Guide to Using International Standards on Auditing in - IFAC

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20 3. The Risk-Based Audit — Overview Chapter Content Audi<strong>to</strong>r objectives, basic elements, and approach <strong>to</strong> performing a risk-based audit. Relevant ISAs Multiple Exhibit 3.0-1 Risk Assessment Plan the audit Perform risk assessment procedures Risk Response Design further audit procedures Perform further audit procedures Reporting Evaluate the audit evidence obtained Prepare the audi<strong>to</strong>r’s report Paragraph # ISA Objective(s) 200.11 In conducting an audit of financial statements, the overall objectives of the audi<strong>to</strong>r are: (a) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due <strong>to</strong> fraud or error, thereby enabling the audi<strong>to</strong>r <strong>to</strong> express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and (b) To report on the financial statements, and communicate as required by the ISAs, in accordance with the audi<strong>to</strong>r’s findings.
21 <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 Paragraph # Relevant Extracts from ISAs 200.3 The purpose of an audit is <strong>to</strong> enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the audi<strong>to</strong>r on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. In the case of most general purpose frameworks, that opinion is on whether the financial statements are presented fairly, in all material respects, or give a true and fair view in accordance with the framework. An audit conducted in accordance with ISAs and relevant ethical requirements enables the audi<strong>to</strong>r <strong>to</strong> form that opinion. (Ref: Para. A1) 200.5 As the basis for the audi<strong>to</strong>r’s opinion, ISAs require the audi<strong>to</strong>r <strong>to</strong> obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due <strong>to</strong> fraud or error. Reasonable assurance is a high level of assurance. It is obtained when the audi<strong>to</strong>r has obtained sufficient appropriate audit evidence <strong>to</strong> reduce audit risk (i.e., the risk that the audi<strong>to</strong>r expresses an inappropriate opinion when the financial statements are materially misstated) <strong>to</strong> an acceptably low level. However, reasonable assurance is not an absolute level of assurance, because there are inherent limitations of an audit which result in most of the audit evidence on which the audi<strong>to</strong>r draws conclusions and bases the audi<strong>to</strong>r’s opinion being persuasive rather than conclusive. (Ref: Para. A28-A52) 200.A34 The risks of material misstatement may exist at two levels: • The overall financial statement level; and • The assertion level for classes of transactions, account balances, and disclosures. 200.A40 The ISAs do not ordinarily refer <strong>to</strong> inherent risk and control risk separately, but rather <strong>to</strong> a combined assessment of the “risks of material misstatement.” However, the audi<strong>to</strong>r may make separate or combined assessments of inherent and control risk depending on preferred audit techniques or methodologies and practical considerations. The assessment of the risks of material misstatement may be expressed in quantitative terms, such as in percentages, or in non-quantitative terms. In any case, the need for the audi<strong>to</strong>r <strong>to</strong> make appropriate risk assessments is more important than the different approaches by which they may be made. 200.A45 The audi<strong>to</strong>r is not expected <strong>to</strong>, and cannot, reduce audit risk <strong>to</strong> zero and cannot therefore obtain absolute assurance that the financial statements are free from material misstatement due <strong>to</strong> fraud or error. This is because there are inherent limitations of an audit, which result in most of the audit evidence on which the audi<strong>to</strong>r draws conclusions and bases the audi<strong>to</strong>r’s opinion being persuasive rather than conclusive. The inherent limitations of an audit arise from: • The nature of financial reporting; • The nature of audit procedures; and • The need for the audit <strong>to</strong> be conducted within a reasonable period of time and at a reasonable cost. 3.1 Overview The audi<strong>to</strong>r’s overall objectives in a risk-based audit are: • To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due <strong>to</strong> fraud or error, thereby enabling the audi<strong>to</strong>r <strong>to</strong> express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and • To report on the financial statements, and communicate as required by the ISAs, in accordance with the audi<strong>to</strong>r’s findings.
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Guide to Using International Standards on Auditing in - IFAC

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