An Auditor‟s Services · [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An...

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

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An Auditor‟s Services Principles of Auditing: An Introduction to

International Standards on Auditing - Ch 4

Rick Stephan Hayes,

Roger Dassen, Arnold Schilder,

Philip Wallage


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IAASB’s Engagement Standards

• Some engagement standards are based on “International Framework for Assurance Engagements” (assurance engagements), and others result from the “Related Services Framework” (related services engagements).

• Three sets of standards (ISAs, ISREs and ISAEs) share the assurance engagement framework and one standard set (ISRS) is based on the related services framework.

• ISAs, ISREs, ISAEs and ISRSs are collectively referred to as the IAASB‟s Engagement Standards.


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Illustration 4.1


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Reasonable and Limited Assurance

Engagements (not in text)

• “Reasonable assurance engagement” and “limited assurance engagement” distinguish between the two types of assurance engagement

• The objective of a reasonable assurance engagement is a reduction in assurance engagement risk to an acceptably low level as the basis for a positive form of expression of the practitioner‟s conclusion. E.g, “presents fairly in all material respects”

• The objective of a limited assurance engagement is a reduction in assurance engagement risk to a level that is acceptable in the circumstances, as the basis for a negative form of expression of the practitioner‟s conclusion. E.g., “nothing has come to our attention that causes us to believe that financial statements do not conform, in all material respects, with IFRS”.


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Besides the International Framework for Assurance

Engagements, ISAs, ISREs and ISAEs, practitioners who perform

assurance engagements are governed by (not in text)

• The IFAC Code of Ethics for Professional

Accountants

• International Standards on Quality Control

(ISQCs)


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Assurance Engagements for Audits and

Reviews for Historical Financial Information

(ISAs / ISREs)

• Historical Financial Standards are divided into those

governed by International Standards on Auditing

(ISAs) and International Standards on Review

Engagements (ISREs)

• Audit standards are described in ISA 200-799.

Special Purpose Engagement and other

examinations of historical financial information is ISA

800 – 899 (except reporting which is ISA 701).

• Review standards are ISREs 2000 – 2699


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Assurance Engagements on Subject Matters Other

than Historical Financial Information (ISAEs)

The ISAE standards are divided into two parts:

(1) ISAEs 3000 – 3399 which are topics that

apply to all assurance engagements

(2) ISAEs 3400 – 3699 which are subject

specific standards, for example standards

relating to examination of prospective financial

information,


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Not all engagements performed by practitioners are assurance

engagements

Frequently performed engagements that are not

covered by the Assurance Framework are:

Engagements covered by International

Standards for Related Services (ISRS), such

as agreed-upon procedures and compilations.

The preparation of tax returns where no

conclusion conveying assurance is expressed.

Consulting (or advisory) engagements, such

as management and tax consulting.


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Related Services Framework (ISRSs)

Standards under this framework, International Standards on Related Services (ISRSs), are applied currently to two audit services:

• Agreed-upon procedures (ISRS 4400) Agreed-upon procedures are assurance based on audit procedures in a very limited “agreed upon” area with a proscribed set of users.

• Compilations (ISRS 4410 ). Compilations offer no assurance whatsoever.


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Assurance Engagements Defined

Assurance engagement means

an engagement in which a

practitioner (professional

accountant or auditor),

expresses a conclusion (in

report form) that is designed

to enhance the degree of

confidence users have about

the evaluation of a subject

matter against identified

criteria.


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five elements that all assurance

engagements exhibit

(1) a three party relationship involving a

practitioner; a responsible party; and the

intended users,

(2) a subject matter,

(3) suitable criteria,

(4) evidence

(5) an assurance

report.


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Illustration 4.2


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Three Party Relationship

The practitioner (e.g., auditor, accountant, expert)

gathers evidence to provide a conclusion to the

intended users about whether a subject matter (e.g.,

financial statements) conforms, in all material

respects, with identified criteria.

The responsible party (usually management or the

board of directors) is one who is responsible for the

subject matter and is not the intended user.

The intended users are generally the addressee of

the assurance report.


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Illustration 4.3


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The assurance engagement evaluates whether the subject matter conforms to suitable criteria that will meet the needs of an intended user.

A subject matter of an assurance is the topic about which the assurance is conducted.

– Subject matter could be information such as financial statements, statistical information, non-financial performance indicators, capacity of a facility, etc.

– The subject matter could also be systems and processes (e.g., internal controls, IT systems) or behavior (e.g., corporate governance, compliance with regulation, human resource practices).

Subject

Matter


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Suitable Criteria

Suitable criteria are the benchmarks (standards, objectives or set of rules) used to evaluate evidence or measure the subject matter of an assurance engagement.

– International Financial Reporting Standards

– U.S. Generally Accepted Accounting Principles

– national standards

– Global Reporting Initiative

– PCAOB internal control report criteria

– Applicable law, regulation or contract

– An agreed level of performance


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Characteristics of Suitable

Criteria

(a) Relevance

(b) Completeness

(c) Reliability

(d) Neutrality

(e) Understandability


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Assurance Report

The practitioner provides a written report containing a conclusion that conveys the assurance obtained as to whether the subject matter conforms, in all material respects, with the identified criteria. For instance, an audit of financial statements provides an opinion on conformity with IFRS.


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Assurance Report Basic Elements

– A title

– An addressee:

– A description of the subject matter.

– A statement restricting the use of the assurance report

– identification the responsible party

– Statement - performed in accordance with ISAEs.

– A summary of the work undertaken

– Identification of the criteria

– The practitioner‟s conclusion

– The assurance report date.

– The name and location of the firm or the practitioner


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Engagements to Review Financial Statements (ISRE 2400)

Where reviews of financial

statements differ most from

a financial statement audit

is in the limited procedures

performed (limited in inquiry

of management and

analytical procedures) and

the review report. Reviews

are limited assurance

engagements.


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ISRE 2400 Objective of Review (not in text)

The objective of a review of financial statements

is to enable an auditor to state whether, on the

basis of procedures which do not provide all

the evidence that would be required in an

audit, anything has come to the auditor‟s

attention that causes the auditor to believe

that the financial statements are not prepared,

in all material respects, in accordance with the

applicable financial reporting framework

(negative assurance).


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• The objective of a review of interim financial

information differs significantly from that of an

audit in accordance with ISAs. A review of

interim financial information does not provide

a basis for expressing an opinion.

• A review may bring significant matters

affecting the interim financial information to

the auditor‟s attention, but it does not provide

all of the evidence that would be required in

an audit.

Engagements to Review Interim Financial Statements (ISRE 2410) Not in Text


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Review: Limited Audit Procedures

• Inquiry consists of seeking information of knowledgeable persons inside or outside the entity.

• Analytical procedures consist of the analysis of significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or deviate from predictable amounts.

• Inspection consists of examining records, documents, or tangible assets, is carried out on a limited basis.


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The review report should contain a clear

written expression of negative

assurance. The auditor should assess

whether anything has come to the

auditor‟s attention based on the review

that causes the auditor to believe the

financial statements do not give a true

and fair view (or „are not presented

fairly, in all material respects,‟) in

accordance with the identified financial

reporting framework.

Review: Review of Financial Statements

Conclusion


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SPECIAL PURPOSE ENGAGEMENTS

New terms from ISA 701 {replace} the old ISA 800 terms Not in text

The auditor refers to ISA 701 when expressing an opinion on:

(a) A complete set of financial statements prepared in accordance with a financial reporting framework designed for a general purpose, but not designed to achieve fair presentation;

(b) A complete set of financial statements prepared in accordance with a financial reporting framework designed for a special purpose {(1) Other comprehensive basis of accounting and (2) Reports on compliance with contractual agreements} such as

That used by an entity to prepare its income tax return.

The cash receipts and disbursements basis of accounting.

The financial reporting provisions of a government regulatory agency

(c) A single financial statement, or statements, that would otherwise be part of a complete set of financial statements and

(d) One or more specific elements, accounts or items of a financial statement {component financial statements}.


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A complete set of financial statements prepared in accordance with

a financial reporting framework designed for a general purpose, but

not designed to achieve fair presentation

For example, for a balance sheet prepared to

establish the value of net assets of an entity at

the date of its sale, the seller and the

purchaser may have agreed that estimates of

allowances for uncollectible accounts

receivable are to be made. This may result in

preparing financial information that is not

neutral (as required in paragraph 36(d) of the

ISA 200 Framework), but it may nevertheless

be acceptable in the circumstances.


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A financial reporting framework designed for a special

purpose {Other Comprehensive Basis of Accounting (OCBA)

and Reports on compliance with contractual agreements}

• That used by an entity to

prepare its income tax return.

• The cash receipts and

disbursements basis of

accounting.

• The financial reporting

provisions of a government

regulatory agency.

• The financial reporting

provisions of a contract


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One or more specific elements, accounts or items of a financial

statement {Reports on a Component of Financial Statements}

The auditor may be requested to express an opinion on one or more components of financial statements, for example, accounts receivable, inventory, an employee‟s bonus calculation or a provision for income taxes.

This type of engagement does not result in a report on the financial statements taken as a whole and, accordingly, the auditor would express an opinion only as to whether that specific component audited is prepared in accordance with the accounting standards.


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Summarized Financial Statements

• ISA 701 does not discuss reports expressing

an opinion on summary historical financial

information which has been derived from

historical financial information. Standards and

guidance for auditors‟ reports on summary

audited financial statements are contained in

proposed ISA 800, “The Independent Auditor‟s

Report on Summary Audited Financial

Statements.”


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Reports on Summarized Financial

Statements

Some financial statement users may only be interested in the highlights of a company‟s financial position.

The auditor expresses an opinion whether the summary financial statements are an appropriate summary of the financial statements from which they have been derived in accordance with the applied criteria.

The report must caution the reader that summarized financial statements should be read in conjunction with the company‟s most recent audited financial statements.


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Assurance Engagements on Other than

Historical Financial Information

Subject specific standards fall into four subject matter groups:

Prospective financial statements

Subject mater related to non-financial information

Subject matter related to systems and processes (e.g., corporate governance, environmental systems, and internal control (SOx SEC 404)

Subject matter about behavior.


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Examples of existing standards that may be considered in

systems and processes, non-financial information or behavior

assurance engagements are:

• Sarbanes Oxley Section 404 internal control audit standard

• Global Reporting Initiative (GRI) Sustainability Reporting Guidelines.

• SA8000 standards for social accountability towards employees,

• International Labour Organization (ILO) conventions for social accountability towards employees,

• World Business Council for Sustainable Development (WBCSD) social and eco-efficiency indicators,

• European Union Eco-management and Audit scheme (EMAS) standard for environmental management systems, and

• ISO14001 standard for environmental management systems.


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The Examination of Prospective

Financial Information (ISAE 3400)

“Prospective financial information” means

financial information based on assumptions

about events that may occur in the future.

Prospective financial information can be in the

form of a forecast, a projection or a combination

of both. A “forecast” is prospective financial information prepared on

the basis of management‟s assumptions as to future events

(best-estimate assumptions).

A “projection” means prospective financial information

prepared on the basis of hypothetical assumptions about

future events and management actions which may or may

not take place, such as a possible merger of two companies.


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Internal Control Reporting and SOX 404

reporting

A company must issue an internal control report containing these statements:

Management's responsibility for establishing and maintaining adequate internal control

The framework used by management to evaluate the effectiveness of internal control over financial reporting

Management's assessment of the effectiveness of the company's internal control over financial reporting

The report is reviewed by an external auditor.


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Auditor Standards for Internal Control

Reports

Section 103 of the Sarbanes-Oxley require that public accounting firms describe in the audit report the scope of its testing of the company's internal control structure and procedures performed in its internal control evaluation under SOx Section 404(b).

In the audit report, the registered public accounting firm also must describe, at a minimum, material weaknesses in company internal controls and any material noncompliance found.


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PCAOB Auditing Standard No. 4, Reporting on Whether a Previously

Reported Material Weakness Continues to Exist (not in text)

• Establishes requirements that apply when an

auditor is engaged to report on whether a

previously reported material weakness in

internal control over financial reporting

continues to exist

• Such an engagement is voluntary in nature at

the election of management, and may be

performed as of any reasonable date selected

by management.


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Economic Sustainability An organization‟s impacts on the economic circumstances of its stakeholders and on economic systems at the local, national and global levels.

Environmental Sustainability An organization‟s impacts on living and non-living natural systems, including ecosystems, land, air and water.

Social Sustainability An organization‟s impacts on the social systems within which it operates.

Impacts on stakeholders at the local, national, and global levels.

The organization‟s intangible assets, such as its human capital and reputation.

Sustainability Reporting “Triple

Bottom Line” Assurances


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The report under the GRI

Guidelines has 5 sections

1. Vision and Strategy – a description of the reporting organization‟s strategy with regard to sustainability, including a statement from the CEO.

2. Profile – overview of the reporting organization‟s structure and operations and of the scope of the report.

3. Governance Structure and Management Systems – description of organizational structure, policies, and management systems, including stakeholder engagement efforts.

4. GRI Content Index – a table supplied by the reporting organization identifying where the information listed.

5. Performance Indicators – measures of the impact or effect of the reporting organization divided into integrated, economic, environmental, and social performance indicators.


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Related Services International Standards on Related

Services (ISRS)

Engagements covered by

International Standards

for Related Services,

including:

• Agreed-upon

procedures.(ISRS

4400)

• Compilation of financial

or other information.

(ISRS 4410)


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Engagements to Perform Agreed-Upon Procedures Regarding

Financial Information (ISRS 4400)

An agreed-upon procedures engagement is an engagement in which the party engaging the professional accountant or the intended user determines the procedures to be performed and the professional accountant provides a report of factual findings as a result of undertaking those procedures.


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Matters to be agreed between auditor and

management include the:

nature of the engagement including the fact

that no assurance will be expressed on the

procedures performed;

identification of the financial information to

which the agreed-upon procedures will be

applied;

nature, timing, and extent of the specific

procedures to be applied.


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Audit Procedures Agreed

The auditor performs certain procedures concerning individual items of financial data (for example, accounts payable, accounts receivable, purchases from related parties and sales and profits of a segment of an entity), a financial statement (for example, a balance sheet) or even a complete set of financial statements.


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Engagements to Compile

Financial Information

(ISRS 4410)

The objective of a compilation

engagement is for the

accountant to use

accounting expertise, as

opposed to auditing

expertise, to collect,

classify and summarize

financial information. This

ordinarily entails reducing

detailed data to a

manageable and

understandable form

without a requirement to

test the assertions

underlying that information.


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The accountant is not ordinarily required to:

• Make any inquiries of management to assess

the reliability and completeness of the

information provided;

• Assess internal controls;

• Verify any matters; or

• Verify any explanations.


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Thank You for Your Attention

Any Questions?

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