Guide to Using International Standards on Auditing in - IFAC

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28 <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 various tasks involved in each of these three phases are outlined below. Each phase is addressed in more detail in subsequent chapters of this <strong>Guide</strong>. Risk Assessment Paragraph # ISA Objective(s) 315.3 The objective of the audi<strong>to</strong>r is <strong>to</strong> identify and assess the risks of material misstatement, whether due <strong>to</strong> fraud or error, at the financial statement and assertion levels, through understanding the entity and its environment, including the entity’s internal control, thereby providing a basis for designing and implementing responses <strong>to</strong> the assessed risks of material misstatement. Exhibit 3.3-3 Activity Purpose Documentation 1 Perform preliminary engagement activities Decide whether <strong>to</strong> accept engagement Listing of risk fac<strong>to</strong>rs Independence Engagement letter Risk Assessment Plan the audit Perform risk assessment procedures Develop an overall audit strategy and audit plan 2 Identify/assess RMM 3 through understanding the entity Materiality Audit team discussions Overall audit strategy Business & fraud risks including significant risks Design/implementation of relevant internal controls Assessed RMM 3 at: F/S level Assertion level Notes: 1. Refer <strong>to</strong> ISA 230 for a more complete list of documentation required. 2. Planning (ISA 300) is a continual and iterative process throughout the audit. 3. RMM = Risks of material misstatement.
29 <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 An effective risk assessment phase would include the following. Exhibit 3.3-4 Requirements Up-Front Involvement of Senior Team Members An Emphasis on “Professional Skepticism” Planning Team Discussions and Ongoing Communication Focus on Risk Identification Ability <strong>to</strong> Evaluate Management’s Response(s) <strong>to</strong> Risk Description The engagement partner and other key members of the engagement team need <strong>to</strong> be actively involved in planning the audit, and in planning and participating in the discussion among engagement team members. This will ensure the audit plan takes advantage of their experience and insight. Note that ISAs usually refer <strong>to</strong> the term “audi<strong>to</strong>r” as the person(s) performing the engagement. Where an ISA intends a requirement or responsibility be fulfilled by the engagement partner, the term "engagement partner" rather than "audi<strong>to</strong>r" is used. The audi<strong>to</strong>r cannot be expected <strong>to</strong> disregard past experience of the honesty and integrity of the entity’s management and those charged with governance. Nevertheless, a belief that management and those charged with governance are honest and have integrity does not relieve the audi<strong>to</strong>r of the need <strong>to</strong> maintain professional skepticism, or allow the audi<strong>to</strong>r <strong>to</strong> be satisfied with less-than-persuasive audit evidence when obtaining reasonable assurance. The time spent in audit planning (developing the overall audit strategy and audit plan) will ensure that audit objectives are properly met, and that the work of audit staff is always focused on gathering evidence on the most critical areas of potential misstatement. A team planning discussion/meeting with the engagement partner present provides an excellent forum for: • Informing staff about the client in general and discussing potential risk areas; • Discussing the effectiveness of the overall audit strategy and the audit plan and then making changes as necessary; • Brains<strong>to</strong>rming how fraud could occur and then designing an appropriate response; and • Allocating audit responsibilities and setting timeframes. Ongoing communication among the audit team throughout the engagement is also important, the better <strong>to</strong> discuss and address audit issues as they arise, any unusual activities noted, or possible indica<strong>to</strong>rs of fraud. This will enable timely communications <strong>to</strong> management and, where necessary, changes <strong>to</strong> the audit strategy and audit procedures. The most important step in a risk assessment process is <strong>to</strong> identify all the relevant risks. If business and fraud risk fac<strong>to</strong>rs are not identified by the audi<strong>to</strong>r, they will not be assessed or documented, and an appropriate audit response (if required) will not be designed. This is why well-designed risk assessment procedures are so important <strong>to</strong> the effectiveness of the audit. These risk assessment procedures also need <strong>to</strong> be performed by the appropriate level of staff. A key step in the risk assessment process is <strong>to</strong> evaluate the effectiveness of management’s responses (that is, management’s control design/implementation), if any, <strong>to</strong> mitigate the identified risks of material misstatement in the financial statements. In smaller entities, more reliance will likely be placed on the control environment and moni<strong>to</strong>ring of controls, and less on the traditional control activities.
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Guide to Using International Standards on Auditing in - IFAC

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