ASA 200 - Lecture notes 1 PDF

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ASA 200...

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ASA 200 Obligations -

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This Auditing Standard deals with the independent auditor’s overall responsibilities when conducting an audit of a financial report. Specifically, it sets out the overall objectives of the independent auditor, and explains the nature and scope of an audit designed to enable the independent auditor to meet those objectives The purpose of an audit is to enhance the degree of confidence of intended users in the financial report. This is achieved by the expression of an opinion by the auditor on whether the financial report is prepared, in all material respects, in accordance with an applicable financial reporting framework. Australian Auditing Standards require the auditor to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error. Reasonable assurance is not an absolute level of assurance, because there are inherent limitations of an audit which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive rather than conclusive misstatements, including omissions, are considered to be material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. The Australian Auditing Standards require that the auditor exercise professional judgement and maintain professional scepticism throughout the planning and performance of the audit Structure of an audit o Identify and assess risks of material misstatement, whether due to fraud or error, based on an understanding of the entity and its environment, including the entity’s internal control. o Obtain sufficient appropriate audit evidence about whether material misstatements exist, through designing and implementing appropriate responses to the assessed risks. o Form an opinion on the financial report based on conclusions drawn from the audit evidence obtained. Objectives of an auditor are to obtain reasonable assurance that the financial report is free from material misstatements Financial reports must satisfy the presentation requirements of AASBs Audit evidence means information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. Audit evidence includes both information contained in the accounting records underlying the financial report and other information. o Sufficiency of audit evidence is the measure of the quantity of audit evidence o Appropriateness of audit evidence is the measure of the quality of audit evidence; that is, its relevance and its reliability in providing support for the conclusions on which the auditor’s opinion is based.

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Audit risk means the risk that the auditor expresses an inappropriate audit opinion when the financial report is materially misstated. Detection risk means the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements. Misstatement means a difference between the amount, classification, presentation, or disclosure of a reported financial report item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. Professional scepticism means an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence. Risk of material misstatement means the risk that the financial report is materially misstated prior to audit. This consists of two components o Inherent risk  The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls. o Control risk  The risk that a misstatement that could occur in an assertion about a class of transaction, account balance or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.

1. Requirements

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The auditor shall plan and perform an audit with professional scepticism recognising that circumstances may exist that cause the financial report to be materially misstated. The auditor shall exercise professional judgement in planning and performing an audit of a financial report. To obtain reasonable assurance, the auditor shall obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level and thereby enable the auditor to draw reasonable conclusions on which to base the auditor’s opinion.

2. Explanatory Material

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The auditor is subject to relevant ethical requirements, including those pertaining to independence, relating to audit engagements

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Professional scepticism includes being alert to o Audit evidence that contradicts other audit evidence obtained o Information that brings into question the reliability of documents and responses to enquiries to be used as audit evidence o Conditions that may indicate possible fraud o Circumstances that suggest the need for audit procedures Maintaining scepticism is a must The auditor may accept records and documents as genuine unless the auditor has reason to believe the contrary. Nevertheless, the auditor is required to consider the reliability of information to be used as audit evidence. Professional judgement is essential to the proper conduct of an audit. Professional judgement is necessary in particular regarding decisions about: o Materiality and audit risk o The nature, timing, and extent of audit procedures used to meet the requirements of the Australian Auditing Standards and gather audit evidence. o Evaluating whether sufficient appropriate audit evidence has been obtained, and whether more needs to be done to achieve the objectives of the Australian Auditing Standards and thereby, the overall objectives of the auditor. o The evaluation of management’s judgements in applying the entity’s applicable financial reporting framework. o The drawing of conclusions based on the audit evidence obtained, for example, assessing the reasonableness of the estimates made by management in preparing the financial report. Professional judgement can be evaluated based on whether the judgement reached reflects a competent application of auditing and accounting principles and is appropriate in the light of, and consistent with, the facts and circumstances that were known to the auditor up to the date of the auditor’s report Audit risk is a function of the risks of material misstatement and detection risk. The assessment of risks is based on audit procedures to obtain information necessary for that purpose and evidence obtained throughout the audit. The assessment of risks is a matter of professional judgement, rather than a matter capable of precise measurement.

Risks of material misstatement at the overall financial report level refer to risks of material misstatement that relate pervasively to the financial report as a whole and potentially affect many assertions

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Risks of material misstatement at the assertion level are assessed in order to determine the nature, timing, and extent of further audit procedures necessary to obtain sufficient appropriate audit evidence. Inherent risk is higher for some assertions and related classes of transactions, account balances, and disclosures than for others. External circumstances giving rise to business risks may also influence inherent risk. For example, technological developments might make a particular product obsolete, thereby causing inventory to be more susceptible to overstatement. Factors in the entity and its environment that relate to several or all of the classes of transactions, account balances, or disclosures may also influence the inherent risk related to a specific assertion Control risk is a function of the effectiveness of the design, implementation and maintenance of internal control by management, or where applicable, those charged with governance, to address identified risks that threaten the achievement of the entity’s objectives relevant to preparation of the entity’s financial report. Detection risk relates to the nature, timing, and extent of the auditor’s procedures that are determined by the auditor to reduce audit risk to an acceptably low level. The risk of the auditor not being able to detect material misstatements

ASA 230 Audit documentation -

This Auditing Standard deals with the auditor’s responsibility to prepare audit documentation for an audit of a financial report The objective of the auditor is to prepare documentation that provides o A sufficient and appropriate record of the basis for the auditor’s report; and o Evidence that the audit was planned and performed in accordance with Australian Auditing Standards and applicable legal and regulatory requirements.

1. Requirements

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The auditor shall prepare audit documentation on a timely basis. The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit, to understand: o The nature, timing, and extent of the audit procedures performed to comply with the Australian Auditing Standards and applicable legal and regulatory requirements o The results of the audit procedures performed, and the audit evidence obtained; and o Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgements made in reaching those conclusions.

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In documenting the nature, timing and extent of audit procedures performed, the auditor shall record: o The identifying characteristics of the specific items or matters tested; o Who performed the audit work and the date such work was completed; and o Who reviewed the audit work performed and the date and extent of such review. The auditor shall document discussions of significant matters with management, those charged with governance, and others, including the nature of the significant matters discussed and when and with whom the discussions took place. If, in exceptional circumstances, the auditor performs new or additional audit procedures or draws new conclusions after the date of the auditor’s report, the auditor shall document: o The circumstances encountered; o The new or additional audit procedures performed, audit evidence obtained, and conclusions reached, and their effect on the auditor’s report; and o When and by whom the resulting changes to audit documentation were made and reviewed. In circumstances other than those envisaged in paragraph 13 of this Auditing Standard where the auditor finds it necessary to modify existing audit documentation or add new audit documentation after the assembly of the final audit file has been completed, the auditor shall, regardless of the nature of the modifications or additions, document: o The specific reason for making them o When and by whom they were made and reviewed We only need to document significant adjustments

ASA 240 The Auditors responsibilities relating to fraud -

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The objectives of the auditor are: o To identify and assess the risks of material misstatement of the financial report due to fraud; o To obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and o To respond appropriately to fraud or suspected fraud identified during the audit. Fraud means an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage.

1. Requirements

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In accordance with ASA 200, the auditor shall maintain professional scepticism throughout the audit, recognising the possibility that a material misstatement due to fraud could exist. Unless the auditor has reason to believe the contrary, the auditor may accept records and documents as genuine.

ASA 320 Materiality -

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This Auditing Standard deals with the auditor’s responsibility to apply the concept of materiality in planning and performing an audit of a financial report. Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report; Judgements about materiality are made in light of surrounding circumstances, and are affected by the size or nature of a misstatement, or a combination of both; and Judgements about matters that are material to users of the financial report are based on a consideration of the common financial information needs of users as a group.2 The possible effect of misstatements on specific individual users, whose needs may vary widely, is not considered. The auditor’s determination of materiality is a matter of professional judgement, and is affected by the auditor’s perception of the financial information needs of users of the financial report. The concept of materiality is applied by the auditor both in planning and performing the audit, and in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial report and in forming the opinion in the auditor’s report

1. Requirements

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When establishing the overall audit strategy, the auditor shall determine materiality for the financial report as a whole. The auditor shall revise materiality for the financial report as a whole (and, if applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures) in the event of becoming aware of information during the audit that would have caused the auditor to have determined a different amount (or amounts) initially If the auditor concludes that a lower materiality for the financial report as a whole (and, if applicable, materiality level or levels for particular classes of transactions, account balances or disclosures) than that initially determined is appropriate, the auditor shall determine whether it is necessary to revise performance materiality, and whether the nature, timing and extent of the further audit procedures remain appropriate. When considering whether misstatements in qualitative disclosures could be material, the auditor may identify relevant factors such as:

The circumstances of the entity for the period (for example, the entity may have undertaken a significant business combination during the period). o The applicable financial reporting framework, including changes therein (for example, a new financial reporting standard may require new qualitative disclosures that are significant to the entity). o Qualitative disclosures that are important to users of the financial report because of the nature of an entity (for example, liquidity risk disclosures may be important to users of the financial report for a financial institution) A percentage is often applied to a chosen benchmark as a starting point in determining materiality for the financial report as a whole. Factors that may affect the identification of an appropriate benchmark include the following: o The elements of the financial report (for example, assets, liabilities, equity, revenue, expenses); o Whether there are items on which the attention of the users of the particular entity’s financial report tends to be focused (for example, for the purpose of evaluating financial performance users may tend to focus on profit, revenue or net assets); o The nature of the entity, where the entity is in its life cycle, and the industry and economic environment in which the entity operates; o The entity’s ownership structure and the way it is financed (for example, if an entity is financed solely by debt rather than equity, users may put more emphasis on assets, and claims on them, than on the entity’s earnings); and o The relative volatility of the benchmark. Examples of benchmarks that may be appropriate, depending on the circumstances of the entity, include categories of reported income such as profit before tax, total revenue, gross profit and total expenses, total equity or net asset value Materiality relates to the financial report on which the auditor is reporting. o

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ASA 315 Identifying and assessing ROMMS -

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The objective of the auditor is to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial report and assertion levels thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement. Assertions – Representations, explicit or otherwise, with respect to the recognition, measurement, presentation and disclosure of information in the financial report Assertions are used by the auditor to consider the different types of potential misstatements that may occur when identifying, assessing and responding to the risks of material misstatement Business risk – A risk resulting from significant conditions, events, circumstances, actions or inactions that could adversely affect an entity’s ability to achieve its objectives and execute its strategies, or from the setting of inappropriate objectives and strategies.

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Inherent risk factors – Characteristics of events or conditions that affect susceptibility to misstatement, whether due to fraud or error, of an assertion about a class of transactions, account balance or disclosure, before consideration of controls. It includes o complexity, subjectivity, change, uncertainty or susceptibility to misstatement due to management bias or other fraud risk factors Significant risk – An identified risk of material misstatement System of internal control – The system designed, implemented and maintained by those charged with governance, management and other personnel, to provide reasonable assurance about the achievement of an entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations.

1. Requirements

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The auditor shall design and perform risk assessment procedures in a manner that is not biased towards obtaining audit evidence that may be corroborative or towards excluding audit evidence that may be contradictory. The risk assessment procedures shall include the following: (Ref: Para. A19–A21) o Enquiries of management and of other appropriate individuals within the entity, o including individuals within the internal audit function (if the function exists). o Analytical procedures. o Observation and inspection The auditor shall obtain an understanding of the control environment relevant to the preparation of the financial report, through performing risk assessment procedures. If the auditor identifies risks of material misstatement that management failed to identify, the auditor shall: o Determine whether any such risks are of a kind that the auditor expects would have been identified by the entity’s risk assessment process and, if so, obtain an understanding of why the e...