Guide to Using International Standards on Auditing in - IFAC

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<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
Management override and fraudulent revenue recognition are presumed <strong>to</strong> be significant risks (see Volume 2,
Chapter 10 of this <strong>Guide</strong>) and addressed as such. As a result, there are certain audit procedures that would be
performed in every audit. These are outlined in the ISA extracts quoted above. Some additional comments
are included in the following exhibit.
Exhibit 9.2-2
Journal Entries
Estimates
Significant
Transactions
Revenue
Recognition
Procedures <strong>to</strong> Address Management Override
Identify, select, and test journal entries and other adjustments based on:
• An understanding of the entity’s financial reporting process and design/
implementation of internal control; and
• Consideration of the:
− Characteristics of fraudulent journal entries or other adjustments,
− Presence of fraud risk fac<strong>to</strong>rs that relate <strong>to</strong> specific classes of journal
entries and other adjustments, and
− Inquiries of individuals involved in the financial reporting process about
inappropriate or unusual activity.
Review estimates relating <strong>to</strong> specific transactions and balances <strong>to</strong> identify possible
biases on the part of management. Further procedures could include:
• Reconsidering the estimates taken as a whole;
• Performing a retrospective review of management’s judgments and
assumptions related <strong>to</strong> significant accounting estimates made in the prior
period; and
• Determining whether the cumulative effect amounts <strong>to</strong> a material misstatement
in the financial statements.
Obtain an understanding of the business’ rationale for significant transactions that
are unusual or outside the normal course of business. This includes an assessment
as <strong>to</strong> whether:
• Management is placing more emphasis on the need for a particular accounting
treatment than on the underlying economics of the transaction;
• The arrangements surrounding such transactions are overly complex;
• Management has discussed the nature of, and accounting for, such transactions
with those charged with governance;
• The transactions involve previously unidentified related parties, or parties that
do not have the substance or the financial strength <strong>to</strong> support the transaction
without assistance from the entity under audit;
• Transactions that involve non-consolidated related parties, including specialpurpose
entities, have been properly reviewed and approved by those charged
with governance; and
• There is adequate documentation.
Perform substantive analytical procedures. Consider computer-assisted audit
techniques <strong>to</strong> identify unusual or unexpected revenue relationships or transactions.
Confirm with cus<strong>to</strong>mers relevant contract terms (acceptance criteria, delivery and
payment terms) and the absence of side agreements (right <strong>to</strong> return the product,
guaranteed resale amounts, etc.).