Guide to Using International Standards on Auditing in - IFAC

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144 <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 Address Possible Management Bias Description • Identify whether there are indica<strong>to</strong>rs of possible management bias. This could include changes in the way estimates are calculated, or the selection of a point estimate that indicates a pattern of optimism or pessimism. This could occur where estimates consistently lie at one boundary of the audi<strong>to</strong>r’s range of reasonableness, or where the bias moves from one boundary of the range <strong>to</strong> the other in successive periods. For example, where management puts the business up for sale and the earnings goal changes from tax minimization <strong>to</strong> maximization of earnings. • Consider the cumulative effect of bias in the preparation of management’s accounting estimates. Where the estimate is complex or involves specialized techniques, the audi<strong>to</strong>r may determine it is necessary <strong>to</strong> use the work of an audi<strong>to</strong>r’s expert (see Volume 1, Chapter 15.7 (ISA 620) for guidance on using the work of an audi<strong>to</strong>r’s expert). 11.4 Reporting Paragraph # Relevant Extracts from ISAs 540.19 The audi<strong>to</strong>r shall obtain sufficient appropriate audit evidence about whether the disclosures in the financial statements related <strong>to</strong> accounting estimates are in accordance with the requirements of the applicable financial reporting framework. (Ref: Para. A120-A121) 540.20 For accounting estimates that give rise <strong>to</strong> significant risks, the audi<strong>to</strong>r shall also evaluate the adequacy of the disclosure of their estimation uncertainty in the financial statements in the context of the applicable financial reporting framework. (Ref: Para. A122-A123) The final step is <strong>to</strong> determine whether: • Sufficient appropriate evidence has been obtained. Where sufficient appropriate evidence is not available or the evidence refutes management’s estimates, the audi<strong>to</strong>r would discuss the findings with management and consider the need <strong>to</strong> change the risk assessment and perform further audit procedures; • The accounting estimates are either reasonable in the context of the applicable financial reporting framework, or are misstated; and • Disclosures in the financial statements about the estimates: – Are in accordance with the requirements of the applicable financial reporting framework, and – Adequately disclose their estimation uncertainty, if they give rise <strong>to</strong> significant risks. Written Representations The audi<strong>to</strong>r would obtain written representations from management regarding the reasonableness of significant assumptions. Also consider obtaining a written representation as <strong>to</strong> whether the assumptions appropriately reflect management’s intent and ability <strong>to</strong> carry out specific courses of action relevant <strong>to</strong> any fair value measurements or disclosures.
145 12. Related Parties Chapter Content Audit procedures regarding related parties and transactions with such parties. Relevant ISA 550 Exhibit 12.0-1 Identify related parties, including changes from previous periods. Understand nature, extent, and purpose of transactions. Consider potential for fraud. Remain alert for related-party transactions throughout audit. Consider significant risks. Do any circumstances identified by the audi<strong>to</strong>r suggest involvement of related parties? Obtain evidence <strong>to</strong> support management’s assertions about the nature, extent, and purpose of transactions If outside normal course of business, consider significance of transactions. Consider measurement and recognition of transactions and balances. Consider possible fraud. Has sufficient appropriate evidence been obtained? Does a material misstatement exist? Is financial statement disclosure adequate? Obtain management representations. Report on any findings.
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