditing.”
To explain the purpose and scope of an audit of financial
statements and the general principles governing the
auditor and the conduct of the audit.
© 2014 Association of Chartered Certified Accountants
Module 2: Overall objectives
The overall objectives of the auditor are to obtain
reasonable assurance about whether the financial statements
as a whole are free from material misstatement, whether due
to fraud or error thereby enabling the auditor to express an
opinion on whether the financial statements are prepared, in
all material respects, in accordance with an applicable
financial reporting framework. The auditor must also report on
the financial statements and communicate in accordance with
the auditor’s findings.
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Overall objectives - opinion
An auditor’s opinion enhances the credibility of financial
statements, but the user cannot assume that it is an
assurance of future viability nor the efficiency or effectiveness
of management.
Responsibilities
Compliance with auditing standards
© 2014 Association of Chartered Certified Accountants
Module 2: Overall objectives
The following is an extract from a typical auditor’s report:
We have audited the accompanying financial statements of
ABC Company, which comprise the balance sheet as at
December 31, 20X1, and the statement of profit or loss,
statement of changes in equity and cash flow statement for
the year then ended, and a summary of significant accounting
policies and other explanatory information.
Management’s responsibility for the financial statements
Management is responsible for the preparation and fair
presentation of these financial statements in accordance with
International Financial Reporting Standards, and for such
internal control as management determines is necessary to
enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit in
accordance with International Standards on Auditing. Those
standards require that we comply with ethical requirements
and plan and perform the audit to obtain reasonable
assurance whether the financial statements are free from
material misstatement.
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 Module 2: Overall objectives

Overall objectives - opinion

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 Module 2: Overall objectives

Overall objectives - responsibility for the financial statements

Management is responsible for preparing and presenting
financial statements (e.g. in accordance with statutory and
other financial reporting requirements).

The auditor forms and expresses an opinion on financial

statements.

An audit of financial statements does not relieve

management of its responsibilities.

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 Module 2: Overall objectives

Overall objectives - fundamental concepts

“True and fair” Materiality

• the term is not defined in ISAs and “definitions” should • materiality is an expression of relative significance or
therefore be regarded with caution importance of a matter in the context of the financial
• truth relates to factual accuracy (bearing in mind statements as a whole
materiality)
• fairness relates to presentation of information and the • a matter is material if its omission or misstatement would
view conveyed to the reader reasonably influence the decisions of an addressee of the
• a degree of imprecision is inevitable because of inherent auditor’s report
limitations
• “view” indicates that a professional judgment has been
reached
• the concept of a “true and fair” view is constantly changing
(e.g. with developments in accounting standards)
• that the phrase is preceded in the statutes by the
indefinite article (“a”) suggests that more than one form of
presentation may satisfy the requirement
• a true and fair view generally implies that IFRSs, IASs and
IFRIC interpretations (of the IASC’s Financial Reporting
Interpretations Committee) have been complied with
• the term “fair presentation” is sometimes used instead of
“true and fair”

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 Module 2: Overall objectives
Overall objectives - general principles - ethical
“The auditor shall comply with relevant ethical
requirements relating to audit engagements.”
Independence
A firm should establish policies and procedures which should
enable it to communicate its independence requirements to its
personnel and, where applicable, others subject to them; and
identify and evaluate circumstances and relationships that
create threats to independence, and to take appropriate
action to eliminate those threats or reduce them to an
acceptable level by applying safeguards, or, if considered
appropriate, to withdraw from engagement.
Integrity
• in all professional, business and personal financial
relationships
• implies honesty, fair dealing and truthfulness
© 2014 Association of Chartered Certified Accountants page 9 of 20
Objectivity
• in all professional and business judgements
• a state of mind which has regard to all considerations
relevant to the task but no other
• presupposes intellectual honesty
Professional competence and due care
• should not accept work which cannot be competently
undertaken, though advice/assistance may be obtained.
• professional work should be carried out with due skill,
care, diligence and expedition, and with proper regard for
technical and professional standards expected
Confidentiality
• information acquired in the course of professional work
should not be disclosed to third parties without first
obtaining the client’s permission
Professional behaviour
• courtesy and consideration
• towards all with whom they come into contact while
performing work
Certificate in International Auditing
 Module 2: Overall objectives

Overall objectives - general principles - conduct of an audit of financial statements

The text of a whole standard is considered in order to
“The auditor shall comply with all ISAs relevant to understand and carry out the requirements of the ISA.
the audit.”
Auditors may also conduct the audit in accordance with both
ISAs and auditing standards of a specific jurisdiction or
country.
ISAs provide objectives and requirements (i.e. basic
principles and essential procedures) and related guidance
(i.e. application and other explanatory material).

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Overall objectives - general principles - professional skepticism
“The auditor shall plan and perform an audit with
“professional skepticism” recognising that
circumstances may exist that cause the financial
statements to be materially misstated.”
© 2014 Association of Chartered Certified Accountants
Module 2: Overall objectives
Professional skepticism is defined as an attitude that includes
a questioning mind, being alert to conditions which may
indicate possible misstatement due to error or fraud, and a
critical assessment of audit evidence
For example, management representations cannot be
assumed to be necessarily correct. The auditor will usually
expect to find evidence to support them.
The IAASB sees professional skepticism as a key issue for
auditors and has recently issued additional guidance on how
auditors can maintain an attitude of professional skepticism
when dealing with audited entities.
See also the auditor’s responsibilities for fraud and error in
Module 4.
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Overall objectives - general principles - scope of an audit of financial statements
“In determining the audit procedures to be
performed in conducting an audit in accordance
with ISAs, the auditor shall comply with each of the
ISAs relevant to the audit.”
“The auditor shall not represent compliance with
ISAs in the auditor's report unless the auditor has
complied fully with all of the ISAs relevant to the
audit.”
© 2014 Association of Chartered Certified Accountants
Module 2: Overall objectives
Auditors may be required to comply with other
professional, legal or regulatory requirements in addition
to ISAs.
ISAs do not override local laws and regulations that
govern and audit, and an auditor may perform additional
procedures necessary to comply with the relevant additional
standards of a specific jurisdiction or country.
Exceptionally, the auditor may depart from following an
ISA as long as the departure is necessary for the
achievement of the objective of the audit.
The auditor should document the departure as required
by ISA 230, “audit documentation” in order to represent
compliance with ISAs.
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Overall objectives - general principles - professional judgement
“The auditor shall exercise professional judgement
in planning and performing an audit. Professional
judgement is essential to the proper conduct of an
audit. This is because interpretation of relevant
ethical requirements and the ISAs and the informed
decisions required throughout the audit cannot be
made without the application of relevant knowledge
and experience to the facts and circumstances. ”
© 2014 Association of Chartered Certified Accountants
Module 2: Overall objectives
Professional judgement is necessary in particular
regarding decisions about:
• materiality and audit risk
• the nature, timing and extent of audit procedures
• evaluating whether sufficient appropriate audit evidence
has been obtained
• the evaluation of management’s judgements in applying
the entity’s applicable financial reporting framework
• the drawing of conclusions based on the audit evidence
obtained
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Overall objectives - general principles - sufficient appropriate audit evidence and audit risk
“To obtain reasonable assurance the auditor shall
obtain sufficient appropriate audit evidence to
reduce audit risk to an acceptably low level and
thereby enable the auditor to draw reasonable
conclusions on which to base the auditor’s
opinion.”
© 2014 Association of Chartered Certified Accountants
Module 2: Overall objectives
• management are responsible for identifying business risks
and responding to them
• the auditor is ultimately concerned only with risks that may
affect the financial statements
• the concept of reasonable assurance acknowledges that
there is a risk the audit opinion is inappropriate
• the risk that an auditor expresses an inappropriate opinion
when the financial statements are materially misstated is
known as audit risk
• audit risk is a function of the risk of material misstatement
of the financial statements (prior to audit) and the risk that
the auditor will not detect such misstatement (“detection
risk”)
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 Module 2: Overall objectives

Overall objectives - scope

Factors to be taken into account The audit process

An audit conducted in accordance with ISAs must have In summary, this covers:
regard to the requirements of:
Agree terms of
• ISAs (i.e. to plan, evaluate controls, obtain evidence, form
engagement
conclusions and report) Obtain
• relevant professional bodies (e.g. ACCA) Form opinion in
understanding
auditor’s report
• legislation and regulations (e.g. Companies Acts) of business
• the terms of the audit engagement and reporting
requirements
Obtain
management Plan
representations
Documentation

Assess risk
Analytical and internal
procedures controls

Verify assets Test controls and

and liabilities transactions

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Overall objectives - scope
Fundamental concepts
“Reasonable assurance - in an audit engagement,
the auditor provides a high, but not absolute, level
of assurance, expressed positively in the audit
report as reasonable assurance, that the
information subject to audit (i.e. the financial
statements) is free of material misstatement.”
Reasonable assurance
To provide such assurance, the auditor assesses the
evidence collected in respect of the financial statements as
a whole and expresses a conclusion thereon.
© 2014 Association of Chartered Certified Accountants
Module 2: Overall objectives
Inherent limitations
However, the auditor may not be able to detect all
material misstatements because:
• testing is on a sample basis (see Module 4 - fraud in an
audit of financial statements [ISA 240]) because it is
impractical to audit every matter exhaustively due to
constraints of time and cost
• any accounting and internal control system has inherent
limitations (see Module 6 Internal control and risk
assessment - [ISA 315])
• Financial reporting involves judgement by management,
subjective decisions or assessments, or a degree of
uncertainty
• most audit evidence is persuasive rather than conclusive
(e.g. an asset purchased by an entity, though physically
possessed, may no longer be owned if title has been
transferred to another)
• transactions between related parties (i.e. where one has
the ability to control or exercise significant influence over
the other) may not be identified as such
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