Audit Framework and Regulation - Presentation Day 1

Technical Cross-Functional Knowledge Sharing Curriculum
A flavour of audit approach
August 2012
Agenda and Objectives
What it is about?
The main objective is a collaborative, inclusive and transparent knowledge sharing curriculum, developed and designed to help us strengthen our market position.
2012 Deloitte Romania
Why participate?
The participation in the training program A flavour of audit approach will :
Enable you to be better equipped with more in-depth knowledge of your Audit colleagues work; Ensure you present yourself as a well-rounded professional by demonstrating borderless behaviors externally and internally; Assist you in your professional development; Help you to build your internal network and make it even stronger
Program overview
Duration 2 * 1/2 day three sessions
weeks starting 06/08/12, 10/09/12 or 08/10/12 Location

Place Targeted Participants
Bucharest
Deloitte office TAX Consulting ERS All All All
Max. no. of Participants

Provider
18
Audit professionals
Contents
Day 1
A. Audit Framework and Regulation
1. Concept of Audit
2. Other assurance engagements 3. Statutory audits, IFRS audits and others
B. Audit Approach 1. Planning and Risk Assessment 2. Objectives and assessing the risks 3. Understanding the entity
Contents - continued
Day 2
B. Audit Approach (continued)
4.
5. 6.
Materiality computation
Fraud, laws and regulations Analytical Procedures
7.
8.
Planning and Audit

Audit Documentation
C.
1. 2.
Audit Evidence
Audit Procedures Audit of specific item
3.
Audit Sampling
Concept of audit

1. Concept of Audit

1. Concept of Audit
Definition of audit [non-IFAC*]
1. An examination of records or financial accounts to check their accuracy. 2. An adjustment or correction of accounts.
3. An examined and verified account.
* International Federation of Accountants

1. Concept of Audit
An Audit of Financial Statements The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements.
This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.
In the case of most general purpose frameworks, that opinion is on whether the financial statements are presented fairly, in all material respects, or give a true and fair view in accordance with the framework.

1. Concept of Audit
An Audit of Financial Statements (continued)
The financial statements subject to audit are those of the entity, prepared by management of the entity with oversight from those charged with governance.
ISAs do not impose responsibilities on management or those charged with governance and do not override laws and regulations that govern their responsibilities. However, an 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. The audit of the financial statements does not relieve management or those charged with governance of their responsibilities. (Ref: Para. A2-A11)
A. Audit Framework and Regulation 1. Concept of Audit

Overall objectives of the Auditor in an audit of Financial Statements In conducting an audit of Financial Statements, the overall objectives of the Auditor are:
To 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 on whether the Financial Statements are prepared, in all material respects, in accordance with an Applicable Financial Reporting Framework
To report on the Financial Statements and communicate as required by The Manual and Professional Standards and applicable legal and regulatory requirements, in accordance with the Auditors findings. [ISA 200.11]

1. Concept of Audit
Overall objectives of the Auditor in an audit of Financial Statements (continued)
When reasonable assurance cannot be obtained and a qualified opinion in the auditors report is insufficient in the circumstances for purposes of reporting to the intended users of the financial statements, the ISAs require that the auditor disclaim an opinion or withdraw (or resign) from the engagement, where withdrawal is possible under applicable law or regulation.

1. Concept of Audit
What can go wrong?

If audit objectives are not met and the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated, the public is misled and legal action can be taken against the companies. For example, in 2001, Enron, an energy provider, and their CPA firm, Arthur Anderson, were found guilty of misstating the financial statements. Enron, once a blue-chip stock company, was falsely reporting revenues and profits. Arthur Anderson was issuing positive audit opinions that supported Enron, and masked the fraud. Enron was bankrupt and sold. Arthur Anderson, once one of the largest CPA firms in the world, was dissolved.

1. Concept of Audit
What is assurance engagement and why is it important? Assurance an opinion expressed by a practitioner (assurance provider) on a subject matter. It is important because it enhances the degree of confidence place in the subject matter by the intended users as to the evaluation or measurement against suitable criteria.
Subject matter informationThe outcome of the evaluation or measurement of a subject matter. It is the subject matter information about which the practitioner gathers sufficient appropriate evidence to provide a reasonable basis for expressing a conclusion in an assurance report. Assurance engagementAn engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria. [IFAC]

1. Concept of Audit
What are the features of an assurance engagement? Features A. Subject matter B. The three main parties involve: Responsible person Assurance provider (practitioner) Intended user C. The report Examples a) Financial statements, interim financial information, etc b) The three main parties: Management Deloitte Shareholders, Banks, Investors, Large Publc, etc
c)
Audit opinion on the financial statements (Independent auditors report); review report, etc

1. Concept of Audit
Regulatory Framework:
International Standards on Auditing (ISAs) issued by the International Federation of Accountants,
Auditing standards of a specific jurisdiction or country (Eg.: US GAAS, Standardele de audit adoptate de Camera Auditorilor Financiari din Romania )
Other relevant legal, regulatory or professional obligations
ISA require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement [stnd para in the report].

1. Concept of Audit
Regulatory Framework (continued)
Assurance engagements 1. Audits of historical financial information (eg.: external (statutory) audits) 2. Reviews of historical financial information 3. Assurance engagements other than audits or reviews of historical financial information Applicable standards I. International Standards on Auditing (ISAs)
II.
International Standards on Review Engagements (ISREs)
III. International Standard on Assurance Engagements (ISAE)

1. Concept of Audit
Levels of assurance Under the International Framework for Assurance Engagements there are two types of assurance engagement a practitioner is permitted to perform: 1 Reasonable assurance engagementThe objective of a reasonable assurance engagement is a reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement as the basis for a positive form of expression of the practitioners conclusion. 2 Limited assurance engagementThe objective of a limited assurance engagement is a reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement, but where that risk is greater than for a reasonable assurance engagement, as the basis for a negative form of expression of the practitioners conclusion.

1. Concept of Audit
As the basis for the auditors opinion, ISAs require the auditor to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. Reasonable assurance is a high level of assurance. 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 auditors opinion.
Reasonable assurance is not an absolute level of assurance!

1. Concept of Audit
The ISAs require that the auditor exercise professional judgment and maintain professional skepticism throughout the planning and performance of the audit.
Other assurance engagements

2. Other assurance engagements
The performance of assurance engagements other than audits or reviews of historical financial information requires the service auditor to comply with ISAE 3000 ASSURANCE ENGAGEMENTS OTHER THAN AUDITS OR REVIEWS OF HISTORICAL FINANCIAL INFORMATION
Examples Report on controls at a service organisation report for use by user entities and their auditors on the controls at a service organization that provides a service to user entities that is likely to be relevant to user entities internal control as it relates to financial reporting.
Statutory audits IFRS audits and others

3. Statutory audits, IFRS audits and other
We perform audits of the financial statements of our clients prepared under both local and international reporting standards:
Statutory audits International Standard Audits

3. Statutory audits, IFRS audits and other
Statutory audits legal requirement banks, listed companies, entities that meet 2 of 3 criteria (total assets: EUR 3,650,000, - net turnover: EUR 7,300,000, - average number of employees during the financial year: 50 ) performed only by statutory licenced auditors (CAFR)
Auditul statutar reprezint auditul situaiilor financiare anuale sau al situaiilor financiare anuale consolidate, aa cum este prevzut de legislaia comunitar, transpus n reglementrile naionale [ORDONAN DE URGEN nr. 90 din 24 iunie 2008 privind auditul statutar al situaiilor financiare anuale i al situaiilor financiare anuale consolidate]

Special considerations ISA 800 special purpose ISA 800 refers to an audit of financial statements prepared in accordance with a special purpose framework. Special purpose framework A financial reporting framework designed to meet the financial information needs of specific users. The financial reporting framework may be a fair presentation framework or a compliance framework. The auditors report on special purpose financial statements shall include an Emphasis of Matter paragraph alerting users of the auditors report that the financial statements are prepared in accordance with a special purpose framework and that, as a result, the financial statements may not be suitable for another purpose.

Special considerations ISA 800 special purpose (continued)
Examples of special purpose framework are:

A tax basis of accounting for a set of financial statements that accompany an entitys tax return; The cash receipts and disbursements basis of accounting for cash flow information that an entity may be requested to prepare for creditors; The financial reporting provisions established by a regulator to meet the requirements of that regulator; or The financial reporting provisions of a contract, such as a bond indenture, a loan agreement, or a project grant.

Special considerations ISA 805 single financial statements and specific elements of a FS
ISA 805 refers to audits of single financial statements and specific

elements, accounts or items of a financial statement.
The auditor shall express a separate opinion.
SPECIAL CONSIDERATIONS ISA 805 single financial statements

and specific elements of a FS (continued) Examples of Specific Elements, Accounts or Items of a Financial Statement Accounts receivable, allowance for doubtful accounts receivable, inventory, the liability for accrued benefits of a private pension plan, the recorded value of identified intangible assets, or the liability for incurred but not reported claims in an insurance portfolio, including related notes. A schedule of externally managed assets and income of a private pension plan, including related notes. A schedule of net tangible assets, including related notes.
A schedule of disbursements in relation to a lease property, including explanatory notes.
ISA 810 - summary financial statements

ISA 810 refers to engagements to report on summary financial statements.
Summary financial statements Historical financial information that is derived from financial statements but that contains less detail than the financial statements.
Opinion:
The summary financial statements are consistent, in all material respects, with the audited financial statements, in accordance with [the applied criteria];
The summary financial statements are a fair summary of the audited financial statements, in accordance with [the applied criteria].
Summary

Benefits of the audit
Provide reasonable assurance to creditors and investors that the financial statements are correct. Enhance the brand of the company, as it provides workers, shareholders and the general public a secure feeling toward a company that complies with a financial statement audit. Greater transparency of the audited entity with respect to third parties (suppliers, financial institutions, customers, others). The transparency is something that is desired by the government for publicly traded companies, and it can be good for private companies, too. This can build integrity within the company to ensure workers recognize that their financials will be checked. Honesty and more responsibility is shared among the top and the bottom. Audits make it hard for a CEO to claim she did not know the financial health of the company she operates.

Benefits of the audit (continued)
Opinion of an independent expert on legal regulations, accounting principles, evaluation criteria, etc with maximum independence with respect to the audited entity.
Improved accountability in companies Satisfy the legality in force Although private companies are not always audited, this could enhance their potential for cash infusions from outside investors.
Our approach Focus on Quality !
Reputation, approach, efficiency, knowledge and experience
End Section A
B. Audit Approach
Audit approach
1.
Planning and risk assessment
2.
3. 4. 5.
Objectives and assessing the risk

Understanding the entity Materiality computation Fraud, laws and regulations
6.
7. 8.
Analytical procedures
Planning and audit Audit documentation
DTT International Audit Approach

Understanding Internal Control ENTITY LEVEL Understand the Accounting Process BUSINESS CYCLE LEVEL Plan Tests of Operating Effectiveness of Controls ENTITY LEVEL BUSINESS CYCLE LEVEL Perform Tests of Operating Effectiveness of Controls
Perform Pre-Engagement Activities Perform Preliminary Planning Develop the Audit Plan Perform the Audit Plan Conclude & Report
ENTITY LEVEL BUSINESS CYCLE LEVEL

Engagement Reporting ENTITY LEVEL BUSINESS CYCLE LEVEL
Perform Post-Engagement Activities
Planning and risk assessment

Planning an audit involves establishing the overall audit strategy for the engagement and developing an audit plan.
Benefits of planning:
Helps the auditor to devote appropriate attention to important areas of audit Helps the auditor to identify and resolve potential problems on a timely basis Helps the auditor to properly organize and manage the audit engagements
Assists in the selection of engagement team members with appropriate

levels of capabilities, and the proper assignment of work to them Facilitates the direction and supervision of engagement team members and the review of their work Assists, where applicable, in coordination of work done by auditors of
components and experts

Planning the audit ISA 300

The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan.
The auditor shall develop an audit plan that shall include a description of:
The nature, timing and extent of planned risk assessment procedures The nature, timing and extent of planned further audit procedures at the assertion level Other planned audit procedures that are required to be carried out so that the
engagement complies with ISAs

The auditor shall update and change the overall audit strategy and the audit
plan as necessary during the course of the audit
Planning the audit ISA 300

The auditor shall include in the audit documentation: The overall audit strategy;
The audit plan; and

Any significant changes made during the audit engagement to the overall audit strategy or the audit plan, and the reasons for such changes The auditor shall undertake the following activities prior to starting an initial audit:
Performing procedures required by ISA 220 regarding the acceptance of the

client relationship and the specific audit engagement Communicating with the predecessor auditor, where there has been a change of auditors, in compliance with relevant ethical requirements.
Risk Assessment ISA 315

The risk assessment procedures shall include the following: Inquiries of management, and of others within the entity who in the auditors
judgment may have information that is likely to assist in identifying risks of

material misstatement due to fraud or error.
Analytical procedures.
Observation and inspection. The auditor shall identify and assess the risks of material misstatement at:
the financial statement level

the assertion level for classes of transactions, account balances, and disclosures

In order to identify and assess the risks of material misstatement, the auditor shall:
Identify risks throughout the process of obtaining an understanding of the

entity and its environment, including relevant controls that relate to the risks,
and by considering the classes of transactions, account balances, and

disclosures in the financial statements;
Assess the identified risks, and evaluate whether they relate more
pervasively to the financial statements as a whole and potentially affect many
assertions;
Relate the identified risks to what can go wrong at the assertion level, taking account of relevant controls that the auditor intends to test;
Consider the likelihood of misstatement, including the possibility of multiple

misstatements, and whether the potential misstatement is of a magnitude
that could result in a material misstatement


As part of the risk assessment , the auditor shall determine whether any of the
risks identified are a significant risk

In exercising judgment as to which risks are significant risks, the auditor shall
consider at least the following:

Whether the risk is a risk of fraud; Whether the risk is related to recent significant economic, accounting or other
developments and, therefore, requires specific attention;

The complexity of transactions; Whether the risk involves significant transactions with related parties;
The degree of subjectivity in the measurement of financial information related to the risk, especially those measurements involving a wide range of measurement uncertainty; Whether the risk involves significant transactions that are outside the normal
course of business for the entity, or that otherwise appear to be unusual.

If the auditor has determined that a significant risk exists, the auditor shall obtain
an understanding of the entitys controls, including control activities, relevant

to that risk
Understanding the Entity ISA 315

The auditor shall obtain an understanding of the following: 1. The entity and its environment
Relevant industry, regulatory and other external factors

The nature of the entity (operations, ownership and governance structure, how the entity is structured and financed) The entitys selection and application of accounting policies (whether there are appropriate for its business and consistent with IFRS) The entitys objectives and strategies
The measurement and review of the entitys financial statements

2. The entitys internal control Although most controls relevant to the audit are likely to relate to financial reporting, not all controls that relate to financial reporting are relevant to the audit.

When obtaining an understanding of controls that are relevant to the audit, the auditor shall evaluate the design of those controls and determine whether they have been implemented. Components of Internal Control:
Control Environment
The entitys risk assessment process The information system, including the related business processes, relevant to
financial reporting, and communication

The auditor shall obtain an understanding of the major activities that the entity
uses to monitor internal control over financial reporting, including those related
to those control activities relevant to the audit, and how the entity initiates remedial actions to deficiencies in its controls

Factor External factors Description External factors affecting the entity include industry matters, the general business environment, and applicable laws and regulations, including the applicable financial reporting framework. Internal factors affecting the entity include the nature of the entity (i.e., ownership structure, related parties, operations, investment and financing activities, financial reporting), the entitys business objectives and strategies, and the related business risks that may result in a material misstatement of the financial statements.
Internal factors
Entitys selection and application of accounting policies
Obtaining an understanding of the entitys selection and application of accounting policies includes our consideration of whether the accounting policies are appropriate for the entitys business and consistent with the applicable financial reporting framework and accounting policies used in the relevant industry.
Measurement and review of the entitys financial performance
In most businesses, management uses certain ratios, financial indicators, or analyses to monitor the effective functioning and overall control of the business. Performance measures create pressures on the entity and these pressures may motivate management to take action to improve the business performance or to misstate the financial statements.
Understanding the Entity ISA 315 Audit procedures to obtain the understanding
We shall perform risk assessment procedures to provide a basis for the identification and assessment of risks of material misstatement at the financial
statement and assertion levels. Risk assessment procedures by themselves,

however, do not provide sufficient appropriate audit evidence on which to base
the audit opinion

Risk assessment procedures shall include the following: Inquiries of management and others within the entity
Preliminary analytical procedures

Observation and inspection
Understanding the Entity ISA 315 Audit procedures to obtain the understanding
Risk assessment procedures related to accounting estimates Risk assessment procedures related to related parties
Risk assessment procedures related to fraud risk considerations

As more professional judgment is required, significant partner and manager involvement is necessary in the upfront planning of the engagement, in order to
provide guidance to the engagement team on the identification of risks by

considering what can go wrong and the development of responses. This risk based approach enhance understanding of each class of transactions, account balance, or disclosure, similar to the concepts described in the profiling approach (e.g., profile and composition of each account, monetary and nonmonetary characteristics - sizes, types, volume of specific items within each account).
How Do We Identify A Material Class Of Transactions, Account Balance, And Disclosure

Steps:
Generally identify from the financial statements
Consider quantitative factors
Consider qualitative factors
Apply your professional judgment to make the determination
How do we identify and assess risks of material misstatement

Understand the entity and its environment, including internal control
Risks of material misstatement that require special audit consideration are referred to as significant risks
Identify risks of material misstatement
There are two presumed significant risks due to fraud,

i.e., revenue recognition and management override of
control
Assess risks of material misstatement at the financial statementor at the assertion level
For all significant risks, evaluate the design and determine
the implementationof any relevant controls the entity has

in place
Assess which risks of material misstatement are significant
Apply professional judgment throughout. Refer to Appendix 1 for examples of risks of material misstatements relating to payroll.
How does this affect the audit engagement?
Consider both the likelihood of a material misstatement in a class of transactions, account balance, or disclosure, and the magnitude of the account
or potential understatement when determining whether a class of transactions,

account balance, or disclosure is material. For material classes of transactions,
account balances, and disclosures identified, we are required to identify risks of

material misstatement at the assertion level to provide a basis for designing and
performing further audit procedures. If a class of transactions, account

balance, or disclosure is not material, further audit procedures
(substantive procedures or control procedures) are not required for it.
An example of determining the material classes of transactions, account balances, and disclosures
Audit Documentation ISA 230

In documenting the nature, timing and extent of audit procedures performed, the auditor shall record:
The identifying characteristics of the specific items or matters tested;

Who performed the audit work and the date such work was completed; Who reviewed the audit work performed and the date and extent of such review. Preparing sufficient and appropriate audit documentation on a timely basis
helps to enhance the quality of the audit and facilitates the effective review and
evaluation of the audit evidence obtained and conclusions reached before the
auditors report is finalized. Documentation prepared after the audit work has
been performed is likely to be less accurate than documentation prepared at
the time such work is performed
Audit Documentation ISA 230
Audit documentation The record of audit procedures performed, relevant
audit evidence obtained, and conclusions the auditor reached

The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit, to understand: The nature, timing and extent of the audit procedures
The results of the audit procedures performed, and the audit evidence
obtained Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions.
Audit Procedures ISA 500

The objective of the auditor is to design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditors opinion. When designing and performing audit procedures, the auditor shall consider the
relevance and reliability of the information to be used as audit evidence

If information to be used as audit evidence has been prepared using the work of a managements expert, the auditor shall:
Evaluate the competence, capabilities and objectivity of that expert;

Obtain an understanding of the work of that expert Evaluate the appropriateness of that experts work as audit evidence for the relevant assertion.

If: audit evidence obtained from one source is inconsistent with that obtained
from another;
the auditor has doubts over the reliability of information to be used as audit
evidence,
the auditor shall determine what modifications or additions to audit procedures are necessary to resolve the matter, and shall consider the effect of the matter, if
any, on other aspects of the audit

Most of the auditors work in forming the auditors opinion consists of obtaining and evaluating audit
evidence. Audit procedures to obtain audit evidence can include:

inspection (involves examining records or documents, whether internal or external) observation (consists of looking at a process or procedure being performed by others)
Confirmation (An external confirmation represents audit evidence obtained by the auditor as a
direct written response to the auditor from a third party) Recalculation (consists of checking the mathematical accuracy of documents or records) Re-performance (involves the auditors independent execution of procedures or controls that were originally performed as part of the entitys internal control)
Analytical procedures (consist of evaluations of financial information through analysis of

plausible relationships among both financial and non-financial data)
Inquiry (consists of seeking information of knowledgeable persons, both financial and nonfinancial, within the entity or outside the entity)
Although inquiry may provide important audit evidence, and may even produce evidence of a misstatement, inquiry alone ordinarily does not provide
sufficient audit evidence of the absence of a material misstatement at the

assertion level, nor of the operating effectiveness of controls.
Procedures for Obtaining Audit Evidence : As required by ISA 315 and ISA
330, audit evidence to draw reasonable conclusions on which to base the auditors opinion is obtained by performing:
Risk assessment procedures;

Further audit procedures, which comprise:
Tests of controls, when required by the ISAs or when the auditor has chosen to do so;
Substantive procedures, including tests of details and substantive analytical procedures


The means available to the auditor for selecting items for testing are:
Selecting all items (100% examination), used when:
The population constitutes a small number of large volume items
There is a significant risk and other means do not provide sufficient appropriate audit evident The repetitive nature of a calculation of process performed automatically by an information system makes a 100% examination cost effective
Selecting specific items, which may include:

High value or key items
All items over a certain amount

Items to obtain information
Audit sampling: is designed to enable conclusions to be drawn about an entire

population on the basis of testing a sample drawn from it.
Audit of Specific Items ISA 501
The objective of the auditor is to obtain sufficient appropriate audit evidence

regarding the:
Existence and condition of inventory;

Completeness of litigation and claims involving the entity; Presentation and disclosure of segment information in accordance with the
applicable financial reporting framework.

If Inventory is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by: Attendance at physical inventory counting
Performing audit procedures over the entitys final inventory records to

determine whether they accurately reflect actual inventory count results

If physical inventory counting is conducted at a date other than the date of
the financial statements, the auditor shall, perform audit procedures to obtain
audit evidence about whether changes in inventory between the count date and
the date of the financial statements are properly recorded. If attendance at physical inventory counting is impracticable, the auditor
shall perform alternative audit procedures to obtain sufficient appropriate audit

evidence regarding the existence and condition of inventory. If it is not possible
to do so, the auditor shall modify the opinion in the auditors report
If inventory under the custody and control of a third party is material to the financial statements, the auditor shall :
Request confirmation from the third party as to the quantities and condition of
inventory held on behalf of the entity
Perform inspection or other audit procedures appropriate in the

circumstances.

The auditor shall design and perform audit procedures in order to identify litigation and claims involving the entity which may give rise to a risk of material misstatement, including: Inquiry of management and, where applicable, others within the entity,
including in-house legal counsel;

Reviewing minutes of meetings of those charged with governance and correspondence between the entity and its external legal counsel;
Reviewing legal expense accounts

The auditor shall request management and, where appropriate, those charged
with governance to provide written representations that all known actual or

possible litigation and claims whose effects should be considered when preparing the financial statements have been disclosed to the auditor and accounted for and disclosed in accordance with the applicable financial reporting framework
The auditor shall obtain sufficient appropriate audit evidence regarding the presentation and disclosure of segment information in accordance with the
applicable financial reporting framework by:

Obtaining an understanding of the methods used by management in
determining segment information, and:

Evaluating whether such methods are likely to result in disclosure in accordance with the applicable financial reporting framework;
Where appropriate, testing the application of such methods;
Performing analytical procedures or other audit procedures appropriate in
the circumstances.
Performing Substantive Analytical Procedures
Identify the account balance or disclosure and the related potential errors to be tested.
Develop an expectation.
Determine the threshold. Identify differences requiring further investigation. Obtain, quantify, and corroborate explanations. Evaluate results.
Tests of Details
What are the three types of tests of details? Representative sampling
Non-representative selection
Testing of all items in the population
Tests of Details
What is the difference between samples selected using nonrepresentative selection and representative sampling?
With nonrepresentative selection, our objective is not to make an assessment

regarding the entire population. With representative sampling, we seek to infer characteristics of the entire
population based on characteristics of the sample.

For items selected using nonrepresentative selection, we only obtain assurance
about those items selected.

Representative samples tend to be made using statistical selection techniques like MUS.
Audit Sampling ISA 530
This International Standard on Auditing applies when the auditor has decided to use audit sampling in performing audit procedures. It deals with the auditors
use of statistical and non-statistical sampling when designing and selecting the
audit sample, performing tests of controls and tests of details, and evaluating
the results from the sample.
Audit sampling The application of audit procedures to less than 100% of
items within a population of audit relevance such that all sampling units have a
chance of selection in order to provide the auditor with a reasonable basis on
which to draw conclusions about the entire population.
Statistical sampling An approach to sampling that has the following characteristics:
(i) Random selection of the sample items; and

(ii)The use of probability theory to evaluate sample results, including measurement of sampling risk. A sampling approach that does not have characteristics (i) and (ii) is considered non-statistical sampling.
When designing an audit sample, the auditor shall consider the purpose of the
audit procedure and the characteristics of the population from which the sample
will be drawn
The auditor shall determine a sample size sufficient to reduce sampling risk to an acceptably low level.
The auditor shall select items for the sample in such a way that each sampling
unit in the population has a chance of selection For tests of details, the auditor shall project misstatements found in the sample to the population. The level of sampling risk that the auditor is willing to accept affects the sample
size required. The lower the risk the auditor is willing to accept, the greater the
sample size will need to be.
Sample size table

Sample Size table
Population Size - Multiples of Monetary Precision 1x 2x 3x 4x 5x 6x 7x 8x 9x 10 x 15 x 20 x 25 x 30 x 40 x 50 x 100 x 200 x (or greater)
Risk(Not Significant )on Controls Low Extent of Testing 1 1 1 1 1 2 2 2 2 2 3 4 5 6 8 10 20 40(*)
Risk (Not Significant) and relying on controls Normal Extent of Testing 1 2 3 3 4 5 5 6 7 7 11 14 18 21 28 35 70 75(*)
Significant Risk (!) and Relying on Controls, or Risk (Not Significant) and not Relying on Significant Risk (!) and Not Relying Controls on Controls 2 3 3 6 5 9 6 12 8 15 9 18 11 21 12 24 14 27 15 30 23 45 30 60 38 75 45 75(*) 60 75(*) 75 75(*) 75(*) 75(*) 75(*) 75(*)
(*) The numbers in red indicate the situations that are impacted by the existence of a maximum sample size (i.e., if we didnt have a maximum sample size, the required number of selections would be larger in these situations) - The sample sizes represent minimum samples sizes. Engagement Management may determine that, in some circumstances, it is appropriate to increase the sample sizes above those in this table - For populations in between the listed levels of Monetary Precision, we may interpolate to obtain the appropriate sample size (!) For a population that contain Significant risk, we arre required to perform substantive procedures that are specifically responsive to that risk (Topic 2820.13). These specifically responsive substantive procedures frequently involve non representative selection.
Representative Sampling
What are the main characteristics of representative sampling? It may be either statistical or nonstatistical. We seek to infer characteristics over the entire population.
Individual items that make up the population need to have similar

characteristics and need to be processed in a similar fashion.
Appropriate if it provides assurance about the items in the population that are
not selected and examined.
Non-representative Selection
What are the main characteristics of non-representative selection? We select items from a population and obtain audit evidence to support them. We examine support for the items selected and do not attempt to make
inferences about unselected items in the broader population.

No assurance is gained on the non-selected portion of the population. Does not relieve us of our responsibility to test the remaining population unless the remaining population is clearly insignificant.
Test Entire Population
When might it be appropriate to test the entire population? Sometimes it is efficient to test the entire population. Used where populations consists of one or a few large items or where we can
use file interrogation techniques.

Gives us full assurance.
Evaluation of Misstatements
What are the three different types of likely misstatements? Projected probable misstatements in populations tested through representative
sampling less the known misstatements found in performing these audit

procedures. Estimated misstatements detected through substantive analytical procedures.
Misstatements in accounting estimates that we judge not to be reasonable.
What do we mean by CTT threshold? Level above which identified uncorrected misstatements are aggregated and
posted onto the overall summary of misstatements.

Maximum 5 % of planning materiality is regarded as CTT. The audit engagement partner may determine that a lower level is appropriate.
Misstatements below the CTT threshold are evaluated for qualitative

considerations
As each misstatement is found, what processes are carried out? Each misstatement is evaluated individually, giving consideration to nature and cause and discussed with the appropriate level of management. Impact on the controls reliance strategy is also reviewed and whether our tests of the operating effectiveness of those controls were adequate. Conclude as to whether we have achieved our desired level of assurance for the potential error being tested. After we have concluded whether we have achieved our desired level of assurance:
If misstatement exceeds CTT threshold, its taken to overall summary of known and
likely misstatements.
If misstatement does not exceed CTT threshold, qualitative factors are considered to
determine if it is taken to the overall summary of known and likely misstatements.
At what stage do we discuss misstatements with management? Best practice to discuss with the Field Senior first.
Discuss all misstatements resulting from fraud or error, whether or not material, with the appropriate level of management. Discussions with management consider correction of the error, the reasons for the misstatement and the potential impact on our audit. Discuss misstatements discovered in performing interim auditing procedures with the appropriate level of management during, or at the completion of, the interim work.
Discuss disclosure deficiencies with the appropriate level of management.
We need to make management aware as soon as practical.
In what circumstances do we ask management to correct misstatements? Best practice to discuss this with the field senior first. Request management to correct known misstatements that, quantitatively or qualitatively, exceed the CTT threshold. Request management to correct likely misstatements arising from estimates
where the recorded estimate is outside the range of amounts we consider to

be reasonable and the likely misstatements exceed the CTT threshold
What is the impact, if any, if the misstatement is indicative of fraud? Consider the implications of fraud and significant error in relation to other
aspects of the audit.

If we believe the effect of the misstatement is immaterial to the financial statements, we evaluate the implications. Communication requirements, such as: Management.
Those charged with governance.

In some cases, to a regulatory authority.
Conclude and report

Evaluate the sufficiency and appropriateness of audit evidence
Conclude whether the audit evidence was sufficient to enable us to draw reasonable conclusions on which to base our audit opinion.
Evaluate indicators of insufficient audit evidence.

Respond to presence of indicators of insufficient audit evidence: Discuss the uncorrected misstatements with management who will be
required to correct them.

Evaluate qualitative assessment about the relationship between undetected misstatements and performance materiality.
Perform additional procedures to arrive at a better estimation of projected

misstatements.
Perform additional procedures using lower performance materiality.
Audit reports Clean opinion
Independent auditors report [Appropriate Addressee]
Report on the Financial Statements

We have audited the accompanying financial statements of ABC Company, which comprise the statement of financial position as at December 31, 20X1, and the
statement of comprehensive income, statement of changes in equity and

statement of cash flows for the year then ended, and a summary of significant
accounting policies and other explanatory information.
Audit report
Managements Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these
financial statements in accordance with International Financial Reporting

Standards, and for 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.
Audit report
Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit in accordance with International Standards on

Auditing. Those standards require that we comply with ethical requirements and
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free from material misstatement.
Audit report
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the financial statements. The procedures selected
depend on the auditors judgment, including the assessment of the risks of

material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements 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 the entitys internal control. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of accounting estimates made by

management, as well as evaluating the overall presentation of the financial
statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Audit report
Opinion In our opinion, the financial statements present fairly, in all material respects, (or
give a true and fair view of) the financial position of ABC Company as at
December 31, 20X1, and (of) its financial performance and its cash flows for the
year then ended in accordance with International Financial Reporting Standards.
Audit report
Report on Other Legal and Regulatory Requirements [Form and content of this section of the auditors report will vary depending on
the nature of the auditors other reporting responsibilities.]

[Auditors signature] [Date of the auditors report]
[Auditors address]
Modified audit reports
Qualified Opinion The auditor shall express a qualified opinion when:
(a) The auditor, having obtained sufficient appropriate audit evidence, concludes
that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence on which
to base the opinion, but the auditor concludes that the possible effects on the
financial statements of undetected misstatements, if any, could be material but

not pervasive.
Basis for Qualified Opinion The companys inventories are carried in the statement of financial position at xxx.
Management has not stated the inventories at the lower of cost and net realizable
value but has stated them solely at cost, which constitutes a departure from
International Financial Reporting Standards. The companys records indicate that

had management stated the inventories at the lower of cost and net realizable value, an amount of xxx would have been required to write the inventories down to their net realizable value. Accordingly, cost of sales would have been increased by xxx, and income tax, net income and shareholders equity would have been reduced by xxx, xxx and xxx, respectively.
Qualified Opinion In our opinion, except for the effects of the matter described in the Basis for
Qualified Opinion paragraph, the financial statements present fairly, in all material
respects, (or give a true and fair view of) the financial position of ABC Company
as at December 31, 20X1, and (of) its financial performance and its cash flows for
the year then ended in accordance with International Financial Reporting Standards.
Adverse Opinion The auditor shall express an adverse opinion when the auditor, having obtained
sufficient appropriate audit evidence, concludes that misstatements, individually or

in the aggregate, are both material and pervasive to the financial statements.

Basis for Adverse Opinion
As explained in Note X, the company has not consolidated the financial statements of subsidiary XYZ Company it acquired during 20X1 because it has not yet been able to ascertain the fair values of certain of the subsidiarys material assets and liabilities at the acquisition date. This investment is therefore
accounted for on a cost basis. Under International Financial Reporting Standards,

the subsidiary should have been consolidated because it is controlled by the
company. Had XYZ been consolidated, many elements in the accompanying

financial statements would have been materially affected. The effects on the
consolidated financial statements of the failure to consolidate have not been

determined.
Adverse Opinion In our opinion, because of the significance of the matter discussed in the Basis for
Adverse Opinion paragraph, the consolidated financial statements do not present

fairly (or do not give a true and fair view of) the financial position of ABC Company
and its subsidiaries as at December 31, 20X1, and (of) their financial performance
and their cash flows for the year then ended in accordance with International Financial Reporting Standards.
Disclaimer of Opinion The auditor shall disclaim an opinion when the auditor is unable to obtain
sufficient appropriate audit evidence on which to base the opinion, and the auditor
concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be both material and pervasive.
Basis for Disclaimer of Opinion The companys investment in its joint venture XYZ (Country X) Company is
carried at xxx on the companys statement of financial position, which represents

over 90% of the companys net assets as at December 31, 20X1. We were not
allowed access to the management and the auditors of XYZ, including XYZs
auditors audit documentation. As a result, we were unable to determine whether any adjustments were necessary in respect of the companys proportional share of XYZs assets that it controls jointly, its proportional share of XYZs liabilities for which it is jointly responsible, its proportional share of XYZs income and expenses for the year, and the elements making up the statement of changes in equity and cash flow statement.
Disclaimer of Opinion Because of the significance of the matter described in the Basis for Disclaimer of
Opinion paragraph, we have not been able to obtain sufficient appropriate audit
evidence to provide a basis for an audit opinion. Accordingly, we do not express
an opinion on the financial statements.
Thank you !
Technical Cross-Functional Knowledge Sharing A flavour of audit approach
Materiality
B. Audit Approach
4. Materiality
The concept of materiality in audit:
Materiality is considered in terms of the smallest aggregate level of misstatements that could be considered material to any one of the statements that comprise the financial statements.
We do not establish separate materiality amounts to individual statements that comprise the financial statements.
Source: Determining Materiality and Performance Materiality, A Guide for Auditors in DTTL Member Firms (March 2012)- For internal distribution only
B. Audit Approach
4. Materiality
Financial reporting frameworks explain the concept of materiality as follows: 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 statements; Judgments 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; Judgments about matters that are material to users of the financial statements are based on a consideration of the common financial information needs of users as a group. The possible effect of misstatements on specific individual users, whose needs may vary widely, is not considered.
B. Audit Approach
4. Materiality
Materiality determination
The auditors determination of materiality:

is a matter of professional judgment and is often a challenging process is affected by the auditors perception of the financial information needs of users of the financial statements. In determining materiality, the auditors make certain assumptions (as described on next slide).
B. Audit Approach
4. Materiality
Materiality determination assumptions Auditor assumes that users: a) Have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information in the financial statements with reasonable diligence; b) Understand that financial statements are prepared, presented and audited to levels of materiality; c) Recognize the uncertainties inherent in the measurement of amounts based on the use of estimates, judgment and the consideration of future events; and d) Make reasonable economic decisions on the basis of the information in the financial statements.
B. Audit Approach
4. Materiality
Determining materiality in Planning Phase
Establish the Overall Audit Strategy

Understand the Entitys Accounting Process
Understand Internal Control Perform Preliminary Analytical Review
Understand the Entity and Its Environment
RISKS
Determine Materiality
Develop the Audit Plan

B. Audit Approach
4. Materiality
The concept of materiality in audit: The concept of materiality is applied by us : in planning and performing the audit - when establishing the Overall Audit Strategy, we shall determine materiality for the Financial Statements as a whole. [2210.01]),
in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements, and in forming the opinion in our audit report.
We determine performance materiality for purposes of assessing the risks of material misstatement and determining the nature, timing, and extent of further audit procedures.
B. Audit Approach
4. Materiality
Computation of materiality: A percentage is often applied to a chosen benchmark as a starting point in determining materiality, depending on several factors:
The elements of the financial statements (for example, assets, liabilities, equity, revenue, expenses); Whether there are items on which the attention of the users of the particular entitys financial statements tends to be focused (for example, for the purpose of evaluating financial performance users may tend to focus on profit, revenue or net assets);
The nature of the entity, where the entity is in its life cycle, and the industry and economic environment in which the entity operates; The entitys ownership structure and the way it is financed;
The relative volatility of the benchmark.
B. Audit Approach
4. Materiality
Determining materiality Steps to determine M: 1. 2. 3. Identify an appropriate base (considering quantitative and qualitative guidelines developed to assist our professional judgment). Estimate its amount based on the financial statements (consider potential need to annualize the amount). Apply an appropriate percentage to the base amount. NOTE: Certain account balances or disclosures which could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements should be reviewed in greater detail than is indicated by M.
B. Audit Approach
4. Materiality
Example
CALCULATIONS Benchmark chosen Specify other benchmark: Benchmark balance: Input selected factor Calculated materiality: Revenues
INSTRUCTIONS
Determined based on professional judgment.
100,000,000 1.50%Enter factor based on Professional Judgment.
1,500,000
$ 1,500,000 Selecting materiality is not a mechanical exercise, it requires us to apply professional judgment. This is the amount that should be entered as "materiality".
Selected materiality:
Total anticipated uncorrected misstatements 150,000
Total anticipated uncorrected misstatements is the total amount of factual, judgmental, projected and SAP misstatements that we anticipate remaining uncorrected at the end of the current engagement.
Calculated performance materiality: $ 1,350,000
This amount or a rounded equivalent should be entered as "performance materiality" in Form 1810.
Percentage to be used as clearly trivial misstatements
Up to five percent of materiality 5.00% This amount or a rounded equivalent should be entered as "trivial misstatements level" in Form 1810.
Calculated trivial misstatements $ 75,000
B. Audit Approach
4. Materiality
Materiality (M) vs. Performance Materiality (PM)
Materiality
Anticipated uncorrected misstatements
The volume of the entire glass represents Materiality.
PM
Each misstatement adds water to the glass. If the glass overflows, the financial statements are misstated. We use PM (less than a full glass) when performing tests to allow extra room for unexpected errors.
We use prior-year errors to estimate how much extra room to allow for in the current year.
Fraud, laws and regulations Laws and regulations
B. Audit Approach
5. Fraud, laws and regulations (ISA 250)
Effect of Laws and Regulations
Non-compliance with laws and regulations may result in fines, litigation or other consequences for the entity that may have a material effect on the financial statements.
Responsibility for Compliance with Laws and Regulations
Management
B. Audit Approach
5. Fraud, laws and regulations (ISA 250)
Management responsibility:
to ensure that the entitys operations are conducted in accordance with the provisions of laws and regulations.
Auditors responsibility:
to obtain reasonable assurance that the financial statements, taken as a whole, are free from material misstatement, whether caused by fraud or error.
to identify material misstatements of the financial statements due to non-compliance with laws and regulations. However, the auditor is not responsible for preventing non-compliance and cannot be expected to detect non-compliance with all laws and regulations.
B. Audit Approach 5. Fraud, laws and regulations (ISA 250)

Categories of laws and regulations from an audit perspective:
1. Direct effect on the determination of material amounts and disclosures in the financial statements (e.g.: tax and pension laws and regulations) The auditors responsibility is to obtain sufficient appropriate audit evidence regarding compliance with the provisions of those laws and regulations.
2. No direct effect on amounts and disclosures, but compliance is fundamental to the operating aspects of the (e.g.: compliance with the terms of an operating license, compliance with regulatory solvency requirements, or compliance with environmental regulations); Non-compliance with such laws and regulations may therefore have a material effect on the financial statements The auditors responsibility is limited to undertaking specified audit procedures to help identify non-compliance with those laws and regulations that may have a material effect on the financial statements.
B. Audit Approach
5. Fraud, laws and regulations ISA 250
Audit Procedures in case of Non-compliance :
Auditor should respond appropriately to non-compliance or suspected non-compliance with laws and regulations identified during the audit. If 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; Further information to evaluate the possible effect on the financial statements. Discuss the matter with management
Consider the need to obtain legal advice. Evaluate the effect of non-compliance on the auditors opinion Report
B. Audit Approach
Matters Relevant to the Auditors Evaluation
The potential financial consequences of non-compliance with laws and regulations on the financial statements including, for example, the imposition of fines, penalties, damages, threat of expropriation of assets, enforced discontinuation of operations, and litigation. Whether the potential financial consequences require disclosure.
Whether the potential financial consequences are so serious as to call into question the fair presentation of the financial statements, or otherwise make the financial statements misleading.
Fraud, laws and regulations Fraud
B. Audit Approach
5. Fraud, laws and regulations ISA 240 Fraud
Characteristics of Fraud Misstatements in the financial statements can arise from either fraud (intentional) or error (unintentional) Fraud is a broad legal concept, but the auditor is concerned with fraud that causes a material misstatement in the financial statements. Two types of intentional misstatements : misstatements resulting from fraudulent financial reporting, and misstatements resulting from misappropriation of assets.
Although the auditor may suspect or, in rare cases, identify the occurrence of fraud, the auditor does not make legal determinations of whether fraud has actually occurred.
B. Audit Approach
Management vs. employees
Fraud by management on the rise:

39.7% of fraud is perpetrated by non-management employees
37.1% of fraud is perpetrated by management

23.3% of fraud is perpetrated by entity owner/executives Level of authority held impacts size of fraud loss:
Median loss for non-management fraud = $70,000

Median loss for management fraud = $150,000 Median loss for entity owner/executive fraud is $834,000
High profile, global cases support these statistics:

Enron, WorldCom, HealthSouth, MicroStrategy, Tyco, Adelphia
B. Audit Approach
Fraud triangle For fraud to occur, three factors must be present:
INCENTIVE / PRESSURE
B. Audit Approach
Professional skepticism An attitude of professional skepticism means an auditor:
Makes a critical assessment with a questioning mind of the validity of the audit evidence obtained Is alert to audit evidence that contradicts Brings into question the reliability of documents and responses to inquires and other information obtained from management and those charged with governance.
B. Audit Approach
Aggressive Conservative accounting accounting (or overly conservative accounting)
Gray zone
The gray zone
Fraudulent accounting
Within
GAAP
Violates
GAAP
Misappropriation of assets
Skimming of cash:
Diversion of funds
Lapping schemes Skimming of funds received from sales
Theft of incoming checks

Theft in cash register
Procurement frauds:
Creation of fictitious vendors

Creation of fictitious shell companies False credits, rebates, refunds, and kickbacks
Phantom or inaccurate invoicing

Overbilling
Personal use of entity accounts

Rigging bidding process
Inventory schemes:
Removal of inventory
False sale of inventory False write-offs and other debits to inventory
Other embezzling schemes:
Larceny of cash
Pay and return schemes Theft of entity checks
Ghost employees
Falsified work hours
Other payroll schemes
B. Audit Approach
Audit Procedures to address Risks of Material Misstatement Due to Fraud: Auditor should determine overall responses to address the assessed risks of material misstatement due to fraud at the financial statement level.
Assign and supervise personnel taking account of the knowledge, skill and ability of the individuals to be given significant engagement responsibilities and the auditors assessment of the risks of material misstatement due to fraud for the engagement
Evaluate whether the selection and application of accounting policies by the entity, particularly those related to subjective measurements and complex transactions, may be indicative of fraudulent financial reporting resulting from managements effort to manage earnings; and Incorporate an element of unpredictability in the selection of the nature, timing and extent of audit procedures.
B. Audit Approach
Audit Procedures (continued):
Inquiry with management Evaluate the Audit Evidence
Auditor Unable to Continue the Engagement?

Reporting Communications to Regulatory and Enforcement Authorities
Analytical procedures
B. Audit Approach
6. Analytical Procedures ISA 520
Use Of Analytical Procedures (AP) In Auditing AP is one method of increasing auditor efficiency. AP consist of evaluations of financial information made by an auditor
of plausible and expected relationships among both financial and

non-financial data. Examples of AP range from simple comparisons (e.g., the current year with the preceding year) to the use of complex models involving many relationships and elements of data (e.g., regression analysis).
B. Audit Approach
Use Of Analytical Procedures (AP) In Auditing The basic premise underlying the application of AP is: Predictability : Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. Particular conditions that can cause variations in these relationships include, for example, specific unusual transactions or events, accounting changes, business changes, random fluctuations, or misstatements. Relationships involving income statement accounts are more predictable than relationships involving only balance sheet accounts.
B. Audit Approach
Analytical procedures used in planning the audit might include the following: Account balance comparison. Compare unadjusted trial balance amounts with adjusted tried balance amounts of the prior year. Computation of significant ratios. Compare current year ratios to current industry ratios and prior year computing ratios. Computation of ratios using nonfinancial and financial data . E.g., sales per square foot of sales space. Regression analysis. This procedure is discussed in a separate section below.
B. Audit Approach
Use Of Analytical Procedures (AP) In Auditing Common analytical procedures we do while assessing audit risk: Trend analysis: compare current financial figures to the same figures in the prior year. Ratio analysis: Some common ratios are the current ratio, and inventory turnover. Reasonableness: Does what were seeing make sense based on other facts? For example, does the depreciation expense appear accurate when you consider the book value of all fixed assets on the balance sheet?
B. Audit Approach
The auditors response to the results of AP in the planning stage When the results of AP signal possible errors ; Increase error risk and thus increase extent of testing
More audit testing than when the results indicate the possibility of no errors.
Investigate the reasons for deviations Investigate deviations from expectations Perform more inquiries with management and obtain corroborative audit evidence
B. Audit Approach
Use of Analytical Procedures in Concluding Phase of the Audit The application of AP in the final review of the audit is one of the last audit tests. Those procedures assist the auditor in assessing conclusions reached concerning certain account balances and in evaluating the overall financial statement presentation. Procedures such as the following may be applied: Comparisons with similar financial data of the prior year or of the clients industry. Ratio analysis. Trend analysis. Development of common-size financial statements.
B. Audit Approach
Use of AP in assessing a companys ability to continue as a going concern apply models using ratios and trends that have been developed to predict bankruptcy
For example: One of the models was developed using a statistical technique (multiple discriminant analysis) and five ratios. Those ratios for a public company are: Working Capital/Total Assets Retained Earnings/Total Assets Earnings before Interest and Taxes/Total Assets
Market Value of Equity/Book Value of Total Debt

Sales/Total Assets
B. Audit Approach
Analytical procedures include the consideration of comparisons of the entitys financial information with, for example: Comparable information for prior periods.
Anticipated results of the entity, such as budgets or forecasts, or expectations

of the auditor, such as an estimation of depreciation.
Similar industry information, such as a comparison of the entitys ratio of

sales to accounts receivable with industry averages or with other entities of
comparable size in the same industry.

Among elements of financial information that would be expected to conform to a predictable pattern based on the entitys experience, such as gross margin percentages. Between financial information and relevant non-financial information, such as payroll costs to number of employees
B. Audit Approach
The auditors substantive procedures at the assertion level may be:
tests of details
substantive analytical procedures a combination of both
Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time. The auditor may inquire of management as to the availability and reliability of information needed to apply substantive analytical procedures, and the results of any such analytical procedures performed by the entity. It may be effective to use analytical data prepared by management, provided the auditor is satisfied that such data is properly prepared.
B. Audit Approach
The following are relevant when determining whether data is reliable for purposes of designing substantive analytical procedures: Source of the information available. ( more reliable when it is obtained from independent sources outside the entity); Comparability of the information available;
Nature and relevance of the information available. (whether budgets have been established as results to be expected rather than as goals to be achieved);
Controls over the preparation of the information that are designed to ensure its completeness, accuracy and validity (controls over the preparation, review and maintenance of budgets).
Thank you!
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/ro/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

Audit Framework and Regulation - Presentation Day 1

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Technical Cross-Functional Knowledge Sharing Curriculum

A flavour of audit approach

Agenda and Objectives

2012 Deloitte Romania

2012 Deloitte Romania

weeks starting 06/08/12, 10/09/12 or 08/10/12 Location

Max. no. of Participants

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2012 Deloitte Romania

Planning and Audit

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A. Audit Framework and Regulation

A. Audit Framework and Regulation

2012 Deloitte Romania

A. Audit Framework and Regulation

Definition of audit [non-IFAC*]

* International Federation of Accountants

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A. Audit Framework and Regulation

2012 Deloitte Romania

A. Audit Framework and Regulation

2012 Deloitte Romania

A. Audit Framework and Regulation 1. Concept of Audit

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A. Audit Framework and Regulation

2012 Deloitte Romania

A. Audit Framework and Regulation

What can go wrong?

2012 Deloitte Romania

A. Audit Framework and Regulation

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A. Audit Framework and Regulation

2012 Deloitte Romania

A. Audit Framework and Regulation

2012 Deloitte Romania

A. Audit Framework and Regulation

International Standards on Review Engagements (ISREs)

III. International Standard on Assurance Engagements (ISAE)

2012 Deloitte Romania

A. Audit Framework and Regulation

2012 Deloitte Romania

A. Audit Framework and Regulation

Reasonable assurance is not an absolute level of assurance!

2012 Deloitte Romania

A. Audit Framework and Regulation

2012 Deloitte Romania

Other assurance engagements

A. Audit Framework and Regulation

2012 Deloitte Romania

Statutory audits IFRS audits and others

A. Audit Framework and Regulation

Statutory audits International Standard Audits

2012 Deloitte Romania

A. Audit Framework and Regulation

2012 Deloitte Romania

A. Audit Framework and Regulation

2012 Deloitte Romania

A. Audit Framework and Regulation

Examples of special purpose framework are:

2012 Deloitte Romania

A. Audit Framework and Regulation

ISA 805 refers to audits of single financial statements and specific