Guide to Using International Standards on Auditing in - IFAC

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30 <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 Requirements Use of Professional Judgment Description The ISA audit requirements require the use and then documentation of significant judgments made by the audi<strong>to</strong>r throughout the audit. Typical examples of tasks throughout the risk assessment process include: • Deciding <strong>to</strong> accept or continue with the client; • Developing the overall audit strategy; • Establishing materiality; • Assessing risks of material misstatement, including the identification of significant risks and other areas where special audit consideration may be necessary; and • Developing expectations for use when performing analytical procedures. Risk Response Paragraph # ISA Objective(s) 330.3 The objective of the audi<strong>to</strong>r is <strong>to</strong> obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement, through designing and implementing appropriate responses <strong>to</strong> those risks. Exhibit 3.3-5 Activity Purpose Documentation 1 Risk Response Design overall responses and further audit procedures Implement responses <strong>to</strong> assessed RMM 3 Develop appropriate responses <strong>to</strong> the assessed RMM 3 Reduce audit risk <strong>to</strong> an acceptably low level Update of overall strategy Overall responses Audit plan that links assessed RMM 3 <strong>to</strong> further audit procedures Work performed Audit findings Staff supervision Working paper review 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. In this phase, the audi<strong>to</strong>r considers the reasons (inherent and control risks) for the risk assessments at the financial statement level and at the assertion level (for each class of transactions, account balance, and disclosure), and develops responsive audit procedures. The audi<strong>to</strong>r’s response <strong>to</strong> the assessed risks of material misstatement is documented in an audit plan that: • Contains an overall response <strong>to</strong> the risks identified at the financial statement level; • Addresses the material financial statement areas; and
31 <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 • Contains the nature, extent, and timing of specific audit procedures tailored <strong>to</strong> respond <strong>to</strong> the assessed risks of material misstatement at the assertion level. The overall responses address assessed risks of material misstatement at the financial statement level. Such responses would include the assignment and supervision of appropriate personnel, need for professional skepticism, the extent of corroboration required for management’s explanations/representations, consideration of the audit procedures <strong>to</strong> be performed, and what documentation would be examined in support of material transactions. Further audit procedures generally consist of substantive procedures such as tests of details, analytical procedures, and tests of controls (where there is an expectation that such controls have been operating effectively during the period). Some of the matters the audi<strong>to</strong>r should consider when planning the appropriate mix of audit procedures <strong>to</strong> respond <strong>to</strong> identified risks include the following: • Use of tests of controls – Identify relevant internal controls that, if tested, would reduce the need/scope for other substantive procedures. As a general rule, the sample size for testing controls is often significantly less than that of a substantive test of a transaction stream. Assuming that the relevant controls operate consistently and control deviations are unlikely, the use of tests of controls can often result in less work being performed. However, there is no requirement that the operating effectiveness of internal controls (direct or indirect) be tested. – Identify any assertions that cannot be addressed by substantive procedures alone. For example, this can often apply <strong>to</strong> completeness of sales in a small entity, and situations where there is highly au<strong>to</strong>mated processing of transactions (such as Internet sales) with little or no manual intervention. • Substantive analytical procedures These are procedures for which the <strong>to</strong>tal amount of a transaction stream can be reliably predicted based on available evidence. This expectation is compared <strong>to</strong> the actual amount in the accounting records, and the extent of any misstatement readily identified (See Volume 1, Chapter 10). In some cases, if the assessed risk for a particular assertion is low (without considering related controls), the audi<strong>to</strong>r may determine that substantive analytical procedures alone would provide sufficient appropriate audit evidence. • Unpredictability The need <strong>to</strong> incorporate an element of unpredictability in procedures performed. A typical example would be procedures <strong>to</strong> address possible fraud. • Management override The need for specific audit procedures <strong>to</strong> address the potential for management override. • Significant risks The audit response <strong>to</strong> “significant risks” that have been identified. (See Volume 2, Chapter 10.)
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