Guide to Using International Standards on Auditing in - IFAC

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106 <strong>Guide</strong> <strong>to</strong> <strong>Using</strong> <strong>International</strong> <strong>Standards</strong> on Auditing in the Audits of Small- and Medium-Sized Entities Volume 1—Core Concepts The three main categories of audit procedures are illustrated below. Exhibit 9.1-1 Risk assessment procedures Further audit procedures Overall responses Evidence <strong>to</strong> support assessed risks Evidence that will reduce audit risk <strong>to</strong> acceptably low level To address assessed RMM at the F/S level RMM = Risks of Material Misstatement F/S = Financial Statements Assessed risks at the financial statement level are pervasive in nature, and require overall audit responses such as determining the experience of those assigned <strong>to</strong> perform the work, the level of supervision required, and any required modification <strong>to</strong> the nature and extent of planned audit procedures. Assessed risks at the assertion level relate <strong>to</strong> particular account balances, classes of transactions, and disclosures. The response is <strong>to</strong> perform further audit procedures such as tests of details, tests of controls, and substantive analytical procedures. The design of further audit procedures will be affected by: • Results of performing risk assessment procedures and the resulting assessments of risk at the assertion level; and • Overall responses developed by the audi<strong>to</strong>r in relation <strong>to</strong> the assessed risks of material misstatement at the financial statement level. 9.2 Overall Responses <strong>to</strong> Risks at the Financial Statement Level Paragraph # Relevant Extracts from ISAs 330.5 The audi<strong>to</strong>r shall design and implement overall responses <strong>to</strong> address the assessed risks of material misstatement at the financial statement level. (Ref: Para. A1-A3) Risks of material misstatement at the financial statement level refer <strong>to</strong> risks that relate pervasively <strong>to</strong> the financial statements as a whole, and potentially affect many assertions. As a result, these risks (such as management having a poor attitude <strong>to</strong>ward control) can contribute indirectly <strong>to</strong> material misstatements at the assertion level. For example, if the entity’s accountant is not competent, many opportunities may arise for error or fraud in multiple financial statement balances, classes of transactions, or disclosures. Consequently, risks at the financial statement level cannot often be addressed by performing specific audit procedures, but require an overall response.
107 <strong>Guide</strong> <strong>to</strong> <strong>Using</strong> <strong>International</strong> <strong>Standards</strong> on Auditing in the Audits of Small- and Medium-Sized Entities Volume 1—Core Concepts ISAs 240 and 330 outline some possible overall responses <strong>to</strong> risks identified at the financial statement level. Some examples are set out below. Exhibit 9.2-1 Possible Overall Responses <strong>to</strong> Assessed Risks at the Financial Statement Level Engagement Management Incorporate Unpredictability in Selection of Further Audit Procedures Emphasize <strong>to</strong> the audit team the need <strong>to</strong> maintain professional skepticism. Assign more experienced staff or those with special skills such as forensic, valuation, and IT specialists. Provide more ongoing supervision <strong>to</strong> staff as they perform the work. Incorporate an element of unpredictability in the selection of the nature, timing, and extent of further audit procedures <strong>to</strong> be performed. This is particularly important when addressing fraud risks, because individuals within the entity may be familiar with audit procedures normally performed, and therefore more able <strong>to</strong> conceal fraudulent financial reporting. Unpredictability can be achieved by: • Performing substantive procedures on selected account balances and assertions not otherwise tested due <strong>to</strong> their materiality or risk; • Adjusting the timing of audit procedures from that otherwise expected; • <strong>Using</strong> different sampling methods; and • Performing audit procedures at different locations, or at locations on an unannounced basis (such as inven<strong>to</strong>ry counts). Revise the Planned Audit Procedures Make changes <strong>to</strong> the nature, timing, or extent of audit procedures. For example: • Perform substantive procedures at the period end instead of at an interim date; • Perform a physical observation or inspection of certain assets; • Perform further review of inven<strong>to</strong>ry records <strong>to</strong> identify unusual items, unexpected amounts, and other items for follow-up procedures; • Perform further work <strong>to</strong> evaluate the reasonableness of management estimates and the underlying judgments and assumptions; • Increase sample sizes or perform analytical procedures at a more detailed level; • Use computer-assisted audit techniques (CAATs) <strong>to</strong>: − Gather more evidence about data contained in significant accounts or electronic transaction files, − Perform more extensive testing of electronic transactions and account files, − Select sample transactions from key electronic files, − Sort transactions with specific characteristics, and − Test an entire population instead of a sample; • Request additional information in external confirmations. For example, on a receivables confirmation, the audi<strong>to</strong>r could ask for confirmation on the details of sales agreements, including date, any rights of return, and delivery terms; and • Modify the nature and extent of audit procedures <strong>to</strong> obtain more substantive audit evidence.
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