Introduction to Auditing Standards
Lecture 1
1. International Standards on Auditing (ISA’s)
Purpose standards:
International Auditing and Assurance Standards Board (IAASB): independent standard setting body
under the auspices of the International Federation of Accountants (IFAC); they establish high quality
auditing, assurance, quality control and related services standards
Overview standards:
- IAASB:
o Independent standard-setting board
o Setting international standards
- Audit and limited review of financial information:
o ISA (200-800): reasonable assurance
o ISRE (International Standards on Review Engagements): limited assurance
- Assessment of non-financial information:
o ISAE (International Standards on Assurance Engagements): reasonable and limited
assurance
- Other standards:
o ISQC (International Standards on Quality Control): safeguard the quality of the audit
o ISRS (International Standards on Related Services): no assurance
Why study ISA’s?
- International standards devised to align auditing around the globe, while not all countries
require compliance with them, they are still a global standard for regulation
- All statutory audits have to comply with ISA’s in BE
- For passing the IBR entrance exam
Structure of ISA’s:
- ISQC 1: International Standards on Quality Control
- 200: general principles and responsibilities
- 300-400: risk assessment and responses to assessed risks
- 500: audit evidence
- 600: using the work of others
- 700: audit conclusions and reporting
- 800: specialized areas
,Introduction to Auditing Standards - Summary
2. ISA 200
Scope: explain an independent auditor’s overall responsibilities when conducting an audit:
- Set out the overall objectives
- Explain the nature and scope of the audit
Overall objectives:
- Obtain reasonable assurance about whether the FS as a whole are free from materials
misstatements; and
- To report on the FS, and communicate as required by the ISA’s, in accordance with the
auditor’s findings
In completing these objectives, the auditor:
- Complies with relevant ethical requirements (ISQC 1 & ISA 220)
- Plans and performance and audit with professional scepticism
- Exercises professional judgement
- Obtains sufficient appropriate evidence on which to base the auditor’s opinion
- Conducts the audit in accordance with professional auditing standards
Professional scepticism: an attitude that includes a questioning mind, being alert to conditions
which may indicate possible misstatement due to error or fraud, and a critical assessment of audit
evidence
- From a regulator’s perspective, a lack of professional scepticism is seen at the root of issues
with audit quality
- Reduces risk of:
o Overlooking unusual circumstances
o Generalizing when drawing conclusions from audit observations
o Using inappropriate assumptions in determining the nature, timing and extent of the
audit procedures and evaluating the results
- Includes being alert to:
o Audit evidence that contradicts other audit evidence obtained
o Information that brings into question the reliability of documents and other
evidence sources
o Conditions that may indicate possible fraud
o Circumstances that suggest the need for audit procedures in addition to those
required by the ISAs
Professional judgement: the process of reaching a conclusion where there are a number of possible
alternative solutions; occurs in a setting of uncertainty and risk
- Is necessary in decisions about:
o Assessment of inherent/control risk and risk of material misstatement due to error and
fraud
o The nature, timing and extent of the audit procedures
o Evaluating the results of these procedures
o Assessing the reasonableness of judgements and estimates made by management
- The exercise of professional judgement should be:
o Based on the relevant facts and circumstances known and available at the time the
judgement is made
o Made after the consideration of reasonable alternatives
o Sensitive to the degree of uncertainty that may be inherent in the judgement
o In compliance with the applicable professional standards
2
,Introduction to Auditing Standards - Summary
- Has a now even greater importance because of:
o Rapid change, increasing the complexity in business
o Increased use of principle-based standards
o Expanded use of subjective estimates in financials
- Judgement biases:
o Overconfidence bias: tendency for decision makers to overestimate their own
abilities to perform task or to make accurate diagnoses or other judgments and
decisions
® avoid by challenging opinions/experts/underlying assumptions
o Confirmation bias: tendency to seek for and put more weight on information that is
consistent with initial beliefs of preferences
® avoid by making the opposing case and consider alternative explanations
o Anchoring and adjustment: we make assessments by starting from an initial value
and adjusting away from that to form a final judgment; however, the adjustment from
the anchor is typically insufficient
® avoid by soliciting input from other/considering management bias
o Availability heuristic: the tendency to consider information that is easily retrievable
from memory as being more likely, more relevant, and more important for judgment
® avoid by considering why something comes to mind; obtain and consider objective
data
Sufficient appropriate audit evidence:
- Obtain this to reduce audit risk to an acceptable low level
- Appropriateness: the measure of quality of audit evidence; that is, its relevance and its
reliability in providing support for the conclusions on which the auditor’s opinion is base
- Sufficiency: the measure of quantity of audit evidence; the quantity needed is affected by
the auditor’s assessment of the risks of material misstatement and by the quality of such audit
evidence
- Auditor is not expected to reduce audit risk to zero
3. ISA 210: Acceptance & continuance
Process:
Preconditions for an audit:
- Determine whether the financial reporting framework applied in preparing the FS is
acceptable
- Obtain the agreement of management that it understands and acknowledges its
responsibilities:
o For the preparation of F/S
o For internal control that enables the preparation of F/S that is free from material
misstatement
3
, Introduction to Auditing Standards - Summary
o To provide the auditor:
§ Access to all information relevant to the preparation of the F/S
§ Additional information requested by the auditor
§ Unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence
Limitation in scope: if management imposes a limitation on the scope of the audit such that the
auditor believes this will result in him disclaiming an opinion, he will not accept such a limited
engagement, unless it is required by law
New engagements, things to do:
- Obtain background information on the client
- Communication with predecessor auditor
- Evaluate risk factors associated with the client
- Obtain an engagement letter
Agreement of audit engagement terms: a letter setting out the terms of engagement to be signed by
both parties; helps avoiding misunderstandings
- Audit engagement letter includes:
o Objective and scope of the audit of FS
o Auditor’s responsibilities
o Management’s responsibilities
o Identification of the applied financial reporting system for FS
o Reference to the expected form and content of any reports to be issues by the auditor
- If the law prescribes the terms of the audit engagement in sufficient detail, no written
agreement must be signed, except for the acknowledgement by management of these laws
and its responsibilities
- Recurring audits: auditor assess whether the circumstances require new terms of the audit
engagement
- Acceptance of a change in terms:
o If there is no reasonable justification for this, the auditor shall not accept a change
o If a change is accepted, a new engagement letter has to record the new terms
o If the auditor cannot accept a change and is not permitted by management to
continue the original engagement, the auditor shall:
§ Withdraw from the engagement if permitted by law
§ Determine whether there is any obligation to report the circumstances to
other parties
4. ISA 230: Audit documentation
Objective: sufficient appropriate record of the basis for auditor’s report; evidence that audit planned
and performed in accordance with ISAs
Benefits:
- Facilitates supervisions and review
- Evaluation of evidence obtained, and conclusions reached
- Internal and external inspections, etc.
Purpose:
- Assisting engagement team to plan and perform the audit
- Assisting engagement team members responsible for supervision (ISA 220)
- Enabling engagement team to be accountable for its work
4
Lecture 1
1. International Standards on Auditing (ISA’s)
Purpose standards:
International Auditing and Assurance Standards Board (IAASB): independent standard setting body
under the auspices of the International Federation of Accountants (IFAC); they establish high quality
auditing, assurance, quality control and related services standards
Overview standards:
- IAASB:
o Independent standard-setting board
o Setting international standards
- Audit and limited review of financial information:
o ISA (200-800): reasonable assurance
o ISRE (International Standards on Review Engagements): limited assurance
- Assessment of non-financial information:
o ISAE (International Standards on Assurance Engagements): reasonable and limited
assurance
- Other standards:
o ISQC (International Standards on Quality Control): safeguard the quality of the audit
o ISRS (International Standards on Related Services): no assurance
Why study ISA’s?
- International standards devised to align auditing around the globe, while not all countries
require compliance with them, they are still a global standard for regulation
- All statutory audits have to comply with ISA’s in BE
- For passing the IBR entrance exam
Structure of ISA’s:
- ISQC 1: International Standards on Quality Control
- 200: general principles and responsibilities
- 300-400: risk assessment and responses to assessed risks
- 500: audit evidence
- 600: using the work of others
- 700: audit conclusions and reporting
- 800: specialized areas
,Introduction to Auditing Standards - Summary
2. ISA 200
Scope: explain an independent auditor’s overall responsibilities when conducting an audit:
- Set out the overall objectives
- Explain the nature and scope of the audit
Overall objectives:
- Obtain reasonable assurance about whether the FS as a whole are free from materials
misstatements; and
- To report on the FS, and communicate as required by the ISA’s, in accordance with the
auditor’s findings
In completing these objectives, the auditor:
- Complies with relevant ethical requirements (ISQC 1 & ISA 220)
- Plans and performance and audit with professional scepticism
- Exercises professional judgement
- Obtains sufficient appropriate evidence on which to base the auditor’s opinion
- Conducts the audit in accordance with professional auditing standards
Professional scepticism: an attitude that includes a questioning mind, being alert to conditions
which may indicate possible misstatement due to error or fraud, and a critical assessment of audit
evidence
- From a regulator’s perspective, a lack of professional scepticism is seen at the root of issues
with audit quality
- Reduces risk of:
o Overlooking unusual circumstances
o Generalizing when drawing conclusions from audit observations
o Using inappropriate assumptions in determining the nature, timing and extent of the
audit procedures and evaluating the results
- Includes being alert to:
o Audit evidence that contradicts other audit evidence obtained
o Information that brings into question the reliability of documents and other
evidence sources
o Conditions that may indicate possible fraud
o Circumstances that suggest the need for audit procedures in addition to those
required by the ISAs
Professional judgement: the process of reaching a conclusion where there are a number of possible
alternative solutions; occurs in a setting of uncertainty and risk
- Is necessary in decisions about:
o Assessment of inherent/control risk and risk of material misstatement due to error and
fraud
o The nature, timing and extent of the audit procedures
o Evaluating the results of these procedures
o Assessing the reasonableness of judgements and estimates made by management
- The exercise of professional judgement should be:
o Based on the relevant facts and circumstances known and available at the time the
judgement is made
o Made after the consideration of reasonable alternatives
o Sensitive to the degree of uncertainty that may be inherent in the judgement
o In compliance with the applicable professional standards
2
,Introduction to Auditing Standards - Summary
- Has a now even greater importance because of:
o Rapid change, increasing the complexity in business
o Increased use of principle-based standards
o Expanded use of subjective estimates in financials
- Judgement biases:
o Overconfidence bias: tendency for decision makers to overestimate their own
abilities to perform task or to make accurate diagnoses or other judgments and
decisions
® avoid by challenging opinions/experts/underlying assumptions
o Confirmation bias: tendency to seek for and put more weight on information that is
consistent with initial beliefs of preferences
® avoid by making the opposing case and consider alternative explanations
o Anchoring and adjustment: we make assessments by starting from an initial value
and adjusting away from that to form a final judgment; however, the adjustment from
the anchor is typically insufficient
® avoid by soliciting input from other/considering management bias
o Availability heuristic: the tendency to consider information that is easily retrievable
from memory as being more likely, more relevant, and more important for judgment
® avoid by considering why something comes to mind; obtain and consider objective
data
Sufficient appropriate audit evidence:
- Obtain this to reduce audit risk to an acceptable low level
- Appropriateness: the measure of quality of audit evidence; that is, its relevance and its
reliability in providing support for the conclusions on which the auditor’s opinion is base
- Sufficiency: the measure of quantity of audit evidence; the quantity needed is affected by
the auditor’s assessment of the risks of material misstatement and by the quality of such audit
evidence
- Auditor is not expected to reduce audit risk to zero
3. ISA 210: Acceptance & continuance
Process:
Preconditions for an audit:
- Determine whether the financial reporting framework applied in preparing the FS is
acceptable
- Obtain the agreement of management that it understands and acknowledges its
responsibilities:
o For the preparation of F/S
o For internal control that enables the preparation of F/S that is free from material
misstatement
3
, Introduction to Auditing Standards - Summary
o To provide the auditor:
§ Access to all information relevant to the preparation of the F/S
§ Additional information requested by the auditor
§ Unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence
Limitation in scope: if management imposes a limitation on the scope of the audit such that the
auditor believes this will result in him disclaiming an opinion, he will not accept such a limited
engagement, unless it is required by law
New engagements, things to do:
- Obtain background information on the client
- Communication with predecessor auditor
- Evaluate risk factors associated with the client
- Obtain an engagement letter
Agreement of audit engagement terms: a letter setting out the terms of engagement to be signed by
both parties; helps avoiding misunderstandings
- Audit engagement letter includes:
o Objective and scope of the audit of FS
o Auditor’s responsibilities
o Management’s responsibilities
o Identification of the applied financial reporting system for FS
o Reference to the expected form and content of any reports to be issues by the auditor
- If the law prescribes the terms of the audit engagement in sufficient detail, no written
agreement must be signed, except for the acknowledgement by management of these laws
and its responsibilities
- Recurring audits: auditor assess whether the circumstances require new terms of the audit
engagement
- Acceptance of a change in terms:
o If there is no reasonable justification for this, the auditor shall not accept a change
o If a change is accepted, a new engagement letter has to record the new terms
o If the auditor cannot accept a change and is not permitted by management to
continue the original engagement, the auditor shall:
§ Withdraw from the engagement if permitted by law
§ Determine whether there is any obligation to report the circumstances to
other parties
4. ISA 230: Audit documentation
Objective: sufficient appropriate record of the basis for auditor’s report; evidence that audit planned
and performed in accordance with ISAs
Benefits:
- Facilitates supervisions and review
- Evaluation of evidence obtained, and conclusions reached
- Internal and external inspections, etc.
Purpose:
- Assisting engagement team to plan and perform the audit
- Assisting engagement team members responsible for supervision (ISA 220)
- Enabling engagement team to be accountable for its work
4
