International Standards On Auditing.: Draft

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International
Standards
Lecture support notes by Alan Biju Palak

on
Auditing.
For any queries - alanbiju31@gmail.com Page 45

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ISA 200 Overall objectives of the independent auditor and

the conduct of an audit in accordance with International
Standards on Auditing.
Objectives of an audit.
ISA 200: para. 11
In conducting an audit of financial statements, 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; and
• To report on the financial statements, and communicate as required by the ISAs, in

accordance with the auditor's findings.
In other words,
• To Express an opinion on the FS

• To ensure that FS are prepared in accordance with Financial reporting framework
• To give a reasonable assurance that the financial statements are free from material misstatements
due to fraud and error .
Professional Judgement
Professional judgement is the application of relevant training,Knowledge
and experience in making informed decision about the appropriate
course of action in the circumstance of the audit engagement.

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Professional Scepticism
Professional Scepticism is an attitude that includes having a questioning
mind,
being alert to the conditions that may indicate possible misstatements

due to fraud or error and
subjecting the audit evidence to a critical assessment rather than taking

it at its face value.

The auditor shall obtain sufficient appropriate evidence to reduce audit
risk to an acceptably low level' (ISA 200: para. 17)

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ISA 210 Agreeing the terms of audit
engagements
ISA 210: para. 3
The objective of the auditor is to accept or continue an audit engagement only when the
basis on which it is to be performed has been agreed, through:
• Establishing whether the preconditions for an audit are present, and
• Confirming that there is a common understanding between the auditor and

management and, where appropriate, those charged with governance of the terms of
the audit engagement.

Preconditions for an audit
ISA 210: para. 6
In order to establish whether the preconditions for an audit are present, the auditor shall
determine whether the financial reporting framework to be applied in the preparation of
the financial statements is acceptable.
- For the preparation of the financial statements in accordance with the applicable
financial reporting framework, including where relevant their fair presentation;
- 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;
- To provide the auditor with:
• Access to all information of which management is aware that is relevant to the
preparation of the financial statements;
• Additional information that the auditor may request from management for the
purpose of the audit; and
• Unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence.
If any of these conditions does not exist, the auditor shall not accept the audit unless
legally required to so do (ISA 210: para. 3).
In addition, the auditor should not accept the engagement if those charged with

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governance impose a limitation on the scope of the auditor's work likely to result in a
disclaimer of opinion, again, unless the auditor is legally required to accept the audit
(ISA 210: para. 7).
ISA 320 Materiality in planning

and performing an audit
A item is material if its omission or misstatement would reasonably

influence the economic decisions by a user of financial statements.

It is affected by the size and nature of the misstatement.
Planning Materiality/Overall materiality

Planning Materiality is the Materiality that have been decided for the
financial statements as a whole.
Performance materiality
The amount or amounts set by the auditor at less than the materiality level or
levels for particular classes of transactions, account balances or disclosures’.
The following benchmarks and percentages may be appropriate in the calculation

of materiality for the financial statements as a whole.

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The calculation or estimation of materiality should be based
on Professional judgement.
Materiality for the financial statements as a whole must be

reviewed throughout the audit and revised if necessary.
ISA 500 Audit evidence

The auditor need to obtain sufficient appropriate evidence to be able to draw reasonable
conclusions. (ISA 500,4)
The sufficiency means the quantity of the evidence and the appropriateness means the

quality of the evidence
Sufficiency of the evidence will depend on the :
• The materiality of the item.
• The risk assessment of the item.
• The results of other audit procedures.
Reliability of evidence depends on several factors:
– Independent, externally generated evidence is better than evidence

generated internally by the client.
– Effective controls imposed by the entity, generally improve the reliability

of evidence.
– Evidence obtained directly by the auditor is more reliable than evidence

obtained indirectly or by inference.
– It is better to get written, documentary evidence rather than verbal

confirmations.
– Original documents provide more reliable evidence than photocopies or

facsimiles.

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Audit procedures for obtaining evidence
• Analytical procedures
• Enquiry
• Inspection
• Observation
• Recalculation and reperformance
• External confirmations

The auditor obtains evidence to draw conclusions on which to base the audit opinion.
This is achieved by performing procedures to:
• Obtain an understanding of the entity and its environment
• Test the operating effectiveness of controls in preventing, detecting and

correcting material misstatements.
• Detect material misstatements by performing substantive procedures.
Audit Procedures
Tests of controls are designed to check that the audit client's internal control systems
operate effectively.
Substantive procedures are designed to detect material misstatement at the assertion

level in the financial statements
• Substantive analytical procedures test the balances as a whole to identify any

unusual relationship
• Substantive tests of detail looks at the supporting evidence for individual

transactions and traces them through to the financial statements to ensure they are
dealt with appropriately.

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ISA 501 Audit Evidence- Specific
Considerations for Selected Items
In accordance with ISA 501 auditors are required to obtain Sufficient and appropriate
evidence with regard to three specific matters, as follows.
1) The existence and condition of inventory
- Attendance at the inventory count

• Evaluate management's instructions
• Observe the count procedures

• Inspect the inventory
• Perform test counts
- Perform procedures with regard to final inventory records to ensure they reflect actual
inventory count results.
2) The completeness of litigation and claims involving the entity
- Enquiry of management and in-house legal counsel.

- Reviewing minutes of board meetings and meetings with legal counsel
- Inspecting legal expense accounts.
- If there is a significant risk of material misstatement due to unidentified litigation or
claims the audit should seek direct communication with the entity's external legal
counsel.
3) The presentation and disclosure of segmental information
- Understand, evaluate and test methods used by management to determine segmental

information.
- Perform analytical procedures.

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Relying the works of others

ISA 610 Using the work of internal
auditors
Factors to consider before using the work of an internal auditor

• Technical Competence/Qualification
• Objectivity/Scope
• Status /level of reporting
• Communication b/w internal and external auditor
• Independence of internal auditor

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Before using the specific work
1. How audit evidence obtained?
2. What judgements/assumptions were taken?
3. How work was performed?
4. What are the conclusions reached?
The work of an internal auditor should not be mentioned in the auditors report.

Using the internal auditor to provide direct
assistance
External auditors can consider whether the internal auditor can provide direct
assistance with gathering audit evidence under the supervision and review of the
external auditor.
The following considerations will be made:
• Direct assistance cannot be provided where laws and regulations prohibit such
assistance.
• The competence and objectivity of the internal auditor. Where threats to

objectivity are present, the significance of them and whether they can be
managed to an acceptable level must be considered.
• The external auditor must not assign work to the internal auditor which
involves significant judgment, a high risk of material misstatement or with
which the internal auditor has been involved.
• The planned work must be communicated with those charged with

governance so agreement can be made that the use of the internal auditor is
not excessive.

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ISA 620 Using the work of an auditor's
expert
An auditors expert is any person who is having in-depth knowledge in subjects other than
accounting and auditing.
Factor to consider:
• The significant assumptions made.
• The use and accuracy of source data.
• The reasonableness of the findings and their consistency with other evidence.

Using the work of a management expert will be dealt under ISA 500
ISA 402 Audit considerations relating to

an entity using a service organisation
Service organisation. A third-party organisation (or segment of a third-party
organisation) that provides services to user entities that are part of those entities'
information systems relevant to financial reporting.
User entity. An entity that uses a service organisation and whose financial statements are
being audited.
User auditor. An auditor who audits and reports on the financial statements of a user
entity.
Service auditor. An auditor who, at the request of the service organisation, provides an
assurance report on the controls of a service organisation.
ISA 402: para. 7

The objectives of the user auditor, when the user entity uses the services of a service
organisation, are:

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(a) To obtain an understanding of the nature and significance of the services provided by
the service organisation and their effect on the user entity's internal control relevant to the
audit, sufficient to identify and assess the risks of material misstatement; and
(b) To design and perform audit procedures responsive to those risks.
Understanding the service provided

• Nature of services provided and the significance of these to the user entity,
including effect on entity's internal control
• Nature and materiality of transactions processed or financial reporting processes

affected

• Degree of interaction
• Nature of relationship including contractual terms.
Alternative options
• Obtaining a type 1 report or type 2 report from a service auditor, if available
• Contacting the service organisation through the user entity
• Visiting the service organisation and performing necessary procedures
• Using another auditor to perform necessary procedures
Type 1 report : A report on the description and design of controls at a service

organisation.
Type 2 report : A report on the description, design and operating effectiveness of controls
at a service organisation.
Reflection in auditors report

Same as ISA 620

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ISA 240 The auditor's responsibilities
relating to fraud in an audit of financial
statements
Fraud is an intentional act, to deceive others and to obtain illegal or unjust advantage.
Error is an unintentional mistake.
The objectives of the auditor are:

• (a) To identify and assess the risks of material misstatement of the financial
statements due to fraud;
• (b) To obtain sufficient appropriate audit evidence regarding the assessed risks of
material misstatement due to fraud, through designing and implementing
appropriate responses; and
• (c) To respond appropriately to fraud or suspected fraud identified during the audit.
Types of fraud:
• Fraudulent Financial reporting
• Misappropriation of Assets
Fraud risk factors:
Those events or conditions that influences or pressurises or given an opportunity to

commit fraud.
• Dishonesty
• Need/Motivation
• Opportunity
Fraud should not be disclosed to any governing body unless it overrides the principle of
confidentiality by any legal or professional duty.

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ISA 230 Audit documentation
Audit documentation is the record of audit procedures performed, audit evidences
obtained and audit conclusions reached. These are also known as audit working papers.
Purpose of audit documentation

๏ To show that the audit work has been done properly.
๏ To enable senior staff to review the work of junior staff. obtained.
๏ To help the audit team in future years.

๏ To encourage a methodical, high-quality approach.
Contents of Working papers
• Title
• Date prepared
• Preparer name and signature
• References to other schedules
• Purpose of the audit tests being performed
• Precise details of work performed
• Conclusion from the work performed
• Reviewers signatures and date of review
• Incase of any further modification, name of person who made the changes and the
reviewers name with reasons for modification.
Incase of Recurring audits- Audit files can be split as,
• Permanent audit file
• Current audit file.
An audit firm should retain the working papers for at least 5 years from the period of
preparation.

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ISA 505 External confirmations
External confirmations are audit evidence obtained as a direct written response to the auditor
from a third party (the confirming party), in paper form, or by electronic or other medium.
Types of confirmation request

• Positive confirmation request
A positive confirmation request is 'a request that the confirming party respond directly to the
auditor indicating whether the confirming party agrees or disagrees with the information in the
request, or providing the requested information'

• Negative confirmation request
A negative confirmation request is 'a request that the confirming party respond directly to the
auditor only if the confirming party disagrees with the information provided in the request'
Steps in obtaining external confirmation

• Select the samples of items that requires confirmation
• Select an assertion
• Design the confirmation request
• Obtain permission from the client
• Send the confirmation request
• Followup request.
Factors to consider before selecting confirmation request:

• Materiality of the item.
• Efficiency of the Internal Control System.
• Existence of fraud risk factors.
• Risk of material misstatement.
• Chances of having non response.

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ISA 530 Audit sampling
Types of sample selection
Random Sampling
Systematic sampling
Haphazard sampling
Cluster sampling
Monetary unit sampling

Data Analytics
Data analytics is the science and art of discovering and analysing
patterns, deviations and inconsistencies, and extracting other useful
information in the data of underlying or related subject matter of an audit
through analysis, modelling, visualisation for the purpose of planning and
performing the audit.
ISA 570 Going concern

ISA 570 Going Concern states that the auditor must:
- Obtain sufficient appropriate evidence regarding the appropriateness of management's use of

the going concern basis of accounting in the preparation of the financial statements.
- Conclude on whether a material uncertainty exists about the entity's ability to continue as a
going concern.
- Report in accordance with ISA 570.

Incase of non existence of going concern financial statements can be prepared in
break-up basis.

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When performing the audit procedures an auditor should focus on cashflows rather than
profits, as the company can pay its debts when they fall due.
ISA 580 Written representations

Written representations are written statements by management provided to the auditor to
confirm certain matters or to support other audit evidence.
The objectives of the auditor are:
! To obtain written representations that management believes that it has fulfilled

the fundamental responsibilities that constitute the premise on which an audit is
conducted
! To support other audit evidence relevant to the financial statements
! To respond appropriately to written representations or if management does

not provide written representations requested by the auditor
Factors to consider
• Must be in clients letter head
• The date of the written representation must be as near as practicable to, but not after,
the date of the auditor's report on the financial statements and must be for all the
financial statements and period(s) referred to in the auditor's report

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Reliability of written representations

An auditor has to check the consistency of the written representation with that of other
audit evidences.
If the matter cannot be resolved, the auditor shall reconsider the assessment of the
competence, integrity and ethical values of management, and the effect this may have on
the reliability of representations and audit evidence in general.
Reflect in Auditors report if required.

Written representations not provided
• Discuss the matter with management
• Re-evaluate the integrity of management and evaluate the effect this may have on the
reliability of representations and audit evidence in general
• Take appropriate actions, including determining the impact on the auditor's report
ISA 260 Communication with those

charged with governance
'Those charged with governance' is defined by ISA 260 as:
The person(s) or organisation(s) with responsibility for overseeing the strategic direction
of the entity and obligations related to the accountability of the entity.
Management' is defined by ISA 260 as:
The person(s) with executive responsibility for the conduct of the entity's operations.

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Matters to be communicated by auditors to those charged
with governance
(a) The auditor's responsibilities in relation to the financial statement audit
(b) Planned scope and timing of the audit
(c) Significant findings from the audit
(e) Audit Conclusion

(d) Auditor independence

The auditor shall communicate the following for listed entities:
. (i) A statement that the engagement team and others in the firm, the firm, and
network firms have complied with relevant ethical requirements regarding
independence
. (ii) All relationships between the firm and entity that may reasonably be
thought to bear on independence
. (iii) Related safeguards that have been applied to eliminate identified threats to
independence or reduce them to an acceptable level
ISA 265 Communicating deficiencies in internal

control to those charged with governance and
management
A deficiency in internal control 'exists when:
. (a) A control is designed, implemented or operated in such a way that it is unable

to prevent, or detect and correct, misstatements in the financial statements on a
timely basis; or
. (b) A control necessary to prevent, or detect and correct, misstatements in the

financial statements on a timely basis is missing' (ISA 265: para. 6(a)).

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A significant deficiency in internal control is a deficiency or combination of deficiencies
in internal control that, in the auditor's professional judgment, is of sufficient importance
to merit the attention of those charged with governance (ISA 265: para. 6(b)).
Management letter or report(Covering letter)

The auditor shall include the following in the written communication:
• Deficiency in the ICS
• Implication in the FS
• Recommendations

ISA 701 Communicating key audit matters in the
independent auditor’s report,
Key audit matters. 'Those matters that, in the auditor's professional judgment, were of
most significance in the audit of the financial statements of the current period.
Key audit matters are selected from matters communicated with those charged with
governance' (ISA 701: para. 8).
ISA 706 Emphasis of matter paragraphs and other matter

paragraphs in the independent auditor's report
An emphasis of matter paragraph is a paragraph included in the auditor's report that

refers to a matter appropriately presented or disclosed in the financial statements that, in
the auditor's judgement, is of such importance that it is fundamental to users'
understanding of the financial statements (ISA 700: para. 7(a))
An other matter paragraph is a paragraph included in the auditor's report that refers to a
matter other than those presented or disclosed in the financial statements that, in the
auditor's judgement, is relevant to users' understanding of the audit, the auditor's
responsibilities or the auditor's report (ISA 706: para. 7(b)).

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ISA 560 Subsequent events
Subsequent events are 'events occurring between the date of the financial statements and
the date of the auditor's report, and facts that become known to the auditor after the date
of the auditor's report’.
IAS 10 Events after the reporting period
• Those that provide evidence of conditions that existed at the year- end date (adjusting
events)
• Those that are indicative of conditions that arose after the year-end date (non-adjusting

events)
The auditor shall perform procedures designed to obtain sufficient appropriate audit
evidence for all the events up to the date of the auditor's report that may require
adjustment of, or disclosure in, the financial statements have been identified .
The auditor does not have any obligation to perform procedures, or make enquiries
regarding the financial statements, after the date of the report
However, if the auditor becomes aware of a fact that, had it been known to the auditor at
the date of the auditor's report, may have caused the auditor to amend the auditor's report,
the auditor shall:
! Discuss the matter with management and those charged with governance.
! Determine whether the financial statements need amendment.

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! If amendment is required, enquire how management intends to address the
matter in the financial statements.
. If amendment is required to the financial statements and management makes the

necessary changes, the auditor must carry out a number of procedures:
! Undertake any necessary audit procedures on the changes made.
! Extend audit procedures for identifying subsequent events that may

require adjustment of or disclosure in the financial statements to the date of
the new auditor's report.
! Provide a new auditor's report on the amended financial statements.

If management does not amend the financial statements:
! If the auditor's report has not yet been provided to the entity, the auditor shall
modify the opinion and then provide the auditor's report.
! If the auditor's report has already been provided to the entity, the auditor shall
notify management and those charged with governance not to issue the financial
statements before the amendments are made; but if the financial statements are
issued anyway, the auditor shall take action to seek to prevent reliance on the
auditor's report.
Facts discovered after the financial statements have been issued
Auditors have no obligations to perform procedures or make enquiries

regarding the financial statements after they have been issued.
However, if the auditor becomes aware of a fact that, had it been known to the
auditor at the date of the auditor's report, may have caused the auditor to amend the
auditor's report, the auditor shall follow same steps as above.
If management amends the financial statements, the auditor shall

carry out any necessary procedures on the amendment and review the steps taken
by management to ensure that anyone in receipt of the previously issued financial
statements is informed.

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The auditor shall also issue a new or amended auditor's report, which will include an
explanatory paragraph .
If management still does not act, the auditor shall take appropriate action to seek to
prevent reliance on the auditor's report.
ISA 540 Auditing accounting estimates, including

fair value accounting estimates, and related
disclosures.
An accounting estimate is an approximation of a monetary amount in the absence

of a precise means of measurement' (ISA 540: para. 7(a)).
The auditor's objective is to obtain sufficient appropriate audit

evidence about whether accounting estimates are reasonable and related
disclosures are adequate.
Estimation uncertainty is 'the susceptibility of an accounting estimate and related

disclosures to an inherent lack of precision in its measurement' (ISA 540:
para. 7(c)).
Management's point estimate is 'the amount selected by management for

recognition or disclosure in financial statements as an accounting
estimate' (ISA 540: para. 7(e)).
Auditor's point estimate or auditor's range is the amount, or range of amounts,

respectively, derived from audit evidence for use in evaluating management's
point estimate' (ISA 540: para. (b)).
The auditor shall also evaluate the degree of estimation uncertainty associated with an
accounting estimate. Where estimation uncertainty is assessed as high, the auditor shall
determine whether this gives rise to significant risks (ISA 540: para. 10–11).

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ISA 520 Analytical procedures
Technique to carryout analytical procedures
• Ratio analysis
• Examining related accounts in conjunction with each other.
• Trend analysis.
• Reasonableness test. This involves calculating the expected value of an item and comparing it
with its actual value.

ISA 520 (para. 5) states that when using analytical procedures as substantive tests,
the auditor must:
(a) Determine the suitability of particular analytical procedures for given assertions.
(b) Evaluate the reliability of data from which the auditor's expectation of recorded amounts or
ratios is developed.
(c) Develop an expectation of recorded amounts or ratios and evaluate whether this is sufficiently
precise to identify a misstatement that may cause the financial statements to be material
misstated.
(d) Determine the amount of any difference that is acceptable without further investigation.
Analytical procedures at the final stage:

- Ensure FS are consistent with FR framework
- Ensure FS are consistent with auditor’s understanding
- Enable the auditor to form an overall conclusion

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ISA 700 Forming an opinion and reporting on
financial statements
An unmodified opinion is the opinion expressed by the auditor when the auditor
concludes that the financial statements are prepared, in all material respects, in
accordance with the applicable financial reporting framework (ISA 700: para. 16).
ISA 705 Modifications to the opinion in the

independent auditor's report
Qualified opinion

. (1) The auditor concludes that misstatements are material, but not pervasive, to
the financial statements (ISA 705: para. 7(a)).
. (2) The auditor cannot obtain sufficient appropriate audit evidence on which to
base the opinion but concludes that the possible effects of undetected
misstatements, if any, could be material but not pervasive (ISA 705: para. 7(b)).
Adverse opinions
An adverse opinion is expressed when the auditor, having obtained sufficient

appropriate audit evidence, concludes that misstatements are both material
and pervasive to the financial statements (ISA 705: para. 8.
Disclaimers of opinion
An opinion must be disclaimed when the auditor cannot obtain sufficient appropriate
audit evidence on which to base the opinion and concludes that the possible effects on the
financial statements of undetected misstatements, if any, could be both material and
pervasive (ISA 705: para.10).
ISA 705 (para. 30) states that when the auditor expects to express a modified opinion,
the auditor must communicate with those charged with governance the circumstances
leading to the expected modification and the proposed wording of the modification in the
auditor's report.
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Pervasiveness
Pervasiveness is a term used to describe the effects or possible effects on the financial
statements of misstatements or undetected misstatements (due to an inability to obtain
sufficient appropriate audit evidence). There are three types of pervasive effect:
. (a) Those that are not confined to specific elements, accounts or items in the
financial statements
. (b) Those that are confined to specific elements, accounts or items in the financial
statements and represent or could represent a substantial portion of the financial
statements

. (c) Those that relate to disclosures which are fundamental to users' understanding
of the financial statements (ISA 705: para. 5(a))
ISA 250 Consideration of laws and

regulations in an audit of financial
statements
ISA 250 (para. 6) distinguishes the auditor's responsibilities in relation to compliance with
two different categories of laws and regulations:
. (a) Those that have a direct effect on the determination of material amounts and
disclosures in the financial statements
. (b) Those that do not have a direct effect on the determination of material amounts
and disclosures in the financial statements but where compliance may be
fundamental to the operating aspects, ability to continue in business, or to avoid
material penalties

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For the first category, the auditor's responsibility is to obtain sufficient appropriate audit
evidence about compliance with those laws and regulations (ISA 250: para. 13).
For the second category, the auditor's responsibility is to undertake specified audit
procedures to help identify non-compliance with laws and regulations that may have a
material effect on the financial statements.
Reporting identified or suspected non-compliance

The auditor shall communicate management and with those charged with governance,
but, if the auditor suspects that those charged with governance are involved, the auditor
shall communicate with the next highest level of authority, such as the audit committee
or supervisory board. If this does not exist, the auditor shall consider the need to obtain
legal advice (ISA 250: paras. 22–24).

The auditor shall consider the impact on the auditor's report.
The auditor shall determine whether identified or suspected non-compliance has to be

reported to the regulatory and enforcement authorities. Although the auditor must
maintain the fundamental principle of confidentiality, in some jurisdictions the duty of
confidentiality may be overridden by law or statute (ISA 250: para. 28).
ISA 720 (Revised) The auditor's responsibilities

relating to other information
Other information is financial or non-financial information (other than the financial

statements and the auditor's report thereon) included in an entity's annual report (ISA 720:
para. 12(c)).
An annual report is a document, or combination of documents, prepared typically on an

annual basis by management or those charged with governance in accordance with law,
regulation or custom.
A misstatement of the other information exists when the other information is

incorrectly stated or otherwise misleading (including because it omits or obscures
information necessary for a proper understanding of a matter disclosed in the other
information) (ISA 720: para. 12(b)).

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Material misstatements of the other information
ISA 720 (para. 14) states that the auditor shall read the other information to identity
material inconsistencies with the audited financial statements. If a material inconsistency
is identified, the auditor shall determine whether the audited financial statements or other
information is misstated.
If the financial statements are materially misstated but management refuses to correct the
misstatement, the auditor shall modify the audit opinion (ISA 720: para. 20).
If the other information is materially misstated and needs to be revised but management
refuses, the auditor shall communicate this matter to those charged with governance and:
! Consider the implications for the auditor's report, or

! Withdraw from the engagement (where this is legally permitted).
Other Information paragraph
. The auditor's report will always include a separate Other Information section when
the auditor has obtained some or all of the other information as of the date of the
auditor's report
If the auditor concludes that there is a material misstatement of the other information, the
'Other Information' section is placed immediately after the basis of opinion section.

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ISA 450 Evaluation of misstatements identified
during the audit.
A misstatement is 'a difference between the reported amount, classification, presentation,
or disclosure of a 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' (ISA 450: 4(a)).
An uncorrected misstatement is a misstatement that the auditor has accumulated during

the audit and that has not been corrected (ISA 450: 4(b)).
The ISA distinguishes misstatements as,

Factual misstatements (misstatements about which there is no doubt),
Judgemental misstatements (misstatements arising from management's judgement

concerning recognition, measurement, presentation and disclosure or accounting policies)
Projected misstatements (the auditor's best estimate of misstatements arising from

sampling populations) (ISA 450: para. A3).
ISA 450 Evaluation of misstatements identified during the audit (para. 5) requires the auditor to
accumulate misstatements identified during the audit, other than those that are clearly trivial.
As part of their completion procedures, auditors shall consider whether the aggregate of
uncorrected misstatements in the financial statements is material and requires the auditor
to communicate uncorrected misstatements and their effect to those charged with
governance, with material uncorrected misstatements being identified individually.
The auditor shall also communicate the effect of uncorrected

misstatements relating to prior periods.
The auditor shall request a written representation from management and those charged
with governance whether they believe the effects of uncorrected misstatements are
immaterial (individually and in aggregate) to the financial statements as a whole.
Documentation
ISA 450 (para. 15) requires the auditor to document the following information:
• The amount below which misstatements would be regarded as clearly trivial

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• All misstatements accumulated during the audit and whether they have been corrected
• The auditor's conclusion as to whether uncorrected misstatements are material and the
basis for that conclusion
ISA 550 Related party disclosures

The auditor should obtain sufficient appropriate evidence that the financial statements
achieve fair presentation of the related party relationships and transactions and have been
accounted for in accordance with the financial reporting framework. [ISA 550, 9]
Disclosure should be made of the following:

• the nature of the related party relationship.
• information about the transactions including the amount and any balances
outstanding at the year-end.
• any allowance for doubtful receivable or expense recognised in respect of
irrecoverable debts.
If transactions have not been disclosed in accordance with those requirements

the potentially significant deficiency in the internal control system should be
reported to those charged with governance.
The related party transactions are generally deemed material by nature.
ISA 510 Initial Engagements -Opening

Balances
ISA 510 Initial Engagements Opening Balances requires that when auditors take on a new
client, they must ensure that:
• Opening balances do not contain material misstatements

• Appropriate accounting policies have been consistently applied, or changes adequately
disclosed.

ACCA AAA
Draft
ISA 710 Comparative Information-
Corresponding Figures and Comparative
Financial Statements
The auditor need to obtain sufficient and appropriate evidence about whether comparative
information included in the financial statements has been presented in accordance with
the financial reporting framework.
Corresponding figures: where preceding period figures are included as integral part of the
current period financial statements (i.e. figures shown to the right of the current year figures). [ISA
710, 6b]

Comparative financial statements: where preceding period amounts are included for
comparison with the current period (i.e. the prior year's full financial statements are included within
the current year annual report).
Effect in auditors report

- The auditor's opinion does not refer to the corresponding figures because the opinion is
on the current period financial statements as a whole including the corresponding figures.
- If the prior period's auditor's report was modified and the a matter which gave rise to the
modification is unresolved, the current auditor's opinion will also have to be modified
either because of the effects on the current period or because of the effects of the
unresolved matter on the comparability of the current and corresponding figures.
- If a material misstatement is identified in the prior period financial statements on which

an unmodified opinion was issued, a modified opinion should be given in respect of the
corresponding figures.
- If a prior year adjustment has been put through to correct material misstatements arising
in the prior year, an unmodified opinion can be issued. An emphasis of matter paragraph
will be needed to draw attention to the disclosure note explaining the reason for the
restatement of the opening balances.
- If the prior period financial statements were audited by a different auditor, or were not
audited, the auditor may refer to this in an Other Matter paragraph.

ACCA AAA
Draft

1. The company undertakes continuous 1. The auditor should discuss with management the
production in its factory. process they will undertake to assess the cut-off point
As production will not cease, the exact for work in progress at the year end. This process should
cut-off of the work in progress will need to be assessed. be reviewed by the auditor while attending the year-end
If the cut-off is not correctly calculated, the inventory inventory count.
valuation may be under or over stated. In addition, consideration should be
given as to whether an independent expert is required
to value the work in progress. If so, this will need to be
arranged with consent from management and in time
for the year-end count.
2. Ordered plant and machinery, but half of the 2. Discuss with management as to whether the
remaining plant and machinery ordered have arrived; if
order have not yet been delivered.
so, physically verify a sample of these assets to ensure
Only assets which physically exist at the year-end should
existence and ensure only appropriate assets are
be included in property, plant and equipment. If items
recorded in the non-current asset register at the year
not yet delivered have been capitalised, PPE will be
end.
overstated.
Determine if the asset received is in
Consideration will also need to be
use at the year-end by physical observation and if so, if
given to depreciation and when this should commence.
depreciation has commenced at an appropriate point.
If depreciation is not appropriately charged when the
asset is available for use, this may result in assets and
profit being over or understated.
3. The audit team will need to agree the purchase price

3. Purchase of patent.
to supporting documentation and to confirm the useful
In accordance with IAS 38 Intangible Assets, this should life.
be included as an intangible asset and amortised over its The amortisation charge should be
life. If management has not correctly accounted for the recalculated in order to ensure the accuracy of the
patent, intangible assets and profits could be charge and that the intangible is correctly valued at the
overstated. year end.
4. Company has taken a new loan. 4. During the audit, the team would need to confirm
The loan needs to be correctly split between current and that the loan finance was received. In addition, the split
non-current liabilities in order to ensure correct between current and non-current liabilities and the
disclosure. disclosures for this loan should be reviewed in detail to
Also, as the level of debt has increased, ensure compliance with relevant accounting standards.
there should be additional finance costs. There is a risk
that this has been omitted from the statement of profit The finance costs should be recalculated
or loss leading to understated finance costs and and any increase agreed to the loan documentation for
overstated profit. confirmation of interest rates. Interest payments should
be agreed to the cash book and bank statements to
confirm the amount was paid and is not therefore a
year-end payable.
5. Company outsources the payroll work. 5. Discuss with management the extent of records
A detection risk arises as to whether sufficient and maintained by the service entity and any monitoring of
appropriate evidence is available at Company to confirm controls undertaken by management over the payroll
the completeness and accuracy of controls over payroll. charge.
If not, another auditor may be required to undertake Consideration should be given to contacting
testing at the service organisation. the service organisation’s auditor to confirm the level of
controls in place.
The payroll processing had transferred to Discuss with management the transfer process
service entity. If any errors occurred during the transfer undertaken and any controls put in place to ensure the
process, these could result in the payroll charge and completeness and accuracy of the data.
related employment tax liabilities being
under/overstated.
Where possible, undertake tests of controls to confirm
the effectiveness of the transfer controls.
6. Land and buildings will be revalued at the year 6. Discuss with management the process adopted for
end. undertaking the valuation, including whether the whole
The land and buildings are to be revalued at the year- class of assets was revalued and if the valuation was
end; it is likely that the revaluation surplus/deficit will be undertaken by an expert. This process should be
material. reviewed for compliance with IAS 16.
The revaluation needs to be carried out and
recorded in accordance with IAS 16 Property, Plant and
Equipment, otherwise non-current assets may be
incorrectly valued.
7. Receivables for the year to date are considerably 7. Discuss with management the reasons for the
higher than the prior year. increase in receivables and management’s process for
If this continues to the year end, there is a risk that identifying potential irrecoverable debt. Test controls
some receivables may be overvalued as they are not surrounding management’s credit control processes.
recoverable. Extended post year-end cash
receipts testing and a review of the aged receivables
ledger to be performed to assess valuation. Also
consider the adequacy of any allowance for receivables.
8. Company is planning to make some employees
8. Discuss with management the status of the
redundant after the year end.
redundancy announcement; if before the year end,
Once the timing of this announcement has been
review supporting documentation to confirm the timing.
confirmed and if it is announced to the staff before the
In addition, review the basis of and recalculate the
year end, then under IAS 37 Provisions, Contingent
redundancy provision.
Liabilities and Contingent Assets a redundancy provision
will be required at the year end. Failure to provide will
result in an understatement of provisions and expenses.
9. Goods in transit.
9. The audit team should undertake detailed cut-off
At the year end, there is a risk that the cut-off of
testing of purchases of goods at the year end and the
inventory, purchases and payables may not be accurate
sample of GRNs from before and after the year end
and may be under/overstated.
relating to goods from suppliers should be increased to
ensure that cut-off is complete and accurate.
10. Company has incurred expenditure in

10. Obtain a breakdown of the expenditure and verify
developing a new range of products.
that it relates to the development of the new products.
This expenditure is classed as research and development
under IAS 38 Intangible Assets. The standard requires
Undertake testing to determine whether the costs relate
research costs to be expensed to profit or loss and
to the research or development stage. Discuss the
development costs to be capitalised as an intangible
accounting treatment with the finance director and
asset.
ensure it is in accordance with IAS 38.
If the company has incorrectly classified
research costs as development expenditure, there is a
risk the intangible asset could be overstated and
expenses understated.
11. Throughout the audit, the team will need to be alert

11. The bonus scheme for senior management and
to this risk and maintain professional scepticism.
directors of the Company is based on the value of year-
Detailed review and testing on judgemental
end total assets.
decisions, including treatment of provisions, and
There is a risk that management might
compare treatment against prior years. Any manual
be motivated to overstate the value of assets through
journal adjustments affecting assets should be tested in
the judgements taken or through the use of releasing
detail.
provisions or capitalisation policy.
In addition, a written representation should be
obtained from management confirming the basis of any
significant judgements.
12. A new general ledger system was introduced 12. The auditor should undertake detailed testing to
and the old and new systems were run in parallel. confirm that all of the balances at the transfer date have
There is a risk of the balances in the month of transfer been correctly recorded in the new general ledger
being misstated and loss of data if they have not been system.
transferred from the old system completely and
accurately. If this is not done, this could result in the The auditor should document and test
auditor not identifying a significant control risk. the new system. They should review any management
reports run comparing the old and new system during
In addition, the new general ledger system will require the parallel run to identify any issues with the
documenting and the controls over this will need to be processing of accounting information.
tested.
13. A number of reconciliations, including the bank 13. Discuss this issue with the finance director and
reconciliation, were not performed at the year end, request that control account reconciliations are
Control account reconciliations provide comfort that undertaken.
Accounting records are being maintained completely
and accurate.
At the year end, it is important to All reconciling items should be tested in
confirm that balances including bank balances are not detail and agreed to supporting documentation.
under or overstated. This is an example of a control
procedure being overridden by management and raises
concerns over the overall emphasis placed on internal
control.
14. Company’s previous finance director left after it 14. Discuss with the new finance director what
was discovered that he had been committing fraud procedures they have adopted to identify any further
with regards to expenses claimed. frauds by the previous finance director.
There is a risk that he may have undertaken other
fraudulent transactions; these would need to be written In addition, the team should maintain their
off in the statement of profit or loss. If these have not professional scepticism and be alert to the risk of further
been uncovered, the financial statements could include fraud and errors.
errors.
15. There have been a significant number of sales 15. Review a sample of the post year-end sales returns
returns made subsequent to the year end. and confirm if they relate to pre year-end sales, that the
As these relate to pre year-end sales, they should be revenue has been reversed and the inventory included
removed from revenue in the draft financial statements in the year-end ledgers.
and the inventory reinstated.
In addition, the reason for the increased
If the sales returns have not been correctly recorded, level of returns should be discussed with management.
then revenue will be overstated and inventory This will help to assess if there are underlying issues with
understated. the net realisable value of inventory.
16. During year-end inventory count there were 16. During the final audit, the goods received notes and
movements of goods in and out. goods despatched notes received during the inventory
If these goods in transit were not carefully controlled, count should be reviewed and followed through into the
then goods could have been omitted or counted twice. inventory count records as correctly included or not.
This would result in inventory being under or
overstated.
17. The audit client is a new client for the auditors. 17. Audit Company should ensure they have a suitably
As the audit team is working with the client for the first experienced team. Also, adequate time should be
time they may not be familiar with the Accounting allocated for team members to obtain an understanding
policies, transactions and balances, there will be an of the company and the risks of material misstatement.
increased detection risk on the audit.
18. The company undertakes continuous (perpetual) 18. The completeness of the continuous (perpetual)
inventory counts. inventory counts should be reviewed. In addition, the
Under such a system all inventory must be counted at level of adjustments made to inventory should be
least once a year with adjustments made to the considered to assess whether reliance on the inventory
inventory records. records at the year-end will be acceptable.
Inventory could be under or overstated

if the continuous (perpetual) inventory counts are not
complete and the inventory records accurately updated
for adjustments.
19. A sales-related bonus scheme has been introduced 19. Increased sales cut-off testing will be performed
in the year; this may lead to sales cut-off errors with along with a review of any post year-end cancellations
employees aiming to maximise their current year bonus. of contracts as they may indicate cut-off errors.
20. Out of the customers who bought goods on credit 20. A review of the aged receivables ledger to be
there are concerns about the creditworthiness of some performed to assess valuation. Also consider the
customers. There is a risk that some receivables may be adequacy of any allowance for receivables.
overvalued as they are not recoverable.
21. Company has incurred expenditure on updating, 21. The auditor should review a breakdown of these
repairing and replacing a significant amount of the costs to ascertain the split of capital and revenue
production process machinery. expenditure, and further testing should be undertaken
If this expenditure is of a capital nature, it should be to ensure that the classification in the financial
capitalised as part of property, plant and equipment statements is correct.
(PPE) in line with IAS 16 Property, Plant and Equipment.
However, if it relates more to repairs, then it should be
Expensed to the statement of profit or loss (income
Statement). If the expenditure is not correctly classified,
Profit and PPE could be under or overstated.
22. Inventory held at different warehouses. 22. The auditor should assess which of the inventory
At the year-end there will be inventory counts sites they will attend the counts for. This will be any with
undertaken in all warehouses. It is unlikely that the material inventory or which have a history of significant
auditor will be able to attend at all inventory counts and errors.
therefore they need to ensure that they obtain sufficient For those not visited, the auditor will
evidence over the inventory counting controls, and need to review the level of exceptions noted during the
completeness and existence of inventory for any count and discuss with management any issues which
warehouses not visited. arose during the count.
Inventory is stored within all warehouses; if some are The auditor should review supporting documentation
owned by company and some rented from third parties. for all warehouses included within PPE to confirm
Only warehouses owned by company should be included ownership by company and to ensure non-current
within PPE. There is a risk of overstatement of PPE and assets are not overstated.
understatement of rental expenses if company has
capitalised all warehouses.
23. During the year an asset has been disposed of at a 23. Review the non-current asset register to ensure that
profit. the asset has been removed. Also confirm the disposal
The asset needs to have been correctly removed from proceeds as well as recalculating the profit on disposal.
property plant and equipment to ensure the non-
current asset register is not overstated, and the profit Consideration should be given as to whether
on disposal should be included within the income the profit on disposal is significant enough to warrant
statement. separate disclosure within the income statement.
24. The company values inventory as selling price less 24. Testing should be undertaken to confirm cost and
average profit margin (any other methods). NRV of inventory and that on a line-by-line basis the
Inventory should be valued at the lower of cost and net goods are valued correctly.
realisable value (NRV) and if this is not the case, then In addition, valuation testing
inventory could be under or overvalued. should focus on comparing the cost of inventory to the
selling price less margin to confirm whether this method
IAS 2 Inventories allows this as an inventory valuation is actually a close approximation to cost.
method as long as it is a close approximation to cost. If
this is not the case, then inventory could be under or
overvalued.
25. Branches maintained their own financial 25. Discuss with management the process undertaken to
records and submitted returns monthly to transfer the data and the testing performed to confirm
head office. the transfer was complete and accurate.
The opening balances for each branch have been
transferred into the head office’s accounting. There is a Computer-assisted audit techniques
risk that if this transfer has not been performed could be utilised by the team to sample test the transfer
completely and accurately, the opening balances may of data from each supermarket to head office to identify
not be correct. any errors.

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ACCA AAA

Lecture support notes by Alan Biju Palak

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ISA 200 Overall objectives of the independent auditor and

Lecture support notes by Alan Biju Palak

• To report on the financial statements, and communicate as required by the ISAs, in

• To Express an opinion on the FS

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being alert to the conditions that may indicate possible misstatements

subjecting the audit evidence to a critical assessment rather than taking

Lecture support notes by Alan Biju Palak

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• Confirming that there is a common understanding between the auditor and

Lecture support notes by Alan Biju Palak

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ISA 320 Materiality in planning

A item is material if its omission or misstatement would reasonably

Lecture support notes by Alan Biju Palak

Planning Materiality/Overall materiality

The following benchmarks and percentages may be appropriate in the calculation

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Materiality for the financial statements as a whole must be

ISA 500 Audit evidence

Lecture support notes by Alan Biju Palak

Sufficiency of the evidence will depend on the :

• The materiality of the item.

• The risk assessment of the item.

• The results of other audit procedures.

Reliability of evidence depends on several factors:

– Independent, externally generated evidence is better than evidence

– Effective controls imposed by the entity, generally improve the reliability

– Evidence obtained directly by the auditor is more reliable than evidence

– It is better to get written, documentary evidence rather than verbal

– Original documents provide more reliable evidence than photocopies or

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• Recalculation and reperformance

Lecture support notes by Alan Biju Palak

• Obtain an understanding of the entity and its environment

• Test the operating effectiveness of controls in preventing, detecting and

• Detect material misstatements by performing substantive procedures.

Substantive procedures are designed to detect material misstatement at the assertion

• Substantive analytical procedures test the balances as a whole to identify any

• Substantive tests of detail looks at the supporting evidence for individual

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1) The existence and condition of inventory

- Attendance at the inventory count

Lecture support notes by Alan Biju Palak

2) The completeness of litigation and claims involving the entity

- Enquiry of management and in-house legal counsel.

3) The presentation and disclosure of segmental information

- Understand, evaluate and test methods used by management to determine segmental

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Lecture support notes by Alan Biju Palak

Factors to consider before using the work of an internal auditor

• Status /level of reporting

• Communication b/w internal and external auditor

• Independence of internal auditor

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Before using the specific work

1. How audit evidence obtained?

2. What judgements/assumptions were taken?

3. How work was performed?

4. What are the conclusions reached?