Auditing – Lecture 4
Part II. Audit process by phase: Phase I. Client acceptance


Content
nObjectives of audit – objectives + setting of objectives
nAcceptance of client – acceptance, ability, professionals, predecessor, engagement
nRecommended reading
nAppendices: ISA 200, 210, 240, 250, 620
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Objectives of conducting an audit – steps
nSteps to develop audit objectives:
qUnderstand objectives and responsibilities (O&R) for the audit
qDivide financial statements into cycles
qKnow management assertions about financial statements
qKnow general audit objectives for classes of transactions, accounts, and disclosures
qKnow specific audit objectives for classes of transactions, accounts, and disclosures
nThe responsibility for adopting sound accounting policies, maintaining adequate internal control,
and making fair representations in the financial statements rests with management rather than with
the auditor. In contrast, the auditor’s knowledge of these matters and internal control is limited
to that acquired during the audit.
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Objectives of conducting an audit – mgmt’s O&R
nThe annual reports of many public companies include a statement about management’s
responsibilities and relationship with the CPA firm. Management’s responsibility for the integrity
and fairness of the representations (assertions) in the financial statements carries with it the
privilege of determining which presentations and disclosures it considers necessary. If management
insists on financial statement disclosure that the auditor finds unacceptable, the auditor can
either issue an adverse or qualified opinion or withdraw from the engagement.
nSOX requires the chief executive officer (CEO) and the chief financial officer (CFO) of public
companies to certify the quarterly and annual financial statements submitted to the SEC. In signing
those statements, management certifies that the financial statements fully comply with the
requirements of the Securities Exchange Act of 1934 and that the information contained in the
financial statements fairly present, in all material respects, the financial condition and results
of operations.
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Objectives of conducting an audit – auditor’s O&R*
nISA 200, 240 and 250 set the following overall objectives of the auditor:
qTo obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, thereby enabling the auditor to express an
opinion whether the financial statements are prepared, in all material respects, in accordance with
an applicable financial reporting framework; and
qTo report on the financial statements, and communicate as required by auditing standards, in
accordance with the auditor’s findings.
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n* See Appendix: ISA 200, 240, 250
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Objectives of conducting an audit – fin statements cycles
nAudits are performed by dividing the financial statements into smaller segments or components. The
division makes the audit more manageable and aids in the assignment of tasks to different members
of the audit team. Each segment is audited separately but not on a completely independent basis.
After the audit of each segment is completed, including interrelationships with other segments, the
results are combined. A conclusion can then be reached about the financial statements taken as a
whole.
nA common way to divide an audit is to keep closely related types (or classes) of transactions and
account balances in the same segment. This is called the cycle approach. For example, sales, sales
returns, cash receipts, and charge-offs of uncollectible accounts are the four classes of
transactions that cause accounts receivable to increase and decrease. Therefore, they are all parts
of the sales and collection cycle. Similarly, payroll transactions and accrued payroll are parts of
the payroll and personnel cycle.
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Objectives of conducting an audit – fin statements cycles
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Objectives of conducting an audit – fin statements cycles
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Objectives of conducting an audit – setting of objectives
nThere are transaction-, balance-, presentation- and disclosure-related audit objectives:
qTransaction-related audit objectives - are closely related to management’s assertions about
classes of transactions. There is a difference between general transaction-related audit objectives
and specific transaction-related audit objectives for each class of transactions. The six general
transaction-related audit objectives discussed here are applicable to every class of transactions
and are stated in broad terms. Specific transaction-related audit objectives are also applied to
each class of transactions but are stated in terms tailored to a specific class of transactions,
such as sales transactions. General transaction-related audit objectives:
ØOccurrence – recorded transactions exist
ØCompleteness – existing transactions are recorded
ØAccuracy – recorded transactions are stated at the correct amounts
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Objectives of conducting an audit – setting of objectives
ØPosting and summarization – recorded transactions are properly included in the master files and
are correctly summarized
ØClassification – transactions included in the client’s journals are properly classified
ØTiming – transactions are recorded on the correct dates
qBalance-related audit objectives – are similar to the transaction-related audit objectives just
discussed. They also follow from management assertions and they provide a framework to help the
auditor accumulate sufficient appropriate evidence related to account balances. There are also both
general and specific balance-related audit objectives. The major difference between balance-related
and transaction-related audit objectives is that balance-related audit objectives are applied to
account balances. General balance-related audit objectives are the following:
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Objectives of conducting an audit – setting of objectives
ØExistence – amounts included exist
ØCompleteness – existing amounts are included
ØAccuracy – amounts included are stated at the correct amounts
ØClassification – amounts included in the client’s listing are properly classified
ØCutoff – transactions near the balance sheet date are recorded in the proper period
ØDetail Tie-In – details in the account balance agree with related master file amounts
ØRealizable Value – assets are included at the amounts estimated to be realized
ØRights and Obligations - in addition to existing, most assets must be owned before it is
acceptable to include them in the financial statements. Similarly, liabilities must belong to the
entity.
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Objectives of conducting an audit – setting of objectives
qThe presentation and disclosure-related audit objectives are identical to the management
assertions for presentation and disclosure discussed previously. The same concepts that apply to
balance-related audit objectives apply equally to presentation and disclosure audit objectives.
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Acceptance of client - sources of information
nThe client acceptance phase of the audit has two objectives:
qexamination of the proposed client to determine if there is any reason to reject the engagement -
acceptance of the client;
qconvincing the client to hire the auditor - acceptance by the client.
nThe procedures to acceptance of the client are: acquiring knowledge of the client’s business;
examination the audit firm’s ethical requirements and technical competence; possible use of other
professionals (including outside specialist) in the audit; communication with the predecessor
auditor; preparation of client proposal; assignment of staff and the submission of the terms of the
engagement in the form of an audit engagement letter.
nSources of information for examination of the proposed client:
qPublicly available information - media and government databases, client, industry, and government
websites
qAudit firm experience – prior workpapers, client financials
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Acceptance of client - discussion
qInformation from client - client press releases, minutes important meetings, government
correspondence, people associated with entity, internal audit personnel, employees, management
nDiscussions with client’s management and staff is important to evaluate governance, internal
controls and possible risks. These discussions might include such subjects as:
qchanges in management, organizational structure, and activities of the client;
qcurrent government regulations affecting the client;
qcurrent business developments affecting the client such as social, technical and economic factors;
qcurrent or impending financial difficulties or accounting problems;
qsusceptibility of the entity’s financial statements to material misstatement due to error or
fraud;
qexistence of related parties
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Acceptance of client – new client
nBefore accepting a new client an audit firm will do a thorough investigation to determine if the
client is acceptable and if the auditor can meet the ethical requirements of independence, specific
competence, etc.
nOther sources of information for investigation of new client include interviews with local
lawyers, other CPAs, banks and other businesses, although many of them, depending on local
circumstances, might be bound by obligations of confidentiality. Sometimes the auditor may hire a
professional investigator or use its forensic accounting department to obtain information about the
reputation and background of the key members of management. If there has not been a previous
auditor, more extensive investigation may be undertaken.
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Acceptance of client – continuing client
nMany auditing firms evaluate existing clients every year. In addition to the research discussed
above, the auditor will consider any previous conflicts over scope of the audit, type of opinion
and fees, pending litigation between the audit firm and client, and management integrity.  These
four factors strongly influence whether the relationship will continue. For continuing engagements,
the auditor would update and re-evaluate information gathered from the prior years’ working papers.
The auditor should also perform procedures designed to identify significant changes that have taken
place since the last audit.
nThe auditor may also choose not to continue conducting audits for a client because he feels
excessive risk is involved. For example, there may be regulatory conflict between a governmental
agency and a client which could result in financial failure of the client and perhaps ultimately
lawsuits against the auditor. It may be that the auditor feels that the industry (such as financial
services) offers more risk than is acceptable to the specific auditor.
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Ability to meet ethical requirements
nIn order to be involved into assurance engagement firstly the CPA firm should be ability to meet
ethical requirements – independence and competence.
nThe auditor will ensure that the members of the auditor team as well as the entire audit firm meet
the relevant independence requirements . This will require procedures to check personal financial
investments of partners and employees and the business relationships with the potential audit
client. He should review the non-audit services his audit firm are providing or have recently been
providing to this potential client. IFAC’s Code of Ethics for Professional Accountants in a
commentary on fees suggests independence is jeopardized if fees due from a client for professional
services remain unpaid for an extended period of time. There is a threat to independence if a
substantial part of what is owed is not paid before the issue of the report of the auditor for the
following year.
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Ability to meet ethical requirements
nThe issue of specific competence needs specific consideration in the light of client evaluation in
the previous step of the engagement process. On the basis of the specific circumstances of the
client and its industry, the auditor should determine if the necessary expertise regarding the
industry, specific US GAAP/IFRS issues, or certain non-audit skills are available to the audit
team. Consideration of whether the firm has the competencies and resources to undertake a new
engagement includes reviewing existing partner and staff competencies, for:
qknowledge of relevant industries or subject matters;
qexperience with relevant regulatory or reporting requirements, or the ability to gain the
necessary skills and knowledge in an effective manner;
qunderstanding and practical experience of similar engagements;
qappropriate technical knowledge, including relevant information technology knowledge
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Cooperation with other professionals – an auditor*
nPart of the search for background information includes considering if another auditor will be
required to audit a component of the business such as a division in another country. If another
auditor is auditing part of the financial statements, the auditor should consider the impact of
using the work of another auditor on the combined financial statements.
nThe purpose of ISA 600 and 620 - the standards about the work of other professionals - is to
establish standards and provide guidance when an auditor, acting as a group auditor, decides to use
the work of a related auditor or other auditor in the audit of group financial statements. A
related auditor is an auditor from the group auditor’s firm, a network firm, or other firm
operating under common quality control policies and procedures. Any auditor who is not the group
auditor or a related auditor is an “other auditor.”
nSee Appendix: ISA 620
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Cooperation with other professionals – an auditor
nWhen the group auditor concludes that the work of the related auditor or other auditor cannot be
used and the group auditor has not been able to perform sufficient additional procedures, the group
auditor should express a qualified opinion because there is a limitation in the scope of the audit.
In some countries, like the Netherlands, the group auditor may only refer to the use made of other
auditors to motivate a qualified, disclaimer of adverse audit opinion. This is to emphasize the
undivided responsibility of the group auditor. In other countries (e.g. the USA) it is possible to
assume divided responsibility, which is expressed by referring in the audit opinion to the fact
that the financial statements include numbers that have been audited by another auditor, without
affecting the unqualified nature of the opinion.
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Cooperation with other professionals – an expert*
nThe auditor’s education and experience enable him to be knowledgeable about business matters in
general, but he is not expected to have the expertise of a person trained for another profession
such as an engineer. If the auditor requires special expertise, the auditor should consider hiring
an expert to assist in gathering the necessary evidence. ISA 620 defines an expert as a person or
firm possessing special skill, knowledge, and experience in a particular field other than
accounting and auditing. Situations where an auditor might use an expert are valuations of certain
types of assets (land and building, works of art, precious stones, etc.); determination of physical
condition of assets; actuarial valuation; value of contracts in progress; specific IT expertise
(e.g. in the audit of a telecommunications company); and legal opinions.
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Cooperation with other professionals – an expert
nIf an expert’s work is to be used as audit evidence, the auditor should determine the expert’s
skills and competence by considering professional certifications, experience and reputation. The
expert’s objectivity should be evaluated. Objectivity is impaired when the expert is employed by
the client or related in some manner to the client. The auditor should obtain sufficient
appropriate audit evidence that the scope of the expert’s work is adequate for the purposes of the
audit.
nWhen issuing an unqualified and unmodified auditor’s report, the auditor should not refer to the
work of the expert. Such a reference might be misunderstood to be a qualification of the auditor’s
opinion or division of responsibility.
nIf, as a result of the work of an expert, the auditor decides to issue a modified auditor’s
report, in some circumstances when explaining the nature of the modification it may be appropriate
to refer to the expert by name and the extent of his involvement. This disclosure requires the
permission of the expert.
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Communication with predecessor
nIf there is an existing auditor, the IFAC Code and AICPA Code require the new auditor to
communicate directly with the predecessor auditor. In cases when a new auditor will replace an
existing auditor, the code of ethics advises the new, proposed auditor to communicate with the
existing accountant. The extent to which an existing accountant can discuss the affairs of the
client with the proposed accountant will depend on receipt of the client’s permission and the legal
or ethical requirements relating to this disclosure. The purpose of this communication is to
determine whether there are technical or ethical facts, or circumstances the new auditor should be
aware of, prior to accepting the audit. This requirement is an important measure to prevent
“opinion shopping,” or to notify the new auditor of the circumstances under which the predecessor
auditor has ended the relationship with the client.
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Engagement proposal*
nAfter the auditor has determined that the client is acceptable from a risk and ethics perspective,
and has concluded that the ethical requirements regarding the specific client engagement can be
met, then, typically, significant effort is devoted to gaining the auditee as a client, given the
competitive pressure that exists in the current audit environment. This requires a carefully
prepared engagement proposal. Aspects of the procedures for the engagement proposal may be found in
ISA 210 - the auditor and the client should have a mutual understanding of the nature of the audit
services to be performed, the timing of those services, the expected fees, audit team, audit
approach, audit quality, use of client’s internal auditors, and the transition needs.
qThe continuing client proposal will differ between firms, but generally it discusses the
following: a review of how the auditing firm can add value, both to the company in general and to
those directly responsible for the engagement of the auditor, for example the Audit Committee;
plans for further improvement in value added including discussion of present
nSee Appendix: ISA 210
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Engagement proposal
nregulatory trends, audit scope, and any recent changes in the company that may affect the audit; a
description of the audit team and any changes in the audit team from the previous year; a detailed
fee proposal.
qA proposal to audit a new client is very important to audit firms because new clients are the
primary growth engine for firms. A proposal to a large, solid client may be very complex, requiring
many hours of staff time to prepare, especially if it is a competitive situation. The general
proposal may begin with a description of client business sectors, technology, financial strengths
and divisions. The client’s objectives as the basis of the audit strategy could be outlined. It may
point out audit requirements relating to securities exchange, environmental, governmental and other
regulations, including items in the company’s policies that go beyond existing statutory
requirements. Strengths of the audit firm may be stated by  emphasizing report quality, continuity
of audit teams, worldwide service, cost effectiveness of audits, and audit firm’s quality
standards.
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Engagement letter
nIt is in the interests of both client and auditor that the auditor sends an engagement letter,
preferably before the commencement of the engagement, to help in avoiding misunderstandings with
respect to the engagement. An engagement letter is an agreement between the accounting firm and the
client for the conduct of the audit and related services. An auditor’s engagement letter documents
and confirms his acceptance of the appointment, the objective and scope of the audit, the extent of
auditor responsibilities to the client, and the form of any reports.
nThe engagement letter may affect legal responsibilities to the client. In litigation, the auditor
may use an engagement letter as a contract stating its scope, responsibilities, and limitations.
The letter describes the auditor’s purpose, that the audit entails study of internal control, the
time schedule of the engagement, and fees.
nContents of the engagement letter - the form and content of the audit engagement letter may vary
for each client, but they should generally include reference to:
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Engagement letter
qthe objective of the audit of financial information;
qmanagement’s responsibility for the financial information as described in ISA 200;
qthe applicable financial reporting framework;
qthe scope of the audit, including reference to applicable legislation such as related to fraud
(ISA 240) or money laundering, regulations or pronouncements of professional bodies to which the
auditor adheres;
qthe form of any reports or other communication of results of the engagement,
qthe fact that because of the test nature and other inherent limitations of an audit, together with
the inherent limitations of any system of internal control, there is an unavoidable risk that even
some material misstatement may remain undiscovered;
qunrestricted access to whatever records, documentation and other information requested in
connection with the audit.
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Recommended reading
nArens et al. (2015) – chosen chapters will be uploaded to IS
qCh. 6 (whole)
nHayes et al. (2014) – chosen chapters will be uploaded to IS
qCh. 5 (whole)
nISA 200, 240, 250, 600, 620, 210.
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Appendix: ISA 200 – O&R
nScope:
qISA 200 deals with the independent auditor’s overall responsibilities when conducting an audit of
financial statements in accordance with ISAs.
qISAs are written in the context of an audit of financial statements.
qAn audit in accordance with ISAs is conducted on the premise that management and, where
appropriate, those charged with governance have acknowledged certain responsibilities that are
fundamental to the conduct of the audit.
qThe audit of the financial statements does not relieve management or those charged with governance
of their responsibilities.
nObjectives:
qTo obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, thereby enabling the auditor to
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Appendix: ISA 200 – O&R
qexpress an opinion on whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework; and
qTo report on the financial statements, and communicate as required by the ISAs, in accordance with
the auditor’s findings.
nRequirements:
qCompliance with ethical requirement relating to audit of financial statement.
qAuditor shall exercise professional judgment in planning and performing audit of financial
statement.
qAuditor shall obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably
low level.
qIn case of departure from ISA auditor shall perform alternative audit procedures to achieve the
aim of that requirement.
qIf objective of ISA cannot be achieved  auditor shall evaluate whether this prevents the auditor
from achieving the overall objectives of the auditor and thereby requires the auditor to modify the
auditor’s opinion or withdraw from the engagement.
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Appendix: ISA 240 – O&R
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nScope:
qISA 240 deals with auditor’s responsibilities relating to fraud in an audit of financial
statements.
qIdentifying and assessing the risks of material misstatement due to fraud.
nObjective:
qTo identify and assess the risks of material misstatement of the financial statements due to
fraud.
qTo obtain sufficient appropriate audit evidence regarding the assessed risks of material
misstatement due to fraud, through designing and implementing appropriate responses.
qTo respond appropriately to fraud or suspected fraud identified during the audit.
nRequirements (general):
qThe auditor shall maintain professional skepticism throughout the audit.
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Appendix: ISA 240 – O&R
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qWhere responses to inquiries of management or those charged with governance are inconsistent, the
auditor shall investigate the inconsistencies.
qMake inquiries of management about:
ØManagement assessment of risk of that the financial statements may be materially misstated due to
fraud, including the nature, extent and frequency of such assessments.
ØManagement’s process for identifying and responding to the risks of fraud in the entity, including
any specific risks of fraud that management has identified or that have been brought to its
attention, or classes of transactions, account balances, or disclosures for which a risk of fraud
is likely to exist.
ØManagement’s communication, if any, to those charged with governance regarding its processes for
identifying and responding to the risks of fraud in the entity.
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Appendix: ISA 240 – O&R
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ØManagement’s communication, if any, to employees regarding its views on business practices and
ethical behavior.
ØManagement, internal audit and others within the entity as appropriate, to determine whether they
have knowledge of any actual, suspected or alleged fraud affecting the entity.
qThe auditor shall obtain an understanding of how those charged with governance exercise oversight
of management’s processes for identifying and responding to the risks of fraud in the entity and
the internal control that management has established to mitigate these risks.
qThe auditor shall evaluate whether the information obtained from the other risk assessment
procedures and related activities performed indicates that one or more fraud risk factors are
present.
qWhen identifying and assessing the risks of material misstatement due to fraud, the auditor shall,
based on a presumption that there are risks of fraud in revenue
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Appendix: ISA 240 – O&R
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nrecognition, evaluate which types of revenue, revenue transactions or assertions give rise to such
risks.
qAuditor shall design and perform procedure that are responsive to assessed risk.
qAuditor shall perform following procedure due to risk of Management override of control;
ØTest the appropriateness of journal entries, for end of period and throughout period  and inquire
about any unusual transaction.
ØReview accounting estimates for biases by evaluation and retrospective review.
ØFor significant transaction outside the normal course of business, evaluate the business
rationale.
nRequirements (specific):
qEvaluation of audit evidence
ØEvaluate the result of analytical procedure that are performed at the end of audit for consistency
with assessed risk
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Appendix: ISA 240 – O&R
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ØEvaluate identified misstatement weather material or not, if its indicative of fraud or not.
ØIf the auditor confirms that, or is unable to conclude whether, the financial statements are
materially misstated as a result of fraud the auditor shall evaluate the implications for the audit
qAuditor is unable to continue the engagement
ØDetermine the professional and legal responsibilities
ØDetermine its appropriate to withdraw or not
ØIf withdraw: discuss with the appropriate level of management and those charged with governance
the auditor’s withdrawal from the engagement and the reasons for the withdrawal; and determine
whether there is a professional or legal requirement to report to the person or persons who made
the audit appointment or, in some cases, to regulatory authorities, the auditor’s withdrawal from
the engagement and the reasons for the withdrawal.
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Appendix: ISA 240 – O&R
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qWritten representations – the auditor shall obtain written representations from management and,
where appropriate, those charged with governance that:
ØThey acknowledge their responsibility for the design, implementation and maintenance of internal
control to prevent and detect fraud;
ØThey have disclosed to the auditor the results of management’s assessment of the risk that the
financial statements may be materially misstated as a result of fraud
ØThey have disclosed to the auditor their knowledge of fraud, or suspected fraud, affecting the
entity and its financial statements.
qCommunications to management and with those charged with governance:
ØIf the auditor has identified a fraud or has obtained information that indicates that a fraud may
exist, the auditor shall communicate these matters on a timely basis to the appropriate level of
management.
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Appendix: ISA 250 – O&R
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nScope:
qISA 250 deals with the auditor’s responsibility to consider laws and regulations in an audit of
financial statements.
qISA 250 does not apply to other assurance engagements in which the auditor is specifically engaged
to test and report separately on compliance with specific laws or regulations.
nObjectives:
qTo obtain sufficient appropriate audit evidence regarding compliance with the provisions of those
laws and regulations generally recognized to have a direct effect on the determination of material
amounts and disclosures in the financial statements;
qTo perform specified audit procedures to help identify instances of non-compliance with other laws
and regulations that may have a material effect on the financial statements; and
qTo respond appropriately to non-compliance or suspected non-compliance with laws and regulations
identified during the audit.
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Appendix: ISA 250 – O&R
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nRequirements (general):
qAuditor shall obtain understanding of legal and regulatory framework applicable to the entity and
how entity is complying with it.
qAudit shall obtain sufficient and appropriate audit evidence regarding compliance with the
provisions of those laws and regulations generally recognized to have a direct effect on the
determination of material amounts and disclosures in the financial statements.
qAuditor shall perform following procedure to help identify instances of non-compliance with other
laws and regulations that may have a material effect on the financial statements;
qAuditor shall remain alert for instances of non-compliance.
qObtain written representation on all known instances of non-compliance or suspected non-compliance
with laws and regulations whose effects should be considered when preparing financial statements
have been disclosed to the auditor.
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Appendix: ISA 250 – O&R
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nRequirements (specific):
qAudit procedures when non-compliance is identified or suspected:
ØIf the auditor becomes aware of information concerning an instance of non-compliance or suspected
non-compliance with laws and regulations, the auditor shall obtain an understanding of the nature
of the act and the circumstances in which it has occurred and further information to evaluate the
possible effect on the financial statements.
ØSeek legal advice if sufficient information not made available on material non-compliance, which
auditor suspects.
ØIf information cannot be obtained consider impact on opinion.
ØConsider the impact of non-compliance on auditor’s risk assessment and the reliability of written
representations, and take appropriate action.
qReporting of identified or suspected non-compliance:
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Appendix: ISA 250 – O&R
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ØCommunicate to those charges d with governance, unless they themselves are involved.
ØIf management and those charged with governance are involved consider reporting to next level of
authority like audit committee.
ØWhere no higher authority exists, or if the auditor believes that the communication may not be
acted upon or is unsure as to the person to whom to report, the auditor shall consider the need to
obtain legal advice
ØIf the auditor concludes that the non-compliance has a material effect on the financial
statements, and has not been adequately reflected in the financial statements, the auditor shall,
express a qualified opinion or an adverse opinion on the financial statements.
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Appendix: ISA 250 – O&R
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ØIf the auditor is precluded by management or those charged with governance from obtaining
sufficient appropriate audit evidence to evaluate whether non-compliance that may be material to
the financial statements has, or is likely to have, occurred, the auditor shall express a qualified
opinion or disclaim an opinion on the financial statements on the basis of a limitation on the
scope.
ØIf the auditor is unable to determine whether non-compliance has occurred because of limitations
imposed by the circumstances rather than by management or those charged with governance, the
auditor shall evaluate the effect on the auditor’s.
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Appendix: ISA 620 – work of others
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nScope - ISA 620 deals with the auditor’s responsibilities relating to the work of an individual or
organization in a field of expertise other than accounting or auditing, when that work is used to
assist the auditor in obtaining sufficient appropriate audit evidence.
nObjectives:
qTo determine whether to use the work of an auditor’s expert; and
qIf using the work of an auditor’s expert, to determine whether that work is adequate for the
auditor’s purposes.
nRequirements:
qDetermining the need for an auditor’s expert
ØIf expertise in a field other than accounting or auditing is necessary to obtain sufficient
appropriate audit evidence, the auditor shall determine whether to use the work of an auditor’s
expert.
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Appendix: ISA 620 – work of others
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qNature, timing and extent of audit procedures - In determining the nature, timing and extent of
those procedures, the auditor shall consider matters including;
ØThe nature of the matter to which that expert’s work relates;
ØThe risks of material misstatement in the matter to which that expert’s work relates;
ØThe significance of that expert’s work in the context of the audit;
ØThe auditor’s knowledge of and experience with previous work performed by that expert; and
ØWhether that expert is subject to the auditor’s firm’s quality control policies and procedures.
qCompetence, capabilities and objectivity of the auditor’s expert - the auditor shall evaluate
whether the auditor’s expert has the necessary competence, capabilities and objectivity for the
Ø
Ø
Ø
Ø
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auditor’s purposes. In the case of an auditor’s external expert, the evaluation of objectivity
shall include inquiry regarding interests and relationships that may create a threat to that
expert’s objectivity.
qObtaining an understanding of the field of expertise of the auditor’s expert - the auditor shall
obtain a sufficient understanding of the field of expertise of the auditor’s expert to enable the
auditor to:
ØDetermine the nature, scope and objectives of that expert’s work for the auditor’s purposes; and
ØEvaluate the adequacy of that work for the auditor’s purposes.
qAgreement with the auditor’s expert - the auditor shall agree, in writing when appropriate, on the
following matters with the auditor’s expert:
ØThe nature, scope and objectives of that expert’s work;
Ø
Ø
Ø
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ØThe nature, timing and extent of communication between the auditor and that expert, including the
form of any report to be provided by that expert; and
ØThe need for the auditor’s expert to observe confidentiality requirements.
qEvaluating the adequacy of the auditor’s expert’s work - The auditor shall evaluate the adequacy
of the auditor’s expert’s work for the auditor’s purposes, including:
ØThe relevance and reasonableness of that expert’s findings or conclusions, and their consistency
with other audit evidence;
ØIf that expert’s work involves use of significant assumptions and methods, the relevance and
reasonableness of those assumptions and methods in the circumstances; and
ØIf that expert’s work involves the use of source data that is significant to that expert’s work,
the relevance, completeness, and accuracy of that source data.
Ø
Ø
Ø
Ø
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ØIf the auditor determines that the work of the auditor’s expert is not adequate for the auditor’s
purposes, the auditor shall: agree with that expert on the nature and extent of further work to be
performed by that expert; or perform additional audit procedures appropriate to the circumstances.
qReference to the auditor’s expert in the auditor’s report - The auditor shall not refer to the
work of an auditor’s expert in an auditor’s report containing an unmodified opinion unless required
by law or regulation to do so. If such reference is required by law or regulation, the auditor
shall indicate in the auditor’s report that the reference does not reduce the auditor’s
responsibility for the auditor’s opinion.
qIf the auditor makes reference to the work of an auditor’s expert in the auditor’s report because
such reference is relevant to an understanding of a modification to the auditor’s opinion, the
auditor shall indicate in the auditor’s report that such reference does not reduce the auditor’s
responsibility for that opinion.
q
Ø
Ø
Ø
Ø
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nScope:
qestablishing certain preconditions for an audit.
qestablishing responsibility which rests with management and, where appropriate, those charged with
governance.
nObjective - to accept or continue an audit engagement only when the basis upon which it is to be
performed has been agreed:
qEstablishing whether the preconditions for an audit are present; and
qConfirming that there is a common understanding between auditor and management and where
appropriate those charged with governance.
nRequirements (general):
qFinancial reporting framework to be applied in the preparation of the financial statements shall
be acceptable.
qManagement acknowledges and understands its responsibility:
ØFor the preparation of the financial statements in accordance with the applicable financial
reporting framework, including where relevant their fair presentation;
Ø
Ø
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ØFor such internal control as management determines is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error; and
ØTo provide auditor with access of all information, additional information and unrestricted access
to person in company for audit.
qIf limitation on the scope of audit prior to acceptance of audit that will result in disclaiming
opinion don’t accept engagement unless required by law.
qAgree the terms of audit engagement with management or those charges with governance
and Engagement letter shall at least include:
ØThe objective and scope of the audit of the financial statements;
ØThe responsibilities of the auditor;
ØThe responsibilities of management;
ØIdentification of the applicable financial reporting
Ø
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framework for the preparation of the financial statements; and
ØReference to the expected form and content of any reports to be issued by the auditor and a
statement that there may be circumstances in which a report may differ from its expected form and
content.
qIf above components of engagement letter in law and regulation, engagement letter not necessary.
qOn recurring audit assess the change in circumstances and need to revise engagement letter.
qThere must be reasonable justification for change in engagement letter, after it has been agreed.
qIf change not agreeable with management, Withdraw and consider the legal or contractual
obligation.
nRequirements (particular):
qFinancial Reporting Standards Supplemented by Law or Regulation - if the auditor considers the
conflict between law and standards, he needs to make additional disclosure or
Ø
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change description of applicable financial reporting framework.
qFinancial Reporting Framework Prescribed by Law or Regulation - Other Matters Affecting Acceptance
–
ØFinancial reporting frame unacceptable but required by law accept engagement if: management agree
to provide additional disclosures; add emphasis of matter paragraph in audit report; don’t add true
and fair like statement unless required and allowed by law.
ØIf above conditions are not meet and audit required by law, evaluate effect of misleading
information and include reference to that in the engagement letter.
Ø
Ø
n
n