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
Scope of an Audit
The scope of the audi<strong>to</strong>r’s work and the opinion provided are usually confined <strong>to</strong> whether the financial
statements are prepared, in all material respects, in accordance with the applicable financial reporting
framework. As a result, an unmodified audi<strong>to</strong>r’s report does not provide any assurance about the future viability
of the entity, nor the efficiency or effectiveness with which management has conducted the affairs of the entity.
Any extension of this basic audit responsibility, such as that required by local laws or securities regulations,
would require the audi<strong>to</strong>r <strong>to</strong> undertake further work and <strong>to</strong> modify or expand the audi<strong>to</strong>r’s report
accordingly.
Material Misstatements
A material misstatement (the aggregate of all uncorrected misstatements and missing/misleading disclosures
in the financial statements, including omissions) has occurred when they could reasonably be expected <strong>to</strong>
influence the economic decisions of users made on the basis of the financial statements.
Assertions
Assertions are representations by management, explicit or otherwise, that are embodied in the financial
statements. They relate <strong>to</strong> the recognition, measurement, presentation, and disclosure of the various
elements (amounts and disclosures) in the financial statements. For example, the completeness assertion
relates <strong>to</strong> all transactions and events that should have been recorded having been recorded. They are used
by the audi<strong>to</strong>r <strong>to</strong> consider the different types of potential misstatements that may occur.
3.2 Audit Risk
Audit risk is the risk of expressing an inappropriate audit opinion on financial statements that are materially
misstated. The objective of the audit is <strong>to</strong> reduce this audit risk <strong>to</strong> an acceptably low level.
Audit risk has two key elements, as illustrated below.
Exhibit 3.2-1
Risk Nature Source
Inherent and
Control Risks
Detection Risk
The financial statements may contain a
material misstatement.
The audi<strong>to</strong>r may fail <strong>to</strong> detect a material
misstatement in the financial statements.
To reduce audit risk <strong>to</strong> an acceptably low level, the audi<strong>to</strong>r is required <strong>to</strong>:
• Assess the risks of material misstatement; and
Entity objectives/operations and
management’s design/implementation
of internal control.
Nature and extent of the procedures
performed by the audi<strong>to</strong>r.
• Limit detection risk. This may be achieved by performing procedures that respond <strong>to</strong> the assessed risks
of material misstatement, both at the financial statement level and at the assertion level for classes of
transactions, account balance, and disclosures.