ISA (UK) 330: The Auditor’s Responses To Assessed Risks

 The auditor's goal is to collect enough suitable audit evidence to support the evaluated risks of material misstatement, as well as to create and implement effective solutions to such risks. The auditor is responsible for developing and implementing overall remedies to the risks of substantial misstatement in the financial statements.

Test of controls as defined by ISA (UK) 330 – An audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level.

Examining a sample of purchase orders to confirm that they have been properly authorized would be a control test. A 'yes' response indicates that the internal control requiring purchase order permission is operational, whereas a 'no' response indicates that the internal control does not appear to be operational, necessitating further audit inquiry.

 

Substantive procedure as defined by ISA (UK) 330 – An audit procedure designed to detect material misstatements at the assertion level. Substantive procedures comprise:

(i) Tests of details (of classes of transactions, account balances, and disclosures); and

(ii) Substantive analytical procedures.

According to ISA 330, the auditor must always execute substantive procedures on material items, regardless of the risk of substantial misstatement, and must design and perform substantive procedures for each material class of transactions, account balance, and disclosure. Invariably, substantive procedures will need more effort than control testing. Consider the example of a manufacturing company's purchasing system and the assertion of account balances' existence in the statement of financial position. Typical detail checks would entail receiving and examining the closing purchase ledger account balances for a sample of purchase ledger accounts with selected suppliers, as well as some physical verification of year-end balances outstanding. Typically, this entails agreeing on the closing balance figure with the supplier's statement, or even asking third-party confirmation of the amount owing from the supplier.

An effective control environment may enable the auditor to have greater confidence in internal control and the reliability of audit evidence generated internally within the entity, allowing the auditor, for example, to conduct some audit procedures at an interim date rather than at the end of the period. Deficiencies in the control environment, on the other hand, have the opposite impact; for example, an ineffective control environment may prompt the auditor to:

§  Conduct more audit processes at the end of the period rather than at an interim date;

§  Obtaining more extensive audit evidence from fundamental procedures;

§  Expanding the audit scope to include more locations.

 

Practice:

Control tests are often brief, rapid audits, whereas substantive procedures will necessitate more extensive auditing. The auditor must create and perform substantial processes for each type of transactions, account balance, and disclosure, regardless of the assessed risks of material misstatement, according to ISA 330.

 

Reference:      https://bit.ly/34QrvaI

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ISA (UK) 315: Identifying and Assessing the Risks of Material Misstatement Through Understanding of the Entity and Its Environment

 The auditor's goal is to detect and analyze the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels, so that responses to the estimated risks of material misstatement can be designed and implemented. ISA 315 (Revised) outlines the reasons "why" risk assessment processes should be performed, as well as "what" has to be evaluated and "how" it should be assessed.

The following steps for risk assessment must be followed:

(a)        Inquiries of management, suitable personnel within the internal audit function (if    one exists), and others inside the organization who, in the auditor's opinion,   may have knowledge that can help detect substantial misstatement risks due to   fraud or error.

(b)        Analytical procedures.

c)         Inspection and observation

In September 2019, the International Audit and Assurance Standards Board (IAASB) authorized major revisions to ISA 315. The modifications will apply to financial statement audits for periods beginning on or after December 15, 2021. The adjustments will have far-reaching consequences, requiring businesses of all kinds to rethink their risk-assessment strategies. The key areas of the revisions are shown below.

§  Subjectivity, complexity, uncertainty, change, and susceptibility to misstatement due to managerial bias or fraud are five new inherent risk characteristics that have been introduced to aid in risk assessment.

§  A new risk spectrum has emerged, with major dangers at the higher end.

§  The risk evaluation must be based on "adequate, appropriate" evidence acquired via risk assessment methods.

§  There will be a lot greater emphasis on IT, particularly on IT general controls.

§  More on audit-relevant controls, as well as the design and implementation effort that goes into them.

§  The removal of smaller entity considerations as a separate category of paragraph and the inclusion of that content inside the main body of the text, as well as the addition of new material.

 

Practice:

The improvements attempt to improve the quality and consistency of risk evaluations while also encouraging professional skepticism. Understanding the nature and scope of the required modifications will be a major task for those conducting ISA audits. ISA 315 (Revised) contains new and updated content for understanding IT and general IT controls, as well as expanded auditor concerns relating to IT. The auditor must be aware of how the entity handles data and how it is used within the organization. The accounting records, how information is gathered and maintained, and how these flow into the accounts in the financial statements should all be understood.

 

References:    https://bit.ly/3vRIswE

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ISA (UK) 265: COMMUNICATING DEFICIENCIES IN INTERNAL CONTROL TO THOSE CHARGED WITH GOVERNANCE AND MANAGEMENT

 The auditor's goal is to report to those charged with governance and management any flaws in internal control that the auditor discovered during the audit and that, in the auditor's professional opinion, are important enough to warrant their attention. When identifying and assessing the risks of material misstatement, the auditor must have a thorough understanding of the internal controls that are relevant to the audit.  In making those risk assessments, the auditor considers internal control in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of internal control. Internal control deficiencies may be discovered by the auditor not only during the risk assessment process but also at any other stage of the audit. This ISA (UK) defines which detected problems the auditor must notify to those charged with governance and management.

The auditor may examine the following factors when deciding whether a defect in internal control or a combination of failures constitutes a substantial deficiency.

§  The possibility of major misstatements while preparing the financial statements in the future as a result of internal control weaknesses.

§  The associated asset's or liability's susceptibility to loss or fraud.

§  Estimated amounts, such as fair value accounting estimates, are prone to subjectivity and complexity.

§  The amounts on the financial statement that are vulnerable to flaws.

§  The amount of activity in the account balance or class of transactions exposed to the shortfall or deficiencies that have occurred or could occur.

§  The value of controls in the financial reporting process, such as:

 

ü  General monitoring controls (such as oversight of management).

ü  Maintains control over fraud prevention and detection.

ü  Has authority over the selection and application of major accounting policies.

ü  Maintains control over major transactions involving associated parties.

ü  Has authority over large transactions that occur outside of the normal course of business.

ü  Period-end financial reporting process controls (such as non-recurring journal entry controls).

§  The reason for the exceptions found as a result of control flaws, as well as the frequency with which they occur.

§  The interaction of the weakness with other internal control problems.

Practice:

Internal control problems that have been identified may call into doubt management's integrity or competence. For example, there could be proof of management fraud or purposeful non-compliance with rules and regulations, or management could show an incapacity to oversee the preparation of the proper financial statements, raising questions about management's competency. As a result, it may not be acceptable to inform management about such deficiencies immediately. When an auditor discovers or suspects fraud involving management, ISA (UK) 240 establishes requirements and provides guidance on how to communicate with those charged with governance.

Reference:      https://bit.ly/35NC6U9

ISA (UK) 240: The auditor's responsibilities relating to fraud in an audit of financial statements

 Financial statement misstatements can result from either fraud or human error. The difference between fraud and error is whether the underlying conduct that causes the financial statements to be misstated is deliberate and involves deception or is unintentional. Although fraud is a broad legal notion, the auditor is concerned with fraud or suspected fraud that produces a material misstatement in the financial statements for the purposes of the ISAs (UK). The auditor is concerned with two sorts of intentional misstatements: those resulting from dishonest financial reporting and those originating from asset misappropriation.

Members of the audit committee should take an active part in preventing fraud by challenging management and auditors to verify that enough is being done to prevent and identify fraud throughout the organization. When financial crises make the news, the most pressing question is who bears blame and who could have stopped it. The auditing standard ISA 240 governs the auditor's responsibilities in relation to fraud, and many amendments have taken effect in both the UK and Ireland. In May 2021, the FRC issued a revised ISA (UK) 240 in response to the Brydon Review's recommendations to clarify auditor roles.

For auditors, what has changed?

-       Professional skepticism is getting more attention.

-       The significance of keeping vigilant and investigating further if conditions indicate that material submitted to auditors may not be real or has been tampered with is emphasized.

-       The auditor must evaluate both qualitative and quantitative elements of the fraud when determining whether it is material.

-       To undertake a risk assessment, audit methods, or evaluate evidence obtained, the audit team must examine whether specialist skills are required.

-       The audit team is likely to have more discussions, including exchanging ideas about how management or others within the entity could commit or hide fraud.

The ISA 240 modification was made in response to recent complaints that auditors aren't doing enough to uncover substantial fraud. It aims to clarify auditor responsibilities and place a greater emphasis on the auditor's role to look for suspected fraud. The auditor's job is to design and conduct an audit so that he or she may have reasonable assurance that the financial statements are free of serious misstatement due to fraud. This is a welcome clarification that will help auditors identify and analyze the risk of a significant misstatement as a result of fraud, as well as design processes to manage those risks.

 

Practice:

Both those charged with governance and management bear major responsibilities for fraud prevention and detection. It is critical that management, under the supervision of those charged with governance, place a high emphasis on fraud prevention, which may minimize possibilities for fraud, and fraud deterrence, which may encourage individuals not to commit fraud due to the risk of detection and punishment. This necessitates a commitment to cultivating a culture of honesty and ethical behavior, which can be maintained through active governance supervision.

Reference:     

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ISA (UK) 250: Consideration of Laws and Regulations in an Audit of Financial Statements

The impact of laws and regulations on financial statements varies greatly. The legal and regulatory framework is made up of the rules and regulations that an entity is bound by. Some laws or regulations have a direct impact on financial statements because they determine the reported amounts and disclosures in the financial statements of a company. Other laws or regulations must be followed by management or establish the conditions under which the corporation is permitted to operate, but they have no direct impact on the financial statements. Some businesses are involved in highly regulated industries (such as banks and chemical companies). Others are solely bound by the numerous laws and regulations that apply to the business's operational aspects (such as those relating to occupational safety and health and equal employment opportunity). Noncompliance with rules and regulations could result in penalties, litigation, or other consequences for the company, all of which could have a major impact on the financial statements.

Management responsibility

Management is responsible for ensuring that the entity's operations are done in conformity with rules and regulations, with oversight from those concerned with governance. Laws and regulations can have a variety of effects on an entity's financial statements. For example, they can alter the specific disclosures that the entity must make in its financial statements, or they can dictate the applicable financial reporting structure. They may also establish the entity's legal rights and liabilities, some of which will be reflected in the financial statements. In addition, violation of rules and regulations may result in sanctions.

Objectives of Auditor under ISA 250

According to paragraph 11 of ISA 250, the auditor's objectives are:

§  to gather adequate relevant audit proof of conformity with the provisions of those laws and regulations commonly recognized to have a direct impact on the assessment of material amounts and disclosures in financial statements.

§  to carry out certain audit procedures in order to detect instances of non-compliance with other laws and regulations that could have a major impact on the financial statements.

§  to respond appropriately to any suspected or identified non-compliance with laws and regulations discovered during the audit.

 

Practice:

When an auditor detects noncompliance with rules and regulations, he or she must tell those responsible for governance. However, the auditor must exercise caution because if the auditor suspects individuals in charge of governance are engaged, the auditor must notify the next highest level of authority, which might include the audit committee. If a higher level of authority is not available, the auditor will consider seeking legal advice. The auditor must also assess if the noncompliance has a material impact on the financial statements and, as a result, the influence on their report.

 

Reference:      https://bit.ly/3rVILnG 

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ISA (UK) – 260: COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE

According to ISA (UK) 260, auditors must convey audit concerns of governance interest to persons charged with governance. It is critical that individuals in charge of governance are aware of all serious issues that have surfaced as a result of the audit process. The board of directors (executive and non-executive) of a firm, as well as members of an audit committee if one exists, are all entrusted with governance in the United Kingdom. It frequently comprises similar persons such as partners, proprietors, management committees, or trustees for various sorts of entities. Communication with individuals charged with governance should be considered as a critical audit reporting 'output.' It permits management to be aware of serious issues raised throughout the audit process, as well as the opportunity to reply to the auditor and take action to enhance the entity's accounting and financial reporting functions.

 

Matters to be communicated

§  Responsibilities of the Auditor in Relation to the Financial Statement Audit

§  Scope and timing of the audit as are planned

§  The Audit's Most Important Findings

§  Matter of Auditor’s independence in case of audit of a listed company

§  Other Supplementary Matters

 

Timing of Communication

A healthy two-way interaction between those responsible for governance and the auditor is aided by timely communication during the audit. However, depending on the conditions of the engagement, the best time to communicate would differ. The importance and nature of the issue, as well as the expected action by those in charge of governance, are all relevant circumstances. For example, communications about planning issues are frequently made early in the audit engagement and, in the case of an initial engagement, as part of agreeing on the engagement conditions. However, the auditor may communicate results from the audit, including his or her thoughts on the qualitative aspects of the entity's accounting practices as part of the final conversation.

 

Practice:

The many modes of communication that should be used are discussed in ISA 260. In most circumstances, communication will be in writing, which is a requirement of the standard in the UK and Ireland. Even if the auditor has no issues to bring to the notice of those charged with governance, a letter should be sent out noting that there are no important findings from the audit that need to be shared. In the case of oral communication, minutes provided by the entity may be included in the audit documentation as part of the oral communication documentation.

 

Source:           https://bit.ly/3soBWKg

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How to make a plan for conducting an audit engagement (ISA-300)

 Establishing the overall audit strategy for the engagement and producing an audit plan are both part of the planning process for an audit. The type and scope of preparatory activities will vary depending on the entity's size and complexity, the past experience of key engagement team members with the entity, and changes in circumstances that occur throughout the audit engagement. Planning is not a distinct phase of an audit; rather, it is a continuous and iterative process that often begins soon after (or in conjunction with) the completion of the prior audit and continues until the current audit engagement is completed.

The audit approach and plan

According to ISA 300, audit planning activities should include:

§  establishing the overall audit strategy for the engagement; and

§  developing an audit plan.

Audit Strategy

The audit strategy lays out in broad terms how the audit will be done, as well as the audit's scope, timing, and direction. After that, the audit strategy directs the creation of the audit plan, which includes the comprehensive responses to the auditor's risk assessment.

Audit Plan

The audit plan is more specific than the overall audit strategy since it specifies the nature, time, and scope of audit procedures that engagement team members will undertake. Prior to the auditor's identification and assessment of the risks of material misstatement, planning includes such matters as:

§  The analytical procedures to be used as risk assessment procedures must be considered.

§  Getting a general grasp of the legal and regulatory framework that applies to the entity, as well as how that framework is being followed.

§  The process of determining materiality.

§  The participation of experts.

§  Performing of other risk assessment techniques.

Benefits of Audit Planning

The audit of financial statements benefits from adequate planning in various ways, including the following:

§  assisting the auditor in devoting adequate attention to critical areas of the audit

§  assisting the auditor in identifying and resolving potential issues in a timely manner.

§  assisting the auditor in appropriately organizing and managing the audit engagement in order for it to be completed in a timely and effective manner.

§  assisting in the selection of engagement team members with the necessary talents and expertise to respond to predicted risks, as well as the suitable assignment of tasks to them.

§  facilitating the direction, supervision, and evaluation of engagement team members' work.

§  assisting, if appropriate, in the coordination of work done by component auditors and experts.

Practice:

At the start of every audit engagement, the auditor must include the following in the audit documentation: (a) the overall audit strategy; (b) the audit plan; and (c) any major changes to the overall audit strategy or the audit plan made during the audit engagement, as well as the reasons for such changes.

 

Source: https://bit.ly/3Gok0V9

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