AIN4 - Audit notes PDF

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Audit Evidence 1. ISA 330 The auditor’s responses to assessed risks – obtain sufficient appropriate audit evidence regarding the assessed risk of material misstatement 2. ISA 500 Audit evidence – to design and perform audit procedures in such a way to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions [As explained in ISA 200/7, reasonable assurance is obtained when the auditor has obtained sufficient appropriate evidence to reduce audit risk.] 3. Sufficient: enough quantity of evidence to respond to the risk; sample size depends on risk assessment AR & materiality 4. Appropriate: good quality – relevant (does it help with the assurance? Consider assertions & directions of testing) and reliable (independent, auditor obtained, documented, original, system reliability) 5. X conclusive evidence but persuasive evidence; x absolute assurance but reasonable assurance 6. Evidence can come from substantive test/analytical procedures, test of detail (source documents), test of control, accounting systems, corroborative evidence 7. Substantive analytical procedures: comparing financial/non financial info to identify unusual fluctuation – at beginning & end of audit, review account balance/bank statement, vouching, sending confirmation, checking building valuation, checking creditor amount through supplier invoices 8. Test of details: trace transactions through a system – SOFP 9. Test of controls: ensure controls are working within accounting system – IS as IS depends on accounting system 10. Audit procedures – consider ASSERTIONS, test of controls (SOAPSPAM) & details (sample testing) & 5analytical procedures (at planning & review stage) & substantive procedures/analytical review (vouching, trace back), reliability of the evidence (independent, auditor obtained, documented, original, system) 11. OBJECTIVES OF SUBSTANTIVE PROCEDURES (i.e. vouching/tracing) – verify assertions of FS & ascertain whether MM exists - ISA 450 Evaluation of misstatement identified during the audit 12. Accumulation (multiple errors sum up becoming material error) – factual? Judgemental? Projected? 13. Evaluation & Auditor response – the impact? The direction of assessing & testing (more testing? Request adjustment? Qualified opinion?) 14. Communication with management 15. OBJECTIVES OF ANALYTICAL PROCEDURES (5) as well as ISA 520 Analytical procedures (useful to sense check overall balances) & predictive – determine suitability of the procedures for given assertion, evaluate the reliability of data, develop expectation from independent sources (based on the knowledge of the business), compare amount of difference (need to be competent in identifying error pattern), investigate explanations for differences (professional scepticism in evaluating corrobative evidence), evaluate impact on the audit (substantive test) 16. Analytical procedures/substantive analysis reduces detection risk – examination of financial & non-financial information – internal v external, current v preceding, budgets 17. Analytical procedures then substantive procedures – can’t judge the analytical review but can give good assurance on controls to reduce detection risk

18. Transaction number must be predictable for AR to obtain effective & persuasive audit evidence 19. ISA 520 “investigating unusual items” – result of ISA 520 analytical procedures identified fluctuations/relationships that are not (i) consistent with other relevant information or (ii) same with expected values by significant amounts the auditor shall investigate differences by management inquiring & other audit procedures performing to obtain audit evidence (i.e. corroborate – extra works) 20. Summary: auditors perform audit procedures to obtain sufficient appropriate audit evidence to form an opinion I. Tests of controls: to check if systems can be relied on II. Substantive tests/test of details: to substantiate 证实 balances III. Analytical procedures: overall sense check Assertions are important in designing audit tests. Misstatements need to be documented & aggregated. Substantive procedures: reviews of documents for a “substantial 充实的 portion” of account activity Analytical procedures: include controls test and test replying of mathematical relationships – audit procedures to gather audit evidence after evaluation of MM through substantive procedures.

Audit Reporting 21. Report opinion – prepared in accordance with CA2006, comply with relevant financial reporting framework, show true and fair view 22. Express opinions in auditor responsibilities (AR should contain sufficient information for reader to gain proper understanding of auditors opinion) I. Accounts agree to underlying records II. Proper accounting record is maintained III. Information & explanation have been received IV. Director report is consistent V. Directors’ loans, emoluments & transactions have been properly disclosed 23. ISA 260 The auditor’s communication with those charged with governance 24. ISA 700 Forming an opinion and reporting on I. Sufficient appropriate audit evidence obtained? II. Remaining misstatements not material? III. FS prepared using & complied with financial reporting framework? IV. FS free from material error? If all no then ISA 705 modified & qualified 25. Content of audit report (ISA 700) – title, address, auditors opinion (headed), basis for opinion, going concern, KAM, other information, management responsibilities for FS, auditors responsibilities, other reporting responsibilities, name of engagement partner, signature, date, auditors address 26. ISA 705 Modifications to the opinion in the independent auditor’s report

“Except for” qualification-The auditor agrees that the accounts show a true and fair view “except for” a particular item Disclaimer opinion-The auditor cannot decide whether the accounts show a true and fair view (due to limitation or uncertainty) Adverse opinion-The auditor’s opinion is that the accounts do not show a true and fair view (due to disagreement with management) 27. Nature of matter giving rise to the modification: inability to obtain sufficient appropriate audit evidence & FS are materially misstated (if material & pervasive: disclaimer & adverse) 28. ISA 706 Emphasis of matter – missing something – auditor agrees that the account shows a true & fair view but adds information about an uncertainty or going concern issue 29. ISA 260: auditor’s communication with those charged with governance – to promote effective 2 way communication & provide value – matters to be communicated: auditors’ responsibilities, planned scope & timing of work, significant audit findings expected to be reported, audit independence 30. ISA 701 Communicating KAM in the independent auditor’s report – determining KAM (i) areas of high assessed risk of MM, or significant risks identified under ISA 315 (ii) significant auditor judgements that involved significant management judgement, including accounting estimates that are of high estimation uncertainty (iii) the effect in the audit of significant events/transactions 31. A must for listed companies as they have large number of stakeholders considering its nature and size of business that may be of significant public interest i.e. financial institutions & charities 32. Why ISA 701? – overly standardised, too generic, excludes shareholders from real audit findings – a chance for auditors to communicate, provide credibility, reduce expectation gap 33. Limitations – detract from key messages? Confidentiality? Liability? 34. Public response: investors welcomed, continued to move away from generic language – relevant & insightful, well-structured (signposting, use of graphics, diagrams & colours) 35. Further enhancement – more explicit information on I. Appropriateness of management estimates & assumptions II. Sensitivity ranges used in audit testing III. Quality of internal controls informing significant risk assessment IV. Risk of misstatement V. Changes to the audit approach & materiality of risk assessment VI. PM – how it is derived & how it impact...