isas clarity

8/8/2019 ISAs Clarity

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210 AGREEING THE TERMS OF AUDIT ENGAGEMENT

260 COMMUNICATION WITH THOSE CHARGED WITHGOVERNANCE

505 EXTERNAL CONFIRMATIONS

620 USING THE WORK OF AN AUDITORS EXPERT

Mohammad Zulfikar Akhtar


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Structure of the ISAs

Definition(s)

Requirements (Commandments)

Application and Other ExplanatoryMaterial

2


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Structure of the Presentation

e n on s an

Objective(s)

N

Requirement - I Requirement - II Requirement - III

ISC

USSI

ApplicationGuidance for

Requirement - I


Requirement - II


Requirement - IIIW

OF

FLOther Considerations

FLOW OF DISCUSSION

3


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AUDIT ENGAGEMENT

ISA 210


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AUDITORS OBJECTIVE

ccep or on nue e ngagemenWHEN the PERFORMANCE BASIS have been

Establishing PRE-CONDITIONS for an

understanding betweenauditor and management+

au are presen ose c arge wgovernance

5ISA 210


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ESTABLISHING PRE-CONDITIONS ARE

Whether the financial reportingframework to be applied in the

Without an acceptable financial

reporting framework, managementdoes not have an appropriate basisfor the preparation of the financial

statements is acceptable

have suitable criteria for auditing thefinancial statements.

+

This premise is fundamental to theconduct of an independent audit. To

Agreement of Management that itacknowledges and understands

its res onsibilit

avoid misunderstanding, agreementis reached with management that itacknowledges and understands thatit has such responsibilities as part of

6ISA 210

the audit engagement


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ACCEPTABILITY OF FRF

Acceptability

The nature of the entity

The nature of the financial statements

Whether law or regulation prescribes the

7ISA 210


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ACCEPTABILITY OF FRF CONTD

Where law or regulation prescribe the FRF

purpose financial statements for certain,

indications to the contrary, such a financialre ortin framework is resumed to beacceptable for general purpose financialstatements prepared by such entities.

8ISA 210


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ACCEPTABILITY OF FRF CONTD

REGULATION

If conflicts exists, agree with the

management whether:

additional requirements can be met

description of the applicable FRF can be

9ISA 210

amended accordingly


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AGREEMENT OF MANAGEMENT OF ITS

I. For the re aration of the FS in accordance with the

applicable FRFII. For internal control as management determines necessary

for preparation of FS free from material misstatement,whether due to fraud or error

. o prov e e au or w :

I. Access to all information of which management is aware

II. Additional information that the auditor may request

10ISA 210

III. Unrestricted access to persons within the entity


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WHEN NOT TO ACCEPT AN

I. If reconditions for an audit are not resent

I. FRF is unacceptable

. greement o management o ts respons ty asnot been obtained, including management not

a reein to rovided written re resentations

II. If a restriction is placed on scope of the audit that auditbelieves to result in the auditor disclaiming the opinion

UNLESS REQUIRED BY

11ISA 210 LAW


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AGREEMENT OF TERMS

..

Management Those charged withgovernance

e ro es o management an t ose c arge w tgovernance in agreeing the terms of the auditen a ement for the entit de end on the overnance

structure of the entity and relevant law or regulation

12ISA 210


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AGREEMENT OF TERMS

I. The objective and scope of the audit of the financial

II. The responsibilities of the auditor

III. The res onsibilities of mana ement includinexpectation to provided written representations

IV. Identification of the applicable FRF for the preparation of

t e nanc a statementsV. Reference to the expected form and content of any

13ISA 210

circumstances in which a report may differ from its

expected form and content


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AGREEMENT OF TERMS

regulation

Engagement letter gets shortened to the agreement of the

fact that such law or regulation applies and that management

the terms of the audit engagement

14ISA 210


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RECURRING AUDITS

,

necessitated considering:

Any indication that the entity misunderstands theobjective and scope of the audit

A recent change of senior management, legal or

re ulator re uirements

A significant change in ownership, nature or size of theentity's business

15ISA 210

A change in FRF or reporting requirements


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CHARGED WITH GOVERNANCE

ISA 260


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ROLE OF COMMUNICATION

-

AUDITOR:

in obtaining from those

TCWG:

in fulfilling their responsibility tocharged with governanceinformation relevant to the

audit

oversee the financial reportingprocess and hence reducing

risk of material mis-statementBOTH:

in understanding matters related to the audit in context, and indevelo in a constructive workin relationshi

Although ISA 260 focuses primarily on communications

17ISA 260


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AUDITORS OBJECTIVES

.

responsibilities in relation to the financial statementaudit, and an overview of the planned scope andt m ng o t e au t

II. To obtain from TCWG information relevant to the audit

III. To provide TCWG with timely observations arisingfrom the audit that are significant and relevant to their

responsibility to oversee the financial reportingprocess

18ISA 260

IV. To promote effective two-way communication between

the auditor and TCWG


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DEFINITIONS

The person(s) or organization(s) with responsibility for overseeing thestrategic direction of the entity and obligations related to theaccounta ty o t e ent ty. s nc u es oversee ng t e nanc areporting process.

wo-t er oar structure

Uni-tier board structure

xecut ve oar s

Audit committees

Auditor to determine the appropriate person(s) within theentity's governance structure with whom to communicate

19ISA 260


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COMMUNICATING TO SUB-GROUP

au or commun ca es w a su group e.g. au

committee), determine whether the auditor also needs tocommunicate with the full governing body, considering:

responsibilities of subgroup and the full governing body

nature of the matter to be communicated relevant legal or regulatory requirements

Whether the subgroup has the authority to take action in relation to theinformation communicated

how effectively and appropriately the subgroup communicates relevantinformation with the governing body

20ISA 260

Communication may be in full or summary form


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ALL EXECUTIVE GOVERNING BODY

u or nee no re-commun ca e e ma ers scusse

with the management with TCWG

HOWEVER: The auditor shall nonetheless needs to be

management responsibilities adequatelyinforms all of those with whom the auditor would

21ISA 260


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MINIMUM COMMUNICATIONS

-

FINANCIAL STATEMENTS AUDIT

s o nc u e:

i. auditor is responsible for forming and expressing an

prepared by management with the oversight of thosecharged with governance

ii. audit of the financial statements does not relievemanagement or those charged with governance of their

22ISA 260

responsibilities


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MINIMUM COMMUNICATIONS CONT

D

-

III- SIGNIFICANT FINDINGS FROM THE AUDIT

i. auditor's views about significant qualitative aspects of theentity's accounting practices, including accounting policies,accountin estimates and financial statement disclosures

ii. Significant difficulties, if any, encountered during the audit

iii. Significant matters, if any, arising from the audit

iv. Written representations the auditor is requesting

v. Other matters, if any, arising from the audit that are

23ISA 260

process


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MINIMUM COMMUNICATIONSCONTD

-

i. A statement that engagement team and others in thefirm as appropriate, the firm and, when applicable,networ rms ave comp e w t re evant et carequirements regarding independence [self-interest

threats, self-review threats, advocacy threats,,an inadvertent violation of relevant ethicalrequirements as they relate to auditor independence,

ii. All relationships that may reasonably be thought tobear on independence including total fees charged

24ISA 260

and the related safeguards that have been applied

[created by the profession, legislation or regulation,-


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- - '

FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS

i. Inquire of TCWG of their knowledge of any fraud orsuspected fraud in relation to FS

ii. Communicate withdrawal and reasons where auditor

withdraws due to exce tional circumstances as a result ofmisstatement from fraud or suspected fraud

iii. Communicate any identified or suspected fraud involving,

misstatement)

iv. Other matters of fraud relevant to responsibilities of TCWG

25ISA 260


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- -AN AUDIT OF FINANCIAL STATEMENTS

i. Inquire of TCWG, where appropriate, of whether the entity

have material impact in relation to FS

ii. If the auditor suspects there is non-compliance, discuss,

iii. Communicate any other than inconsequential non-compliances

iv. Communicate any intentional non-compliancesVII- ISA 265 - COMMUNICATING DEFICIENCIES IN INTERNAL

CONTROL TO THOSE CHARGED WITH GOVERNANCE AND

26ISA 260

MANAGEMENTi. All significant control deficiencies


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- -DURING THE AUDIT

i. Separately identifying, material uncorrected

on the opinion in the auditor's report, with a request forthese misstatements to be corrected

.periods on the relevant classes of transactions, accountbalances or disclosures, and the financial statements as awhole

IX- ISA 505 EXTERNAL CONFIRMATIONS

i. If mana ements refusal to allow for external confirmation

27ISA 260

is unreasonable, communicate with TCWG


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X- ISA 550 RELATED PARTIES

i. Significant matters arising during the audit in connectionwith the entity's related parties

XI- ISA 560 SUBSEQUENT EVENTS

i. Inquire TCWG of matters discussed in their meeting forwhich minutes are not available

. ac as sur ace a er e repor a e a , ear ersurfaced, would have resulted in auditor amending thereport, discuss with TCWG

28ISA 260


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-

i. Events or conditions identified that may cast significantdoubt on the entity's ability to continue as a going concern

XIII- ISA 705 MODIFICATIONS TO THE OPINION IN THE

INDEPENDENT AUDITOR'S REPORT. anagement p aces a scope m tat on an t e au tor

expects to issue qualified opinion or to disclaim the opinion

ii. When the auditors is unable to obtain sufficient appropriate

audit evidence and decides resigningiii. Material misstatement due to non disclosure of an

information re uired to be disclosed

29ISA 260

iv. Where the auditor expects to modify the opinion


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-

MATTER PARAGRAPHS IN THE INDEPENDENT AUDITOR'SREPORTi. If the auditor expects to include and emphasis or otherparagrap n e repor

XV- ISA 720 THE AUDITOR'S RESPONSIBILITIES RELATING TOOTHER INFORMATION IN DOCUMENTS CONTAININGAUDITED FINANCIAL STATEMENTS

.

management refuses

30ISA 260


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ISA 505


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AUDITORS OBJECTIVE

I. To design and perform such procedures to obtainrelevant and reliable audit evidence

32ISA 505


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DEFINITIONSExternal confirmations

Audit evidence obtained as a direct written response to the auditorfrom a third party, in paper form, or by electronic or other medium

Positive confirmation request Negative confirmation

request-

A failure of the confirming party to respond, or fully respond, to apositive confirmation request, or a confirmation request returnedun e vereException

A response that indicates a difference between information requested

33ISA 505

or conta ne n t e ent ty s recor s, an n ormat on prov e y t econfirming party


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TYPE OF INFORMATION

INFORMATION TO BE CONFIRMED OR REQUESTED

Definitely relevant when addressing assertionassociated with account balances and their elements

May be used to confirm existence of:

contracts or transactions

34ISA 505

r use o con rm non-ex s ence o say s eagreements


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DESIGN AND EXECUTIONAUDITOR TO MAINTAIN CONTROL OVER:

I. Selecting the appropriate confirming party

. es gn ng t e con rmat on requests

Assertions and risks ayout an presentat on

Method of communication

III. Sending the requests, including follow-up requests

35ISA 505

on confirmation requests


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NEGATIVE CONFIRMATIONNEGATIVE CONFIRMATION CAN NOT BE USED AS THE

SOLE SUBSTANTIVE AUDIT PROCEDURE UNLESS RoMM has been assessed as LOW AND evidence

regarding operating effectiveness of related controlsobtained

,homogeneous items

very low exception rate is expected

auditor is not aware of circumstances or conditions thatwould cause recipients of negative confirmation

36ISA 505


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MANAGEMENT REQUESTS NOT TO

I. In uire mana ement of reasons for refusal

Validate the reasonableness of refusal

. ons er mo y ng t e or g na r s assessment

Refusal may result in enhancement of RoMM. Maya so n ca e a rau s ac or

III. Performe alternative procedures

IV. Communicate with TCWG

V. Consider affects on o inion

37ISA 505

A


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ASSESSING RELIABILITY OF

Doubts about reliabilit of a res onse must be resolved

Confirmation:

Appears not to come from the originally intended

confirming party ppears to e tampere w t , spec ca y t e e ectron c

ones

If doubts about reliability can not be resolved

38ISA 505

.Fraud Risk factor


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ASSESSING EXCEPTIONS

Exce tions to be investi ated to determine whether the

are indicative of misstatementMisstatement ma indicate:

Quality of response from similar sources

Deficiency in internal control

Where ANY of above exists

May result in enhancement of RoMM. May also indicate aFraud Risk factor

39ISA 505


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AUDITOR'S EXPERT

ISA 620


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AUDITOR

S OBJECTIVES

I. To determine whether to use the work ofan auditor's ex ert

. ,to determine whether that work is

'

41ISA 620


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DEFINITIONS

Auditors ex ert

An individual or organisation possessing expertise in a field other thanaccounting or auditing whose work in that field is used by the auditor

Examples of other than auditing or accounting

instruments

Valuation of land and building,lant and machiner , etc.

benefit plans

Estimation of oil, gas and mineralreserves

Valuation of intangibles Impairment analysis

Valuing environmental liabilities Interpretation of laws, regulations,

contracts

42ISA 620


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DEFINITIONS

T es of Auditors ex ert

Auditors internal expert Auditors external expert

Partners or staff (includingtemporary staff) possessing

expertise in a field other than

An individual or organisationexternal to Auditors firm, with

expertise in a field other thanaccounting or auditing, whosework in that field is used bythe auditor to assist in

accounting or auditing, whosework in that field is used bythe auditor to assist in

o a n ng su c enappropriate audit evidence.

o a n ng su c enappropriate audit evidence.

43ISA 620


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DEFINITIONS

Mana ements ex ert

An individual or organisation possessing expertise in a field other thanaccounting or auditing, whose work in that field is used by the entity to

Examples of other than auditing or accounting

instruments

Valuation of land and building,lant and machiner , etc.

benefit plans

Estimation of oil, gas and mineralreserves

Valuation of intangibles Impairment analysis

Valuing environmental liabilities Interpretation of laws, regulations,

contracts

44ISA 620


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STAGES OF INVOLVEMENT

Almost all sta es

Obtaining an understanding ofthe entity and its environment,

Designing and performingfurther audit procedures to

Identifying and assessing therisks of material misstatement

the assertion level, comprisingtests of controls or substantive

rocedures Determining and implementing

overall responses to assessedrisks at the financial statement

Evaluating the sufficiency andappropriateness of audit

level

an opinion on the financialstatementsRoMM generally increases when expertise in a field other than

45ISA 620

statements

ONSIDERATION IN DECIDING


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WHETHER TO USE AN AUDITOR'SEXPERTAuditor is re uired to be satisfied that the en a ement team, and anauditor's experts have the appropriate competence and capabilities to

perform the audit engagement

Whether management hasused

a management's expert in

to respond to identified risks

the auditor's knowledge of and

ex erience with the work ofprepar ng e nanc astatements

Nature and significance of the

experts in relation to suchmatters

matter, including its complexity Risks of material misstatement

sources of audit evidence

46ISA 620

expected nature of procedures

ONSIDERATION IN DECIDING


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WHETHER TO USE AN AUDITOR'SEXPERTWHEN MANAGEMENTS EXPERT HAS BEEN USED, DECISION TOUSE AUDITORS EXPERT MAY BE INFLUENCED BY

The nature, scope and The management's expert'so ec ves o emanagement's expert's work

Whether the management's

compe ence an capa es

Whether the management's

expert is subject to technicalexpert is employed by theentity, or is a party engaged byit to provide relevant services

performance standards orother professional or industryrequirements

The extent to whichmanagement can exercisecontrol or influence over the

Any controls within the entityover the management'sex ert's work

47ISA 620

work of the management'sexpert

WHEN AUDITORS EXTERNAL EXPERT


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WHEN AUDITOR S EXTERNAL EXPERT

I - Evaluate com etence and ca abilities

Personal experience with recognition

Discussions with the expert

Discussions with others who

u s e papers or oo swritten by that expert

Ethical standards and otherare familiar with that expert'swork

'

membership requirements of aprofessional body or industryassociation

qualifications, membership of aprofessional body or industryassociation, license to ractice,

Accreditation standards of alicensing body

48ISA 620

or other forms of external

or regulation

WHEN AUDITORS EXTERNAL EXPERT


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WHEN AUDITOR S EXTERNAL EXPERT

II - Evaluate ob ectivit

self-interest threats Inquire of the entity about any

a vocacy t reats

familiarity threats

the entity has with the auditor'sexternal expert that may affect that

expert's objectivity-

intimidation threats Discuss with that expert any

applicable safeguards

Inquire about:

Financial interest

49ISA 620

relationships

Provision of other services etc.


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AUDITORS EXPERT DECIDED

A reement with auditors ex ert AT LEAST on the followin matters(may be in writing when considered appropriate)

I. Nature sco e and ob ectives of that ex ert's work Expected standards to be used Working methodology, it relevant

. expert Whether the auditor or the auditor's expert will perform

e a e es ng o source a a Consent for the auditor to discuss the auditor's expert's

findings or conclusions with the entity' '

50ISA 620

conclusions concerning that expert's work

Access to working papers


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AUDITORS EXPERT DECIDED

A reement with auditors ex ert AT LEAST on the followin matters(may be in writing when considered appropriate) Cont.

III. Re ortin re uirements Form of experts report Timing of the report

Should there be progressive reports or one conclusive report,etc

IV. Confidentiality requirements

Further requirements imposed by law or regulation Further requirements imposed by the client

51ISA 620

E


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EVALUATING ADEQUACY OF WORK

. va ua ng n ngs an conc us ons

ADEQUACY RELEVANCE

Inquiring of expert

Reviewing experts

Presented in a mannerconsistent with any

standards of profession orreports

Consistency check with

n ustry

Clearly expressed referringto the objectives agreed

evidences

Discussing with other

Based on an appropriateperiod taking account of

52ISA 620

expert, if needed

Discussing withmana ement

Subject to any reservation,

limitation or restriction on

E


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EVALUATING ADEQUACY OF WORK

II. Evaluatin assum tions and methods

Generally accepted within the auditor's expert's field Consistent with the requirements of the applicable

financial reporting framework

Consistent with those of management, and if not, the

, ,

III. Evaluating source data used by expert

Obtaining an understanding of, and where applicabletesting, the internal controls over the data and, where

53ISA 620

re evan , s ransm ss on o e exper

Reviewing the data for completeness and internalconsistency

REFERENCING TO THE AUDITOR'S


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REFERENCING TO THE AUDITOR S

'

RESTS WITH THE AUDITOR

No reference, unless Only if such reference isrequired by law orregulation

relevant to anunderstanding of amodification

IN BOTH CASES, INDICATE IN THE AUDITORSREPORT THAT SUCH REFERENCE DOES NOTREDUCE THE AUDITOR'S RESPONSIBILITY FOR

54ISA 620

THAT OPINION


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CLARITY ISAS210 AGREEING THE TERMS OF AUDIT ENGAGEMENT

260 COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE

505 EXTERNAL CONFIRMATIONS

620 USING THE WORK OF AN AUDITORS EXPERT

Mohammad Zulfikar Akhtar

isas clarity

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