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
Benefits
Audit Team’s
Effort Focused
on Key Areas
Audit Procedures
Focused on
Specific Risks
Understanding
of Internal Control
Timely
Communication
of Matters of
Interest <strong>to</strong>
Management
Description
By understanding where the risks of material misstatement can occur in financial
statements, the audi<strong>to</strong>r can direct the audit team’s effort <strong>to</strong>ward high-risk areas and
perhaps reduce work in lower-risk areas. This will also help <strong>to</strong> ensure that audit staff
resources are used effectively.
Further audit procedures are designed <strong>to</strong> respond <strong>to</strong> assessed risks. Consequently,
tests of details that only address risks in general terms may be significantly reduced
or even eliminated.
The required understanding of internal control enables the audi<strong>to</strong>r <strong>to</strong> make informed
decisions on whether <strong>to</strong> test the operating effectiveness of internal control. Tests
of controls (for which some controls may only require testing every three years) will
often result in much less work being required than performing extensive tests of
details. (See Volume 2, Chapter 17.)
The improved understanding of internal control may enable the audi<strong>to</strong>r <strong>to</strong> identify
weaknesses in internal control (such as in the control environment and general IT
controls) that were not previously recognized. Communicating these weaknesses <strong>to</strong>
management on a timely basis will enable them <strong>to</strong> take appropriate action, which is
<strong>to</strong> their benefit. This may also save time in performing the audit.
3.6 ISAs for Smaller Audits
Paragraph #
Relevant Extracts from Application Material in ISAs
200.A63 When appropriate, additional considerations specific <strong>to</strong> audits of smaller entities and public
sec<strong>to</strong>r entities are included within the application and other explana<strong>to</strong>ry material of an ISA.
These additional considerations assist in the application of the requirements of the ISA in the
audit of such entities. They do not, however, limit or reduce the responsibility of the audi<strong>to</strong>r <strong>to</strong>
apply and comply with the requirements of the ISAs.
200.A64 For purposes of specifying additional considerations <strong>to</strong> audits of smaller entities, a “smaller
entity” refers <strong>to</strong> an entity which typically possesses qualitative characteristics such as:
(a) Concentration of ownership and management in a small number of individuals (often
a single individual—either a natural person or another enterprise that owns the entity
provided the owner exhibits the relevant qualitative characteristics); and
(b) One or more of the following:
(i) Straightforward or uncomplicated transactions;
(ii) Simple record-keeping;
(iii) Few lines of business and few products within business lines;
(iv) Few internal controls;
(v) Few levels of management with responsibility for a broad range of controls; or
(vi) Few personnel, many having a wide range of duties.
These qualitative characteristics are not exhaustive, they are not exclusive <strong>to</strong> smaller entities,
and smaller entities do not necessarily display all of these characteristics.
200.A65 The considerations specific <strong>to</strong> smaller entities included in the ISAs have been developed
primarily with unlisted entities in mind. Some of the considerations, however, may be helpful
in audits of smaller listed entities.
200.A66 The ISAs refer <strong>to</strong> the proprie<strong>to</strong>r of a smaller entity who is involved in running the entity on a
day-<strong>to</strong>-day basis as the “owner-manager.”