the clarified international standards on auditing brian smith june 8, 2011
TRANSCRIPT
The Clarified International Standards on Auditing
The Background
The Timetable
RBI and the Forum of Firms
The Overall Approach
The Important Changes
Reference Material Available
Action Needed
The Background
Concerns of the Regulators
Difficulty of Getting Wide Acceptance of Standards
All Standards Reviewed – 2007 -2009
More Open and Structured Process
Input from all Interested Parties
The Timetable
The Clarified Standards Apply for Audits for Periods Starting on or After December 15, 2009
Some Countries Have Adopted as National Standards Consistent With This Timing
Others Are One Year Late
Others Are Waiting
RBI and the Forum of Firms
RBI is a Member of the Forum of Firms
Members are Required to Comply with the Forum’s Obligations for Transnational Audits
This Includes Complying with ISA
RBI and the Forum of Firms
THE CLARIFIED STANDARDS APPLY TO RBI MEMBERS WHETHER OR NOT THE STANDARDS HAVE BEEN INCORPORATED INTO NATIONAL STANDARDS
The Clarified Standards – The Overall Approach
Setting Out an Objective for Each Standard
Splitting Requirements (SHALL) from Guidance
Eliminating Ambiguities
Improving Readability
Reducing Complexity
…… But This Does Not Look Very Interesting!
The Clarified Standards – The Overall Approach
12 Standards have Revisions as well as Clarifications
That is Where the Main Impact is
Not all the Changes will Impact Every Audit or Every Firm
But Many Will
The Important Changes ISA 200, Overall Objectives ISA 210, Engagement Terms ISA 260 and 265, Communication with Directors ISA 320, Materiality ISA 450, Misstatements ISA 540, Accounting Estimates ISA 550, Related Parties ISA 580, Written Representations ISA 600, Group Audits
……. Cover a major part of the basic structure of an audit
ISA 200 Overall Objectives of the Audit
Each Standard now has an OBJECTIVE
Two Basic Questions to Ask in Each Area:
– Are There Any Additional Procedures necessary to achieve the OBJECTIVES?
– Has Sufficient Audit Evidence Been Obtained?
ISA 220Terms of the Engagement
Required to Get Management’s Agreement as to its Responsibilities for:
– Preparation of the Financial Statements– Internal Control– Providing Access for the Auditor
….. Annual Engagement Letters
ISA 260Communication with the Directors
A Significant Expansion of Requirements:
– Acceptable but not Best Practices– Significant Difficulties Encountered– Significant Discussions With Management
….. Must be Documented
ISA 265Deficiencies in Internal Control
Deficiencies Must be Communicated to Management and the Directors
A Deficiency Exists When:
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
….This Should Produce More Communications
ISA 320Materiality
Uses the Concept of Performance Materiality
Materiality May be at a Lower Level for some Classes of Transactions or Balances
Documentation is Required
ISA 450Misstatements
Evaluation Must Consider the Nature as Well as the Amount of Misstatements
Materiality May Need to be Reassessed at the End of the Audit
More Documentation is Required
Materiality is not Just an Arithmetic Calculation
ISA 540Accounting Estimates
Requirement for Greater RIGOUR and SCEPTICISM
Need to Consider Indications of MANAGEMENT BIAS
Focus on RISK and ESTIMATION UNCERTAINTY
Consideration of ALTERNATIVE ASSUMPTIONS by Management
Review of outcome of past estimates
ISA 550Related Parties
Those Outside Normal Course of Business are Significant Risks
Need to Assess Fraud Possibilities
Sets Out Specific Audit Procedures
Must Communicate With the Directors
ISA 580Written Representations
Management Representations Required Regarding Responsibilities for:
– Preparation of the Financial Statements– Providing Auditors With Access– Recording All Transactions
… Representations Alone DO NOT PROVIDE SUFFICIENT AUDIT EVIDENCE
ISA 600Group Audits
Applies Whenever Other Auditors Are Used Including RBI Members
Greater Responsibility on the Principal Auditor
Requires Involvement With the Audit of ALL SIGNIFICANT COMPONENTS
Must Obtain an Understanding of the Competence of Component Auditors
The Important Changes
Overall Audit Approach – 200 (Objectives), 220 (Engagement Terms) The Audit Itself – 320 (Materiality), 540 (Accounting Estimates), 550 (Related Parties), 600 (Group Audits) Completing the Audit – 450 (Misstatements), 580 (Representations) Communicating Results – 260 (Directors), 265 (Internal Control)
The Clarified StandardsReference Material Available
The Standards Themselves
Translated Versions in Most Countries
IFAC Guide – Using ISA for SMEs
IFAC Adoption and Implementation Videos
RBI Summary Available Shortly
The Clarified StandardsAction Needed
Decide Which Changes Have Most Impact on Practice
Review Changes in Detail
Incorporate into Standard Programmes or Checklists
Hold Training Sessions
Use Audit Quality Control Questionnaires to Check Degree of Compliance
The Clarified StandardsHow Important Are They?
The Process and the Outcome are More Acceptable to the Regulators
The Standards Will Have Wide Acceptance
They Will Narrow the Gap Between Country Standards
They Provide the Opportunity to Strengthen Common Practices Across the World
The Clarified StandardsMembership of the Forum of Firms
Forum Members are Required to Comply with ISA on Transnational Audits
RBI Member Firms are Required to Comply Whether or Not National Standards Have Been Adjusted to Comply with the Clarified Standards
RBI Member Firms Must Comply for all Transnational Audits with Year Ends Starting on or After December 15, 2009
….. If Audits are Primarily December 31, the Clarified Standards Applied to 2010 Audits