The Clarified International Standards on Auditing Brian Smith

June 8, 2011

The Clarified International Standards on Auditing

WHY?

WHAT?

HOW?

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 Background and Timetable

Questions

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

The Overall Approach

Questions

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 Detailed Changes

Questions

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

The Clarified International Standards on Auditing

IMPORTANT

SIGNIFICANT

……. And NOW

Questions