2009 Handbook of International Standard On Audit

International Federation of Accountants 545 Fifth Avenue, 14
th
Floor New York, New York 10017 USA
his !u"lication was !re!ared "# the International Federation of Accountants $IFA%&' Its (ission is to
serve the !u"lic interest, stren)then the worldwide accountanc# !rofession and contri"ute to the
develo!(ent of stron) international econo(ies "# esta"lishin) and !ro(otin) adherence to hi)h *ualit#
!rofessional standards, furtherin) the international conver)ence of such standards and s!eakin) out on
!u"lic interest issues where the !rofession+s e,!ertise is (ost relevant'
his !u"lication (a# "e downloaded free-of-char)e fro( the IFA% we"site htt!.//www'ifac'or)' he
a!!roved te,t is !u"lished in the 0n)lish lan)ua)e'
IFA% welco(es an# co((ents #ou (a# have re)ardin) this hand"ook' %o((ents (a# "e sent to the
address a"ove or e(ailed to IAAS1!u"s2ifac'or)'
%o!#ri)ht 3 A!ril 4005 "# the International Federation of Accountants $IFA%&' All ri)hts reserved'
6er(ission is )ranted to (ake co!ies of this work !rovided that such co!ies are for use in acade(ic
classroo(s or for !ersonal use and are not sold or disse(inated and !rovided that each co!# "ears the
followin) credit line: Copyright April 2009 by the International Federation of Accountants (IFAC) All
rights reser!ed "sed #ith per$ission of IFAC Contact per$issions%ifacorg for per$ission to reproduce&
store& or trans$it this docu$ent' 7therwise, written !er(ission fro( IFA% is re*uired to re!roduce, store,
or trans(it, or to (ake other si(ilar uses of, this docu(ent, e,ce!t as !er(itted "# law' %ontact
!er(issions2ifac'or)'
IS1N. 578-1-594775-54-7
HANDBOOK OF INTERNATIONAL STANDARDS ON AUDITING AND
QUALITY CONTROL
2009 EDITION
Scope of thi H!"#$oo%
his hand"ook "rin)s to)ether all the International Standards on Auditin) and the International Standard on
:ualit# %ontrol that have "een redrafted "# the International Auditin) and Assurance Standards 1oard
$IAAS1& to i(!rove their clarit# $%larit# !ro;ect&' It also includes a <lossar# of er(s and the (reface to
the International )tandards on *uality Control& Auditing& +e!ie#& ,ther Assurance and +elated )er!ices'
hese "eco(e effective on =ece("er 15, 4005' 1ack)round infor(ation on the International Federation of
Accountants $IFA%& is also included'
his hand"ook re!laces 6art II of the 4008 edition of the IFA% -andboo. of International )tandards on
Auditing& Assurance& and /thics (ronounce$ents'
6art I of the 4008 edition of the hand"ook will re(ain in effect durin) 4005' It contains !ronounce(ents on
auditin), review, other assurance, and related services issued "# the IAAS1 as of >anuar# 1, 4008' It also
includes the Code of /thics for (rofessional Accountants, issued "# the International 0thics Standards
1oard for Accountants' he !ronounce(ents on auditin) will re(ain in effect u! to =ece("er
14, 4005? thereafter the# will "e re!laced "# those contained in this hand"ook'
Ho& thi H!"#$oo% i A''!"(e#
he contents of this hand"ook are arran)ed "# section as follows.
%han)es of Su"stance fro( 6arts I and II of the 4008 0dition of the @and"ook
and Aecent =evelo!(ents '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1
1ack)round Infor(ation on the International Federation of
Accountants '''''''''''''
4
6reface to the International Standards on :ualit# %ontrol, Auditin), Aeview,
7ther Assurance and Aelated Services ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 11
<lossar# of er(s '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1B
International Standards on Auditin) and :ualit# %ontrol ''''''''''''''''''''''''''''''''''''' 41
IFA% encoura)es and facilitates the re!roduction, or translation and re!roduction of its
!u"lications' For interested !arties wishin) to re!roduce, or translate and re!roduce this
@and"ook, !lease contact !er(issions2ifac'or) for ter(s and conditions of a)ree(ent'
CHANGES OF SUBSTANCE FRO) *ARTS I AND II OF THE 200+ EDITION OF
THE HANDBOOK AND RECENT DE,ELO*)ENTS
Refe'e"ce
his hand"ook contains references to International Accountin) Standards $IASs& and International
Financial Ae!ortin) Standards $IFASs&' Unless otherwise indicated, references to IASs and IFASs are
to the IASs and IFASs in effect at the date of !re!arin) a !ronounce(ent' Accordin)l#, readers are
cautioned that, where a revised IAS or IFAS has "een issued su"se*uentl#, reference should "e (ade
to the (ost recent IAS or IFAS'
Aeferences to Ccountr#D in this hand"ook should "e read as Ccountr# or ;urisdiction'D
*'o"o-"ce.e"t I-e# $/ the I"te'"!tio"!0 A-#iti"( !"# A-'!"ce
St!"#!'# Bo!'#
his hand"ook contains the co(!lete set of International Auditin) and Assurance Standards 1oard+s
$IAAS1& !ronounce(ents on auditin) and *ualit# control' his includes all the International Standards
on Auditin) $ISAs& that have "een redrafted to i(!rove their clarit#, the redrafted International
Standard on :ualit# %ontrol $IS:%& 1, a <lossar# of er(s, and a 6reface which "eco(e effective on
=ece("er 15, 4005'
his hand"ook re!laces 6art II of the 4008 edition of the International Federation of Accountants
$IFA%& @and"ook of International )tandards on Auditing& Assurance& and /thics (ronounce$ents
which featured nine redrafted ISAs issued "# the IAAS1 as at >anuar# 1, 4008'
Ch!"(e to *!'t I of the 200+ E#itio" of the IFAC H!"#$oo%
6art I of the 4008 edition of the IFA% @and"ook will 'e.!i" i" effect #-'i"( 2009' hat !u"lication
contains !ronounce(ents on auditin), review, other assurance, and related services issued "# the
IAAS1 as of >anuar# 1, 4008' he !ronounce(ents on auditin) and *ualit# control will re(ain in
effect u! to =ece("er 14, 4005' It also includes the Code of /thics for (rofessional Accountants,
issued "# the International 0thics Standards 1oard for Accountants'
6ara)ra!hs 15 and 18 of the International Standard on Aeview 0n)a)e(ents $ISA0& 4410, CAeview of
Interi( Financial Infor(ation 6erfor(ed "# the Inde!endent Auditor of the 0ntit#D have "een
a(ended as a result of ISA 400, C7verall 7";ectives of the Inde!endent Auditor and the %onduct of an
Audit in Accordance with International Standards on Auditin)D issued in 7cto"er 4008' he
a(end(ents "eco(e effective on =ece("er 15, 4005'
1 %@AN<0S
he confor(in) chan)es are shown in the A!!endi, to this section' he a(ended ISA0 4410 can "e
accessed fro( the 6u"lications/1ookstore section on the IFA% we"site at htt!.//www'ifac'or)'

S.!00 E"tit/ A-#it Co"i#e'!tio"
For ISAs issued su"se*uent to Earch 4009, whenever necessar#, s(all entit# audit considerations are
included in the "od# of those ISAs' <uidance contained in International Auditin) 6ractice State(ent
$IA6S& 1005, Che S!ecial %onsiderations in the Audit of S(all 0ntitiesD is withdrawn when revisions to
related ISAs "eco(e effective' Accordin)l#, readers are cautioned that, in addition to the )uidance in IA6S
1005, reference should "e (ade to the s(all entit# audit considerations included in ISAs issued su"se*uent
to Earch 4009'

C0!'it/ *'o1ect
In Earch 4005, the IAAS1 announced the co(!letion of its 18-(onth lon) !ro)ra( to co(!rehensivel#
review all of its ISAs and IS:% to i(!rove their clarit# $%larit# !ro;ect&' As a result of this land(ark
achieve(ent, auditors worldwide will have access to 9B newl# u!dated and clarified ISAs and a clarified
IS:%' hese standards are desi)ned to enhance the understandin) and i(!le(entation of the(, as well as
to facilitate translation' he clarified standards, all of which are contained in this hand"ook, are effective
for audits of financial state(ents for !eriods "e)innin) on or after =ece("er 15, 4005'
Fisit the IAAS1+s %larit# %entre we"site at htt!.//we"'ifac'or)/clarit#-center/inde, for (ore infor(ation on
the %larit# 6ro;ect'

Fi"!0 *'o"o-"ce.e"t I-e# S-$e2-e"t to Ap'i0 304 2009 !"# E5po-'e D'!ft
For infor(ation on recent develo!(ents and to o"tain final !ronounce(ents issued su"se*uent to A!ril 90,
4005 or outstandin) e,!osure drafts, visit the IAAS1+s we"site at htt!.//www'ifac'or)/IAAS1/'
%@AN<0S 4

Appe"#i5
Note to Users of this @and"ook. ISA0s issued "# the IAAS1 as of >anuar# 1, 4008 are contained in 6art I
of the 4008 edition of the IFA% -andboo. of International )tandards on Auditing& Assurance& and /thics
(ronounce$ents' 6art I of the 4008 edition of the IFA% @and"ook will re(ain in effect durin) 4005'
Co"fo'.i"( !.e"#.e"t to ISRE 26704 8Re9ie& of I"te'i. Fi"!"ci!0 I"fo'.!tio" *e'fo'.e# $/ the
I"#epe"#e"t A-#ito' of the E"tit/: ! ! 'e-0t of ISA 2004 8O9e'!00 O$1ecti9e of the I"#epe"#e"t
A-#ito' !"# the Co"#-ct of !" A-#it i" Acco'#!"ce &ith I"te'"!tio"!0 St!"#!'# o" A-#iti"(:
15' he !rocedures !erfor(ed "# the auditor to u!date the understandin) of the entit# and its
environ(ent, includin) its internal control, ordinaril# include the followin).
% G H
% G %onsiderin) si)nificant financial accountin) and re!ortin) (atters that (a# "e of
continuin) si)nificance such as (aterial weaknesses si)nificant deficiencies in internal control'
% G H
18' his understandin) ena"les the auditor to focus the in*uiries (ade, and the anal#tical and other
review !rocedures a!!lied in !erfor(in) a review of interi( financial infor(ation in accordance
with this ISA0' As !art of o"tainin) this understandin), the auditor ordinaril# (akes in*uiries of the
!redecessor auditor and, where !ractica"le, reviews the !redecessor auditor+s docu(entation for the
!recedin) annual audit, and for an# !rior interi( !eriods in the current #ear that have "een reviewed
"# the !redecessor auditor' In doin) so, the auditor considers the nature of an# corrected
(isstate(ents, and an# uncorrected (isstate(ents a))re)ated "# the !redecessor auditor, an#
si)nificant risks, includin) the risk of (ana)e(ent override of controls, and si)nificant accountin)
and an# re!ortin) (atters that (a# "e of continuin) si)nificance, such as (aterial weaknesses
si)nificant deficiencies in internal control'
9 %@AN<0S A660N=II
BACKGROUND INFOR)ATION ON THE INTERNATIONAL FEDERATION
OF ACCOUNTANTS

The O'(!"i;!tio"
he International Federation of Accountants $IFA%& is the worldwide or)aniJation for the accountanc#
!rofession' Founded in 1577, its (ission is Cto serve the !u"lic interest, IFA% will continue to stren)then
the worldwide accountanc# !rofession and contri"ute to the develo!(ent of stron) international econo(ies
"# esta"lishin) and !ro(otin) adherence to hi)h-*ualit# !rofessional standards, furtherin) the international
conver)ence of such standards and s!eakin) out on !u"lic interest issues where the !rofession+s e,!ertise is
(ost relevant'D
IFA%+s )overnin) "odies, staff and volunteers are co((itted to the values of inte)rit#, trans!arenc# and
e,!ertise' IFA% also seeks to reinforce !rofessional accountants+ adherence to these values, which are
reflected in the IFA% Code of /thics for (rofessional Accountants
*'i.!'/ Acti9itie
Se'9i"( the *-$0ic I"te'et
IFA% !rovides leadershi! to the worldwide accountanc# !rofession in servin) the !u"lic interest "#.
% G =evelo!in), !ro(otin) and (aintainin) )lo"al !rofessional standards and a Code of
/thics for (rofessional Accountants of a consistentl# hi)h-*ualit#?
% G Activel# encoura)in) conver)ence of !rofessional standards, !articularl#, auditin),
assurance, ethics, education, and !u"lic and !rivate sector financial re!ortin) standards?
% G Seekin) continuous i(!rove(ents in the *ualit# of auditin) and financial (ana)e(ent?
% G 6ro(otin) the values of the accountanc# !rofession to ensure that it continuall# attracts
hi)h cali"er entrants?
% G 6ro(otin) co(!liance with (e("ershi! o"li)ations? and
% G Assistin) develo!in) and e(er)in) econo(ies, in coo!eration with re)ional accountin)
"odies and others, in esta"lishin) and (aintainin) a !rofession co((itted to *ualit# !erfor(ance
and to servin) the !u"lic interest'
Co"t'i$-ti"( to the Efficie"c/ of the G0o$!0 Eco"o./
IFA% contri"utes to the efficient functionin) of the international econo(# "#.
% G I(!rovin) confidence in the *ualit# and relia"ilit# of financial re!ortin)?
% G 0ncoura)in) the !rovision of hi)h-*ualit# !erfor(ance infor(ation $financial and non-
financial& within or)aniJations?
IFA% 4
% G 6ro(otin) the !rovision of hi)h-*ualit# services "# all (e("ers of the worldwide
accountanc# !rofession? and
% G 6ro(otin) the i(!ortance of adherence to the Code of /thics for (rofessional
Accountants "# all (e("ers of the accountanc# !rofession, includin) (e("ers in industr#,
co((erce, the !u"lic sector, the not-for-!rofit sector, acade(ia, and !u"lic !ractice'
*'o9i#i"( Le!#e'hip !"# Spo%e.!"hip
IFA% is the !ri(ar# s!okes!erson for the international !rofession and s!eaks out on !u"lic !olic# issues,
es!eciall# those where the !rofession+s e,!ertise is (ost relevant, as well as on re)ulator# issues related to
auditin) and financial re!ortin)' his is acco(!lished, in !art, throu)h outreach to nu(erous or)aniJations
that rel# on or have an interest in the activities of the international accountanc# !rofession and throu)h the
issuance of !u"lic !olic# !ositions'

)e.$e'hip
IFA% is co(!rised of 158 (e("ers and associates in 149 countries worldwide, re!resentin) a!!ro,i(atel#
4'5 (illion accountants in !u"lic !ractice, industr# and co((erce, the !u"lic sector, and education' No
other accountanc# "od# in the world and few other !rofessional or)aniJations have the "road-"ased
international su!!ort that characteriJes IFA%'
IFA%+s stren)ths derive not onl# fro( its international re!resentation, "ut also fro( the su!!ort and
involve(ent of its individual (e("er "odies, which are the(selves dedicated to !ro(otin) inte)rit#,
trans!arenc#, and e,!ertise in the accountanc# !rofession, as well as fro( the su!!ort of re)ional
accountanc# "odies'

St!"#!'#<Setti"( I"iti!ti9e
IFA% has lon) reco)niJed the need for a )lo"all# har(oniJed fra(ework to (eet the increasin)l#
international de(ands that are !laced on the accountanc# !rofession, whether fro( the "usiness, !u"lic
sector or education co((unities' Ea;or co(!onents of this fra(ework are the Code of /thics for
(rofessional Accountants, International Standards on Auditin) $ISAs&, International 0ducation Standards
$I0Ss&, and International 6u"lic Sector Accountin) Standards $I6SASs&'
IFA%+s standard-settin) "oards, descri"ed "elow, follow a due !rocess that su!!orts the develo!(ent of
hi)h-*ualit# standards in the !u"lic interest in a trans!arent, efficient, and effective (anner' hese
standard-settin) "oards all have %onsultative Advisor# <rou!s, which !rovide !u"lic interest !ers!ectives,
and include !u"lic (e("ers'
IFA%+s 6u"lic Interest Activit# %o((ittees $6IA%s& K the International Auditin) and Assurance Standards
1oard, International Accountin) 0ducation Standards 1oard, International 0thics Standards 1oard for
Accountants $I0S1A& and the %o(!liance Advisor# 6anel K are su";ect to oversi)ht "# the 6u"lic Interest
7versi)ht 1oard $6I71& $see "elow&'
5 IFA%
he ter(s of reference, due !rocess and o!eratin) !rocedures of the IFA% standard-settin) "oards are
availa"le fro( the IFA% we"site at htt!.//www'ifac'or)'
IFA% activel# su!!orts conver)ence to ISAs and other standards develo!ed "# IFA%+s inde!endent
standard-settin) "oards and the International Accountin) Standards 1oard'
A-#iti"( !"# A-'!"ce Se'9ice
he IAAS1 develo!s ISAs and International Standards on Aeview 0n)a)e(ents, which deal with the audit
and review of historical financial state(ents, and International Standards on Assurance 0n)a)e(ents,
which deal with assurance en)a)e(ents other than the audit or review of historical financial infor(ation'
he IAAS1 also develo!s related !ractice state(ents' hese standards and state(ents serve as the
"ench(ark for hi)h-*ualit# auditin) and assurance standards and state(ents worldwide' he# esta"lish
standards and !rovide )uidance for auditors and other !rofessional accountants, )ivin) the( the tools to
co!e with the increased and chan)in) de(ands for re!orts on financial infor(ation, and !rovide )uidance
in s!ecialiJed areas'
In addition, the IAAS1 develo!s *ualit# control standards for fir(s and en)a)e(ent tea(s in the !ractice
areas of audit, assurance and related services'

Ethic
he Code of /thics for (rofessional Accountants $the %ode&, develo!ed "# the I0S1A, esta"lishes ethical
re*uire(ents for !rofessional accountants and !rovides a conce!tual fra(ework for all !rofessional
accountants to ensure co(!liance with the five funda(ental !rinci!les of !rofessional ethics' hese
!rinci!les are inte)rit#, o";ectivit#, !rofessional co(!etence and due care, confidentialit#, and !rofessional
"ehavior' Under the fra(ework, all !rofessional accountants are re*uired to identif# threats to these
funda(ental !rinci!les and, if there are threats, a!!l# safe)uards to ensure that the !rinci!les are not
co(!ro(ised' A (e("er "od# of IFA% or fir( conductin) an audit usin) ISAs (a# not a!!l# less
strin)ent standards than those stated in the %ode'

*-$0ic Secto' Acco-"ti"(
IFA%+s International 6u"lic Sector Accountin) Standards 1oard $I6SAS1& focuses on the develo!(ent of
hi)h-*ualit# financial re!ortin) standards for use "# !u"lic sector entities around the world' It has
develo!ed a co(!rehensive "od# of I6SASs settin) out the re*uire(ents for financial re!ortin) "#
)overn(ents and other !u"lic sector or)aniJations' he I6SASs re!resent international "est !ractice in
financial re!ortin) "# !u"lic sector entities' In (an# ;urisdictions, the a!!lication of the re*uire(ents of
I6SASs will enhance the accounta"ilit# and trans!arenc# of the financial re!orts !re!ared "# )overn(ents
and their a)encies'
IFA% B
he I6SASs are contained in the 4008 edition of the IFA% -andboo. of International (ublic )ector
Accounting (ronounce$ents and are also availa"le fro( the IFA% we"site at htt!.//www'ifac'or)' French
and S!anish translations of the I6SASs are also availa"le for download fro( the IFA% we"site'

E#-c!tio"
Lorkin) to advance accountin) education !ro)ra(s worldwide, IFA%+s International Accountin)
0ducation Standards 1oard $IA0S1& develo!s International 0ducation Standards $I0Ss&, settin) the
"ench(arks for the education of (e("ers of the accountanc# !rofession' All IFA% (e("er "odies are
re*uired to co(!l# with those standards, which address the education !rocess leadin) to *ualification as a
!rofessional accountant, as well as the on)oin) continuin) !rofessional develo!(ent of !rofessional
accountants, and the co(!etence re*uire(ents of audit !rofessionals' he IA0S1 also develo!s
International 0ducation 6ractice State(ents $I06Ss& and other )uidance to assist (e("er "odies and
accountin) educators i(!le(ent and achieve )ood !ractice in accountin) education'
he I0Ss and I06Ss are contained in the 4005 edition of IFA%+s @and"ook of International 0ducation
6ronounce(ents and are also availa"le fro( the IFA% we"site at htt!.//www'ifac'or)'

S-ppo't fo' *'ofeio"!0 Acco-"t!"t i" B-i"e
1oth IFA% and its (e("er "odies face the challen)e of (eetin) the needs of an increasin) nu("er of
accountants e(!lo#ed in "usiness and industr#, the !u"lic sector, education, and the not-for-!rofit sector'
hese accountants now co(!rise (ore than 50 !ercent of the (e("ershi! of (e("er "odies' IFA%+s
6rofessional Accountants in 1usiness $6AI1& %o((ittee develo!s )ood !ractice )uidance and other
resources, and facilitates the e,chan)e of knowled)e a(on) its (e("er "odies' hese address a wide ran)e
of !rofessional issues, encoura)e hi)h-*ualit# !erfor(ance "# !rofessional accountants in "usiness, and
"uild !u"lic awareness and understandin) of the roles these individuals !la# in their or)aniJations' Eore
infor(ation on the work of the co((ittee can "e o"tained at htt!.//www'ifac'or)/!ai"'

S.!00< !"# )e#i-.<Si;e# *'!ctice
IFA% is also focused on !rovidin) su!!ort for another i(!ortant constituenc#. s(all-and (ediu(-siJed
!ractices $SE6s& and other accountants !rovidin) services to s(all- and (ediu(-siJed entities $SE0s&'
hrou)h its SE6 %o((ittee, direct in!ut fro( an SE6/SE0 !ers!ective is !rovided into the work of
international standard setters with the o";ective of hel!in) sha!e the work a)enda of the standard setters
and ensurin) standards !roduced are a!!lica"le to SE6s and SE0s' he co((ittee also !rovides !ractical
su!!ort in the for( of i(!le(entation )uides and we"-"ased resources desi)ned to hel! SE6s efficientl#
i(!le(ent international standards, !roficientl# (ana)e their !ractices and re(ain relevant to their clients'
In addition, the %o((ittee en)a)es in outreach activities such as its annual SE6 foru(, to
7 IFA%
ensure it is ke!t a"reast of e(er)in) issues and a"le to res!ond to the needs of its constituenc# in a ti(el#
(anner' Eore infor(ation on the work of the co((ittee can "e o"tained at htt!.//www'ifac'or)/s(!'

De9e0opi"( N!tio"
IFA%+s =evelo!in) Nations %o((ittee su!!orts the develo!(ent of the accountanc# !rofession in all
re)ions of the world "# re!resentin) and addressin) the interests of develo!in) nations and "# !rovidin)
)uidance to stren)then the accountanc# !rofession worldwide' he co((ittee also seeks resources and
develo!(ent assistance fro( the donor co((unit# and IFA% (e("ers on their "ehalf' In addition, the
co((ittee holds annual foru(s on addressin) the needs of develo!in) nations' Eore infor(ation on the
work of the co((ittee can "e o"tained at htt!.//www'ifac'or)/develo!in)nations'

IFAC )e.$e' Bo#/ Co.p0i!"ce *'o('!.
As !art of the Ee("er 1od# %o(!liance 6ro)ra(, IFA% (e("ers and associates are re*uired to
de(onstrate how the# have used "est endeavors, su";ect to national laws and re)ulations, to i(!le(ent the
standards issued "# IFA% and the International Accountin) Standards 1oard' Lhere IFA% (e("ers and
associates are the national standard setters, the# are re*uired to use their "est endeavors to incor!orate
international standards' he !ro)ra(, which is overseen "# IFA%+s %o(!liance Advisor# 6anel, also seeks
to deter(ine how (e("ers and associates have (et their o"li)ations with res!ect to *ualit# assurance and
investi)ation and disci!linar# !ro)ra(s for their (e("ers as set out in IFA%+s State(ents of Ee("ershi!
7"li)ations $SE7s&' he SE7s serve as the foundation of the %o(!liance 6ro)ra( and !rovide clear
"ench(arks to current and !otential (e("er "odies to assist the( in ensurin) hi)h-*ualit# !erfor(ance "#
!rofessional accountants'
his hand"ook does not contain the SE7s, which are availa"le fro( the IFA% we"site at
htt!.//www'ifac'or)' Eore infor(ation on the work of the advisor# !anel can "e o"tained at
htt!.//www'ifac'or)/co(!liance!ro)ra('

Re(-0!to'/ F'!.e&o'%
In Nove("er 4009, IFA%, with the stron) su!!ort of (e("er "odies and international re)ulators, a!!roved
a series of refor(s to increase confidence that the activities of IFA% are !ro!erl# res!onsive to the !u"lic
interest and will lead to the esta"lish(ent of hi)h-*ualit# standards and !ractices in auditin) and assurance'
he refor(s !rovide for the followin). (ore trans!arent standard-settin) !rocesses, )reater !u"lic and
re)ulator# in!ut into those !rocesses, re)ulator# (onitorin), !u"lic interest oversi)ht, and on)oin)
dialo)ue "etween re)ulators and the accountanc# !rofession' his is acco(!lished throu)h the followin)
structures.
Public Interest Oversight Board (PIOB)0sta"lished in Fe"ruar# 4005, the 6I71 oversees IFA%+s
standard-settin) activities in the areas of auditin) and assurance,
IFA% 8
ethics K includin) inde!endence K and education, as well as the IFA% Ee("er 1od# %o(!liance 6ro)ra('
he 6I71 is co(!rised of ten re!resentatives no(inated "# international re)ulators and institutions'
Monitoring Group (MG)0he E< co(!rises international re)ulators and related or)aniJations' Its role is
to u!date the 6I71 re)ardin) si)nificant events in the re)ulator# environ(ent' It is also the vehicle for
dialo)ue "etween re)ulators and the international accountanc# !rofession'
IFAC Regulator !iaison Group (IR!G)he IAM< includes the IFA% 6resident, =e!ut# 6resident,
%hief 0,ecutive 7fficer, three (e("ers desi)nated "# the IFA% 1oard, the %hair of the Foru( of Fir(s,
and si, (e("ers desi)nated "# the fir(s' his )rou! works with the E< and addresses issues related to the
re)ulation of the !rofession'

IFAC St'-ct-'e !"# Ope'!tio"
<overnance of IFA% rests with its 1oard and %ouncil' he IFA% %ouncil co(!rises one re!resentative
fro( each (e("er' he 1oard is a s(aller )rou! res!onsi"le for !olic# settin)' As re!resentatives of the
worldwide accountanc# !rofession, 1oard (e("ers take an oath of office to act with inte)rit# and in the
!u"lic interest'
he IFA% No(inatin) %o((ittee (akes reco((endations on the co(!osition of IFA% "oards and
co((ittees, the IFA% 1oard, and candidates for the office of IFA% =e!ut# 6resident' he co((ittee is
)uided in its work "# the !rinci!le of choosin) the "est !erson for the !osition' It also seeks to "alance
re)ional and !rofessional re!resentation on the "oards and co((ittees as well as re!resentation fro(
countries with different levels of econo(ic develo!(ent'
IFA% is head*uartered in New York %it#, United States and has offices in oronto, %anada and Eel"ourne,
Australia' Its staff (e("ers consist of accountin) and other !rofessionals fro( around the world'

IFAC =e$ite4 Cop/'i(ht !"# T'!"0!tio"
IFA% (akes its )uidance widel# availa"le "# ena"lin) individuals to freel# download all !u"lications fro(
its we"site $htt!.//www'ifac'or)& and "# encoura)in) its (e("ers and associates, re)ional accountanc#
"odies, standard setters, re)ulators, and others to include links fro( their own we"sites, or !rint (aterials,
to the !u"lications on IFA%+s we"site' he IFA% 6olic# State(ent, (er$issions (olicy for (ublications
Issued by the International Federation of Accountants& outlines its !olic# with re)ard to co!#ri)ht'
IFA% reco)niJes that it is i(!ortant that !re!arers and users of financial state(ents, auditors, re)ulators,
law#ers, acade(ia, students, and other interested )rou!s in non-0n)lish s!eakin) countries have access to
its standards in their native lan)ua)e' he IFA% 6olic# State(ent, 1ranslation of )tandards and 2uidance
Issued by the International Federation of Accountants& outlines its !olic# with re)ard to translation of its
standards'
5 IFA%
his hand"ook does not contain these !olic# state(ents' @owever, the# are availa"le fro( the IFA%
we"site at htt!.//www'ifac'or)/translations' he we"site also features additional infor(ation a"out IFA%+s
structure and activities'
IFA% 10
*REFACE TO THE INTERNATIONAL STANDARDS ON QUALITY CONTROL4
AUDITING4 RE,IE=4 OTHER ASSURANCE AND RELATED SER,ICES
$0ffective as of =ece("er 15, 4005&
CONTENTS
6ara)ra!h
Introduction ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1-4
he IAAS1+s 6ronounce(ents he
Authorit# Attachin) to International
Standards Issued "# the
'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''
' 9
International Auditin) and Assurance Standards 1oard ''''''''''''''''''''''''''' 4-5
International Standards on Auditin) '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 10
International Standards on :ualit# %ontrol '''''''''''''''''''''''''''''''''''''''''''''''''''''' 11
7ther International Standards ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 14-14
6rofessional >ud)(ent '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 15
A!!lica"ilit# of the International Standards ''''''''''''''''''''''''''''''''''''''''''''''''''''' 1B-17
he Authorit# Attachin) to 6ractice State(ents Issued "# the International
Auditin) and Assurance Standards 1oard '''''''''''''''''''''''''''''''''''''''''''''''' 18-15
7ther 6a!ers 6u"lished "# the International Auditin) and Assurance
Standards 1oard '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 40
Man)ua)e ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 41
11 6A0FA%0
I"t'o#-ctio"
1. 1' his !reface to the International Standards on :ualit# %ontrol, Auditin), Aeview, 7ther
Assurance and Aelated Services $International Standards or IAAS1+s Standards& is issued to
facilitate understandin) of the sco!e and authorit# of the !ronounce(ents the International
Auditin) and Assurance Standards 1oard $IAAS1& issues, as set forth in the IAAS1+s er(s of
Aeference'
2. 4' he IAAS1 is co((itted to the )oal of develo!in) a set of International Standards which
are )enerall# acce!ted worldwide' IAAS1 (e("ers act in the co((on interest of the !u"lic at
lar)e and the worldwide accountanc# !rofession' his could result in their takin) a !osition on a
(atter that is not in accordance with current !ractice in their countr# or fir( or not in accordance
with the !osition taken "# those who !ut the( forward for (e("ershi! of the IAAS1'
The IAASB> *'o"o-"ce.e"t
9' he IAAS1+s !ronounce(ents )overn audit, review, other assurance and related services
en)a)e(ents that are conducted in accordance with International Standards' he# do not override
the local laws or re)ulations that )overn the audit of historical financial state(ents or assurance
en)a)e(ents on other infor(ation in a !articular countr# re*uired to "e followed in accordance
with that countr#+s national standards' In the event that local laws or re)ulations differ fro(, or
conflict with, the IAAS1+s Standards on a !articular su";ect, an en)a)e(ent conducted in
accordance with local laws or re)ulations will not auto(aticall# co(!l# with the IAAS1+s
Standards' A !rofessional accountant should not re!resent co(!liance with the IAAS1+s
Standards unless the !rofessional accountant has co(!lied full# with all of those relevant to the
en)a)e(ent'
The A-tho'it/ Att!chi"( to I"te'"!tio"!0 St!"#!'# I-e# $/ the I"te'"!tio"!0
A-#iti"( !"# A-'!"ce St!"#!'# Bo!'#
1. 4' International Standards on Auditin) $ISAs& are to "e a!!lied in the audit of historical
financial infor(ation'
2. 5' International Standards on Aeview 0n)a)e(ents $ISA0s& are to "e a!!lied in the review
of historical financial infor(ation'
3. B' International Standards on Assurance 0n)a)e(ents $ISA0s& are to "e a!!lied in
assurance en)a)e(ents other than audits or reviews of historical financial infor(ation'
4. 7' International Standards on Aelated Services $ISASs& are to "e a!!lied to co(!ilation
en)a)e(ents, en)a)e(ents to a!!l# a)reed u!on !rocedures to infor(ation and other related
services en)a)e(ents as s!ecified "# the IAAS1'
6A0FA%0 14
1. 8' ISAs, ISA0s, ISA0s and ISASs are collectivel# referred to as the IAAS1+s 0n)a)e(ent
Standards'
2. 5' International Standards on :ualit# %ontrol $IS:%s& are to "e a!!lied for all services
fallin) under the IAAS1+s 0n)a)e(ent Standards'
I"te'"!tio"!0 St!"#!'# o" A-#iti"(
10' ISAs are written in the conte,t of an audit of financial state(ents
1
"# an inde!endent auditor' he#
are to "e ada!ted as necessar# in the circu(stances when a!!lied to audits of other historical
financial infor(ation' he authorit# of ISAs is set out in ISA 400'
4
I"te'"!tio"!0 St!"#!'# o" Q-!0it/ Co"t'o0
11' IS:%s are written to a!!l# to fir(s in res!ect of all their services fallin) under the IAAS1+s
0n)a)e(ent Standards' he authorit# of IS:%s is set out in the introduction to the IS:%s'
Othe' I"te'"!tio"!0 St!"#!'#
1. 14' he International Standards identified in !ara)ra!hs 5-7 contain "asic !rinci!les and
essential !rocedures $identified in "old t#!e letterin) and "# the word CshouldD& to)ether with
related )uidance in the for( of e,!lanator# and other (aterial, includin) a!!endices' he "asic
!rinci!les and essential !rocedures are to "e understood and a!!lied in the conte,t of the
e,!lanator# and other (aterial that !rovides )uidance for their a!!lication' It is therefore
necessar# to consider the entire te,t of a Standard to understand and a!!l# the "asic !rinci!les and
essential !rocedures'
2. 19' he "asic !rinci!les and essential !rocedures of a Standard are to "e a!!lied in all cases
where the# are relevant in the circu(stances of the en)a)e(ent' In e,ce!tional circu(stances,
however, a !rofessional accountant (a# ;ud)e it necessar# to de!art fro( a relevant essential
!rocedure in order to achieve the !ur!ose of that !rocedure' Lhen such a situation arises, the
!rofessional accountant is re*uired to docu(ent how alternative !rocedures !erfor(ed achieve the
!ur!ose of the !rocedure and, unless otherwise clear, the reasons for the de!arture' he need for
the !rofessional accountant to de!art fro( a relevant essential !rocedure is e,!ected to arise onl#
where, in the s!ecific circu(stances of the en)a)e(ent, that !rocedure would "e ineffective'
1
Unless otherwise stated, Cfinancial state(entsD (ean financial state(ents
co(!risin) historical financial infor(ation' 4
ISA 400, C7verall 7";ectives of the Inde!endent Auditor and the %onduct of an Audit in Accordance with International
Standards on Auditin)'D
19 6A0FA%0
14' A!!endices, which for( !art of the a!!lication (aterial, are an inte)ral !art of a Standard' he
!ur!ose and intended use of an a!!endi, are e,!lained in the "od# of the related Standard or
within the title and introduction of the a!!endi, itself'
*'ofeio"!0 ?-#(.e"t
15' he nature of the International Standards re*uires the !rofessional accountant to e,ercise
!rofessional ;ud)(ent in a!!l#in) the('
App0ic!$i0it/ of the I"te'"!tio"!0 St!"#!'#
1. 1B' he sco!e, effective date and an# s!ecific li(itation of the a!!lica"ilit# of a s!ecific
International Standard is (ade clear in the Standard' Unless otherwise stated in the International
Standard, the !rofessional accountant is !er(itted to a!!l# an International Standard "efore the
effective date s!ecified therein'
1. 17' International Standards are relevant to en)a)e(ents in the !u"lic sector' Lhen
a!!ro!riate, additional considerations s!ecific to !u"lic sector entities are included.
2. $a& Lithin the "od# of an International Standard in the case of ISAs and IS:%s? or
3. $"& In a 6u"lic Sector 6ers!ective $6S6& a!!earin) at the end of other International
Standards'
The A-tho'it/ Att!chi"( to *'!ctice St!te.e"t I-e# $/ the I"te'"!tio"!0
A-#iti"( !"# A-'!"ce St!"#!'# Bo!'#
1. 18' International Auditin) 6ractice State(ents $IA6Ss& are issued to !rovide inter!retive
)uidance and !ractical assistance to !rofessional accountants in i(!le(entin) ISAs and to
!ro(ote )ood !ractice' International Aeview 0n)a)e(ent 6ractice State(ents $IA06Ss&,
International Assurance 0n)a)e(ent 6ractice State(ents $IA06Ss& and International Aelated
Services 6ractice State(ents $IAS6Ss& are issued to serve the sa(e !ur!ose for i(!le(entation of
ISA0s, ISA0s and ISASs res!ectivel#'
1. 15' 6rofessional accountants should "e aware of and consider 6ractice State(ents a!!lica"le
to the en)a)e(ent' A !rofessional accountant who does not consider and a!!l# the )uidance
included in a relevant 6ractice State(ent should "e !re!ared to e,!lain how.
2. $a& he re*uire(ents in the ISAs? or
3. $"& he "asic !rinci!les and essential !rocedures in the IAAS1+s other 0n)a)e(ent
Standard$s&, addressed "# the 6ractice State(ent, have "een co(!lied with'
6A0FA%0 14
Othe' *!pe' *-$0ihe# $/ the I"te'"!tio"!0 A-#iti"( !"# A-'!"ce
St!"#!'# Bo!'#
40' 7ther !a!ers, for e,a(!le =iscussion 6a!ers, are !u"lished
9
to !ro(ote discussion or de"ate on
auditin), review, other assurance and related services and *ualit# control issues affectin) the
accountin) !rofession, !resent findin)s, or descri"e (atters of interest relatin) to auditin), review,
other assurance, related services and *ualit# control issues affectin) the accountin) !rofession'
he# do not esta"lish an# "asic !rinci!les or essential !rocedures to "e followed in audit, review,
other assurance or related services en)a)e(ents'
L!"(-!(e
41' he sole authoritative te,t of an e,!osure draft, International Standard, 6ractice State(ent or other
!a!er is that !u"lished "# the IAAS1 in the 0n)lish lan)ua)e'
he IAAS1 %hair will a!!oint a review )rou! of four IAAS1 (e("ers to consider whether a draft !a!er has sufficient (erit to
"e added to the IAAS1+s literature' he draft !a!er (a# co(e fro( an# source and the IAAS1 need not have s!ecificall#
co((issioned it' If the review )rou! "elieves that the !a!er has sufficient (erit, it reco((ends to the IAAS1 that the !a!er "e
!u"lished and added to its literature'
15 6A0FA%0
GLOSSARY OF TER)S
1
$Fe"ruar# 4005&
Access controlsN6rocedures desi)ned to restrict access to on-line ter(inal devices, !ro)ra(s and data'
Access controls consist of Cuser authenticationD and Cuser authoriJation'D CUser authenticationD t#!icall#
atte(!ts to identif# a user throu)h uni*ue lo)on identifications, !asswords, access cards or "io(etric data'
CUser authoriJationD consists of access rules to deter(ine the co(!uter resources each user (a# access'
S!ecificall#, such !rocedures are desi)ned to !revent or detect.
OAccounting esti$ateNAn a!!ro,i(ation of a (onetar# a(ount in the a"sence of a !recise (eans of
(easure(ent' his ter( is used for an a(ount (easured at fair value where there is esti(ation uncertaint#,
as well as for other a(ounts that re*uire esti(ation' Lhere ISA 540
4
addresses onl# accountin) esti(ates
involvin) (easure(ent at fair value, the ter( Cfair value accountin) esti(atesD is used'
OAccounting recordsNhe records of initial accountin) entries and su!!ortin) records, such as checks and
records of electronic fund transfers? invoices? contracts? the )eneral and su"sidiar# led)ers, ;ournal entries
and other ad;ust(ents to the financial state(ents that are not reflected in for(al ;ournal entries? and records
such as work sheets and s!readsheets su!!ortin) cost allocations, co(!utations, reconciliations and
disclosures'
Agreed3upon procedures engage$entNAn en)a)e(ent in which an auditor is en)a)ed to carr# out those
!rocedures of an audit nature to which the auditor and the entit# and an# a!!ro!riate third !arties have
a)reed and to re!ort on factual findin)s' he reci!ients of the re!ort for( their own conclusions fro( the
re!ort "# the auditor' he re!ort is restricted to those !arties that have a)reed to the !rocedures to "e
!erfor(ed since others, unaware of the reasons for the !rocedures (a# (isinter!ret the results'
O =enotes a ter( defined in the ISAs'
P =enotes a ter( defined in IS:% 1' 1
In the case of !u"lic sector en)a)e(ents, the ter(s in this )lossar# should "e read as referrin) to their !u"lic sector e*uivalents'
Lhere accountin) ter(s have not "een defined in the !ronounce(ents of the International Auditin) and
Assurance Standards 1oard, reference should "e (ade to the <lossar# of er(s !u"lished "# the
International Accountin) Standards 1oard' 4
ISA 540, CAuditin) Accountin) 0sti(ates, Includin) Fair Falue Accountin) 0sti(ates, and Aelated =isclosures'D
<M7SSAAY 1B
OAnalytical proceduresN0valuations of financial infor(ation throu)h anal#sis of !lausi"le relationshi!s
a(on) "oth financial and non-financial data' Anal#tical !rocedures also enco(!ass such investi)ation as is
necessar# of identified fluctuations or relationshi!s that are inconsistent with other relevant infor(ation or
that differ fro( e,!ected values "# a si)nificant a(ount'
Annual reportNA docu(ent issued "# an entit#, ordinaril# on an annual "asis, which includes its financial
state(ents to)ether with the auditor+s re!ort thereon'
OAno$alyNA (isstate(ent or deviation that is de(onstra"l# not re!resentative of (isstate(ents or
deviations in a !o!ulation'
OApplicable financial reporting fra$e#or.Nhe financial re!ortin) fra(ework ado!ted "# (ana)e(ent
and, where a!!ro!riate, those char)ed with )overnance in the !re!aration of the financial state(ents that is
acce!ta"le in view of the nature of the entit# and the o";ective of the financial state(ents, or that is
re*uired "# law or re)ulation'
he ter( Cfair !resentation fra(eworkD is used to refer to a financial re!ortin) fra(ework that re*uires
co(!liance with the re*uire(ents of the fra(ework and.
he ter( Cco(!liance fra(eworkD is used to refer to a financial re!ortin) fra(ework that re*uires
co(!liance with the re*uire(ents of the fra(ework, "ut does not contain the acknowled)e(ents in $a& or
$"& a"ove'
Application controls in infor$ation technologyN Eanual or auto(ated !rocedures that t#!icall# o!erate at
a "usiness !rocess level' A!!lication controls can "e !reventative or detective in nature and are desi)ned to
ensure the inte)rit# of the accountin) records' Accordin)l#, a!!lication controls relate to !rocedures used to
initiate, record, !rocess and re!ort transactions or other financial data'
OApplied criteria (in the conte4t of I)A 560
7
)Nhe criteria a!!lied "# (ana)e(ent in the !re!aration of
the su((ar# financial state(ents'
OAppropriateness (of audit e!idence)Nhe (easure of the *ualit# of audit evidence? that is, its relevance
and its relia"ilit# in !rovidin) su!!ort for the conclusions on which the auditor+s o!inion is "ased'
ISA 810, C0n)a)e(ents to Ae!ort on Su((ar# Financial State(ents'D
17 <M7SSAAY
OAr$8s length transactionNA transaction conducted on such ter(s and conditions as "etween a willin)
"u#er and a willin) seller who are unrelated and are actin) inde!endentl# of each other and !ursuin) their
own "est interests'
OAssertionsNAe!resentations "# (ana)e(ent, e,!licit or otherwise, that are e("odied in the financial
state(ents, as used "# the auditor to consider the different t#!es of !otential (isstate(ents that (a# occur'
AssessNAnal#Je identified risks of to conclude on their si)nificance' CAssess,D "# convention, is used onl#
in relation to risk' $also see /!aluate&
AssociationN$see Auditor association #ith financial infor$ation&
OPAssuranceN$see +easonable assurance&
Assurance engage$entNAn en)a)e(ent in which a !ractitioner e,!resses a conclusion desi)ned to
enhance the de)ree of confidence of the intended users other than the res!onsi"le !art# a"out the outco(e
of the evaluation or (easure(ent of a su";ect (atter a)ainst criteria' he outco(e of the evaluation or
(easure(ent of a su";ect (atter is the infor(ation that results fro( a!!l#in) the criteria $also see )ub9ect
$atter infor$ation&' Under the CInternational Fra(ework for Assurance 0n)a)e(entsD there are two t#!es
of assurance en)a)e(ent a !ractitioner is !er(itted to !erfor(. a reasona"le assurance en)a)e(ent and a
li(ited assurance en)a)e(ent'
+easonable assurance engage$entNhe o";ective of a reasona"le assurance en)a)e(ent is a
reduction in assurance en)a)e(ent risk to an acce!ta"l# low level in the circu(stances of the
en)a)e(ent
4
as the "asis for a !ositive for( of e,!ression of the !ractitioner+s conclusion'
:i$ited assurance engage$entNhe o";ective of a li(ited assurance en)a)e(ent is a reduction in
assurance en)a)e(ent risk to a level that is acce!ta"le in the circu(stances of the en)a)e(ent, "ut
where that risk is )reater than for a reasona"le assurance en)a)e(ent, as the "asis for a ne)ative for(
of e,!ression of the !ractitioner+s conclusion'
Assurance engage$ent ris.Nhe risk that the !ractitioner e,!resses an ina!!ro!riate conclusion when the
su";ect (atter infor(ation is (ateriall# (isstated'
OAudit docu$entationNhe record of audit !rocedures !erfor(ed, relevant audit evidence o"tained, and
conclusions the auditor reached $ter(s such as Cworkin) !a!ersD or Cwork!a!ersD are also so(eti(es
used&'
OAudit e!idenceNInfor(ation used "# the auditor in arrivin) at the conclusions on which the auditor+s
o!inion is "ased' Audit evidence includes "oth infor(ation
0n)a)e(ent circu(stances include the ter(s of the en)a)e(ent, includin) whether it is a reasona"le assurance en)a)e(ent or a
li(ited assurance en)a)e(ent, the characteristics of the su";ect (atter, the criteria to "e used, the needs of the intended users,
relevant characteristics of the res!onsi"le !art# and its environ(ent, and other (atters, for e,a(!le events, transactions,
conditions and !ractices, that (a# have a si)nificant effect on the en)a)e(ent'
<M7SSAAY 18
contained in the accountin) records underl#in) the financial state(ents and other infor(ation' $See
)ufficiency of audit e!idence and Appropriateness of audit e!idence'&
OAudit fileN 7ne or (ore folders or other stora)e (edia, in !h#sical or electronic for(, containin) the
records that co(!rise the audit docu(entation for a s!ecific en)a)e(ent'
OPAudit fir$N$see Fir$&
;Audit opinionN$see <odified opinion and "n$odified opinion&
OAudit ris.Nhe risk that the auditor e,!resses an ina!!ro!riate audit o!inion when the financial
state(ents are (ateriall# (isstated' Audit risk is a function of the risks of (aterial (isstate(ent and
detection risk'
OAudit sa$pling (sa$pling)Nhe a!!lication of audit !rocedures to less than 100Q of ite(s within a
!o!ulation of audit relevance such that all sa(!lin) units have a chance of selection in order to !rovide the
auditor with a reasona"le "asis on which to draw conclusions a"out the entire !o!ulation'
OAudited financial state$ents (in the conte4t of I)A 560)0Financial state(ents
5
audited "# the auditor in
accordance with ISAs, and fro( which the su((ar# financial state(ents are derived'
OAuditorNCAuditorD is used to refer to the !erson or !ersons conductin) the audit, usuall# the en)a)e(ent
!artner or other (e("ers of the en)a)e(ent tea(, or, as a!!lica"le, the fir(' Lhere an ISA e,!ressl#
intends that a re*uire(ent or res!onsi"ilit# "e fulfilled "# the en)a)e(ent !artner, the ter( Cen)a)e(ent
!artnerD rather than CauditorD is used' C0n)a)e(ent !artnerD and Cfir(D are to "e read as referrin) to their
!u"lic sector e*uivalents where relevant'
Auditor association #ith financial infor$ationNAn auditor is associated with financial infor(ation when
the auditor attaches a re!ort to that infor(ation or consents to the use of the auditor+s na(e in a
!rofessional connection'
OAuditor8s e4pertNAn individual or or)aniJation !ossessin) e,!ertise in a field other than accountin) or
auditin), whose work in that field is used "# the auditor to assist the auditor in o"tainin) sufficient
a!!ro!riate audit evidence' An auditor+s e,!ert (a# "e either an auditor+s internal e,!ert $who is a !artner
B
or staff, includin) te(!orar# staff, of the auditor+s fir( or a network fir(&, or an auditor+s e,ternal e,!ert'
OAuditor8s point esti$ate or auditor8s rangeNhe a(ount, or ran)e of a(ounts, res!ectivel#, derived fro(
audit evidence for use in evaluatin) (ana)e(ent+s !oint esti(ate'
;Auditor8s rangeN$see Auditor8s point esti$ate&
O=usiness ris.NA risk resultin) fro( si)nificant conditions, events, circu(stances, actions or inactions
that could adversel# affect an entit#+s a"ilit# to achieve its
5
Standards on Auditin),D !ara)ra!h 19$f&, defines the ter( Cfinancial state(ents'D
B
C6artnerD and Cfir(D should "e read as referrin) to their !u"lic sector e*uivalents where relevant'
15 <M7SSAAY
o";ectives and e,ecute its strate)ies, or fro( the settin) of ina!!ro!riate o";ectives and strate)ies'
OCo$parati!e financial state$entsN%o(!arative infor(ation where a(ounts and other disclosures for the
!rior !eriod are included for co(!arison with the financial state(ents of the current !eriod "ut, if audited,
are referred to in the auditor+s o!inion' he level of infor(ation included in those co(!arative financial
state(ents is co(!ara"le with that of the financial state(ents of the current !eriod'
OCo$parati!e infor$ationNhe a(ounts and disclosures included in the financial state(ents in res!ect of
one or (ore !rior !eriods in accordance with the a!!lica"le financial re!ortin) fra(ework'
Co$pilation engage$entNAn en)a)e(ent in which accountin) e,!ertise, as o!!osed to auditin) e,!ertise,
is used to collect, classif# and su((ariJe financial infor(ation'
OCo$ple$entary user entity controlsN%ontrols that the service or)aniJation assu(es, in the desi)n of its
service, will "e i(!le(ented "# user entities, and which, if necessar# to achieve control o";ectives, are
identified in the descri!tion of its s#ste('
OCo$pliance fra$e#or.N$see Applicable financial reporting fra$e#or. and 2eneral purpose fra$e#or.&
OCo$ponentNAn entit# or "usiness activit# for which )rou! or co(!onent (ana)e(ent !re!ares financial
infor(ation that should "e included in the )rou! financial state(ents'
OCo$ponent auditorNAn auditor who, at the re*uest of the )rou! en)a)e(ent tea(, !erfor(s work on
financial infor(ation related to a co(!onent for the )rou! audit'
OCo$ponent $anage$entNEana)e(ent res!onsi"le for the !re!aration of the financial infor(ation of a
co(!onent'
OCo$ponent $aterialityNhe (aterialit# for a co(!onent deter(ined "# the )rou! en)a)e(ent tea('
Co$puter3assisted audit techni>uesNA!!lications of auditin) !rocedures usin) the co(!uter as an audit
tool $also known as %AAs&'
Control acti!itiesNhose !olicies and !rocedures that hel! ensure that (ana)e(ent directives are carried
out' %ontrol activities are a co(!onent of internal control'
Control en!iron$entNIncludes the )overnance and (ana)e(ent functions and the attitudes, awareness and
actions of those char)ed with )overnance and (ana)e(ent concernin) the entit#+s internal control and its
i(!ortance in the entit#' he control environ(ent is a co(!onent of internal control'
OControl ris.N$see +is. of $aterial $isstate$ent&
Corporate go!ernanceN$see 2o!ernance&
<M7SSAAY 40
OCorresponding figuresN%o(!arative infor(ation where a(ounts and other disclosures for the !rior
!eriod are included as an inte)ral !art of the current !eriod financial state(ents, and are intended to "e read
onl# in relation to the a(ounts and other disclosures relatin) to the current !eriod $referred to as Ccurrent
!eriod fi)uresD&' he level of detail !resented in the corres!ondin) a(ounts and disclosures is dictated
!ri(aril# "# its relevance to the current !eriod fi)ures'
CriteriaNhe "ench(arks used to evaluate or (easure the su";ect (atter includin), where relevant,
"ench(arks for !resentation and disclosure' %riteria can "e for(al or less for(al' here can "e different
criteria for the sa(e su";ect (atter' Suita"le criteria are re*uired for reasona"l# consistent evaluation or
(easure(ent of a su";ect (atter within the conte,t of !rofessional ;ud)(ent'
)uitable criteriaN0,hi"it the followin) characteristics.
O?ate of appro!al of the financial state$entsNhe date on which all the state(ents that co(!rise the
financial state(ents, includin) the related notes, have "een !re!ared and those with the reco)niJed
authorit# have asserted that the# have taken res!onsi"ilit# for those financial state(ents'
P?ate of report (in relation to >uality control)Nhe date selected "# the !ractitioner to date the re!ort'
O?ate of the auditor8s reportNhe date the auditor dates the re!ort on the financial state(ents in
accordance with ISA 700'
7
O?ate of the financial state$entsNhe date of the end of the latest !eriod covered "# the financial
state(ents'
ISA 700, CFor(in) an 7!inion and Ae!ortin) on Financial State(ents'D
41 <M7SSAAY
O?ate the financial state$ents are issuedNhe date that the auditor+s re!ort and audited financial
state(ents are (ade availa"le to third !arties'
O?eficiency in internal controlNhis e,ists when.
1. $a& A control is desi)ned, i(!le(ented or o!erated in such a wa# that it is una"le to !revent,
or detect and correct, (isstate(ents in the financial state(ents on a ti(el# "asis? or
2. $"& A control necessar# to !revent, or detect and correct, (isstate(ents in the financial state(ents
on a ti(el# "asis is (issin)'
O?etection ris.Nhe risk that the !rocedures !erfor(ed "# the auditor to reduce audit risk to an
acce!ta"l# low level will not detect a (isstate(ent that e,ists and that could "e (aterial, either individuall#
or when a))re)ated with other (isstate(ents'
;/le$entN$see /le$ent of a financial state$ent&
O/le$ent of a financial state$ent (in the conte4t of I)A 50@
8
)NAn ele(ent, account or ite( of a financial
state(ent'
O/$phasis of <atter paragraph0A !ara)ra!h included in the auditor+s re!ort that refers to a (atter
a!!ro!riatel# !resented or disclosed in the financial state(ents that, in the auditor+s ;ud)(ent, is of such
i(!ortance that it is funda(ental to users+ understandin) of the financial state(ents'
P/ngage$ent docu$entationNhe record of work !erfor(ed, results o"tained, and conclusions the
!ractitioner reached $ter(s such as Cworkin) !a!ersD or Cwork!a!ersD are so(eti(es used&'
/ngage$ent letterNLritten ter(s of an en)a)e(ent in the for( of a letter'
OP/ngage$ent partner
5
Nhe !artner or other !erson in the fir( who is res!onsi"le for the en)a)e(ent
and its !erfor(ance, and for the re!ort that is issued on "ehalf of the fir(, and who, where re*uired, has the
a!!ro!riate authorit# fro( a !rofessional, le)al or re)ulator# "od#'
OP/ngage$ent >uality control re!ie#NA !rocess desi)ned to !rovide an o";ective evaluation, on or "efore
the date of the re!ort, of the si)nificant ;ud)(ents the en)a)e(ent tea( (ade and the conclusions it
reached in for(ulatin) the re!ort' he en)a)e(ent *ualit# control review !rocess is for audits of financial
state(ents of listed entities and those other en)a)e(ents, if an#, for which the fir( has deter(ined an
en)a)e(ent *ualit# control review is re*uired'
OP/ngage$ent >uality control re!ie#erNA !artner, other !erson in the fir(, suita"l# *ualified e,ternal
!erson, or a tea( (ade u! of such individuals, none of who( is !art
8
ISA 805, CS!ecial %onsiderationsNAudits of Sin)le Financial State(ents and S!ecific 0le(ents,
Accounts or Ite(s of a Financial State(ent'D 5
C0n)a)e(ent !artner,D C!artner,D and Cfir(D should "e read as referrin) to their !u"lic sector e*uivalents where relevant'
<M7SSAAY 44
of the en)a)e(ent tea(, with sufficient and a!!ro!riate e,!erience and authorit# to o";ectivel# evaluate
the si)nificant ;ud)(ents the en)a)e(ent tea( (ade and the conclusions it reached in for(ulatin) the
re!ort'
OP/ngage$ent tea$NAll !artners and staff !erfor(in) the en)a)e(ent, and an# individuals en)a)ed "#
the fir( or a network fir( who !erfor( !rocedures on the en)a)e(ent' his e,cludes e,ternal e,!erts
en)a)ed "# the fir( or a network fir('
10
/ntity8s ris. assess$ent processNA co(!onent of internal control that is the entit#+s !rocess for identif#in)
"usiness risks relevant to financial re!ortin) o";ectives and decidin) a"out actions to address those risks,
and the results thereof'
/n!iron$ental $attersN
/n!iron$ental perfor$ance reportNA re!ort, se!arate fro( the financial state(ents, in which an entit#
!rovides third !arties with *ualitative infor(ation on the entit#+s co((it(ents towards the environ(ental
as!ects of the "usiness, its !olicies and tar)ets in that field, its achieve(ent in (ana)in) the relationshi!
"etween its "usiness !rocesses and environ(ental risk, and *uantitative infor(ation on its environ(ental
!erfor(ance'
/n!iron$ental ris.NIn certain circu(stances, factors relevant to the assess(ent of inherent risk for the
develo!(ent of the overall audit !lan (a# include the risk of (aterial (isstate(ent of the financial
state(ents due to environ(ental (atters'
/rrorNAn unintentional (isstate(ent in financial state(ents, includin) the o(ission of an a(ount or a
disclosure'
O/sti$ation uncertaintyNhe susce!ti"ilit# of an accountin) esti(ate and related disclosures to an
inherent lack of !recision in its (easure(ent'
/!aluateNIdentif# and anal#Je the relevant issues, includin) !erfor(in) further !rocedures as necessar#,
to co(e to a s!ecific conclusion on a (atter' C0valuation,D "# convention, is used onl# in relation to a
ran)e of (atters, includin) evidence, the results of !rocedures and the effectiveness of (ana)e(ent+s
res!onse to a risk' $also see Assess&
ISA B40, CUsin) the Lork of an Auditor+s 0,!ert,D !ara)ra!h B$a&, defines the ter( Cauditor+s e,!ert'D
49 <M7SSAAY
O/4ceptionNA res!onse that indicates a difference "etween infor(ation re*uested to "e confir(ed, or
contained in the entit#+s records, and infor(ation !rovided "# the confir(in) !art#'
O/4perienced auditorNAn individual $whether internal or e,ternal to the fir(& who has !ractical audit
e,!erience, and a reasona"le understandin) of.
;/4pertN$see Auditor8s e4pert and <anage$ent8s e4pert&
O/4pertiseNSkills, knowled)e and e,!erience in a !articular field'
O/4ternal confir$ationNAudit evidence o"tained as a direct written res!onse to the auditor fro( a third
!art# $the confir(in) !art#&, in !a!er for(, or "# electronic or other (ediu('
OFair presentation fra$e#or. N$see Applicable financial reporting fra$e#or. and 2eneral purpose
fra$e#or.&
OFinancial state$entsNA structured re!resentation of historical financial infor(ation, includin) related
notes, intended to co((unicate an entit#+s econo(ic resources or o"li)ations at a !oint in ti(e or the
chan)es therein for a !eriod of ti(e in accordance with a financial re!ortin) fra(ework' he related notes
ordinaril# co(!rise a su((ar# of si)nificant accountin) !olicies and other e,!lanator# infor(ation' he
ter( Cfinancial state(entsD ordinaril# refers to a co(!lete set of financial state(ents as deter(ined "# the
re*uire(ents of the a!!lica"le financial re!ortin) fra(ework, "ut it can also refer to a sin)le financial
state(ent'
OPFir$NA sole !ractitioner, !artnershi! or cor!oration or other entit# of !rofessional accountants'
ForecastN6ros!ective financial infor(ation !re!ared on the "asis of assu(!tions as to future events which
(ana)e(ent e,!ects to take !lace and the actions (ana)e(ent e,!ects to take as of the date the
infor(ation is !re!ared $"est-esti(ate assu(!tions&'
OFraudNAn intentional act "# one or (ore individuals a(on) (ana)e(ent, those char)ed with
)overnance, e(!lo#ees, or third !arties, involvin) the use of dece!tion to o"tain an un;ust or ille)al
advanta)e'
OFraud ris. factorsN0vents or conditions that indicate an incentive or !ressure to co((it fraud or !rovide
an o!!ortunit# to co((it fraud'
Fraudulent financial reportingNInvolves intentional (isstate(ents, includin) o(issions of a(ounts or
disclosures in financial state(ents, to deceive financial state(ent users'
<M7SSAAY 44
2eneral I13controlsN6olicies and !rocedures that relate to (an# a!!lications and su!!ort the effective
functionin) of a!!lication controls "# hel!in) to ensure the continued !ro!er o!eration of infor(ation
s#ste(s' <eneral I-controls co((onl# include controls over data center and network o!erations? s#ste(
software ac*uisition, chan)e and (aintenance? access securit#? and a!!lication s#ste( ac*uisition,
develo!(ent, and (aintenance'
O2eneral purpose financial state$entsNFinancial state(ents !re!ared in accordance with a )eneral
!ur!ose fra(ework'
O2eneral purpose fra$e#or.NA financial re!ortin) fra(ework desi)ned to (eet the co((on financial
infor(ation needs of a wide ran)e of users' he financial re!ortin) fra(ework (a# "e a fair !resentation
fra(ework or a co(!liance fra(ework'
he ter( Cfair !resentation fra(eworkD is used to refer to a financial re!ortin) fra(ework that re*uires
co(!liance with the re*uire(ents of the fra(ework and.
co(!liance with the re*uire(ents of the fra(ework, "ut does not contain the acknowled)e(ents in $a& or
$"& a"ove'
11
;2o!ernanceN=escri"es the role of !erson$s& or or)aniJation$s& with res!onsi"ilit# for overseein) the
strate)ic direction of the entit# and o"li)ations related to the accounta"ilit# of the entit#'
O2roupNAll the co(!onents whose financial infor(ation is included in the )rou! financial state(ents'
A )rou! alwa#s has (ore than one co(!onent'
O2roup auditNhe audit of )rou! financial state(ents'
O2roup audit opinionNhe audit o!inion on the )rou! financial state(ents'
O2roup engage$ent partnerNhe !artner or other !erson in the fir( who is res!onsi"le for the )rou!
audit en)a)e(ent and its !erfor(ance, and for the auditor+s re!ort on the )rou! financial state(ents that is
issued on "ehalf of the fir(' Lhere ;oint auditors conduct the )rou! audit, the ;oint en)a)e(ent !artners
and their en)a)e(ent tea(s collectivel# constitute the )rou! en)a)e(ent !artner and the )rou!
en)a)e(ent tea('
O2roup engage$ent tea$N6artners, includin) the )rou! en)a)e(ent !artner, and staff who esta"lish the
overall )rou! audit strate)#, co((unicate with co(!onent auditors,
ISA 400, !ara)ra!h 19$a&'
45 <M7SSAAY
!erfor( work on the consolidation !rocess, and evaluate the conclusions drawn fro( the audit evidence as
the "asis for for(in) an o!inion on the )rou! financial state(ents'
O2roup financial state$entsNFinancial state(ents that include the financial infor(ation of (ore than one
co(!onent' he ter( C)rou! financial state(entsD also refers to co("ined financial state(ents a))re)atin)
the financial infor(ation !re!ared "# co(!onents that have no !arent "ut are under co((on control'
O2roup $anage$entNEana)e(ent res!onsi"le for the !re!aration of the )rou! financial state(ents'
O2roup3#ide controlsN%ontrols desi)ned, i(!le(ented and (aintained "# )rou! (ana)e(ent over )rou!
financial re!ortin)'
O-istorical financial infor$ationNInfor(ation e,!ressed in financial ter(s in relation to a !articular
entit#, derived !ri(aril# fro( that entit#+s accountin) s#ste(, a"out econo(ic events occurrin) in !ast ti(e
!eriods or a"out econo(ic conditions or circu(stances at !oints in ti(e in the !ast'
OInconsistencyN7ther infor(ation that contradicts infor(ation contained in the audited financial
state(ents' A (aterial inconsistenc# (a# raise dou"t a"out the audit conclusions drawn fro( audit
evidence !reviousl# o"tained and, !ossi"l#, a"out the "asis for the auditor+s o!inion on the financial
state(ents'
Independence
14
N%o(!rises.
1. $a& Inde!endence of (indNthe state of (ind that !er(its the !rovision of an o!inion
without "ein) affected "# influences that co(!ro(ise !rofessional ;ud)(ent, allowin) an
individual to act with inte)rit#, and e,ercise o";ectivit# and !rofessional ske!ticis('
2. $"& Inde!endence in a!!earanceNthe avoidance of facts and circu(stances that are so si)nificant
a reasona"le and infor(ed third !art#, havin) knowled)e of all relevant infor(ation, includin) an#
safe)uards a!!lied, would reasona"l# conclude a fir(+s, or a (e("er of the assurance tea(+s,
inte)rit#, o";ectivit# or !rofessional ske!ticis( had "een co(!ro(ised'
Infor$ation syste$ rele!ant to financial reportingNA co(!onent of internal control that includes the
financial re!ortin) s#ste(, and consists of the !rocedures and records esta"lished to initiate, record, !rocess
and re!ort entit# transactions $as well as events and conditions& and to (aintain accounta"ilit# for the
related assets, lia"ilities and e*uit#'
OInherent ris.N$see +is. of $aterial $isstate$ent&
OInitial audit engage$entNAn en)a)e(ent in which either.
1$a&he financial state(ents for the !rior !eriod were not audited? or
2$"&he financial state(ents for the !rior !eriod were audited "# a !redecessor auditor'
As defined in the IFA% Code of /thics for (rofessional Accountants'
<M7SSAAY 4B
In>uiryNIn*uir# consists of seekin) infor(ation of knowled)ea"le !ersons, "oth financial and non-
financial, within the entit# or outside the entit#'
Inspection (as an audit procedure)N0,a(inin) records or docu(ents, whether internal or e,ternal, in
!a!er for(, electronic for(, or other (edia, or a !h#sical e,a(ination of an asset'
OPInspection (in relation to >uality control)NIn relation to co(!leted en)a)e(ents, !rocedures desi)ned to
!rovide evidence of co(!liance "# en)a)e(ent tea(s with the fir(+s *ualit# control !olicies and
!rocedures'
Intended usersNhe !erson, !ersons or class of !ersons for who( the !ractitioner !re!ares the assurance
re!ort' he res!onsi"le !art# can "e one of the intended users, "ut not the onl# one'
Interi$ financial infor$ation or state$entsNFinancial infor(ation $which (a# "e less than a co(!lete set
of financial state(ents as defined a"ove& issued at interi( dates $usuall# half-#earl# or *uarterl#& in res!ect
of a financial !eriod'
OInternal audit functionNAn a!!raisal activit# esta"lished or !rovided as a service to the entit#' Its
functions include, a(on)st other thin)s, e,a(inin), evaluatin) and (onitorin) the ade*uac# and
effectiveness of internal control'
OInternal auditorsNhose individuals who !erfor( the activities of the internal audit function' Internal
auditors (a# "elon) to an internal audit de!art(ent or e*uivalent function'
OInternal controlNhe !rocess desi)ned, i(!le(ented and (aintained "# those char)ed with )overnance,
(ana)e(ent and other !ersonnel to !rovide reasona"le assurance a"out the achieve(ent of an entit#+s
o";ectives with re)ard to relia"ilit# of financial re!ortin), effectiveness and efficienc# of o!erations, and
co(!liance with a!!lica"le laws and re)ulations' he ter( CcontrolsD refers to an# as!ects of one or (ore
of the co(!onents of internal control'
OInternational Financial +eporting )tandardsNhe International Financial Ae!ortin) Standards issued "#
the International Accountin) Standards 1oard'
In!estigateNIn*uire into (atters arisin) fro( other !rocedures to resolve the('
I1 en!iron$entNhe !olicies and !rocedures that the entit# i(!le(ents and the I infrastructure
$hardware, o!eratin) s#ste(s, etc'& and a!!lication software that it uses to su!!ort "usiness o!erations and
achieve "usiness strate)ies'
:i$ited assurance engage$entN$see Assurance engage$ent&
OP:isted entityNAn entit# whose shares, stock or de"t are *uoted or listed on a reco)niJed stock e,chan)e,
or are (arketed under the re)ulations of a reco)niJed stock e,chan)e or other e*uivalent "od#'
O<anage$entNhe !erson$s& with e,ecutive res!onsi"ilit# for the conduct of the entit#+s o!erations' For
so(e entities in so(e ;urisdictions, (ana)e(ent includes so(e
47 <M7SSAAY
or all of those char)ed with )overnance, for e,a(!le, e,ecutive (e("ers of a )overnance "oard, or an
owner-(ana)er'
O<anage$ent biasNA lack of neutralit# "# (ana)e(ent in the !re!aration of infor(ation'
O<anage$ent8s e4pertNAn individual or or)aniJation !ossessin) e,!ertise in a field other than accountin)
or auditin), whose work in that field is used "# the entit# to assist the entit# in !re!arin) the financial
state(ents'
O<anage$ent8s point esti$ateNhe a(ount selected "# (ana)e(ent for reco)nition or disclosure in the
financial state(ents as an accountin) esti(ate'
<isappropriation of assetsNInvolves the theft of an entit#+s assets and is often !er!etrated "# e(!lo#ees
in relativel# s(all and i((aterial a(ounts' @owever, it can also involve (ana)e(ent who are usuall#
(ore ca!a"le of dis)uisin) or concealin) (isa!!ro!riations in wa#s that are difficult to detect'
O<isstate$entNA difference "etween the a(ount, classification, !resentation, or disclosure of a re!orted
financial state(ent ite( and the a(ount, classification, !resentation, or disclosure that is re*uired for the
ite( to "e in accordance with the a!!lica"le financial re!ortin) fra(ework' Eisstate(ents can arise fro(
error or fraud'
Lhere the auditor e,!resses an o!inion on whether the financial state(ents are !resented fairl#, in all
(aterial res!ects, or )ive a true and fair view, (isstate(ents also include those ad;ust(ents of a(ounts,
classifications, !resentation, or disclosures that, in the auditor+s ;ud)(ent, are necessar# for the financial
state(ents to "e !resented fairl#, in all (aterial res!ects, or to )ive a true and fair view'
O<isstate$ent of factN7ther infor(ation that is unrelated to (atters a!!earin) in the audited financial
state(ents that is incorrectl# stated or !resented' A (aterial (isstate(ent of fact (a# under(ine the
credi"ilit# of the docu(ent containin) audited financial state(ents'
O<odified opinionNA *ualified o!inion, an adverse o!inion or a disclai(er of o!inion'
OP<onitoring (in relation to >uality control)NA !rocess co(!risin) an on)oin) consideration and
evaluation of the fir(+s s#ste( of *ualit# control, includin) a !eriodic ins!ection of a selection of
co(!leted en)a)e(ents, desi)ned to !rovide the fir( with reasona"le assurance that its s#ste( of *ualit#
control is o!eratin) effectivel#'
<onitoring of controlsNA !rocess to assess the effectiveness of internal control !erfor(ance over ti(e' It
includes assessin) the desi)n and o!eration of controls on a ti(el# "asis and takin) necessar# corrective
actions (odified for chan)es in conditions' Eonitorin) of controls is a co(!onent of internal control'
OAegati!e confir$ation re>uestNA re*uest that the confir(in) !art# res!ond directl# to the auditor onl# if
the confir(in) !art# disa)rees with the infor(ation !rovided in the re*uest'
OPAet#or.NA lar)er structure.
<M7SSAAY 48
OPAet#or. fir$NA fir( or entit# that "elon)s to a network'
OAon3co$pliance (in the conte4t of I)A 2@0
19
)NActs of o(ission or co((ission "# the entit#, either
intentional or unintentional, which are contrar# to the !revailin) laws or re)ulations' Such acts include
transactions entered into "#, or in the na(e of, the entit#, or on its "ehalf, "# those char)ed with
)overnance, (ana)e(ent or e(!lo#ees' Nonco(!liance does not include !ersonal (isconduct $unrelated
to the "usiness activities of the entit#& "# those char)ed with )overnance, (ana)e(ent or e(!lo#ees of the
entit#'
OAon3responseNA failure of the confir(in) !art# to res!ond, or full# res!ond, to a !ositive confir(ation
re*uest, or a confir(ation re*uest returned undelivered'
OAon3sa$pling ris.Nhe risk that the auditor reaches an erroneous conclusion for an# reason not related
to sa(!lin) risk'
,bser!ationN%onsists of lookin) at a !rocess or !rocedure "ein) !erfor(ed "# others, for e,a(!le, the
auditor+s o"servation of inventor# countin) "# the entit#+s !ersonnel, or of the !erfor(ance of control
activities'
O,pening balancesNhose account "alances that e,ist at the "e)innin) of the !eriod' 7!enin) "alances
are "ased u!on the closin) "alances of the !rior !eriod and reflect the effects of transactions and events of
!rior !eriods and accountin) !olicies a!!lied in the !rior !eriod' 7!enin) "alances also include (atters
re*uirin) disclosure that e,isted at the "e)innin) of the !eriod, such as contin)encies and co((it(ents'
O,ther infor$ationNFinancial and non-financial infor(ation $other than the financial state(ents and the
auditor+s re!ort thereon& which is included, either "# law, re)ulation, or custo(, in a docu(ent containin)
audited financial state(ents and the auditor+s re!ort thereon'
O,ther <atter paragraphNA !ara)ra!h included in the auditor+s re!ort that refers to a (atter other than
those !resented or disclosed in the financial state(ents that, in the auditor+s ;ud)(ent, is relevant to users+
understandin) of the audit, the auditor+s res!onsi"ilities or the auditor+s re!ort'
O,utco$e of an accounting esti$ateNhe actual (onetar# a(ount which results fro( the resolution of the
underl#in) transaction$s&, event$s& or condition$s& addressed "# the accountin) esti(ate'
,!erall audit strategyNSets the sco!e, ti(in) and direction of the audit, and )uides the develo!(ent of the
(ore detailed audit !lan'
ISA 450, C%onsideration of Maws and Ae)ulations in an Audit of Financial State(ents'D
45 <M7SSAAY
OP(artnerNAn# individual with authorit# to "ind the fir( with res!ect to the !erfor(ance of a
!rofessional services en)a)e(ent'
O(erfor$ance $aterialityNhe a(ount or a(ounts set "# the auditor at less than (aterialit# for the
financial state(ents as a whole to reduce to an a!!ro!riatel# low level the !ro"a"ilit# that the a))re)ate of
uncorrected and undetected (isstate(ents e,ceeds (aterialit# for the financial state(ents as a whole' If
a!!lica"le, !erfor(ance (aterialit# also refers to the a(ount or a(ounts set "# the auditor at less than the
(aterialit# level or levels for !articular classes of transactions, account "alances or disclosures'
OP(ersonnelN6artners and staff'
O(er!asi!eNA ter( used, in the conte,t of (isstate(ents, to descri"e the effects on the financial
state(ents of (isstate(ents or the !ossi"le effects on the financial state(ents of (isstate(ents, if an#, that
are undetected due to an ina"ilit# to o"tain sufficient a!!ro!riate audit evidence' 6ervasive effects on the
financial state(ents are those that, in the auditor+s ;ud)(ent.
O(opulation0he entire set of data fro( which a sa(!le is selected and a"out which the auditor wishes to
draw conclusions
O(ositi!e confir$ation re>uestNA re*uest that the confir(in) !art# res!ond directl# to the auditor
indicatin) whether the confir(in) !art# a)rees or disa)rees with the infor(ation in the re*uest, or
!rovidin) the re*uested infor(ation'
(ractitionerNA !rofessional accountant in !u"lic !ractice'
O(reconditions for an auditNhe use "# (ana)e(ent of an acce!ta"le financial re!ortin) fra(ework in
the !re!aration of the financial state(ents and the a)ree(ent of (ana)e(ent and, where a!!ro!riate, those
char)ed with )overnance to the !re(ise
14
on which an audit is conducted'
O(redecessor auditorNhe auditor fro( a different audit fir(, who audited the financial state(ents of an
entit# in the !rior !eriod and who has "een re!laced "# the current auditor'
O(re$ise& relating to the responsibilities of $anage$ent and& #here appropriate& those charged #ith
go!ernance& on #hich an audit is conductedNhat (ana)e(ent and, where a!!ro!riate, those char)ed
with )overnance have acknowled)ed and understand
ISA 400, !ara)ra!h 19'
<M7SSAAY 90
that the# have the followin) res!onsi"ilities that are funda(ental to the conduct of an audit in accordance
with ISAs' hat is, res!onsi"ilit#.
1. $a& For the !re!aration of the financial state(ents in accordance with the a!!lica"le financial
re!ortin) fra(ework, includin) where relevant their fair !resentation?
2. $"& For such internal control as (ana)e(ent and, where a!!ro!riate, those char)ed with
)overnance deter(ine is necessar# to ena"le the !re!aration of financial state(ents that are free
fro( (aterial (isstate(ent, whether due to fraud or error? and
3. $c& o !rovide the auditor with.
4. $i& Access to all infor(ation of which (ana)e(ent and, where a!!ro!riate, those char)ed
with )overnance are aware that is relevant to the !re!aration of the financial state(ents such as
records, docu(entation and other (atters?
5. $ii& Additional infor(ation that the auditor (a# re*uest fro( (ana)e(ent and, where
a!!ro!riate, those char)ed with )overnance for the !ur!ose of the audit? and
$iii& Unrestricted access to !ersons within the entit# fro( who( the auditor deter(ines it
necessar# to o"tain audit evidence'
In the case of a fair !resentation fra(ework, $a& a"ove (a# "e restated as Cfor the !re!aration and fair
!resentation of the financial state(ents in accordance with the financial re!ortin) fra(ework,D or Cfor the
!re!aration of financial state(ents that gi!e a true and fair !ie# in accordance with the financial re!ortin)
fra(ework'D
he C!re(ise, relatin) to the res!onsi"ilities of (ana)e(ent and, where a!!ro!riate, those char)ed with
)overnance, on which an audit is conductedD (a# also "e referred to as the C!re(ise'D
(rofessional accountant
15
NAn individual who is a (e("er of an IFA% (e("er "od#'
(rofessional accountant in public practice
1B
NA !rofessional accountant, irres!ective of functional
classification $for e,a(!le, audit, ta, or consultin)& in a fir( that !rovides !rofessional services' his ter(
is also used to refer to a fir( of !rofessional accountants in !u"lic !ractice'
O(rofessional 9udg$entNhe a!!lication of relevant trainin), knowled)e and e,!erience, within the
conte,t !rovided "# auditin), accountin) and ethical standards, in (akin) infor(ed decisions a"out the
courses of action that are a!!ro!riate in the circu(stances of the audit en)a)e(ent'
15
1B
91 <M7SSAAY
O(rofessional s.epticis$NAn attitude that includes a *uestionin) (ind, "ein) alert to conditions which
(a# indicate !ossi"le (isstate(ent due to error or fraud, and a critical assess(ent of evidence'
O(rofessional standardsNInternational Standards on Auditin) $ISAs& and relevant ethical re*uire(ents
P(rofessional standards (in the conte4t of I)*C 6
17
)NIAAS1 0n)a)e(ent Standards, as defined in the
IAAS1+s (reface to the International )tandards on *uality Control& Auditing& +e!ie#& ,ther Assurance
and +elated )er!ices, and relevant ethical re*uire(ents'
(ro9ectionN6ros!ective financial infor(ation !re!ared on the "asis of.
1. $a& @#!othetical assu(!tions a"out future events and (ana)e(ent actions which are not
necessaril# e,!ected to take !lace, such as when so(e entities are in a startu! !hase or are
considerin) a (a;or chan)e in the nature of o!erations? or
2. $"& A (i,ture of "est-esti(ate and h#!othetical assu(!tions'
(rospecti!e financial infor$ationNFinancial infor(ation "ased on assu(!tions a"out events that (a#
occur in the future and !ossi"le actions "# an entit#' 6ros!ective financial infor(ation can "e in the for( of
a forecast, a !ro;ection or a co("ination of "oth' $see Forecast and (ro9ection&
(ublic sectorNNational )overn(ents, re)ional $for e,a(!le, state, !rovincial, territorial& )overn(ents,
local $for e,a(!le, cit#, town& )overn(ents and related )overn(ental entities $for e,a(!le, a)encies,
"oards, co((issions and enter!rises&'
OP+easonable assurance (in the conte4t of assurance engage$ents& including audit engage$ents& and
>uality control)0A hi)h, "ut not a"solute, level of assurance'
+easonable assurance engage$entN$see Assurance engage$ent&
+ecalculationN%onsists of checkin) the (athe(atical accurac# of docu(ents or records'
O+elated partyNA !art# that is either.
1. $a& A related !art# as defined in the a!!lica"le financial re!ortin) fra(ework? or
1. $"& Lhere the a!!lica"le financial re!ortin) fra(ework esta"lishes (ini(al or no related
!art# re*uire(ents.
2. $i& A !erson or other entit# that has control or si)nificant influence, directl# or indirectl#
throu)h one or (ore inter(ediaries, over the re!ortin) entit#?
3. $ii& Another entit# over which the re!ortin) entit# has control or si)nificant influence,
directl# or indirectl# throu)h one or (ore inter(ediaries? or
IS:% 1, C:ualit# %ontrol for Fir(s that 6erfor( Audits and Aeviews of Financial State(ents, and 7ther Assurance and Aelated
Services 0n)a)e(ents'D
<M7SSAAY 94
$iii& Another entit# that is under co((on control with the re!ortin) entit# throu)h havin).
1. a' %o((on controllin) ownershi!?
2. "' 7wners who are close fa(il# (e("ers? or
3. c' %o((on ke# (ana)e(ent'
@owever, entities that are under co((on control "# a state $that is, a national, re)ional or
local )overn(ent& are not considered related unless the# en)a)e in si)nificant transactions or
share resources to a si)nificant e,tent with one another'
+elated ser!icesN%o(!rise a)reed-u!on !rocedures and co(!ilations'
OP+ele!ant ethical re>uire$entsN0thical re*uire(ents to which the en)a)e(ent tea( and en)a)e(ent
*ualit# control reviewer are su";ect, which ordinaril# co(!rise 6arts A and 1 of the International
Federation of Accountants+ Code of /thics for (rofessional Accountants $IFA% %ode& to)ether with
national re*uire(ents that are (ore restrictive'
+eperfor$anceNhe auditor+s inde!endent e,ecution of !rocedures or controls that were ori)inall#
!erfor(ed as !art of the entit#+s internal controls'
O+eport on the description and design of controls at a ser!ice organiBation (referred to in I)A C02
18
as a
type 6 report)NA re!ort that co(!rises.
1. $a& A descri!tion, !re!ared "# (ana)e(ent of the service or)aniJation, of the service
or)aniJation+s s#ste(, control o";ectives and related controls that have "een desi)ned and
i(!le(ented as at a s!ecified date? and
2. $"& A re!ort "# the service auditor with the o";ective of conve#in) reasona"le assurance that
includes the service auditor+s o!inion on the descri!tion of the service or)aniJation+s s#ste(,
control o";ectives and related controls and the suita"ilit# of the desi)n of the controls to achieve
the s!ecified control o";ectives'
O+eport on the description& design& and operating effecti!eness of controls at a ser!ice organiBation
(referred to in I)A C02 as a type 2 report)NA re!ort that co(!rises.
1$a&A descri!tion, !re!ared "# (ana)e(ent of the service or)aniJation, of the service or)aniJation+s
s#ste(, control o";ectives and related controls, their desi)n and i(!le(entation as at a s!ecified
date or throu)hout a s!ecified !eriod and, in so(e cases, their o!eratin) effectiveness throu)hout a
s!ecified !eriod? and
2$"&A re!ort "# the service auditor with the o";ective of conve#in) reasona"le assurance that includes.
3$i& he service auditor+s o!inion on the descri!tion of the service or)aniJation+s s#ste(, control
o";ectives and related controls, the suita"ilit#
ISA 404, CAudit %onsiderations Aelatin) to an 0ntit# Usin) a Service 7r)aniJation'D
99 <M7SSAAY
of the desi)n of the controls to achieve the s!ecified control o";ectives, and the o!eratin)
effectiveness of the controls? and
$ii& A descri!tion of the service auditor+s tests of the controls and the results thereof'
+esponsible partyNhe !erson $or !ersons& who.
1$a&In a direct re!ortin) en)a)e(ent, is res!onsi"le for the su";ect (atter? or
2$"&In an assertion-"ased en)a)e(ent, is res!onsi"le for the su";ect (atter infor(ation $the assertion&,
and (a# "e res!onsi"le for the su";ect (atter'
he res!onsi"le !art# (a# or (a# not "e the !art# who en)a)es the !ractitioner $the en)a)in) !art#&'
+e!ie# (in relation to >uality control)NA!!raisin) the *ualit# of the work !erfor(ed and conclusions
reached "# others'
+e!ie# engage$entNhe o";ective of a review en)a)e(ent is to ena"le an auditor to state whether, on the
"asis of !rocedures which do not !rovide all the evidence that would "e re*uired in an audit, an#thin) has
co(e to the auditor+s attention that causes the auditor to "elieve that the financial state(ents are not
!re!ared, in all (aterial res!ects, in accordance with an a!!lica"le financial re!ortin) fra(ework'
+e!ie# proceduresNhe !rocedures dee(ed necessar# to (eet the o";ective of a review en)a)e(ent,
!ri(aril# in*uiries of entit# !ersonnel and anal#tical !rocedures a!!lied to financial data'
O+is. assess$ent proceduresNhe audit !rocedures !erfor(ed to o"tain an understandin) of the entit# and
its environ(ent, includin) the entit#+s internal control, to identif# and assess the risks of (aterial
(isstate(ent, whether due to fraud or error, at the financial state(ent and assertion levels'
O+is. of $aterial $isstate$entNhe risk that the financial state(ents are (ateriall# (isstated !rior to
audit' his consists of two co(!onents, descri"ed as follows at the assertion level.
1. $a& Inherent riskNhe susce!ti"ilit# of an assertion a"out a class of transaction, account
"alance or disclosure to a (isstate(ent that could "e (aterial, either individuall# or when
a))re)ated with other (isstate(ents, "efore consideration of an# related controls'
2. $"& %ontrol riskNhe risk that a (isstate(ent that could occur in an assertion a"out a class
of transaction, account "alance or disclosure and that could "e (aterial, either individuall# or
when a))re)ated with other (isstate(ents, will not "e !revented, or detected and corrected, on a
ti(el# "asis "# the entit#+s internal control'
O)a$pling0$see Audit sa$pling&
<M7SSAAY 94
O)a$pling ris.Nhe risk that the auditor+s conclusion "ased on a sa(!le (a# "e different fro( the
conclusion if the entire !o!ulation were su";ected to the sa(e audit !rocedure' Sa(!lin) risk can lead to
two t#!es of erroneous conclusions.
O)a$pling unitNhe individual ite(s constitutin) a !o!ulation'
)cope of a re!ie#Nhe review !rocedures dee(ed necessar# in the circu(stances to achieve the o";ective
of the review'
O)er!ice auditorNAn auditor who, at the re*uest of the service or)aniJation, !rovides an assurance re!ort
on the controls of a service or)aniJation'
O)er!ice organiBationNA third-!art# or)aniJation $or se)(ent of a third-!art# or)aniJation& that !rovides
services to user entities that are !art of those entities+ infor(ation s#ste(s relevant to financial re!ortin)'
O)er!ice organiBation8s syste$Nhe !olicies and !rocedures desi)ned, i(!le(ented and (aintained "# the
service or)aniJation to !rovide user entities with the services covered "# the service auditor+s re!ort'
)ignificanceNhe relative i(!ortance of a (atter, taken in conte,t' he si)nificance of a (atter is ;ud)ed
"# the !ractitioner in the conte,t in which it is "ein) considered' his (i)ht include, for e,a(!le, the
reasona"le !ros!ect of its chan)in) or influencin) the decisions of intended users of the !ractitioner+s
re!ort? or, as another e,a(!le, where the conte,t is a ;ud)(ent a"out whether to re!ort a (atter to those
char)ed with )overnance, whether the (atter would "e re)arded as i(!ortant "# the( in relation to their
duties' Si)nificance can "e considered in the conte,t of *uantitative and *ualitative factors, such as relative
(a)nitude, the nature and effect on the su";ect (atter and the e,!ressed interests of intended users or
reci!ients'
O)ignificant co$ponentNA co(!onent identified "# the )rou! en)a)e(ent tea( $i& that is of individual
financial si)nificance to the )rou!, or $ii& that, due to its s!ecific nature or circu(stances, is likel# to
include si)nificant risks of (aterial (isstate(ent of the )rou! financial state(ents'
O)ignificant deficiency in internal controlNA deficienc# or co("ination of deficiencies in internal control
that, in the auditor+s !rofessional ;ud)(ent, is of sufficient i(!ortance to (erit the attention of those
char)ed with )overnance'
95 <M7SSAAY
O)ignificant ris.0An identified and assessed risk of (aterial (isstate(ent that, in the auditor+s ;ud)(ent,
re*uires s!ecial audit consideration'
)$aller entityNAn entit# which t#!icall# !ossesses *ualitative characteristics such as.
1$a&%oncentration of ownershi! and (ana)e(ent in a s(all nu("er of individuals $often a sin)le
individual K either a natural !erson or another enter!rise that owns the entit# !rovided the owner
e,hi"its the relevant *ualitative characteristics&? and
1$"&7ne or (ore of the followin).
2$i& Strai)htforward or unco(!licated transactions?
3$ii& Si(!le record-kee!in)?
$iii& Few lines of "usiness and few !roducts within "usiness lines?
1. $iv& Few internal controls?
2. $v& Few levels of (ana)e(ent with res!onsi"ilit# for a "road ran)e of controls? or
3. $vi& Few !ersonnel, (an# havin) a wide ran)e of duties'
hese *ualitative characteristics are not e,haustive, the# are not e,clusive to s(aller entities, and
s(aller entities do not necessaril# dis!la# all of these characteristics'
O)pecial purpose financial state$entsNFinancial state(ents !re!ared in accordance with a s!ecial !ur!ose
fra(ework'
O)pecial purpose fra$e#or.NA financial re!ortin) fra(ework desi)ned to (eet the financial infor(ation
needs of s!ecific users' he financial re!ortin) fra(ework (a# "e a fair !resentation fra(ework or a
co(!liance fra(ework'
15
OP)taffN6rofessionals, other than !artners, includin) an# e,!erts the fir( e(!lo#s'
O)tatistical sa$plingNAn a!!roach to sa(!lin) that has the followin) characteristics.
1. $a& Aando( selection of the sa(!le ite(s? and
2. $"& he use of !ro"a"ilit# theor# to evaluate sa(!le results, includin) (easure(ent of
sa(!lin) risk'
A sa(!lin) a!!roach that does not have characteristics $a& and $"& is considered non-statistical sa(!lin)'
O)tratificationNhe !rocess of dividin) a !o!ulation into su"-!o!ulations, each of which is a )rou! of
sa(!lin) units which have si(ilar characteristics $often (onetar# value&'
)ub9ect $atter infor$ationNhe outco(e of the evaluation or (easure(ent of a su";ect (atter' It is the
su";ect (atter infor(ation a"out which the !ractitioner )athers
15
<M7SSAAY 9B
sufficient a!!ro!riate evidence to !rovide a reasona"le "asis for e,!ressin) a conclusion in an assurance
re!ort'
O)ubse>uent e!entsN0vents occurrin) "etween the date of the financial state(ents and the date of the
auditor+s re!ort, and facts that "eco(e known to the auditor after the date of the auditor+s re!ort'
O)ubser!ice organiBationNA service or)aniJation used "# another service or)aniJation to !erfor( so(e of
the services !rovided to user entities that are !art of those user entities+ infor(ation s#ste(s relevant to
financial re!ortin)'
O)ubstanti!e procedureNAn audit !rocedure desi)ned to detect (aterial (isstate(ents at the assertion
level' Su"stantive !rocedures co(!rise.
1$a& ests of details $of classes of transactions, account "alances, and disclosures&? and
2$"& Su"stantive anal#tical !rocedures'
O)ufficiency (of audit e!idence)Nhe (easure of the *uantit# of audit evidence' he *uantit# of the audit
evidence needed is affected "# the auditor+s assess(ent of the risks of (aterial (isstate(ent and also "#
the *ualit# of such audit evidence'
)uitable criteriaN$see Criteria&
OP)uitably >ualified e4ternal personNAn individual outside the fir( with the co(!etence and ca!a"ilities
to act as an en)a)e(ent !artner, for e,a(!le a !artner of another fir(, or an e(!lo#ee $with a!!ro!riate
e,!erience& of either a !rofessional accountanc# "od# whose (e("ers (a# !erfor( audits and reviews of
historical financial infor(ation, or other assurance or related services en)a)e(ents, or of an or)aniJation
that !rovides relevant *ualit# control services'
O)u$$ary financial state$ents (in the conte4t of I)A 560)N@istorical financial infor(ation that is derived
fro( financial state(ents "ut that contains less detail than the financial state(ents, while still !rovidin) a
structured re!resentation consistent with that !rovided "# the financial state(ents of the entit#+s econo(ic
resources or o"li)ations at a !oint in ti(e or the chan)es therein for a !eriod of ti(e'
40
=ifferent
;urisdictions (a# use different ter(inolo)# to descri"e such historical financial infor(ation'
)upple$entary infor$ationNInfor(ation that is !resented to)ether with the financial state(ents that is not
re*uired "# the a!!lica"le financial re!ortin) fra(ework used to !re!are the financial state(ents, nor(all#
!resented in either su!!le(entar# schedules or as additional notes'
1estNhe a!!lication of !rocedures to so(e or all ite(s in a !o!ulation'
O1ests of controlsNAn audit !rocedure desi)ned to evaluate the o!eratin) effectiveness of controls in
!reventin), or detectin) and correctin), (aterial (isstate(ents at the assertion level'
ISA 400, !ara)ra!h 19$f&'
97 <M7SSAAY
O1hose charged #ith go!ernanceNhe !erson$s& or or)aniJation$s& $for e,a(!le, a cor!orate trustee& with
res!onsi"ilit# for overseein) the strate)ic direction of the entit# and o"li)ations related to the
accounta"ilit# of the entit#' his includes overseein) the financial re!ortin) !rocess' For so(e entities in
so(e ;urisdictions, those char)ed with )overnance (a# include (ana)e(ent !ersonnel, for e,a(!le,
e,ecutive (e("ers of a )overnance "oard of a !rivate or !u"lic sector entit#, or an owner-(ana)er'
41
O1olerable $isstate$entNA (onetar# a(ount set "# the auditor in res!ect of which the auditor seeks to
o"tain an a!!ro!riate level of assurance that the (onetar# a(ount set "# the auditor is not e,ceeded "# the
actual (isstate(ent in the !o!ulation'
O1otal rate of de!iationNA rate of deviation fro( !rescri"ed internal control !rocedures set "# the auditor
in res!ect of which the auditor seeks to o"tain an a!!ro!riate level of assurance that the rate of deviation set
"# the auditor is not e,ceeded "# the actual rate of deviation in the !o!ulation'
"ncertaintyNA (atter whose outco(e de!ends on future actions or events not under the direct control of
the entit# "ut that (a# affect the financial state(ents'
O"ncorrected $isstate$entsNEisstate(ents that the auditor has accu(ulated durin) the audit and that
have not "een corrected'
O"n$odified opinionNhe o!inion e,!ressed "# the auditor when the auditor concludes that the financial
state(ents are !re!ared, in all (aterial res!ects, in accordance with the a!!lica"le financial re!ortin)
fra(ework'
44
O"ser auditorNAn auditor who audits and re!orts on the financial state(ents of a user entit#'
O"ser entityNAn entit# that uses a service or)aniJation and whose financial state(ents are "ein) audited'
Dal.3through testNInvolves tracin) a few transactions throu)h the financial re!ortin) s#ste('
ODritten representationNA written state(ent "# (ana)e(ent !rovided to the auditor to confir( certain
(atters or to su!!ort other audit evidence' Lritten re!resentations in this conte,t do not include financial
state(ents, the assertions therein, or su!!ortin) "ooks and records'
41
For discussion of the diversit# of )overnance structures, see !ara)ra!hs A1-A8 of ISA 4B0, C%o((unication
with hose %har)ed with <overnance'D 44
ISA 700, !ara)ra!hs 95-9B, deal with the !hrases used to e,!ress this o!inion in the case of a fair !resentation fra(ework and a
co(!liance fra(ework res!ectivel#'
<M7SSAAY 98
INTERNATIONAL STANDARDS ON AUDITING AND QUALITY
CONTROL
CONTENTS
6a)e
ISA 410, A)reein) the er(s of Audit 0n)a)e(ents ''''''''''''''''''''''''''''''''''''''''''' 107 ISA 440, :ualit#
%ontrol for an Audit of Financial State(ents '''''''''''''''''''''''''''' 190 ISA 490, Audit
=ocu(entation ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 145 ISA 440, he AuditorRs
Aes!onsi"ilities Aelatin) to Fraud in an Audit of
Financial State(ents ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1B9 ISA 450,
%onsideration of Maws and Ae)ulations in an Audit of Financial
State(ents ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 407 ISA 4B0,
%o((unication with hose %har)ed with <overnance ''''''''''''''''''''''''' 444 ISA 4B5, %o((unicatin)
=eficiencies in Internal %ontrol to hose %har)ed
with <overnance and Eana)e(ent '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 44B
300<699 RISK ASSESS)ENT AND RES*ONSE TO ASSESSED RISKS
ISA 900, 6lannin) an Audit of Financial State(ents '''''''''''''''''''''''''''''''''''''''''''' 458 ISA 915, Identif#in)
and Assessin) the Aisks of Eaterial Eisstate(ent
throu)h Understandin) the 0ntit# and Its 0nviron(ent ''''''''''''''''''''''''''''''''' 471 ISA 940, Eaterialit#
in 6lannin) and 6erfor(in) an Audit '''''''''''''''''''''''''''''''''' 944 ISA 990, he Auditor+s Aes!onses to
Assessed Aisks '''''''''''''''''''''''''''''''''''''''''' 991 ISA 404, Audit %onsiderations Aelatin) to an 0ntit# Usin)
a Service
7r)aniJation ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 955
ISA 450, 0valuation of Eisstate(ents Identified durin) the Audit ''''''''''''''''''''''' 975
@00<@99 AUDIT E,IDENCE
ISA 500, Audit 0vidence ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 951
95 %7N0NS
ISA 501, Audit 0videnceNS!ecific %onsiderations for Selected Ite(s ''''''''''''''' 405
ISA 505, 0,ternal %onfir(ations '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 440
ISA 510, Initial Audit 0n)a)e(entsN7!enin) 1alances '''''''''''''''''''''''''''''''''''' 494
ISA 540, Anal#tical 6rocedures '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 445
ISA 590, Audit Sa(!lin) '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 459
ISA 540, Auditin) Accountin) 0sti(ates, Includin) Fair Falue Accountin)
0sti(ates, and Aelated =isclosures ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 470
ISA 550, Aelated 6arties ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 51B
ISA 5B0, Su"se*uent 0vents ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 544
ISA 570, <oin) %oncern ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 557
ISA 580, Lritten Ae!resentations '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 574
$Includin) the Lork of %o(!onent Auditors& ''''''''''''''''''''''''''''''''''''''''''''''' 551
ISA B10, Usin) the Lork of Internal Auditors ''''''''''''''''''''''''''''''''''''''''''''''''''''' B44
ISA B40, Usin) the Lork of an Auditor+s 0,!ert ''''''''''''''''''''''''''''''''''''''''''''''''' B45
A00<A99 USING =ORK OF OTHERS
ISA B00, S!ecial %onsiderationsNAudits of <rou! Financial State(ents
B00<B99 AUDIT CONCLUSIONS AND RE*ORTING
ISA 700, For(in) an 7!inion and Ae!ortin) on Financial State(ents '''''''''''''''' B70
ISA 705, Eodifications to the 7!inion in the Inde!endent Auditor+s Ae!ort '''''' B55
ISA 70B, 0(!hasis of Eatter 6ara)ra!hs and 7ther Eatter 6ara)ra!hs in
the Inde!endent Auditor+s Ae!ort '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 747
ISA 710, %o(!arative Infor(ationN%orres!ondin) Fi)ures and %o(!arative
Financial State(ents '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 795
ISA 740, he Auditor+s Aes!onsi"ilities Aelatin) to 7ther Infor(ation in
=ocu(ents %ontainin) Audited Financial State(ents '''''''''''''''''''''''''''''''''' 755
+00<+99 S*ECIALICED AREAS
ISA 800, S!ecial %onsiderationsNAudits of Financial State(ents
6re!ared in Accordance with S!ecial 6ur!ose Fra(eworks '''''''''''''''''''''''''' 7BB
ISA 805, S!ecial %onsiderationsNAudits of Sin)le Financial State(ents
and S!ecific 0le(ents, Accounts or Ite(s of a Financial State(ent ''''''''''''' 784
ISA 810, 0n)a)e(ents to Ae!ort on Su((ar# Financial State(ents '''''''''''''''''' 800
%7N0NS 40
INTERNATIONAL STANDARD ON QUALITY CONTROL 7
QUALITY CONTROL FOR FIR)S THAT *ERFOR) AUDITS AND RE,IE=S
OF FINANCIAL STATE)ENTS4 AND OTHER ASSURANCE AND RELATED
SER,ICES ENGAGE)ENTS
$0ffective as of =ece("er 15, 4005&
CONTENTS
6ara)ra!h
@u(an Aesources ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A44-A91
0n)a)e(ent 6erfor(ance ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A94-AB9
Eonitorin) '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' AB4-A74
=ocu(entation of the S#ste( of :ualit# %ontrol '''''''''''''''''''''''''''''''''''''''' A79-A75
International Standard on :ualit# %ontrol $IS:%& 1 C:ualit# %ontrol for Fir(s that 6erfor( Audits and
Aeviews of Financial State(ents and 7ther Assurance and Aelated Services 0n)a)e(entsD should "e read
in con;unction with ISA 400 C7verall 7";ectives of the Inde!endent Auditor and the %onduct of an Audit in
Accordance with International Standards on Auditin)'D
IS:% 1 44
I"t'o#-ctio" Scope of thi ISQC
1. 1' his International Standard on :ualit# %ontrol $IS:%& deals with a fir(+s res!onsi"ilities
for its s#ste( of *ualit# control for audits and reviews of financial state(ents, and other assurance
and related services en)a)e(ents' his IS:% is to "e read in con;unction with relevant ethical
re*uire(ents'
2. 4' 7ther !ronounce(ents of the International Auditin) and Assurance Standards 1oard
$IAAS1& set out additional standards and )uidance on the res!onsi"ilities of fir( !ersonnel
re)ardin) *ualit# control !rocedures for s!ecific t#!es of en)a)e(ents' ISA 440,
1
for e,a(!le,
deals with *ualit# control !rocedures for audits of financial state(ents'
3. 9' A s#ste( of *ualit# control consists of !olicies desi)ned to achieve the o";ective set out
in !ara)ra!h 11 and the !rocedures necessar# to i(!le(ent and (onitor co(!liance with those
!olicies'
A-tho'it/ of thi ISQC
1. 4' his IS:% a!!lies to all fir(s of !rofessional accountants in res!ect of audits and
reviews of financial state(ents, and other assurance and related services en)a)e(ents' he nature
and e,tent of the !olicies and !rocedures develo!ed "# an individual fir( to co(!l# with this
IS:% will de!end on various factors such as the siJe and o!eratin) characteristics of the fir(, and
whether it is !art of a network'
2. 5' his IS:% contains the o";ective of the fir( in followin) the IS:%, and re*uire(ents
desi)ned to ena"le the fir( to (eet that stated o";ective' In addition, it contains related )uidance
in the for( of a!!lication and other e,!lanator# (aterial, as discussed further in !ara)ra!h 8, and
introductor# (aterial that !rovides conte,t relevant to a !ro!er understandin) of the IS:%, and
definitions'
1. B' he o";ective !rovides the conte,t in which the re*uire(ents of this IS:% are set, and is
intended to assist the fir( in.
1. G Understandin) what needs to "e acco(!lished? and
2. G =ecidin) whether (ore needs to "e done to achieve the o";ective'
3. 7' he re*uire(ents of this IS:% are e,!ressed usin) Cshall'D
4. 8' Lhere necessar#, the a!!lication and other e,!lanator# (aterial !rovides further
e,!lanation of the re*uire(ents and )uidance for carr#in) the( out' In !articular, it (a#.
ISA 440, C:ualit# %ontrol for an Audit of Financial State(ents'D
49 IS:% 1
1. G 0,!lain (ore !recisel# what a re*uire(ent (eans or is intended to cover? and
2. G Include e,a(!les of !olicies and !rocedures that (a# "e a!!ro!riate in the
circu(stances'
Lhile such )uidance does not in itself i(!ose a re*uire(ent, it is relevant to the !ro!er
a!!lication of the re*uire(ents' he a!!lication and other e,!lanator# (aterial (a# also !rovide
"ack)round infor(ation on (atters addressed in this IS:%' Lhere a!!ro!riate, additional
considerations s!ecific to !u"lic sector audit or)aniJations or s(aller fir(s are included within the
a!!lication and other e,!lanator# (aterial' hese additional considerations assist in the
a!!lication of the re*uire(ents in this IS:%' he# do not, however, li(it or reduce the
res!onsi"ilit# of the fir( to a!!l# and co(!l# with the re*uire(ents in this IS:%'
5' his IS:% includes, under the headin) C=efinitions,D a descri!tion of the (eanin)s attri"uted to
certain ter(s for !ur!oses of this IS:%' hese are !rovided to assist in the consistent a!!lication
and inter!retation of this IS:%, and are not intended to override definitions that (a# "e
esta"lished for other !ur!oses, whether in law, re)ulation or otherwise' he <lossar# of er(s
relatin) to International Standards issued "# the IAAS1 in the
-andboo. of International )tandards on Auditing and *uality Control
!u"lished "# IFA% includes the ter(s defined in this IS:%' It also includes descri!tions of other
ter(s found in this IS:% to assist in co((on and consistent inter!retation and translation'
Effecti9e D!te
10' S#ste(s of *ualit# control in co(!liance with this IS:% are re*uired to "e esta"lished "#
=ece("er 15, 4005'
O$1ecti9e
11' he o";ective of the fir( is to esta"lish and (aintain a s#ste( of *ualit# control to !rovide it with
reasona"le assurance that.
1. $a& he fir( and its !ersonnel co(!l# with !rofessional standards and a!!lica"le le)al and
re)ulator# re*uire(ents? and
2. $"& Ae!orts issued "# the fir( or en)a)e(ent !artners are a!!ro!riate in the circu(stances'
Defi"itio"
14' In this IS:%, the followin) ter(s have the (eanin)s attri"uted "elow.
1. $a& =ate of re!ort K he date selected "# the !ractitioner to date the re!ort'
2. $"& 0n)a)e(ent docu(entation K he record of work !erfor(ed, results o"tained, and
conclusions the !ractitioner reached $ter(s such as Cworkin) !a!ersD or Cwork!a!ersD are
so(eti(es used&'
3. $c& 0n)a)e(ent !artner
4
K he !artner or other !erson in the fir( who is res!onsi"le for the
en)a)e(ent and its !erfor(ance, and for the re!ort that is issued on "ehalf of the fir(, and
who, where re*uired, has the a!!ro!riate authorit# fro( a !rofessional, le)al or re)ulator#
"od#'
4. $d& 0n)a)e(ent *ualit# control review K A !rocess desi)ned to !rovide an o";ective
evaluation, on or "efore the date of the re!ort, of the si)nificant ;ud)(ents the en)a)e(ent
tea( (ade and the conclusions it reached in for(ulatin) the re!ort' he en)a)e(ent *ualit#
control review !rocess is for audits of financial state(ents of listed entities, and those other
en)a)e(ents, if an#, for which the fir( has deter(ined an en)a)e(ent *ualit# control review
is re*uired'
5. $e& 0n)a)e(ent *ualit# control reviewer K A !artner, other !erson in the fir(, suita"l#
*ualified e,ternal !erson, or a tea( (ade u! of such individuals, none of who( is !art of the
en)a)e(ent tea(, with sufficient and a!!ro!riate e,!erience and authorit# to o";ectivel#
evaluate the si)nificant ;ud)(ents the en)a)e(ent tea( (ade and the conclusions it reached
in for(ulatin) the re!ort'
6. $f& 0n)a)e(ent tea( K All !artners and staff !erfor(in) the en)a)e(ent, and an# individuals
en)a)ed "# the fir( or a network fir( who !erfor( !rocedures on the en)a)e(ent' his
e,cludes e,ternal e,!erts en)a)ed "# the fir( or a network fir('
7. $)& Fir( K A sole !ractitioner, !artnershi! or cor!oration or other entit# of !rofessional
accountants'
8. $h& Ins!ection K In relation to co(!leted en)a)e(ents, !rocedures desi)ned to !rovide
evidence of co(!liance "# en)a)e(ent tea(s with the fir(+s *ualit# control !olicies and
!rocedures'
9. $i& Misted entit# K An entit# whose shares, stock or de"t are *uoted or listed on a reco)niJed
stock e,chan)e, or are (arketed under the re)ulations of a reco)niJed stock e,chan)e or other
e*uivalent "od#'
10. $;& Eonitorin) K A !rocess co(!risin) an on)oin) consideration and evaluation of the fir(+s
s#ste( of *ualit# control, includin) a !eriodic ins!ection of a selection of co(!leted
en)a)e(ents, desi)ned to !rovide the fir( with reasona"le assurance that its s#ste( of
*ualit# control is o!eratin) effectivel#'
2. $k& Network fir( K A fir( or entit# that "elon)s to a network'
1. $l& Network K A lar)er structure.
2. $i& hat is ai(ed at coo!eration, and
3. $ii& hat is clearl# ai(ed at !rofit or cost-sharin) or shares co((on ownershi!, control or
(ana)e(ent, co((on *ualit# control !olicies and !rocedures, co((on "usiness strate)#, the
use of a co((on "rand na(e, or a si)nificant !art of !rofessional resources'
3. $(& 6artner K An# individual with authorit# to "ind the fir( with res!ect to the !erfor(ance of a
!rofessional services en)a)e(ent'
4. $n& 6ersonnel K 6artners and staff'
5. $o& 6rofessional standards K IAAS1 0n)a)e(ent Standards, as defined in the IAAS1+s (reface to
the International )tandards on *uality Control& Auditing& +e!ie#& ,ther Assurance and +elated
)er!ices, and relevant ethical re*uire(ents'
6. $!& Aeasona"le assurance K In the conte,t of this IS:%, a hi)h, "ut not a"solute, level of
assurance'
7. $*& Aelevant ethical re*uire(ents K 0thical re*uire(ents to which the en)a)e(ent tea( and
en)a)e(ent *ualit# control reviewer are su";ect, which ordinaril# co(!rise 6arts A and 1 of the
International Federation of Accountants+ Code of /thics for (rofessional Accountants $IFA%
%ode& to)ether with national re*uire(ents that are (ore restrictive'
8. $r& Staff K 6rofessionals, other than !artners, includin) an# e,!erts the fir( e(!lo#s'
9. $s& Suita"l# *ualified e,ternal !erson K An individual outside the fir( with the co(!etence
and ca!a"ilities to act as an en)a)e(ent !artner, for e,a(!le a !artner of another fir(, or an
e(!lo#ee $with a!!ro!riate e,!erience& of either a !rofessional accountanc# "od# whose
(e("ers (a# !erfor( audits and reviews of historical financial infor(ation, or other assurance or
related services en)a)e(ents, or of an or)aniJation that !rovides relevant *ualit# control services'
IS:% 1 44 C0n)a)e(ent !artner,D C!artner,D and Cfir(D should "e read as referrin) to their
!u"lic sector e*uivalents where relevant'
45 IS:% 1
Re2-i'e.e"t App0/i"(4 !"# Co.p0/i"( &ith4 Re0e9!"t Re2-i'e.e"t
19' 6ersonnel within the fir( res!onsi"le for esta"lishin) and (aintainin) the fir(+s s#ste( of *ualit#
control shall have an understandin) of the entire
IS:% 1 4B
te,t of this IS:%, includin) its a!!lication and other e,!lanator# (aterial, to understand its
o";ective and to a!!l# its re*uire(ents !ro!erl#'
1. 14' he fir( shall co(!l# with each re*uire(ent of this IS:% unless, in the circu(stances of
the fir(, the re*uire(ent is not relevant to the services !rovided in res!ect of audits and reviews
of financial state(ents, and other assurance and related services en)a)e(ents' $Aef. 6ara' A1&
2. 15' he re*uire(ents are desi)ned to ena"le the fir( to achieve the o";ective stated in this
IS:%' he !ro!er a!!lication of the re*uire(ents is therefore e,!ected to !rovide a sufficient
"asis for the achieve(ent of the o";ective' @owever, "ecause circu(stances var# widel# and all
such circu(stances cannot "e antici!ated, the fir( shall consider whether there are !articular
(atters or circu(stances that re*uire the fir( to esta"lish !olicies and !rocedures in addition to
those re*uired "# this IS:% to (eet the stated o";ective'
E0e.e"t of ! S/te. of Q-!0it/ Co"t'o0
11B' he fir( shall esta"lish and (aintain a s#ste( of *ualit# control that includes !olicies
and !rocedures that address each of the followin) ele(ents.
2$a& Meadershi! res!onsi"ilities for *ualit# within the fir('
3$"& Aelevant ethical re*uire(ents'
4$c& Acce!tance and continuance of client relationshi!s and s!ecific en)a)e(ents'
5$d& @u(an resources'
6$e& 0n)a)e(ent !erfor(ance'
7$f& Eonitorin)'
2. 17' he fir( shall docu(ent its !olicies and !rocedures and co((unicate the( to the fir(+s
!ersonnel' $Aef. 6ara' A4-A9&
Le!#e'hip Repo"i$i0itie fo' Q-!0it/ &ithi" the Fi'.
1. 18' he fir( shall esta"lish !olicies and !rocedures desi)ned to !ro(ote an internal culture
reco)niJin) that *ualit# is essential in !erfor(in) en)a)e(ents' Such !olicies and !rocedures
shall re*uire the fir(+s chief e,ecutive officer $or e*uivalent& or, if a!!ro!riate, the fir(+s
(ana)in) "oard of !artners $or e*uivalent& to assu(e ulti(ate res!onsi"ilit# for the fir(+s s#ste(
of *ualit# control' $Aef. 6ara' A4-A5&
2. 15' he fir( shall esta"lish !olicies and !rocedures such that an# !erson or !ersons assi)ned
o!erational res!onsi"ilit# for the fir(+s s#ste( of *ualit# control "# the fir(+s chief e,ecutive
officer or (ana)in) "oard of !artners has sufficient and a!!ro!riate e,!erience and a"ilit#, and the
necessar# authorit#, to assu(e that res!onsi"ilit#' $Aef. 6ara' AB&
47 IS:% 1
Re0e9!"t Ethic!0 Re2-i'e.e"t
40' he fir( shall esta"lish !olicies and !rocedures desi)ned to !rovide it with reasona"le assurance
that the fir( and its !ersonnel co(!l# with relevant ethical re*uire(ents' $Aef. 6ara' A7-A10&
Independence
1. 41' he fir( shall esta"lish !olicies and !rocedures desi)ned to !rovide it with reasona"le
assurance that the fir(, its !ersonnel and, where a!!lica"le, others su";ect to inde!endence
re*uire(ents $includin) network fir( !ersonnel& (aintain inde!endence where re*uired "#
relevant ethical re*uire(ents' Such !olicies and !rocedures shall ena"le the fir( to. $Aef.
6ara' A10&
2. $a& %o((unicate its inde!endence re*uire(ents to its !ersonnel and, where a!!lica"le,
others su";ect to the(? and
3. $"& Identif# and evaluate circu(stances and relationshi!s that create threats to inde!endence,
and to take a!!ro!riate action to eli(inate those threats or reduce the( to an acce!ta"le level
"# a!!l#in) safe)uards, or, if considered a!!ro!riate, to withdraw fro( the en)a)e(ent,
where withdrawal is !ossi"le under a!!lica"le law or re)ulation'
4. 44' Such !olicies and !rocedures shall re*uire. $Aef. 6ara' A10&
5. $a& 0n)a)e(ent !artners to !rovide the fir( with relevant infor(ation a"out client
en)a)e(ents, includin) the sco!e of services, to ena"le the fir( to evaluate the overall
i(!act, if an#, on inde!endence re*uire(ents?
6. $"& 6ersonnel to !ro(!tl# notif# the fir( of circu(stances and relationshi!s that create a
threat to inde!endence so that a!!ro!riate action can "e taken? and
7. $c& he accu(ulation and co((unication of relevant infor(ation to a!!ro!riate !ersonnel so
that.
8. $i& he fir( and its !ersonnel can readil# deter(ine whether the# satisf# inde!endence
re*uire(ents?
9. $ii& he fir( can (aintain and u!date its records relatin) to inde!endence? and
10. $iii& he fir( can take a!!ro!riate action re)ardin) identified threats to inde!endence that are
not at an acce!ta"le level'
2. 49' he fir( shall esta"lish !olicies and !rocedures desi)ned to !rovide it with reasona"le
assurance that it is notified of "reaches of inde!endence re*uire(ents, and to ena"le it to take
a!!ro!riate actions to resolve such
IS:% 1 48
situations' he !olicies and !rocedures shall include re*uire(ents for. $Aef. 6ara' A10&
1$a& 6ersonnel to !ro(!tl# notif# the fir( of inde!endence "reaches of which the# "eco(e
aware?
1$"& he fir( to !ro(!tl# co((unicate identified "reaches of these !olicies and !rocedures to.
2$i& he en)a)e(ent !artner who, with the fir(, needs to address the "reach? and
3$ii& 7ther relevant !ersonnel in the fir( and, where a!!ro!riate, the network, and those
su";ect to the inde!endence re*uire(ents who need to take a!!ro!riate action? and
2$c&6ro(!t co((unication to the fir(, if necessar#, "# the en)a)e(ent !artner and the other
individuals referred to in su"!ara)ra!h 49$"&$ii& of the actions taken to resolve the (atter, so that
the fir( can deter(ine whether it should take further action'
1. 44' At least annuall#, the fir( shall o"tain written confir(ation of co(!liance with its
!olicies and !rocedures on inde!endence fro( all fir( !ersonnel re*uired to "e inde!endent "#
relevant ethical re*uire(ents' $Aef. 6ara' A10-A11&
1. 45' he fir( shall esta"lish !olicies and !rocedures. $Aef. 6ara' A10&
2. $a& Settin) out criteria for deter(inin) the need for safe)uards to reduce the fa(iliarit# threat
to an acce!ta"le level when usin) the sa(e senior !ersonnel on an assurance en)a)e(ent over
a lon) !eriod of ti(e? and
3. $"& Ae*uirin), for audits of financial state(ents of listed entities, the rotation of the
en)a)e(ent !artner and the individuals res!onsi"le for en)a)e(ent *ualit# control review,
and where a!!lica"le, others su";ect to rotation re*uire(ents, after a s!ecified !eriod in
co(!liance with relevant ethical re*uire(ents' $Aef. 6ara' A14-A17&
Accept!"ce !"# Co"ti"-!"ce of C0ie"t Re0!tio"hip !"# Specific E"(!(e.e"t
4B' he fir( shall esta"lish !olicies and !rocedures for the acce!tance and continuance of client
relationshi!s and s!ecific en)a)e(ents, desi)ned to !rovide the fir( with reasona"le assurance
that it will onl# undertake or continue relationshi!s and en)a)e(ents where the fir(.
1$a& Is co(!etent to !erfor( the en)a)e(ent and has the ca!a"ilities, includin) ti(e and
resources, to do so? $Aef. 6ara' A18, A49&
2$"& %an co(!l# with relevant ethical re*uire(ents? and
45 IS:% 1
$c& @as considered the inte)rit# of the client, and does not have infor(ation that would lead it
to conclude that the client lacks inte)rit#' $Aef. 6ara' A15-A40, A49&
147' Such !olicies and !rocedures shall re*uire.
2$a& he fir( to o"tain such infor(ation as it considers necessar# in the circu(stances "efore
acce!tin) an en)a)e(ent with a new client, when decidin) whether to continue an e,istin)
en)a)e(ent, and when considerin) acce!tance of a new en)a)e(ent with an e,istin) client'
$Aef. 6ara' A41, A49&
3$"& If a !otential conflict of interest is identified in acce!tin) an en)a)e(ent fro( a new or
an e,istin) client, the fir( to deter(ine whether it is a!!ro!riate to acce!t the en)a)e(ent'
4$c& If issues have "een identified, and the fir( decides to acce!t or continue the client
relationshi! or a s!ecific en)a)e(ent, the fir( to docu(ent how the issues were resolved'
548' he fir( shall esta"lish !olicies and !rocedures on continuin) an en)a)e(ent and the
client relationshi!, addressin) the circu(stances where the fir( o"tains infor(ation that
would have caused it to decline the en)a)e(ent had that infor(ation "een availa"le earlier'
Such !olicies and !rocedures shall include consideration of.
6$a& he !rofessional and le)al res!onsi"ilities that a!!l# to the circu(stances, includin)
whether there is a re*uire(ent for the fir( to re!ort to the !erson or !ersons who (ade the
a!!oint(ent or, in so(e cases, to re)ulator# authorities? and
7$"& he !ossi"ilit# of withdrawin) fro( the en)a)e(ent or fro( "oth the en)a)e(ent and
the client relationshi!' $Aef. 6ara' A44-49&
H-.!" Reo-'ce
that it has sufficient !ersonnel with the co(!etence, ca!a"ilities, and co((it(ent to ethical
!rinci!les necessar# to.
1$a& 6erfor( en)a)e(ents in accordance with !rofessional standards and a!!lica"le le)al and
2$"& 0na"le the fir( or en)a)e(ent !artners to issue re!orts that are a!!ro!riate in the circu(stances'
$Aef. 6ara' A44-A45&
Assign$ent of /ngage$ent 1ea$s
90' he fir( shall assi)n res!onsi"ilit# for each en)a)e(ent to an en)a)e(ent !artner and shall
esta"lish !olicies and !rocedures re*uirin) that.
IS:% 1 50
1$a& he identit# and role of the en)a)e(ent !artner are co((unicated to ke# (e("ers of
client (ana)e(ent and those char)ed with )overnance?
2$"& he en)a)e(ent !artner has the a!!ro!riate co(!etence, ca!a"ilities, and authorit# to
!erfor( the role? and
3$c& he res!onsi"ilities of the en)a)e(ent !artner are clearl# defined and co((unicated to
that !artner' $Aef. 6ara' A90&
91' he fir( shall also esta"lish !olicies and !rocedures to assi)n a!!ro!riate !ersonnel with the
necessar# co(!etence, and ca!a"ilities to.
1. $a& 6erfor( en)a)e(ents in accordance with !rofessional standards and a!!lica"le le)al and
2. $"& 0na"le the fir( or en)a)e(ent !artners to issue re!orts that are a!!ro!riate in the
circu(stances' $Aef. 6ara' A91&
E"(!(e.e"t *e'fo'.!"ce
194' he fir( shall esta"lish !olicies and !rocedures desi)ned to !rovide it with reasona"le
assurance that en)a)e(ents are !erfor(ed in accordance with !rofessional standards and
a!!lica"le le)al and re)ulator# re*uire(ents, and that the fir( or the en)a)e(ent !artner
issue re!orts that are a!!ro!riate in the circu(stances' Such !olicies and !rocedures shall
include.
2$a& Eatters relevant to !ro(otin) consistenc# in the *ualit# of en)a)e(ent !erfor(ance?
3$"& Su!ervision res!onsi"ilities? and $Aef. 6ara' A94&
4$c& Aeview res!onsi"ilities' $Aef. 6ara' A95&
2. 99' he fir(+s review res!onsi"ilit# !olicies and !rocedures shall "e deter(ined on the "asis
that work of less e,!erienced tea( (e("ers is reviewed "# (ore e,!erienced en)a)e(ent tea(
(e("ers'
Consultation
that.
1. $a& A!!ro!riate consultation takes !lace on difficult or contentious (atters?
2. $"& Sufficient resources are availa"le to ena"le a!!ro!riate consultation to take !lace?
3. $c& he nature and sco!e of, and conclusions resultin) fro(, such consultations are
docu(ented and are a)reed "# "oth the individual seekin) consultation and the individual
consulted? and
51 IS:% 1
$d& %onclusions resultin) fro( consultations are i(!le(ented' $Aef. 6ara' A9B-A40&
/ngage$ent *uality Control +e!ie#
195' he fir( shall esta"lish !olicies and !rocedures re*uirin), for a!!ro!riate en)a)e(ents,
an en)a)e(ent *ualit# control review that !rovides an o";ective evaluation of the si)nificant
;ud)(ents (ade "# the en)a)e(ent tea( and the conclusions reached in for(ulatin) the
re!ort' Such !olicies and !rocedures shall.
2$a& Ae*uire an en)a)e(ent *ualit# control review for all audits of financial state(ents of
listed entities?
3$"& Set out criteria a)ainst which all other audits and reviews of historical financial infor(ation
and other assurance and related services en)a)e(ents shall "e evaluated to deter(ine whether
an en)a)e(ent *ualit# control review should "e !erfor(ed? and $Aef. 6ara' A41&
4$c& Ae*uire an en)a)e(ent *ualit# control review for all en)a)e(ents, if an#, (eetin) the
criteria esta"lished in co(!liance with su"!ara)ra!h 95$"&'
2. 9B' he fir( shall esta"lish !olicies and !rocedures settin) out the nature, ti(in) and e,tent
of an en)a)e(ent *ualit# control review' Such !olicies and !rocedures shall re*uire that the
en)a)e(ent re!ort not "e dated until the co(!letion of the en)a)e(ent *ualit# control review'
197' he fir( shall esta"lish !olicies and !rocedures to re*uire the en)a)e(ent *ualit# control
review to include.
2$a&=iscussion of si)nificant (atters with the en)a)e(ent !artner?
3$"& Aeview of the financial state(ents or other su";ect (atter infor(ation and the !ro!osed
re!ort?
4$c&Aeview of selected en)a)e(ent docu(entation relatin) to si)nificant ;ud)(ents the
en)a)e(ent tea( (ade and the conclusions it reached? and
5$d& 0valuation of the conclusions reached in for(ulatin) the re!ort and consideration of
whether the !ro!osed re!ort is a!!ro!riate' $Aef. 6ara' A44&
3. 98' For audits of financial state(ents of listed entities, the fir( shall esta"lish !olicies and
!rocedures to re*uire the en)a)e(ent *ualit# control review to also include consideration of the
followin).
$a& he en)a)e(ent tea(+s evaluation of the fir(+s inde!endence in relation to the s!ecific
en)a)e(ent?
IS:% 1 54
1$"& Lhether a!!ro!riate consultation has taken !lace on (atters involvin) differences of
o!inion or other difficult or contentious (atters, and the conclusions arisin) fro( those
consultations? and
2$c& Lhether docu(entation selected for review reflects the work !erfor(ed in relation to the
si)nificant ;ud)(ents and su!!orts the conclusions reached' $Aef. 6ara' A45-A4B&
%riteria for the 0li)i"ilit# of 0n)a)e(ent :ualit# %ontrol Aeviewers
195' he fir( shall esta"lish !olicies and !rocedures to address the a!!oint(ent of
en)a)e(ent *ualit# control reviewers and esta"lish their eli)i"ilit# throu)h.
2$a& he technical *ualifications re*uired to !erfor( the role, includin) the necessar#
e,!erience and authorit#? and $Aef. 6ara' A47&
3$"& he de)ree to which an en)a)e(ent *ualit# control reviewer can "e consulted on the
en)a)e(ent without co(!ro(isin) the reviewer+s o";ectivit#' $Aef. 6ara' A48&
2. 40' he fir( shall esta"lish !olicies and !rocedures desi)ned to (aintain the o";ectivit# of
the en)a)e(ent *ualit# control reviewer' $Aef. 6ara' A45A51&
3. 41' he fir(+s !olicies and !rocedures shall !rovide for the re!lace(ent of the en)a)e(ent
*ualit# control reviewer where the reviewer+s a"ilit# to !erfor( an o";ective review (a# "e
i(!aired'
=ocu(entation of the 0n)a)e(ent :ualit# %ontrol Aeview
44' he fir( shall esta"lish !olicies and !rocedures on docu(entation of the en)a)e(ent *ualit#
control review which re*uire docu(entation that.
1$a& he !rocedures re*uired "# the fir(+s !olicies on en)a)e(ent *ualit# control review
have "een !erfor(ed?
2$"& he en)a)e(ent *ualit# control review has "een co(!leted on or "efore the date of the
re!ort? and
3$c& he reviewer is not aware of an# unresolved (atters that would cause the reviewer to
"elieve that the si)nificant ;ud)(ents the en)a)e(ent tea( (ade and the conclusions it reached
were not a!!ro!riate'
?ifferences of ,pinion
49' he fir( shall esta"lish !olicies and !rocedures for dealin) with and resolvin) differences of
o!inion within the en)a)e(ent tea(, with those consulted and, where a!!lica"le, "etween the
en)a)e(ent !artner and the en)a)e(ent *ualit# control reviewer' $Aef. 6ara' A54-A59&
59 IS:% 1
44' Such !olicies and !rocedures shall re*uire that.
1$a& %onclusions reached "e docu(ented and i(!le(ented? and
2$"& he re!ort not "e dated until the (atter is resolved'
/ngage$ent ?ocu$entation
%o(!letion of the Asse("l# of Final 0n)a)e(ent Files
45' he fir( shall esta"lish !olicies and !rocedures for en)a)e(ent tea(s to co(!lete the asse("l#
of final en)a)e(ent files on a ti(el# "asis after the en)a)e(ent re!orts have "een finaliJed' $Aef.
6ara' A54-A55&
%onfidentialit#, Safe %ustod#, Inte)rit#, Accessi"ilit# and Aetrieva"ilit# of 0n)a)e(ent
=ocu(entation
4B' he fir( shall esta"lish !olicies and !rocedures desi)ned to (aintain the confidentialit#, safe
custod#, inte)rit#, accessi"ilit# and retrieva"ilit# of en)a)e(ent docu(entation' $Aef. 6ara' A5B-
A55&
Aetention of 0n)a)e(ent =ocu(entation
47' he fir( shall esta"lish !olicies and !rocedures for the retention of en)a)e(ent docu(entation for
a !eriod sufficient to (eet the needs of the fir( or as re*uired "# law or re)ulation' $Aef. 6ara'
AB0-AB9&
)o"ito'i"(
<onitoring the Fir$8s *uality Control (olicies and (rocedures
48' he fir( shall esta"lish a (onitorin) !rocess desi)ned to !rovide it with reasona"le assurance that
the !olicies and !rocedures relatin) to the s#ste( of *ualit# control are relevant, ade*uate, and
o!eratin) effectivel#' his !rocess shall.
1$a& Include an on)oin) consideration and evaluation of the fir(+s s#ste( of *ualit# control includin),
on a c#clical "asis, ins!ection of at least one co(!leted en)a)e(ent for each en)a)e(ent !artner?
2$"& Ae*uire res!onsi"ilit# for the (onitorin) !rocess to "e assi)ned to a !artner or !artners
or other !ersons with sufficient and a!!ro!riate e,!erience and authorit# in the fir( to assu(e that
res!onsi"ilit#? and
3$c&Ae*uire that those !erfor(in) the en)a)e(ent or the en)a)e(ent *ualit# control review are not
involved in ins!ectin) the en)a)e(ents' $Aef. 6ara' AB4-AB8&
IS:% 1 54
/!aluating& Co$$unicating and +e$edying Identified ?eficiencies
1. 45' he fir( shall evaluate the effect of deficiencies noted as a result of the (onitorin)
!rocess and deter(ine whether the# are either.
2. $a& Instances that do not necessaril# indicate that the fir(+s s#ste( of *ualit# control is
insufficient to !rovide it with reasona"le assurance that it co(!lies with !rofessional
standards and a!!lica"le le)al and re)ulator# re*uire(ents, and that the re!orts issued "# the
fir( or en)a)e(ent !artners are a!!ro!riate in the circu(stances? or
3. $"& S#ste(ic, re!etitive or other si)nificant deficiencies that re*uire !ro(!t corrective action'
2. 50' he fir( shall co((unicate to relevant en)a)e(ent !artners and other a!!ro!riate
!ersonnel deficiencies noted as a result of the (onitorin) !rocess and reco((endations for
a!!ro!riate re(edial action' $Aef. 6ara' AB5&
1. 51' Aeco((endations for a!!ro!riate re(edial actions for deficiencies noted shall include
one or (ore of the followin).
2. $a& akin) a!!ro!riate re(edial action in relation to an individual en)a)e(ent or (e("er of
!ersonnel?
3. $"& he co((unication of the findin)s to those res!onsi"le for trainin) and !rofessional
develo!(ent?
4. $c& %han)es to the *ualit# control !olicies and !rocedures? and
5. $d& =isci!linar# action a)ainst those who fail to co(!l# with the !olicies and !rocedures of
the fir(, es!eciall# those who do so re!eatedl#'
3. 54' he fir( shall esta"lish !olicies and !rocedures to address cases where the results of the
(onitorin) !rocedures indicate that a re!ort (a# "e ina!!ro!riate or that !rocedures were o(itted
durin) the !erfor(ance of the en)a)e(ent' Such !olicies and !rocedures shall re*uire the fir( to
deter(ine what further action is a!!ro!riate to co(!l# with relevant !rofessional standards and
a!!lica"le le)al and re)ulator# re*uire(ents and to consider whether to o"tain le)al advice'
1. 59' he fir( shall co((unicate at least annuall# the results of the (onitorin) of its s#ste(
of *ualit# control to en)a)e(ent !artners and other a!!ro!riate individuals within the fir(,
includin) the fir(+s chief e,ecutive officer or, if a!!ro!riate, its (ana)in) "oard of !artners'
his co((unication shall "e sufficient to ena"le the fir( and these individuals to take !ro(!t
and a!!ro!riate action where necessar# in accordance with their defined roles and
res!onsi"ilities' Infor(ation co((unicated shall include the followin).
2. $a& A descri!tion of the (onitorin) !rocedures !erfor(ed'
3. $"& he conclusions drawn fro( the (onitorin) !rocedures'
55 IS:% 1
$c& Lhere relevant, a descri!tion of s#ste(ic, re!etitive or other si)nificant deficiencies and of
the actions taken to resolve or a(end those deficiencies'
54' So(e fir(s o!erate as !art of a network and, for consistenc#, (a# i(!le(ent so(e of their
(onitorin) !rocedures on a network "asis' Lhere fir(s within a network o!erate under co((on
(onitorin) !olicies and !rocedures desi)ned to co(!l# with this IS:%, and these fir(s !lace
reliance on such a (onitorin) s#ste(, the fir(+s !olicies and !rocedures shall re*uire that.
1. $a& At least annuall#, the network co((unicate the overall sco!e, e,tent and results of the
(onitorin) !rocess to a!!ro!riate individuals within the network fir(s? and
2. $"& he network co((unicate !ro(!tl# an# identified deficiencies in the s#ste( of *ualit#
control to a!!ro!riate individuals within the relevant network fir( or fir(s so that the necessar#
action can "e taken,
in order that en)a)e(ent !artners in the network fir(s can rel# on the results of the (onitorin)
!rocess i(!le(ented within the network, unless the fir(s or the network advise otherwise'
Co$plaints and Allegations
that it deals a!!ro!riatel# with.
1. $a& %o(!laints and alle)ations that the work !erfor(ed "# the fir( fails to co(!l# with
!rofessional standards and a!!lica"le le)al and re)ulator# re*uire(ents? and
2. $"& Alle)ations of non-co(!liance with the fir(+s s#ste( of *ualit# control'
As !art of this !rocess, the fir( shall esta"lish clearl# defined channels for fir( !ersonnel to raise
an# concerns in a (anner that ena"les the( to co(e forward without fear of re!risals' $Aef. 6ara'
A70&
5B' If durin) the investi)ations into co(!laints and alle)ations, deficiencies in the desi)n or o!eration
of the fir(+s *ualit# control !olicies and !rocedures or non-co(!liance with the fir(+s s#ste( of
*ualit# control "# an individual or individuals are identified, the fir( shall take a!!ro!riate actions
as set out in !ara)ra!h 51' $Aef. 6ara' A71-A74&
Doc-.e"t!tio" of the S/te. of Q-!0it/ Co"t'o0
57' he fir( shall esta"lish !olicies and !rocedures re*uirin) a!!ro!riate docu(entation to !rovide
evidence of the o!eration of each ele(ent of its s#ste( of *ualit# control' $Aef. 6ara' A79-A75&
IS:% 1 5B
1. 58' he fir( shall esta"lish !olicies and !rocedures that re*uire retention of docu(entation
for a !eriod of ti(e sufficient to !er(it those !erfor(in) (onitorin) !rocedures to evaluate the
fir(+s co(!liance with its s#ste( of *ualit# control, or for a lon)er !eriod if re*uired "# law or
re)ulation'
2. 55' he fir( shall esta"lish !olicies and !rocedures re*uirin) docu(entation of co(!laints
and alle)ations and the res!onses to the('
OOO
App0ic!tio" !"# Othe' E5p0!"!to'/ )!te'i!0 App0/i"(4 !"# Co.p0/i"( &ith4 Re0e9!"t Re2-i'e.e"t
Considerations )pecific to )$aller Fir$s $Aef. 6ara' 14&
A1' his IS:% does not call for co(!liance with re*uire(ents that are not relevant, for e,a(!le, in
the circu(stances of a sole !ractitioner with no staff' Ae*uire(ents in this IS:% such as those for
!olicies and !rocedures for the assi)n(ent of a!!ro!riate !ersonnel to the en)a)e(ent tea( $see
!ara)ra!h 91&, for review res!onsi"ilities $see !ara)ra!h 99&, and for the annual co((unication of
the results of (onitorin) to en)a)e(ent !artners within the fir( $see !ara)ra!h 59& are not
relevant in the a"sence of staff'
E0e.e"t of ! S/te. of Q-!0it/ Co"t'o0 $Aef. 6ara' 17&
A4' In )eneral, co((unication of *ualit# control !olicies and !rocedures to fir( !ersonnel includes a
descri!tion of the *ualit# control !olicies and !rocedures and the o";ectives the# are desi)ned to
achieve, and the (essa)e that each individual has a !ersonal res!onsi"ilit# for *ualit# and is
e,!ected to co(!l# with these !olicies and !rocedures' 0ncoura)in) fir( !ersonnel to
co((unicate their views or concerns on *ualit# control (atters reco)niJes the i(!ortance of
o"tainin) feed"ack on the fir(+s s#ste( of *ualit# control'
Considerations )pecific to )$aller Fir$s
A9' =ocu(entation and co((unication of !olicies and !rocedures for s(aller fir(s (a# "e less
for(al and e,tensive than for lar)er fir(s'
Le!#e'hip Repo"i$i0itie fo' Q-!0it/ &ithi" the Fi'.
(ro$oting an Internal Culture of *uality $Aef. 6ara' 18&
A4' he fir(+s leadershi! and the e,a(!les it sets si)nificantl# influence the internal culture of the
fir(' he !ro(otion of a *ualit#-oriented internal culture de!ends on clear, consistent and
fre*uent actions and (essa)es fro( all levels of the fir(+s (ana)e(ent that e(!hasiJe the fir(+s
*ualit# control !olicies and !rocedures, and the re*uire(ent to.
57 IS:% 1
1. $a& !erfor( work that co(!lies with !rofessional standards and a!!lica"le le)al and
2. $"& issue re!orts that are a!!ro!riate in the circu(stances'
Such actions and (essa)es encoura)e a culture that reco)niJes and rewards hi)h *ualit# work'
hese actions and (essa)es (a# "e co((unicated "#, "ut are not li(ited to, trainin) se(inars,
(eetin)s, for(al or infor(al dialo)ue, (ission state(ents, newsletters, or "riefin) (e(oranda'
he# (a# "e incor!orated in the fir(+s internal docu(entation and trainin) (aterials, and in
!artner and staff a!!raisal !rocedures such that the# will su!!ort and reinforce the fir(+s view on
the i(!ortance of *ualit# and how, !racticall#, it is to "e achieved'
A5' 7f !articular i(!ortance in !ro(otin) an internal culture "ased on *ualit# is the need for the
fir(+s leadershi! to reco)niJe that the fir(+s "usiness strate)# is su";ect to the overridin)
re*uire(ent for the fir( to achieve *ualit# in all the en)a)e(ents that the fir( !erfor(s'
6ro(otin) such an internal culture includes.
1. $a& 0sta"lish(ent of !olicies and !rocedures that address !erfor(ance evaluation,
co(!ensation, and !ro(otion $includin) incentive s#ste(s& with re)ard to its !ersonnel, in order
to de(onstrate the fir(+s overridin) co((it(ent to *ualit#?
2. $"& Assi)n(ent of (ana)e(ent res!onsi"ilities so that co((ercial considerations do not
override the *ualit# of work !erfor(ed? and
3. $c& 6rovision of sufficient resources for the develo!(ent, docu(entation and su!!ort of its
*ualit# control !olicies and !rocedures'
Assigning ,perational +esponsibility for the Fir$8s )yste$ of *uality Control $Aef. 6ara' 15&
AB' Sufficient and a!!ro!riate e,!erience and a"ilit# ena"les the !erson or !ersons res!onsi"le for the
fir(+s s#ste( of *ualit# control to identif# and understand *ualit# control issues and to develo!
a!!ro!riate !olicies and !rocedures' Necessar# authorit# ena"les the !erson or !ersons to
i(!le(ent those !olicies and !rocedures'
Co$pliance #ith +ele!ant /thical +e>uire$ents $Aef. 6ara' 40&
A7' he IFA% %ode esta"lishes the funda(ental !rinci!les of !rofessional ethics, which include.
1. $c& 6rofessional co(!etence and due care?
2. $d& %onfidentialit#? and
3. $e& 6rofessional "ehavior'
A8' 6art 1 of the IFA% %ode illustrates how the conce!tual fra(ework is to "e a!!lied in s!ecific
situations' It !rovides e,a(!les of safe)uards that (a# "e a!!ro!riate to address threats to
co(!liance with the funda(ental !rinci!les and also !rovides e,a(!les of situations where
safe)uards are not availa"le to address the threats'
A5' he funda(ental !rinci!les are reinforced in !articular "#.
1. G he leadershi! of the fir(?
2. G 0ducation and trainin)?
3. G Eonitorin)? and
4. G A !rocess for dealin) with non-co(!liance'
=efinition of CFir(,D CNetworkD and CNetwork Fir(D $Aef. 6ara' 40-45&
A10' he definitions of Cfir(,D networkD or Cnetwork fir(D in relevant ethical re*uire(ents (a# differ
fro( those set out in this ISA' For e,a(!le, the IFA% %ode
9
defines the Cfir(D as.
1. $i& A sole !ractitioner, !artnershi! or cor!oration of !rofessional accountants?
2. $ii& An entit# that controls such !arties throu)h ownershi!, (ana)e(ent or other (eans? and
$iii& An entit# controlled "# such !arties throu)h ownershi!, (ana)e(ent or other (eans'
he IFA% %ode also !rovides )uidance in relation to the ter(s CnetworkD and Cnetwork fir('D
In co(!l#in) with the re*uire(ents in !ara)ra!hs 40-45, the definitions used in the relevant
ethical re*uire(ents a!!l# in so far as is necessar# to inter!ret those ethical re*uire(ents'
Lritten %onfir(ation $Aef. 6ara' 44&
A11' Lritten confir(ation (a# "e in !a!er or electronic for(' 1# o"tainin) confir(ation and takin)
a!!ro!riate action on infor(ation indicatin) nonco(!liance, the fir( de(onstrates the i(!ortance
that it attaches to inde!endence and (akes the issue current for, and visi"le to, its !ersonnel'
IFA% Code of /thics for (rofessional Accountants
55 IS:% 1
Fa(iliarit# hreat $Aef. 6ara' 45&
A14' he IFA% %ode discusses the fa(iliarit# threat that (a# "e created "# usin) the sa(e senior
!ersonnel on an assurance en)a)e(ent over a lon) !eriod of ti(e and the safe)uards that (i)ht "e
a!!ro!riate to address such threats'
A19' =eter(inin) a!!ro!riate criteria to address fa(iliarit# threat (a# include (atters such as.
1. G he nature of the en)a)e(ent, includin) the e,tent to which it involves a (atter of !u"lic
interest? and
2. G he len)th of service of the senior !ersonnel on the en)a)e(ent'
0,a(!les of safe)uards include rotatin) the senior !ersonnel or re*uirin) an en)a)e(ent *ualit#
control review'
A14' he IFA% %ode reco)niJes that the fa(iliarit# threat is !articularl# relevant in the conte,t of
financial state(ent audits of listed entities' For these audits, the IFA% %ode re*uires the rotation
of the ke# audit !artner
4
after a !redefined !eriod, nor(all# no (ore than seven #ears, and
!rovides related standards and )uidance' National re*uire(ents (a# esta"lish shorter rotation
!eriods'
%onsiderations s!ecific to !u"lic sector audit or)aniJations
A15' Statutor# (easures (a# !rovide safe)uards for the inde!endence of !u"lic sector auditors'
@owever, threats to inde!endence (a# still e,ist re)ardless of an# statutor# (easures desi)ned to
!rotect it' herefore, in esta"lishin) the !olicies and !rocedures re*uired "# !ara)ra!hs 40-45, the
!u"lic sector auditor (a# have re)ard to the !u"lic sector (andate and address an# threats to
inde!endence in that conte,t'
A1B' Misted entities as referred to in !ara)ra!hs 45 and A14 are not co((on in the !u"lic sector'
@owever, there (a# "e other !u"lic sector entities that are si)nificant due to siJe, co(!le,it# or
!u"lic interest as!ects, and which conse*uentl# have a wide ran)e of stakeholders' herefore,
there (a# "e instances when a fir( deter(ines, "ased on its *ualit# control !olicies and
!rocedures, that a !u"lic sector entit# is si)nificant for the !ur!oses of e,!anded *ualit# control
!rocedures'
A17' In the !u"lic sector, le)islation (a# esta"lish the a!!oint(ents and ter(s of office of the auditor
with en)a)e(ent !artner res!onsi"ilit#' As a result, it (a# not "e !ossi"le to co(!l# strictl# with
the en)a)e(ent !artner rotation re*uire(ents envisa)ed for listed entities' Nonetheless, for !u"lic
sector entities considered si)nificant, as noted in !ara)ra!h A1B, it (a# "e in the !u"lic interest
for !u"lic sector audit or)aniJations to esta"lish !olicies and
IFA% %ode, =efinitions'
IS:% 1 B0
!rocedures to !ro(ote co(!liance with the s!irit of rotation of en)a)e(ent !artner res!onsi"ilit#'
Accept!"ce !"# Co"ti"-!"ce of C0ie"t Re0!tio"hip !"# Specific E"(!(e.e"t
Co$petence& Capabilities& and +esources $Aef. 6ara' 4B$a&&
A18' %onsideration of whether the fir( has the co(!etence, ca!a"ilities, and resources to undertake a
new en)a)e(ent fro( a new or an e,istin) client involves reviewin) the s!ecific re*uire(ents of
the en)a)e(ent and the e,istin) !artner and staff !rofiles at all relevant levels, and includin)
whether.
1. G Fir( !ersonnel have knowled)e of relevant industries or su";ect (atters?
2. G Fir( !ersonnel have e,!erience with relevant re)ulator# or re!ortin) re*uire(ents, or the
a"ilit# to )ain the necessar# skills and knowled)e effectivel#?
3. G he fir( has sufficient !ersonnel with the necessar# co(!etence and ca!a"ilities?
4. G 0,!erts are availa"le, if needed?
5. G Individuals (eetin) the criteria and eli)i"ilit# re*uire(ents to !erfor( en)a)e(ent
*ualit# control review are availa"le, where a!!lica"le? and
6. G he fir( is a"le to co(!lete the en)a)e(ent within the re!ortin) deadline'
Integrity of Client $Aef. 6ara' 4B$c&&
A15' Lith re)ard to the inte)rit# of a client, (atters to consider include, for e,a(!le.
1. G he identit# and "usiness re!utation of the client+s !rinci!al owners, ke# (ana)e(ent,
and those char)ed with its )overnance'
2. G he nature of the client+s o!erations, includin) its "usiness !ractices'
3. G Infor(ation concernin) the attitude of the client+s !rinci!al owners, ke# (ana)e(ent and
those char)ed with its )overnance towards such (atters as a))ressive inter!retation of accountin)
standards and the internal control environ(ent'
4. G Lhether the client is a))ressivel# concerned with (aintainin) the fir(+s fees as low as
!ossi"le'
5. G Indications of an ina!!ro!riate li(itation in the sco!e of work'
6. G Indications that the client (i)ht "e involved in (one# launderin) or other cri(inal
activities'
B1 IS:% 1
1. G he reasons for the !ro!osed a!!oint(ent of the fir( and non-rea!!oint(ent of the
!revious fir('
2. G he identit# and "usiness re!utation of related !arties'
he e,tent of knowled)e a fir( will have re)ardin) the inte)rit# of a client will )enerall# )row
within the conte,t of an on)oin) relationshi! with that client'
A40' Sources of infor(ation on such (atters o"tained "# the fir( (a# include the followin).
% G %o((unications with e,istin) or !revious !roviders of !rofessional accountanc#
services to the client in accordance with relevant ethical re*uire(ents, and discussions with other
third !arties'
% G In*uir# of other fir( !ersonnel or third !arties such as "ankers, le)al counsel and
industr# !eers'
% G 1ack)round searches of relevant data"ases'
Continuance of Client +elationship $Aef. 6ara' 47$a&&
A41' =ecidin) whether to continue a client relationshi! includes consideration of si)nificant (atters
that have arisen durin) the current or !revious en)a)e(ents, and their i(!lications for continuin)
the relationshi!' For e,a(!le, a client (a# have started to e,!and its "usiness o!erations into an
area where the fir( does not !ossess the necessar# e,!ertise'
Dithdra#al $Aef. 6ara' 48&
A44' 6olicies and !rocedures on withdrawal fro( an en)a)e(ent or fro( "oth the en)a)e(ent and the
client relationshi! address issues that include the followin).
1. G =iscussin) with the a!!ro!riate level of the client+s (ana)e(ent and those char)ed with
its )overnance the a!!ro!riate action that the fir( (i)ht take "ased on the relevant facts and
circu(stances'
2. G If the fir( deter(ines that it is a!!ro!riate to withdraw, discussin) with the a!!ro!riate
level of the client+s (ana)e(ent and those char)ed with its )overnance withdrawal fro( the
en)a)e(ent or fro( "oth the en)a)e(ent and the client relationshi!, and the reasons for the
withdrawal'
3. G %onsiderin) whether there is a !rofessional, le)al or re)ulator# re*uire(ent for the fir(
to re(ain in !lace, or for the fir( to re!ort the withdrawal fro( the en)a)e(ent, or fro( "oth the
en)a)e(ent and the client relationshi!, to)ether with the reasons for the withdrawal, to re)ulator#
authorities'
IS:% 1 B4
G =ocu(entin) si)nificant (atters, consultations, conclusions and the "asis for the
conclusions'
Considerations )pecific to (ublic )ector Audit ,rganiBations $Aef. 6ara' 4B-48&
A49' In the !u"lic sector, auditors (a# "e a!!ointed in accordance with statutor# !rocedures'
Accordin)l#, certain of the re*uire(ents and considerations re)ardin) the acce!tance and
continuance of client relationshi!s and s!ecific en)a)e(ents as set out !ara)ra!hs 4B-48 and A18-
A44 (a# not "e relevant' Nonetheless, esta"lishin) !olicies and !rocedures as descri"ed (a#
!rovide valua"le infor(ation to !u"lic sector auditors in !erfor(in) risk assess(ents and in
carr#in) out re!ortin) res!onsi"ilities'
H-.!" Reo-'ce $Aef. 6ara' 45&
A44' 6ersonnel issues relevant to the fir(+s !olicies and !rocedures related to hu(an resources include,
for e,a(!le.
% G Aecruit(ent'
% G 6erfor(ance evaluation'
% G %a!a"ilities, includin) ti(e to !erfor( assi)n(ents'
% G %o(!etence'
% G %areer develo!(ent'
% G 6ro(otion'
% G %o(!ensation'
% G he esti(ation of !ersonnel needs'
0ffective recruit(ent !rocesses and !rocedures hel! the fir( select individuals of inte)rit# who
have the ca!acit# to develo! the co(!etence and ca!a"ilities necessar# to !erfor( the fir(+s work
and !ossess the a!!ro!riate characteristics to ena"le the( to !erfor( co(!etentl#'
A45' %o(!etence can "e develo!ed throu)h a variet# of (ethods, includin) the followin).
% G 6rofessional education'
% G %ontinuin) !rofessional develo!(ent, includin) trainin)'
% G Lork e,!erience'
% G %oachin) "# (ore e,!erienced staff, for e,a(!le, other (e("ers of the en)a)e(ent
tea('
% G Inde!endence education for !ersonnel who are re*uired to "e inde!endent'
B9 IS:% 1
A4B' he continuin) co(!etence of the fir(+s !ersonnel de!ends to a si)nificant e,tent on an
a!!ro!riate level of continuin) !rofessional develo!(ent so that !ersonnel (aintain their
knowled)e and ca!a"ilities' 0ffective !olicies and !rocedures e(!hasiJe the need for continuin)
trainin) for all levels of fir( !ersonnel, and !rovide the necessar# trainin) resources and
assistance to ena"le !ersonnel to develo! and (aintain the re*uired co(!etence and ca!a"ilities'
A47' he fir( (a# use a suita"l# *ualified e,ternal !erson, for e,a(!le, when internal technical and
trainin) resources are unavaila"le'
A48' 6erfor(ance evaluation, co(!ensation and !ro(otion !rocedures )ive due reco)nition and reward
to the develo!(ent and (aintenance of co(!etence and co((it(ent to ethical !rinci!les' Ste!s a
fir( (a# take in develo!in) and (aintainin) co(!etence and co((it(ent to ethical !rinci!les
include.
1. G Eakin) !ersonnel aware of the fir(+s e,!ectations re)ardin) !erfor(ance and ethical
!rinci!les?
2. G 6rovidin) !ersonnel with evaluation of, and counselin) on, !erfor(ance, !ro)ress and
career develo!(ent? and
3. G @el!in) !ersonnel understand that advance(ent to !ositions of )reater res!onsi"ilit#
de!ends, a(on) other thin)s, u!on !erfor(ance *ualit# and adherence to ethical !rinci!les, and
that failure to co(!l# with the fir(+s !olicies and !rocedures (a# result in disci!linar# action'
A45' he siJe and circu(stances of the fir( will influence the structure of the fir(+s !erfor(ance
evaluation !rocess' S(aller fir(s, in !articular, (a# e(!lo# less for(al (ethods of evaluatin) the
!erfor(ance of their !ersonnel'
Assign$ent of /ngage$ent 1ea$s
0n)a)e(ent 6artners $Aef. 6ara' 90&
A90' 6olicies and !rocedures (a# include s#ste(s to (onitor the workload and availa"ilit# of
en)a)e(ent !artners so as to ena"le these individuals to have sufficient ti(e to ade*uatel#
dischar)e their res!onsi"ilities'
0n)a)e(ent ea(s $Aef. 6ara' 91&
A91' he fir(+s assi)n(ent of en)a)e(ent tea(s and the deter(ination of the level of su!ervision
re*uired, include for e,a(!le, consideration of the en)a)e(ent tea(+s.
IS:% 1 B4
% G Understandin) of, and !ractical e,!erience with, en)a)e(ents of a si(ilar nature and
co(!le,it# throu)h a!!ro!riate trainin) and !artici!ation?
% G Understandin) of !rofessional standards and a!!lica"le le)al and re)ulator#
re*uire(ents?
% G echnical knowled)e and e,!ertise, includin) knowled)e of relevant infor(ation
technolo)#?
% G Snowled)e of relevant industries in which the clients o!erate?
% G A"ilit# to a!!l# !rofessional ;ud)(ent? and
% G Understandin) of the fir(+s *ualit# control !olicies and !rocedures'
Consistency in the *uality of /ngage$ent (erfor$ance $Aef. 6ara' 94$a&&
A94' he fir( !ro(otes consistenc# in the *ualit# of en)a)e(ent !erfor(ance throu)h its !olicies and
!rocedures' his is often acco(!lished throu)h written or electronic (anuals, software tools or
other for(s of standardiJed docu(entation, and industr# or su";ect (atter-s!ecific )uidance
(aterials' Eatters addressed (a# include.
% G @ow en)a)e(ent tea(s are "riefed on the en)a)e(ent to o"tain an understandin) of the
o";ectives of their work'
% G 6rocesses for co(!l#in) with a!!lica"le en)a)e(ent standards'
% G 6rocesses of en)a)e(ent su!ervision, staff trainin) and coachin)'
% G Eethods of reviewin) the work !erfor(ed, the si)nificant ;ud)(ents (ade and the for(
of re!ort "ein) issued'
% G A!!ro!riate docu(entation of the work !erfor(ed and of the ti(in) and e,tent of the
review'
% G 6rocesses to kee! all !olicies and !rocedures current'
A99' A!!ro!riate tea(work and trainin) assist less e,!erienced (e("ers of the en)a)e(ent tea( to
clearl# understand the o";ectives of the assi)ned work'
)uper!ision $Aef. 6ara' 94$"&& A94' 0n)a)e(ent su!ervision includes the followin).
1. G rackin) the !ro)ress of the en)a)e(ent?
2. G %onsiderin) the co(!etence and ca!a"ilities of individual (e("ers of the en)a)e(ent
tea(, whether the# have sufficient ti(e to carr# out their work, whether the# understand their
instructions and
B5 IS:% 1
whether the work is "ein) carried out in accordance with the !lanned a!!roach to the
en)a)e(ent?
% G Addressin) si)nificant (atters arisin) durin) the en)a)e(ent, considerin) their
si)nificance and (odif#in) the !lanned a!!roach a!!ro!riatel#? and
% G Identif#in) (atters for consultation or consideration "# (ore e,!erienced en)a)e(ent
tea( (e("ers durin) the en)a)e(ent'
+e!ie# $Aef. 6ara' 94$c&& A95' A review consists of consideration of whether.
% G he work has "een !erfor(ed in accordance with !rofessional standards and a!!lica"le
le)al and re)ulator# re*uire(ents?
% G Si)nificant (atters have "een raised for further consideration?
% G A!!ro!riate consultations have taken !lace and the resultin) conclusions have "een
docu(ented and i(!le(ented?
% G here is a need to revise the nature, ti(in) and e,tent of work !erfor(ed?
% G he work !erfor(ed su!!orts the conclusions reached and is a!!ro!riatel# docu(ented?
% G he evidence o"tained is sufficient and a!!ro!riate to su!!ort the re!ort? and
% G he o";ectives of the en)a)e(ent !rocedures have "een achieved'
Consultation $Aef. 6ara' 94&
A9B' %onsultation includes discussion at the a!!ro!riate !rofessional level, with individuals within or
outside the fir( who have s!ecialiJed e,!ertise'
A97' %onsultation uses a!!ro!riate research resources as well as the collective e,!erience and technical
e,!ertise of the fir(' %onsultation hel!s to !ro(ote *ualit# and i(!roves the a!!lication of
!rofessional ;ud)(ent' A!!ro!riate reco)nition of consultation in the fir(+s !olicies and
!rocedures hel!s to !ro(ote a culture in which consultation is reco)niJed as a stren)th and
encoura)es !ersonnel to consult on difficult or contentious (atters'
A98' 0ffective consultation on si)nificant technical, ethical and other (atters within the fir(, or where
a!!lica"le, outside the fir( can "e achieved when those consulted.
G are )iven all the relevant facts that will ena"le the( to !rovide infor(ed advice? and
IS:% 1 BB
G have a!!ro!riate knowled)e, seniorit# and e,!erience,
and when conclusions resultin) fro( consultations are a!!ro!riatel# docu(ented and
i(!le(ented'
A95' =ocu(entation of consultations with other !rofessionals that involve difficult or contentious
(atters that is sufficientl# co(!lete and detailed contri"utes to an understandin) of.
1. G he issue on which consultation was sou)ht? and
2. G he results of the consultation, includin) an# decisions taken, the "asis for those
decisions and how the# were i(!le(ented'
%onsiderations S!ecific to S(aller Fir(s
A40' A fir( needin) to consult e,ternall#, for e,a(!le, a fir( without a!!ro!riate internal resources,
(a# take advanta)e of advisor# services !rovided "#.
1. G 7ther fir(s?
2. G 6rofessional and re)ulator# "odies? or
3. G %o((ercial or)aniJations that !rovide relevant *ualit# control services'
1efore contractin) for such services, consideration of the co(!etence and ca!a"ilities of the
e,ternal !rovider hel!s the fir( to deter(ine whether the e,ternal !rovider is suita"l# *ualified for
that !ur!ose'
%riteria for an 0n)a)e(ent :ualit# %ontrol Aeview $Aef. 6ara' 95$"&&
A41' %riteria for deter(inin) which en)a)e(ents other than audits of financial state(ents of listed
entities are to "e su";ect to an en)a)e(ent *ualit# control review (a# include, for e,a(!le.
% G he nature of the en)a)e(ent, includin) the e,tent to which it involves a (atter of !u"lic
interest'
% G he identification of unusual circu(stances or risks in an en)a)e(ent or class of
en)a)e(ents'
% G Lhether laws or re)ulations re*uire an en)a)e(ent *ualit# control review'
Nature, i(in) and 0,tent of the 0n)a)e(ent :ualit# %ontrol Aeview $Aef. 6ara' 9B-97&
A44' he en)a)e(ent re!ort is not dated until the co(!letion of the en)a)e(ent *ualit# control review'
@owever, docu(entation of the en)a)e(ent *ualit# control review (a# "e co(!leted after the
date of the re!ort'
B7 IS:% 1
A49' %onductin) the en)a)e(ent *ualit# control review in a ti(el# (anner at a!!ro!riate sta)es durin)
the en)a)e(ent allows si)nificant (atters to "e !ro(!tl# resolved to the en)a)e(ent *ualit#
control reviewer+s satisfaction on or "efore the date of the re!ort'
A44' he e,tent of the en)a)e(ent *ualit# control review (a# de!end, a(on) other thin)s, on the
co(!le,it# of the en)a)e(ent, whether the entit# is a listed entit#, and the risk that the re!ort
(i)ht not "e a!!ro!riate in the circu(stances' he !erfor(ance of an en)a)e(ent *ualit# control
review does not reduce the res!onsi"ilities of the en)a)e(ent !artner'
0n)a)e(ent :ualit# %ontrol Aeview of a Misted 0ntit# $Aef. 6ara' 98&
A45' 7ther (atters relevant to evaluatin) the si)nificant ;ud)(ents (ade "# the en)a)e(ent tea( that
(a# "e considered in an en)a)e(ent *ualit# control review of an audit of financial state(ents of a
listed entit# include.
1. G Si)nificant risks identified durin) the en)a)e(ent and the res!onses to those risks'
2. G >ud)(ents (ade, !articularl# with res!ect to (aterialit# and si)nificant risks'
3. G he si)nificance and dis!osition of corrected and uncorrected (isstate(ents identified
durin) the en)a)e(ent'
4. G he (atters to "e co((unicated to (ana)e(ent and those char)ed with )overnance and,
where a!!lica"le, other !arties such as re)ulator# "odies'
hese other (atters, de!endin) on the circu(stances, (a# also "e a!!lica"le for en)a)e(ent
*ualit# control reviews for audits of the financial state(ents of other entities as well as reviews of
financial state(ents and other assurance and related services en)a)e(ents'
A4B' Althou)h not referred to as listed entities, as descri"ed in !ara)ra!h A1B, certain !u"lic sector
entities (a# "e of sufficient si)nificance to warrant !erfor(ance of an en)a)e(ent *ualit# control
review'
Criteria for the /ligibility of /ngage$ent *uality Control +e!ie#ers
Sufficient and A!!ro!riate echnical 0,!ertise, 0,!erience and Authorit# $Aef. 6ara' 95$a&&
A47' Lhat constitutes sufficient and a!!ro!riate technical e,!ertise, e,!erience and authorit# de!ends
on the circu(stances of the en)a)e(ent' For e,a(!le, the en)a)e(ent *ualit# control reviewer
for an audit of the financial state(ents of a listed entit# is likel# to "e an individual with
IS:% 1 B8
sufficient and a!!ro!riate e,!erience and authorit# to act as an audit en)a)e(ent !artner on audits
of financial state(ents of listed entities'
%onsultation with the 0n)a)e(ent :ualit# %ontrol Aeviewer $Aef. 6ara' 95$"&&
A48' he en)a)e(ent !artner (a# consult the en)a)e(ent *ualit# control reviewer durin) the
en)a)e(ent, for e,a(!le, to esta"lish that a ;ud)(ent (ade "# the en)a)e(ent !artner will "e
acce!ta"le to the en)a)e(ent *ualit# control reviewer' Such consultation avoids identification of
differences of o!inion at a late sta)e of the en)a)e(ent and need not co(!ro(ise the en)a)e(ent
*ualit# control reviewer+s eli)i"ilit# to !erfor( the role' Lhere the nature and e,tent of the
consultations "eco(e si)nificant the reviewer+s o";ectivit# (a# "e co(!ro(ised unless care is
taken "# "oth the en)a)e(ent tea( and the reviewer to (aintain the reviewer+s o";ectivit#' Lhere
this is not !ossi"le, another individual within the fir( or a suita"l# *ualified e,ternal !erson (a#
"e a!!ointed to take on the role of either the en)a)e(ent *ualit# control reviewer or the !erson to
"e consulted on the en)a)e(ent'
7";ectivit# of the 0n)a)e(ent :ualit# %ontrol Aeviewer $Aef. 6ara' 40&
A45' he fir( is re*uired to esta"lish !olicies and !rocedures desi)ned to (aintain o";ectivit# of the
en)a)e(ent *ualit# control reviewer' Accordin)l#, such !olicies and !rocedures !rovide that the
en)a)e(ent *ualit# control reviewer.
% G Lhere !ractica"le, is not selected "# the en)a)e(ent !artner?
% G =oes not otherwise !artici!ate in the en)a)e(ent durin) the !eriod of review?
% G =oes not (ake decisions for the en)a)e(ent tea(? and
% G Is not su";ect to other considerations that would threaten the reviewer+s o";ectivit#'
%onsiderations s!ecific to s(aller fir(s
A50' It (a# not "e !ractica"le, in the case of fir(s with few !artners, for the en)a)e(ent !artner not to
"e involved in selectin) the en)a)e(ent *ualit# control reviewer' Suita"l# *ualified e,ternal
!ersons (a# "e contracted where sole !ractitioners or s(all fir(s identif# en)a)e(ents re*uirin)
en)a)e(ent *ualit# control reviews' Alternativel#, so(e sole !ractitioners or s(all fir(s (a#
wish to use other fir(s to facilitate en)a)e(ent *ualit# control reviews' Lhere the fir( contracts
suita"l# *ualified e,ternal !ersons, the re*uire(ents in !ara)ra!hs 95-41 and )uidance in
!ara)ra!hs A47-A48 a!!l#'
B5 IS:% 1
A51' In the !u"lic sector, a statutoril# a!!ointed auditor $for e,a(!le, an Auditor <eneral, or other
suita"l# *ualified !erson a!!ointed on "ehalf of the Auditor <eneral& (a# act in a role e*uivalent
to that of en)a)e(ent !artner with overall res!onsi"ilit# for !u"lic sector audits' In such
circu(stances, where a!!lica"le, the selection of the en)a)e(ent *ualit# control reviewer includes
consideration of the need for inde!endence fro( the audited entit# and the a"ilit# of the
en)a)e(ent *ualit# control reviewer to !rovide an o";ective evaluation'
?ifferences of ,pinion $Aef. 6ara' 49&
A54' 0ffective !rocedures encoura)e identification of differences of o!inion at an earl# sta)e, !rovide
clear )uidelines as to the successive ste!s to "e taken thereafter, and re*uire docu(entation
re)ardin) the resolution of the differences and the i(!le(entation of the conclusions reached'
A59' 6rocedures to resolve such differences (a# include consultin) with another !ractitioner or fir(, or
a !rofessional or re)ulator# "od#'
/ngage$ent ?ocu$entation
%o(!letion of the Asse("l# of Final 0n)a)e(ent Files $Aef. 6ara' 45&
A54' Maw or re)ulation (a# !rescri"e the ti(e li(its "# which the asse("l# of final en)a)e(ent files
for s!ecific t#!es of en)a)e(ent is to "e co(!leted' Lhere no such ti(e li(its are !rescri"ed in
law or re)ulation, !ara)ra!h 45 re*uires the fir( to esta"lish ti(e li(its that reflect the need to
co(!lete the asse("l# of final en)a)e(ent files on a ti(el# "asis' In the case of an audit, for
e,a(!le, such a ti(e li(it would ordinaril# not "e (ore than B0 da#s after the date of the
auditor+s re!ort'
A55' Lhere two or (ore different re!orts are issued in res!ect of the sa(e su";ect (atter infor(ation
of an entit#, the fir(+s !olicies and !rocedures relatin) to ti(e li(its for the asse("l# of final
en)a)e(ent files address each re!ort as if it were for a se!arate en)a)e(ent' his (a#, for
e,a(!le, "e the case when the fir( issues an auditor+s re!ort on a co(!onent+s financial
infor(ation for )rou! consolidation !ur!oses and, at a su"se*uent date, an auditor+s re!ort on the
sa(e financial infor(ation for statutor# !ur!oses'
%onfidentialit#, Safe %ustod#, Inte)rit#, Accessi"ilit# and Aetrieva"ilit# of 0n)a)e(ent
=ocu(entation $Aef. 6ara' 4B&
A5B' Aelevant ethical re*uire(ents esta"lish an o"li)ation for the fir(+s !ersonnel to o"serve at all
ti(es the confidentialit# of infor(ation contained in en)a)e(ent docu(entation, unless s!ecific
client authorit# has "een )iven to disclose infor(ation, or there is a le)al or !rofessional dut# to
do so' S!ecific laws or re)ulations (a# i(!ose additional o"li)ations on the
IS:% 1 70
fir(+s !ersonnel to (aintain client confidentialit#, !articularl# where data of a !ersonal nature are
concerned'
A57' Lhether en)a)e(ent docu(entation is in !a!er, electronic or other (edia, the inte)rit#, accessi"ilit#
or retrieva"ilit# of the underl#in) data (a# "e co(!ro(ised if the docu(entation could "e altered,
added to or deleted without the fir(+s knowled)e, or if it could "e !er(anentl# lost or da(a)ed'
Accordin)l#, controls that the fir( desi)ns and i(!le(ents to avoid unauthoriJed alteration or loss
of en)a)e(ent docu(entation (a# include those that.
1. G 0na"le the deter(ination of when and "# who( en)a)e(ent docu(entation was created,
chan)ed or reviewed?
2. G 6rotect the inte)rit# of the infor(ation at all sta)es of the en)a)e(ent, es!eciall# when
the infor(ation is shared within the en)a)e(ent tea( or trans(itted to other !arties via the
Internet?
3. G 6revent unauthoriJed chan)es to the en)a)e(ent docu(entation? and
4. G Allow access to the en)a)e(ent docu(entation "# the en)a)e(ent tea( and other
authoriJed !arties as necessar# to !ro!erl# dischar)e their res!onsi"ilities'
A58' %ontrols that the fir( desi)ns and i(!le(ents to (aintain the confidentialit#, safe custod#, inte)rit#,
accessi"ilit# and retrieva"ilit# of en)a)e(ent docu(entation (a# include the followin).
1. G he use of a !assword a(on) en)a)e(ent tea( (e("ers to restrict access to electronic
en)a)e(ent docu(entation to authoriJed users'
2. G A!!ro!riate "ack-u! routines for electronic en)a)e(ent docu(entation at a!!ro!riate
sta)es durin) the en)a)e(ent'
3. G 6rocedures for !ro!erl# distri"utin) en)a)e(ent docu(entation to the tea( (e("ers at
the start of the en)a)e(ent, !rocessin) it durin) en)a)e(ent, and collatin) it at the end of
en)a)e(ent'
4. G 6rocedures for restrictin) access to, and ena"lin) !ro!er distri"ution and confidential
stora)e of, hardco!# en)a)e(ent docu(entation'
A55' For !ractical reasons, ori)inal !a!er docu(entation (a# "e electronicall# scanned for inclusion in
en)a)e(ent files' In such cases, the fir(+s !rocedures desi)ned to (aintain the inte)rit#,
accessi"ilit#, and retrieva"ilit# of the docu(entation (a# include re*uirin) the en)a)e(ent tea(s
to.
1. G <enerate scanned co!ies that reflect the entire content of the ori)inal !a!er
docu(entation, includin) (anual si)natures, cross-references and annotations?
2. G Inte)rate the scanned co!ies into the en)a)e(ent files, includin)
71 IS:% 1
inde,in) and si)nin) off on the scanned co!ies as necessar#? and
G 0na"le the scanned co!ies to "e retrieved and !rinted as necessar#'
here (a# "e le)al, re)ulator# or other reasons for a fir( to retain ori)inal !a!er docu(entation
that has "een scanned'
Aetention of 0n)a)e(ent =ocu(entation $Aef. 6ara' 47&
AB0' he needs of the fir( for retention of en)a)e(ent docu(entation, and the !eriod of such
retention, will var# with the nature of the en)a)e(ent and the fir(+s circu(stances, for e,a(!le,
whether the en)a)e(ent docu(entation is needed to !rovide a record of (atters of continuin)
si)nificance to future en)a)e(ents' he retention !eriod (a# also de!end on other factors, such as
whether local law or re)ulation !rescri"es s!ecific retention !eriods for certain t#!es of
en)a)e(ents, or whether there are )enerall# acce!ted retention !eriods in the ;urisdiction in the
a"sence of s!ecific le)al or re)ulator# re*uire(ents'
AB1' In the s!ecific case of audit en)a)e(ents, the retention !eriod would ordinaril# "e no shorter than
five #ears fro( the date of the auditor+s re!ort, or, if later, the date of the )rou! auditor+s re!ort'
AB4' 6rocedures that the fir( ado!ts for retention of en)a)e(ent docu(entation include those that
ena"le the re*uire(ents of !ara)ra!h 47 to "e (et durin) the retention !eriod, for e,a(!le to.
1. G 0na"le the retrieval of, and access to, the en)a)e(ent docu(entation durin) the retention
!eriod, !articularl# in the case of electronic docu(entation since the underl#in) technolo)# (a#
"e u!)raded or chan)ed over ti(e?
2. G 6rovide, where necessar#, a record of chan)es (ade to en)a)e(ent docu(entation after
the en)a)e(ent files have "een co(!leted? and
3. G 0na"le authoriJed e,ternal !arties to access and review s!ecific en)a)e(ent
docu(entation for *ualit# control or other !ur!oses'
7wnershi! of en)a)e(ent docu(entation
AB9' Unless otherwise s!ecified "# law or re)ulation, en)a)e(ent docu(entation is the !ro!ert# of the
fir(' he fir( (a#, at its discretion, (ake !ortions of, or e,tracts fro(, en)a)e(ent
docu(entation availa"le to clients, !rovided such disclosure does not under(ine the validit# of
the work !erfor(ed, or, in the case of assurance en)a)e(ents, the inde!endence of the fir( or its
!ersonnel'
IS:% 1 74
)o"ito'i"(
<onitoring the Fir$8s *uality Control (olicies and (rocedures $Aef. 6ara' 48&
AB4' he !ur!ose of (onitorin) co(!liance with *ualit# control !olicies and !rocedures is to !rovide
an evaluation of.
% G Adherence to !rofessional standards and a!!lica"le le)al and re)ulator# re*uire(ents?
% G Lhether the s#ste( of *ualit# control has "een a!!ro!riatel# desi)ned and effectivel#
i(!le(ented? and
% G Lhether the fir(+s *ualit# control !olicies and !rocedures have "een a!!ro!riatel#
a!!lied, so that re!orts that are issued "# the fir( or en)a)e(ent !artners are a!!ro!riate in the
circu(stances'
AB5' 7n)oin) consideration and evaluation of the s#ste( of *ualit# control include (atters such as the
followin).
1. G Anal#sis of.
1. o New develo!(ents in !rofessional standards and a!!lica"le le)al and re)ulator#
re*uire(ents, and how the# are reflected in the fir(+s !olicies and !rocedures where
a!!ro!riate?
2. o Lritten confir(ation of co(!liance with !olicies and !rocedures on
inde!endence?
3. o %ontinuin) !rofessional develo!(ent, includin) trainin)? and
4. o =ecisions related to acce!tance and continuance of client relationshi!s and
s!ecific en)a)e(ents'
2. G =eter(ination of corrective actions to "e taken and i(!rove(ents to "e (ade in the
s#ste(, includin) the !rovision of feed"ack into the fir(+s !olicies and !rocedures relatin) to
education and trainin)'
3. G %o((unication to a!!ro!riate fir( !ersonnel of weaknesses identified in the s#ste(, in
the level of understandin) of the s#ste(, or co(!liance with it'
4. G Follow-u! "# a!!ro!riate fir( !ersonnel so that necessar# (odifications are !ro(!tl#
(ade to the *ualit# control !olicies and !rocedures'
ABB' Ins!ection c#cle !olicies and !rocedures (a#, for e,a(!le, s!ecif# a c#cle that s!ans three #ears'
he (anner in which the ins!ection c#cle is or)aniJed, includin) the ti(in) of selection of
individual en)a)e(ents, de!ends on (an# factors, such as the followin).
% G he siJe of the fir('
% G he nu("er and )eo)ra!hical location of offices'
79 IS:% 1
1. G he results of !revious (onitorin) !rocedures'
2. G he de)ree of authorit# "oth !ersonnel and offices have $for e,a(!le, whether individual
offices are authoriJed to conduct their own ins!ections or whether onl# the head office (a#
conduct the(&'
3. G he nature and co(!le,it# of the fir(+s !ractice and or)aniJation'
4. G he risks associated with the fir(+s clients and s!ecific en)a)e(ents'
AB7' he ins!ection !rocess includes the selection of individual en)a)e(ents, so(e of which (a# "e
selected without !rior notification to the en)a)e(ent tea(' In deter(inin) the sco!e of the
ins!ections, the fir( (a# take into account the sco!e or conclusions of an inde!endent e,ternal
ins!ection !ro)ra(' @owever, an inde!endent e,ternal ins!ection !ro)ra( does not act as a
su"stitute for the fir(+s own internal (onitorin) !ro)ra('
%onsiderations S!ecific to S(aller Fir(s
AB8' In the case of s(all fir(s, (onitorin) !rocedures (a# need to "e !erfor(ed "# individuals who
are res!onsi"le for desi)n and i(!le(entation of the fir(+s *ualit# control !olicies and
!rocedures, or who (a# "e involved in !erfor(in) the en)a)e(ent *ualit# control review' A fir(
with a li(ited nu("er of !ersons (a# choose to use a suita"l# *ualified e,ternal !erson or another
fir( to carr# out en)a)e(ent ins!ections and other (onitorin) !rocedures' Alternativel#, the fir(
(a# esta"lish arran)e(ents to share resources with other a!!ro!riate or)aniJations to facilitate
(onitorin) activities'
Co$$unicating ?eficiencies $Aef. 6ara' 50&
AB5' he re!ortin) of identified deficiencies to individuals other than the relevant en)a)e(ent !artners
need not include an identification of the s!ecific en)a)e(ents concerned, althou)h there (a# "e
cases where such identification (a# "e necessar# for the !ro!er dischar)e of the res!onsi"ilities of
the individuals other than the en)a)e(ent !artners'
Co$plaints and Allegations
Source of %o(!laints and Alle)ations $Aef. 6ara' 55&
A70' %o(!laints and alle)ations $which do not include those that are clearl# frivolous& (a# ori)inate
fro( within or outside the fir(' he# (a# "e (ade "# fir( !ersonnel, clients or other third
!arties' he# (a# "e received "# en)a)e(ent tea( (e("ers or other fir( !ersonnel'
Investi)ation 6olicies and 6rocedures $Aef. 6ara' 5B&
A71' 6olicies and !rocedures esta"lished for the investi)ation of co(!laints and alle)ations (a#
include for e,a(!le, that the !artner su!ervisin) the investi)ation.
IS:% 1 74
% G @as sufficient and a!!ro!riate e,!erience?
% G @as authorit# within the fir(? and
% G Is otherwise not involved in the en)a)e(ent'
he !artner su!ervisin) the investi)ation (a# involve le)al counsel as necessar#'
%onsiderations s!ecific to s(aller fir(s
A74' It (a# not "e !ractica"le, in the case of fir(s with few !artners, for the !artner su!ervisin) the
investi)ation not to "e involved in the en)a)e(ent' hese s(all fir(s and sole !ractitioners (a#
use the services of a suita"l# *ualified e,ternal !erson or another fir( to carr# out the
investi)ation into co(!laints and alle)ations'
Doc-.e"t!tio" of the S/te. of Q-!0it/ Co"t'o0 $Aef. 6ara' 57&
A79' he for( and content of docu(entation evidencin) the o!eration of each of the ele(ents of the
s#ste( of *ualit# control is a (atter of ;ud)(ent and de!ends on a nu("er of factors, includin)
the followin).
% G he siJe of the fir( and the nu("er of offices'
% G he nature and co(!le,it# of the fir(+s !ractice and or)aniJation'
For e,a(!le, lar)e fir(s (a# use electronic data"ases to docu(ent (atters such as inde!endence
confir(ations, !erfor(ance evaluations and the results of (onitorin) ins!ections'
A74' A!!ro!riate docu(entation relatin) to (onitorin) includes, for e,a(!le.
% G Eonitorin) !rocedures, includin) the !rocedure for selectin) co(!leted en)a)e(ents to
"e ins!ected'
1G A record of the evaluation of.
a. o Adherence to !rofessional standards and a!!lica"le le)al and re)ulator#
re*uire(ents?
b. o Lhether the s#ste( of *ualit# control has "een a!!ro!riatel# desi)ned and
effectivel# i(!le(ented? and
c. o Lhether the fir(+s *ualit# control !olicies and !rocedures have "een
a!!ro!riatel# a!!lied, so that re!orts that are issued "# the fir( or en)a)e(ent !artners
are a!!ro!riate in the circu(stances'
% G Identification of the deficiencies noted, an evaluation of their effect, and the "asis for
deter(inin) whether and what further action is necessar#'
75 IS:% 1
A75' S(aller fir(s (a# use (ore infor(al (ethods in the docu(entation of their s#ste(s of *ualit#
control such as (anual notes, checklists and for(s'
IS:% 1 7B
INTERNATIONAL STANDARD ON AUDITING 200
O,ERALL OB?ECTI,ES OF THE INDE*ENDENT AUDITOR AND THE
CONDUCT OF AN AUDIT IN ACCORDANCE =ITH INTERNATIONAL
STANDARDS ON AUDITING
$0ffective for audits of financial state(ents for !eriods "e)innin) on or after =ece("er 15, 4005&
CONTENTS
6ara)ra!h
0thical Ae*uire(ents Aelatin) to an Audit of Financial State(ents '''''''''' A14TA17
6rofessional Ske!ticis( '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A18TA44
6rofessional >ud)(ent '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A49TA47
Sufficient A!!ro!riate Audit 0vidence and Audit Aisk '''''''''''''''''''''''''''''' A48TA54
%onduct of an Audit in Accordance with ISAs ''''''''''''''''''''''''''''''''''''''''''' A59TA7B
77 ISA 400
I"t'o#-ctio" Scope of thi ISA
1. 1' his International Standard on Auditin) $ISA& deals with the inde!endent auditor+s
overall res!onsi"ilities when conductin) an audit of financial state(ents in accordance with ISAs'
S!ecificall#, it sets out the overall o";ectives of the inde!endent auditor, and e,!lains the nature
and sco!e of an audit desi)ned to ena"le the inde!endent auditor to (eet those o";ectives' It also
e,!lains the sco!e, authorit# and structure of the ISAs, and includes re*uire(ents esta"lishin) the
)eneral res!onsi"ilities of the inde!endent auditor a!!lica"le in all audits, includin) the o"li)ation
to co(!l# with the ISAs' he inde!endent auditor is referred to as Cthe auditorD hereafter'
2. 4' ISAs are written in the conte,t of an audit of financial state(ents "# an auditor' he# are
to "e ada!ted as necessar# in the circu(stances when a!!lied to audits of other historical financial
infor(ation' ISAs do not address the res!onsi"ilities of the auditor that (a# e,ist in le)islation,
re)ulation or otherwise in connection with, for e,a(!le, the offerin) of securities to the !u"lic'
Such res!onsi"ilities (a# differ fro( those esta"lished in the ISAs' Accordin)l#, while the auditor
(a# find as!ects of the ISAs hel!ful in such circu(stances, it is the res!onsi"ilit# of the auditor to
ensure co(!liance with all relevant le)al, re)ulator# or !rofessional o"li)ations'
A" A-#it of Fi"!"ci!0 St!te.e"t
1. 9' he !ur!ose of an audit is to enhance the de)ree of confidence of intended users in the
financial state(ents' his is achieved "# the e,!ression of an o!inion "# the auditor on whether
the financial state(ents are !re!ared, in all (aterial res!ects, in accordance with an a!!lica"le
financial re!ortin) fra(ework' In the case of (ost )eneral !ur!ose fra(eworks, that o!inion is on
whether the financial state(ents are !resented fairl#, in all (aterial res!ects, or )ive a true and fair
view in accordance with the fra(ework' An audit conducted in accordance with ISAs and relevant
ethical re*uire(ents ena"les the auditor to for( that o!inion' $Aef. 6ara' A1&
1. 4' he financial state(ents su";ect to audit are those of the entit#, !re!ared "# (ana)e(ent
of the entit# with oversi)ht fro( those char)ed with )overnance' ISAs do not i(!ose
res!onsi"ilities on (ana)e(ent or those char)ed with )overnance and do not override laws
and re)ulations that )overn their res!onsi"ilities' @owever, an audit in accordance with ISAs
is conducted on the !re(ise that (ana)e(ent and, where a!!ro!riate, those char)ed with
)overnance have acknowled)ed certain res!onsi"ilities that are funda(ental to the conduct of
the audit' he audit of the financial state(ents does not relieve (ana)e(ent or those char)ed
with )overnance of their res!onsi"ilities' $Aef. 6ara' A4-A11&
1. 5' As the "asis for the auditor+s o!inion, ISAs re*uire the auditor to o"tain
reasona"le assurance a"out whether the financial state(ents as a whole are free fro(
(aterial (isstate(ent, whether due to fraud or error' Aeasona"le assurance is a hi)h level
of assurance' It is o"tained when the auditor has o"tained sufficient a!!ro!riate audit
evidence to reduce audit risk $that is, the risk that the auditor e,!resses an ina!!ro!riate
o!inion when the financial state(ents are (ateriall# (isstated& to an acce!ta"l# low
level' @owever, reasona"le assurance is not an a"solute level of assurance, "ecause there
are inherent li(itations of an audit which result in (ost of the audit evidence on which
the auditor draws conclusions and "ases the auditor+s o!inion "ein) !ersuasive rather
than conclusive' $Aef. 6ara' A48-A54&
2. B' he conce!t of (aterialit# is a!!lied "# the auditor "oth in !lannin) and
!erfor(in) the audit, and in evaluatin) the effect of identified (isstate(ents on the audit
and of uncorrected (isstate(ents, if an#, on the financial state(ents'
1
In )eneral,
(isstate(ents, includin) o(issions, are considered to "e (aterial if, individuall# or in
the a))re)ate, the# could reasona"l# "e e,!ected to influence the econo(ic decisions of
users taken on the "asis of the financial state(ents' >ud)(ents a"out (aterialit# are (ade
in the li)ht of surroundin) circu(stances, and are affected "# the auditor+s !erce!tion of
the financial infor(ation needs of users of the financial state(ents, and "# the siJe or
nature of a (isstate(ent, or a co("ination of "oth' he auditor+s o!inion deals with the
financial state(ents as a whole and therefore the auditor is not res!onsi"le for the
detection of (isstate(ents that are not (aterial to the financial state(ents as a whole'
2. 7' he ISAs contain o";ectives, re*uire(ents and a!!lication and other e,!lanator# (aterial
that are desi)ned to su!!ort the auditor in o"tainin) reasona"le assurance' he ISAs re*uire
that the auditor e,ercise !rofessional ;ud)(ent and (aintain !rofessional ske!ticis(
throu)hout the !lannin) and !erfor(ance of the audit and, a(on) other thin)s.
1. G Identif# and assess risks of (aterial (isstate(ent, whether due to fraud or error,
"ased on an understandin) of the entit# and its environ(ent, includin) the entit#+s
internal control'
2. G 7"tain sufficient a!!ro!riate audit evidence a"out whether (aterial
(isstate(ents e,ist, throu)h desi)nin) and i(!le(entin) a!!ro!riate res!onses to
the assessed risks'
3. G For( an o!inion on the financial state(ents "ased on conclusions drawn fro(
the audit evidence o"tained'
2. 8' he for( of o!inion e,!ressed "# the auditor will de!end u!on the a!!lica"le financial
re!ortin) fra(ework and an# a!!lica"le law or re)ulation' $Aef. 6ara' A14-A19&
3. 5' he auditor (a# also have certain other co((unication and re!ortin) res!onsi"ilities to
users, (ana)e(ent, those char)ed with )overnance, or !arties outside the entit#, in relation to
(atters arisin) fro( the audit' hese (a# "e esta"lished "# the ISAs or "# a!!lica"le law or
re)ulation'
4
ISA 400 78 ISA 940, CEaterialit# in 6lannin) and 6erfor(in) an AuditD and ISA 450,
C0valuation of Eisstate(ents Identified durin) the Audit'D
75 ISA 400
Effecti9e D!te
10' his ISA is effective for audits of financial state(ents for !eriods "e)innin) on or after =ece("er
15, 4005'
O9e'!00 O$1ecti9e of the A-#ito'
1. 11' In conductin) an audit of financial state(ents, the overall o";ectives of the auditor are.
2. $a& o o"tain reasona"le assurance a"out whether the financial state(ents as a whole are free
fro( (aterial (isstate(ent, whether due to fraud or error, there"# ena"lin) the auditor to
e,!ress an o!inion on whether the financial state(ents are !re!ared, in all (aterial res!ects,
in accordance with an a!!lica"le financial re!ortin) fra(ework? and
3. $"& o re!ort on the financial state(ents, and co((unicate as re*uired "# the ISAs, in
accordance with the auditor+s findin)s'
2. 14' In all cases when reasona"le assurance cannot "e o"tained and a *ualified o!inion in the
auditor+s re!ort is insufficient in the circu(stances for !ur!oses of re!ortin) to the intended users
of the financial state(ents, the ISAs re*uire that the auditor disclai( an o!inion or withdraw $or
resi)n&
9
fro( the en)a)e(ent, where withdrawal is !ossi"le under a!!lica"le law or re)ulation'
Defi"itio"
19' For !ur!oses of the ISAs, the followin) ter(s have the (eanin)s
attri"uted "elow.
$a& A!!lica"le financial re!ortin) fra(ework K he financial re!ortin) fra(ework ado!ted "#
(ana)e(ent and, where a!!ro!riate, those char)ed with )overnance in the !re!aration of
the financial state(ents that is acce!ta"le in view of the nature of the entit# and the
o";ective of the financial state(ents, or that is re*uired "# law or re)ulation'
4
See, for e,a(!le, ISA 4B0, C%o((unication with hose %har)ed with <overnance?D and !ara)ra!h 49 of ISA 440, Che Auditor+s
Aes!onsi"ilities Aelatin) to Fraud in an Audit of Financial State(ents'D 9
In the ISAs, onl# the ter( CwithdrawalD is used'
ISA 400 80
he ter( Cfair !resentation fra(eworkD is used to refer to a financial re!ortin) fra(ework that
re*uires co(!liance with the re*uire(ents of the fra(ework and.
1. $i& Acknowled)es e,!licitl# or i(!licitl# that, to achieve fair !resentation of the financial
state(ents, it (a# "e necessar# for (ana)e(ent to !rovide disclosures "e#ond those s!ecificall#
re*uired "# the fra(ework? or
2. $ii& Acknowled)es e,!licitl# that it (a# "e necessar# for (ana)e(ent to de!art fro( a
re*uire(ent of the fra(ework to achieve fair !resentation of the financial state(ents' Such
de!artures are e,!ected to "e necessar# onl# in e,tre(el# rare circu(stances'
co(!liance with the re*uire(ents of the fra(ework, "ut does not contain the acknowled)e(ents in
$i& or $ii& a"ove'
1. $"& Audit evidence K Infor(ation used "# the auditor in arrivin) at the conclusions on which
the auditor+s o!inion is "ased' Audit evidence includes "oth infor(ation contained in the
accountin) records underl#in) the financial state(ents and other infor(ation' For !ur!oses of
the ISAs.
2. $i& Sufficienc# of audit evidence is the (easure of the *uantit# of audit evidence' he
*uantit# of the audit evidence needed is affected "# the auditor+s assess(ent of the risks of
(aterial (isstate(ent and also "# the *ualit# of such audit evidence'
3. $ii& A!!ro!riateness of audit evidence is the (easure of the *ualit# of audit evidence? that is,
its relevance and its relia"ilit# in !rovidin) su!!ort for the conclusions on which the auditor+s
o!inion is "ased'
2. $c& Audit risk K he risk that the auditor e,!resses an ina!!ro!riate audit o!inion when the
financial state(ents are (ateriall# (isstated' Audit risk is a function of the risks of (aterial
(isstate(ent and detection risk'
3. $d& Auditor K CAuditorD is used to refer to the !erson or !ersons conductin) the audit, usuall# the
en)a)e(ent !artner or other (e("ers of the en)a)e(ent tea(, or, as a!!lica"le, the fir(' Lhere
an ISA e,!ressl# intends that a re*uire(ent or res!onsi"ilit# "e fulfilled "# the en)a)e(ent
!artner, the ter( Cen)a)e(ent !artnerD rather than CauditorD is used' C0n)a)e(ent !artnerD and
Cfir(D are to "e read as referrin) to their !u"lic sector e*uivalents where relevant'
4. $e& =etection risk K he risk that the !rocedures !erfor(ed "# the auditor to reduce audit risk
to an acce!ta"l# low level will not detect a (isstate(ent that e,ists and that could "e (aterial,
either individuall# or when a))re)ated with other (isstate(ents'
81 ISA 400
$iii& o !rovide the auditor with.
1a' Access to all infor(ation of which (ana)e(ent and, where a!!ro!riate, those char)ed with
)overnance are aware that is relevant to the !re!aration of the financial state(ents such as records,
docu(entation and other (atters?
2"' Additional infor(ation that the auditor (a# re*uest fro( (ana)e(ent and, where a!!ro!riate,
those char)ed with )overnance for the !ur!ose of the audit? and
3c' Unrestricted access to !ersons within the entit# fro( who( the auditor deter(ines it necessar# to
o"tain audit evidence'
In the case of a fair !resentation fra(ework, $i& a"ove (a# "e restated as Cfor the !re!aration and
fair !resentation of the financial state(ents in accordance with the financial re!ortin) fra(ework,D
or Cfor the !re!aration of financial state(ents that gi!e a true and fair !ie# in accordance with the
financial re!ortin) fra(ework'D
he C!re(ise, relatin) to the res!onsi"ilities of (ana)e(ent and, where a!!ro!riate, those char)ed
with )overnance, on which an audit is conductedD (a# also "e referred to as the C!re(ise'D
1$k&6rofessional ;ud)(ent K he a!!lication of relevant trainin), knowled)e and e,!erience, within
the conte,t !rovided "# auditin), accountin) and ethical standards, in (akin) infor(ed decisions
a"out the courses of action that are a!!ro!riate in the circu(stances of the audit en)a)e(ent'
2$l& 6rofessional ske!ticis( K An attitude that includes a *uestionin) (ind, "ein) alert to conditions
which (a# indicate !ossi"le (isstate(ent due to error or fraud, and a critical assess(ent of audit
evidence'
3$(& Aeasona"le assurance K In the conte,t of an audit of financial state(ents, a hi)h, "ut not
a"solute, level of assurance'
1$n& Aisk of (aterial (isstate(ent K he risk that the financial state(ents are (ateriall#
(isstated !rior to audit' his consists of two co(!onents, descri"ed as follows at the assertion
level.
2$i& Inherent risk K he susce!ti"ilit# of an assertion a"out a class of transaction, account "alance
or disclosure to a (isstate(ent that could "e (aterial, either individuall# or when a))re)ated
with other (isstate(ents, "efore consideration of an# related controls'
3$ii& %ontrol risk K he risk that a (isstate(ent that could occur in an assertion a"out a class of
transaction, account "alance or disclosure and that could "e (aterial, either individuall# or
when a))re)ated with other (isstate(ents, will not "e !revented, or detected and corrected,
on a ti(el# "asis "# the entit#+s internal control'
89 ISA 400
$o& hose char)ed with )overnance K he !erson$s& or or)aniJation$s& $for e,a(!le, a cor!orate
trustee& with res!onsi"ilit# for overseein) the strate)ic direction of the entit# and
o"li)ations related to the accounta"ilit# of the entit#' his includes overseein) the financial
re!ortin) !rocess' For so(e entities in so(e ;urisdictions, those char)ed with )overnance
(a# include (ana)e(ent !ersonnel, for e,a(!le, e,ecutive (e("ers of a )overnance
"oard of a !rivate or !u"lic sector entit#, or an owner-(ana)er'
Re2-i'e.e"t Ethic!0 Re2-i'e.e"t Re0!ti"( to !" A-#it of Fi"!"ci!0 St!te.e"t
14' he auditor shall co(!l# with relevant ethical re*uire(ents, includin) those !ertainin) to
inde!endence, relatin) to financial state(ent audit en)a)e(ents' $Aef. 6ara' A14-A17&
*'ofeio"!0 S%eptici.
15' he auditor shall !lan and !erfor( an audit with !rofessional ske!ticis( reco)niJin) that
circu(stances (a# e,ist that cause the financial state(ents to "e (ateriall# (isstated' $Aef. 6ara'
A18-A44&
*'ofeio"!0 ?-#(.e"t
1B' he auditor shall e,ercise !rofessional ;ud)(ent in !lannin) and !erfor(in) an audit of financial
state(ents' $Aef. 6ara' A49-A47&
S-fficie"t App'op'i!te A-#it E9i#e"ce !"# A-#it Ri%
17' o o"tain reasona"le assurance, the auditor shall o"tain sufficient a!!ro!riate audit evidence to
reduce audit risk to an acce!ta"l# low level and there"# ena"le the auditor to draw reasona"le
conclusions on which to "ase the auditor+s o!inion' $Aef. 6ara' A48-A54&
Co"#-ct of !" A-#it i" Acco'#!"ce &ith ISA
Co$plying #ith I)As +ele!ant to the Audit
1. 18' he auditor shall co(!l# with all ISAs relevant to the audit' An ISA is relevant to the
audit when the ISA is in effect and the circu(stances addressed "# the ISA e,ist' $Aef. 6ara' A59-
A57&
2. 15' he auditor shall have an understandin) of the entire te,t of an ISA, includin) its
a!!lication and other e,!lanator# (aterial, to understand its o";ectives and to a!!l# its
re*uire(ents !ro!erl#' $Aef. 6ara' A58-ABB&
3. 40' he auditor shall not re!resent co(!liance with ISAs in the auditor+s re!ort unless the
auditor has co(!lied with the re*uire(ents of this ISA and all other ISAs relevant to the audit'
ISA 400 84
,b9ecti!es )tated in Indi!idual I)As
41' o achieve the overall o";ectives of the auditor, the auditor shall use the o";ectives stated in
relevant ISAs in !lannin) and !erfor(in) the audit, havin) re)ard to the interrelationshi!s a(on)
the ISAs, to. $Aef. 6ara' AB7-AB5&
1$a& =eter(ine whether an# audit !rocedures in addition to those re*uired "# the ISAs are
necessar# in !ursuance of the o";ectives stated in the ISAs? and $Aef. 6ara' A70&
2$"& 0valuate whether sufficient a!!ro!riate audit evidence has "een o"tained' $Aef. 6ara'
A71&
Co$plying #ith +ele!ant +e>uire$ents
144' Su";ect to !ara)ra!h 49, the auditor shall co(!l# with each re*uire(ent of an ISA unless,
in the circu(stances of the audit.
2$a& he entire ISA is not relevant? or
3$"& he re*uire(ent is not relevant "ecause it is conditional and the condition does not e,ist'
2. 49' In e,ce!tional circu(stances, the auditor (a# ;ud)e it necessar# to de!art fro( a relevant
re*uire(ent in an ISA' In such circu(stances, the auditor shall !erfor( alternative audit
!rocedures to achieve the ai( of that re*uire(ent' he need for the auditor to de!art fro( a
relevant re*uire(ent is e,!ected to arise onl# where the re*uire(ent is for a s!ecific !rocedure to
"e !erfor(ed and, in the s!ecific circu(stances of the audit, that !rocedure would "e ineffective
in achievin) the ai( of the re*uire(ent' $Aef. 6ara' A74&
Failure to Achie!e an ,b9ecti!e
44' If an o";ective in a relevant ISA cannot "e achieved, the auditor shall evaluate whether this
!revents the auditor fro( achievin) the overall o";ectives of the auditor and there"# re*uires the
auditor, in accordance with the ISAs, to (odif# the auditor+s o!inion or withdraw fro( the
en)a)e(ent $where withdrawal is !ossi"le under a!!lica"le law or re)ulation&' Failure to achieve
an o";ective re!resents a si)nificant (atter re*uirin) docu(entation in accordance with ISA 490'
4
$Aef. 6ara' A75-A7B&
OOO
ISA 490, CAudit =ocu(entation,D !ara)ra!h 8$c&'
85 ISA 400
App0ic!tio" !"# Othe' E5p0!"!to'/ )!te'i!0 A" A-#it of
Fi"!"ci!0 St!te.e"t
)cope of the Audit $Aef. 6ara' 9&
A1' he auditor+s o!inion on the financial state(ents deals with whether the financial state(ents are
!re!ared, in all (aterial res!ects, in accordance with the a!!lica"le financial re!ortin) fra(ework'
Such an o!inion is co((on to all audits of financial state(ents' he auditor+s o!inion therefore
does not assure, for e,a(!le, the future via"ilit# of the entit# nor the efficienc# or effectiveness
with which (ana)e(ent has conducted the affairs of the entit#' In so(e ;urisdictions, however,
a!!lica"le law or re)ulation (a# re*uire auditors to !rovide o!inions on other s!ecific (atters,
such as the effectiveness of internal control, or the consistenc# of a se!arate (ana)e(ent re!ort
with the financial state(ents' Lhile the ISAs include re*uire(ents and )uidance in relation to
such (atters to the e,tent that the# are relevant to for(in) an o!inion on the financial state(ents,
the auditor would "e re*uired to undertake further work if the auditor had additional
res!onsi"ilities to !rovide such o!inions'
(reparation of the Financial )tate$ents $Aef. 6ara' 4&
A4' Maw or re)ulation (a# esta"lish the res!onsi"ilities of (ana)e(ent and, where a!!ro!riate, those
char)ed with )overnance in relation to financial re!ortin)' @owever, the e,tent of these
res!onsi"ilities, or the wa# in which the# are descri"ed, (a# differ across ;urisdictions' =es!ite
these differences, an audit in accordance with ISAs is conducted on the !re(ise that (ana)e(ent
and, where a!!ro!riate, those char)ed with )overnance have acknowled)ed and understand that
the# have res!onsi"ilit#.
$iii& Unrestricted access to !ersons within the entit# fro( who( the auditor deter(ines it
A9' he !re!aration of the financial state(ents "# (ana)e(ent and, where a!!ro!riate, those char)ed
with )overnance re*uires.
% G he identification of the a!!lica"le financial re!ortin) fra(ework, in the conte,t of an#
relevant laws or re)ulations'
% G he !re!aration of the financial state(ents in accordance with that fra(ework'
% G he inclusion of an ade*uate descri!tion of that fra(ework in the financial state(ents'
he !re!aration of the financial state(ents re*uires (ana)e(ent to e,ercise ;ud)(ent in (akin)
accountin) esti(ates that are reasona"le in the circu(stances, as well as to select and a!!l#
a!!ro!riate accountin) !olicies' hese ;ud)(ents are (ade in the conte,t of the a!!lica"le financial
re!ortin) fra(ework'
A4' he financial state(ents (a# "e !re!ared in accordance with a financial re!ortin) fra(ework
desi)ned to (eet.
1. G he co((on financial infor(ation needs of a wide ran)e of users $that is, C)eneral
!ur!ose financial state(entsD&? or
2. G he financial infor(ation needs of s!ecific users $that is, Cs!ecial !ur!ose financial
state(entsD&'
A5' he a!!lica"le financial re!ortin) fra(ework often enco(!asses financial re!ortin) standards
esta"lished "# an authoriJed or reco)niJed standards settin) or)aniJation, or le)islative or re)ulator#
re*uire(ents' In so(e cases, the financial re!ortin) fra(ework (a# enco(!ass "oth financial
re!ortin) standards esta"lished "# an authoriJed or reco)niJed standards settin) or)aniJation and
le)islative or re)ulator# re*uire(ents' 7ther sources (a# !rovide direction on the a!!lication of the
a!!lica"le financial re!ortin) fra(ework' In so(e cases, the a!!lica"le financial re!ortin)
fra(ework (a# enco(!ass such other sources, or (a# even consist onl# of such sources' Such other
sources (a# include.
% G he le)al and ethical environ(ent, includin) statutes, re)ulations, court decisions, and
!rofessional ethical o"li)ations in relation to accountin) (atters?
% G 6u"lished accountin) inter!retations of var#in) authorit# issued "# standards settin),
!rofessional or re)ulator# or)aniJations?
% G 6u"lished views of var#in) authorit# on e(er)in) accountin) issues issued "# standards
settin), !rofessional or re)ulator# or)aniJations?
% G <eneral and industr# !ractices widel# reco)niJed and !revalent? and
87 ISA 400
G Accountin) literature'
Lhere conflicts e,ist "etween the financial re!ortin) fra(ework and the sources fro( which
direction on its a!!lication (a# "e o"tained, or a(on) the sources that enco(!ass the financial
re!ortin) fra(ework, the source with the hi)hest authorit# !revails'
AB' he re*uire(ents of the a!!lica"le financial re!ortin) fra(ework deter(ine the for( and content
of the financial state(ents' Althou)h the fra(ework (a# not s!ecif# how to account for or
disclose all transactions or events, it ordinaril# e("odies sufficient "road !rinci!les that can serve
as a "asis for develo!in) and a!!l#in) accountin) !olicies that are consistent with the conce!ts
underl#in) the re*uire(ents of the fra(ework'
A7' So(e financial re!ortin) fra(eworks are fair !resentation fra(eworks, while others are
co(!liance fra(eworks' Financial re!ortin) fra(eworks that enco(!ass !ri(aril# the financial
re!ortin) standards esta"lished "# an or)aniJation that is authoriJed or reco)niJed to !ro(ul)ate
standards to "e used "# entities for !re!arin) )eneral !ur!ose financial state(ents are often
desi)ned to achieve fair !resentation, for e,a(!le, International Financial Ae!ortin) Standards
$IFASs& issued "# the International Accountin) Standards 1oard $IAS1&'
A8' he re*uire(ents of the a!!lica"le financial re!ortin) fra(ework also deter(ine what constitutes
a co(!lete set of financial state(ents' In the case of (an# fra(eworks, financial state(ents are
intended to !rovide infor(ation a"out the financial !osition, financial !erfor(ance and cash flows
of an entit#' For such fra(eworks, a co(!lete set of financial state(ents would include a "alance
sheet? an inco(e state(ent? a state(ent of chan)es in e*uit#? a cash flow state(ent? and related
notes' For so(e other financial re!ortin) fra(eworks, a sin)le financial state(ent and the related
notes (i)ht constitute a co(!lete set of financial state(ents.
1. G For e,a(!le, the International 6u"lic Sector Accountin) Standard $I6SAS&, CFinancial
Ae!ortin) Under the %ash 1asis of Accountin)D issued "# the International 6u"lic Sector
Accountin) Standards 1oard states that the !ri(ar# financial state(ent is a state(ent of cash
recei!ts and !a#(ents when a !u"lic sector entit# !re!ares its financial state(ents in accordance
with that I6SAS'
1. G 7ther e,a(!les of a sin)le financial state(ent, each of which would include related
notes, are.
1. o 1alance sheet'
2. o State(ent of inco(e or state(ent of o!erations'
3. o State(ent of retained earnin)s'
ISA 400 88
1. o State(ent of cash flows'
2. o State(ent of assets and lia"ilities that does not include owner+s e*uit#'
3. o State(ent of chan)es in owners+ e*uit#'
4. o State(ent of revenue and e,!enses'
5. o State(ent of o!erations "# !roduct lines'
A5' ISA 410 esta"lishes re*uire(ents and !rovides )uidance on deter(inin) the acce!ta"ilit# of the
a!!lica"le financial re!ortin) fra(ework'
5
ISA 800 deals with s!ecial considerations when
financial state(ents are !re!ared in accordance with a s!ecial !ur!ose fra(ework'
B
A10' 1ecause of the si)nificance of the !re(ise to the conduct of an audit, the auditor is re*uired to
o"tain the a)ree(ent of (ana)e(ent and, where a!!ro!riate, those char)ed with )overnance that
the# acknowled)e and understand that the# have the res!onsi"ilities set out in !ara)ra!h A4 as a
!recondition for acce!tin) the audit en)a)e(ent'
7
%onsiderations S!ecific to Audits in the 6u"lic Sector
A11' he (andates for audits of the financial state(ents of !u"lic sector entities (a# "e "roader than
those of other entities' As a result, the !re(ise, relatin) to (ana)e(ent+s res!onsi"ilities, on
which an audit of the financial state(ents of a !u"lic sector entit# is conducted (a# include
additional res!onsi"ilities, such as the res!onsi"ilit# for the e,ecution of transactions and events in
accordance with law, re)ulation or other authorit#'
8
For$ of the Auditor8s ,pinion $Aef. 6ara' 8&
A14' he o!inion e,!ressed "# the auditor is on whether the financial state(ents are !re!ared, in all
(aterial res!ects, in accordance with the a!!lica"le financial re!ortin) fra(ework' he for( of
the auditor+s o!inion, however, will de!end u!on the a!!lica"le financial re!ortin) fra(ework and
an# a!!lica"le law or re)ulation' Eost financial re!ortin) fra(eworks include re*uire(ents
relatin) to the !resentation of the financial state(ents? for such fra(eworks, preparation of the
financial state(ents in accordance with the a!!lica"le financial re!ortin) fra(ework includes
presentation'
5
ISA 410, CA)reein) the er(s of Audit 0n)a)e(ents,D !ara)ra!h B$a&' B
ISA 800, CS!ecial %onsiderationsNAudits of Financial State(ents 6re!ared in Accordance with S!ecial 6ur!ose Fra(eworks,D
!ara)ra!h 8'
7
ISA 410, !ara)ra!h B$"&' 8
See !ara)ra!h A57'
85 ISA 400
A19' Lhere the financial re!ortin) fra(ework is a fair !resentation fra(ework, as is )enerall# the case
for )eneral !ur!ose financial state(ents, the o!inion re*uired "# the ISAs is on whether the
financial state(ents are !resented fairl#, in all (aterial res!ects, or )ive a true and fair view'
Lhere the financial re!ortin) fra(ework is a co(!liance fra(ework, the o!inion re*uired is on
whether the financial state(ents are !re!ared, in all (aterial res!ects, in accordance with the
fra(ework' Unless s!ecificall# stated otherwise, references in the ISAs to the auditor+s o!inion
cover "oth for(s of o!inion'
Ethic!0 Re2-i'e.e"t Re0!ti"( to !" A-#it of Fi"!"ci!0 St!te.e"t $Aef. 6ara' 14&
A14' he auditor is su";ect to relevant ethical re*uire(ents, includin) those !ertainin) to inde!endence,
relatin) to financial state(ent audit en)a)e(ents' Aelevant ethical re*uire(ents ordinaril#
co(!rise 6arts A and 1 of the International Federation of Accountants+ Code of /thics for
(rofessional Accountants $the IFA% %ode& related to an audit of financial state(ents to)ether with
national re*uire(ents that are (ore restrictive'
A15' 6art A of the IFA% %ode esta"lishes the funda(ental !rinci!les of !rofessional ethics relevant to
the auditor when conductin) an audit of financial state(ents and !rovides a conce!tual fra(ework
for a!!l#in) those !rinci!les' he funda(ental !rinci!les with which the auditor is re*uired to
co(!l# "# the IFA% %ode are.
1. $a& Inte)rit#?
2. $"& 7";ectivit#?
6art 1 of the IFA% %ode illustrates how the conce!tual fra(ework is to "e a!!lied in s!ecific
situations'
A1B' In the case of an audit en)a)e(ent it is in the !u"lic interest and, therefore, re*uired "# the IFA%
%ode, that the auditor "e inde!endent of the entit# su";ect to the audit' he IFA% %ode descri"es
inde!endence as co(!risin) "oth inde!endence of (ind and inde!endence in a!!earance' he
auditor+s inde!endence fro( the entit# safe)uards the auditor+s a"ilit# to for( an audit o!inion
without "ein) affected "# influences that (i)ht co(!ro(ise that o!inion' Inde!endence enhances
the auditor+s a"ilit# to act with inte)rit#, to "e o";ective and to (aintain an attitude of !rofessional
ske!ticis('
ISA 400 50
A17' International Standard on :ualit# %ontrol $IS:%& 1
5
&, or national re*uire(ents that are at least as
de(andin),
10
deal with the fir(+s res!onsi"ilities to esta"lish and (aintain its s#ste( of *ualit#
control for audit en)a)e(ents' IS:% 1 sets out the res!onsi"ilities of the fir( for esta"lishin)
!olicies and !rocedures desi)ned to !rovide it with reasona"le assurance that the fir( and its
!ersonnel co(!l# with relevant ethical re*uire(ents, includin) those !ertainin) to
inde!endence'
11
ISA 440 sets out the en)a)e(ent !artner+s res!onsi"ilities with res!ect to relevant
ethical re*uire(ents' hese include re(ainin) alert, throu)h o"servation and (akin) in*uiries as
necessar#, for evidence of non-co(!liance with relevant ethical re*uire(ents "# (e("ers of the
en)a)e(ent tea(, deter(inin) the a!!ro!riate action if (atters co(e to the en)a)e(ent !artner+s
attention that indicate that (e("ers of the en)a)e(ent tea( have not co(!lied with relevant
ethical re*uire(ents, and for(in) a conclusion on co(!liance with inde!endence re*uire(ents
that a!!l# to the audit en)a)e(ent'
14
ISA 440 reco)niJes that the en)a)e(ent tea( is entitled to
rel# on a fir(+s s#ste( of *ualit# control in (eetin) its res!onsi"ilities with res!ect to *ualit#
control !rocedures a!!lica"le to the individual audit en)a)e(ent, unless infor(ation !rovided "#
the fir( or other !arties su))ests otherwise'
*'ofeio"!0 S%eptici. $Aef. 6ara' 15& A18' 6rofessional ske!ticis( includes "ein) alert
to, for e,a(!le.
% G Audit evidence that contradicts other audit evidence o"tained'
% G Infor(ation that "rin)s into *uestion the relia"ilit# of docu(ents and res!onses to
in*uiries to "e used as audit evidence'
% G %onditions that (a# indicate !ossi"le fraud'
% G %ircu(stances that su))est the need for audit !rocedures in addition to those re*uired "#
the ISAs'
A15' Eaintainin) !rofessional ske!ticis( throu)hout the audit is necessar# if the auditor is, for
e,a(!le, to reduce the risks of.
1. G 7verlookin) unusual circu(stances'
2. G 7ver )eneraliJin) when drawin) conclusions fro( audit o"servations'
3. G Usin) ina!!ro!riate assu(!tions in deter(inin) the nature, ti(in), and e,tent of the
audit !rocedures and evaluatin) the results thereof'
5
International Standard on :ualit# %ontrol $IS:%& 1, C:ualit# %ontrol for Fir(s that 6erfor( Audits and Aeviews of Financial
State(ents, and 7ther Assurance and Aelated Services 0n)a)e(ents'D
10
ISA 440, C:ualit# %ontrol for an Audit of Financial State(ents,D !ara)ra!h 4'
11
IS:% 1, !ara)ra!hs 40-45' 14
ISA 440, !ara)ra!hs 5-14'
51 ISA 400
A40' 6rofessional ske!ticis( is necessar# to the critical assess(ent of audit evidence' his includes
*uestionin) contradictor# audit evidence and the relia"ilit# of docu(ents and res!onses to
in*uiries and other infor(ation o"tained fro( (ana)e(ent and those char)ed with )overnance' It
also includes consideration of the sufficienc# and a!!ro!riateness of audit evidence o"tained in
the li)ht of the circu(stances, for e,a(!le in the case where fraud risk factors e,ist and a sin)le
docu(ent, of a nature that is susce!ti"le to fraud, is the sole su!!ortin) evidence for a (aterial
financial state(ent a(ount'
A41' he auditor (a# acce!t records and docu(ents as )enuine unless the auditor has reason to "elieve
the contrar#' Nevertheless, the auditor is re*uired to consider the relia"ilit# of infor(ation to "e
used as audit evidence'
19
In cases of dou"t a"out the relia"ilit# of infor(ation or indications of
!ossi"le fraud $for e,a(!le, if conditions identified durin) the audit cause the auditor to "elieve
that a docu(ent (a# not "e authentic or that ter(s in a docu(ent (a# have "een falsified&, the
ISAs re*uire that the auditor investi)ate further and deter(ine what (odifications or additions to
audit !rocedures are necessar# to resolve the (atter'
14
A44' he auditor cannot "e e,!ected to disre)ard !ast e,!erience of the honest# and inte)rit# of the
entit#+s (ana)e(ent and those char)ed with )overnance' Nevertheless, a "elief that (ana)e(ent
and those char)ed with )overnance are honest and have inte)rit# does not relieve the auditor of the
need to (aintain !rofessional ske!ticis( or allow the auditor to "e satisfied with less-than-
!ersuasive audit evidence when o"tainin) reasona"le assurance'
*'ofeio"!0 ?-#(.e"t $Aef. 6ara' 1B&
A49' 6rofessional ;ud)(ent is essential to the !ro!er conduct of an audit' his is "ecause inter!retation
of relevant ethical re*uire(ents and the ISAs and the infor(ed decisions re*uired throu)hout the
audit cannot "e (ade without the a!!lication of relevant knowled)e and e,!erience to the facts
and circu(stances' 6rofessional ;ud)(ent is necessar# in !articular re)ardin) decisions a"out.
1. G Eaterialit# and audit risk'
2. G he nature, ti(in), and e,tent of audit !rocedures used to (eet the re*uire(ents of the
ISAs and )ather audit evidence'
3. G 0valuatin) whether sufficient a!!ro!riate audit evidence has "een o"tained, and whether
(ore needs to "e done to achieve the o";ectives of the ISAs and there"#, the overall o";ectives of
the auditor'
19
ISA 500, CAudit 0vidence,D !ara)ra!hs 7-5' 14
ISA 440, !ara)ra!h 19? ISA 500, !ara)ra!h 11?ISA 505, C0,ternal %onfir(ations,D !ara)ra!hs 10-11, and 1B'
ISA 400 54
% G he evaluation of (ana)e(ent+s ;ud)(ents in a!!l#in) the entit#+s a!!lica"le financial
% G he drawin) of conclusions "ased on the audit evidence o"tained, for e,a(!le, assessin)
the reasona"leness of the esti(ates (ade "# (ana)e(ent in !re!arin) the financial state(ents'
A44' he distin)uishin) feature of the !rofessional ;ud)(ent e,!ected of an auditor is that it is
e,ercised "# an auditor whose trainin), knowled)e and e,!erience have assisted in develo!in) the
necessar# co(!etencies to achieve reasona"le ;ud)(ents'
A45' he e,ercise of !rofessional ;ud)(ent in an# !articular case is "ased on the facts and
circu(stances that are known "# the auditor' %onsultation on difficult or contentious (atters
durin) the course of the audit, "oth within the en)a)e(ent tea( and "etween the en)a)e(ent
tea( and others at the a!!ro!riate level within or outside the fir(, such as that re*uired "# ISA
440,
15
assist the auditor in (akin) infor(ed and reasona"le ;ud)(ents'
A4B' 6rofessional ;ud)(ent can "e evaluated "ased on whether the ;ud)(ent reached reflects a
co(!etent a!!lication of auditin) and accountin) !rinci!les and is a!!ro!riate in the li)ht of, and
consistent with, the facts and circu(stances that were known to the auditor u! to the date of the
auditor+s re!ort'
A47' 6rofessional ;ud)(ent needs to "e e,ercised throu)hout the audit' It also needs to "e a!!ro!riatel#
docu(ented' In this re)ard, the auditor is re*uired to !re!are audit docu(entation sufficient to
ena"le an e,!erienced auditor, havin) no !revious connection with the audit, to understand the
si)nificant !rofessional ;ud)(ents (ade in reachin) conclusions on si)nificant (atters arisin)
durin) the audit'
1B
6rofessional ;ud)(ent is not to "e used as the ;ustification for decisions that are
not otherwise su!!orted "# the facts and circu(stances of the en)a)e(ent or sufficient
a!!ro!riate audit evidence'
S-fficie"t App'op'i!te A-#it E9i#e"ce !"# A-#it Ri% $Aef. 6ara' 5 and 17&
)ufficiency and Appropriateness of Audit /!idence
A48' Audit evidence is necessar# to su!!ort the auditor+s o!inion and re!ort' It is cu(ulative in nature
and is !ri(aril# o"tained fro( audit !rocedures !erfor(ed durin) the course of the audit' It (a#,
however, also include infor(ation o"tained fro( other sources such as !revious audits $!rovided
the auditor has deter(ined whether chan)es have occurred since the !revious audit
15
ISA 440, !ara)ra!h 18' 1B
59 ISA 400
that (a# affect its relevance to the current audit
17
& or a fir(+s *ualit# control !rocedures for client
acce!tance and continuance' In addition to other sources inside and outside the entit#, the entit#+s
accountin) records are an i(!ortant source of audit evidence' Also, infor(ation that (a# "e used
as audit evidence (a# have "een !re!ared "# an e,!ert e(!lo#ed or en)a)ed "# the entit#' Audit
evidence co(!rises "oth infor(ation that su!!orts and corro"orates (ana)e(ent+s assertions, and
an# infor(ation that contradicts such assertions' In addition, in so(e cases, the a"sence of
infor(ation $for e,a(!le, (ana)e(ent+s refusal to !rovide a re*uested re!resentation& is used "#
the auditor, and therefore, also constitutes audit evidence' Eost of the auditor+s work in for(in)
the auditor+s o!inion consists of o"tainin) and evaluatin) audit evidence'
A45' he sufficienc# and a!!ro!riateness of audit evidence are interrelated' Sufficienc# is the (easure
of the *uantit# of audit evidence' he *uantit# of audit evidence needed is affected "# the
auditor+s assess(ent of the risks of (isstate(ent $the hi)her the assessed risks, the (ore audit
evidence is likel# to "e re*uired& and also "# the *ualit# of such audit evidence $the hi)her the
*ualit#, the less (a# "e re*uired&' 7"tainin) (ore audit evidence, however, (a# not co(!ensate
for its !oor *ualit#'
A90' A!!ro!riateness is the (easure of the *ualit# of audit evidence? that is, its relevance and its
relia"ilit# in !rovidin) su!!ort for the conclusions on which the auditor+s o!inion is "ased' he
relia"ilit# of evidence is influenced "# its source and "# its nature, and is de!endent on the
individual circu(stances under which it is o"tained'
A91' Lhether sufficient a!!ro!riate audit evidence has "een o"tained to reduce audit risk to an
acce!ta"l# low level, and there"# ena"le the auditor to draw reasona"le conclusions on which to
"ase the auditor+s o!inion, is a (atter of !rofessional ;ud)(ent' ISA 500 and other relevant ISAs
esta"lish additional re*uire(ents and !rovide further )uidance a!!lica"le throu)hout the audit
re)ardin) the auditor+s considerations in o"tainin) sufficient a!!ro!riate audit evidence'
Audit +is.
A94' Audit risk is a function of the risks of (aterial (isstate(ent and detection risk' he assess(ent of
risks is "ased on audit !rocedures to o"tain infor(ation necessar# for that !ur!ose and evidence
o"tained throu)hout the audit' he assess(ent of risks is a (atter of !rofessional ;ud)(ent, rather
than a (atter ca!a"le of !recise (easure(ent'
ISA 915, CIdentif#in) and Assessin) the Aisks of Eaterial Eisstate(ent throu)h Understandin) the 0ntit# and Its 0nviron(ent,D
!ara)ra!h 5'
ISA 400 54
A99' For !ur!oses of the ISAs, audit risk does not include the risk that the auditor (i)ht e,!ress an
o!inion that the financial state(ents are (ateriall# (isstated when the# are not' his risk is
ordinaril# insi)nificant' Further, audit risk is a technical ter( related to the !rocess of auditin)? it
does not refer to the auditor+s "usiness risks such as loss fro( liti)ation, adverse !u"licit#, or other
events arisin) in connection with the audit of financial state(ents'
Aisks of Eaterial Eisstate(ent A94' he risks of (aterial (isstate(ent (a# e,ist at two levels.
1. G he overall financial state(ent level? and
2. G he assertion level for classes of transactions, account "alances, and disclosures'
A95' Aisks of (aterial (isstate(ent at the overall financial state(ent level refer to risks of (aterial
(isstate(ent that relate !ervasivel# to the financial state(ents as a whole and !otentiall# affect
(an# assertions'
A9B' Aisks of (aterial (isstate(ent at the assertion level are assessed in order to deter(ine the nature,
ti(in), and e,tent of further audit !rocedures necessar# to o"tain sufficient a!!ro!riate audit
evidence' his evidence ena"les the auditor to e,!ress an o!inion on the financial state(ents at an
acce!ta"l# low level of audit risk' Auditors use various a!!roaches to acco(!lish the o";ective of
assessin) the risks of (aterial (isstate(ent' For e,a(!le, the auditor (a# (ake use of a (odel
that e,!resses the )eneral relationshi! of the co(!onents of audit risk in (athe(atical ter(s to
arrive at an acce!ta"le level of detection risk' So(e auditors find such a (odel to "e useful when
!lannin) audit !rocedures'
A97' he risks of (aterial (isstate(ent at the assertion level consist of two co(!onents. inherent risk
and control risk' Inherent risk and control risk are the entit#+s risks? the# e,ist inde!endentl# of the
audit of the financial state(ents'
A98' Inherent risk is hi)her for so(e assertions and related classes of transactions, account "alances,
and disclosures than for others' For e,a(!le, it (a# "e hi)her for co(!le, calculations or for
accounts consistin) of a(ounts derived fro( accountin) esti(ates that are su";ect to si)nificant
esti(ation uncertaint#' 0,ternal circu(stances )ivin) rise to "usiness risks (a# also influence
inherent risk' For e,a(!le, technolo)ical develo!(ents (i)ht (ake a !articular !roduct o"solete,
there"# causin) inventor# to "e (ore susce!ti"le to overstate(ent' Factors in the entit# and its
environ(ent that relate to several or all of the classes of transactions, account "alances, or
disclosures (a# also influence the inherent risk related to a s!ecific assertion' Such factors (a#
include, for e,a(!le, a lack of sufficient workin) ca!ital to continue o!erations or a declinin)
industr# characteriJed "# a lar)e nu("er of "usiness failures'
55 ISA 400
A95' %ontrol risk is a function of the effectiveness of the desi)n, i(!le(entation and (aintenance of
internal control "# (ana)e(ent to address identified risks that threaten the achieve(ent of the
entit#+s o";ectives relevant to !re!aration of the entit#+s financial state(ents' @owever, internal
control, no (atter how well desi)ned and o!erated, can onl# reduce, "ut not eli(inate, risks of
(aterial (isstate(ent in the financial state(ents, "ecause of the inherent li(itations of internal
control' hese include, for e,a(!le, the !ossi"ilit# of hu(an errors or (istakes, or of controls
"ein) circu(vented "# collusion or ina!!ro!riate (ana)e(ent override' Accordin)l#, so(e
control risk will alwa#s e,ist' he ISAs !rovide the conditions under which the auditor is re*uired
to, or (a# choose to, test the o!eratin) effectiveness of controls in deter(inin) the nature, ti(in)
and e,tent of su"stantive !rocedures to "e !erfor(ed'
18
A40' he ISAs do not ordinaril# refer to inherent risk and control risk se!aratel#, "ut rather to a
co("ined assess(ent of the Crisks of (aterial (isstate(ent'D @owever, the auditor (a# (ake
se!arate or co("ined assess(ents of inherent and control risk de!endin) on !referred audit
techni*ues or (ethodolo)ies and !ractical considerations' he assess(ent of the risks of (aterial
(isstate(ent (a# "e e,!ressed in *uantitative ter(s, such as in !ercenta)es, or in non-
*uantitative ter(s' In an# case, the need for the auditor to (ake a!!ro!riate risk assess(ents is
(ore i(!ortant than the different a!!roaches "# which the# (a# "e (ade'
A41' ISA 915 esta"lishes re*uire(ents and !rovides )uidance on identif#in) and assessin) the risks of
(aterial (isstate(ent at the financial state(ent and assertion levels'
=etection Aisk
A44' For a )iven level of audit risk, the acce!ta"le level of detection risk "ears an inverse relationshi!
to the assessed risks of (aterial (isstate(ent at the assertion level' For e,a(!le, the )reater the
risks of (aterial (isstate(ent the auditor "elieves e,ists, the less the detection risk that can "e
acce!ted and, accordin)l#, the (ore !ersuasive the audit evidence re*uired "# the auditor'
A49' =etection risk relates to the nature, ti(in), and e,tent of the auditor+s !rocedures that are
deter(ined "# the auditor to reduce audit risk to an acce!ta"l# low level' It is therefore a function
of the effectiveness of an audit !rocedure and of its a!!lication "# the auditor' Eatters such as.
1. G ade*uate !lannin)?
2. G !ro!er assi)n(ent of !ersonnel to the en)a)e(ent tea(?
3. G the a!!lication of !rofessional sce!ticis(? and
ISA 990, Che Auditor+s Ae!onses to Assessed Aisks,D !ara)ra!hs 7-17'
ISA 400 5B
G su!ervision and review of the audit work !erfor(ed,
assist to enhance the effectiveness of an audit !rocedure and of its a!!lication and reduce the
!ossi"ilit# that an auditor (i)ht select an ina!!ro!riate audit !rocedure, (isa!!l# an a!!ro!riate
audit !rocedure, or (isinter!ret the audit results'
A44' ISA 900
15
and ISA 990 esta"lish re*uire(ents and !rovide )uidance on !lannin) an audit of
financial state(ents and the auditor+s res!onses to assessed risks' =etection risk, however, can
onl# "e reduced, not eli(inated, "ecause of the inherent li(itations of an audit' Accordin)l#, so(e
detection risk will alwa#s e,ist'
Inherent :i$itations of an Audit
A45' he auditor is not e,!ected to, and cannot, reduce audit risk to Jero and cannot therefore o"tain
a"solute assurance that the financial state(ents are free fro( (aterial (isstate(ent due to fraud
or error' his is "ecause there are inherent li(itations of an audit, which result in (ost of the audit
evidence on which the auditor draws conclusions and "ases the auditor+s o!inion "ein) !ersuasive
rather than conclusive' he inherent li(itations of an audit arise fro(.
% G he nature of financial re!ortin)?
% G he nature of audit !rocedures? and
% G he need for the audit to "e conducted within a reasona"le !eriod of ti(e and at a
reasona"le cost'
he Nature of Financial Ae!ortin)
A4B' he !re!aration of financial state(ents involves ;ud)(ent "# (ana)e(ent in a!!l#in) the
re*uire(ents of the entit#+s a!!lica"le financial re!ortin) fra(ework to the facts and
circu(stances of the entit#' In addition, (an# financial state(ent ite(s involve su";ective
decisions or assess(ents or a de)ree of uncertaint#, and there (a# "e a ran)e of acce!ta"le
inter!retations or ;ud)(ents that (a# "e (ade' %onse*uentl#, so(e financial state(ent ite(s are
su";ect to an inherent level of varia"ilit# which cannot "e eli(inated "# the a!!lication of
additional auditin) !rocedures' For e,a(!le, this is often the case with res!ect to certain
accountin) esti(ates' Nevertheless, the ISAs re*uire the auditor to )ive s!ecific consideration to
whether accountin) esti(ates are reasona"le in the conte,t of the a!!lica"le financial re!ortin)
fra(ework and related disclosures, and to the *ualitative as!ects of the entit#+s accountin)
!ractices, includin) indicators of !ossi"le "ias in (ana)e(ent+s ;ud)(ents'
40
15
ISA 900, C6lannin) an Audit of Financial State(ents'D
40
ISA 540, CAuditin) Accountin) 0sti(ates, Includin) Fair Falue Accountin) 0sti(ates, and Aelated =isclosures,D and ISA 700,
CFor(in) an 7!inion and Ae!ortin) on Financial State(ents,D !ara)ra!h 14'
57 ISA 400
he Nature of Audit 6rocedures
A47' here are !ractical and le)al li(itations on the auditor+s a"ilit# to o"tain audit evidence' For
e,a(!le.
1. G here is the !ossi"ilit# that (ana)e(ent or others (a# not !rovide, intentionall# or
unintentionall#, the co(!lete infor(ation that is relevant to the !re!aration of the financial
state(ents or that has "een re*uested "# the auditor' Accordin)l#, the auditor cannot "e certain of
the co(!leteness of infor(ation, even thou)h the auditor has !erfor(ed audit !rocedures to o"tain
assurance that all relevant infor(ation has "een o"tained'
2. G Fraud (a# involve so!histicated and carefull# or)aniJed sche(es desi)ned to conceal it'
herefore, audit !rocedures used to )ather audit evidence (a# "e ineffective for detectin) an
intentional (isstate(ent that involves, for e,a(!le, collusion to falsif# docu(entation which (a#
cause the auditor to "elieve that audit evidence is valid when it is not' he auditor is neither
trained as nor e,!ected to "e an e,!ert in the authentication of docu(ents'
3. G An audit is not an official investi)ation into alle)ed wron)doin)' Accordin)l#, the auditor
is not )iven s!ecific le)al !owers, such as the !ower of search, which (a# "e necessar# for such
an investi)ation'
i(eliness of Financial Ae!ortin) and the 1alance "etween 1enefit and %ost
A48' he (atter of difficult#, ti(e, or cost involved is not in itself a valid "asis for the auditor to o(it
an audit !rocedure for which there is no alternative or to "e satisfied with audit evidence that is
less than !ersuasive' A!!ro!riate !lannin) assists in (akin) sufficient ti(e and resources
availa"le for the conduct of the audit' Notwithstandin) this, the relevance of infor(ation, and
there"# its value, tends to di(inish over ti(e, and there is a "alance to "e struck "etween the
relia"ilit# of infor(ation and its cost' his is reco)niJed in certain financial re!ortin) fra(eworks
$see, for e,a(!le, the IAS1+s CFra(ework for the 6re!aration and 6resentation of Financial
State(entsD&' herefore, there is an e,!ectation "# users of financial state(ents that the auditor
will for( an o!inion on the financial state(ents within a reasona"le !eriod of ti(e and at a
reasona"le cost, reco)niJin) that it is i(!ractica"le to address all infor(ation that (a# e,ist or to
!ursue ever# (atter e,haustivel# on the assu(!tion that infor(ation is in error or fraudulent until
!roved otherwise'
A45' %onse*uentl#, it is necessar# for the auditor to.
G 6lan the audit so that it will "e !erfor(ed in an effective (anner?
ISA 400 58
% G =irect audit effort to areas (ost e,!ected to contain risks of (aterial (isstate(ent,
whether due to fraud or error, with corres!ondin)l# less effort directed at other areas? and
% G Use testin) and other (eans of e,a(inin) !o!ulations for (isstate(ents'
A50' In li)ht of the a!!roaches descri"ed in !ara)ra!h A45, the ISAs contain re*uire(ents for the
!lannin) and !erfor(ance of the audit and re*uire the auditor, a(on) other thin)s, to.
1. G @ave a "asis for the identification and assess(ent of risks of (aterial (isstate(ent at the
financial state(ent and assertion levels "# !erfor(in) risk assess(ent !rocedures and related
activities?
41
and
2. G Use testin) and other (eans of e,a(inin) !o!ulations in a (anner that !rovides a
reasona"le "asis for the auditor to draw conclusions a"out the !o!ulation'
44
7ther Eatters that Affect the Inherent Mi(itations of an Audit
A51' In the case of certain assertions or su";ect (atters, the !otential effects of the inherent li(itations
on the auditor+s a"ilit# to detect (aterial (isstate(ents are !articularl# si)nificant' Such
assertions or su";ect (atters include.
1. G Fraud, !articularl# fraud involvin) senior (ana)e(ent or collusion' See ISA 440 for
further discussion'
2. G he e,istence and co(!leteness of related !art# relationshi!s and transactions' See ISA
550
49
for further discussion'
3. G he occurrence of non-co(!liance with laws and re)ulations' See ISA 450
44
for further
discussion'
4. G Future events or conditions that (a# cause an entit# to cease to continue as a )oin)
concern' See ISA 570
45
for further discussion'
Aelevant ISAs identif# s!ecific audit !rocedures to assist in (iti)atin) the effect of the inherent
li(itations'
A54' 1ecause of the inherent li(itations of an audit, there is an unavoida"le risk that so(e (aterial
(isstate(ents of the financial state(ents (a# not "e detected, even thou)h the audit is !ro!erl#
!lanned and !erfor(ed in accordance with
41
ISA 915, !ara)ra!hs 5-10' 44
ISA 990? ISA 500? ISA 540, CAnal#tical 6rocedures?D ISA 590, CAudit Sa(!lin)'D 49
ISA 550, CAelated 6arties'D
44
ISA 450, C%onsideration of Maws and Ae)ulations in an Audit of Financial State(ents'D 45
ISA 570, C<oin) %oncern'D
55 ISA 400
ISAs' Accordin)l#, the su"se*uent discover# of a (aterial (isstate(ent of the financial state(ents
resultin) fro( fraud or error does not "# itself indicate a failure to conduct an audit in accordance
with ISAs' @owever, the inherent li(itations of an audit are not a ;ustification for the auditor to "e
satisfied with less-than-!ersuasive audit evidence' Lhether the auditor has !erfor(ed an audit in
accordance with ISAs is deter(ined "# the audit !rocedures !erfor(ed in the circu(stances, the
sufficienc# and a!!ro!riateness of the audit evidence o"tained as a result thereof and the
suita"ilit# of the auditor+s re!ort "ased on an evaluation of that evidence in li)ht of the overall
o";ectives of the auditor'
Co"#-ct of !" A-#it i" Acco'#!"ce &ith ISA
Aature of the I)As $Aef. 6ara' 18&
A59' he ISAs, taken to)ether, !rovide the standards for the auditor+s work in fulfillin) the overall
o";ectives of the auditor' he ISAs deal with the )eneral res!onsi"ilities of the auditor, as well as
the auditor+s further considerations relevant to the a!!lication of those res!onsi"ilities to s!ecific
to!ics'
A54' he sco!e, effective date and an# s!ecific li(itation of the a!!lica"ilit# of a s!ecific ISA is (ade
clear in the ISA' Unless otherwise stated in the ISA, the auditor is !er(itted to a!!l# an ISA
"efore the effective date s!ecified therein'
A55' In !erfor(in) an audit, the auditor (a# "e re*uired to co(!l# with le)al or re)ulator#
re*uire(ents in addition to the ISAs' he ISAs do not override law or re)ulation that )overns an
audit of financial state(ents' In the event that such law or re)ulation differs fro( the ISAs, an
audit conducted onl# in accordance with law or re)ulation will not auto(aticall# co(!l# with
ISAs'
A5B' he auditor (a# also conduct the audit in accordance with "oth ISAs and auditin) standards of a
s!ecific ;urisdiction or countr#' In such cases, in addition to co(!l#in) with each of the ISAs
relevant to the audit, it (a# "e necessar# for the auditor to !erfor( additional audit !rocedures in
order to co(!l# with the relevant standards of that ;urisdiction or countr#'
%onsiderations S!ecific to Audits in the 6u"lic Sector
A57' he ISAs are relevant to en)a)e(ents in the !u"lic sector' he !u"lic sector auditor+s
res!onsi"ilities, however, (a# "e affected "# the audit (andate, or "# o"li)ations on !u"lic sector
entities arisin) fro( law, re)ulation or other authorit# $such as (inisterial directives, )overn(ent
!olic# re*uire(ents, or resolutions of the le)islature&, which (a# enco(!ass a "roader sco!e than
an audit of financial state(ents in accordance with the ISAs' hese additional res!onsi"ilities are
not dealt with in the ISAs' he# (a# "e dealt with in the !ronounce(ents of the International
7r)aniJation of Su!re(e Audit Institutions or national standard setters, or in )uidance develo!ed
"# )overn(ent audit a)encies'
ISA 400 100
Contents of the I)As $Aef. 6ara' 15&
A58' In addition to o";ectives and re*uire(ents $re*uire(ents are e,!ressed in the ISAs usin) CshallD&,
an ISA contains related )uidance in the for( of a!!lication and other e,!lanator# (aterial' It (a#
also contain introductor# (aterial that !rovides conte,t relevant to a !ro!er understandin) of the
ISA, and definitions' he entire te,t of an ISA, therefore, is relevant to an understandin) of the
o";ectives stated in an ISA and the !ro!er a!!lication of the re*uire(ents of an ISA'
A55' Lhere necessar#, the a!!lication and other e,!lanator# (aterial !rovides further e,!lanation of
the re*uire(ents of an ISA and )uidance for carr#in) the( out' In !articular, it (a#.
% G 0,!lain (ore !recisel# what a re*uire(ent (eans or is intended to cover'
% G Include e,a(!les of !rocedures that (a# "e a!!ro!riate in the circu(stances'
Lhile such )uidance does not in itself i(!ose a re*uire(ent, it is relevant to the !ro!er
a!!lication of the re*uire(ents of an ISA' he a!!lication and other e,!lanator# (aterial (a#
also !rovide "ack)round infor(ation on (atters addressed in an ISA'
AB0' A!!endices for( !art of the a!!lication and other e,!lanator# (aterial' he !ur!ose and intended
use of an a!!endi, are e,!lained in the "od# of the related ISA or within the title and introduction
of the a!!endi, itself'
AB1' Introductor# (aterial (a# include, as needed, such (atters as e,!lanation of.
1. G he !ur!ose and sco!e of the ISA, includin) how the ISA relates to other ISAs'
2. G he su";ect (atter of the ISA'
3. G he res!ective res!onsi"ilities of the auditor and others in relation to the su";ect (atter of
the ISA'
4. G he conte,t in which the ISA is set'
AB4' An ISA (a# include, in a se!arate section under the headin) C=efinitions,D a descri!tion of the
(eanin)s attri"uted to certain ter(s for !ur!oses of the ISAs' hese are !rovided to assist in the
consistent a!!lication and inter!retation of the ISAs, and are not intended to override definitions
that (a# "e esta"lished for other !ur!oses, whether in law, re)ulation or otherwise' Unless
otherwise indicated, those ter(s will carr# the sa(e (eanin)s throu)hout the ISAs' he <lossar#
of er(s relatin) to International Standards issued "# the International Auditin) and Assurance
Standards 1oard in the -andboo. of International )tandards on Auditing and *uality Control
!u"lished "# IFA%
101 ISA 400
contains a co(!lete listin) of ter(s defined in the ISAs' It also includes descri!tions of other
ter(s found in ISAs to assist in co((on and consistent inter!retation and translation'
AB9' Lhen a!!ro!riate, additional considerations s!ecific to audits of s(aller entities and !u"lic sector
entities are included within the a!!lication and other e,!lanator# (aterial of an ISA' hese
additional considerations assist in the a!!lication of the re*uire(ents of the ISA in the audit of
such entities' he# do not, however, li(it or reduce the res!onsi"ilit# of the auditor to a!!l# and
co(!l# with the re*uire(ents of the ISAs'
%onsiderations S!ecific to S(aller 0ntities
AB4' For !ur!oses of s!ecif#in) additional considerations to audits of s(aller entities, a Cs(aller
entit#D refers to an entit# which t#!icall# !ossesses *ualitative characteristics such as.
1. $a& %oncentration of ownershi! and (ana)e(ent in a s(all nu("er of individuals $often a
sin)le individual K either a natural !erson or another enter!rise that owns the entit# !rovided the
owner e,hi"its the relevant *ualitative characteristics&? and
1. $"& 7ne or (ore of the followin).
2. $i& Strai)htforward or unco(!licated transactions?
3. $ii& Si(!le record-kee!in)?
$iii& Few lines of "usiness and few !roducts within "usiness lines?
1$iv& Few internal controls?
2$v& Few levels of (ana)e(ent with res!onsi"ilit# for a "road ran)e of controls? or
3$vi& Few !ersonnel, (an# havin) a wide ran)e of duties'
hese *ualitative characteristics are not e,haustive, the# are not e,clusive to s(aller entities, and
s(aller entities do not necessaril# dis!la# all of these characteristics'
AB5' he considerations s!ecific to s(aller entities included in the ISAs have "een develo!ed !ri(aril#
with unlisted entities in (ind' So(e of the considerations, however, (a# "e hel!ful in audits of
s(aller listed entities'
ABB' he ISAs refer to the !ro!rietor of a s(aller entit# who is involved in runnin) the entit# on a da#-
to-da# "asis as the Cowner-(ana)er'D
,b9ecti!es )tated in Indi!idual I)As $Aef. 6ara' 41&
AB7' 0ach ISA contains one or (ore o";ectives which !rovide a link "etween the re*uire(ents and the
overall o";ectives of the auditor' he o";ectives in
ISA 400 104
individual ISAs serve to focus the auditor on the desired outco(e of the ISA, while "ein) s!ecific
enou)h to assist the auditor in.
1. G Understandin) what needs to "e acco(!lished and, where necessar#, the a!!ro!riate
(eans of doin) so? and
2. G =ecidin) whether (ore needs to "e done to achieve the( in the !articular circu(stances
of the audit'
AB8' 7";ectives are to "e understood in the conte,t of the overall o";ectives of the auditor stated in
!ara)ra!h 11 of this ISA' As with the overall o";ectives of the auditor, the a"ilit# to achieve an
individual o";ective is e*uall# su";ect to the inherent li(itations of an audit'
AB5' In usin) the o";ectives, the auditor is re*uired to have re)ard to the interrelationshi!s a(on) the
ISAs' his is "ecause, as indicated in !ara)ra!h A59, the ISAs deal in so(e cases with )eneral
res!onsi"ilities and in others with the a!!lication of those res!onsi"ilities to s!ecific to!ics' For
e,a(!le, this ISA re*uires the auditor to ado!t an attitude of !rofessional ske!ticis(? this is
necessar# in all as!ects of !lannin) and !erfor(in) an audit "ut is not re!eated as a re*uire(ent of
each ISA' At a (ore detailed level, ISA 915 and ISA 990 contain, a(on) other thin)s, o";ectives
and re*uire(ents that deal with the auditor+s res!onsi"ilities to identif# and assess the risks of
(aterial (isstate(ent and to desi)n and !erfor( further audit !rocedures to res!ond to those
assessed risks, res!ectivel#? these o";ectives and re*uire(ents a!!l# throu)hout the audit' An ISA
dealin) with s!ecific as!ects of the audit $for e,a(!le, ISA 540& (a# e,!and on how the
o";ectives and re*uire(ents of such ISAs as ISA 915 and ISA 990 are to "e a!!lied in relation to
the su";ect of the ISA "ut does not re!eat the(' hus, in achievin) the o";ective stated in ISA 540,
the auditor has re)ard to the o";ectives and re*uire(ents of other relevant ISAs'
Use of 7";ectives to =eter(ine Need for Additional Audit 6rocedures $Aef. 6ara' 41$a&&
A70' he re*uire(ents of the ISAs are desi)ned to ena"le the auditor to achieve the o";ectives s!ecified
in the ISAs, and there"# the overall o";ectives of the auditor' he !ro!er a!!lication of the
re*uire(ents of the ISAs "# the auditor is therefore e,!ected to !rovide a sufficient "asis for the
auditor+s achieve(ent of the o";ectives' @owever, "ecause the circu(stances of audit
en)a)e(ents var# widel# and all such circu(stances cannot "e antici!ated in the ISAs, the auditor
is res!onsi"le for deter(inin) the audit !rocedures necessar# to fulfill the re*uire(ents of the
ISAs and to achieve the o";ectives' In the circu(stances of an en)a)e(ent, there (a# "e
!articular (atters that re*uire the auditor to !erfor( audit !rocedures in addition to those re*uired
"# the ISAs to (eet the o";ectives s!ecified in the ISAs'
109 ISA 400
Use of 7";ectives to 0valuate Lhether Sufficient A!!ro!riate Audit 0vidence @as 1een 7"tained $Aef.
6ara' 41$"&&
A71' he auditor is re*uired to use the o";ectives to evaluate whether sufficient a!!ro!riate audit
evidence has "een o"tained in the conte,t of the overall o";ectives of the auditor' If as a result the
auditor concludes that the audit evidence is not sufficient and a!!ro!riate, then the auditor (a#
follow one or (ore of the followin) a!!roaches to (eetin) the re*uire(ent of !ara)ra!h 41$"&.
% G 0valuate whether further relevant audit evidence has "een, or will "e, o"tained as a result
of co(!l#in) with other ISAs?
% G 0,tend the work !erfor(ed in a!!l#in) one or (ore re*uire(ents? or
% G 6erfor( other !rocedures ;ud)ed "# the auditor to "e necessar# in the circu(stances'
Lhere none of the a"ove is e,!ected to "e !ractical or !ossi"le in the circu(stances, the auditor
will not "e a"le to o"tain sufficient a!!ro!riate audit evidence and is re*uired "# the ISAs to
deter(ine the effect on the auditor+s re!ort or on the auditor+s a"ilit# to co(!lete the en)a)e(ent'
Co$plying #ith +ele!ant +e>uire$ents
Aelevant Ae*uire(ents $Aef. 6ara' 44&
A74' In so(e cases, an ISA $and therefore all of its re*uire(ents& (a# not "e relevant in the
circu(stances' For e,a(!le, if an entit# does not have an internal audit function, nothin) in ISA
B10
4B
is relevant'
A79' Lithin a relevant ISA, there (a# "e conditional re*uire(ents' Such a re*uire(ent is relevant
when the circu(stances envisioned in the re*uire(ent a!!l# and the condition e,ists' In )eneral,
the conditionalit# of a re*uire(ent will either "e e,!licit or i(!licit, for e,a(!le.
1. G he re*uire(ent to (odif# the auditor+s o!inion if there is a li(itation of sco!e
47

re!resents an e,!licit conditional re*uire(ent'
2. G he re*uire(ent to co((unicate si)nificant deficiencies in internal control identified
durin) the audit to those char)ed with )overnance,
48
which de!ends on the e,istence of such
identified si)nificant deficiencies? and the re*uire(ent to o"tain sufficient a!!ro!riate audit
4B
ISA B10, CUsin) the Lork of Internal Auditors'D
47
ISA 705, CEodifications to the 7!inion in the Inde!endent Auditor+s Ae!ort,D !ara)ra!h 19'
48
ISA 4B5, C%o((unicatin) =eficiencies in Internal %ontrol to hose %har)ed with <overnance and Eana)e(ent,D !ara)ra!h 5'
ISA 400 104
evidence re)ardin) the !resentation and disclosure of se)(ent infor(ation in accordance
with the a!!lica"le financial re!ortin) fra(ework,
45
which de!ends on that fra(ework
re*uirin) or !er(ittin) such disclosure, re!resent i(!licit conditional re*uire(ents'
In so(e cases, a re*uire(ent (a# "e e,!ressed as "ein) conditional on a!!lica"le law or
re)ulation' For e,a(!le, the auditor (a# "e re*uired to withdraw fro( the audit en)a)e(ent,
#here #ithdra#al is possible under applicable la# or regulation, or the auditor (a# "e re*uired to
do so(ethin), unless prohibited by la# or regulation' =e!endin) on the ;urisdiction, the le)al or
re)ulator# !er(ission or !rohi"ition (a# "e e,!licit or i(!licit'
=e!arture fro( a Ae*uire(ent $Aef. 6ara' 49&
A74' ISA 490 esta"lishes docu(entation re*uire(ents in those e,ce!tional circu(stances where the
auditor de!arts fro( a relevant re*uire(ent'
90
he ISAs do not call for co(!liance with a
re*uire(ent that is not relevant in the circu(stances of the audit'
Failure to Achie!e an ,b9ecti!e $Aef. 6ara' 44&
A75' Lhether an o";ective has "een achieved is a (atter for the auditor+s !rofessional ;ud)(ent' hat
;ud)(ent takes account of the results of audit !rocedures !erfor(ed in co(!l#in) with the
re*uire(ents of the ISAs, and the auditor+s evaluation of whether sufficient a!!ro!riate audit
evidence has "een o"tained and whether (ore needs to "e done in the !articular circu(stances of
the audit to achieve the o";ectives stated in the ISAs' Accordin)l#, circu(stances that (a# )ive
rise to a failure to achieve an o";ective include those that.
1. G 6revent the auditor fro( co(!l#in) with the relevant re*uire(ents of an ISA'
2. G Aesult in its not "ein) !ractica"le or !ossi"le for the auditor to carr# out the additional
audit !rocedures or o"tain further audit evidence as deter(ined necessar# fro( the use of the
o";ectives in accordance with !ara)ra!h 41, for e,a(!le due to a li(itation in the availa"le audit
evidence'
A7B' Audit docu(entation that (eets the re*uire(ents of ISA 490 and the s!ecific docu(entation
re*uire(ents of other relevant ISAs !rovides evidence of the auditor+s "asis for a conclusion
a"out the achieve(ent of the overall o";ectives of the auditor' Lhile it is unnecessar# for the
auditor to docu(ent se!aratel# $as in a checklist, for e,a(!le& that individual o";ectives have "een
achieved,
45
ISA 501, CAudit 0videnceNS!ecific %onsiderations for Selected Ite(s,D !ara)ra!h 19' 90
105 ISA 400
the docu(entation of a failure to achieve an o";ective assists the auditor+s evaluation of whether such a
failure has !revented the auditor fro( achievin) the overall o";ectives of the auditor'
ISA 400 10B
INTERNATIONAL STANDARD ON AUDITING 270 AGREEING THE TER)S
OF AUDIT ENGAGE)ENTS
CONTENTS
107 ISA 410
International Standard on Auditin) $ISA& 410, CA)reein) the er(s of Audit 0n)a)e(entsD should "e read
in con;unction with ISA 400 C7verall 7";ectives of the Inde!endent Auditor and the %onduct of an Audit in
ISA 410 108
1' his International Standard on Auditin) $ISA& deals with the auditor+s res!onsi"ilities in a)reein)
the ter(s of the audit en)a)e(ent with (ana)e(ent and, where a!!ro!riate, those char)ed with
)overnance' his includes esta"lishin) that certain !reconditions for an audit, res!onsi"ilit# for
which rests with (ana)e(ent and, where a!!ro!riate, those char)ed with )overnance, are !resent'
ISA 440
1
deals with those as!ects of en)a)e(ent acce!tance that are within the control of the
auditor' $Aef. 6ara' A1&
Effecti9e D!te
15, 4005'
O$1ecti9e
9' he o";ective of the auditor is to acce!t or continue an audit en)a)e(ent onl# when the "asis u!on
which it is to "e !erfor(ed has "een a)reed, throu)h.
1. $a& 0sta"lishin) whether the !reconditions for an audit are !resent? and
2. $"& %onfir(in) that there is a co((on understandin) "etween the auditor and (ana)e(ent and,
where a!!ro!riate, those char)ed with )overnance of the ter(s of the audit en)a)e(ent'
Defi"itio"
1. 4' For !ur!oses of the ISAs, the followin) ter( has the (eanin) attri"uted "elow.
2. 6reconditions for an audit K he use "# (ana)e(ent of an acce!ta"le financial re!ortin)
fra(ework in the !re!aration of the financial state(ents and the a)ree(ent of (ana)e(ent
and, where a!!ro!riate, those char)ed with )overnance to the !re(ise
4
on which an audit is
conducted'
2. 5' For the !ur!oses of this ISA, references to C(ana)e(entD should "e read hereafter as
C(ana)e(ent and, where a!!ro!riate, those char)ed with )overnance'D
Re2-i'e.e"t *'eco"#itio" fo' !" A-#it
B' In order to esta"lish whether the !reconditions for an audit are !resent, the auditor shall.
$a& =eter(ine whether the financial re!ortin) fra(ework to "e a!!lied in
1
ISA 440, C:ualit# %ontrol for an Audit of Financial State(ents'D 4
Standards on Auditin),D !ara)ra!h 19'
105 ISA 410
the !re!aration of the financial state(ents is acce!ta"le? and $Aef. 6ara' A4-A10&
$"& 7"tain the a)ree(ent of (ana)e(ent that it acknowled)es and understands its res!onsi"ilit#.
$Aef. 6ara' A11-A14, A40&
1$i& For the !re!aration of the financial state(ents in accordance with the a!!lica"le financial
re!ortin) fra(ework, includin) where relevant their fair !resentation? $Aef. 6ara' A15&
2$ii& For such internal control as (ana)e(ent deter(ines is necessar# to ena"le the !re!aration of
financial state(ents that are free fro( (aterial (isstate(ent, whether due to fraud or error? and
$Aef. 6ara' A1B-A15&
$iii& o !rovide the auditor with.
1. a' Access to all infor(ation of which (ana)e(ent is aware that is relevant to the
!re!aration of the financial state(ents such as records, docu(entation and other (atters?
2. "' Additional infor(ation that the auditor (a# re*uest fro( (ana)e(ent for the !ur!ose of
the audit? and
3. c' Unrestricted access to !ersons within the entit# fro( who( the auditor deter(ines it
:i$itation on )cope (rior to Audit /ngage$ent Acceptance
7' If (ana)e(ent or those char)ed with )overnance i(!ose a li(itation on the sco!e of the auditor+s
work in the ter(s of a !ro!osed audit en)a)e(ent such that the auditor "elieves the li(itation will
result in the auditor disclai(in) an o!inion on the financial state(ents, the auditor shall not acce!t
such a li(ited en)a)e(ent as an audit en)a)e(ent, unless re*uired "# law or re)ulation to do so'
,ther Factors Affecting Audit /ngage$ent Acceptance
8' If the !reconditions for an audit are not !resent, the auditor shall discuss the (atter with
(ana)e(ent' Unless re*uired "# law or re)ulation to do so, the auditor shall not acce!t the
!ro!osed audit en)a)e(ent.
1$a&If the auditor has deter(ined that the financial re!ortin) fra(ework to "e a!!lied in the
!re!aration of the financial state(ents is unacce!ta"le, e,ce!t as !rovided in !ara)ra!h 15? or
2$"&If the a)ree(ent referred to in !ara)ra!h B$"& has not "een o"tained'
ISA 410 110
A('ee.e"t o" A-#it E"(!(e.e"t Te'.
1. 5' he auditor shall a)ree the ter(s of the audit en)a)e(ent with (ana)e(ent or those
char)ed with )overnance, as a!!ro!riate' $Aef. 6ara' A41&
1. 10' Su";ect to !ara)ra!h 11, the a)reed ter(s of the audit en)a)e(ent shall "e recorded in an
audit en)a)e(ent letter or other suita"le for( of written a)ree(ent and shall include. $Aef.
6ara' A44-A45&
2. $a& he o";ective and sco!e of the audit of the financial state(ents?
3. $"& he res!onsi"ilities of the auditor?
4. $c& he res!onsi"ilities of (ana)e(ent?
5. $d& Identification of the a!!lica"le financial re!ortin) fra(ework for the !re!aration of the
financial state(ents? and
6. $e& Aeference to the e,!ected for( and content of an# re!orts to "e issued "# the auditor and
a state(ent that there (a# "e circu(stances in which a re!ort (a# differ fro( its e,!ected
for( and content'
2. 11' If law or re)ulation !rescri"es in sufficient detail the ter(s of the audit en)a)e(ent
referred to in !ara)ra!h 10, the auditor need not record the( in a written a)ree(ent, e,ce!t for the
fact that such law or re)ulation a!!lies and that (ana)e(ent acknowled)es and understands its
res!onsi"ilities as set out in !ara)ra!h B$"&' $Aef. 6ara' A44, A4B-A47&
3. 14' If law or re)ulation !rescri"es res!onsi"ilities of (ana)e(ent si(ilar to those descri"ed
in !ara)ra!h B$"&, the auditor (a# deter(ine that the law or re)ulation includes res!onsi"ilities
that, in the auditor+s ;ud)(ent, are e*uivalent in effect to those set out in that !ara)ra!h' For such
res!onsi"ilities that are e*uivalent, the auditor (a# use the wordin) of the law or re)ulation to
descri"e the( in the written a)ree(ent' For those res!onsi"ilities that are not !rescri"ed "# law or
re)ulation such that their effect is e*uivalent, the written a)ree(ent shall use the descri!tion in
!ara)ra!h B$"&' $Aef. 6ara' A4B&
Rec-''i"( A-#it
19' 7n recurrin) audits, the auditor shall assess whether circu(stances re*uire the ter(s of the audit
en)a)e(ent to "e revised and whether there is a need to re(ind the entit# of the e,istin) ter(s of
the audit en)a)e(ent' $Aef. 6ara' A48&
Accept!"ce of ! Ch!"(e i" the Te'. of the A-#it E"(!(e.e"t
1. 14' he auditor shall not a)ree to a chan)e in the ter(s of the audit en)a)e(ent where there
is no reasona"le ;ustification for doin) so' $Aef. 6ara' A45-A91&
2. 15' If, !rior to co(!letin) the audit en)a)e(ent, the auditor is re*uested to chan)e the audit
en)a)e(ent to an en)a)e(ent that conve#s a lower level of
111 ISA 410
assurance, the auditor shall deter(ine whether there is reasona"le ;ustification for doin) so' $Aef.
6ara' A94-A99&
1. 1B' If the ter(s of the audit en)a)e(ent are chan)ed, the auditor and (ana)e(ent shall a)ree
on and record the new ter(s of the en)a)e(ent in an en)a)e(ent letter or other suita"le for( of
written a)ree(ent'
117' If the auditor is una"le to a)ree to a chan)e of the ter(s of the audit en)a)e(ent and is
not !er(itted "# (ana)e(ent to continue the ori)inal audit en)a)e(ent, the auditor shall.
2$a&Lithdraw fro( the audit en)a)e(ent where !ossi"le under a!!lica"le law or re)ulation? and
3$"& =eter(ine whether there is an# o"li)ation, either contractual or otherwise, to re!ort the
circu(stances to other !arties, such as those char)ed with )overnance, owners or re)ulators'
A##itio"!0 Co"i#e'!tio" i" E"(!(e.e"t Accept!"ce
Financial +eporting )tandards )upple$ented by :a# or +egulation
18' If financial re!ortin) standards esta"lished "# an authoriJed or reco)niJed standards settin)
or)aniJation are su!!le(ented "# law or re)ulation, the auditor shall deter(ine whether there are
an# conflicts "etween the financial re!ortin) standards and the additional re*uire(ents' If such
conflicts e,ist, the auditor shall discuss with (ana)e(ent the nature of the additional re*uire(ents
and shall a)ree whether.
1$a&he additional re*uire(ents can "e (et throu)h additional disclosures in the financial state(ents?
or
2$"& he descri!tion of the a!!lica"le financial re!ortin) fra(ework in the financial state(ents can "e
a(ended accordin)l#'
If neither of the a"ove actions is !ossi"le, the auditor shall deter(ine whether it will "e necessar#
to (odif# the auditor+s o!inion in accordance with ISA 705'
9
$Aef. 6ara' A94&
Financial +eporting Fra$e#or. (rescribed by :a# or +egulation0,ther <atters Affecting Acceptance
15' If the auditor has deter(ined that the financial re!ortin) fra(ework !rescri"ed "# law or
re)ulation would "e unacce!ta"le "ut for the fact that it is !rescri"ed "# law or re)ulation, the
auditor shall acce!t the audit en)a)e(ent onl# if the followin) conditions are !resent. $Aef. 6ara'
A95&
$a& Eana)e(ent a)rees to !rovide additional disclosures in the financial state(ents re*uired to
avoid the financial state(ents "ein) (isleadin)? and
ISA 705, CEodifications to the 7!inion in the Inde!endent Auditor+s Ae!ort'D
ISA 410 114
$"& It is reco)niJed in the ter(s of the audit en)a)e(ent that.
1$i& he auditor+s re!ort on the financial state(ents will incor!orate an 0(!hasis of Eatter !ara)ra!h,
drawin) users+ attention to the additional disclosures, in accordance with ISA 70B?
4
and
2$ii& Unless the auditor is re*uired "# law or re)ulation to e,!ress the auditor+s o!inion on the
financial state(ents "# usin) the !hrases C!resent fairl#, in all (aterial res!ects,D or C)ive a true
and fair viewD in accordance with the a!!lica"le financial re!ortin) fra(ework, the auditor+s
o!inion on the financial state(ents will not include such !hrases'
40' If the conditions outlined in !ara)ra!h 15 are not !resent and the auditor is re*uired "# law or
re)ulation to undertake the audit en)a)e(ent, the auditor shall.
1$a&0valuate the effect of the (isleadin) nature of the financial state(ents on the auditor+s re!ort? and
2$"& Include a!!ro!riate reference to this (atter in the ter(s of the audit en)a)e(ent'
Auditor8s +eport (rescribed by :a# or +egulation
41' In so(e cases, law or re)ulation of the relevant ;urisdiction !rescri"es the la#out or wordin) of the
auditor+s re!ort in a for( or in ter(s that are si)nificantl# different fro( the re*uire(ents of ISAs'
In these circu(stances, the auditor shall evaluate.
1$a&Lhether users (i)ht (isunderstand the assurance o"tained fro( the audit of the financial
state(ents and, if so,
2$"& Lhether additional e,!lanation in the auditor+s re!ort can (iti)ate !ossi"le (isunderstandin)'
5
If the auditor concludes that additional e,!lanation in the auditor+s re!ort cannot (iti)ate !ossi"le
(isunderstandin), the auditor shall not acce!t the audit en)a)e(ent, unless re*uired "# law or
re)ulation to do so' An audit conducted in accordance with such law or re)ulation does not co(!l#
with ISAs' Accordin)l#, the auditor shall not include an# reference within the auditor+s re!ort to
the audit havin) "een conducted in accordance with ISAs'
B
$Aef. 6ara' A9B-A97&
OOO
4
ISA 70B, C0(!hasis of Eatter 6ara)ra!hs and 7ther Eatter 6ara)ra!hs in the Inde!endent Auditor+s Ae!ort'D
5
ISA 70B'
B
See also ISA 700, CFor(in) an 7!inion and Ae!ortin) on Financial State(ents,D !ara)ra!h 49'
119 ISA 410
App0ic!tio" !"# Othe' E5p0!"!to'/ )!te'i!0
Scope of thi ISA $Aef. 6ara' 1&
A1' Assurance en)a)e(ents, which include audit en)a)e(ents, (a# onl# "e acce!ted when the
!ractitioner considers that relevant ethical re*uire(ents such as inde!endence and !rofessional
co(!etence will "e satisfied, and when the en)a)e(ent e,hi"its certain characteristics'
7
he
auditor+s res!onsi"ilities in res!ect of ethical re*uire(ents in the conte,t of the acce!tance of an
audit en)a)e(ent and in so far as the# are within the control of the auditor are dealt with in ISA
440'
8
his ISA deals with those (atters $or !reconditions& that are within the control of the entit#
and u!on which it is necessar# for the auditor and the entit#+s (ana)e(ent to a)ree'
*'eco"#itio" fo' !" A-#it
1he Financial +eporting Fra$e#or. $Aef. 6ara' B$a&&
A4' A condition for acce!tance of an assurance en)a)e(ent is that the criteria referred to in the
definition of an assurance en)a)e(ent are suita"le and availa"le to intended users'
5
%riteria are
the "ench(arks used to evaluate or (easure the su";ect (atter includin), where relevant,
"ench(arks for !resentation and disclosure' Suita"le criteria ena"le reasona"l# consistent
evaluation or (easure(ent of a su";ect (atter within the conte,t of !rofessional ;ud)(ent' For
!ur!oses of the ISAs, the a!!lica"le financial re!ortin) fra(ework !rovides the criteria the auditor
uses to audit the financial state(ents, includin) where relevant their fair !resentation'
A9' Lithout an acce!ta"le financial re!ortin) fra(ework, (ana)e(ent does not have an a!!ro!riate
"asis for the !re!aration of the financial state(ents and the auditor does not have suita"le criteria
for auditin) the financial state(ents' In (an# cases the auditor (a# !resu(e that the a!!lica"le
financial re!ortin) fra(ework is acce!ta"le, as descri"ed in !ara)ra!hs A8-A5'
=eter(inin) the Acce!ta"ilit# of the Financial Ae!ortin) Fra(ework
A4' Factors that are relevant to the auditor+s deter(ination of the acce!ta"ilit# of the financial
re!ortin) fra(ework to "e a!!lied in the !re!aration of the financial state(ents include.
G he nature of the entit# $for e,a(!le, whether it is a "usiness enter!rise, a !u"lic sector
entit# or a not for !rofit or)aniJation&?
7
CInternational Fra(ework for Assurance 0n)a)e(ents,D !ara)ra!h 17' 8
5
CInternational Fra(ework for Assurance 0n)a)e(ents,D !ara)ra!h 17$"&$ii&'
ISA 410 114
% G he !ur!ose of the financial state(ents $for e,a(!le, whether the# are !re!ared to (eet
the co((on financial infor(ation needs of a wide ran)e of users or the financial infor(ation
needs of s!ecific users&?
% G he nature of the financial state(ents $for e,a(!le, whether the financial state(ents are
a co(!lete set of financial state(ents or a sin)le financial state(ent&? and
% G Lhether law or re)ulation !rescri"es the a!!lica"le financial re!ortin) fra(ework'
A5' Ean# users of financial state(ents are not in a !osition to de(and financial state(ents tailored to
(eet their s!ecific infor(ation needs' Lhile all the infor(ation needs of s!ecific users cannot "e
(et, there are financial infor(ation needs that are co((on to a wide ran)e of users' Financial
state(ents !re!ared in accordance with a financial re!ortin) fra(ework desi)ned to (eet the
co((on financial infor(ation needs of a wide ran)e of users are referred to as )eneral !ur!ose
financial state(ents'
AB' In so(e cases, the financial state(ents will "e !re!ared in accordance with a financial re!ortin)
fra(ework desi)ned to (eet the financial infor(ation needs of s!ecific users' Such financial
state(ents are referred to as s!ecial !ur!ose financial state(ents' he financial infor(ation needs
of the intended users will deter(ine the a!!lica"le financial re!ortin) fra(ework in these
circu(stances' ISA 800 discusses the acce!ta"ilit# of financial re!ortin) fra(eworks desi)ned to
(eet the financial infor(ation needs of s!ecific users'
10
A7' =eficiencies in the a!!lica"le financial re!ortin) fra(ework that indicate that the fra(ework is
not acce!ta"le (a# "e encountered after the audit en)a)e(ent has "een acce!ted' Lhen use of
that fra(ework is !rescri"ed "# law or re)ulation, the re*uire(ents of !ara)ra!hs 15-40 a!!l#'
Lhen use of that fra(ework is not !rescri"ed "# law or re)ulation, (ana)e(ent (a# decide to
ado!t another fra(ework that is acce!ta"le' Lhen (ana)e(ent does so, as re*uired "# !ara)ra!h
1B, new ter(s of the audit en)a)e(ent are a)reed to reflect the chan)e in the fra(ework as the
!reviousl# a)reed ter(s will no lon)er "e accurate'
<eneral !ur!ose fra(eworks
A8' At !resent, there is no o";ective and authoritative "asis that has "een )enerall# reco)niJed )lo"all#
for ;ud)in) the acce!ta"ilit# of )eneral !ur!ose fra(eworks' In the a"sence of such a "asis,
financial re!ortin) standards esta"lished "# or)aniJations that are authoriJed or reco)niJed to
!ro(ul)ate standards to "e used "# certain t#!es of entities are !resu(ed to "e acce!ta"le for
)eneral !ur!ose financial state(ents !re!ared "# such entities, !rovided the or)aniJations follow
an esta"lished and trans!arent !rocess involvin)
ISA 800, CS!ecial %onsiderationsNAudits of Financial State(ents 6re!ared in Accordance with S!ecial 6ur!ose Fra(eworks,D
!ara)ra!h 8'
115 ISA 410
deli"eration and consideration of the views of a wide ran)e of stakeholders' 0,a(!les of such
financial re!ortin) standards include.
% G International Financial Ae!ortin) Standards $IFASs& !ro(ul)ated "# the International
Accountin) Standards 1oard?
% G International 6u"lic Sector Accountin) Standards $I6SASs& !ro(ul)ated "# the
International 6u"lic Sector Accountin) Standards 1oard? and
% G Accountin) !rinci!les !ro(ul)ated "# an authoriJed or reco)niJed standards settin)
or)aniJation in a !articular ;urisdiction, !rovided the or)aniJation follows an esta"lished and
trans!arent !rocess involvin) deli"eration and consideration of the views of a wide ran)e of
stakeholders'
hese financial re!ortin) standards are often identified as the a!!lica"le financial re!ortin)
fra(ework in law or re)ulation )overnin) the !re!aration of )eneral !ur!ose financial state(ents'
Financial re!ortin) fra(eworks !rescri"ed "# law or re)ulation
A5' In accordance with !ara)ra!h B$a&, the auditor is re*uired to deter(ine whether the financial
re!ortin) fra(ework, to "e a!!lied in the !re!aration of the financial state(ents, is acce!ta"le' In
so(e ;urisdictions, law or re)ulation (a# !rescri"e the financial re!ortin) fra(ework to "e used
in the !re!aration of )eneral !ur!ose financial state(ents for certain t#!es of entities' In the
a"sence of indications to the contrar#, such a financial re!ortin) fra(ework is !resu(ed to "e
acce!ta"le for )eneral !ur!ose financial state(ents !re!ared "# such entities' In the event that the
fra(ework is not considered to "e acce!ta"le, !ara)ra!hs 15-40 a!!l#'
>urisdictions that do not have standards settin) or)aniJations or !rescri"ed financial re!ortin)
fra(eworks
A10' Lhen an entit# is re)istered or o!eratin) in a ;urisdiction that does not have an authoriJed or
reco)niJed standards settin) or)aniJation, or where use of the financial re!ortin) fra(ework is not
!rescri"ed "# law or re)ulation, (ana)e(ent identifies a financial re!ortin) fra(ework to "e
a!!lied in the !re!aration of the financial state(ents' A!!endi, 4 contains )uidance on
deter(inin) the acce!ta"ilit# of financial re!ortin) fra(eworks in such circu(stances'
Agree$ent of the +esponsibilities of <anage$ent $Aef. 6ara' B$"&&
A11' An audit in accordance with ISAs is conducted on the !re(ise that (ana)e(ent has
acknowled)ed and understands that it has the res!onsi"ilities set out in !ara)ra!h B$"&'
11
In certain
;urisdictions, such res!onsi"ilities (a# "e
ISA 400, !ara)ra!h A4'
ISA 410 11B
s!ecified in law or re)ulation' In others, there (a# "e little or no le)al or re)ulator# definition of
such res!onsi"ilities' ISAs do not override law or re)ulation in such (atters' @owever, the conce!t
of an inde!endent audit re*uires that the auditor+s role does not involve takin) res!onsi"ilit# for
the !re!aration of the financial state(ents or for the entit#+s related internal control, and that the
auditor has a reasona"le e,!ectation of o"tainin) the infor(ation necessar# for the audit in so far
as (ana)e(ent is a"le to !rovide or !rocure it' Accordin)l#, the !re(ise is funda(ental to the
conduct of an inde!endent audit' o avoid (isunderstandin), a)ree(ent is reached with
(ana)e(ent that it acknowled)es and understands that it has such res!onsi"ilities as !art of
a)reein) and recordin) the ter(s of the audit en)a)e(ent in !ara)ra!hs 5-14'
A14' he wa# in which the res!onsi"ilities for financial re!ortin) are divided "etween (ana)e(ent and
those char)ed with )overnance will var# accordin) to the resources and structure of the entit# and
an# relevant law or re)ulation, and the res!ective roles of (ana)e(ent and those char)ed with
)overnance within the entit#' In (ost cases, (ana)e(ent is res!onsi"le for e,ecution while those
char)ed with )overnance have oversi)ht of (ana)e(ent' In so(e cases, those char)ed with
)overnance will have, or will assu(e, res!onsi"ilit# for a!!rovin) the financial state(ents or
(onitorin) the entit#+s internal control related to financial re!ortin)' In lar)er or !u"lic entities, a
su")rou! of those char)ed with )overnance, such as an audit co((ittee, (a# "e char)ed with
certain oversi)ht res!onsi"ilities'
A19' ISA 580 re*uires the auditor to re*uest (ana)e(ent to !rovide written re!resentations that it has
fulfilled certain of its res!onsi"ilities'
14
It (a# therefore "e a!!ro!riate to (ake (ana)e(ent
aware that recei!t of such written re!resentations will "e e,!ected, to)ether with written
re!resentations re*uired "# other ISAs and, where necessar#, written re!resentations to su!!ort
other audit evidence relevant to the financial state(ents or one or (ore s!ecific assertions in the
A14' Lhere (ana)e(ent will not acknowled)e its res!onsi"ilities, or a)ree to !rovide the written
re!resentations, the auditor will "e una"le to o"tain sufficient a!!ro!riate audit evidence'
19
In such
circu(stances, it would not "e a!!ro!riate for the auditor to acce!t the audit en)a)e(ent, unless
law or re)ulation re*uires the auditor to do so' In cases where the auditor is re*uired to acce!t the
audit en)a)e(ent, the auditor (a# need to e,!lain to (ana)e(ent the i(!ortance of these
(atters, and the i(!lications for the auditor+s re!ort'
14
ISA 580, CLritten Ae!resentations,D !ara)ra!hs 10-11'
19
ISA 580, !ara)ra!h A4B'
117 ISA 410
6re!aration of the Financial State(ents $Aef. 6ara' B$"&$i&&
A15' Eost financial re!ortin) fra(eworks include re*uire(ents relatin) to the !resentation of the
financial state(ents? for such fra(eworks, preparation of the financial state(ents in accordance
with the financial re!ortin) fra(ework includes presentation' In the case of a fair !resentation
fra(ework the i(!ortance of the re!ortin) o";ective of fair !resentation is such that the !re(ise
a)reed with (ana)e(ent includes s!ecific reference to fair !resentation, or to the res!onsi"ilit# to
ensure that the financial state(ents will C)ive a true and fair viewD in accordance with the
financial re!ortin) fra(ework'
Internal %ontrol $Aef. 6ara' B$"&$ii&&
A1B' Eana)e(ent (aintains such internal control as it deter(ines is necessar# to ena"le the !re!aration
of financial state(ents that are free fro( (aterial (isstate(ent, whether due to fraud or error'
Internal control, no (atter how effective, can !rovide an entit# with onl# reasona"le assurance
a"out achievin) the entit#+s financial re!ortin) o";ectives due to the inherent li(itations of
internal control'
14
A17' An inde!endent audit conducted in accordance with the ISAs does not act as a su"stitute for the
(aintenance of internal control necessar# for the !re!aration of financial state(ents "#
(ana)e(ent' Accordin)l#, the auditor is re*uired to o"tain the a)ree(ent of (ana)e(ent that it
acknowled)es and understands its res!onsi"ilit# for internal control' @owever, the a)ree(ent
re*uired "# !ara)ra!h B$"&$ii& does not i(!l# that the auditor will find that internal control
(aintained "# (ana)e(ent has achieved its !ur!ose or will "e free of deficiencies'
A18' It is for (ana)e(ent to deter(ine what internal control is necessar# to ena"le the !re!aration of
the financial state(ents' he ter( Cinternal controlD enco(!asses a wide ran)e of activities within
co(!onents that (a# "e descri"ed as the control environ(ent? the entit#+s risk assess(ent
!rocess? the infor(ation s#ste(, includin) the related "usiness !rocesses relevant to financial
re!ortin), and co((unication? control activities? and (onitorin) of controls' his division,
however, does not necessaril# reflect how a !articular entit# (a# desi)n, i(!le(ent and (aintain
its internal control, or how it (a# classif# an# !articular co(!onent'
15
An entit#+s internal control
$in !articular, its accountin) "ooks and records, or accountin) s#ste(s& will reflect the needs of
(ana)e(ent, the co(!le,it# of the "usiness, the nature of the risks to which the entit# is su";ect,
and relevant laws or re)ulation'
14
!ara)ra!h A4B'
15
ISA 915, !ara)ra!h A51 and A!!endi, 1'
ISA 410 118
A15' In so(e ;urisdictions, law or re)ulation (a# refer to the res!onsi"ilit# of (ana)e(ent for the
ade*uac# of accountin) "ooks and records, or accountin) s#ste(s' In so(e cases, )eneral !ractice
(a# assu(e a distinction "etween accountin) "ooks and records or accountin) s#ste(s on the one
hand, and internal control or controls on the other' As accountin) "ooks and records, or accountin)
s#ste(s, are an inte)ral !art of internal control as referred to in !ara)ra!h A18, no s!ecific
reference is (ade to the( in !ara)ra!h B$"&$ii& for the descri!tion of the res!onsi"ilit# of
(ana)e(ent' o avoid (isunderstandin), it (a# "e a!!ro!riate for the auditor to e,!lain to
(ana)e(ent the sco!e of this res!onsi"ilit#'
%onsiderations Aelevant to S(aller 0ntities $Aef. 6ara' B$"&&
A40' 7ne of the !ur!oses of a)reein) the ter(s of the audit en)a)e(ent is to avoid (isunderstandin)
a"out the res!ective res!onsi"ilities of (ana)e(ent and the auditor' For e,a(!le, when a third
!art# has assisted with the !re!aration of the financial state(ents, it (a# "e useful to re(ind
(ana)e(ent that the !re!aration of the financial state(ents in accordance with the a!!lica"le
financial re!ortin) fra(ework re(ains its res!onsi"ilit#'
A('ee.e"t o" A-#it E"(!(e.e"t Te'.
Agreeing the 1er$s of the Audit /ngage$ent $Aef. 6ara' 5&
A41' he roles of (ana)e(ent and those char)ed with )overnance in a)reein) the ter(s of the audit
en)a)e(ent for the entit# de!end on the )overnance structure of the entit# and relevant law or
re)ulation'
Audit /ngage$ent :etter or ,ther For$ of Dritten Agree$ent
1B
$Aef. 6ara' 10-11&
A44' It is in the interests of "oth the entit# and the auditor that the auditor sends an audit en)a)e(ent
letter "efore the co((ence(ent of the audit to hel! avoid (isunderstandin)s with res!ect to the
audit' In so(e countries, however, the o";ective and sco!e of an audit and the res!onsi"ilities of
(ana)e(ent and of the auditor (a# "e sufficientl# esta"lished "# law, that is, the# !rescri"e the
(atters descri"ed in !ara)ra!h 10' Althou)h in these circu(stances !ara)ra!h 11 !er(its the
auditor to include in the en)a)e(ent letter onl# reference to the fact that relevant law or re)ulation
a!!lies and that (ana)e(ent acknowled)es and understands its res!onsi"ilities as set out in
!ara)ra!h B$"&, the auditor (a# nevertheless consider it a!!ro!riate to include the (atters
descri"ed in !ara)ra!h 10 in an en)a)e(ent letter for the infor(ation of (ana)e(ent'
In the !ara)ra!hs that follow, an# reference to an audit en)a)e(ent letter is to "e taken as a reference to an audit en)a)e(ent
letter or other suita"le for( of written a)ree(ent'
115 ISA 410
For( and %ontent of the Audit 0n)a)e(ent Metter
A49' he for( and content of the audit en)a)e(ent letter (a# var# for each entit#' Infor(ation
included in the audit en)a)e(ent letter on the auditor+s res!onsi"ilities (a# "e "ased on ISA
400'
17
6ara)ra!hs B$"& and 14 of this ISA deal with the descri!tion of the res!onsi"ilities of
(ana)e(ent' In addition to includin) the (atters re*uired "# !ara)ra!h 10, an audit en)a)e(ent
letter (a# (ake reference to, for e,a(!le.
% G 0la"oration of the sco!e of the audit, includin) reference to a!!lica"le le)islation,
re)ulations, ISAs, and ethical and other !ronounce(ents of !rofessional "odies to which the
auditor adheres'
% G he for( of an# other co((unication of results of the audit en)a)e(ent'
% G he fact that "ecause of the inherent li(itations of an audit, to)ether with the inherent
li(itations of internal control, there is an unavoida"le risk that so(e (aterial (isstate(ents (a#
not "e detected, even thou)h the audit is !ro!erl# !lanned and !erfor(ed in accordance with ISAs'
% G Arran)e(ents re)ardin) the !lannin) and !erfor(ance of the audit, includin) the
co(!osition of the audit tea('
% G he e,!ectation that (ana)e(ent will !rovide written re!resentations $see also !ara)ra!h
A19&'
% G he a)ree(ent of (ana)e(ent to (ake availa"le to the auditor draft financial state(ents
and an# acco(!an#in) other infor(ation in ti(e to allow the auditor to co(!lete the audit in
accordance with the !ro!osed ti(eta"le'
% G he a)ree(ent of (ana)e(ent to infor( the auditor of facts that (a# affect the financial
state(ents, of which (ana)e(ent (a# "eco(e aware durin) the !eriod fro( the date of the
auditor+s re!ort to the date the financial state(ents are issued'
% G he "asis on which fees are co(!uted and an# "illin) arran)e(ents'
% G A re*uest for (ana)e(ent to acknowled)e recei!t of the audit en)a)e(ent letter and to
a)ree to the ter(s of the en)a)e(ent outlined therein'
A44' Lhen relevant, the followin) !oints could also "e (ade in the audit
en)a)e(ent letter.
G Arran)e(ents concernin) the involve(ent of other auditors and e,!erts in so(e as!ects of
the audit'
ISA 410 140
% G Arran)e(ents concernin) the involve(ent of internal auditors and other staff of the
entit#'
% G Arran)e(ents to "e (ade with the !redecessor auditor, if an#, in the case of an initial
audit'
% G An# restriction of the auditor+s lia"ilit# when such !ossi"ilit# e,ists'
% G A reference to an# further a)ree(ents "etween the auditor and the entit#'
% G An# o"li)ations to !rovide audit workin) !a!ers to other !arties' An e,a(!le of an audit
en)a)e(ent letter is set out in A!!endi, 1'
Audits of %o(!onents
A45' Lhen the auditor of a !arent entit# is also the auditor of a co(!onent, the factors that (a#
influence the decision whether to send a se!arate audit en)a)e(ent letter to the co(!onent
include the followin).
% G Lho a!!oints the co(!onent auditor?
% G Lhether a se!arate auditor+s re!ort is to "e issued on the co(!onent?
% G Me)al re*uire(ents in relation to audit a!!oint(ents?
% G =e)ree of ownershi! "# !arent? and
% G =e)ree of inde!endence of the co(!onent (ana)e(ent fro( the !arent entit#'
Aes!onsi"ilities of Eana)e(ent 6rescri"ed "# Maw or Ae)ulation $Aef. 6ara' 11-14&
A4B' If, in the circu(stances descri"ed in !ara)ra!hs A44 and A47, the auditor concludes that it is not
necessar# to record certain ter(s of the audit en)a)e(ent in an audit en)a)e(ent letter, the
auditor is still re*uired "# !ara)ra!h 11 to seek the written a)ree(ent fro( (ana)e(ent that it
acknowled)es and understands that it has the res!onsi"ilities set out in !ara)ra!h B$"&' @owever,
in accordance with !ara)ra!h 14, such written a)ree(ent (a# use the wordin) of the law or
re)ulation if such law or re)ulation esta"lishes res!onsi"ilities for (ana)e(ent that are e*uivalent
in effect to those descri"ed in !ara)ra!h B$"&' he accountin) !rofession, audit standards setter, or
audit re)ulator in a ;urisdiction (a# have !rovided )uidance as to whether the descri!tion in law
or re)ulation is e*uivalent'
%onsiderations s!ecific to !u"lic sector entities
A47' Maw or re)ulation )overnin) the o!erations of !u"lic sector audits )enerall# (andate the
a!!oint(ent of a !u"lic sector auditor and co((onl# set out the !u"lic sector auditor+s
res!onsi"ilities and !owers, includin) the !ower to access an entit#+s records and other
infor(ation' Lhen law or re)ulation
141 ISA 410
!rescri"es in sufficient detail the ter(s of the audit en)a)e(ent, the !u"lic sector auditor (a#
nonetheless consider that there are "enefits in issuin) a fuller audit en)a)e(ent letter than
!er(itted "# !ara)ra!h 11'
Rec-''i"( A-#it $Aef. 6ara' 19&
A48' he auditor (a# decide not to send a new audit en)a)e(ent letter or other written a)ree(ent each
!eriod' @owever, the followin) factors (a# (ake it a!!ro!riate to revise the ter(s of the audit
en)a)e(ent or to re(ind the entit# of e,istin) ter(s.
% G An# indication that the entit# (isunderstands the o";ective and sco!e of the audit'
% G An# revised or s!ecial ter(s of the audit en)a)e(ent'
% G A recent chan)e of senior (ana)e(ent'
% G A si)nificant chan)e in ownershi!'
% G A si)nificant chan)e in nature or siJe of the entit#+s "usiness'
% G A chan)e in le)al or re)ulator# re*uire(ents'
% G A chan)e in the financial re!ortin) fra(ework ado!ted in the !re!aration of the financial
state(ents'
% G A chan)e in other re!ortin) re*uire(ents'
Accept!"ce of ! Ch!"(e i" the Te'. of the A-#it E"(!(e.e"t
+e>uest to Change the 1er$s of the Audit /ngage$ent $Aef. 6ara' 14&
A45' A re*uest fro( the entit# for the auditor to chan)e the ter(s of the audit en)a)e(ent (a# result
fro( a chan)e in circu(stances affectin) the need for the service, a (isunderstandin) as to the
nature of an audit as ori)inall# re*uested or a restriction on the sco!e of the audit en)a)e(ent,
whether i(!osed "# (ana)e(ent or caused "# other circu(stances' he auditor, as re*uired "#
!ara)ra!h 14, considers the ;ustification )iven for the re*uest, !articularl# the i(!lications of a
restriction on the sco!e of the audit en)a)e(ent'
A90' A chan)e in circu(stances that affects the entit#+s re*uire(ents or a (isunderstandin) concernin)
the nature of the service ori)inall# re*uested (a# "e considered a reasona"le "asis for re*uestin) a
chan)e in the audit en)a)e(ent'
A91' In contrast, a chan)e (a# not "e considered reasona"le if it a!!ears that the chan)e relates to
infor(ation that is incorrect, inco(!lete or otherwise unsatisfactor#' An e,a(!le (i)ht "e where
the auditor is una"le to o"tain sufficient a!!ro!riate audit evidence re)ardin) receiva"les and the
entit# asks for the audit en)a)e(ent to "e chan)ed to a review en)a)e(ent to avoid a *ualified
o!inion or a disclai(er of o!inion'
ISA 410 144
Ae*uest to %han)e to a Aeview or a Aelated Service $Aef. 6ara' 15&
A94' 1efore a)reein) to chan)e an audit en)a)e(ent to a review or a related service, an auditor who
was en)a)ed to !erfor( an audit in accordance with ISAs (a# need to assess, in addition to the
(atters referred to in !ara)ra!hs A45-A91 a"ove, an# le)al or contractual i(!lications of the
chan)e'
A99' If the auditor concludes that there is reasona"le ;ustification to chan)e the audit en)a)e(ent to a
review or a related service, the audit work !erfor(ed to the date of chan)e (a# "e relevant to the
chan)ed en)a)e(ent? however, the work re*uired to "e !erfor(ed and the re!ort to "e issued
would "e those a!!ro!riate to the revised en)a)e(ent' In order to avoid confusin) the reader, the
re!ort on the related service would not include reference to.
1$a&he ori)inal audit en)a)e(ent? or
2$"& An# !rocedures that (a# have "een !erfor(ed in the ori)inal audit en)a)e(ent, e,ce!t where the
audit en)a)e(ent is chan)ed to an en)a)e(ent to undertake a)reed-u!on !rocedures and thus
reference to the !rocedures !erfor(ed is a nor(al !art of the re!ort'
A##itio"!0 Co"i#e'!tio" i" E"(!(e.e"t Accept!"ce
Financial +eporting )tandards )upple$ented by :a# or +egulation $Aef. 6ara' 18&
A94' In so(e ;urisdictions, law or re)ulation (a# su!!le(ent the financial re!ortin) standards
esta"lished "# an authoriJed or reco)niJed standards settin) or)aniJation with additional
re*uire(ents relatin) to the !re!aration of financial state(ents' In those ;urisdictions, the
a!!lica"le financial re!ortin) fra(ework for the !ur!oses of a!!l#in) the ISAs enco(!asses "oth
the identified financial re!ortin) fra(ework and such additional re*uire(ents !rovided the# do
not conflict with the identified financial re!ortin) fra(ework' his (a#, for e,a(!le, "e the case
when law or re)ulation !rescri"es disclosures in addition to those re*uired "# the financial
re!ortin) standards or when the# narrow the ran)e of acce!ta"le choices that can "e (ade within
the financial re!ortin) standards'
18
Financial +eporting Fra$e#or. (rescribed by :a# or +egulation0,ther <atters Affecting Acceptance
$Aef. 6ara' 15&
A95' Maw or re)ulation (a# !rescri"e that the wordin) of the auditor+s o!inion use the !hrases C!resent
fairl#, in all (aterial res!ectsD or C)ive a true and fair viewD in a case where the auditor concludes
that the a!!lica"le financial re!ortin) fra(ework !rescri"ed "# law or re)ulation would otherwise
have "een unacce!ta"le' In this case, the ter(s of the !rescri"ed wordin) of the
ISA 700, !ara)ra!h 15, includes a re*uire(ent re)ardin) the evaluation of whether the financial state(ents ade*uatel# refer to or
descri"e the a!!lica"le financial re!ortin) fra(ework'
149 ISA 410
auditor+s re!ort are si)nificantl# different fro( the re*uire(ents of ISAs $see !ara)ra!h 41&'
Auditor8s +eport (rescribed by :a# or +egulation $Aef. 6ara' 41&
A9B' ISAs re*uire that the auditor shall not re!resent co(!liance with ISAs unless the auditor has
co(!lied with all of the ISAs relevant to the audit'
15
Lhen law or re)ulation !rescri"es the la#out
or wordin) of the auditor+s re!ort in a for( or in ter(s that are si)nificantl# different fro( the
re*uire(ents of ISAs and the auditor concludes that additional e,!lanation in the auditor+s re!ort
cannot (iti)ate !ossi"le (isunderstandin), the auditor (a# consider includin) a state(ent in the
auditor+s re!ort that the audit is not conducted in accordance with ISAs' he auditor is, however,
encoura)ed to a!!l# ISAs, includin) the ISAs that address the auditor+s re!ort, to the e,tent
!ractica"le, notwithstandin) that the auditor is not !er(itted to refer to the audit "ein) conducted
in accordance with ISAs'
%onsiderations S!ecific to 6u"lic Sector 0ntities
A97' In the !u"lic sector, s!ecific re*uire(ents (a# e,ist within the le)islation )overnin) the audit
(andate? for e,a(!le, the auditor (a# "e re*uired to re!ort directl# to a (inister, the le)islature
or the !u"lic if the entit# atte(!ts to li(it the sco!e of the audit'
ISA 410 144
Appe"#i5 7
$Aef. 6aras' A49-44&
E5!.p0e of !" A-#it E"(!(e.e"t Lette'
he followin) is an e,a(!le of an audit en)a)e(ent letter for an audit of )eneral !ur!ose financial
state(ents !re!ared in accordance with International Financial Ae!ortin) Standards' his letter is not
authoritative "ut is intended onl# to "e a )uide that (a# "e used in con;unction with the considerations
outlined in this ISA' It will need to "e varied accordin) to individual re*uire(ents and circu(stances' It is
drafted to refer to the audit of financial state(ents for a sin)le re!ortin) !eriod and would re*uire
ada!tation if intended or e,!ected to a!!l# to recurrin) audits $see !ara)ra!h 19 of this ISA&' It (a# "e
a!!ro!riate to seek le)al advice that an# !ro!osed letter is suita"le'
OOO
o the a!!ro!riate re!resentative of (ana)e(ent or those char)ed with )overnance of A1% %o(!an#.
40
U1he ob9ecti!e and scope of the auditV
You
41
have re*uested that we audit the financial state(ents of A1% %o(!an#, which co(!rise the "alance
sheet as at =ece("er 91, 40I1, and the inco(e state(ent, state(ent of chan)es in e*uit# and cash flow
state(ent for the #ear then ended, and a su((ar# of si)nificant accountin) !olicies and other e,!lanator#
infor(ation' Le are !leased to confir( our acce!tance and our understandin) of this audit en)a)e(ent "#
(eans of this letter' 7ur audit will "e conducted with the o";ective of our e,!ressin) an o!inion on the
U1he responsibilities of the auditorV
Le will conduct our audit in accordance with International Standards on Auditin) $ISAs&' hose standards
re*uire that we co(!l# with ethical re*uire(ents and !lan and !erfor( the audit to o"tain reasona"le
assurance a"out whether the financial state(ents are free fro( (aterial (isstate(ent' An audit involves
!erfor(in) !rocedures to o"tain audit evidence a"out the a(ounts and disclosures in the financial
state(ents' he !rocedures selected de!end on the auditor+s ;ud)(ent, includin) the assess(ent of the risks
of (aterial (isstate(ent of the financial state(ents, whether due to fraud or error' An audit also includes
evaluatin) the a!!ro!riateness of accountin) !olicies used and
40
he addressees and references in the letter would "e those that are a!!ro!riate in the circu(stances of the
en)a)e(ent, includin) the relevant ;urisdiction' It is i(!ortant to refer to the a!!ro!riate !ersons K see
!ara)ra!h A41' 41
hrou)hout this letter, references to C#ou,D Cwe,D Cus,D C(ana)e(ent,D Cthose char)ed with )overnanceD and CauditorD would "e
used or a(ended as a!!ro!riate in the circu(stances'
145 ISA 410 A660N=II
the reasona"leness of accountin) esti(ates (ade "# (ana)e(ent, as well as evaluatin) the overall
!resentation of the financial state(ents'
1ecause of the inherent li(itations of an audit, to)ether with the inherent li(itations of internal control,
there is an unavoida"le risk that so(e (aterial (isstate(ents (a# not "e detected, even thou)h the audit is
!ro!erl# !lanned and !erfor(ed in accordance with ISAs'
In (akin) our risk assess(ents, we consider internal control relevant to the entit#+s !re!aration of the
financial state(ents in order to desi)n audit !rocedures that are a!!ro!riate in the circu(stances, "ut not
for the !ur!ose of e,!ressin) an o!inion on the effectiveness of the entit#+s internal control' @owever, we
will co((unicate to #ou in writin) concernin) an# si)nificant deficiencies in internal control relevant to
the audit of the financial state(ents that we have identified durin) the audit'
U1he responsibilities of $anage$ent and identification of the applicable financial reporting fra$e#or. (for
purposes of this e4a$ple it is assu$ed that the auditor has not deter$ined that the la# or regulation
prescribes those responsibilities in appropriate ter$sE the descriptions in paragraph F(b) of this I)A are
therefore used)V
7ur audit will "e conducted on the "asis that U(ana)e(ent and, where a!!ro!riate, those char)ed with
)overnanceV
44
acknowled)e and understand that the# have res!onsi"ilit#.
As !art of our audit !rocess, we will re*uest fro( U(ana)e(ent and, where a!!ro!riate, those char)ed with
)overnanceV, written confir(ation concernin) re!resentations (ade to us in connection with the audit'
44
Use ter(inolo)# as a!!ro!riate in the circu(stances' 49
7r, if a!!ro!riate, CFor the !re!aration of financial state(ents that )ive a true and fair view in accordance with International
Financial Ae!ortin) Standards'D
ISA 410 A660N=II 14B
Le look forward to full coo!eration fro( #our staff durin) our audit'
U,ther rele!ant infor$ationV
UInsert other infor$ation& such as fee arrange$ents& billings and other specific ter$s& as
appropriate'V
U+eportingV
UInsert appropriate reference to the e4pected for$ and content of the auditor8s reportV
he for( and content of our re!ort (a# need to "e a(ended in the li)ht of our audit findin)s'
6lease si)n and return the attached co!# of this letter to indicate #our acknowled)e(ent of, and a)ree(ent
with, the arran)e(ents for our audit of the financial state(ents includin) our res!ective res!onsi"ilities'
IYW X %o'
Acknowled)ed and a)reed on "ehalf of A1% %o(!an# "#
$si)ned& '''''''''''''''''''''' Na(e and itle =ate
147 ISA 410 A660N=II
Appe"#i5 2
$Aef. 6ara' A10&
Dete'.i"i"( the Accept!$i0it/ of Ge"e'!0 *-'poe F'!.e&o'%
?-'i#ictio" th!t Do Not H!9e A-tho'i;e# o' Reco("i;e# St!"#!'# Setti"( O'(!"i;!tio" o'
Fi"!"ci!0 Repo'ti"( F'!.e&o'% *'ec'i$e# $/ L!& o' Re(-0!tio"
1. 1' As e,!lained in !ara)ra!h A10 of this ISA, when an entit# is re)istered or o!eratin) in a
;urisdiction that does not have an authoriJed or reco)niJed standards settin) or)aniJation, or
where use of the financial re!ortin) fra(ework is not !rescri"ed "# law or re)ulation,
(ana)e(ent identifies an a!!lica"le financial re!ortin) fra(ework' 6ractice in such ;urisdictions
is often to use the financial re!ortin) standards esta"lished "# one of the or)aniJations descri"ed
in !ara)ra!h A8 of this ISA'
2. 4' Alternativel#, there (a# "e esta"lished accountin) conventions in a !articular ;urisdiction
that are )enerall# reco)niJed as the financial re!ortin) fra(ework for )eneral !ur!ose financial
state(ents !re!ared "# certain s!ecified entities o!eratin) in that ;urisdiction' Lhen such a
financial re!ortin) fra(ework is ado!ted, the auditor is re*uired "# !ara)ra!h B$a& of this ISA to
deter(ine whether the accountin) conventions collectivel# can "e considered to constitute an
acce!ta"le financial re!ortin) fra(ework for )eneral !ur!ose financial state(ents' Lhen the
accountin) conventions are widel# used in a !articular ;urisdiction, the accountin) !rofession in
that ;urisdiction (a# have considered the acce!ta"ilit# of the financial re!ortin) fra(ework on
"ehalf of the auditors' Alternativel#, the auditor (a# (ake this deter(ination "# considerin)
whether the accountin) conventions e,hi"it attri"utes nor(all# e,hi"ited "# acce!ta"le financial
re!ortin) fra(eworks $see !ara)ra!h 9 "elow&, or "# co(!arin) the accountin) conventions to the
re*uire(ents of an e,istin) financial re!ortin) fra(ework considered to "e acce!ta"le $see
!ara)ra!h 4 "elow&'
3. 9' Acce!ta"le financial re!ortin) fra(eworks nor(all# e,hi"it the followin) attri"utes that
result in infor(ation !rovided in financial state(ents that is useful to the intended users.
$a& Aelevance, in that the infor(ation !rovided in the financial state(ents is relevant to the
nature of the entit# and the !ur!ose of the financial state(ents' For e,a(!le, in the case of
a "usiness enter!rise that !re!ares )eneral !ur!ose financial state(ents, relevance is
assessed in ter(s of the infor(ation necessar# to (eet the co((on financial infor(ation
needs of a wide ran)e of users in (akin) econo(ic decisions' hese needs are ordinaril#
(et "# !resentin) the financial !osition, financial !erfor(ance and cash flows of the
"usiness enter!rise'
ISA 410 A660N=II 148
1$"& %o(!leteness, in that transactions and events, account "alances and disclosures that
could affect conclusions "ased on the financial state(ents are not o(itted'
1$c& Aelia"ilit#, in that the infor(ation !rovided in the financial state(ents.
2$i& Lhere a!!lica"le, reflects the econo(ic su"stance of events and transactions and not (erel#
their le)al for(? and
3$ii& Aesults in reasona"l# consistent evaluation, (easure(ent, !resentation and disclosure,
when used in si(ilar circu(stances'
2$d& Neutralit#, in that it contri"utes to infor(ation in the financial state(ents that is free fro(
"ias'
3$e& Understanda"ilit#, in that the infor(ation in the financial state(ents is clear and
co(!rehensive and not su";ect to si)nificantl# different inter!retation'
1. 4' he auditor (a# decide to co(!are the accountin) conventions to the re*uire(ents of an
e,istin) financial re!ortin) fra(ework considered to "e acce!ta"le' For e,a(!le, the auditor (a#
co(!are the accountin) conventions to IFASs' For an audit of a s(all entit#, the auditor (a#
decide to co(!are the accountin) conventions to a financial re!ortin) fra(ework s!ecificall#
develo!ed for such entities "# an authoriJed or reco)niJed standards settin) or)aniJation' Lhen
the auditor (akes such a co(!arison and differences are identified, the decision as to whether the
accountin) conventions ado!ted in the !re!aration of the financial state(ents constitute an
acce!ta"le financial re!ortin) fra(ework includes considerin) the reasons for the differences and
whether a!!lication of the accountin) conventions, or the descri!tion of the financial re!ortin)
fra(ework in the financial state(ents, could result in financial state(ents that are (isleadin)'
2. 5' A con)lo(eration of accountin) conventions devised to suit individual !references is not
an acce!ta"le financial re!ortin) fra(ework for )eneral !ur!ose financial state(ents' Si(ilarl#, a
co(!liance fra(ework will not "e an acce!ta"le financial re!ortin) fra(ework, unless it is
)enerall# acce!ted in the !articular ;urisdictions "# !re!arers and users'
145 ISA 410 A660N=II
QUALITY CONTROL FOR AN AUDIT OF FINANCIAL STATE)ENTS
$0ffective for audits of financial state(ents for !eriods "e)innin) on or after =ece("er
15, 4005&
CONTENTS
6ara)ra!h
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1
S#ste( of :ualit# %ontrol and Aole of 0n)a)e(ent ea(s '''''''''''''''''''''' 4-4
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' B
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 7
Re2-i'e.e"t
Meadershi! Aes!onsi"ilities for :ualit# on Audits ''''''''''''''''''''''''''''''''''''' 8
Aelevant 0thical Ae*uire(ents ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5-11
Acce!tance and %ontinuance of %lient Aelationshi!s and Audit
0n)a)e(ents '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 14-19
Assi)n(ent of 0n)a)e(ent ea(s ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 14
0n)a)e(ent 6erfor(ance ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 15-44
Eonitorin) '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 49
=ocu(entation '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 44-45
S#ste( of :ualit# %ontrol and Aole of 0n)a)e(ent ea(s '''''''''''''''''''''' A1-A4 Meadershi!
Aes!onsi"ilities for :ualit# on Audits ''''''''''''''''''''''''''''''''''''' A9 Aelevant 0thical
Ae*uire(ents ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A4-A7 Acce!tance and %ontinuance of %lient
Aelationshi!s and Audit
0n)a)e(ents '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A8-A5
Assi)n(ent of 0n)a)e(ent ea(s ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A10-A14
0n)a)e(ent 6erfor(ance ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A19-A91
ISA 440 190
Eonitorin) '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A94-A94
=ocu(entation '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A95
International Standard on Auditin) $ISA& 440, C:ualit# %ontrol for an Audit of Financial State(entsD
should "e read in con;unction with ISA 400 C7verall 7";ectives of the Inde!endent Auditor and the
%onduct of an Audit in Accordance with International Standards on Auditin)'D
191 ISA 440
1' his International Standard on Auditin) $ISA& deals with the s!ecific res!onsi"ilities of the auditor
re)ardin) *ualit# control !rocedures for an audit of financial state(ents' It also addresses, where
a!!lica"le, the res!onsi"ilities of the en)a)e(ent *ualit# control reviewer' his ISA is to "e read
in con;unction with relevant ethical re*uire(ents'
S/te. of Q-!0it/ Co"t'o0 !"# Ro0e of E"(!(e.e"t Te!.
4' :ualit# control s#ste(s, !olicies and !rocedures are the res!onsi"ilit# of the audit fir(' Under
IS:% 1, the fir( has an o"li)ation to esta"lish and (aintain a s#ste( of *ualit# control to !rovide
it with reasona"le assurance that.
1. $a& he fir( and its !ersonnel co(!l# with !rofessional standards and a!!lica"le le)al and
2. $"& he re!orts issued "# the fir( or en)a)e(ent !artners are a!!ro!riate in the circu(stances'
1
his ISA is !re(ised on the "asis that the fir( is su";ect to IS:% 1 or to national re*uire(ents
that are at least as de(andin)' $Aef. 6ara' A1&
1. 9' Lithin the conte,t of the fir(+s s#ste( of *ualit# control, en)a)e(ent tea(s have a
res!onsi"ilit# to i(!le(ent *ualit# control !rocedures that are a!!lica"le to the audit en)a)e(ent
and !rovide the fir( with relevant infor(ation to ena"le the functionin) of that !art of the fir(+s
s#ste( of *ualit# control relatin) to inde!endence'
2. 4' 0n)a)e(ent tea(s are entitled to rel# on the fir(+s s#ste( of *ualit# control, unless
infor(ation !rovided "# the fir( or other !arties su))ests otherwise' $Aef. 6ara' A4&
Effecti9e D!te
15, 4005'
O$1ecti9e
B' he o";ective of the auditor is to i(!le(ent *ualit# control !rocedures at the en)a)e(ent level
that !rovide the auditor with reasona"le assurance that.
$a& he audit co(!lies with !rofessional standards and a!!lica"le le)al and re)ulator#
re*uire(ents? and
Services 0n)a)e(ents,D !ara)ra!h 11'
ISA 440 194
$"& he auditor+s re!ort issued is a!!ro!riate in the circu(stances'
Defi"itio"
1. $h& Eonitorin) K A !rocess co(!risin) an on)oin) consideration and evaluation of the fir(+s
s#ste( of *ualit# control, includin) a !eriodic ins!ection of a selection of co(!leted
en)a)e(ents, desi)ned to !rovide the fir( with reasona"le assurance that its s#ste( of *ualit#
control is o!eratin) effectivel#'
2. $i& Network fir( K A fir( or entit# that "elon)s to a network'
1. $;& Network K A lar)er structure.
2. $i& hat is ai(ed at coo!eration, and
3. $ii& hat is clearl# ai(ed at !rofit or cost-sharin) or shares co((on ownershi!, control or
(ana)e(ent, co((on *ualit# control !olicies and !rocedures, co((on "usiness strate)#, the
use of a co((on "rand na(e, or a si)nificant !art of !rofessional resources'
3. $k& 6artner K An# individual with authorit# to "ind the fir( with res!ect to the !erfor(ance
of a !rofessional services en)a)e(ent'
4. $l& 6ersonnel K 6artners and staff'
5. $(& 6rofessional standards K International Standards on Auditin) $ISAs& and relevant ethical
re*uire(ents'
6. $n& Aelevant ethical re*uire(ents K 0thical re*uire(ents to which the en)a)e(ent tea( and
en)a)e(ent *ualit# control reviewer are su";ect, which ordinaril# co(!rise 6arts A and 1 of the
International Federation of Accountants+ Code of /thics for (rofessional Accountants $IFA%
%ode& related to an audit of financial state(ents to)ether with national re*uire(ents that are (ore
restrictive'
7. $o& Staff K 6rofessionals, other than !artners, includin) an# e,!erts the fir( e(!lo#s'
8. $!& Suita"l# *ualified e,ternal !erson K An individual outside the fir( with the co(!etence
and ca!a"ilities to act as an en)a)e(ent !artner, for e,a(!le a !artner of another fir(, or an
e(!lo#ee $with a!!ro!riate e,!erience& of either a !rofessional accountanc# "od# whose
(e("ers (a# !erfor( audits of historical financial infor(ation or of an or)aniJation that !rovides
relevant *ualit# control services'
Re2-i'e.e"t Le!#e'hip Repo"i$i0itie fo' Q-!0it/ o" A-#it
8' he en)a)e(ent !artner shall take res!onsi"ilit# for the overall *ualit# on each audit en)a)e(ent
to which that !artner is assi)ned' $Aef. 6ara' A9&
ISA 440 194
1. 5' hrou)hout the audit en)a)e(ent, the en)a)e(ent !artner shall re(ain alert, throu)h
o"servation and (akin) in*uiries as necessar#, for evidence of non-co(!liance with relevant
ethical re*uire(ents "# (e("ers of the en)a)e(ent tea(' $Aef. 6ara' A4-A5&
2. 10' If (atters co(e to the en)a)e(ent !artner+s attention throu)h the fir(+s s#ste( of
*ualit# control or otherwise that indicate that (e("ers of the en)a)e(ent tea( have not co(!lied
with relevant ethical re*uire(ents, the en)a)e(ent !artner, in consultation with others in the fir(,
shall deter(ine the a!!ro!riate action' $Aef. 6ara' A5&
Independence
11' he en)a)e(ent !artner shall for( a conclusion on co(!liance with inde!endence re*uire(ents
that a!!l# to the audit en)a)e(ent' In doin) so, the en)a)e(ent !artner shall. $Aef. 6ara' A5&
1$a& 7"tain relevant infor(ation fro( the fir( and, where a!!lica"le, network fir(s, to
identif# and evaluate circu(stances and relationshi!s that create threats to inde!endence?
2$"& 0valuate infor(ation on identified "reaches, if an#, of the fir(+s inde!endence !olicies
and !rocedures to deter(ine whether the# create a threat to inde!endence for the audit
en)a)e(ent? and
3$c& ake a!!ro!riate action to eli(inate such threats or reduce the( to an acce!ta"le level "#
a!!l#in) safe)uards, or, if considered a!!ro!riate, to withdraw fro( the audit en)a)e(ent, where
withdrawal is !ossi"le under a!!lica"le law or re)ulation' he en)a)e(ent !artner shall !ro(!tl#
re!ort to the fir( an# ina"ilit# to resolve the (atter for a!!ro!riate action' $Aef. 6ara' AB-A7&
Accept!"ce !"# Co"ti"-!"ce of C0ie"t Re0!tio"hip !"# A-#it E"(!(e.e"t
1. 14' he en)a)e(ent !artner shall "e satisfied that a!!ro!riate !rocedures re)ardin) the
acce!tance and continuance of client relationshi!s and audit en)a)e(ents have "een followed, and
shall deter(ine that conclusions reached in this re)ard are a!!ro!riate' $Aef. 6ara' A8-A5&
2. 19' If the en)a)e(ent !artner o"tains infor(ation that would have caused the fir( to decline
the audit en)a)e(ent had that infor(ation "een availa"le earlier, the en)a)e(ent !artner shall
co((unicate that infor(ation !ro(!tl# to the fir(, so that the fir( and the en)a)e(ent !artner
can take the necessar# action' $Aef. 6ara' A5&
195 ISA 440
Ai(".e"t of E"(!(e.e"t Te!.
14' he en)a)e(ent !artner shall "e satisfied that the en)a)e(ent tea(, and an# auditor+s e,!erts
who are not !art of the en)a)e(ent tea(, collectivel# have the a!!ro!riate co(!etence and
ca!a"ilities to.
1. $a& 6erfor( the audit en)a)e(ent in accordance with !rofessional standards and a!!lica"le
le)al and re)ulator# re*uire(ents? and
2. $"& 0na"le an auditor+s re!ort that is a!!ro!riate in the circu(stances to "e issued' $Aef. 6ara'
A10-A14&
?irection& )uper!ision and (erfor$ance
15' he en)a)e(ent !artner shall take res!onsi"ilit# for.
1. $a& he direction, su!ervision and !erfor(ance of the audit en)a)e(ent in co(!liance with
!rofessional standards and a!!lica"le le)al and re)ulator# re*uire(ents? and $Aef. 6ara' A19-A15,
A40&
2. $"& he auditor+s re!ort "ein) a!!ro!riate in the circu(stances'
+e!ie#s
1. 1B' he en)a)e(ent !artner shall take res!onsi"ilit# for reviews "ein) !erfor(ed in
accordance with the fir(+s review !olicies and !rocedures' $Aef. 6ara' A1B-A17, A40&
2. 17' 7n or "efore the date of the auditor+s re!ort, the en)a)e(ent !artner shall, throu)h a
review of the audit docu(entation and discussion with the en)a)e(ent tea(, "e satisfied that
sufficient a!!ro!riate audit evidence has "een o"tained to su!!ort the conclusions reached and for
the auditor+s re!ort to "e issued' $Aef. 6ara' A18-A40&
Consultation
18' he en)a)e(ent !artner shall.
1. $a& ake res!onsi"ilit# for the en)a)e(ent tea( undertakin) a!!ro!riate consultation on
difficult or contentious (atters?
2. $"& 1e satisfied that (e("ers of the en)a)e(ent tea( have undertaken a!!ro!riate consultation
durin) the course of the en)a)e(ent, "oth within the en)a)e(ent tea( and "etween the
en)a)e(ent tea( and others at the a!!ro!riate level within or outside the fir(?
3. $c& 1e satisfied that the nature and sco!e of, and conclusions resultin) fro(, such
consultations are a)reed with the !art# consulted? and
ISA 440 19B
$d& =eter(ine that conclusions resultin) fro( such consultations have "een i(!le(ented'
115' For audits of financial state(ents of listed entities, and those other audit en)a)e(ents, if
an#, for which the fir( has deter(ined that an en)a)e(ent *ualit# control review is re*uired,
the en)a)e(ent !artner shall.
2$a& =eter(ine that an en)a)e(ent *ualit# control reviewer has "een a!!ointed?
3$"& =iscuss si)nificant (atters arisin) durin) the audit en)a)e(ent, includin) those
identified durin) the en)a)e(ent *ualit# control review, with the en)a)e(ent *ualit# control
reviewer? and
4$c& Not date the auditor+s re!ort until the co(!letion of the en)a)e(ent *ualit# control
review' $Aef. 6ara' A49-A45&
540' he en)a)e(ent *ualit# control reviewer shall !erfor( an o";ective evaluation of the
si)nificant ;ud)(ents (ade "# the en)a)e(ent tea(, and the conclusions reached in
for(ulatin) the auditor+s re!ort' his evaluation shall involve.
6$a&=iscussion of si)nificant (atters with the en)a)e(ent !artner?
7$"&Aeview of the financial state(ents and the !ro!osed auditor+s re!ort?
8$c&Aeview of selected audit docu(entation relatin) to the si)nificant ;ud)(ents the en)a)e(ent
tea( (ade and the conclusions it reached? and
9$d& 0valuation of the conclusions reached in for(ulatin) the auditor+s re!ort and consideration of
whether the !ro!osed auditor+s re!ort is a!!ro!riate' $Aef. 6ara' A4B-A47, A45-A91&
1041' For audits of financial state(ents of listed entities, the en)a)e(ent *ualit# control
reviewer, on !erfor(in) an en)a)e(ent *ualit# control review, shall also consider the
followin).
11$a& he en)a)e(ent tea(+s evaluation of the fir(+s inde!endence in relation to the audit
en)a)e(ent?
12$"& Lhether a!!ro!riate consultation has taken !lace on (atters involvin) differences of
o!inion or other difficult or contentious (atters, and the conclusions arisin) fro( those
consultations? and
13$c& Lhether audit docu(entation selected for review reflects the work !erfor(ed in relation
to the si)nificant ;ud)(ents and su!!orts the conclusions reached' $Aef. 6ara' A48-A91&
197 ISA 440
?ifferences of ,pinion
44' If differences of o!inion arise within the en)a)e(ent tea(, with those consulted or, where
a!!lica"le, "etween the en)a)e(ent !artner and the en)a)e(ent *ualit# control reviewer, the
en)a)e(ent tea( shall follow the fir(+s !olicies and !rocedures for dealin) with and resolvin)
differences of o!inion'
)o"ito'i"(
49' An effective s#ste( of *ualit# control includes a (onitorin) !rocess desi)ned to !rovide the fir(
with reasona"le assurance that its !olicies and !rocedures relatin) to the s#ste( of *ualit# control
are relevant, ade*uate, and o!eratin) effectivel#' he en)a)e(ent !artner shall consider the results
of the fir(+s (onitorin) !rocess as evidenced in the latest infor(ation circulated "# the fir( and,
if a!!lica"le, other network fir(s and whether deficiencies noted in that infor(ation (a# affect
the audit en)a)e(ent' $Aef. 6ara A94-A94&
Doc-.e"t!tio"
1. 44' he auditor shall include in the audit docu(entation.
4
2. $a& Issues identified with res!ect to co(!liance with relevant ethical re*uire(ents and how
the# were resolved'
3. $"& %onclusions on co(!liance with inde!endence re*uire(ents that a!!l# to the audit
en)a)e(ent, and an# relevant discussions with the fir( that su!!ort these conclusions'
4. $c& %onclusions reached re)ardin) the acce!tance and continuance of client relationshi!s and
audit en)a)e(ents'
5. $d& he nature and sco!e of, and conclusions resultin) fro(, consultations undertaken durin)
the course of the audit en)a)e(ent' $Aef. 6ara' A95&
6. 45' he en)a)e(ent *ualit# control reviewer shall docu(ent, for the audit en)a)e(ent
reviewed, that.
7. $a& he !rocedures re*uired "# the fir(+s !olicies on en)a)e(ent *ualit# control review
have "een !erfor(ed?
8. $"& he en)a)e(ent *ualit# control review has "een co(!leted on or "efore the date of the
auditor+s re!ort? and
9. $c& he reviewer is not aware of an# unresolved (atters that would cause the reviewer to
"elieve that the si)nificant ;ud)(ents the en)a)e(ent tea( (ade and the conclusions it
reached were not a!!ro!riate'
OOO
ISA 490, CAudit =ocu(entation,D !ara)ra!hs 8-11, and !ara)ra!h AB'
ISA 440 198
S/te. of Q-!0it/ Co"t'o0 !"# Ro0e of E"(!(e.e"t Te!. $Aef. 6ara' 4&
A1' IS:% 1, or national re*uire(ents that are at least as de(andin), deals with the fir(+s
res!onsi"ilities to esta"lish and (aintain its s#ste( of *ualit# control for audit en)a)e(ents' he
s#ste( of *ualit# control includes !olicies and !rocedures that address each of the followin)
ele(ents.
% G Meadershi! res!onsi"ilities for *ualit# within the fir(?
% G Aelevant ethical re*uire(ents?
% G Acce!tance and continuance of client relationshi!s and s!ecific en)a)e(ents?
% G @u(an resources?
% G 0n)a)e(ent !erfor(ance? and
% G Eonitorin)'
National re*uire(ents that deal with the fir(+s res!onsi"ilities to esta"lish and (aintain a s#ste(
of *ualit# control are at least as de(andin) as IS:% 1 when the# address all the ele(ents referred
to in this !ara)ra!h and i(!ose o"li)ations on the fir( that achieve the ai(s of the re*uire(ents
set out in IS:% 1'
+eliance on the Fir$8s )yste$ of *uality Control $Aef. 6ara' 4&
A4' Unless infor(ation !rovided "# the fir( or other !arties su))est otherwise, the en)a)e(ent tea(
(a# rel# on the fir(+s s#ste( of *ualit# control in relation to, for e,a(!le.
% G %o(!etence of !ersonnel throu)h their recruit(ent and for(al trainin)'
% G Inde!endence throu)h the accu(ulation and co((unication of relevant inde!endence
infor(ation'
% G Eaintenance of client relationshi!s throu)h acce!tance and continuance s#ste(s'
% G Adherence to a!!lica"le le)al and re)ulator# re*uire(ents throu)h the (onitorin)
!rocess'
Le!#e'hip Repo"i$i0itie fo' Q-!0it/ o" A-#it $Aef. 6ara' 8&
A9' he actions of the en)a)e(ent !artner and a!!ro!riate (essa)es to the other (e("ers of the
en)a)e(ent tea(, in takin) res!onsi"ilit# for the overall *ualit# on each audit en)a)e(ent,
e(!hasiJe.
1$a& he i(!ortance to audit *ualit# of.
2$i& 6erfor(in) work that co(!lies with !rofessional standards and a!!lica"le le)al and re)ulator#
re*uire(ents?
3$ii& %o(!l#in) with the fir(+s *ualit# control !olicies and !rocedures as a!!lica"le?
195 ISA 440
$iii& Issuin) auditor+s re!orts that are a!!ro!riate in the circu(stances? and
$iv& he en)a)e(ent tea(+s a"ilit# to raise concerns without fear of re!risals? and
$"& he fact that *ualit# is essential in !erfor(in) audit en)a)e(ents'
Co$pliance #ith +ele!ant /thical +e>uire$ents $Aef. 6ara' 5&
A4' he IFA% %ode esta"lishes the funda(ental !rinci!les of !rofessional ethics, which include.
1. $a& Inte)rit#?
2. $"& 7";ectivit#?
=efinition of CFir(,D CNetworkD and CNetwork Fir(D $Aef. 6ara' 5-11&
A5' he definitions of Cfir(,D CnetworkD or Cnetwork fir(D in relevant ethical re*uire(ents (a# differ
fro( those set out in this ISA' For e,a(!le, the IFA% %ode defines the Cfir(D as.
1. $a& A sole !ractitioner, !artnershi! or cor!oration of !rofessional accountants?
2. $"& An entit# that controls such !arties throu)h ownershi!, (ana)e(ent or other (eans? and
3. $c& An entit# controlled "# such !arties throu)h ownershi!, (ana)e(ent or other (eans'
he IFA% %ode also !rovides )uidance in relation to the ter(s CnetworkD and Cnetwork fir('D
In co(!l#in) with the re*uire(ents in !ara)ra!hs 5-11, the definitions used in the relevant ethical
re*uire(ents a!!l# in so far as is necessar# to inter!ret those ethical re*uire(ents'
ISA 440 140
1hreats to Independence $Aef. 6ara' 11$c&&
AB' he en)a)e(ent !artner (a# identif# a threat to inde!endence re)ardin) the audit en)a)e(ent
that safe)uards (a# not "e a"le to eli(inate or reduce to an acce!ta"le level' In that case, as
re*uired "# !ara)ra!h 11$c&, the en)a)e(ent !artner re!orts to the relevant !erson$s& within the
fir( to deter(ine a!!ro!riate action, which (a# include eli(inatin) the activit# or interest that
creates the threat, or withdrawin) fro( the audit en)a)e(ent, where withdrawal is !ossi"le under
a!!lica"le law or re)ulation'
A7' Statutor# (easures (a# !rovide safe)uards for the inde!endence of !u"lic sector auditors'
@owever, !u"lic sector auditors or audit fir(s carr#in) out !u"lic sector audits on "ehalf of the
statutor# auditor (a#, de!endin) on the ter(s of the (andate in a !articular ;urisdiction, need to
ada!t their a!!roach in order to !ro(ote co(!liance with the s!irit of !ara)ra!h 11' his (a#
include, where the !u"lic sector auditor+s (andate does not !er(it withdrawal fro( the
en)a)e(ent, disclosure throu)h a !u"lic re!ort, of circu(stances that have arisen that would, if
the# were in the !rivate sector, lead the auditor to withdraw'
Accept!"ce !"# Co"ti"-!"ce of C0ie"t Re0!tio"hip !"# A-#it E"(!(e.e"t
$Aef. 6ara' 14&
A8' IS:% 1 re*uires the fir( to o"tain infor(ation considered necessar# in the circu(stances "efore
acce!tin) an en)a)e(ent with a new client, when decidin) whether to continue an e,istin)
en)a)e(ent, and when considerin) acce!tance of a new en)a)e(ent with an e,istin) client'
5
Infor(ation such as the followin) assists the en)a)e(ent !artner in deter(inin) whether the
conclusions reached re)ardin) the acce!tance and continuance of client relationshi!s and audit
en)a)e(ents are a!!ro!riate.
% G he inte)rit# of the !rinci!al owners, ke# (ana)e(ent and those char)ed with
)overnance of the entit#?
% G Lhether the en)a)e(ent tea( is co(!etent to !erfor( the audit en)a)e(ent and has the
necessar# ca!a"ilities, includin) ti(e and resources?
% G Lhether the fir( and the en)a)e(ent tea( can co(!l# with relevant ethical
re*uire(ents? and
% G Si)nificant (atters that have arisen durin) the current or !revious audit en)a)e(ent, and
their i(!lications for continuin) the relationshi!'
IS:% 1, !ara)ra!h 47$a&'
141 ISA 440
Considerations )pecific to (ublic )ector /ntities $Aef. 6ara' 14-19&
A5' In the !u"lic sector, auditors (a# "e a!!ointed in accordance with statutor# !rocedures'
Accordin)l#, certain of the re*uire(ents and considerations re)ardin) the acce!tance and
continuance of client relationshi!s and audit en)a)e(ents as set out in !ara)ra!hs 14, 19 and A8
(a# not "e relevant' Nonetheless, infor(ation )athered as a result of the !rocess descri"ed (a# "e
valua"le to !u"lic sector auditors in !erfor(in) risk assess(ents and in carr#in) out re!ortin)
res!onsi"ilities'
Ai(".e"t of E"(!(e.e"t Te!. $Aef. 6ara' 14&
A10' An en)a)e(ent tea( includes a !erson usin) e,!ertise in a s!ecialiJed area of accountin) or
auditin), whether en)a)ed or e(!lo#ed "# the fir(, if an#, who !erfor(s audit !rocedures on the
en)a)e(ent' @owever, a !erson with such e,!ertise is not a (e("er of the en)a)e(ent tea( if
that !erson+s involve(ent with the en)a)e(ent is onl# consultation' %onsultations are addressed
in !ara)ra!h 18, and !ara)ra!h A41-A44'
A11' Lhen considerin) the a!!ro!riate co(!etence and ca!a"ilities e,!ected of the en)a)e(ent tea(
as a whole, the en)a)e(ent !artner (a# take into consideration such (atters as the tea(+s.
% G Understandin) of, and !ractical e,!erience with, audit en)a)e(ents of a si(ilar nature
and co(!le,it# throu)h a!!ro!riate trainin) and !artici!ation'
% G Understandin) of !rofessional standards and a!!lica"le le)al and re)ulator#
re*uire(ents'
% G echnical e,!ertise, includin) e,!ertise with relevant infor(ation technolo)# and
s!ecialiJed areas of accountin) or auditin)'
% G Snowled)e of relevant industries in which the client o!erates'
% G A"ilit# to a!!l# !rofessional ;ud)(ent'
% G Understandin) of the fir(+s *ualit# control !olicies and !rocedures'
Considerations )pecific to (ublic )ector /ntities
A14' In the !u"lic sector, additional a!!ro!riate co(!etence (a# include skills that are necessar# to
dischar)e the ter(s of the audit (andate in a !articular ;urisdiction' Such co(!etence (a# include
an understandin) of the a!!lica"le re!ortin) arran)e(ents, includin) re!ortin) to the le)islature or
other )overnin) "od# or in the !u"lic interest' he wider sco!e of a !u"lic sector audit (a#
include, for e,a(!le, so(e as!ects of !erfor(ance auditin) or a co(!rehensive assess(ent of
co(!liance with law, re)ulation or other authorit# and !reventin) and detectin) fraud and
corru!tion'
ISA 440 144
?irection& )uper!ision and (erfor$ance $Aef. 6ara' 15$a&&
A19' =irection of the en)a)e(ent tea( involves infor(in) the (e("ers of the en)a)e(ent tea( of
(atters such as.
% G heir res!onsi"ilities, includin) the need to co(!l# with relevant ethical re*uire(ents,
and to !lan and !erfor( an audit with !rofessional ske!ticis( as re*uired "# ISA 400'
B
% G Aes!onsi"ilities of res!ective !artners where (ore than one !artner is involved in the
conduct of an audit en)a)e(ent'
% G he o";ectives of the work to "e !erfor(ed'
% G he nature of the entit#+s "usiness'
% G Aisk-related issues'
% G 6ro"le(s that (a# arise'
% G he detailed a!!roach to the !erfor(ance of the en)a)e(ent'
=iscussion a(on) (e("ers of the en)a)e(ent tea( allows less e,!erienced tea( (e("ers to
raise *uestions with (ore e,!erienced tea( (e("ers so that a!!ro!riate co((unication can
occur within the en)a)e(ent tea('
A14' A!!ro!riate tea(work and trainin) assist less e,!erienced (e("ers of the en)a)e(ent tea( to
clearl# understand the o";ectives of the assi)ned work'
A15' Su!ervision includes (atters such as.
1. G rackin) the !ro)ress of the audit en)a)e(ent'
2. G %onsiderin) the co(!etence and ca!a"ilities of individual (e("ers of the en)a)e(ent
tea(, includin) whether the# have sufficient ti(e to carr# out their work, whether the# understand
their instructions, and whether the work is "ein) carried out in accordance with the !lanned
a!!roach to the audit en)a)e(ent'
3. G Addressin) si)nificant (atters arisin) durin) the audit en)a)e(ent, considerin) their
si)nificance and (odif#in) the !lanned a!!roach a!!ro!riatel#'
4. G Identif#in) (atters for consultation or consideration "# (ore e,!erienced en)a)e(ent
tea( (e("ers durin) the audit en)a)e(ent'
149 ISA 440
+e!ie#s
Aeview Aes!onsi"ilities $Aef. 6ara' 1B&
A1B' Under IS:% 1, the fir(+s review res!onsi"ilit# !olicies and !rocedures are deter(ined on the
"asis that work of less e,!erienced tea( (e("ers is reviewed "# (ore e,!erienced tea(
(e("ers'
7
A17' A review consists of consideration whether, for e,a(!le.
1. G he work has "een !erfor(ed in accordance with !rofessional standards and a!!lica"le
le)al and re)ulator# re*uire(ents?
2. G Si)nificant (atters have "een raised for further consideration?
3. G A!!ro!riate consultations have taken !lace and the resultin) conclusions have "een
docu(ented and i(!le(ented?
4. G here is a need to revise the nature, ti(in) and e,tent of work !erfor(ed?
5. G he work !erfor(ed su!!orts the conclusions reached and is a!!ro!riatel# docu(ented?
6. G he evidence o"tained is sufficient and a!!ro!riate to su!!ort the auditor+s re!ort? and
7. G he o";ectives of the en)a)e(ent !rocedures have "een achieved'
he 0n)a)e(ent 6artner+s Aeview of Lork 6erfor(ed $Aef. 6ara' 17&
A18' i(el# reviews of the followin) "# the en)a)e(ent !artner at a!!ro!riate sta)es durin) the
en)a)e(ent allow si)nificant (atters to "e resolved on a ti(el# "asis to the en)a)e(ent !artner+s
satisfaction on or "efore the date of the auditor+s re!ort.
1. G %ritical areas of ;ud)(ent, es!eciall# those relatin) to difficult or contentious (atters
identified durin) the course of the en)a)e(ent?
2. G Si)nificant risks? and
3. G 7ther areas the en)a)e(ent !artner considers i(!ortant'
he en)a)e(ent !artner need not review all audit docu(entation, "ut (a# do so' @owever, as
re*uired "# ISA 490, the !artner docu(ents the e,tent and ti(in) of the reviews'
8
A15' An en)a)e(ent !artner takin) over an audit durin) the en)a)e(ent (a# a!!l# the review
!rocedures as descri"ed in !ara)ra!hs A18 to review the
7
IS:% 1, !ara)ra!h 99' 8
ISA 490, !ara)ra!h 5$c&'
ISA 440 144
work !erfor(ed to the date of a chan)e in order to assu(e the res!onsi"ilities of an en)a)e(ent
!artner'
Considerations +ele!ant Dhere a <e$ber of the /ngage$ent 1ea$ #ith /4pertise in a )pecialiBed Area of
Accounting or Auditing Is "sed $Aef. 6ara' 15-17&
A40' Lhere a (e("er of the en)a)e(ent tea( with e,!ertise in a s!ecialiJed area of accountin) or
auditin) is used, direction, su!ervision and review of that en)a)e(ent tea( (e("er+s work (a#
include (atters such as.
% G A)reein) with that (e("er the nature, sco!e and o";ectives of that (e("er+s work? and
the res!ective roles of, and the nature, ti(in) and e,tent of co((unication "etween that (e("er
and other (e("ers of the en)a)e(ent tea('
% G 0valuatin) the ade*uac# of that (e("er+s work includin) the relevance and
reasona"leness of that (e("er+s findin)s or conclusions and their consistenc# with other audit
evidence'
Consultation $Aef. 6ara' 18&
A41' 0ffective consultation on si)nificant technical, ethical, and other (atters within the fir( or, where
a!!lica"le, outside the fir( can "e achieved when those consulted.
1. G Are )iven all the relevant facts that will ena"le the( to !rovide infor(ed advice? and
2. G @ave a!!ro!riate knowled)e, seniorit# and e,!erience'
A44' It (a# "e a!!ro!riate for the en)a)e(ent tea( to consult outside the fir(, for e,a(!le, where the
fir( lacks a!!ro!riate internal resources' he# (a# take advanta)e of advisor# services !rovided
"# other fir(s, !rofessional and re)ulator# "odies, or co((ercial or)aniJations that !rovide
relevant *ualit# control services'
%o(!letion of the 0n)a)e(ent :ualit# %ontrol Aeview "efore =atin) of the Auditor+s Ae!ort
$Aef. 6ara' 15$c&&
A49' ISA 700 re*uires the auditor+s re!ort to "e dated no earlier than the date on which the auditor has
o"tained sufficient a!!ro!riate evidence on which to "ase the auditor+s o!inion on the financial
state(ents'
5
In cases of an audit of financial state(ents of listed entities or when an en)a)e(ent
(eets the criteria for an en)a)e(ent *ualit# control review, such a review assists the auditor in
deter(inin) whether sufficient a!!ro!riate evidence has "een o"tained'
ISA 700, CFor(in) an 7!inion and Ae!ortin) on Financial State(ents,D !ara)ra!h 41'
145 ISA 440
A44' %onductin) the en)a)e(ent *ualit# control review in a ti(el# (anner at a!!ro!riate sta)es durin)
the en)a)e(ent allows si)nificant (atters to "e !ro(!tl# resolved to the en)a)e(ent *ualit#
control reviewer+s satisfaction on or "efore the date of the auditor+s re!ort'
A45' %o(!letion of the en)a)e(ent *ualit# control review (eans the co(!letion "# the en)a)e(ent
*ualit# control reviewer of the re*uire(ents in !ara)ra!hs 40-41, and where a!!lica"le,
co(!liance with !ara)ra!h 44' =ocu(entation of the en)a)e(ent *ualit# control review (a# "e
co(!leted after the date of the auditor+s re!ort as !art of the asse("l# of the final audit file' ISA
490 esta"lishes re*uire(ents and !rovides )uidance in this re)ard'
10
Nature, 0,tent and i(in) of 0n)a)e(ent :ualit# %ontrol Aeview $Aef. 6ara' 40&
A4B' Ae(ainin) alert for chan)es in circu(stances allows the en)a)e(ent !artner to identif# situations
in which an en)a)e(ent *ualit# control review is necessar#, even thou)h at the start of the
en)a)e(ent, such a review was not re*uired'
A47' he e,tent of the en)a)e(ent *ualit# control review (a# de!end, a(on) other thin)s, on the
co(!le,it# of the audit en)a)e(ent, whether the entit# is a listed entit#, and the risk that the
auditor+s re!ort (i)ht not "e a!!ro!riate in the circu(stances' he !erfor(ance of an en)a)e(ent
*ualit# control review does not reduce the res!onsi"ilities of the en)a)e(ent !artner for the audit
en)a)e(ent and its !erfor(ance'
0n)a)e(ent :ualit# %ontrol Aeview of Misted 0ntities $Aef. 6ara' 41&
A48' 7ther (atters relevant to evaluatin) the si)nificant ;ud)(ents (ade "# the en)a)e(ent tea( that
(a# "e considered in an en)a)e(ent *ualit# control review of a listed entit# include.
1. G Si)nificant risks identified durin) the en)a)e(ent in accordance with ISA 915,
11
and the
res!onses to those risks in accordance with ISA 990,
14
includin) the en)a)e(ent tea(+s
assess(ent of, and res!onse to, the risk of fraud in accordance with ISA 440'
19
2. G >ud)(ents (ade, !articularl# with res!ect to (aterialit# and si)nificant risks'
3. G he si)nificance and dis!osition of corrected and uncorrected (isstate(ents identified
durin) the audit'
10
ISA 490, !ara)ra!hs 14-1B' 11
ISA 915, CIdentif#in) and Assessin) the Aisks of Eaterial Eisstate(ent throu)h Understandin) the 0ntit# and Its 0nviron(ent'D
14
ISA 990, Che Auditor+s Aes!onses to Assessed Aisks'D 19
ISA 440, Che Auditor+s Aes!onsi"ilities Aelatin) to Fraud in an Audit of Financial
State(ents'D
ISA 440 14B
G he (atters to "e co((unicated to (ana)e(ent and those char)ed with )overnance and,
where a!!lica"le, other !arties such as re)ulator# "odies'
hese other (atters, de!endin) on the circu(stances, (a# also "e a!!lica"le for en)a)e(ent
*ualit# control reviews for audits of financial state(ents of other entities'
%onsiderations S!ecific to S(aller 0ntities $Aef. 6ara' 40-41&
A45' In addition to the audits of financial state(ents of listed entities, an en)a)e(ent *ualit# control
review is re*uired for audit en)a)e(ents that (eet the criteria esta"lished "# the fir( that su";ects
en)a)e(ents to an en)a)e(ent *ualit# control review' In so(e cases, none of the fir(+s audit
en)a)e(ents (a# (eet the criteria that would su";ect the( to such a review'
%onsiderations S!ecific to 6u"lic Sector 0ntities $Aef. 6ara' 40-41&
A90' In the !u"lic sector, a statutoril# a!!ointed auditor $for e,a(!le, an Auditor <eneral, or other
suita"l# *ualified !erson a!!ointed on "ehalf of the Auditor <eneral&, (a# act in a role e*uivalent
to that of en)a)e(ent !artner with overall res!onsi"ilit# for !u"lic sector audits' In such
circu(stances, where a!!lica"le, the selection of the en)a)e(ent *ualit# control reviewer includes
consideration of the need for inde!endence fro( the audited entit# and the a"ilit# of the
en)a)e(ent *ualit# control reviewer to !rovide an o";ective evaluation'
A91' Misted entities as referred to in !ara)ra!hs 41 and A48 are not co((on in the !u"lic sector'
@owever, there (a# "e other !u"lic sector entities that are si)nificant due to siJe, co(!le,it# or
!u"lic interest as!ects, and which conse*uentl# have a wide ran)e of stakeholders' 0,a(!les
include state owned cor!orations and !u"lic utilities' 7n)oin) transfor(ations within the !u"lic
sector (a# also )ive rise to new t#!es of si)nificant entities' here are no fi,ed o";ective criteria
on which the deter(ination of si)nificance is "ased' Nonetheless, !u"lic sector auditors evaluate
which entities (a# "e of sufficient si)nificance to warrant !erfor(ance of an en)a)e(ent *ualit#
control review'
)o"ito'i"( $Aef. 6ara' 49&
A94' IS:% 1 re*uires the fir( to esta"lish a (onitorin) !rocess desi)ned to !rovide it with reasona"le
assurance that the !olicies and !rocedures relatin) to the s#ste( of *ualit# control are relevant,
ade*uate and o!eratin) effectivel#'
14
IS:% 1, !ara)ra!h 48'
147 ISA 440
A99' In considerin) deficiencies that (a# affect the audit en)a)e(ent, the en)a)e(ent !artner (a#
have re)ard to (easures the fir( took to rectif# the situation that the en)a)e(ent !artner
considers are sufficient in the conte,t of that audit'
A94' A deficienc# in the fir(+s s#ste( of *ualit# control does not necessaril# indicate that a !articular
audit en)a)e(ent was not !erfor(ed in accordance with !rofessional standards and a!!lica"le
le)al and re)ulator# re*uire(ents, or that the auditor+s re!ort was not a!!ro!riate'
Doc-.e"t!tio"
?ocu$entation of Consultations $Aef. 6ara' 44$d&&
A95' =ocu(entation of consultations with other !rofessionals that involve difficult or contentious
(atters that is sufficientl# co(!lete and detailed contri"utes to an understandin) of.
% G he issue on which consultation was sou)ht? and
% G he results of the consultation, includin) an# decisions taken, the "asis for those
decisions and how the# were i(!le(ented'
ISA 440 148
INTERNATIONAL STANDARD ON AUDITING 230 AUDIT DOCU)ENTATION
CONTENTS
6ara)ra!h
International Standard on Auditin) $ISA& 490, CAudit =ocu(entationD should "e read in con;unction with
ISA 400, C7verall 7";ectives of the Inde!endent Auditor and the %onduct of an Audit in Accordance with
International Standards on Auditin)'D
145 ISA 490
1' his International Standard on Auditin) $ISA& deals with the auditor+s res!onsi"ilit# to !re!are
audit docu(entation for an audit of financial state(ents' he A!!endi, lists other ISAs that
contain s!ecific docu(entation re*uire(ents and )uidance' he s!ecific docu(entation
re*uire(ents of other ISAs do not li(it the a!!lication of this ISA' Maw or re)ulation (a#
esta"lish additional docu(entation re*uire(ents'
N!t-'e !"# *-'poe of A-#it Doc-.e"t!tio"
1. 4' Audit docu(entation that (eets the re*uire(ents of this ISA and the s!ecific
docu(entation re*uire(ents of other relevant ISAs !rovides.
2. $a& 0vidence of the auditor+s "asis for a conclusion a"out the achieve(ent of the overall
o";ectives of the auditor?
1
and
3. $"& 0vidence that the audit was !lanned and !erfor(ed in accordance with ISAs and
a!!lica"le le)al and re)ulator# re*uire(ents'
4. 9' Audit docu(entation serves a nu("er of additional !ur!oses, includin) the followin).
1. G Assistin) the en)a)e(ent tea( to !lan and !erfor( the audit'
2. G Assistin) (e("ers of the en)a)e(ent tea( res!onsi"le for su!ervision to direct
and su!ervise the audit work, and to dischar)e their review res!onsi"ilities in accordance
with ISA 440'
4
3. G 0na"lin) the en)a)e(ent tea( to "e accounta"le for its work'
4. G Aetainin) a record of (atters of continuin) si)nificance to future audits'
5. G 0na"lin) the conduct of *ualit# control reviews and ins!ections in accordance
with IS:% 1
9
or national re*uire(ents that are at least as de(andin)'
4
6. G 0na"lin) the conduct of e,ternal ins!ections in accordance with a!!lica"le
le)al, re)ulator# or other re*uire(ents'
1
International Standards on Auditin),D !ara)ra!h 11' 4
ISA 440, C:ualit# %ontrol for an Audit of Financial State(ents,D !ara)ra!hs 15-17' 9
IS:% 1, C:ualit# %ontrol for Fir(s that 6erfor( Audits and Aeviews of Financial State(ents, and 7ther Assurance and
Aelated Services 0n)a)e(ents,D !ara)ra!hs 94-99, 95-98, and 48' 4
ISA 490 150
Effecti9e D!te
15, 4005'
O$1ecti9e
5' he o";ective of the auditor is to !re!are docu(entation that !rovides.
1$a&A sufficient and a!!ro!riate record of the "asis for the auditor+s re!ort? and
2$"& 0vidence that the audit was !lanned and !erfor(ed in accordance with ISAs and a!!lica"le le)al
and re)ulator# re*uire(ents'
Defi"itio"
B' For !ur!oses of the ISAs, the followin) ter(s have the (eanin)s attri"uted "elow.
1$a&Audit docu(entation K he record of audit !rocedures !erfor(ed, relevant audit evidence
o"tained, and conclusions the auditor reached $ter(s such as Cworkin) !a!ersD or Cwork!a!ersD
are also so(eti(es used&'
2$"& Audit file K 7ne or (ore folders or other stora)e (edia, in !h#sical or electronic for(, containin)
the records that co(!rise the audit docu(entation for a s!ecific en)a)e(ent'
1$c& 0,!erienced auditor K An individual $whether internal or e,ternal to the fir(& who has
!ractical audit e,!erience, and a reasona"le understandin) of.
2$i& Audit !rocesses?
3$ii& ISAs and a!!lica"le le)al and re)ulator# re*uire(ents?
$iii& he "usiness environ(ent in which the entit# o!erates? and
$iv& Auditin) and financial re!ortin) issues relevant to the entit#+s industr#'
Re2-i'e.e"t Ti.e0/ *'ep!'!tio" of A-#it Doc-.e"t!tio"
7' he auditor shall !re!are audit docu(entation on a ti(el# "asis' $Aef. 6ara' A1&
151 ISA 490
Doc-.e"t!tio" of the A-#it *'oce#-'e *e'fo'.e# !"# A-#it E9i#e"ce O$t!i"e#
For$& Content and /4tent of Audit ?ocu$entation
1. 8' he auditor shall !re!are audit docu(entation that is sufficient to ena"le an e,!erienced
auditor, havin) no !revious connection with the audit, to understand. $Aef. 6ara' A4-A5, A1B-
A17&
2. $a& he nature, ti(in) and e,tent of the audit !rocedures !erfor(ed to co(!l# with the ISAs
and a!!lica"le le)al and re)ulator# re*uire(ents? $Aef. 6ara' AB-A7&
3. $"& he results of the audit !rocedures !erfor(ed, and the audit evidence o"tained? and
4. $c& Si)nificant (atters arisin) durin) the audit, the conclusions reached thereon, and
si)nificant !rofessional ;ud)(ents (ade in reachin) those conclusions' $Aef. 6ara' A8-A11&
5. 5' In docu(entin) the nature, ti(in) and e,tent of audit !rocedures !erfor(ed, the auditor
shall record.
6. $a& he identif#in) characteristics of the s!ecific ite(s or (atters tested? $Aef. 6ara' A14&
7. $"& Lho !erfor(ed the audit work and the date such work was co(!leted? and
8. $c& Lho reviewed the audit work !erfor(ed and the date and e,tent of such review' $Aef.
6ara' A19&
2. 10' he auditor shall docu(ent discussions of si)nificant (atters with (ana)e(ent, those
char)ed with )overnance, and others, includin) the nature of the si)nificant (atters discussed and
when and with who( the discussions took !lace' $Aef. 6ara' A14&
3. 11' If the auditor identified infor(ation that is inconsistent with the auditor+s final conclusion
re)ardin) a si)nificant (atter, the auditor shall docu(ent how the auditor addressed the
inconsistenc#' $Aef. 6ara' A15&
?eparture fro$ a +ele!ant +e>uire$ent
14' If, in e,ce!tional circu(stances, the auditor ;ud)es it necessar# to de!art fro( a relevant
re*uire(ent in an ISA, the auditor shall docu(ent how the alternative audit !rocedures !erfor(ed
achieve the ai( of that re*uire(ent, and the reasons for the de!arture' $Aef. 6ara' A18-A15&
ISA 490 154
<atters Arising after the ?ate of the Auditor8s +eport
19' If, in e,ce!tional circu(stances, the auditor !erfor(s new or additional audit !rocedures or draws
new conclusions after the date of the auditor+s re!ort, the auditor shall docu(ent. $Aef. 6ara' A40&
1. $a& he circu(stances encountered?
2. $"& he new or additional audit !rocedures !erfor(ed, audit evidence o"tained, and
conclusions reached, and their effect on the auditor+s re!ort? and
3. $c& Lhen and "# who( the resultin) chan)es to audit docu(entation were (ade and
reviewed'
Ae.$0/ of the Fi"!0 A-#it Fi0e
1. 14' he auditor shall asse("le the audit docu(entation in an audit file and co(!lete the
ad(inistrative !rocess of asse("lin) the final audit file on a ti(el# "asis after the date of the
auditor+s re!ort' $Aef. 6ara' A41-A44&
2. 15' After the asse("l# of the final audit file has "een co(!leted, the auditor shall not delete
or discard audit docu(entation of an# nature "efore the end of its retention !eriod' $Aef. 6ara'
A49&
11B' In circu(stances other than those envisa)ed in !ara)ra!h 19 where the auditor finds it
necessar# to (odif# e,istin) audit docu(entation or add new audit docu(entation after the
asse("l# of the final audit file has "een co(!leted, the auditor shall, re)ardless of the nature
of the (odifications or additions, docu(ent. $Aef. 6ara' A44&
2$a& he s!ecific reasons for (akin) the(? and
3$"&Lhen and "# who( the# were (ade and reviewed'
OOO
Ti.e0/ *'ep!'!tio" of A-#it Doc-.e"t!tio" $Aef. 6ara' 7&
A1' 6re!arin) sufficient and a!!ro!riate audit docu(entation on a ti(el# "asis hel!s to enhance the
*ualit# of the audit and facilitates the effective review and evaluation of the audit evidence
o"tained and conclusions reached "efore the auditor+s re!ort is finaliJed' =ocu(entation
!re!ared after the audit work has "een !erfor(ed is likel# to "e less accurate than
docu(entation !re!ared at the ti(e such work is !erfor(ed'
159 ISA 490
Doc-.e"t!tio" of the A-#it *'oce#-'e *e'fo'.e# !"# A-#it E9i#e"ce O$t!i"e#
For$& Content and /4tent of Audit ?ocu$entation $Aef. 6ara' 8&
A4' he for(, content and e,tent of audit docu(entation de!end on factors such as.
1. G he siJe and co(!le,it# of the entit#'
2. G he nature of the audit !rocedures to "e !erfor(ed'
3. G he identified risks of (aterial (isstate(ent'
4. G he si)nificance of the audit evidence o"tained'
5. G he nature and e,tent of e,ce!tions identified'
6. G he need to docu(ent a conclusion or the "asis for a conclusion not readil# deter(ina"le
fro( the docu(entation of the work !erfor(ed or audit evidence o"tained'
7. G he audit (ethodolo)# and tools used'
A9' Audit docu(entation (a# "e recorded on !a!er or on electronic or other (edia' 0,a(!les of
audit docu(entation include.
% G Audit !ro)ra(s'
% G Anal#ses'
% G Issues (e(oranda'
% G Su((aries of si)nificant (atters'
% G Metters of confir(ation and re!resentation'
% G %hecklists'
% G %orres!ondence $includin) e-(ail& concernin) si)nificant (atters'
he auditor (a# include a"stracts or co!ies of the entit#+s records $for e,a(!le, si)nificant and
s!ecific contracts and a)ree(ents& as !art of audit docu(entation' Audit docu(entation,
however, is not a su"stitute for the entit#+s accountin) records'
A4' he auditor need not include in audit docu(entation su!erseded drafts of workin) !a!ers and
financial state(ents, notes that reflect inco(!lete or !reli(inar# thinkin), !revious co!ies of
docu(ents corrected for t#!o)ra!hical or other errors, and du!licates of docu(ents'
A5' 7ral e,!lanations "# the auditor, on their own, do not re!resent ade*uate su!!ort for the work
the auditor !erfor(ed or conclusions the auditor
ISA 490 154
reached, "ut (a# "e used to e,!lain or clarif# infor(ation contained in the audit docu(entation'
=ocu(entation of %o(!liance with ISAs $Aef. 6ara' 8$a&&
AB' In !rinci!le, co(!liance with the re*uire(ents of this ISA will result in the audit docu(entation
"ein) sufficient and a!!ro!riate in the circu(stances' 7ther ISAs contain s!ecific
docu(entation re*uire(ents that are intended to clarif# the a!!lication of this ISA in the
!articular circu(stances of those other ISAs' he s!ecific docu(entation re*uire(ents of other
ISAs do not li(it the a!!lication of this ISA' Further(ore, the a"sence of a docu(entation
re*uire(ent in an# !articular ISA is not intended to su))est that there is no docu(entation that
will "e !re!ared as a result of co(!l#in) with that ISA'
A7' Audit docu(entation !rovides evidence that the audit co(!lies with the ISAs' @owever, it is
neither necessar# nor !ractica"le for the auditor to docu(ent ever# (atter considered, or
!rofessional ;ud)(ent (ade, in an audit' Further, it is unnecessar# for the auditor to docu(ent
se!aratel# $as in a checklist, for e,a(!le& co(!liance with (atters for which co(!liance is
de(onstrated "# docu(ents included within the audit file' For e,a(!le.
% G he e,istence of an ade*uatel# docu(ented audit !lan de(onstrates that the auditor has
!lanned the audit'
% G he e,istence of a si)ned en)a)e(ent letter in the audit file de(onstrates that the auditor
has a)reed the ter(s of the audit en)a)e(ent with (ana)e(ent or, where a!!ro!riate, those
% G An auditor+s re!ort containin) an a!!ro!riatel# *ualified o!inion on the financial
state(ents de(onstrates that the auditor has co(!lied with the re*uire(ent to e,!ress a *ualified
o!inion under the circu(stances s!ecified in the ISAs'
% G In relation to re*uire(ents that a!!l# )enerall# throu)hout the audit, there (a# "e a
nu("er of wa#s in which co(!liance with the( (a# "e de(onstrated within the audit file.
For e,a(!le, there (a# "e no sin)le wa# in which the auditor+s !rofessional
ske!ticis( is docu(ented' 1ut the audit docu(entation (a# nevertheless !rovide
evidence of the auditor+s e,ercise of !rofessional ske!ticis( in accordance with
the ISAs' Such evidence (a# include s!ecific !rocedures !erfor(ed to corro"orate
(ana)e(ent+s res!onses to the auditor+s in*uiries'
155 ISA 490
Si(ilarl#, that the en)a)e(ent !artner has taken res!onsi"ilit# for the direction,
su!ervision and !erfor(ance of the audit in co(!liance with the ISAs (a# "e
evidenced in a nu("er of wa#s within the audit docu(entation' his (a# include
docu(entation of the en)a)e(ent !artner+s ti(el# involve(ent in as!ects of the
audit, such as !artici!ation in the tea( discussions re*uired "# ISA 915'
5
=ocu(entation of Si)nificant Eatters and Aelated Si)nificant 6rofessional >ud)(ents $Aef.
6ara' 8$c&&
A8' >ud)in) the si)nificance of a (atter re*uires an o";ective anal#sis of the facts and
circu(stances' 0,a(!les of si)nificant (atters include.
% G Eatters that )ive rise to si)nificant risks $as defined in ISA 915&'
B
% G Aesults of audit !rocedures indicatin) $a& that the financial state(ents could "e (ateriall#
(isstated, or $"& a need to revise the auditor+s !revious assess(ent of the risks of (aterial
(isstate(ent and the auditor+s res!onses to those risks'
% G %ircu(stances that cause the auditor si)nificant difficult# in a!!l#in) necessar# audit
!rocedures'
% G Findin)s that could result in a (odification to the audit o!inion or the inclusion of an
0(!hasis of Eatter !ara)ra!h in the auditor+s re!ort'
A5' An i(!ortant factor in deter(inin) the for(, content and e,tent of audit docu(entation of
si)nificant (atters is the e,tent of !rofessional ;ud)(ent e,ercised in !erfor(in) the work and
evaluatin) the results' =ocu(entation of the !rofessional ;ud)(ents (ade, where si)nificant,
serves to e,!lain the auditor+s conclusions and to reinforce the *ualit# of the ;ud)(ent' Such
(atters are of !articular interest to those res!onsi"le for reviewin) audit docu(entation,
includin) those carr#in) out su"se*uent audits when reviewin) (atters of continuin)
si)nificance $for e,a(!le, when !erfor(in) a retros!ective review of accountin) esti(ates&'
A10' So(e e,a(!les of circu(stances in which, in accordance with !ara)ra!h 8, it is a!!ro!riate to
!re!are audit docu(entation relatin) to the use of !rofessional ;ud)(ent include, where the
(atters and ;ud)(ents are si)nificant.
5
!ara)ra!h 10'
B
ISA 915, !ara)ra!h 4$e&'
ISA 490 15B
% G he rationale for the auditor+s conclusion when a re*uire(ent !rovides that the auditor
Cshall considerD certain infor(ation or factors, and that consideration is si)nificant in the conte,t
of the !articular en)a)e(ent'
% G he "asis for the auditor+s conclusion on the reasona"leness of areas of su";ective
;ud)(ents $for e,a(!le, the reasona"leness of si)nificant accountin) esti(ates&'
% G he "asis for the auditor+s conclusions a"out the authenticit# of a docu(ent when further
investi)ation $such as (akin) a!!ro!riate use of an e,!ert or of confir(ation !rocedures& is
undertaken in res!onse to conditions identified durin) the audit that caused the auditor to "elieve
that the docu(ent (a# not "e authentic'
A11' he auditor (a# consider it hel!ful to !re!are and retain as !art of the audit docu(entation a
su((ar# $so(eti(es known as a co(!letion (e(orandu(& that descri"es the si)nificant
(atters identified durin) the audit and how the# were addressed, or that includes cross-
references to other relevant su!!ortin) audit docu(entation that !rovides such infor(ation'
Such a su((ar# (a# facilitate effective and efficient reviews and ins!ections of the audit
docu(entation, !articularl# for lar)e and co(!le, audits' Further, the !re!aration of such a
su((ar# (a# assist the auditor+s consideration of the si)nificant (atters' It (a# also hel! the
auditor to consider whether, in li)ht of the audit !rocedures !erfor(ed and conclusions reached,
there is an# individual relevant ISA o";ective that the auditor cannot achieve that would !revent
the auditor fro( achievin) the overall o";ectives of the auditor'
Identification of )pecific Ite$s or <atters 1ested& and of the (reparer and +e!ie#er
$Aef. 6ara' 5&
A14' Aecordin) the identif#in) characteristics serves a nu("er of !ur!oses' For e,a(!le, it ena"les
the en)a)e(ent tea( to "e accounta"le for its work and facilitates the investi)ation of
e,ce!tions or inconsistencies' Identif#in) characteristics will var# with the nature of the audit
!rocedure and the ite( or (atter tested' For e,a(!le.
% G For a detailed test of entit#-)enerated !urchase orders, the auditor (a# identif# the
docu(ents selected for testin) "# their dates and uni*ue !urchase order nu("ers'
% G For a !rocedure re*uirin) selection or review of all ite(s over a s!ecific a(ount fro( a
)iven !o!ulation, the auditor (a# record the sco!e of the !rocedure and identif# the !o!ulation
$for e,a(!le, all ;ournal entries over a s!ecified a(ount fro( the ;ournal re)ister&'
157 ISA 490
% G For a !rocedure re*uirin) s#ste(atic sa(!lin) fro( a !o!ulation of docu(ents, the
auditor (a# identif# the docu(ents selected "# recordin) their source, the startin) !oint and the
sa(!lin) interval $for e,a(!le, a s#ste(atic sa(!le of shi!!in) re!orts selected fro( the shi!!in)
lo) for the !eriod fro( A!ril 1 to Se!te("er 90, startin) with re!ort nu("er 14945 and selectin)
ever# 145th re!ort&'
% G For a !rocedure re*uirin) in*uiries of s!ecific entit# !ersonnel, the auditor (a# record
the dates of the in*uiries and the na(es and ;o" desi)nations of the entit# !ersonnel'
% G For an o"servation !rocedure, the auditor (a# record the !rocess or (atter "ein)
o"served, the relevant individuals, their res!ective res!onsi"ilities, and where and when the
o"servation was carried out'
A19' ISA 440 re*uires the auditor to review the audit work !erfor(ed throu)h review of the audit
docu(entation'
7
he re*uire(ent to docu(ent who reviewed the audit work !erfor(ed does not
i(!l# a need for each s!ecific workin) !a!er to include evidence of review' he re*uire(ent,
however, (eans docu(entin) what audit work was reviewed, who reviewed such work, and
when it was reviewed'
=ocu(entation of =iscussions of Si)nificant Eatters with Eana)e(ent, hose %har)ed with
<overnance, and 7thers $Aef. 6ara' 10&
A14' he docu(entation is not li(ited to records !re!ared "# the auditor "ut (a# include other
a!!ro!riate records such as (inutes of (eetin)s !re!ared "# the entit#+s !ersonnel and a)reed
"# the auditor' 7thers with who( the auditor (a# discuss si)nificant (atters (a# include other
!ersonnel within the entit#, and e,ternal !arties, such as !ersons !rovidin) !rofessional advice
to the entit#'
=ocu(entation of @ow Inconsistencies have "een Addressed $Aef. 6ara' 11&
A15' he re*uire(ent to docu(ent how the auditor addressed inconsistencies in infor(ation does not
i(!l# that the auditor needs to retain docu(entation that is incorrect or su!erseded'
%onsiderations S!ecific to S(aller 0ntities $Aef' 6ara' 8&
A1B' he audit docu(entation for the audit of a s(aller entit# is )enerall# less e,tensive than that for
the audit of a lar)er entit#' Further, in the case of an audit where the en)a)e(ent !artner
!erfor(s all the audit work, the docu(entation will not include (atters that (i)ht have to "e
docu(ented
ISA 490 158
solel# to infor( or instruct (e("ers of an en)a)e(ent tea(, or to !rovide evidence of review
"# other (e("ers of the tea( $for e,a(!le, there will "e no (atters to docu(ent relatin) to
tea( discussions or su!ervision&' Nevertheless, the en)a)e(ent !artner co(!lies with the
overridin) re*uire(ent in !ara)ra!h 8 to !re!are audit docu(entation that can "e understood "#
an e,!erienced auditor, as the audit docu(entation (a# "e su";ect to review "# e,ternal !arties
for re)ulator# or other !ur!oses'
A17' Lhen !re!arin) audit docu(entation, the auditor of a s(aller entit# (a# also find it hel!ful and
efficient to record various as!ects of the audit to)ether in a sin)le docu(ent, with cross-
references to su!!ortin) workin) !a!ers as a!!ro!riate' 0,a(!les of (atters that (a# "e
docu(ented to)ether in the audit of a s(aller entit# include the understandin) of the entit# and
its internal control, the overall audit strate)# and audit !lan, (aterialit# deter(ined in
accordance with ISA 940,
8
assessed risks, si)nificant (atters noted durin) the audit, and
conclusions reached'
?eparture fro$ a +ele!ant +e>uire$ent $Aef. 6ara' 14&
A18' he re*uire(ents of the ISAs are desi)ned to ena"le the auditor to achieve the o";ectives
s!ecified in the ISAs, and there"# the overall o";ectives of the auditor' Accordin)l#, other than
in e,ce!tional circu(stances, the ISAs call for co(!liance with each re*uire(ent that is
relevant in the circu(stances of the audit'
A15' he docu(entation re*uire(ent a!!lies onl# to re*uire(ents that are relevant in the
circu(stances' A re*uire(ent is not relevant
5
onl# in the cases where.
1$a& he entire ISA is not relevant $for e,a(!le, if an entit# does not have an internal audit
function, nothin) in ISA B10
10
is relevant&? or
2$"& he re*uire(ent is conditional and the condition does not e,ist $for e,a(!le, the
re*uire(ent to (odif# the auditor+s o!inion where there is an ina"ilit# to o"tain sufficient
a!!ro!riate audit evidence, and there is no such ina"ilit#&'
<atters Arising after the ?ate of the Auditor8s +eport $Aef. 6ara' 19&
A40' 0,a(!les of e,ce!tional circu(stances include facts which "eco(e known to the auditor after
the date of the auditor+s re!ort "ut which e,isted at that date and which, if known at that date,
(i)ht have caused the financial
8
ISA 940, CEaterialit# in 6lannin) and 6erfor(in) an Audit'D
5
ISA 400, !ara)ra!h 44' 10
ISA B10, CUsin) the Lork of Internal Auditors'D
155 ISA 490
state(ents to "e a(ended or the auditor to (odif# the o!inion in the auditor+s re!ort'
11
he
resultin) chan)es to the audit docu(entation are reviewed in accordance with the review
res!onsi"ilities set out in ISA 440,
14
with the en)a)e(ent !artner takin) final res!onsi"ilit# for
the chan)es'
Ae.$0/ of the Fi"!0 A-#it Fi0e $Aef. 6ara' 14-1B&
A41' IS:% 1 $or national re*uire(ents that are at least as de(andin)& re*uires fir(s to esta"lish
!olicies and !rocedures for the ti(el# co(!letion of the asse("l# of audit files'
19
An
a!!ro!riate ti(e li(it within which to co(!lete the asse("l# of the final audit file is ordinaril#
not (ore than B0 da#s after the date of the auditor+s re!ort'
14
A44' he co(!letion of the asse("l# of the final audit file after the date of the auditor+s re!ort is an
ad(inistrative !rocess that does not involve the !erfor(ance of new audit !rocedures or the
drawin) of new conclusions' %han)es (a#, however, "e (ade to the audit docu(entation durin)
the final asse("l# !rocess if the# are ad(inistrative in nature' 0,a(!les of such chan)es
include.
% G =eletin) or discardin) su!erseded docu(entation'
% G Sortin), collatin) and cross-referencin) workin) !a!ers'
% G Si)nin) off on co(!letion checklists relatin) to the file asse("l# !rocess'
% G =ocu(entin) audit evidence that the auditor has o"tained, discussed and a)reed with the
relevant (e("ers of the en)a)e(ent tea( "efore the date of the auditor+s re!ort'
A49' IS:% 1 $or national re*uire(ents that are at least as de(andin)& re*uires fir(s to esta"lish
!olicies and !rocedures for the retention of en)a)e(ent docu(entation'
15
he retention !eriod
for audit en)a)e(ents ordinaril# is no shorter than five #ears fro( the date of the auditor+s
re!ort, or, if later, the date of the )rou! auditor+s re!ort'
1B
A44' An e,a(!le of a circu(stance in which the auditor (a# find it necessar# to (odif# e,istin)
audit docu(entation or add new audit docu(entation after
11
ISA 5B0, CSu"se*uent 0vents,D !ara)ra!h 14'
14
ISA 440, !ara)ra!h 1B' 19
IS:% 1, !ara)ra!h 45' 14
IS:% 1, !ara)ra!h A54'
15
IS:% 1, !ara)ra!h 47' 1B
IS:% 1, !ara)ra!h AB1'
ISA 490 1B0
file asse("l# has "een co(!leted is the need to clarif# e,istin) audit docu(entation arisin) fro(
co((ents received durin) (onitorin) ins!ections !erfor(ed "# internal or e,ternal !arties'
1B1 ISA 490
Appe"#i5
$Aef. 6ara' 1&
Specific A-#it Doc-.e"t!tio" Re2-i'e.e"t i" Othe' ISA
his a!!endi, identifies !ara)ra!hs in other ISAs in effect for audits of financial state(ents for !eriods
"e)innin) on or after =ece("er 15, 4005 that contain s!ecific docu(entation re*uire(ents' he list is not a
su"stitute for considerin) the re*uire(ents and related a!!lication and other e,!lanator# (aterial in ISAs'
1. G ISA 410, CA)reein) the er(s of Audit 0n)a)e(entsD K !ara)ra!hs 10-14
2. G ISA 440, C:ualit# %ontrol for an Audit of Financial State(entsD K !ara)ra!hs 44-45
3. G ISA 440, Che Auditor+s Aes!onsi"ilities Aelatin) to Fraud in an Audit of Financial
State(entsD K !ara)ra!hs 44-47
4. G ISA 450, C%onsideration of Maws and Ae)ulations in an Audit of Financial State(entsD K
!ara)ra!h 45
5. G ISA 4B0, C%o((unication with hose %har)ed with <overnanceD K !ara)ra!h 49
6. G ISA 900, C6lannin) an Audit of Financial State(entsD K !ara)ra!h 14
7. G ISA 915, CIdentif#in) and Assessin) the Aisks of Eaterial Eisstate(ent throu)h
Understandin) the 0ntit# and Its 0nviron(entD K !ara)ra!h 94
8. G ISA 940, CEaterialit# in 6lannin) and 6erfor(in) an AuditD K !ara)ra!h 14
9. G ISA 990, Che Auditor+s Aes!onses to Assessed AisksD K !ara)ra!hs 48-90
10. G ISA 450, C0valuation of Eisstate(ents Identified =urin) the AuditD K !ara)ra!h 15
11. G ISA 540, CAuditin) Accountin) 0sti(ates, Includin) Fair Falue Accountin) 0sti(ates,
and Aelated =isclosuresD K !ara)ra!h 49
12. G ISA 550, CAelated 6artiesD K !ara)ra!h 48
13. G ISA B00, CS!ecial %onsiderationsNAudits of <rou! Financial State(ents $Includin) the
Lork of %o(!onent Auditors&D K !ara)ra!h 50
14. G ISA B10, CUsin) the Lork of Internal AuditorsD K !ara)ra!h 19
ISA 490 A660N=II 1B4
THE AUDITOR>S RES*ONSIBILITIES RELATING TO FRAUD IN AN AUDIT
OF FINANCIAL STATE)ENTS
CONTENTS
6ara)ra!h
1B9 ISA 440
%haracteristics of Fraud '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1-AB
6rofessional Ske!ticis( '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A7-A5
=iscussion a(on) the 0n)a)e(ent ea( '''''''''''''''''''''''''''''''''''''''''''''''''' A10-A11
Aisk Assess(ent 6rocedures and Aelated Activities '''''''''''''''''''''''''''''''''' A14-A47
Identification and Assess(ent of the Aisks of Eaterial
Eisstate(ent =ue to Fraud '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A48-A94 Aes!onses to the
Assessed Aisks of Eaterial Eisstate(ent
=ue to Fraud '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A99-A48
0valuation of Audit 0vidence ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A45-A59
Auditor Una"le to %ontinue the 0n)a)e(ent ''''''''''''''''''''''''''''''''''''''''''''' A54-A57
Lritten Ae!resentations '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A58-A55
%o((unications to Eana)e(ent and with hose %har)ed
with <overnance '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' AB0-AB4 %o((unications to
Ae)ulator# and 0nforce(ent
Authorities ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' AB5-AB7 A!!endi, 1. 0,a(!les
of Fraud Aisk Factors A!!endi, 4. 0,a(!les of 6ossi"le Audit 6rocedures to Address the
Assessed Aisks of Eaterial Eisstate(ent =ue to Fraud A!!endi, 9. 0,a(!les of
%ircu(stances that Indicate the 6ossi"ilit#
of Fraud
International Standard on Auditin) $ISA& 440, Che Auditor+s Aes!onsi"ilities Aelatin) to Fraud in an
Audit of Financial State(entsD should "e read in con;unction with ISA 400, C7verall 7";ectives of the
Inde!endent Auditor and the %onduct of an Audit in Accordance with International Standards on Auditin)'D
ISA 440 1B4
1' his International Standard on Auditin) $ISA& deals with the auditor+s res!onsi"ilities relatin) to
fraud in an audit of financial state(ents' S!ecificall#, it e,!ands on how ISA 915
1
and ISA 990
4
are to "e a!!lied in relation to risks of (aterial (isstate(ent due to fraud'
Ch!'!cte'itic of F'!-#
1. 4' Eisstate(ents in the financial state(ents can arise fro( either fraud or error' he
distin)uishin) factor "etween fraud and error is whether the underl#in) action that results in the
(isstate(ent of the financial state(ents is intentional or unintentional'
2. 9' Althou)h fraud is a "road le)al conce!t, for the !ur!oses of the ISAs, the auditor is
concerned with fraud that causes a (aterial (isstate(ent in the financial state(ents' wo t#!es of
intentional (isstate(ents are relevant to the auditor K (isstate(ents resultin) fro( fraudulent
financial re!ortin) and (isstate(ents resultin) fro( (isa!!ro!riation of assets' Althou)h the
auditor (a# sus!ect or, in rare cases, identif# the occurrence of fraud, the auditor does not (ake
le)al deter(inations of whether fraud has actuall# occurred' $Aef. 6ara' A1-AB&
Repo"i$i0it/ fo' the *'e9e"tio" !"# Detectio" of F'!-#
4' he !ri(ar# res!onsi"ilit# for the !revention and detection of fraud rests with "oth those char)ed
with )overnance of the entit# and (ana)e(ent' It is i(!ortant that (ana)e(ent, with the
oversi)ht of those char)ed with )overnance, !lace a stron) e(!hasis on fraud !revention, which
(a# reduce o!!ortunities for fraud to take !lace, and fraud deterrence, which could !ersuade
individuals not to co((it fraud "ecause of the likelihood of detection and !unish(ent' his
involves a co((it(ent to creatin) a culture of honest# and ethical "ehavior which can "e
reinforced "# an active oversi)ht "# those char)ed with )overnance' 7versi)ht "# those char)ed
with )overnance includes considerin) the !otential for override of controls or other ina!!ro!riate
influence over the financial re!ortin) !rocess, such as efforts "# (ana)e(ent to (ana)e earnin)s
in order to influence the !erce!tions of anal#sts as to the entit#+s !erfor(ance and !rofita"ilit#'
1
4
ISA 990, Che Auditor+s Aes!onses to Assessed Aisks'D
1B5 ISA 440
+esponsibilities of the Auditor
1. 5' An auditor conductin) an audit in accordance with ISAs is res!onsi"le for o"tainin)
reasona"le assurance that the financial state(ents taken as a whole are free fro( (aterial
(isstate(ent, whether caused "# fraud or error' 7win) to the inherent li(itations of an audit,
there is an unavoida"le risk that so(e (aterial (isstate(ents of the financial state(ents (a# not
"e detected, even thou)h the audit is !ro!erl# !lanned and !erfor(ed in accordance with the
ISAs'
9
2. B' As descri"ed in ISA 400,
4
the !otential effects of inherent li(itations are !articularl#
si)nificant in the case of (isstate(ent resultin) fro( fraud' he risk of not detectin) a (aterial
(isstate(ent resultin) fro( fraud is hi)her than the risk of not detectin) one resultin) fro( error'
his is "ecause fraud (a# involve so!histicated and carefull# or)aniJed sche(es desi)ned to
conceal it, such as for)er#, deli"erate failure to record transactions, or intentional
(isre!resentations "ein) (ade to the auditor' Such atte(!ts at conceal(ent (a# "e even (ore
difficult to detect when acco(!anied "# collusion' %ollusion (a# cause the auditor to "elieve that
audit evidence is !ersuasive when it is, in fact, false' he auditor+s a"ilit# to detect a fraud
de!ends on factors such as the skillfulness of the !er!etrator, the fre*uenc# and e,tent of
(ani!ulation, the de)ree of collusion involved, the relative siJe of individual a(ounts
(ani!ulated, and the seniorit# of those individuals involved' Lhile the auditor (a# "e a"le to
identif# !otential o!!ortunities for fraud to "e !er!etrated, it is difficult for the auditor to
deter(ine whether (isstate(ents in ;ud)(ent areas such as accountin) esti(ates are caused "#
fraud or error'
3. 7' Further(ore, the risk of the auditor not detectin) a (aterial (isstate(ent resultin) fro(
(ana)e(ent fraud is )reater than for e(!lo#ee fraud, "ecause (ana)e(ent is fre*uentl# in a
!osition to directl# or indirectl# (ani!ulate accountin) records, !resent fraudulent financial
infor(ation or override control !rocedures desi)ned to !revent si(ilar frauds "# other e(!lo#ees'
4. 8' Lhen o"tainin) reasona"le assurance, the auditor is res!onsi"le for (aintainin)
!rofessional ske!ticis( throu)hout the audit, considerin) the !otential for (ana)e(ent override
of controls and reco)niJin) the fact that audit !rocedures that are effective for detectin) error (a#
not "e effective in detectin) fraud' he re*uire(ents in this ISA are desi)ned to assist the auditor
in identif#in) and assessin) the risks of (aterial (isstate(ent due to fraud and in desi)nin)
!rocedures to detect such (isstate(ent'
9
Standards on Auditin),D !ara)ra!h A51'
4
ISA 440 1BB
Effecti9e D!te
15, 4005'
O$1ecti9e
10' he o";ectives of the auditor are.
1$a& o identif# and assess the risks of (aterial (isstate(ent of the financial state(ents due to fraud?
2$"& o o"tain sufficient a!!ro!riate audit evidence re)ardin) the assessed risks of (aterial
(isstate(ent due to fraud, throu)h desi)nin) and i(!le(entin) a!!ro!riate res!onses? and
3$c& o res!ond a!!ro!riatel# to fraud or sus!ected fraud identified durin) the audit'
Defi"itio"
11' For !ur!oses of the ISAs, the followin) ter(s have the (eanin)s attri"uted "elow.
1. $a& Fraud K An intentional act "# one or (ore individuals a(on) (ana)e(ent, those char)ed
with )overnance, e(!lo#ees, or third !arties, involvin) the use of dece!tion to o"tain an un;ust or
ille)al advanta)e'
2. $"& Fraud risk factors K 0vents or conditions that indicate an incentive or !ressure to co((it
fraud or !rovide an o!!ortunit# to co((it fraud'
Re2-i'e.e"t *'ofeio"!0 S%eptici.
1. 14' In accordance with ISA 400, the auditor shall (aintain !rofessional ske!ticis(
throu)hout the audit, reco)niJin) the !ossi"ilit# that a (aterial (isstate(ent due to fraud could
e,ist, notwithstandin) the auditor+s !ast e,!erience of the honest# and inte)rit# of the entit#+s
(ana)e(ent and those char)ed with )overnance' $Aef. 6ara' A7- A8&
2. 19' Unless the auditor has reason to "elieve the contrar#, the auditor (a# acce!t records and
docu(ents as )enuine' If conditions identified durin) the audit cause the auditor to "elieve that a
docu(ent (a# not "e authentic or that ter(s in a docu(ent have "een (odified "ut not disclosed
to the auditor, the auditor shall investi)ate further' $Aef. 6ara' A5&
3. 14' Lhere res!onses to in*uiries of (ana)e(ent or those char)ed with )overnance are
inconsistent, the auditor shall investi)ate the inconsistencies'
1B7 ISA 440
Dic-io" !.o"( the E"(!(e.e"t Te!.
15' ISA 915 re*uires a discussion a(on) the en)a)e(ent tea( (e("ers and a deter(ination "# the
en)a)e(ent !artner of which (atters are to "e co((unicated to those tea( (e("ers not involved
in the discussion'
5
his discussion shall !lace !articular e(!hasis on how and where the entit#+s
financial state(ents (a# "e susce!ti"le to (aterial (isstate(ent due to fraud, includin) how
fraud (i)ht occur' he discussion shall occur settin) aside "eliefs that the en)a)e(ent tea(
(e("ers (a# have that (ana)e(ent and those char)ed with )overnance are honest and have
inte)rit#' $Aef. 6ara' A10-A11&
Ri% Ae.e"t *'oce#-'e !"# Re0!te# Acti9itie
1B' Lhen !erfor(in) risk assess(ent !rocedures and related activities to o"tain an understandin) of
the entit# and its environ(ent, includin) the entit#+s internal control, re*uired "# ISA 915,
B
the
auditor shall !erfor( the !rocedures in !ara)ra!hs 17-44 to o"tain infor(ation for use in
identif#in) the risks of (aterial (isstate(ent due to fraud'
<anage$ent and ,thers #ithin the /ntity
117' he auditor shall (ake in*uiries of (ana)e(ent re)ardin).
2$a& Eana)e(ent+s assess(ent of the risk that the financial state(ents (a# "e (ateriall#
(isstated due to fraud, includin) the nature, e,tent and fre*uenc# of such assess(ents? $Aef.
6ara' A14-A19&
3$"& Eana)e(ent+s !rocess for identif#in) and res!ondin) to the risks of fraud in the entit#,
includin) an# s!ecific risks of fraud that (ana)e(ent has identified or that have "een "rou)ht
to its attention, or classes of transactions, account "alances, or disclosures for which a risk of
fraud is likel# to e,ist? $Aef. 6ara' A14&
4$c&Eana)e(ent+s co((unication, if an#, to those char)ed with )overnance re)ardin) its
!rocesses for identif#in) and res!ondin) to the risks of fraud in the entit#? and
5$d& Eana)e(ent+s co((unication, if an#, to e(!lo#ees re)ardin) its views on "usiness !ractices
and ethical "ehavior'
2. 18' he auditor shall (ake in*uiries of (ana)e(ent, and others within the entit# as
a!!ro!riate, to deter(ine whether the# have knowled)e of an# actual, sus!ected or alle)ed fraud
affectin) the entit#' $Aef. 6ara' A15-A17&
3. 15' For those entities that have an internal audit function, the auditor shall (ake in*uiries of
internal audit to deter(ine whether it has knowled)e of an# actual,
5
B
ISA 440 1B8
sus!ected or alle)ed fraud affectin) the entit#, and to o"tain its views a"out the risks of fraud'
$Aef. 6ara' A18&
1hose Charged #ith 2o!ernance
1. 40' Unless all of those char)ed with )overnance are involved in (ana)in) the entit#,
7
the
auditor shall o"tain an understandin) of how those char)ed with )overnance e,ercise oversi)ht of
(ana)e(ent+s !rocesses for identif#in) and res!ondin) to the risks of fraud in the entit# and the
internal control that (ana)e(ent has esta"lished to (iti)ate these risks' $Aef. 6ara' A15-A41&
2. 41' Unless all of those char)ed with )overnance are involved in (ana)in) the entit#, the
auditor shall (ake in*uiries of those char)ed with )overnance to deter(ine whether the# have
knowled)e of an# actual, sus!ected or alle)ed fraud affectin) the entit#' hese in*uiries are (ade
in !art to corro"orate the res!onses to the in*uiries of (ana)e(ent'
"nusual or "ne4pected +elationships Identified
44' he auditor shall evaluate whether unusual or une,!ected relationshi!s that have "een identified in
!erfor(in) anal#tical !rocedures, includin) those related to revenue accounts, (a# indicate risks
of (aterial (isstate(ent due to fraud'
,ther Infor$ation
49' he auditor shall consider whether other infor(ation o"tained "# the auditor indicates risks of
(aterial (isstate(ent due to fraud' $Aef. 6ara' A44&
/!aluation of Fraud +is. Factors
44' he auditor shall evaluate whether the infor(ation o"tained fro( the other risk assess(ent
!rocedures and related activities !erfor(ed indicates that one or (ore fraud risk factors are
!resent' Lhile fraud risk factors (a# not necessaril# indicate the e,istence of fraud, the# have
often "een !resent in circu(stances where frauds have occurred and therefore (a# indicate risks
of (aterial (isstate(ent due to fraud' $Aef. 6ara' A49-A47&
I#e"tific!tio" !"# Ae.e"t of the Ri% of )!te'i!0 )it!te.e"t D-e to F'!-#
1. 45' In accordance with ISA 915, the auditor shall identif# and assess the risks of (aterial
(isstate(ent due to fraud at the financial state(ent level, and at the assertion level for classes of
transactions, account "alances and disclosures'
8
2. 4B' Lhen identif#in) and assessin) the risks of (aterial (isstate(ent due to fraud, the
auditor shall, "ased on a !resu(!tion that there are risks of fraud in
7
ISA 4B0, C%o((unication with hose %har)ed with <overnance,D !ara)ra!h 19'
8
1B5 ISA 440
revenue reco)nition, evaluate which t#!es of revenue, revenue transactions or assertions )ive rise
to such risks' 6ara)ra!h 47 s!ecifies the docu(entation re*uired where the auditor concludes that
the !resu(!tion is not a!!lica"le in the circu(stances of the en)a)e(ent and, accordin)l#, has not
identified revenue reco)nition as a risk of (aterial (isstate(ent due to fraud' $Aef. 6ara' A48-
A90&
47' he auditor shall treat those assessed risks of (aterial (isstate(ent due to fraud as si)nificant
risks and accordin)l#, to the e,tent not alread# done so, the auditor shall o"tain an understandin)
of the entit#+s related controls, includin) control activities, relevant to such risks' $Aef. 6ara' A91-
A94&
Repo"e to the Aee# Ri% of )!te'i!0 )it!te.e"t D-e to F'!-#
,!erall +esponses
1. 48' In accordance with ISA 990, the auditor shall deter(ine overall res!onses to address the
assessed risks of (aterial (isstate(ent due to fraud at the financial state(ent level'
5
$Aef. 6ara'
A99&
1. 45' In deter(inin) overall res!onses to address the assessed risks of (aterial (isstate(ent
due to fraud at the financial state(ent level, the auditor shall.
2. $a& Assi)n and su!ervise !ersonnel takin) account of the knowled)e, skill and a"ilit# of the
individuals to "e )iven si)nificant en)a)e(ent res!onsi"ilities and the auditor+s assess(ent of
the risks of (aterial (isstate(ent due to fraud for the en)a)e(ent? $Aef. 6ara' A94-A95&
3. $"& 0valuate whether the selection and a!!lication of accountin) !olicies "# the entit#,
!articularl# those related to su";ective (easure(ents and co(!le, transactions, (a# "e
indicative of fraudulent financial re!ortin) resultin) fro( (ana)e(ent+s effort to (ana)e
earnin)s? and
4. $c& Incor!orate an ele(ent of un!redicta"ilit# in the selection of the nature, ti(in) and e,tent
of audit !rocedures' $Aef. 6ara' A9B&
Audit (rocedures +esponsi!e to Assessed +is.s of <aterial <isstate$ent ?ue to Fraud at the
Assertion :e!el
90' In accordance with ISA 990, the auditor shall desi)n and !erfor( further audit !rocedures whose
nature, ti(in) and e,tent are res!onsive to the assessed risks of (aterial (isstate(ent due to fraud
at the assertion level'
10
$Aef. 6ara' A97A40&
5
10
ISA 990, !ara)ra!h B'
ISA 440 170
Audit (rocedures +esponsi!e to +is.s +elated to <anage$ent ,!erride of Controls
1. 91' Eana)e(ent is in a uni*ue !osition to !er!etrate fraud "ecause of (ana)e(ent+s a"ilit#
to (ani!ulate accountin) records and !re!are fraudulent financial state(ents "# overridin)
controls that otherwise a!!ear to "e o!eratin) effectivel#' Althou)h the level of risk of
(ana)e(ent override of controls will var# fro( entit# to entit#, the risk is nevertheless !resent in
all entities' =ue to the un!redicta"le wa# in which such override could occur, it is a risk of
(aterial (isstate(ent due to fraud and thus a si)nificant risk'
194' Irres!ective of the auditor+s assess(ent of the risks of (ana)e(ent override of controls,
the auditor shall desi)n and !erfor( audit !rocedures to.
2$a& est the a!!ro!riateness of ;ournal entries recorded in the )eneral led)er and other
ad;ust(ents (ade in the !re!aration of the financial state(ents' In desi)nin) and !erfor(in)
audit !rocedures for such tests, the auditor shall.
3$i& Eake in*uiries of individuals involved in the financial re!ortin) !rocess a"out ina!!ro!riate
or unusual activit# relatin) to the !rocessin) of ;ournal entries and other ad;ust(ents?
4$ii& Select ;ournal entries and other ad;ust(ents (ade at the end of a re!ortin) !eriod? and
5$iii& %onsider the need to test ;ournal entries and other ad;ust(ents throu)hout the !eriod'
6$"& Aeview accountin) esti(ates for "iases and evaluate whether the circu(stances
!roducin) the "ias, if an#, re!resent a risk of (aterial (isstate(ent due to fraud' In
!erfor(in) this review, the auditor shall.
7$i& 0valuate whether the ;ud)(ents and decisions (ade "# (ana)e(ent in (akin) the
accountin) esti(ates included in the financial state(ents, even if the# are individuall#
reasona"le, indicate a !ossi"le "ias on the !art of the entit#+s (ana)e(ent that (a# re!resent
a risk of (aterial (isstate(ent due to fraud' If so, the auditor shall reevaluate the accountin)
esti(ates taken as a whole? and
8$ii& 6erfor( a retros!ective review of (ana)e(ent ;ud)(ents and assu(!tions related to
si)nificant accountin) esti(ates reflected in the financial state(ents of the !rior #ear' $Aef.
6ara' A45A47&
9$c& For si)nificant transactions that are outside the nor(al course of "usiness for the entit#,
or that otherwise a!!ear to "e unusual )iven the auditor+s understandin) of the entit# and its
environ(ent and other infor(ation
171 ISA 440
o"tained durin) the audit, the auditor shall evaluate whether the "usiness rationale $or the
lack thereof& of the transactions su))ests that the# (a# have "een entered into to en)a)e in
fraudulent financial re!ortin) or to conceal (isa!!ro!riation of assets' $Aef. 6ara' A48&
99' he auditor shall deter(ine whether, in order to res!ond to the identified risks of (ana)e(ent
override of controls, the auditor needs to !erfor( other audit !rocedures in addition to those
s!ecificall# referred to a"ove $that is, where there are s!ecific additional risks of (ana)e(ent
override that are not covered as !art of the !rocedures !erfor(ed to address the re*uire(ents in
!ara)ra!h 94&'
E9!0-!tio" of A-#it E9i#e"ce $Aef. 6ara' A45&
1. 94' he auditor shall evaluate whether anal#tical !rocedures that are !erfor(ed near the end
of the audit, when for(in) an overall conclusion as to whether the financial state(ents are
consistent with the auditor+s understandin) of the entit#, indicate a !reviousl# unreco)niJed risk of
(aterial (isstate(ent due to fraud' $Aef. 6ara' A50&
2. 95' If the auditor identifies a (isstate(ent, the auditor shall evaluate whether such a
(isstate(ent is indicative of fraud' If there is such an indication, the auditor shall evaluate the
i(!lications of the (isstate(ent in relation to other as!ects of the audit, !articularl# the relia"ilit#
of (ana)e(ent re!resentations, reco)niJin) that an instance of fraud is unlikel# to "e an isolated
occurrence' $Aef. 6ara' A51&
3. 9B' If the auditor identifies a (isstate(ent, whether (aterial or not, and the auditor has
reason to "elieve that it is or (a# "e the result of fraud and that (ana)e(ent $in !articular, senior
(ana)e(ent& is involved, the auditor shall reevaluate the assess(ent of the risks of (aterial
(isstate(ent due to fraud and its resultin) i(!act on the nature, ti(in) and e,tent of audit
!rocedures to res!ond to the assessed risks' he auditor shall also consider whether circu(stances
or conditions indicate !ossi"le collusion involvin) e(!lo#ees, (ana)e(ent or third !arties when
reconsiderin) the relia"ilit# of evidence !reviousl# o"tained' $Aef. 6ara' A54&
4. 97' If the auditor confir(s that, or is una"le to conclude whether, the financial state(ents are
(ateriall# (isstated as a result of fraud the auditor shall evaluate the i(!lications for the audit'
$Aef. 6ara' A59&
A-#ito' U"!$0e to Co"ti"-e the E"(!(e.e"t
98' If, as a result of a (isstate(ent resultin) fro( fraud or sus!ected fraud, the auditor encounters
e,ce!tional circu(stances that "rin) into *uestion the auditor+s a"ilit# to continue !erfor(in) the
audit, the auditor shall.
$a& =eter(ine the !rofessional and le)al res!onsi"ilities a!!lica"le in the circu(stances,
includin) whether there is a re*uire(ent for the auditor
ISA 440 174
to re!ort to the !erson or !ersons who (ade the audit a!!oint(ent or, in so(e cases, to
re)ulator# authorities?
1. $"& %onsider whether it is a!!ro!riate to withdraw fro( the en)a)e(ent, where withdrawal is
!ossi"le under a!!lica"le law or re)ulation? and
1. $c& If the auditor withdraws.
2. $i& =iscuss with the a!!ro!riate level of (ana)e(ent and those char)ed with )overnance the
auditor+s withdrawal fro( the en)a)e(ent and the reasons for the withdrawal? and
3. $ii& =eter(ine whether there is a !rofessional or le)al re*uire(ent to re!ort to the !erson or
!ersons who (ade the audit a!!oint(ent or, in so(e cases, to re)ulator# authorities, the
auditor+s withdrawal fro( the en)a)e(ent and the reasons for the withdrawal' $Aef. 6ara'
A54-A57&
='itte" Rep'ee"t!tio"
95' he auditor shall o"tain written re!resentations fro( (ana)e(ent and, where a!!ro!riate, those
char)ed with )overnance that.
1$a& he# acknowled)e their res!onsi"ilit# for the desi)n, i(!le(entation and (aintenance of
internal control to !revent and detect fraud?
2$"& he# have disclosed to the auditor the results of (ana)e(ent+s assess(ent of the risk that the
financial state(ents (a# "e (ateriall# (isstated as a result of fraud?
1$c&he# have disclosed to the auditor their knowled)e of fraud or sus!ected fraud affectin) the
entit# involvin).
2$i& Eana)e(ent?
3$ii& 0(!lo#ees who have si)nificant roles in internal control? or
4$iii& 7thers where the fraud could have a (aterial effect on the financial state(ents? and
3$d& he# have disclosed to the auditor their knowled)e of an# alle)ations of fraud, or
sus!ected fraud, affectin) the entit#+s financial state(ents co((unicated "# e(!lo#ees, for(er
e(!lo#ees, anal#sts, re)ulators or others' $Aef. 6ara' A58-A55&
Co..-"ic!tio" to )!"!(e.e"t !"# &ith Thoe Ch!'(e# &ith Go9e'"!"ce
40' If the auditor has identified a fraud or has o"tained infor(ation that indicates that a fraud (a#
e,ist, the auditor shall co((unicate these (atters on a ti(el# "asis to the a!!ro!riate level of
(ana)e(ent in order to infor( those with !ri(ar# res!onsi"ilit# for the !revention and detection
of fraud of (atters
179 ISA 440
relevant to their res!onsi"ilities' $Aef. 6ara' AB0&
41' Unless all of those char)ed with )overnance are involved in (ana)in) the entit#, if the auditor has
identified or sus!ects fraud involvin).
1. $a& (ana)e(ent?
2. $"& e(!lo#ees who have si)nificant roles in internal control? or
3. $c& others where the fraud results in a (aterial (isstate(ent in the financial state(ents,
the auditor shall co((unicate these (atters to those char)ed with )overnance on a ti(el# "asis' If
the auditor sus!ects fraud involvin) (ana)e(ent, the auditor shall co((unicate these sus!icions
to those char)ed with )overnance and discuss with the( the nature, ti(in) and e,tent of audit
!rocedures necessar# to co(!lete the audit' $Aef. 6ara' AB1-AB9&
44' he auditor shall co((unicate with those char)ed with )overnance an# other (atters related to
fraud that are, in the auditor+s ;ud)(ent, relevant to their res!onsi"ilities' $Aef. 6ara' AB4&
Co..-"ic!tio" to Re(-0!to'/ !"# E"fo'ce.e"t A-tho'itie
49' If the auditor has identified or sus!ects a fraud, the auditor shall deter(ine whether there is a
res!onsi"ilit# to re!ort the occurrence or sus!icion to a !art# outside the entit#' Althou)h the
auditor+s !rofessional dut# to (aintain the confidentialit# of client infor(ation (a# !reclude such
re!ortin), the auditor+s le)al res!onsi"ilities (a# override the dut# of confidentialit# in so(e
circu(stances' $Aef. 6ara' AB5-AB7&
Doc-.e"t!tio"
144' he auditor shall include the followin) in the audit docu(entation
11
of the auditor+s
understandin) of the entit# and its environ(ent and the assess(ent of the risks of (aterial
(isstate(ent re*uired "# ISA 915.
14
2$a&he si)nificant decisions reached durin) the discussion a(on) the en)a)e(ent tea(
re)ardin) the susce!ti"ilit# of the entit#+s financial state(ents to (aterial (isstate(ent due to
fraud? and
3$"& he identified and assessed risks of (aterial (isstate(ent due to fraud at the financial
state(ent level and at the assertion level'
2. 45' he auditor shall include the followin) in the audit docu(entation of the auditor+s
res!onses to the assessed risks of (aterial (isstate(ent re*uired "# ISA 990.
19
11
ISA 490, CAudit =ocu(entation,D !ara)ra!hs 8-11, and !ara)ra!h AB' 14
19
ISA 440 174
1$a& he overall res!onses to the assessed risks of (aterial (isstate(ent due to fraud at the
financial state(ent level and the nature, ti(in) and e,tent of audit !rocedures, and the linka)e of
those !rocedures with the assessed risks of (aterial (isstate(ent due to fraud at the assertion
level? and
2$"& he results of the audit !rocedures, includin) those desi)ned to address the risk of
(ana)e(ent override of controls'
1. 4B' he auditor shall include in the audit docu(entation co((unications a"out fraud (ade
to (ana)e(ent, those char)ed with )overnance, re)ulators and others'
2. 47' If the auditor has concluded that the !resu(!tion that there is a risk of (aterial
(isstate(ent due to fraud related to revenue reco)nition is not a!!lica"le in the circu(stances of
the en)a)e(ent, the auditor shall include in the audit docu(entation the reasons for that
conclusion'
OOO
Ch!'!cte'itic of F'!-# $Aef. 6ara' 9&
A1' Fraud, whether fraudulent financial re!ortin) or (isa!!ro!riation of assets, involves incentive or
!ressure to co((it fraud, a !erceived o!!ortunit# to do so and so(e rationaliJation of the act' For
e,a(!le.
1. G Incentive or !ressure to co((it fraudulent financial re!ortin) (a# e,ist when
(ana)e(ent is under !ressure, fro( sources outside or inside the entit#, to achieve an e,!ected
$and !erha!s unrealistic& earnin)s tar)et or financial outco(e K !articularl# since the
conse*uences to (ana)e(ent for failin) to (eet financial )oals can "e si)nificant' Si(ilarl#,
individuals (a# have an incentive to (isa!!ro!riate assets, for e,a(!le, "ecause the individuals
are livin) "e#ond their (eans'
2. G A !erceived o!!ortunit# to co((it fraud (a# e,ist when an individual "elieves internal
control can "e overridden, for e,a(!le, "ecause the individual is in a !osition of trust or has
knowled)e of s!ecific deficiencies in internal control'
3. G Individuals (a# "e a"le to rationaliJe co((ittin) a fraudulent act' So(e individuals
!ossess an attitude, character or set of ethical values that allow the( knowin)l# and intentionall#
to co((it a dishonest act' @owever, even otherwise honest individuals can co((it fraud in an
environ(ent that i(!oses sufficient !ressure on the('
A4' Fraudulent financial re!ortin) involves intentional (isstate(ents includin) o(issions of a(ounts
or disclosures in financial state(ents to deceive financial
175 ISA 440
state(ent users' It can "e caused "# the efforts of (ana)e(ent to (ana)e earnin)s in order to
deceive financial state(ent users "# influencin) their !erce!tions as to the entit#+s !erfor(ance
and !rofita"ilit#' Such earnin)s (ana)e(ent (a# start out with s(all actions or ina!!ro!riate
ad;ust(ent of assu(!tions and chan)es in ;ud)(ents "# (ana)e(ent' 6ressures and incentives
(a# lead these actions to increase to the e,tent that the# result in fraudulent financial re!ortin)'
Such a situation could occur when, due to !ressures to (eet (arket e,!ectations or a desire to
(a,i(iJe co(!ensation "ased on !erfor(ance, (ana)e(ent intentionall# takes !ositions that lead
to fraudulent financial re!ortin) "# (ateriall# (isstatin) the financial state(ents' In so(e entities,
(ana)e(ent (a# "e (otivated to reduce earnin)s "# a (aterial a(ount to (ini(iJe ta, or to
inflate earnin)s to secure "ank financin)'
A9' Fraudulent financial re!ortin) (a# "e acco(!lished "# the followin).
1. G Eani!ulation, falsification $includin) for)er#&, or alteration of accountin) records or
su!!ortin) docu(entation fro( which the financial state(ents are !re!ared'
2. G Eisre!resentation in, or intentional o(ission fro(, the financial state(ents of events,
transactions or other si)nificant infor(ation'
3. G Intentional (isa!!lication of accountin) !rinci!les relatin) to a(ounts, classification,
(anner of !resentation, or disclosure'
A4' Fraudulent financial re!ortin) often involves (ana)e(ent override of controls that otherwise (a#
a!!ear to "e o!eratin) effectivel#' Fraud can "e co((itted "# (ana)e(ent overridin) controls
usin) such techni*ues as.
1. G Aecordin) fictitious ;ournal entries, !articularl# close to the end of an accountin) !eriod,
to (ani!ulate o!eratin) results or achieve other o";ectives'
2. G Ina!!ro!riatel# ad;ustin) assu(!tions and chan)in) ;ud)(ents used to esti(ate account
"alances'
3. G 7(ittin), advancin) or dela#in) reco)nition in the financial state(ents of events and
transactions that have occurred durin) the re!ortin) !eriod'
4. G %oncealin), or not disclosin), facts that could affect the a(ounts recorded in the financial
state(ents'
5. G 0n)a)in) in co(!le, transactions that are structured to (isre!resent the financial
!osition or financial !erfor(ance of the entit#'
6. G Alterin) records and ter(s related to si)nificant and unusual transactions'
A5' Eisa!!ro!riation of assets involves the theft of an entit#+s assets and is often !er!etrated "#
e(!lo#ees in relativel# s(all and i((aterial a(ounts'
ISA 440 17B
@owever, it can also involve (ana)e(ent who are usuall# (ore a"le to dis)uise or conceal
(isa!!ro!riations in wa#s that are difficult to detect' Eisa!!ro!riation of assets can "e
acco(!lished in a variet# of wa#s includin).
1. G 0("eJJlin) recei!ts $for e,a(!le, (isa!!ro!riatin) collections on accounts receiva"le or
divertin) recei!ts in res!ect of written-off accounts to !ersonal "ank accounts&'
2. G Stealin) !h#sical assets or intellectual !ro!ert# $for e,a(!le, stealin) inventor# for
!ersonal use or for sale, stealin) scra! for resale, colludin) with a co(!etitor "# disclosin)
technolo)ical data in return for !a#(ent&'
3. G %ausin) an entit# to !a# for )oods and services not received $for e,a(!le, !a#(ents to
fictitious vendors, kick"acks !aid "# vendors to the entit#+s !urchasin) a)ents in return for
inflatin) !rices, !a#(ents to fictitious e(!lo#ees&'
4. G Usin) an entit#+s assets for !ersonal use $for e,a(!le, usin) the entit#+s assets as
collateral for a !ersonal loan or a loan to a related !art#&'
Eisa!!ro!riation of assets is often acco(!anied "# false or (isleadin) records or docu(ents in
order to conceal the fact that the assets are (issin) or have "een !led)ed without !ro!er
authoriJation'
AB' he !u"lic sector auditor+s res!onsi"ilities relatin) to fraud (a# "e a result of law, re)ulation or
other authorit# a!!lica"le to !u"lic sector entities or se!aratel# covered "# the auditor+s (andate'
%onse*uentl#, the !u"lic sector auditor+s res!onsi"ilities (a# not "e li(ited to consideration of
risks of (aterial (isstate(ent of the financial state(ents, "ut (a# also include a "roader
res!onsi"ilit# to consider risks of fraud'
*'ofeio"!0 S%eptici. $Aef. 6ara' 14-14&
A7' Eaintainin) !rofessional ske!ticis( re*uires an on)oin) *uestionin) of whether the infor(ation
and audit evidence o"tained su))ests that a (aterial (isstate(ent due to fraud (a# e,ist' It
includes considerin) the relia"ilit# of the infor(ation to "e used as audit evidence and the controls
over its !re!aration and (aintenance where relevant' =ue to the characteristics of fraud, the
auditor+s !rofessional ske!ticis( is !articularl# i(!ortant when considerin) the risks of (aterial
(isstate(ent due to fraud'
A8' Althou)h the auditor cannot "e e,!ected to disre)ard !ast e,!erience of the honest# and inte)rit#
of the entit#+s (ana)e(ent and those char)ed with )overnance, the auditor+s !rofessional
ske!ticis( is !articularl# i(!ortant in considerin) the risks of (aterial (isstate(ent due to fraud
"ecause there (a# have "een chan)es in circu(stances'
177 ISA 440
A5' An audit !erfor(ed in accordance with ISAs rarel# involves the authentication of docu(ents, nor
is the auditor trained as or e,!ected to "e an e,!ert in such authentication'
14
@owever, when the
auditor identifies conditions that cause the auditor to "elieve that a docu(ent (a# not "e authentic
or that ter(s in a docu(ent have "een (odified "ut not disclosed to the auditor, !ossi"le
!rocedures to investi)ate further (a# include.
% G %onfir(in) directl# with the third !art#'
% G Usin) the work of an e,!ert to assess the docu(ent+s authenticit#'
Dic-io" !.o"( the E"(!(e.e"t Te!. $Aef. 6ara' 15&
A10' =iscussin) the susce!ti"ilit# of the entit#+s financial state(ents to (aterial (isstate(ent due to
fraud with the en)a)e(ent tea(.
1. G 6rovides an o!!ortunit# for (ore e,!erienced en)a)e(ent tea( (e("ers to share their
insi)hts a"out how and where the financial state(ents (a# "e susce!ti"le to (aterial (isstate(ent
due to fraud'
2. G 0na"les the auditor to consider an a!!ro!riate res!onse to such susce!ti"ilit# and to
deter(ine which (e("ers of the en)a)e(ent tea( will conduct certain audit !rocedures'
3. G 6er(its the auditor to deter(ine how the results of audit !rocedures will "e shared a(on)
the en)a)e(ent tea( and how to deal with an# alle)ations of fraud that (a# co(e to the auditor+s
attention'
A11' he discussion (a# include such (atters as.
1. G An e,chan)e of ideas a(on) en)a)e(ent tea( (e("ers a"out how and where the#
"elieve the entit#+s financial state(ents (a# "e susce!ti"le to (aterial (isstate(ent due to fraud,
how (ana)e(ent could !er!etrate and conceal fraudulent financial re!ortin), and how assets of
the entit# could "e (isa!!ro!riated'
2. G A consideration of circu(stances that (i)ht "e indicative of earnin)s (ana)e(ent and
the !ractices that (i)ht "e followed "# (ana)e(ent to (ana)e earnin)s that could lead to
fraudulent financial re!ortin)'
3. G A consideration of the known e,ternal and internal factors affectin) the entit# that (a#
create an incentive or !ressure for (ana)e(ent or others to co((it fraud, !rovide the o!!ortunit#
for fraud to "e !er!etrated, and indicate a culture or environ(ent that ena"les (ana)e(ent or
others to rationaliJe co((ittin) fraud'
4. G A consideration of (ana)e(ent+s involve(ent in overseein) e(!lo#ees with access to
cash or other assets susce!ti"le to (isa!!ro!riation'
ISA 440 178
1. G A consideration of an# unusual or une,!lained chan)es in "ehavior or lifest#le of
(ana)e(ent or e(!lo#ees which have co(e to the attention of the en)a)e(ent tea('
2. G An e(!hasis on the i(!ortance of (aintainin) a !ro!er state of (ind throu)hout the
audit re)ardin) the !otential for (aterial (isstate(ent due to fraud'
3. G A consideration of the t#!es of circu(stances that, if encountered, (i)ht indicate the
!ossi"ilit# of fraud'
4. G A consideration of how an ele(ent of un!redicta"ilit# will "e incor!orated into the
nature, ti(in) and e,tent of the audit !rocedures to "e !erfor(ed'
5. G A consideration of the audit !rocedures that (i)ht "e selected to res!ond to the
susce!ti"ilit# of the entit#+s financial state(ent to (aterial (isstate(ent due to fraud and whether
certain t#!es of audit !rocedures are (ore effective than others'
6. G A consideration of an# alle)ations of fraud that have co(e to the auditor+s attention'
7. G A consideration of the risk of (ana)e(ent override of controls'
In>uiries of <anage$ent
Eana)e(ent+s Assess(ent of the Aisk of Eaterial Eisstate(ent =ue to Fraud $Aef. 6ara' 17$a&&
A14' Eana)e(ent acce!ts res!onsi"ilit# for the entit#+s internal control and for the !re!aration of the
entit#+s financial state(ents' Accordin)l#, it is a!!ro!riate for the auditor to (ake in*uiries of
(ana)e(ent re)ardin) (ana)e(ent+s own assess(ent of the risk of fraud and the controls in
!lace to !revent and detect it' he nature, e,tent and fre*uenc# of (ana)e(ent+s assess(ent of
such risk and controls (a# var# fro( entit# to entit#' In so(e entities, (ana)e(ent (a# (ake
detailed assess(ents on an annual "asis or as !art of continuous (onitorin)' In other entities,
(ana)e(ent+s assess(ent (a# "e less structured and less fre*uent' he nature, e,tent and
fre*uenc# of (ana)e(ent+s assess(ent are relevant to the auditor+s understandin) of the entit#+s
control environ(ent' For e,a(!le, the fact that (ana)e(ent has not (ade an assess(ent of the
risk of fraud (a# in so(e circu(stances "e indicative of the lack of i(!ortance that (ana)e(ent
!laces on internal control'
%onsiderations s!ecific to s(aller entities
A19' In so(e entities, !articularl# s(aller entities, the focus of (ana)e(ent+s assess(ent (a# "e on
the risks of e(!lo#ee fraud or (isa!!ro!riation of assets'
175 ISA 440
Eana)e(ent+s 6rocess for Identif#in) and Aes!ondin) to the Aisks of Fraud $Aef. 6ara' 17$"&&
A14' In the case of entities with (ulti!le locations (ana)e(ent+s !rocesses (a# include different levels
of (onitorin) of o!eratin) locations, or "usiness se)(ents' Eana)e(ent (a# also have identified
!articular o!eratin) locations or "usiness se)(ents for which a risk of fraud (a# "e (ore likel# to
e,ist'
In>uiry of <anage$ent and ,thers #ithin the /ntity $Aef. 6ara' 18&
A15' he auditor+s in*uiries of (ana)e(ent (a# !rovide useful infor(ation concernin) the risks of
(aterial (isstate(ents in the financial state(ents resultin) fro( e(!lo#ee fraud' @owever, such
in*uiries are unlikel# to !rovide useful infor(ation re)ardin) the risks of (aterial (isstate(ent in
the financial state(ents resultin) fro( (ana)e(ent fraud' Eakin) in*uiries of others within the
entit# (a# !rovide individuals with an o!!ortunit# to conve# infor(ation to the auditor that (a#
not otherwise "e co((unicated'
A1B' 0,a(!les of others within the entit# to who( the auditor (a# direct in*uiries a"out the e,istence
or sus!icion of fraud include.
% G 7!eratin) !ersonnel not directl# involved in the financial re!ortin) !rocess'
% G 0(!lo#ees with different levels of authorit#'
% G 0(!lo#ees involved in initiatin), !rocessin) or recordin) co(!le, or unusual
transactions and those who su!ervise or (onitor such e(!lo#ees'
% G In-house le)al counsel'
% G %hief ethics officer or e*uivalent !erson'
% G he !erson or !ersons char)ed with dealin) with alle)ations of fraud'
A17' Eana)e(ent is often in the "est !osition to !er!etrate fraud' Accordin)l#, when evaluatin)
(ana)e(ent+s res!onses to in*uiries with an attitude of !rofessional ske!ticis(, the auditor (a#
;ud)e it necessar# to corro"orate res!onses to in*uiries with other infor(ation'
In>uiry of Internal Audit $Aef. 6ara' 15&
A18' ISA 915 and ISA B10 esta"lish re*uire(ents and !rovide )uidance in audits of those entities that
have an internal audit function'
15
In carr#in) out the re*uire(ents of those ISAs in the conte,t of
fraud, the auditor (a# in*uire a"out s!ecific internal audit activities includin), for e,a(!le.
G he !rocedures !erfor(ed, if an#, "# the internal auditors durin) the #ear to detect fraud'
ISA 915, !ara)ra!h 49, and ISA B10, CUsin) the Lork of Internal Auditors'D
ISA 440 180
G Lhether (ana)e(ent has satisfactoril# res!onded to an# findin)s resultin) fro( those
!rocedures'
,btaining an "nderstanding of ,!ersight /4ercised by 1hose Charged #ith 2o!ernance $Aef.
6ara' 40&
A15' hose char)ed with )overnance of an entit# oversee the entit#+s s#ste(s for (onitorin) risk,
financial control and co(!liance with the law' In (an# countries, cor!orate )overnance !ractices
are well develo!ed and those char)ed with )overnance !la# an active role in oversi)ht of the
entit#+s assess(ent of the risks of fraud and of the relevant internal control' Since the
res!onsi"ilities of those char)ed with )overnance and (ana)e(ent (a# var# "# entit# and "#
countr#, it is i(!ortant that the auditor understands their res!ective res!onsi"ilities to ena"le the
auditor to o"tain an understandin) of the oversi)ht e,ercised "# the a!!ro!riate individuals'
1B
A40' An understandin) of the oversi)ht e,ercised "# those char)ed with )overnance (a# !rovide
insi)hts re)ardin) the susce!ti"ilit# of the entit# to (ana)e(ent fraud, the ade*uac# of internal
control over risks of fraud, and the co(!etenc# and inte)rit# of (ana)e(ent' he auditor (a#
o"tain this understandin) in a nu("er of wa#s, such as "# attendin) (eetin)s where such
discussions take !lace, readin) the (inutes fro( such (eetin)s or (akin) in*uiries of those
A41' In so(e cases, all of those char)ed with )overnance are involved in (ana)in) the entit#' his (a#
"e the case in a s(all entit# where a sin)le owner (ana)es the entit# and no one else has a
)overnance role' In these cases, there is ordinaril# no action on the !art of the auditor "ecause
there is no oversi)ht se!arate fro( (ana)e(ent'
Consideration of ,ther Infor$ation $Aef. 6ara' 49&
A44' In addition to infor(ation o"tained fro( a!!l#in) anal#tical !rocedures, other infor(ation
o"tained a"out the entit# and its environ(ent (a# "e hel!ful in identif#in) the risks of (aterial
(isstate(ent due to fraud' he discussion a(on) tea( (e("ers (a# !rovide infor(ation that is
hel!ful in identif#in) such risks' In addition, infor(ation o"tained fro( the auditor+s client
acce!tance and retention !rocesses, and e,!erience )ained on other en)a)e(ents !erfor(ed for
the entit#, for e,a(!le en)a)e(ents to review interi( financial infor(ation, (a# "e relevant in
the identification of the risks of (aterial (isstate(ent due to fraud'
ISA 4B0, !ara)ra!hs A1-A8, discuss with who( the auditor co((unicates when the entit#+s )overnance structure is not well
defined'
181 ISA 440
/!aluation of Fraud +is. Factors $Aef. 6ara' 44&
A49' he fact that fraud is usuall# concealed can (ake it ver# difficult to detect' Nevertheless, the
auditor (a# identif# events or conditions that indicate an incentive or !ressure to co((it fraud or
!rovide an o!!ortunit# to co((it fraud $fraud risk factors&' For e,a(!le.
1. G he need to (eet e,!ectations of third !arties to o"tain additional e*uit# financin) (a#
create !ressure to co((it fraud?
2. G he )rantin) of si)nificant "onuses if unrealistic !rofit tar)ets are (et (a# create an
incentive to co((it fraud? and
3. G A control environ(ent that is not effective (a# create an o!!ortunit# to co((it fraud'
A44' Fraud risk factors cannot easil# "e ranked in order of i(!ortance' he si)nificance of fraud risk
factors varies widel#' So(e of these factors will "e !resent in entities where the s!ecific
conditions do not !resent risks of (aterial (isstate(ent' Accordin)l#, the deter(ination of
whether a fraud risk factor is !resent and whether it is to "e considered in assessin) the risks of
(aterial (isstate(ent of the financial state(ents due to fraud re*uires the e,ercise of !rofessional
;ud)(ent'
A45' 0,a(!les of fraud risk factors related to fraudulent financial re!ortin) and (isa!!ro!riation of
assets are !resented in A!!endi, 1' hese illustrative risk factors are classified "ased on the three
conditions that are )enerall# !resent when fraud e,ists.
% G An incentive or !ressure to co((it fraud?
% G A !erceived o!!ortunit# to co((it fraud? and
% G An a"ilit# to rationaliJe the fraudulent action'
Aisk factors reflective of an attitude that !er(its rationaliJation of the fraudulent action (a# not
"e susce!ti"le to o"servation "# the auditor' Nevertheless, the auditor (a# "eco(e aware of the
e,istence of such infor(ation' Althou)h the fraud risk factors descri"ed in A!!endi, 1 cover a
"road ran)e of situations that (a# "e faced "# auditors, the# are onl# e,a(!les and other risk
factors (a# e,ist'
A4B' he siJe, co(!le,it#, and ownershi! characteristics of the entit# have a si)nificant influence on
the consideration of relevant fraud risk factors' For e,a(!le, in the case of a lar)e entit#, there
(a# "e factors that )enerall# constrain i(!ro!er conduct "# (ana)e(ent, such as.
% G 0ffective oversi)ht "# those char)ed with )overnance'
% G An effective internal audit function'
% G he e,istence and enforce(ent of a written code of conduct'
ISA 440 184
Further(ore, fraud risk factors considered at a "usiness se)(ent o!eratin) level (a# !rovide
different insi)hts when co(!ared with those o"tained when considered at an entit#-wide level'
A47' In the case of a s(all entit#, so(e or all of these considerations (a# "e ina!!lica"le or less
relevant' For e,a(!le, a s(aller entit# (a# not have a written code of conduct "ut, instead, (a#
have develo!ed a culture that e(!hasiJes the i(!ortance of inte)rit# and ethical "ehavior throu)h
oral co((unication and "# (ana)e(ent e,a(!le' =o(ination of (ana)e(ent "# a sin)le
individual in a s(all entit# does not )enerall#, in and of itself, indicate a failure "# (ana)e(ent to
dis!la# and co((unicate an a!!ro!riate attitude re)ardin) internal control and the financial
re!ortin) !rocess' In so(e entities, the need for (ana)e(ent authoriJation can co(!ensate for
otherwise deficient controls and reduce the risk of e(!lo#ee fraud' @owever, do(ination of
(ana)e(ent "# a sin)le individual can "e a !otential deficienc# in internal control since there is
an o!!ortunit# for (ana)e(ent override of controls'
I#e"tific!tio" !"# Ae.e"t of the Ri% of )!te'i!0 )it!te.e"t D-e to F'!-#
+is.s of Fraud in +e!enue +ecognition $Aef. 6ara' 4B&
A48' Eaterial (isstate(ent due to fraudulent financial re!ortin) relatin) to revenue reco)nition often
results fro( an overstate(ent of revenues throu)h, for e,a(!le, !re(ature revenue reco)nition or
recordin) fictitious revenues' It (a# result also fro( an understate(ent of revenues throu)h, for
e,a(!le, i(!ro!erl# shiftin) revenues to a later !eriod'
A45' he risks of fraud in revenue reco)nition (a# "e )reater in so(e entities than others' For e,a(!le,
there (a# "e !ressures or incentives on (ana)e(ent to co((it fraudulent financial re!ortin)
throu)h ina!!ro!riate revenue reco)nition in the case of listed entities when, for e,a(!le,
!erfor(ance is (easured in ter(s of #ear-over-#ear revenue )rowth or !rofit' Si(ilarl#, for
e,a(!le, there (a# "e )reater risks of fraud in revenue reco)nition in the case of entities that
)enerate a su"stantial !ortion of revenues throu)h cash sales'
A90' he !resu(!tion that there are risks of fraud in revenue reco)nition (a# "e re"utted' For e,a(!le,
the auditor (a# conclude that there is no risk of (aterial (isstate(ent due to fraud relatin) to
revenue reco)nition in the case where a there is a sin)le t#!e of si(!le revenue transaction, for
e,a(!le, leasehold revenue fro( a sin)le unit rental !ro!ert#'
189 ISA 440
Identifying and Assessing the +is.s of <aterial <isstate$ent ?ue to Fraud and "nderstanding the
/ntity8s +elated Controls $Aef. 6ara' 47&
A91' Eana)e(ent (a# (ake ;ud)(ents on the nature and e,tent of the controls it chooses to
i(!le(ent, and the nature and e,tent of the risks it chooses to assu(e'
17
In deter(inin) which
controls to i(!le(ent to !revent and detect fraud, (ana)e(ent considers the risks that the
financial state(ents (a# "e (ateriall# (isstated as a result of fraud' As !art of this consideration,
(ana)e(ent (a# conclude that it is not cost effective to i(!le(ent and (aintain a !articular
control in relation to the reduction in the risks of (aterial (isstate(ent due to fraud to "e
achieved'
A94' It is therefore i(!ortant for the auditor to o"tain an understandin) of the controls that (ana)e(ent
has desi)ned, i(!le(ented and (aintained to !revent and detect fraud' In doin) so, the auditor
(a# learn, for e,a(!le, that (ana)e(ent has consciousl# chosen to acce!t the risks associated
with a lack of se)re)ation of duties' Infor(ation fro( o"tainin) this understandin) (a# also "e
useful in identif#in) fraud risks factors that (a# affect the auditor+s assess(ent of the risks that
the financial state(ents (a# contain (aterial (isstate(ent due to fraud'
Repo"e to the Aee# Ri% of )!te'i!0 )it!te.e"t D-e to F'!-#
,!erall +esponses $Aef. 6ara' 48&
A99' =eter(inin) overall res!onses to address the assessed risks of (aterial (isstate(ent due to fraud
)enerall# includes the consideration of how the overall conduct of the audit can reflect increased
!rofessional ske!ticis(, for e,a(!le, throu)h.
1. G Increased sensitivit# in the selection of the nature and e,tent of docu(entation to "e
e,a(ined in su!!ort of (aterial transactions'
2. G Increased reco)nition of the need to corro"orate (ana)e(ent e,!lanations or
re!resentations concernin) (aterial (atters'
It also involves (ore )eneral considerations a!art fro( the s!ecific !rocedures otherwise !lanned?
these considerations include the (atters listed in !ara)ra!h 45, which are discussed "elow'
Assign$ent and )uper!ision of (ersonnel $Aef. 6ara' 45$a&&
A94' he auditor (a# res!ond to identified risks of (aterial (isstate(ent due to fraud "#, for e,a(!le,
assi)nin) additional individuals with s!ecialiJed skill and knowled)e, such as forensic and I
e,!erts, or "# assi)nin) (ore e,!erienced individuals to the en)a)e(ent'
ISA 440 184
A95' he e,tent of su!ervision reflects the auditor+s assess(ent of risks of (aterial (isstate(ent due to
fraud and the co(!etencies of the en)a)e(ent tea( (e("ers !erfor(in) the work'
"npredictability in the )election of Audit (rocedures $Aef. 6ara' 45$c&&
A9B' Incor!oratin) an ele(ent of un!redicta"ilit# in the selection of the nature, ti(in) and e,tent of
audit !rocedures to "e !erfor(ed is i(!ortant as individuals within the entit# who are fa(iliar
with the audit !rocedures nor(all# !erfor(ed on en)a)e(ents (a# "e (ore a"le to conceal
fraudulent financial re!ortin)' his can "e achieved "#, for e,a(!le.
% G 6erfor(in) su"stantive !rocedures on selected account "alances and assertions not
otherwise tested due to their (aterialit# or risk'
% G Ad;ustin) the ti(in) of audit !rocedures fro( that otherwise e,!ected'
% G Usin) different sa(!lin) (ethods'
% G 6erfor(in) audit !rocedures at different locations or at locations on an unannounced
"asis'
Audit (rocedures +esponsi!e to Assessed +is.s of <aterial <isstate$ent ?ue to Fraud at the
Assertion :e!el (Aef. 6ara' 90&
A97' he auditor+s res!onses to address the assessed risks of (aterial (isstate(ent due to fraud at the
assertion level (a# include chan)in) the nature, ti(in) and e,tent of audit !rocedures in the
followin) wa#s.
G he nature of audit !rocedures to "e !erfor(ed (a# need to "e chan)ed to o"tain audit
evidence that is (ore relia"le and relevant or to o"tain additional corro"orative
infor(ation' his (a# affect "oth the t#!e of audit !rocedures to "e !erfor(ed and their
co("ination' For e,a(!le.
1. 6h#sical o"servation or ins!ection of certain assets (a# "eco(e (ore i(!ortant or the
auditor (a# choose to use co(!uter-assisted audit techni*ues to )ather (ore evidence a"out data
contained in si)nificant accounts or electronic transaction files'
2. he auditor (a# desi)n !rocedures to o"tain additional corro"orative infor(ation' For
e,a(!le, if the auditor identifies that (ana)e(ent is under !ressure to (eet earnin)s e,!ectations,
there (a# "e a related risk that (ana)e(ent is inflatin) sales "# enterin) into sales a)ree(ents
that include ter(s that !reclude revenue reco)nition or "# invoicin) sales "efore deliver#' In these
circu(stances, the auditor (a#, for e,a(!le, desi)n e,ternal confir(ations not onl# to confir(
outstandin) a(ounts, "ut also to confir( the details of the sales a)ree(ents, includin) date, an#
ri)hts of return and deliver#
185 ISA 440
ter(s' In addition, the auditor (i)ht find it effective to su!!le(ent such e,ternal
confir(ations with in*uiries of nonfinancial !ersonnel in the entit# re)ardin) an#
chan)es in sales a)ree(ents and deliver# ter(s'
1. G he ti(in) of su"stantive !rocedures (a# need to "e (odified' he auditor (a#
conclude that !erfor(in) su"stantive testin) at or near the !eriod end "etter addresses an assessed
risk of (aterial (isstate(ent due to fraud' he auditor (a# conclude that, )iven the assessed risks
of intentional (isstate(ent or (ani!ulation, audit !rocedures to e,tend audit conclusions fro( an
interi( date to the !eriod end would not "e effective' In contrast, "ecause an intentional
(isstate(ent K for e,a(!le, a (isstate(ent involvin) i(!ro!er revenue reco)nition K (a# have
"een initiated in an interi( !eriod, the auditor (a# elect to a!!l# su"stantive !rocedures to
transactions occurrin) earlier in or throu)hout the re!ortin) !eriod'
2. G he e,tent of the !rocedures a!!lied reflects the assess(ent of the risks of (aterial
(isstate(ent due to fraud' For e,a(!le, increasin) sa(!le siJes or !erfor(in) anal#tical
!rocedures at a (ore detailed level (a# "e a!!ro!riate' Also, co(!uter-assisted audit techni*ues
(a# ena"le (ore e,tensive testin) of electronic transactions and account files' Such techni*ues
can "e used to select sa(!le transactions fro( ke# electronic files, to sort transactions with
s!ecific characteristics, or to test an entire !o!ulation instead of a sa(!le'
A98' If the auditor identifies a risk of (aterial (isstate(ent due to fraud that affects inventor#
*uantities, e,a(inin) the entit#+s inventor# records (a# hel! to identif# locations or ite(s that
re*uire s!ecific attention durin) or after the !h#sical inventor# count' Such a review (a# lead to a
decision to o"serve inventor# counts at certain locations on an unannounced "asis or to conduct
inventor# counts at all locations on the sa(e date'
A95' he auditor (a# identif# a risk of (aterial (isstate(ent due to fraud affectin) a nu("er of
accounts and assertions' hese (a# include asset valuation, esti(ates relatin) to s!ecific
transactions $such as ac*uisitions, restructurin)s, or dis!osals of a se)(ent of the "usiness&, and
other si)nificant accrued lia"ilities $such as !ension and other !ost-e(!lo#(ent "enefit
o"li)ations, or environ(ental re(ediation lia"ilities&' he risk (a# also relate to si)nificant
chan)es in assu(!tions relatin) to recurrin) esti(ates' Infor(ation )athered throu)h o"tainin) an
understandin) of the entit# and its environ(ent (a# assist the auditor in evaluatin) the
reasona"leness of such (ana)e(ent esti(ates and underl#in) ;ud)(ents and assu(!tions' A
retros!ective review of si(ilar (ana)e(ent ;ud)(ents and assu(!tions a!!lied in !rior !eriods
(a# also !rovide insi)ht a"out the reasona"leness of ;ud)(ents and assu(!tions su!!ortin)
(ana)e(ent esti(ates'
ISA 440 18B
A40' 0,a(!les of !ossi"le audit !rocedures to address the assessed risks of (aterial (isstate(ent due
to fraud, includin) those that illustrate the incor!oration of an ele(ent of un!redicta"ilit#, are
!resented in A!!endi, 4' he a!!endi, includes e,a(!les of res!onses to the auditor+s assess(ent
of the risks of (aterial (isstate(ent resultin) fro( "oth fraudulent financial re!ortin), includin)
fraudulent financial re!ortin) resultin) fro( revenue reco)nition, and (isa!!ro!riation of assets'
Audit (rocedures +esponsi!e to +is.s +elated to <anage$ent ,!erride of Controls
>ournal 0ntries and 7ther Ad;ust(ents $Aef. 6ara' 94$a&&
A41' Eaterial (isstate(ent of financial state(ents due to fraud often involve the (ani!ulation of the
financial re!ortin) !rocess "# recordin) ina!!ro!riate or unauthoriJed ;ournal entries' his (a#
occur throu)hout the #ear or at !eriod end, or "# (ana)e(ent (akin) ad;ust(ents to a(ounts
re!orted in the financial state(ents that are not reflected in ;ournal entries, such as throu)h
consolidatin) ad;ust(ents and reclassifications'
A44' Further, the auditor+s consideration of the risks of (aterial (isstate(ent associated with
ina!!ro!riate override of controls over ;ournal entries is i(!ortant since auto(ated !rocesses and
controls (a# reduce the risk of inadvertent error "ut do not overco(e the risk that individuals (a#
ina!!ro!riatel# override such auto(ated !rocesses, for e,a(!le, "# chan)in) the a(ounts "ein)
auto(aticall# !assed to the )eneral led)er or to the financial re!ortin) s#ste(' Further(ore, where
I is used to transfer infor(ation auto(aticall#, there (a# "e little or no visi"le evidence of such
intervention in the infor(ation s#ste(s'
A49' Lhen identif#in) and selectin) ;ournal entries and other ad;ust(ents for testin) and deter(inin)
the a!!ro!riate (ethod of e,a(inin) the underl#in) su!!ort for the ite(s selected, the followin)
(atters are of relevance.
% G 1he assess$ent of the ris.s of $aterial $isstate$ent due to fraud K the !resence of fraud
risk factors and other infor(ation o"tained durin) the auditor+s assess(ent of the risks of (aterial
(isstate(ent due to fraud (a# assist the auditor to identif# s!ecific classes of ;ournal entries and
other ad;ust(ents for testin)'
% G Controls that ha!e been i$ple$ented o!er 9ournal entries and other ad9ust$ents K
effective controls over the !re!aration and !ostin) of ;ournal entries and other ad;ust(ents (a#
reduce the e,tent of su"stantive testin) necessar#, !rovided that the auditor has tested the
o!eratin) effectiveness of the controls'
% G 1he entity8s financial reporting process and the nature of e!idence that can be obtained K
for (an# entities routine !rocessin) of transactions involves a co("ination of (anual and
auto(ated ste!s and !rocedures'
187 ISA 440
Si(ilarl#, the !rocessin) of ;ournal entries and other ad;ust(ents (a# involve "oth (anual
and auto(ated !rocedures and controls' Lhere infor(ation technolo)# is used in the
financial re!ortin) !rocess, ;ournal entries and other ad;ust(ents (a# e,ist onl# in
electronic for('
G 1he characteristics of fraudulent 9ournal entries or other ad9ust$ents K ina!!ro!riate
;ournal entries or other ad;ust(ents often have uni*ue identif#in) characteristics' Such
characteristics (a# include entries $a& (ade to unrelated, unusual, or seldo(-used
accounts, $"& (ade "# individuals who t#!icall# do not (ake ;ournal entries, $c& recorded
at the end of the !eriod or as !ost-closin) entries that have little or no e,!lanation or
descri!tion, $d& (ade either "efore or durin) the !re!aration of the financial state(ents that
do not have account nu("ers, or $e& containin) round nu("ers or consistent endin)
nu("ers'
% G 1he nature and co$ple4ity of the accounts K ina!!ro!riate ;ournal entries or ad;ust(ents
(a# "e a!!lied to accounts that $a& contain transactions that are co(!le, or unusual in nature, $"&
contain si)nificant esti(ates and !eriod-end ad;ust(ents, $c& have "een !rone to (isstate(ents in
the !ast, $d& have not "een reconciled on a ti(el# "asis or contain unreconciled differences, $e&
contain inter-co(!an# transactions, or $f& are otherwise associated with an identified risk of
(aterial (isstate(ent due to fraud' In audits of entities that have several locations or co(!onents,
consideration is )iven to the need to select ;ournal entries fro( (ulti!le locations'
% G Gournal entries or other ad9ust$ents processed outside the nor$al course of business K
non standard ;ournal entries (a# not "e su";ect to the sa(e level of internal control as those
;ournal entries used on a recurrin) "asis to record transactions such as (onthl# sales, !urchases
and cash dis"urse(ents'
A44' he auditor uses !rofessional ;ud)(ent in deter(inin) the nature, ti(in) and e,tent of testin) of
;ournal entries and other ad;ust(ents' @owever, "ecause fraudulent ;ournal entries and other
ad;ust(ents are often (ade at the end of a re!ortin) !eriod, !ara)ra!h 94$a&$ii& re*uires the
auditor to select the ;ournal entries and other ad;ust(ents (ade at that ti(e' Further, "ecause
(aterial (isstate(ents in financial state(ents due to fraud can occur throu)hout the !eriod and
(a# involve e,tensive efforts to conceal how the fraud is acco(!lished, !ara)ra!h 94$a&$iii&
re*uires the auditor to consider whether there is also a need to test ;ournal entries and other
ad;ust(ents throu)hout the !eriod'
Accounting /sti$ates $Aef. 6ara' 94$"&&
A45' he !re!aration of the financial state(ents re*uires (ana)e(ent to (ake a nu("er of ;ud)(ents
or assu(!tions that affect si)nificant accountin) esti(ates and to (onitor the reasona"leness of
such esti(ates on an on)oin)
ISA 440 188
"asis' Fraudulent financial re!ortin) is often acco(!lished throu)h intentional (isstate(ent of
accountin) esti(ates' his (a# "e achieved "#, for e,a(!le, understatin) or overstatin) all
!rovisions or reserves in the sa(e fashion so as to "e desi)ned either to s(ooth earnin)s over two
or (ore accountin) !eriods, or to achieve a desi)nated earnin)s level in order to deceive financial
state(ent users "# influencin) their !erce!tions as to the entit#+s !erfor(ance and !rofita"ilit#'
A4B' he !ur!ose of !erfor(in) a retros!ective review of (ana)e(ent ;ud)(ents and assu(!tions
related to si)nificant accountin) esti(ates reflected in the financial state(ents of the !rior #ear is
to deter(ine whether there is an indication of a !ossi"le "ias on the !art of (ana)e(ent' It is not
intended to call into *uestion the auditor+s !rofessional ;ud)(ents (ade in the !rior #ear that were
"ased on infor(ation availa"le at the ti(e'
A47' A retros!ective review is also re*uired "# ISA 540'
18
hat review is conducted as a risk
assess(ent !rocedure to o"tain infor(ation re)ardin) the effectiveness of (ana)e(ent+s !rior
!eriod esti(ation !rocess, audit evidence a"out the outco(e, or where a!!lica"le, the su"se*uent
re-esti(ation of !rior !eriod accountin) esti(ates that is !ertinent to (akin) current !eriod
accountin) esti(ates, and audit evidence of (atters, such as esti(ation uncertaint#, that (a# "e
re*uired to "e disclosed in the financial state(ents' As a !ractical (atter, the auditor+s review of
(ana)e(ent ;ud)(ents and assu(!tions for "iases that could re!resent a risk of (aterial
(isstate(ent due to fraud in accordance with this ISA (a# "e carried out in con;unction with the
review re*uired "# ISA 540'
=usiness +ationale for )ignificant 1ransactions $Aef. 6ara' 94$c&&
A48' Indicators that (a# su))est that si)nificant transactions that are outside the nor(al course of
"usiness for the entit#, or that otherwise a!!ear to "e unusual, (a# have "een entered into to
en)a)e in fraudulent financial re!ortin) or to conceal (isa!!ro!riation of assets include.
1. G he for( of such transactions a!!ears overl# co(!le, $for e,a(!le, the transaction
involves (ulti!le entities within a consolidated )rou! or (ulti!le unrelated third !arties&'
2. G Eana)e(ent has not discussed the nature of and accountin) for such transactions with
those char)ed with )overnance of the entit#, and there is inade*uate docu(entation'
3. G Eana)e(ent is !lacin) (ore e(!hasis on the need for a !articular accountin) treat(ent
than on the underl#in) econo(ics of the transaction'
ISA 540, CAuditin) Accountin) 0sti(ates, Includin) Fair Falue Accountin) 0sti(ates, and Aelated =isclosures,D !ara)ra!h 5'
185 ISA 440
1. G ransactions that involve non-consolidated related !arties, includin) s!ecial !ur!ose
entities, have not "een !ro!erl# reviewed or a!!roved "# those char)ed with )overnance of the
entit#'
2. G he transactions involve !reviousl# unidentified related !arties or !arties that do not have
the su"stance or the financial stren)th to su!!ort the transaction without assistance fro( the entit#
under audit'
E9!0-!tio" of A-#it E9i#e"ce $Aef. 6ara' 94-97&
A45' ISA 990 re*uires the auditor, "ased on the audit !rocedures !erfor(ed and the audit evidence
o"tained, to evaluate whether the assess(ents of the risks of (aterial (isstate(ent at the assertion
level re(ain a!!ro!riate'
15
his evaluation is !ri(aril# a *ualitative (atter "ased on the auditor+s
;ud)(ent' Such an evaluation (a# !rovide further insi)ht a"out the risks of (aterial (isstate(ent
due to fraud and whether there is a need to !erfor( additional or different audit !rocedures'
A!!endi, 9 contains e,a(!les of circu(stances that (a# indicate the !ossi"ilit# of fraud'
Analytical (rocedures (erfor$ed Aear the /nd of the Audit in For$ing an ,!erall Conclusion $Aef.
6ara' 94&
A50' =eter(inin) which !articular trends and relationshi!s (a# indicate a risk of (aterial (isstate(ent
due to fraud re*uires !rofessional ;ud)(ent' Unusual relationshi!s involvin) #ear-end revenue
and inco(e are !articularl# relevant' hese (i)ht include, for e,a(!le. uncharacteristicall# lar)e
a(ounts of inco(e "ein) re!orted in the last few weeks of the re!ortin) !eriod or unusual
transactions? or inco(e that is inconsistent with trends in cash flow fro( o!erations'
Consideration of Identified <isstate$ents $Aef. 6ara' 95-97&
A51' Since fraud involves incentive or !ressure to co((it fraud, a !erceived o!!ortunit# to do so or
so(e rationaliJation of the act, an instance of fraud is unlikel# to "e an isolated occurrence'
Accordin)l#, (isstate(ents, such as nu(erous (isstate(ents at a s!ecific location even thou)h
the cu(ulative effect is not (aterial, (a# "e indicative of a risk of (aterial (isstate(ent due to
fraud'
A54' he i(!lications of identified fraud de!end on the circu(stances' For e,a(!le, an otherwise
insi)nificant fraud (a# "e si)nificant if it involves senior (ana)e(ent' In such circu(stances, the
relia"ilit# of evidence !reviousl# o"tained (a# "e called into *uestion, since there (a# "e dou"ts
a"out the co(!leteness and truthfulness of re!resentations (ade and a"out the )enuineness of
accountin) records and docu(entation' here (a# also "e a !ossi"ilit# of collusion involvin)
e(!lo#ees, (ana)e(ent or third !arties'
ISA 440 150
A59' ISA 450
40
and ISA 700
41
esta"lish re*uire(ents and !rovide )uidance on the evaluation and
dis!osition of (isstate(ents and the effect on the auditor+s o!inion in the auditor+s re!ort'
A-#ito' U"!$0e to Co"ti"-e the E"(!(e.e"t $Aef. 6ara' 98&
A54' 0,a(!les of e,ce!tional circu(stances that (a# arise and that (a# "rin) into *uestion the
auditor+s a"ilit# to continue !erfor(in) the audit include.
1. G he entit# does not take the a!!ro!riate action re)ardin) fraud that the auditor considers
necessar# in the circu(stances, even where the fraud is not (aterial to the financial state(ents?
2. G he auditor+s consideration of the risks of (aterial (isstate(ent due to fraud and the
results of audit tests indicate a si)nificant risk of (aterial and !ervasive fraud? or
3. G he auditor has si)nificant concern a"out the co(!etence or inte)rit# of (ana)e(ent or
those char)ed with )overnance'
A55' 1ecause of the variet# of the circu(stances that (a# arise, it is not !ossi"le to descri"e
definitivel# when withdrawal fro( an en)a)e(ent is a!!ro!riate' Factors that affect the auditor+s
conclusion include the i(!lications of the involve(ent of a (e("er of (ana)e(ent or of those
char)ed with )overnance $which (a# affect the relia"ilit# of (ana)e(ent re!resentations& and the
effects on the auditor of a continuin) association with the entit#'
A5B' he auditor has !rofessional and le)al res!onsi"ilities in such circu(stances and these
res!onsi"ilities (a# var# "# countr#' In so(e countries, for e,a(!le, the auditor (a# "e entitled
to, or re*uired to, (ake a state(ent or re!ort to the !erson or !ersons who (ade the audit
a!!oint(ent or, in so(e cases, to re)ulator# authorities' <iven the e,ce!tional nature of the
circu(stances and the need to consider the le)al re*uire(ents, the auditor (a# consider it
a!!ro!riate to seek le)al advice when decidin) whether to withdraw fro( an en)a)e(ent and in
deter(inin) an a!!ro!riate course of action, includin) the !ossi"ilit# of re!ortin) to shareholders,
re)ulators or others'
44
A57' In (an# cases in the !u"lic sector, the o!tion of withdrawin) fro( the en)a)e(ent (a# not "e
availa"le to the auditor due to the nature of the (andate or !u"lic interest considerations'
40
ISA 450, C0valuation of Eisstate(ents Identified durin) the Audit'D 41
ISA 700, CFor(in) an 7!inion and Ae!ortin) on Financial State(ents'D 44
he IFA% Code of /thics for (rofessional Accountants !rovides )uidance on co((unications with an auditor re!lacin) the
e,istin) auditor'
151 ISA 440
='itte" Rep'ee"t!tio" $Aef. 6ara' 95&
A58' ISA 580
49
esta"lishes re*uire(ents and !rovides )uidance on o"tainin) a!!ro!riate re!resentations
fro( (ana)e(ent and, where a!!ro!riate, those char)ed with )overnance in the audit' In addition
to acknowled)in) that the# have fulfilled their res!onsi"ilit# for the !re!aration of the financial
state(ents, it is i(!ortant that, irres!ective of the siJe of the entit#, (ana)e(ent and, where
a!!ro!riate, those char)ed with )overnance acknowled)e their res!onsi"ilit# for internal control
desi)ned, i(!le(ented and (aintained to !revent and detect fraud'
A55' 1ecause of the nature of fraud and the difficulties encountered "# auditors in detectin) (aterial
(isstate(ents in the financial state(ents resultin) fro( fraud, it is i(!ortant that the auditor
o"tain a written re!resentation fro( (ana)e(ent and, where a!!ro!riate, those char)ed with
)overnance confir(in) that the# have disclosed to the auditor.
1$a&he results of (ana)e(ent+s assess(ent of the risk that the financial state(ents (a# "e (ateriall#
(isstated as a result of fraud? and
2$"& heir knowled)e of actual, sus!ected or alle)ed fraud affectin) the entit#'
Co..-"ic!tio" to )!"!(e.e"t !"# &ith Thoe Ch!'(e# &ith Go9e'"!"ce
Co$$unication to <anage$ent $Aef. 6ara' 40&
AB0' Lhen the auditor has o"tained evidence that fraud e,ists or (a# e,ist, it is i(!ortant that the
(atter "e "rou)ht to the attention of the a!!ro!riate level of (ana)e(ent as soon as !ractica"le'
his is so even if the (atter (i)ht "e considered inconse*uential $for e,a(!le, a (inor
defalcation "# an e(!lo#ee at a low level in the entit#+s or)aniJation&' he deter(ination of which
level of (ana)e(ent is the a!!ro!riate one is a (atter of !rofessional ;ud)(ent and is affected "#
such factors as the likelihood of collusion and the nature and (a)nitude of the sus!ected fraud'
7rdinaril#, the a!!ro!riate level of (ana)e(ent is at least one level a"ove the !ersons who a!!ear
to "e involved with the sus!ected fraud'
Co$$unication #ith 1hose Charged #ith 2o!ernance $Aef. 6ara' 41&
AB1' he auditor+s co((unication with those char)ed with )overnance (a# "e (ade orall# or in
writin)' ISA 4B0 identifies factors the auditor considers in deter(inin) whether to co((unicate
orall# or in writin)'
44
=ue to the nature and sensitivit# of fraud involvin) senior (ana)e(ent, or
fraud that results in a (aterial (isstate(ent in the financial state(ents, the auditor re!orts such
49
ISA 580, CLritten Ae!resentations'D
44
ISA 4B0, !ara)ra!h A98'
ISA 440 154
(atters on a ti(el# "asis and (a# consider it necessar# to also re!ort such (atters in writin)'
AB4' In so(e cases, the auditor (a# consider it a!!ro!riate to co((unicate with those char)ed with
)overnance when the auditor "eco(es aware of fraud involvin) e(!lo#ees other than
(ana)e(ent that does not result in a (aterial (isstate(ent' Si(ilarl#, those char)ed with
)overnance (a# wish to "e infor(ed of such circu(stances' he co((unication !rocess is
assisted if the auditor and those char)ed with )overnance a)ree at an earl# sta)e in the audit a"out
the nature and e,tent of the auditor+s co((unications in this re)ard'
AB9' In the e,ce!tional circu(stances where the auditor has dou"ts a"out the inte)rit# or honest# of
(ana)e(ent or those char)ed with )overnance, the auditor (a# consider it a!!ro!riate to o"tain
le)al advice to assist in deter(inin) the a!!ro!riate course of action'
,ther <atters +elated to Fraud $Aef. 6ara' 44&
AB4' 7ther (atters related to fraud to "e discussed with those char)ed with )overnance of the entit#
(a# include, for e,a(!le.
% G %oncerns a"out the nature, e,tent and fre*uenc# of (ana)e(ent+s assess(ents of the
controls in !lace to !revent and detect fraud and of the risk that the financial state(ents (a# "e
(isstated'
% G A failure "# (ana)e(ent to a!!ro!riatel# address identified si)nificant deficiencies in
internal control, or to a!!ro!riatel# res!ond to an identified fraud'
% G he auditor+s evaluation of the entit#+s control environ(ent, includin) *uestions
re)ardin) the co(!etence and inte)rit# of (ana)e(ent'
% G Actions "# (ana)e(ent that (a# "e indicative of fraudulent financial re!ortin), such as
(ana)e(ent+s selection and a!!lication of accountin) !olicies that (a# "e indicative of
(ana)e(ent+s effort to (ana)e earnin)s in order to deceive financial state(ent users "#
influencin) their !erce!tions as to the entit#+s !erfor(ance and !rofita"ilit#'
% G %oncerns a"out the ade*uac# and co(!leteness of the authoriJation of transactions that
a!!ear to "e outside the nor(al course of "usiness'
Co..-"ic!tio" to Re(-0!to'/ !"# E"fo'ce.e"t A-tho'itie $Aef. 6ara' 49&
AB5' he auditor+s !rofessional dut# to (aintain the confidentialit# of client infor(ation (a#
!reclude re!ortin) fraud to a !art# outside the client entit#' @owever, the auditor+s le)al
res!onsi"ilities var# "# countr# and, in certain circu(stances, the dut# of confidentialit# (a# "e
overridden "# statute, the law or courts of law' In so(e countries, the auditor of a financial
institution has a statutor# dut# to re!ort the occurrence of fraud to su!ervisor#
159 ISA 440
authorities' Also, in so(e countries the auditor has a dut# to re!ort (isstate(ents to authorities
in those cases where (ana)e(ent and those char)ed with )overnance fail to take corrective
action'
ABB' he auditor (a# consider it a!!ro!riate to o"tain le)al advice to deter(ine the a!!ro!riate
course of action in the circu(stances, the !ur!ose of which is to ascertain the ste!s necessar# in
considerin) the !u"lic interest as!ects of identified fraud'
AB7' In the !u"lic sector, re*uire(ents for re!ortin) fraud, whether or not discovered throu)h the
audit !rocess, (a# "e su";ect to s!ecific !rovisions of the audit (andate or related law,
re)ulation or other authorit#'
ISA 440 154
Appe"#i5 7
$Aef. 6ara' A45&
E5!.p0e of F'!-# Ri% F!cto'
he fraud risk factors identified in this A!!endi, are e,a(!les of such factors that (a# "e faced "#
auditors in a "road ran)e of situations' Se!aratel# !resented are e,a(!les relatin) to the two t#!es of fraud
relevant to the auditor+s consideration K that is, fraudulent financial re!ortin) and (isa!!ro!riation of
assets' For each of these t#!es of fraud, the risk factors are further classified "ased on the three conditions
)enerall# !resent when (aterial (isstate(ents due to fraud occur. $a& incentives/!ressures, $"&
o!!ortunities, and $c& attitudes/rationaliJations' Althou)h the risk factors cover a "road ran)e of situations,
the# are onl# e,a(!les and, accordin)l#, the auditor (a# identif# additional or different risk factors' Not
all of these e,a(!les are relevant in all circu(stances, and so(e (a# "e of )reater or lesser si)nificance in
entities of different siJe or with different ownershi! characteristics or circu(stances' Also, the order of the
e,a(!les of risk factors !rovided is not intended to reflect their relative i(!ortance or fre*uenc# of
occurrence'
Ri% F!cto' Re0!ti"( to )it!te.e"t A'ii"( f'o. F'!-#-0e"t Fi"!"ci!0 Repo'ti"(
he followin) are e,a(!les of risk factors relatin) to (isstate(ents arisin) fro( fraudulent financial
re!ortin)'
Incenti!esH(ressures
Financial sta"ilit# or !rofita"ilit# is threatened "# econo(ic, industr#, or entit# o!eratin) conditions, such
as $or as indicated "#&.
1. G @i)h de)ree of co(!etition or (arket saturation, acco(!anied "# declinin) (ar)ins'
2. G @i)h vulnera"ilit# to ra!id chan)es, such as chan)es in technolo)#, !roduct
o"solescence, or interest rates'
3. G Si)nificant declines in custo(er de(and and increasin) "usiness failures in either the
industr# or overall econo(#'
4. G 7!eratin) losses (akin) the threat of "ankru!tc#, foreclosure, or hostile takeover
i((inent'
5. G Aecurrin) ne)ative cash flows fro( o!erations or an ina"ilit# to )enerate cash flows fro(
o!erations while re!ortin) earnin)s and earnin)s )rowth'
6. G Aa!id )rowth or unusual !rofita"ilit# es!eciall# co(!ared to that of other co(!anies in
the sa(e industr#'
155 ISA 440 A660N=II
1. G New accountin), statutor#, or re)ulator# re*uire(ents'
2. 0,cessive !ressure e,ists for (ana)e(ent to (eet the re*uire(ents or e,!ectations of third
!arties due to the followin).
2. G 6rofita"ilit# or trend level e,!ectations of invest(ent anal#sts, institutional investors,
si)nificant creditors, or other e,ternal !arties $!articularl# e,!ectations that are undul# a))ressive
or unrealistic&, includin) e,!ectations created "# (ana)e(ent in, for e,a(!le, overl# o!ti(istic
!ress releases or annual re!ort (essa)es'
3. G Need to o"tain additional de"t or e*uit# financin) to sta# co(!etitive K includin)
financin) of (a;or research and develo!(ent or ca!ital e,!enditures'
4. G Ear)inal a"ilit# to (eet e,chan)e listin) re*uire(ents or de"t re!a#(ent or other de"t
covenant re*uire(ents'
1. G 6erceived or real adverse effects of re!ortin) !oor financial results on si)nificant !endin)
transactions, such as "usiness co("inations or contract awards'
2. Infor(ation availa"le indicates that the !ersonal financial situation of (ana)e(ent or those
char)ed with )overnance is threatened "# the entit#+s financial !erfor(ance arisin) fro( the
followin).
5. G Si)nificant financial interests in the entit#'
6. G Si)nificant !ortions of their co(!ensation $for e,a(!le, "onuses, stock o!tions, and
earn-out arran)e(ents& "ein) contin)ent u!on achievin) a))ressive tar)ets for stock !rice,
o!eratin) results, financial !osition, or cash flow'
45
7. G 6ersonal )uarantees of de"ts of the entit#'
here is e,cessive !ressure on (ana)e(ent or o!eratin) !ersonnel to (eet financial tar)ets esta"lished "#
those char)ed with )overnance, includin) sales or !rofita"ilit# incentive )oals'
,pportunities
he nature of the industr# or the entit#+s o!erations !rovides o!!ortunities to en)a)e in fraudulent financial
re!ortin) that can arise fro( the followin).
% G Si)nificant related-!art# transactions not in the ordinar# course of "usiness or with
related entities not audited or audited "# another fir('
% G A stron) financial !resence or a"ilit# to do(inate a certain industr# sector that allows the
entit# to dictate ter(s or conditions to su!!liers or custo(ers that (a# result in ina!!ro!riate or
non-ar(+s-len)th transactions'
Eana)e(ent incentive !lans (a# "e contin)ent u!on achievin) tar)ets relatin) onl# to certain accounts or selected activities of
the entit#, even thou)h the related accounts or activities (a# not "e (aterial to the entit# as a whole'
1. G Assets, lia"ilities, revenues, or e,!enses "ased on si)nificant esti(ates that involve
su";ective ;ud)(ents or uncertainties that are difficult to corro"orate'
2. G Si)nificant, unusual, or hi)hl# co(!le, transactions, es!eciall# those close to !eriod end
that !ose difficult Csu"stance over for(D *uestions'
3. G Si)nificant o!erations located or conducted across international "orders in ;urisdictions
where differin) "usiness environ(ents and cultures e,ist'
4. G Use of "usiness inter(ediaries for which there a!!ears to "e no clear "usiness
;ustification'
1. G Si)nificant "ank accounts or su"sidiar# or "ranch o!erations in ta,-haven ;urisdictions
for which there a!!ears to "e no clear "usiness ;ustification'
2. he (onitorin) of (ana)e(ent is not effective as a result of the followin).
5. G =o(ination of (ana)e(ent "# a sin)le !erson or s(all )rou! $in a non owner-(ana)ed
"usiness& without co(!ensatin) controls'
1. G 7versi)ht "# those char)ed with )overnance over the financial re!ortin) !rocess and
internal control is not effective'
2. here is a co(!le, or unsta"le or)aniJational structure, as evidenced "# the followin).
6. G =ifficult# in deter(inin) the or)aniJation or individuals that have controllin) interest in
the entit#'
7. G 7verl# co(!le, or)aniJational structure involvin) unusual le)al entities or (ana)erial
lines of authorit#'
1. G @i)h turnover of senior (ana)e(ent, le)al counsel, or those char)ed with )overnance'
2. Internal control co(!onents are deficient as a result of the followin).
8. G Inade*uate (onitorin) of controls, includin) auto(ated controls and controls over
interi( financial re!ortin) $where e,ternal re!ortin) is re*uired&'
9. G @i)h turnover rates or e(!lo#(ent of accountin), internal audit, or infor(ation
technolo)# staff that are not effective'
10. G Accountin) and infor(ation s#ste(s that are not effective, includin) situations involvin)
si)nificant deficiencies in internal control'
AttitudesH+ationaliBations
1. G %o((unication, i(!le(entation, su!!ort, or enforce(ent of the entit#+s values or ethical
standards "# (ana)e(ent, or the co((unication of ina!!ro!riate values or ethical standards, that
are not effective'
2. G Nonfinancial (ana)e(ent+s e,cessive !artici!ation in or !reoccu!ation with the selection
of accountin) !olicies or the deter(ination of si)nificant esti(ates'
157 ISA 440 A660N=II
1. G Snown histor# of violations of securities laws or other laws and re)ulations, or clai(s
a)ainst the entit#, its senior (ana)e(ent, or those char)ed with )overnance alle)in) fraud or
violations of laws and re)ulations'
2. G 0,cessive interest "# (ana)e(ent in (aintainin) or increasin) the entit#+s stock !rice or
earnin)s trend'
3. G he !ractice "# (ana)e(ent of co((ittin) to anal#sts, creditors, and other third !arties
to achieve a))ressive or unrealistic forecasts'
4. G Eana)e(ent failin) to re(ed# known si)nificant deficiencies in internal control on a
ti(el# "asis'
5. G An interest "# (ana)e(ent in e(!lo#in) ina!!ro!riate (eans to (ini(iJe re!orted
earnin)s for ta,-(otivated reasons'
6. G Mow (orale a(on) senior (ana)e(ent'
7. G he owner-(ana)er (akes no distinction "etween !ersonal and "usiness transactions'
8. G =is!ute "etween shareholders in a closel# held entit#'
9. G Aecurrin) atte(!ts "# (ana)e(ent to ;ustif# (ar)inal or ina!!ro!riate accountin) on the
"asis of (aterialit#'
1. G he relationshi! "etween (ana)e(ent and the current or !redecessor auditor is strained,
as e,hi"ited "# the followin).
1. Fre*uent dis!utes with the current or !redecessor auditor on accountin),
auditin), or re!ortin) (atters'
2. Unreasona"le de(ands on the auditor, such as unrealistic ti(e constraints
re)ardin) the co(!letion of the audit or the issuance of the auditor+s re!ort'
3. Aestrictions on the auditor that ina!!ro!riatel# li(it access to !eo!le or
infor(ation or the a"ilit# to co((unicate effectivel# with those char)ed with
)overnance'
4. =o(ineerin) (ana)e(ent "ehavior in dealin) with the auditor, es!eciall#
involvin) atte(!ts to influence the sco!e of the auditor+s work or the selection or
continuance of !ersonnel assi)ned to or consulted on the audit en)a)e(ent'
Ri% F!cto' A'ii"( f'o. )it!te.e"t A'ii"( f'o. )i!pp'op'i!tio" of Aet
Aisk factors that relate to (isstate(ents arisin) fro( (isa!!ro!riation of assets are also classified
accordin) to the three conditions )enerall# !resent when fraud e,ists. incentives/!ressures, o!!ortunities,
and attitudes/rationaliJation' So(e of the risk factors
ISA 440 A660N=II 158
related to (isstate(ents arisin) fro( fraudulent financial re!ortin) also (a# "e !resent when
(isstate(ents arisin) fro( (isa!!ro!riation of assets occur' For e,a(!le, ineffective (onitorin) of
(ana)e(ent and other deficiencies in internal control (a# "e !resent when (isstate(ents due to either
fraudulent financial re!ortin) or (isa!!ro!riation of assets e,ist' he followin) are e,a(!les of risk
factors related to (isstate(ents arisin) fro( (isa!!ro!riation of assets'
Incenti!esH(ressures
6ersonal financial o"li)ations (a# create !ressure on (ana)e(ent or e(!lo#ees with access to cash or
other assets susce!ti"le to theft to (isa!!ro!riate those assets'
Adverse relationshi!s "etween the entit# and e(!lo#ees with access to cash or other assets susce!ti"le to
theft (a# (otivate those e(!lo#ees to (isa!!ro!riate those assets' For e,a(!le, adverse relationshi!s (a#
"e created "# the followin).
1. G Snown or antici!ated future e(!lo#ee la#offs'
2. G Aecent or antici!ated chan)es to e(!lo#ee co(!ensation or "enefit !lans'
3. G 6ro(otions, co(!ensation, or other rewards inconsistent with e,!ectations'
,pportunities
%ertain characteristics or circu(stances (a# increase the susce!ti"ilit# of assets to (isa!!ro!riation' For
e,a(!le, o!!ortunities to (isa!!ro!riate assets increase when there are the followin).
% G Mar)e a(ounts of cash on hand or !rocessed'
% G Inventor# ite(s that are s(all in siJe, of hi)h value, or in hi)h de(and'
% G 0asil# converti"le assets, such as "earer "onds, dia(onds, or co(!uter chi!s'
1. G Fi,ed assets which are s(all in siJe, (arketa"le, or lackin) o"serva"le identification of
ownershi!'
2. Inade*uate internal control over assets (a# increase the susce!ti"ilit# of (isa!!ro!riation of
those assets' For e,a(!le, (isa!!ro!riation of assets (a# occur "ecause there is the
followin).
% G Inade*uate se)re)ation of duties or inde!endent checks'
% G Inade*uate oversi)ht of senior (ana)e(ent e,!enditures, such as travel and other re-
i("urse(ents'
% G Inade*uate (ana)e(ent oversi)ht of e(!lo#ees res!onsi"le for assets, for e,a(!le,
inade*uate su!ervision or (onitorin) of re(ote locations'
% G Inade*uate ;o" a!!licant screenin) of e(!lo#ees with access to assets'
% G Inade*uate record kee!in) with res!ect to assets'
155 ISA 440 A660N=II
1. G Inade*uate s#ste( of authoriJation and a!!roval of transactions $for e,a(!le, in
!urchasin)&'
2. G Inade*uate !h#sical safe)uards over cash, invest(ents, inventor#, or fi,ed assets'
3. G Mack of co(!lete and ti(el# reconciliations of assets'
4. G Mack of ti(el# and a!!ro!riate docu(entation of transactions, for e,a(!le, credits for
(erchandise returns'
5. G Mack of (andator# vacations for e(!lo#ees !erfor(in) ke# control functions'
6. G Inade*uate (ana)e(ent understandin) of infor(ation technolo)#, which ena"les
infor(ation technolo)# e(!lo#ees to !er!etrate a (isa!!ro!riation'
7. G Inade*uate access controls over auto(ated records, includin) controls over and review of
co(!uter s#ste(s event lo)s'
AttitudesH+ationaliBations
% G =isre)ard for the need for (onitorin) or reducin) risks related to (isa!!ro!riations of
assets'
% G =isre)ard for internal control over (isa!!ro!riation of assets "# overridin) e,istin)
controls or "# failin) to take a!!ro!riate re(edial action on known deficiencies in internal control'
% G 1ehavior indicatin) dis!leasure or dissatisfaction with the entit# or its treat(ent of the
e(!lo#ee'
% G %han)es in "ehavior or lifest#le that (a# indicate assets have "een (isa!!ro!riated'
% G olerance of !ett# theft'
ISA 440 A660N=II 400
Appe"#i5 2
$Aef. 6ara' A40&
E5!.p0e of *oi$0e A-#it *'oce#-'e to A##'e the Aee# Ri% of
)!te'i!0 )it!te.e"t D-e to F'!-#
he followin) are e,a(!les of !ossi"le audit !rocedures to address the assessed risks of (aterial
(isstate(ent due to fraud resultin) fro( "oth fraudulent financial re!ortin) and (isa!!ro!riation of assets'
Althou)h these !rocedures cover a "road ran)e of situations, the# are onl# e,a(!les and, accordin)l# the#
(a# not "e the (ost a!!ro!riate nor necessar# in each circu(stance' Also the order of the !rocedures
!rovided is not intended to reflect their relative i(!ortance'
Co"i#e'!tio" !t the Ae'tio" Le9e0
S!ecific res!onses to the auditor+s assess(ent of the risks of (aterial (isstate(ent due to fraud will var#
de!endin) u!on the t#!es or co("inations of fraud risk factors or conditions identified, and the classes of
transactions, account "alances, disclosures and assertions the# (a# affect'
he followin) are s!ecific e,a(!les of res!onses.
1. G Fisitin) locations or !erfor(in) certain tests on a sur!rise or unannounced "asis' For
e,a(!le, o"servin) inventor# at locations where auditor attendance has not "een !reviousl#
announced or countin) cash at a !articular date on a sur!rise "asis'
2. G Ae*uestin) that inventories "e counted at the end of the re!ortin) !eriod or on a date
closer to !eriod end to (ini(iJe the risk of (ani!ulation of "alances in the !eriod "etween the
date of co(!letion of the count and the end of the re!ortin) !eriod'
3. G Alterin) the audit a!!roach in the current #ear' For e,a(!le, contactin) (a;or custo(ers
and su!!liers orall# in addition to sendin) written confir(ation, sendin) confir(ation re*uests to
a s!ecific !art# within an or)aniJation, or seekin) (ore or different infor(ation'
4. G 6erfor(in) a detailed review of the entit#+s *uarter-end or #ear-end ad;ustin) entries and
investi)atin) an# that a!!ear unusual as to nature or a(ount'
5. G For si)nificant and unusual transactions, !articularl# those occurrin) at or near #ear-end,
investi)atin) the !ossi"ilit# of related !arties and the sources of financial resources su!!ortin) the
transactions'
6. G 6erfor(in) su"stantive anal#tical !rocedures usin) disa))re)ated data' For e,a(!le,
co(!arin) sales and cost of sales "# location, line of "usiness or (onth to e,!ectations develo!ed
"# the auditor'
401 ISA 440 A660N=II
% G %onductin) interviews of !ersonnel involved in areas where a risk of (aterial
(isstate(ent due to fraud has "een identified, to o"tain their insi)hts a"out the risk and whether,
or how, controls address the risk'
% G Lhen other inde!endent auditors are auditin) the financial state(ents of one or (ore
su"sidiaries, divisions or "ranches, discussin) with the( the e,tent of work necessar# to "e
!erfor(ed to address the assessed risk of (aterial (isstate(ent due to fraud resultin) fro(
transactions and activities a(on) these co(!onents'
% G If the work of an e,!ert "eco(es !articularl# si)nificant with res!ect to a financial
state(ent ite( for which the assessed risk of (isstate(ent due to fraud is hi)h, !erfor(in)
additional !rocedures relatin) to so(e or all of the e,!ert+s assu(!tions, (ethods or findin)s to
deter(ine that the findin)s are not unreasona"le, or en)a)in) another e,!ert for that !ur!ose'
% G 6erfor(in) audit !rocedures to anal#Je selected o!enin) "alance sheet accounts of
!reviousl# audited financial state(ents to assess how certain issues involvin) accountin)
esti(ates and ;ud)(ents, for e,a(!le, an allowance for sales returns, were resolved with the
"enefit of hindsi)ht'
% G 6erfor(in) !rocedures on account or other reconciliations !re!ared "# the entit#,
includin) considerin) reconciliations !erfor(ed at interi( !eriods'
% G 6erfor(in) co(!uter-assisted techni*ues, such as data (inin) to test for ano(alies in a
!o!ulation'
% G estin) the inte)rit# of co(!uter-!roduced records and transactions'
% G Seekin) additional audit evidence fro( sources outside of the entit# "ein) audited'
Specific Repo"eD)it!te.e"t Re-0ti"( f'o. F'!-#-0e"t Fi"!"ci!0 Repo'ti"(
0,a(!les of res!onses to the auditor+s assess(ent of the risks of (aterial (isstate(ent due to fraudulent
financial re!ortin) are as follows.
+e!enue +ecognition
1. G 6erfor(in) su"stantive anal#tical !rocedures relatin) to revenue usin) disa))re)ated
data, for e,a(!le, co(!arin) revenue re!orted "# (onth and "# !roduct line or "usiness se)(ent
durin) the current re!ortin) !eriod with co(!ara"le !rior !eriods' %o(!uter-assisted audit
techni*ues (a# "e useful in identif#in) unusual or une,!ected revenue relationshi!s or
transactions'
2. G %onfir(in) with custo(ers certain relevant contract ter(s and the a"sence of side
a)ree(ents, "ecause the a!!ro!riate accountin) often is influenced "# such ter(s or a)ree(ents
and "asis for re"ates or the !eriod to which the# relate are often !oorl# docu(ented' For e,a(!le,
acce!tance criteria, deliver# and !a#(ent ter(s, the a"sence of future or continuin) vendor
o"li)ations, the ri)ht to return the
ISA 440 A660N=II 404
!roduct, )uaranteed resale a(ounts, and cancellation or refund !rovisions often are relevant in such
circu(stances'
% G In*uirin) of the entit#+s sales and (arketin) !ersonnel or in-house le)al counsel
re)ardin) sales or shi!(ents near the end of the !eriod and their knowled)e of an# unusual ter(s
or conditions associated with these transactions'
% G 1ein) !h#sicall# !resent at one or (ore locations at !eriod end to o"serve )oods "ein)
shi!!ed or "ein) readied for shi!(ent $or returns awaitin) !rocessin)& and !erfor(in) other
a!!ro!riate sales and inventor# cutoff !rocedures'
% G For those situations for which revenue transactions are electronicall# initiated, !rocessed,
and recorded, testin) controls to deter(ine whether the# !rovide assurance that recorded revenue
transactions occurred and are !ro!erl# recorded'
In!entory *uantities
1. G 0,a(inin) the entit#+s inventor# records to identif# locations or ite(s that re*uire
s!ecific attention durin) or after the !h#sical inventor# count'
2. G 7"servin) inventor# counts at certain locations on an unannounced "asis or conductin)
inventor# counts at all locations on the sa(e date'
3. G %onductin) inventor# counts at or near the end of the re!ortin) !eriod to (ini(iJe the
risk of ina!!ro!riate (ani!ulation durin) the !eriod "etween the count and the end of the
re!ortin) !eriod'
4. G 6erfor(in) additional !rocedures durin) the o"servation of the count, for e,a(!le, (ore
ri)orousl# e,a(inin) the contents of "o,ed ite(s, the (anner in which the )oods are stacked $for
e,a(!le, hollow s*uares& or la"eled, and the *ualit# $that is, !urit#, )rade, or concentration& of
li*uid su"stances such as !erfu(es or s!ecialt# che(icals' Usin) the work of an e,!ert (a# "e
hel!ful in this re)ard'
5. G %o(!arin) the *uantities for the current !eriod with !rior !eriods "# class or cate)or# of
inventor#, location or other criteria, or co(!arison of *uantities counted with !er!etual records'
6. G Usin) co(!uter-assisted audit techni*ues to further test the co(!ilation of the !h#sical
inventor# counts K for e,a(!le, sortin) "# ta) nu("er to test ta) controls or "# ite( serial nu("er
to test the !ossi"ilit# of ite( o(ission or du!lication'
<anage$ent /sti$ates
1. G Usin) an e,!ert to develo! an inde!endent esti(ate for co(!arison to (ana)e(ent+s
esti(ate'
2. G 0,tendin) in*uiries to individuals outside of (ana)e(ent and the accountin) de!art(ent
to corro"orate (ana)e(ent+s a"ilit# and intent to carr# out !lans that are relevant to develo!in)
the esti(ate'
409 ISA 440 A660N=II
Specific Repo"eD)it!te.e"t D-e to )i!pp'op'i!tio" of Aet
=ifferin) circu(stances would necessaril# dictate different res!onses' 7rdinaril#, the audit res!onse to an
assessed risk of (aterial (isstate(ent due to fraud relatin) to (isa!!ro!riation of assets will "e directed
toward certain account "alances and classes of transactions' Althou)h so(e of the audit res!onses noted in
the two cate)ories a"ove (a# a!!l# in such circu(stances, the sco!e of the work is to "e linked to the
s!ecific infor(ation a"out the (isa!!ro!riation risk that has "een identified'
0,a(!les of res!onses to the auditor+s assess(ent of the risk of (aterial (isstate(ents due to
(isa!!ro!riation of assets are as follows.
% G %ountin) cash or securities at or near #ear-end'
% G %onfir(in) directl# with custo(ers the account activit# $includin) credit (e(o and sales
return activit# as well as dates !a#(ents were (ade& for the !eriod under audit'
% G Anal#Jin) recoveries of written-off accounts'
% G Anal#Jin) inventor# shorta)es "# location or !roduct t#!e'
% G %o(!arin) ke# inventor# ratios to industr# nor('
% G Aeviewin) su!!ortin) docu(entation for reductions to the !er!etual inventor# records'
% G 6erfor(in) a co(!uteriJed (atch of the vendor list with a list of e(!lo#ees to identif#
(atches of addresses or !hone nu("ers'
% G 6erfor(in) a co(!uteriJed search of !a#roll records to identif# du!licate addresses,
e(!lo#ee identification or ta,in) authorit# nu("ers or "ank accounts
% G Aeviewin) !ersonnel files for those that contain little or no evidence of activit#, for
e,a(!le, lack of !erfor(ance evaluations'
% G Anal#Jin) sales discounts and returns for unusual !atterns or trends'
% G %onfir(in) s!ecific ter(s of contracts with third !arties'
% G 7"tainin) evidence that contracts are "ein) carried out in accordance with their ter(s'
% G Aeviewin) the !ro!riet# of lar)e and unusual e,!enses'
% G Aeviewin) the authoriJation and carr#in) value of senior (ana)e(ent and related !art#
loans'
% G Aeviewin) the level and !ro!riet# of e,!ense re!orts su"(itted "# senior (ana)e(ent'
ISA 440 A660N=II 404
Appe"#i5 3
$Aef. 6ara' A45&
E5!.p0e of Ci'c-.t!"ce th!t I"#ic!te the *oi$i0it/ of F'!-#
he followin) are e,a(!les of circu(stances that (a# indicate the !ossi"ilit# that the financial state(ents
(a# contain a (aterial (isstate(ent resultin) fro( fraud'
=iscre!ancies in the accountin) records, includin).
% G ransactions that are not recorded in a co(!lete or ti(el# (anner or are i(!ro!erl#
recorded as to a(ount, accountin) !eriod, classification, or entit# !olic#'
% G Unsu!!orted or unauthoriJed "alances or transactions'
% G Mast-(inute ad;ust(ents that si)nificantl# affect financial results'
% G 0vidence of e(!lo#ees+ access to s#ste(s and records inconsistent with that necessar# to
!erfor( their authoriJed duties'
1. G i!s or co(!laints to the auditor a"out alle)ed fraud'
2. %onflictin) or (issin) evidence, includin).
% G Eissin) docu(ents'
% G =ocu(ents that a!!ear to have "een altered'
% G Unavaila"ilit# of other than !hotoco!ied or electronicall# trans(itted docu(ents when
docu(ents in ori)inal for( are e,!ected to e,ist'
% G Si)nificant une,!lained ite(s on reconciliations'
% G Unusual "alance sheet chan)es, or chan)es in trends or i(!ortant financial state(ent
ratios or relationshi!s K for e,a(!le, receiva"les )rowin) faster than revenues'
% G Inconsistent, va)ue, or i(!lausi"le res!onses fro( (ana)e(ent or e(!lo#ees arisin)
fro( in*uiries or anal#tical !rocedures'
% G Unusual discre!ancies "etween the entit#Rs records and confir(ation re!lies'
% G Mar)e nu("ers of credit entries and other ad;ust(ents (ade to accounts receiva"le
records'
% G Une,!lained or inade*uatel# e,!lained differences "etween the accounts receiva"le su"-
led)er and the control account, or "etween the custo(er state(ents and the accounts receiva"le
su"-led)er'
% G Eissin) or non-e,istent cancelled checks in circu(stances where cancelled checks are
ordinaril# returned to the entit# with the "ank state(ent'
405 ISA 440 A660N=II
% G Eissin) inventor# or !h#sical assets of si)nificant (a)nitude'
% G Unavaila"le or (issin) electronic evidence, inconsistent with the entit#+s record retention
!ractices or !olicies'
% G Fewer res!onses to confir(ations than antici!ated or a )reater nu("er of res!onses than
antici!ated'
1G Ina"ilit# to !roduce evidence of ke# s#ste(s develo!(ent and !ro)ra( chan)e testin) and
i(!le(entation activities for current-#ear s#ste( chan)es and de!lo#(ents'
26ro"le(atic or unusual relationshi!s "etween the auditor and (ana)e(ent, includin).
% G =enial of access to records, facilities, certain e(!lo#ees, custo(ers, vendors, or others
fro( who( audit evidence (i)ht "e sou)ht'
% G Undue ti(e !ressures i(!osed "# (ana)e(ent to resolve co(!le, or contentious issues'
% G %o(!laints "# (ana)e(ent a"out the conduct of the audit or (ana)e(ent inti(idation
of en)a)e(ent tea( (e("ers, !articularl# in connection with the auditor+s critical assess(ent of
audit evidence or in the resolution of !otential disa)ree(ents with (ana)e(ent'
% G Unusual dela#s "# the entit# in !rovidin) re*uested infor(ation'
% G Unwillin)ness to facilitate auditor access to ke# electronic files for testin) throu)h the
use of co(!uter-assisted audit techni*ues'
% G =enial of access to ke# I o!erations staff and facilities, includin) securit#, o!erations,
and s#ste(s develo!(ent !ersonnel'
% G An unwillin)ness to add or revise disclosures in the financial state(ents to (ake the(
(ore co(!lete and understanda"le'
1G An unwillin)ness to address identified deficiencies in internal control on a ti(el# "asis'
27ther
% G Unwillin)ness "# (ana)e(ent to !er(it the auditor to (eet !rivatel# with those char)ed
with )overnance'
% G Accountin) !olicies that a!!ear to "e at variance with industr# nor(s'
% G Fre*uent chan)es in accountin) esti(ates that do not a!!ear to result fro( chan)ed
circu(stances'
% G olerance of violations of the entit#+s code of conduct'
INTERNATIONAL STANDARD ON AUDITING 2@0
CONSIDERATION OF LA=S AND REGULATIONS IN AN AUDIT OF FINANCIAL STATE)ENTS
CONTENTS
6ara)ra!h
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1
0ffect of Maws and Ae)ulations '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
Aes!onsi"ilit# for %o(!liance with Maws and Ae)ulations ''''''''''''''''''''''' 9-8
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 10
Defi"itio" ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 11
Re2-i'e.e"t
he Auditor+s %onsideration of %o(!liance with Maws and
Ae)ulations '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 14-17
Audit 6rocedures Lhen Non-%o(!liance Is Identified or Sus!ected '''''''' 18-41
Ae!ortin) of Identified or Sus!ected Non-%o(!liance '''''''''''''''''''''''''''''' 44-48
=ocu(entation '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 45
Aes!onsi"ilit# for %o(!liance with Maws and Ae)ulations ''''''''''''''''''''''' A1-AB he Auditor+s
%onsideration of %o(!liance with Maws and
Ae)ulations '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A7-A14 Audit 6rocedures Lhen
Non-%o(!liance Is Identified or
Sus!ected ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A19-A18
Ae!ortin) of Identified or Sus!ected Non-%o(!liance '''''''''''''''''''''''''''''' A15-A40
=ocu(entation '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A41
407 ISA 450
International Standard on Auditin) $ISA& 450, C%onsideration of Maws and Ae)ulations in an Audit of
Financial State(entsD should "e read in con;unction with ISA 400 C7verall 7";ectives of the Inde!endent
Auditor and the %onduct of an Audit in Accordance with International Standards on Auditin)'D
ISA 450 408
1' his International Standard on Auditin) $ISA& deals with the auditor+s res!onsi"ilit# to consider
laws and re)ulations in an audit of financial state(ents' his ISA does not a!!l# to other
assurance en)a)e(ents in which the auditor is s!ecificall# en)a)ed to test and re!ort se!aratel# on
co(!liance with s!ecific laws or re)ulations'
Effect of L!& !"# Re(-0!tio"
4' he effect on financial state(ents of laws and re)ulations varies considera"l#' hose laws and
re)ulations to which an entit# is su";ect constitute the le)al and re)ulator# fra(ework' he
!rovisions of so(e laws or re)ulations have a direct effect on the financial state(ents in that the#
deter(ine the re!orted a(ounts and disclosures in an entit#+s financial state(ents' 7ther laws or
re)ulations are to "e co(!lied with "# (ana)e(ent or set the !rovisions under which the entit# is
allowed to conduct its "usiness "ut do not have a direct effect on an entit#+s financial state(ents'
So(e entities o!erate in heavil# re)ulated industries $such as "anks and che(ical co(!anies&'
7thers are su";ect onl# to the (an# laws and re)ulations that relate )enerall# to the o!eratin)
as!ects of the "usiness $such as those related to occu!ational safet# and health, and e*ual
e(!lo#(ent o!!ortunit#&' Non-co(!liance with laws and re)ulations (a# result in fines,
liti)ation or other conse*uences for the entit# that (a# have a (aterial effect on the financial
state(ents'
Repo"i$i0it/ fo' Co.p0i!"ce &ith L!& !"# Re(-0!tio" $Aef. 6ara' A1-AB&
9' It is the res!onsi"ilit# of (ana)e(ent, with the oversi)ht of those char)ed with )overnance, to
ensure that the entit#+s o!erations are conducted in accordance with the !rovisions of laws and
re)ulations, includin) co(!liance with the !rovisions of laws and re)ulations that deter(ine the
re!orted a(ounts and disclosures in an entit#+s financial state(ents'
+esponsibility of the Auditor
1. 4' he re*uire(ents in this ISA are desi)ned to assist the auditor in identif#in) (aterial
(isstate(ent of the financial state(ents due to non-co(!liance with laws and re)ulations'
@owever, the auditor is not res!onsi"le for !reventin) non-co(!liance and cannot "e e,!ected to
detect nonco(!liance with all laws and re)ulations'
2. 5' he auditor is res!onsi"le for o"tainin) reasona"le assurance that the financial
state(ents, taken as a whole, are free fro( (aterial (isstate(ent,
405 ISA 450
whether caused "# fraud or error'
1
In conductin) an audit of financial state(ents, the auditor takes
into account the a!!lica"le le)al and re)ulator# fra(ework' 7win) to the inherent li(itations of
an audit, there is an unavoida"le risk that so(e (aterial (isstate(ents in the financial state(ents
(a# not "e detected, even thou)h the audit is !ro!erl# !lanned and !erfor(ed in accordance with
the ISAs'
4
In the conte,t of laws and re)ulations, the !otential effects of inherent li(itations on the
auditor+s a"ilit# to detect (aterial (isstate(ents are )reater for such reasons as the followin).
1. G here are (an# laws and re)ulations, relatin) !rinci!all# to the o!eratin) as!ects of an
entit#, that t#!icall# do not affect the financial state(ents and are not ca!tured "# the entit#+s
infor(ation s#ste(s relevant to financial re!ortin)'
2. G Non-co(!liance (a# involve conduct desi)ned to conceal it, such as collusion, for)er#,
deli"erate failure to record transactions, (ana)e(ent override of controls or intentional
(isre!resentations "ein) (ade to the auditor'
3. G Lhether an act constitutes non-co(!liance is ulti(atel# a (atter for le)al deter(ination
"# a court of law'
7rdinaril#, the further re(oved non-co(!liance is fro( the events and transactions reflected in the
financial state(ents, the less likel# the auditor is to "eco(e aware of it or to reco)niJe the non-
co(!liance'
B' his ISA distin)uishes the auditor+s res!onsi"ilities in relation to co(!liance with two different
cate)ories of laws and re)ulations as follows.
1$a&he !rovisions of those laws and re)ulations )enerall# reco)niJed to have a direct effect on the
deter(ination of (aterial a(ounts and disclosures in the financial state(ents such as ta, and
!ension laws and re)ulations $see !ara)ra!h 19&? and
2$"&7ther laws and re)ulations that do not have a direct effect on the deter(ination of the a(ounts and
disclosures in the financial state(ents, "ut co(!liance with which (a# "e funda(ental to the
o!eratin) as!ects of the "usiness, to an entit#+s a"ilit# to continue its "usiness, or to avoid (aterial
!enalties $for e,a(!le, co(!liance with the ter(s of an o!eratin) license, co(!liance with
re)ulator# solvenc# re*uire(ents, or co(!liance with environ(ental re)ulations&? nonco(!liance
with such laws and re)ulations (a# therefore have a (aterial effect on the financial state(ents
$see !ara)ra!h 14&'
1
4
ISA 450 410
1. 7' In this ISA, differin) re*uire(ents are s!ecified for each of the a"ove cate)ories of laws
and re)ulations' For the cate)or# referred to in !ara)ra!h B$a&, the auditor+s res!onsi"ilit# is to
o"tain sufficient a!!ro!riate audit evidence re)ardin) co(!liance with the !rovisions of those
laws and re)ulations' For the cate)or# referred to in !ara)ra!h B$"&, the auditor+s res!onsi"ilit# is
li(ited to undertakin) s!ecified audit !rocedures to hel! identif# non-co(!liance with those laws
and re)ulations that (a# have a (aterial effect on the financial state(ents'
2. 8' he auditor is re*uired "# this ISA to re(ain alert to the !ossi"ilit# that other audit
!rocedures a!!lied for the !ur!ose of for(in) an o!inion on financial state(ents (a# "rin)
instances of identified or sus!ected nonco(!liance to the auditor+s attention' Eaintainin)
!rofessional ske!ticis( throu)hout the audit, as re*uired "# ISA 400,
9
is i(!ortant in this conte,t,
)iven the e,tent of laws and re)ulations that affect the entit#'
Effecti9e D!te
15, 4005'
O$1ecti9e
1$a&o o"tain sufficient a!!ro!riate audit evidence re)ardin) co(!liance with the !rovisions of those
laws and re)ulations )enerall# reco)niJed to have a direct effect on the deter(ination of (aterial
a(ounts and disclosures in the financial state(ents?
2$"& o !erfor( s!ecified audit !rocedures to hel! identif# instances of non-co(!liance with other
laws and re)ulations that (a# have a (aterial effect on the financial state(ents? and
3$c&o res!ond a!!ro!riatel# to non-co(!liance or sus!ected nonco(!liance with laws and
re)ulations identified durin) the audit'
Defi"itio"
11' For the !ur!oses of this ISA, the followin) ter( has the (eanin) attri"uted "elow.
Non-co(!liance K Acts of o(ission or co((ission "# the entit#, either intentional or
unintentional, which are contrar# to the !revailin) laws or re)ulations' Such acts include
transactions entered into "#, or in the na(e of, the entit#, or on its "ehalf, "# those char)ed with
)overnance, (ana)e(ent or e(!lo#ees' Non-co(!liance does not include !ersonal (isconduct
$unrelated
411 ISA 450
to the "usiness activities of the entit#& "# those char)ed with )overnance, (ana)e(ent or
e(!lo#ees of the entit#'
Re2-i'e.e"t The A-#ito'> Co"i#e'!tio" of Co.p0i!"ce &ith L!& !"# Re(-0!tio"
114' As !art of o"tainin) an understandin) of the entit# and its environ(ent in accordance
with ISA 915,
4
the auditor shall o"tain a )eneral understandin) of.
2$a&he le)al and re)ulator# fra(ework a!!lica"le to the entit# and the industr# or sector in
which the entit# o!erates? and
3$"&@ow the entit# is co(!l#in) with that fra(ework' $Aef. 6ara' A7&
2. 19' he auditor shall o"tain sufficient a!!ro!riate audit evidence re)ardin) co(!liance with
the !rovisions of those laws and re)ulations )enerall# reco)niJed to have a direct effect on the
deter(ination of (aterial a(ounts and disclosures in the financial state(ents' $Aef. 6ara' A8&
114' he auditor shall !erfor( the followin) audit !rocedures to hel! identif# instances of
non-co(!liance with other laws and re)ulations that (a# have a (aterial effect on the
financial state(ents. $Aef. 6ara' A5-A10&
2$a&In*uirin) of (ana)e(ent and, where a!!ro!riate, those char)ed with )overnance, as to
whether the entit# is in co(!liance with such laws and re)ulations? and
3$"& Ins!ectin) corres!ondence, if an#, with the relevant licensin) or re)ulator# authorities'
3. 15' =urin) the audit, the auditor shall re(ain alert to the !ossi"ilit# that other audit
!rocedures a!!lied (a# "rin) instances of non-co(!liance or sus!ected non-co(!liance with
laws and re)ulations to the auditor+s attention' $Aef. 6ara' A11&
4. 1B' he auditor shall re*uest (ana)e(ent and, where a!!ro!riate, those char)ed with
)overnance to !rovide written re!resentations that all known instances of non-co(!liance or
sus!ected non-co(!liance with laws and re)ulations whose effects should "e considered when
!re!arin) financial state(ents have "een disclosed to the auditor' $Aef. 6ara' A14&
5. 17' In the a"sence of identified or sus!ected non-co(!liance, the auditor is not re*uired to
!erfor( audit !rocedures re)ardin) the entit#+s co(!liance with laws and re)ulations, other than
those set out in !ara)ra!hs 14-1B'
ISA 915, CIdentif#in) and Assessin) the Aisks of Eaterial Eisstate(ent throu)h Understandin) the 0ntit# and Its
0nviron(ent,D !ara)ra!h 11'
ISA 450 414
A-#it *'oce#-'e =he" No"<Co.p0i!"ce I I#e"tifie# o' S-pecte#
1. 18' If the auditor "eco(es aware of infor(ation concernin) an instance of nonco(!liance or
sus!ected non-co(!liance with laws and re)ulations, the auditor shall o"tain. $Aef. 6ara'
A19&
2. $a& An understandin) of the nature of the act and the circu(stances in which it has occurred?
and
3. $"& Further infor(ation to evaluate the !ossi"le effect on the financial state(ents' $Aef. 6ara'
A14&
2. 15' If the auditor sus!ects there (a# "e non-co(!liance, the auditor shall discuss the (atter
with (ana)e(ent and, where a!!ro!riate, those char)ed with )overnance' If (ana)e(ent or, as
a!!ro!riate, those char)ed with )overnance do not !rovide sufficient infor(ation that su!!orts
that the entit# is in co(!liance with laws and re)ulations and, in the auditor+s ;ud)(ent, the effect
of the sus!ected non-co(!liance (a# "e (aterial to the financial state(ents, the auditor shall
consider the need to o"tain le)al advice' $Aef. 6ara' A15-A1B&
3. 40' If sufficient infor(ation a"out sus!ected non-co(!liance cannot "e o"tained, the auditor
shall evaluate the effect of the lack of sufficient a!!ro!riate audit evidence on the auditor+s
o!inion'
4. 41' he auditor shall evaluate the i(!lications of non-co(!liance in relation to other as!ects
of the audit, includin) the auditor+s risk assess(ent and the relia"ilit# of written re!resentations,
and take a!!ro!riate action' $Aef. 6ara' A17-A18&
Repo'ti"( of I#e"tifie# o' S-pecte# No"<Co.p0i!"ce
+eporting Aon3Co$pliance to 1hose Charged #ith 2o!ernance
1. 44' Unless all of those char)ed with )overnance are involved in (ana)e(ent of the entit#,
and therefore are aware of (atters involvin) identified or sus!ected non-co(!liance alread#
co((unicated "# the auditor,
5
the auditor shall co((unicate with those char)ed with )overnance
(atters involvin) non-co(!liance with laws and re)ulations that co(e to the auditor+s attention
durin) the course of the audit, other than when the (atters are clearl# inconse*uential'
2. 49' If, in the auditor+s ;ud)(ent, the non-co(!liance referred to in !ara)ra!h 44 is "elieved
to "e intentional and (aterial, the auditor shall co((unicate the (atter to those char)ed with
)overnance as soon as !ractica"le'
419 ISA 450
44' If the auditor sus!ects that (ana)e(ent or those char)ed with )overnance are involved in non-
co(!liance, the auditor shall co((unicate the (atter to the ne,t hi)her level of authorit# at the
entit#, if it e,ists, such as an audit co((ittee or su!ervisor# "oard' Lhere no hi)her authorit#
e,ists, or if the auditor "elieves that the co((unication (a# not "e acted u!on or is unsure as to
the !erson to who( to re!ort, the auditor shall consider the need to o"tain le)al advice'
+eporting Aon3Co$pliance in the Auditor8s +eport on the Financial )tate$ents
1. 45' If the auditor concludes that the non-co(!liance has a (aterial effect on the financial
state(ents, and has not "een ade*uatel# reflected in the financial state(ents, the auditor shall, in
accordance with ISA 705, e,!ress a *ualified o!inion or an adverse o!inion on the financial
state(ents'
B
2. 4B' If the auditor is !recluded "# (ana)e(ent or those char)ed with )overnance fro(
o"tainin) sufficient a!!ro!riate audit evidence to evaluate whether non-co(!liance that (a# "e
(aterial to the financial state(ents has, or is likel# to have, occurred, the auditor shall e,!ress a
*ualified o!inion or disclai( an o!inion on the financial state(ents on the "asis of a li(itation on
the sco!e of the audit in accordance with ISA 705'
3. 47' If the auditor is una"le to deter(ine whether non-co(!liance has occurred "ecause of
li(itations i(!osed "# the circu(stances rather than "# (ana)e(ent or those char)ed with
)overnance, the auditor shall evaluate the effect on the auditor+s o!inion in accordance with ISA
705'
+eporting Aon3Co$pliance to +egulatory and /nforce$ent Authorities
48' If the auditor has identified or sus!ects non-co(!liance with laws and re)ulations, the auditor
shall deter(ine whether the auditor has a res!onsi"ilit# to re!ort the identified or sus!ected non-
co(!liance to !arties outside the entit#' $Aef. 6ara' A15-A40&
Doc-.e"t!tio"
45' he auditor shall include in the audit docu(entation identified or sus!ected non-co(!liance with
laws and re)ulations and the results of discussion with (ana)e(ent and, where a!!lica"le, those
char)ed with )overnance and other !arties outside the entit#'
7
$Aef. 6ara' A41&
OOO
B
ISA 705, CEodifications to the 7!inion in the Inde!endent Auditor+s Ae!ort,D !ara)ra!hs 7-8'
7
ISA 450 414
Repo"i$i0it/ fo' Co.p0i!"ce &ith L!& !"# Re(-0!tio" $Aef. 6ara' 9-8&
A1' It is the res!onsi"ilit# of (ana)e(ent, with the oversi)ht of those char)ed with )overnance, to
ensure that the entit#+s o!erations are conducted in accordance with laws and re)ulations' Maws
and re)ulations (a# affect an entit#+s financial state(ents in different wa#s. for e,a(!le, (ost
directl#, the# (a# affect s!ecific disclosures re*uired of the entit# in the financial state(ents or
the# (a# !rescri"e the a!!lica"le financial re!ortin) fra(ework' he# (a# also esta"lish certain
le)al ri)hts and o"li)ations of the entit#, so(e of which will "e reco)niJed in the entit#+s financial
state(ents' In addition, laws and re)ulations (a# i(!ose !enalties in cases of non-co(!liance'
A4' he followin) are e,a(!les of the t#!es of !olicies and !rocedures an entit# (a# i(!le(ent to
assist in the !revention and detection of nonco(!liance with laws and re)ulations.
% G Eonitorin) le)al re*uire(ents and ensurin) that o!eratin) !rocedures are desi)ned to
(eet these re*uire(ents'
% G Institutin) and o!eratin) a!!ro!riate s#ste(s of internal control'
% G =evelo!in), !u"liciJin) and followin) a code of conduct'
% G 0nsurin) e(!lo#ees are !ro!erl# trained and understand the code of conduct'
% G Eonitorin) co(!liance with the code of conduct and actin) a!!ro!riatel# to disci!line
e(!lo#ees who fail to co(!l# with it'
% G 0n)a)in) le)al advisors to assist in (onitorin) le)al re*uire(ents'
1. G Eaintainin) a re)ister of si)nificant laws and re)ulations with which the entit# has to
co(!l# within its !articular industr# and a record of co(!laints'
2. In lar)er entities, these !olicies and !rocedures (a# "e su!!le(ented "# assi)nin)
a!!ro!riate res!onsi"ilities to the followin).
% G An internal audit function'
% G An audit co((ittee'
% G A co(!liance function'
+esponsibility of the Auditor
A9' Non-co(!liance "# the entit# with laws and re)ulations (a# result in a (aterial (isstate(ent of
the financial state(ents' =etection of nonco(!liance, re)ardless of (aterialit#, (a# affect other
as!ects of the audit
415 ISA 450
includin), for e,a(!le, the auditor+s consideration of the inte)rit# of (ana)e(ent or e(!lo#ees'
A4' Lhether an act constitutes non-co(!liance with laws and re)ulations is a (atter for le)al
deter(ination, which is ordinaril# "e#ond the auditor+s !rofessional co(!etence to deter(ine'
Nevertheless, the auditor+s trainin), e,!erience and understandin) of the entit# and its industr# or
sector (a# !rovide a "asis to reco)niJe that so(e acts, co(in) to the auditor+s attention, (a#
constitute non-co(!liance with laws and re)ulations'
A5' In accordance with s!ecific statutor# re*uire(ents, the auditor (a# "e s!ecificall# re*uired to
re!ort, as !art of the audit of the financial state(ents, on whether the entit# co(!lies with certain
!rovisions of laws or re)ulations' In these circu(stances, ISA 700
8
or ISA 800
5
deal with how
these audit res!onsi"ilities are addressed in the auditor+s re!ort' Further(ore, where there are
s!ecific statutor# re!ortin) re*uire(ents, it (a# "e necessar# for the audit !lan to include
a!!ro!riate tests for co(!liance with these !rovisions of the laws and re)ulations'
AB' In the !u"lic sector, there (a# "e additional audit res!onsi"ilities with res!ect to the consideration
of laws and re)ulations which (a# relate to the audit of financial state(ents or (a# e,tend to
other as!ects of the entit#+s o!erations'
The A-#ito'> Co"i#e'!tio" of Co.p0i!"ce &ith L!& !"# Re(-0!tio"
,btaining an "nderstanding of the :egal and +egulatory Fra$e#or. $Aef. 6ara' 14&
A7' o o"tain a )eneral understandin) of the le)al and re)ulator# fra(ework, and how the entit#
co(!lies with that fra(ework, the auditor (a#, for e,a(!le.
1. G Use the auditor+s e,istin) understandin) of the entit#+s industr#, re)ulator# and other
e,ternal factors?
2. G U!date the understandin) of those laws and re)ulations that directl# deter(ine the
re!orted a(ounts and disclosures in the financial state(ents?
3. G In*uire of (ana)e(ent as to other laws or re)ulations that (a# "e e,!ected to have a
funda(ental effect on the o!erations of the entit#?
4. G In*uire of (ana)e(ent concernin) the entit#+s !olicies and !rocedures re)ardin)
co(!liance with laws and re)ulations? and
8
ISA 700, CFor(in) an 7!inion and Ae!ortin) on Financial State(ents,D !ara)ra!h 98' 5
ISA 800 CS!ecial %onsiderationsNAudits of Financial State(ents 6re!ared in Accordance with S!ecial 6ur!ose Fra(eworks,D
!ara)ra!h 11'
ISA 450 41B
G In*uire of (ana)e(ent re)ardin) the !olicies or !rocedures ado!ted for identif#in),
evaluatin) and accountin) for liti)ation clai(s'
:a#s and +egulations 2enerally +ecogniBed to -a!e a ?irect /ffect on the ?eter$ination of <aterial
A$ounts and ?isclosures in the Financial )tate$ents
$Aef. 6ara' 19&
A8' %ertain laws and re)ulations are well-esta"lished, known to the entit# and within the entit#+s
industr# or sector, and relevant to the entit#+s financial state(ents $as descri"ed in !ara)ra!h B$a&&'
he# could include those that relate to, for e,a(!le.
% G he for( and content of financial state(ents?
% G Industr#-s!ecific financial re!ortin) issues?
% G Accountin) for transactions under )overn(ent contracts? or
% G he accrual or reco)nition of e,!enses for inco(e ta, or !ension costs'
So(e !rovisions in those laws and re)ulations (a# "e directl# relevant to s!ecific assertions in the
financial state(ents $for e,a(!le, the co(!leteness of inco(e ta, !rovisions&, while others (a#
"e directl# relevant to the financial state(ents as a whole $for e,a(!le, the re*uired state(ents
constitutin) a co(!lete set of financial state(ents&' he ai( of the re*uire(ent in !ara)ra!h 19 is
for the auditor to o"tain sufficient a!!ro!riate audit evidence re)ardin) the deter(ination of
a(ounts and disclosures in the financial state(ents in co(!liance with the relevant !rovisions of
those laws and re)ulations'
Non-co(!liance with other !rovisions of such laws and re)ulations and other laws and re)ulations
(a# result in fines, liti)ation or other conse*uences for the entit#, the costs of which (a# need to
"e !rovided for in the financial state(ents, "ut are not considered to have a direct effect on the
financial state(ents as descri"ed in !ara)ra!h B$a&'
(rocedures to Identify Instances of Aon3Co$pliance0,ther :a#s and +egulations
$Aef. 6ara' 14&
A5' %ertain other laws and re)ulations (a# need !articular attention "# the auditor "ecause the# have
a funda(ental effect on the o!erations of the entit# $as descri"ed in !ara)ra!h B$"&&' Non-
co(!liance with laws and re)ulations that have a funda(ental effect on the o!erations of the
entit# (a# cause the entit# to cease o!erations, or call into *uestion the entit#+s continuance as a
)oin) concern' For e,a(!le, non-co(!liance with the re*uire(ents of the entit#+s license or other
entitle(ent to !erfor( its o!erations could have such an i(!act $for e,a(!le, for a "ank,
nonco(!liance with ca!ital or invest(ent re*uire(ents&' here are also (an# laws and
re)ulations relatin) !rinci!all# to the o!eratin) as!ects of the
417 ISA 450
entit# that t#!icall# do not affect the financial state(ents and are not ca!tured "# the entit#+s
A10' As the financial re!ortin) conse*uences of other laws and re)ulations can var# de!endin) on the
entit#+s o!erations, the audit !rocedures re*uired "# !ara)ra!h 14 are directed to "rin)in) to the
auditor+s attention instances of non-co(!liance with laws and re)ulations that (a# have a (aterial
effect on the financial state(ents'
Aon3Co$pliance =rought to the Auditor8s Attention by ,ther Audit (rocedures $Aef. 6ara' 15&
A11' Audit !rocedures a!!lied to for( an o!inion on the financial state(ents (a# "rin) instances of
non-co(!liance or sus!ected non-co(!liance with laws and re)ulations to the auditor+s attention'
For e,a(!le, such audit !rocedures (a# include.
1. G Aeadin) (inutes?
2. G In*uirin) of the entit#+s (ana)e(ent and in-house le)al counsel or e,ternal le)al counsel
concernin) liti)ation, clai(s and assess(ents? and
3. G 6erfor(in) su"stantive tests of details of classes of transactions, account "alances or
disclosures'
Dritten +epresentations $Aef. 6ara' 1B&
A14' 1ecause the effect on financial state(ents of laws and re)ulations can var# considera"l#, written
re!resentations !rovide necessar# audit evidence a"out (ana)e(ent+s knowled)e of identified or
sus!ected non-co(!liance with laws and re)ulations, whose effects (a# have a (aterial effect on
the financial state(ents' @owever, written re!resentations do not !rovide sufficient a!!ro!riate
audit evidence on their own and, accordin)l#, do not affect the nature and e,tent of other audit
evidence that is to "e o"tained "# the auditor'
10
A-#it *'oce#-'e =he" No"<Co.p0i!"ce I I#e"tifie# o' S-pecte#
Indications of Aon3Co$pliance #ith :a#s and +egulations $Aef. 6ara' 18&
A19' If the auditor "eco(es aware of the e,istence of, or infor(ation a"out, the followin) (atters, it
(a# "e an indication of non-co(!liance with laws and re)ulations.
G Investi)ations "# re)ulator# or)aniJations and )overn(ent de!art(ents or !a#(ent of
fines or !enalties'
ISA 580, CLritten Ae!resentations,D !ara)ra!h 4'
ISA 450 418
1. G 6a#(ents for uns!ecified services or loans to consultants, related !arties, e(!lo#ees or
)overn(ent e(!lo#ees'
2. G Sales co((issions or a)ent+s fees that a!!ear e,cessive in relation to those ordinaril#
!aid "# the entit# or in its industr# or to the services actuall# received'
3. G 6urchasin) at !rices si)nificantl# a"ove or "elow (arket !rice'
4. G Unusual !a#(ents in cash, !urchases in the for( of cashiers+ che*ues !a#a"le to "earer
or transfers to nu("ered "ank accounts'
5. G Unusual transactions with co(!anies re)istered in ta, havens'
6. G 6a#(ents for )oods or services (ade other than to the countr# fro( which the )oods or
services ori)inated'
7. G 6a#(ents without !ro!er e,chan)e control docu(entation'
8. G 0,istence of an infor(ation s#ste( which fails, whether "# desi)n or "# accident, to
!rovide an ade*uate audit trail or sufficient evidence'
9. G UnauthoriJed transactions or i(!ro!erl# recorded transactions'
10. G Adverse (edia co((ent'
<atters +ele!ant to the Auditor8s /!aluation $Aef. 6ara' 18$"&&
A14' Eatters relevant to the auditor+s evaluation of the !ossi"le effect on the financial state(ents
include.
% G he !otential financial conse*uences of non-co(!liance with laws and re)ulations on the
financial state(ents includin), for e,a(!le, the i(!osition of fines, !enalties, da(a)es, threat of
e,!ro!riation of assets, enforced discontinuation of o!erations, and liti)ation'
% G Lhether the !otential financial conse*uences re*uire disclosure'
% G Lhether the !otential financial conse*uences are so serious as to call into *uestion the
fair !resentation of the financial state(ents, or otherwise (ake the financial state(ents
(isleadin)'
Audit (rocedures $Aef. 6ara' 15&
A15' he auditor (a# discuss the findin)s with those char)ed with )overnance where the# (a# "e a"le
to !rovide additional audit evidence' For e,a(!le, the auditor (a# confir( that those char)ed
with )overnance have the sa(e understandin) of the facts and circu(stances relevant to
transactions or events that have led to the !ossi"ilit# of non-co(!liance with laws and re)ulations'
415 ISA 450
A1B' If (ana)e(ent or, as a!!ro!riate, those char)ed with )overnance do not !rovide sufficient
infor(ation to the auditor that the entit# is in fact in co(!liance with laws and re)ulations, the
auditor (a# consider it a!!ro!riate to consult with the entit#+s in-house le)al counsel or e,ternal
le)al counsel a"out the a!!lication of the laws and re)ulations to the circu(stances, includin) the
!ossi"ilit# of fraud, and the !ossi"le effects on the financial state(ents' If it is not considered
a!!ro!riate to consult with the entit#+s le)al counsel or if the auditor is not satisfied with the le)al
counsel+s o!inion, the auditor (a# consider it a!!ro!riate to consult the auditor+s own le)al
counsel as to whether a contravention of a law or re)ulation is involved, the !ossi"le le)al
conse*uences, includin) the !ossi"ilit# of fraud, and what further action, if an#, the auditor would
take'
/!aluating the I$plications of Aon3Co$pliance $Aef. 6ara' 41&
A17' As re*uired "# !ara)ra!h 41, the auditor evaluates the i(!lications of nonco(!liance in relation
to other as!ects of the audit, includin) the auditor+s risk assess(ent and the relia"ilit# of written
re!resentations' he i(!lications of !articular instances of non-co(!liance identified "# the
auditor will de!end on the relationshi! of the !er!etration and conceal(ent, if an#, of the act to
s!ecific control activities and the level of (ana)e(ent or e(!lo#ees involved, es!eciall#
i(!lications arisin) fro( the involve(ent of the hi)hest authorit# within the entit#'
A18' In e,ce!tional cases, the auditor (a# consider whether withdrawal fro( the en)a)e(ent, where
withdrawal is !ossi"le under a!!lica"le law or re)ulation, is necessar# when (ana)e(ent or those
char)ed with )overnance do not take the re(edial action that the auditor considers a!!ro!riate in
the circu(stances, even when the non-co(!liance is not (aterial to the financial state(ents'
Lhen decidin) whether withdrawal fro( the en)a)e(ent is necessar#, the auditor (a# consider
seekin) le)al advice' If withdrawal fro( the en)a)e(ent is not !ossi"le, the auditor (a# consider
alternative actions, includin) descri"in) the non-co(!liance in an 7ther Eatter$s& !ara)ra!h in
the auditor+s re!ort'
11
Repo'ti"( of I#e"tifie# o' S-pecte# No"<Co.p0i!"ce
+eporting Aon3Co$pliance to +egulatory and /nforce$ent Authorities $Aef. 6ara' 48&
A15' he auditor+s !rofessional dut# to (aintain the confidentialit# of client infor(ation (a# !reclude
re!ortin) identified or sus!ected non-co(!liance with laws and re)ulations to a !art# outside the
entit#' @owever, the auditor+s le)al res!onsi"ilities var# "# ;urisdiction and, in certain
circu(stances, the dut# of confidentialit# (a# "e overridden "# statute, the
11
ISA 70B, C0(!hasis of Eatter 6ara)ra!hs and 7ther Eatter 6ara)ra!hs in the Inde!endent Auditor+s Ae!ort,D !ara)ra!h 8'
ISA 450 440
law or courts of law' In so(e ;urisdictions, the auditor of a financial institution has a statutor# dut#
to re!ort the occurrence, or sus!ected occurrence, of non-co(!liance with laws and re)ulations to
su!ervisor# authorities' Also, in so(e ;urisdictions, the auditor has a dut# to re!ort (isstate(ents
to authorities in those cases where (ana)e(ent and, where a!!lica"le, those char)ed with
)overnance fail to take corrective action' he auditor (a# consider it a!!ro!riate to o"tain le)al
advice to deter(ine the a!!ro!riate course of action'
A40 A !u"lic sector auditor (a# "e o"li)ed to re!ort on instances of nonco(!liance to the le)islature
or other )overnin) "od# or to re!ort the( in the auditor+s re!ort'
Doc-.e"t!tio" $Aef. 6ara' 45&
A41' he auditor+s docu(entation of findin)s re)ardin) identified or sus!ected non-co(!liance with
laws and re)ulations (a# include, for e,a(!le.
% G %o!ies of records or docu(ents'
% G Einutes of discussions held with (ana)e(ent, those char)ed with )overnance or !arties
outside the entit#'
441 ISA 450
INTERNATIONAL STANDARD ON AUDITING 2A0
CO))UNICATION =ITH THOSE CHARGED =ITH GO,ERNANCE
CONTENTS
6ara)ra!h
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1-9
he Aole of %o((unication ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4-7
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 8
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 10
Re2-i'e.e"t
hose %har)ed with <overnance '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 11-19
Eatters to 1e %o((unicated ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 14-17
he %o((unication 6rocess '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 18-44
=ocu(entation '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 49
hose %har)ed with <overnance '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1-A8
Eatters to 1e %o((unicated ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A5-A47
he %o((unication 6rocess '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A48-A44
=ocu(entation '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A45
A!!endi, 1 . S!ecific Ae*uire(ents in IS:% 1 and 7ther ISAs that
Aefer to %o((unications with hose %har)ed with <overnance A!!endi, 4 .
:ualitative As!ects of Accountin) 6ractices
International Standard on Auditin) $ISA& 4B0, C%o((unication with hose %har)ed with <overnanceD
should "e read in con;unction with ISA 400, C7verall 7";ectives of the Inde!endent Auditor and the
ISA 4B0 444
1. 1' his International Standard on Auditin) $ISA& deals with the auditor+s res!onsi"ilit# to
co((unicate with those char)ed with )overnance in an audit of financial state(ents' Althou)h
this ISA a!!lies irres!ective of an entit#+s )overnance structure or siJe, !articular considerations
a!!l# where all of those char)ed with )overnance are involved in (ana)in) an entit#, and for
listed entities' his ISA does not esta"lish re*uire(ents re)ardin) the auditor+s co((unication
with an entit#+s (ana)e(ent or owners unless the# are also char)ed with a )overnance role'
2. 4' his ISA is written in the conte,t of an audit of financial state(ents, "ut (a# also "e
a!!lica"le, ada!ted as necessar# in the circu(stances, to audits of other historical financial
infor(ation when those char)ed with )overnance have a res!onsi"ilit# to oversee the !re!aration
of the other historical financial infor(ation'
3. 9' Aeco)niJin) the i(!ortance of effective two-wa# co((unication in an audit of financial
state(ents, this ISA !rovides an overarchin) fra(ework for the auditor+s co((unication with
those char)ed with )overnance, and identifies so(e s!ecific (atters to "e co((unicated with
the(' Additional (atters to "e co((unicated, which co(!le(ent the re*uire(ents of this ISA,
are identified in other ISAs $see A!!endi, 1&' In addition, ISA 4B5
1
esta"lishes s!ecific
re*uire(ents re)ardin) the co((unication of si)nificant deficiencies in internal control the
auditor has identified durin) the audit to those char)ed with )overnance' Further (atters, not
re*uired "# this or other ISAs, (a# "e re*uired to "e co((unicated "# law or re)ulation, "#
a)ree(ent with the entit#, or "# additional re*uire(ents a!!lica"le to the en)a)e(ent, for
e,a(!le, the standards of a national !rofessional accountanc# "od#' Nothin) in this ISA !recludes
the auditor fro( co((unicatin) an# other (atters to those char)ed with )overnance' $Aef. 6ara'
A44-A47&
The Ro0e of Co..-"ic!tio"
4' his ISA focuses !ri(aril# on co((unications fro( the auditor to those char)ed with
)overnance' Nevertheless, effective two-wa# co((unication is i(!ortant in assistin).
$a& he auditor and those char)ed with )overnance in understandin) (atters related to the
audit in conte,t, and in develo!in) a constructive workin) relationshi!' his relationshi! is
develo!ed while (aintainin) the auditor+s inde!endence and o";ectivit#?
ISA 4B5, C%o((unicatin) =eficiencies in Internal %ontrol to hose %har)ed with <overnance and Eana)e(ent'D
449 ISA 4B0
1$"& he auditor in o"tainin) fro( those char)ed with )overnance infor(ation relevant to the audit'
For e,a(!le, those char)ed with )overnance (a# assist the auditor in understandin) the entit# and
its environ(ent, in identif#in) a!!ro!riate sources of audit evidence, and in !rovidin) infor(ation
a"out s!ecific transactions or events? and
2$c& hose char)ed with )overnance in fulfillin) their res!onsi"ilit# to oversee the financial
re!ortin) !rocess, there"# reducin) the risks of (aterial (isstate(ent of the financial state(ents'
1. 5' Althou)h the auditor is res!onsi"le for co((unicatin) (atters re*uired "# this ISA,
(ana)e(ent also has a res!onsi"ilit# to co((unicate (atters of )overnance interest to those
char)ed with )overnance' %o((unication "# the auditor does not relieve (ana)e(ent of this
res!onsi"ilit#' Si(ilarl#, co((unication "# (ana)e(ent with those char)ed with )overnance of
(atters that the auditor is re*uired to co((unicate does not relieve the auditor of the
res!onsi"ilit# to also co((unicate the(' %o((unication of these (atters "# (ana)e(ent (a#,
however, affect the for( or ti(in) of the auditor+s co((unication with those char)ed with
)overnance'
2. B' %lear co((unication of s!ecific (atters re*uired to "e co((unicated "# ISAs is an
inte)ral !art of ever# audit' ISAs do not, however, re*uire the auditor to !erfor( !rocedures
s!ecificall# to identif# an# other (atters to co((unicate with those char)ed with )overnance'
3. 7' Maw or re)ulation (a# restrict the auditor+s co((unication of certain (atters with those
char)ed with )overnance' For e,a(!le, laws or re)ulations (a# s!ecificall# !rohi"it a
co((unication, or other action, that (i)ht !re;udice an investi)ation "# an a!!ro!riate authorit#
into an actual, or sus!ected, ille)al act' In so(e circu(stances, !otential conflicts "etween the
auditor+s o"li)ations of confidentialit# and o"li)ations to co((unicate (a# "e co(!le,' In such
cases, the auditor (a# consider o"tainin) le)al advice'
Effecti9e D!te
15, 4005'
O$1ecti9e
1$a& o co((unicate clearl# with those char)ed with )overnance the res!onsi"ilities of the
auditor in relation to the financial state(ent audit, and an overview of the !lanned sco!e and
ti(in) of the audit?
2$"& o o"tain fro( those char)ed with )overnance infor(ation relevant to the audit?
ISA 4B0 444
1$c&o !rovide those char)ed with )overnance with ti(el# o"servations arisin) fro( the audit that are
si)nificant and relevant to their res!onsi"ilit# to oversee the financial re!ortin) !rocess? and
2$d& o !ro(ote effective two-wa# co((unication "etween the auditor and those char)ed with
)overnance'
Defi"itio"
1. $a& hose char)ed with )overnance K he !erson$s& or or)aniJation$s& $for e,a(!le, a
cor!orate trustee& with res!onsi"ilit# for overseein) the strate)ic direction of the entit# and
o"li)ations related to the accounta"ilit# of the entit#' his includes overseein) the financial
re!ortin) !rocess' For so(e entities in so(e ;urisdictions, those char)ed with )overnance (a#
include (ana)e(ent !ersonnel, for e,a(!le, e,ecutive (e("ers of a )overnance "oard of a
!rivate or !u"lic sector entit#, or an owner-(ana)er' For discussion of the diversit# of )overnance
structures, see !ara)ra!hs A1-A8'
2. $"& Eana)e(ent K he !erson$s& with e,ecutive res!onsi"ilit# for the conduct of the entit#+s
o!erations' For so(e entities in so(e ;urisdictions, (ana)e(ent includes so(e or all of those
char)ed with )overnance, for e,a(!le, e,ecutive (e("ers of a )overnance "oard, or an owner-
(ana)er'
Re2-i'e.e"t Thoe Ch!'(e# &ith Go9e'"!"ce
11' he auditor shall deter(ine the a!!ro!riate !erson$s& within the entit#+s )overnance structure with
who( to co((unicate' $Aef. 6ara' A1-A4&
Co$$unication #ith a )ubgroup of 1hose Charged #ith 2o!ernance
14' If the auditor co((unicates with a su")rou! of those char)ed with )overnance, for e,a(!le, an
audit co((ittee, or an individual, the auditor shall deter(ine whether the auditor also needs to
co((unicate with the )overnin) "od#' $Aef. 6ara' A5-A7&
Dhen All of 1hose Charged #ith 2o!ernance Are In!ol!ed in <anaging the /ntity
19' In so(e cases, all of those char)ed with )overnance are involved in (ana)in) the entit#, for
e,a(!le, a s(all "usiness where a sin)le owner (ana)es the entit# and no one else has a
)overnance role' In these cases, if (atters re*uired "# this ISA are co((unicated with !erson$s&
with (ana)e(ent res!onsi"ilities, and those !erson$s& also have )overnance res!onsi"ilities, the
445 ISA 4B0
(atters need not "e co((unicated a)ain with those sa(e !erson$s& in their )overnance role'
hese (atters are noted in !ara)ra!h 1B$c&' he auditor shall nonetheless "e satisfied that
co((unication with !erson$s& with (ana)e(ent res!onsi"ilities ade*uatel# infor(s all of those
with who( the auditor would otherwise co((unicate in their )overnance ca!acit#' $Aef. 6ara'
A8&
)!tte' to Be Co..-"ic!te#
1he Auditor8s +esponsibilities in +elation to the Financial )tate$ent Audit
14' he auditor shall co((unicate with those char)ed with )overnance the res!onsi"ilities of the
auditor in relation to the financial state(ent audit, includin) that.
1. $a& he auditor is res!onsi"le for for(in) and e,!ressin) an o!inion on the financial state(ents
that have "een !re!ared "# (ana)e(ent with the oversi)ht of those char)ed with )overnance? and
2. $"& he audit of the financial state(ents does not relieve (ana)e(ent or those char)ed with
)overnance of their res!onsi"ilities' $Aef. 6ara' A5-A10&
(lanned )cope and 1i$ing of the Audit
15' he auditor shall co((unicate with those char)ed with )overnance an overview of the !lanned
sco!e and ti(in) of the audit' $Aef. 6ara' A11-A15&
)ignificant Findings fro$ the Audit
1B' he auditor shall co((unicate with those char)ed with )overnance. $Aef. 6ara' A1B&
1. $a& he auditor+s views a"out si)nificant *ualitative as!ects of the entit#+s accountin)
!ractices, includin) accountin) !olicies, accountin) esti(ates and financial state(ent disclosures'
Lhen a!!lica"le, the auditor shall e,!lain to those char)ed with )overnance wh# the auditor
considers a si)nificant accountin) !ractice, that is acce!ta"le under the a!!lica"le financial
re!ortin) fra(ework, not to "e (ost a!!ro!riate to the !articular circu(stances of the entit#? $Aef.
6ara' A17&
2. $"& Si)nificant difficulties, if an#, encountered durin) the audit? $Aef. 6ara' A18&
1. $c& Unless all of those char)ed with )overnance are involved in (ana)in) the entit#.
2. $i& Si)nificant (atters, if an#, arisin) fro( the audit that were discussed, or su";ect to
corres!ondence with (ana)e(ent? and $Aef. 6ara' A15&
3. $ii& Lritten re!resentations the auditor is re*uestin)? and
4. $d& 7ther (atters, if an#, arisin) fro( the audit that, in the auditor+s !rofessional ;ud)(ent,
are si)nificant to the oversi)ht of the financial re!ortin) !rocess' $Aef. 6ara' A40&
ISA 4B0 44B
Auditor Independence
17' In the case of listed entities, the auditor shall co((unicate with those char)ed with )overnance.
1. $a& A state(ent that the en)a)e(ent tea( and others in the fir( as a!!ro!riate, the fir( and,
when a!!lica"le, network fir(s have co(!lied with relevant ethical re*uire(ents re)ardin)
inde!endence? and
2. $"& $i& All relationshi!s and other (atters "etween the fir(, network fir(s, and the entit# that, in
the auditor+s !rofessional ;ud)(ent, (a# reasona"l# "e thou)ht to "ear on inde!endence' his
shall include total fees char)ed durin) the !eriod covered "# the financial state(ents for audit and
non-audit services !rovided "# the fir( and network fir(s to the entit# and co(!onents controlled
"# the entit#' hese fees shall "e allocated to cate)ories that are a!!ro!riate to assist those char)ed
with )overnance in assessin) the effect of services on the inde!endence of the auditor? and
$ii& he related safe)uards that have "een a!!lied to eli(inate identified threats to
inde!endence or reduce the( to an acce!ta"le level' $Aef. 6ara' A41-A49&
The Co..-"ic!tio" *'oce
/stablishing the Co$$unication (rocess
18' he auditor shall co((unicate with those char)ed with )overnance the for(, ti(in) and
e,!ected )eneral content of co((unications' $Aef. 6ara' A48-A9B&
For$s of Co$$unication
1. 15' he auditor shall co((unicate in writin) with those char)ed with )overnance re)ardin)
si)nificant findin)s fro( the audit if, in the auditor+s !rofessional ;ud)(ent, oral co((unication
would not "e ade*uate' Lritten co((unications need not include all (atters that arose durin) the
course of the audit' $Aef. 6ara' A97-A95&
2. 40' he auditor shall co((unicate in writin) with those char)ed with )overnance re)ardin)
auditor inde!endence when re*uired "# !ara)ra!h 17'
1i$ing of Co$$unications
41' he auditor shall co((unicate with those char)ed with )overnance on a ti(el# "asis' $Aef. 6ara'
A40-A41&
447 ISA 4B0
Ade>uacy of the Co$$unication (rocess
44' he auditor shall evaluate whether the two-wa# co((unication "etween the auditor and those
char)ed with )overnance has "een ade*uate for the !ur!ose of the audit' If it has not, the auditor
shall evaluate the effect, if an#, on the auditor+s assess(ent of the risks of (aterial (isstate(ent
and a"ilit# to o"tain sufficient a!!ro!riate audit evidence, and shall take a!!ro!riate action' $Aef.
6ara' A44-A44&
Doc-.e"t!tio"
49' Lhere (atters re*uired "# this ISA to "e co((unicated are co((unicated orall#, the auditor
shall include the( in the audit docu(entation, and when and to who( the# were co((unicated'
Lhere (atters have "een co((unicated in writin), the auditor shall retain a co!# of the
co((unication as !art of the audit docu(entation'
4
$Aef. 6ara' A45&
OOO
Thoe Ch!'(e# &ith Go9e'"!"ce $Aef. 6ara' 11&
A1' <overnance structures var# "# ;urisdiction and "# entit#, reflectin) influences such as different
cultural and le)al "ack)rounds, and siJe and ownershi! characteristics' For e,a(!le.
% G In so(e ;urisdictions a su!ervisor# $wholl# or (ainl# non-e,ecutive& "oard e,ists that is
le)all# se!arate fro( an e,ecutive $(ana)e(ent& "oard $a Ctwo-tier "oardD structure&' In other
;urisdictions, "oth the su!ervisor# and e,ecutive functions are the le)al res!onsi"ilit# of a sin)le,
or unitar#, "oard $a Cone-tier "oardD structure&'
% G In so(e entities, those char)ed with )overnance hold !ositions that are an inte)ral !art of
the entit#+s le)al structure, for e,a(!le, co(!an# directors' In others, for e,a(!le, so(e
)overn(ent entities, a "od# that is not !art of the entit# is char)ed with )overnance'
% G In so(e cases, so(e or all of those char)ed with )overnance are involved in (ana)in)
the entit#' In others, those char)ed with )overnance and (ana)e(ent co(!rise different !ersons'
% G In so(e cases, those char)ed with )overnance are res!onsi"le for a!!rovin)
9
the entit#+s
financial state(ents $in other cases (ana)e(ent has this res!onsi"ilit#&'
4
9
As descri"ed at !ara)ra!h A40 of ISA 700, CFor(in) an 7!inion and Ae!ortin) on Financial State(ents,D havin) res!onsi"ilit#
for a!!rovin) in this conte,t (eans havin) the authorit# to conclude
ISA 4B0 448
A4' In (ost entities, )overnance is the collective res!onsi"ilit# of a )overnin) "od#, such as a "oard of
directors, a su!ervisor# "oard, !artners, !ro!rietors, a co((ittee of (ana)e(ent, a council of
)overnors, trustees, or e*uivalent !ersons' In so(e s(aller entities, however, one !erson (a# "e
char)ed with )overnance, for e,a(!le, the owner-(ana)er where there are no other owners, or a
sole trustee' Lhen )overnance is a collective res!onsi"ilit#, a su")rou! such as an audit co((ittee
or even an individual, (a# "e char)ed with s!ecific tasks to assist the )overnin) "od# in (eetin)
its res!onsi"ilities' Alternativel#, a su")rou! or individual (a# have s!ecific, le)all# identified
res!onsi"ilities that differ fro( those of the )overnin) "od#'
A9' Such diversit# (eans that it is not !ossi"le for this ISA to s!ecif# for all audits the !erson$s& with
who( the auditor is to co((unicate !articular (atters' Also, in so(e cases the a!!ro!riate
!erson$s& with who( to co((unicate (a# not "e clearl# identifia"le fro( the a!!lica"le le)al
fra(ework or other en)a)e(ent circu(stances, for e,a(!le, entities where the )overnance
structure is not for(all# defined, such as so(e fa(il#-owned entities, so(e not-for-!rofit
or)aniJations, and so(e )overn(ent entities' In such cases, the auditor (a# need to discuss and
a)ree with the en)a)in) !art# the relevant !erson$s& with who( to co((unicate' In decidin) with
who( to co((unicate, the auditor+s understandin) of an entit#+s )overnance structure and
!rocesses o"tained in accordance with ISA 915
4
is relevant' he a!!ro!riate !erson$s& with who(
to co((unicate (a# var# de!endin) on the (atter to "e co((unicated'
A4' ISA B00 includes s!ecific (atters to "e co((unicated "# )rou! auditors with those char)ed with
)overnance'
5
Lhen the entit# is a co(!onent of a )rou!, the a!!ro!riate !erson$s& with who( the
co(!onent auditor co((unicates de!ends on the en)a)e(ent circu(stances and the (atter to "e
co((unicated' In so(e cases, a nu("er of co(!onents (a# "e conductin) the sa(e "usinesses
within the sa(e s#ste( of internal control and usin) the sa(e accountin) !ractices' Lhere those
char)ed with )overnance of those co(!onents are the sa(e $for e,a(!le, co((on "oard of
directors&, du!lication (a# "e avoided "# dealin) with these co(!onents concurrentl# for the
!ur!ose of co((unication'
NNNNNN that all the state(ents that co(!rise the financial state(ents, includin) the related notes, have "een !re!ared'
4
5
ISA B00, CS!ecial %onsiderationsNAudits of <rou! Financial State(ents $Includin) the Lork of %o(!onent Auditors&,D
!ara)ra!hs 4B-45'
445 ISA 4B0
Co$$unication #ith a )ubgroup of 1hose Charged #ith 2o!ernance $Aef. 6ara' 14&
A5' Lhen considerin) co((unicatin) with a su")rou! of those char)ed with )overnance, the auditor
(a# take into account such (atters as.
1. G he res!ective res!onsi"ilities of the su")rou! and the )overnin) "od#'
2. G he nature of the (atter to "e co((unicated'
3. G Aelevant le)al or re)ulator# re*uire(ents'
4. G Lhether the su")rou! has the authorit# to take action in relation to the infor(ation
co((unicated, and can !rovide further infor(ation and e,!lanations the auditor (a# need'
AB' Lhen decidin) whether there is also a need to co((unicate infor(ation, in full or in su((ar#
for(, with the )overnin) "od#, the auditor (a# "e influenced "# the auditor+s assess(ent of how
effectivel# and a!!ro!riatel# the su")rou! co((unicates relevant infor(ation with the )overnin)
"od#' he auditor (a# (ake e,!licit in a)reein) the ter(s of en)a)e(ent that, unless !rohi"ited
"# law or re)ulation, the auditor retains the ri)ht to co((unicate directl# with the )overnin)
"od#'
A7' Audit co((ittees $or si(ilar su")rou!s with different na(es& e,ist in (an# ;urisdictions'
Althou)h their s!ecific authorit# and functions (a# differ, co((unication with the audit
co((ittee, where one e,ists, has "eco(e a ke# ele(ent in the auditor+s co((unication with those
char)ed with )overnance' <ood )overnance !rinci!les su))est that.
% G he auditor will "e invited to re)ularl# attend (eetin)s of the audit co((ittee'
% G he chair of the audit co((ittee and, when relevant, the other (e("ers of the audit
co((ittee, will liaise with the auditor !eriodicall#'
% G he audit co((ittee will (eet the auditor without (ana)e(ent !resent at least annuall#'
Dhen All of 1hose Charged #ith 2o!ernance Are In!ol!ed in <anaging the /ntity
$Aef. 6ara'19&
A8' In so(e cases, all of those char)ed with )overnance are involved in (ana)in) the entit#, and the
a!!lication of co((unication re*uire(ents is (odified to reco)niJe this !osition' In such cases,
co((unication with !erson$s& with (ana)e(ent res!onsi"ilities (a# not ade*uatel# infor( all of
those with who( the auditor would otherwise co((unicate in their )overnance ca!acit#' For
e,a(!le, in a co(!an# where all directors are involved in (ana)in) the entit#, so(e of those
directors $for e,a(!le, one res!onsi"le for (arketin)& (a# "e unaware of si)nificant (atters
discussed with another director $for e,a(!le, one res!onsi"le for the !re!aration of the financial
state(ents&'
ISA 4B0 490
)!tte' to Be Co..-"ic!te#
1he Auditor8s +esponsibilities in +elation to the Financial )tate$ent Audit $Aef. 6ara' 14&
A5' he auditor+s res!onsi"ilities in relation to the financial state(ent audit are often included in the
en)a)e(ent letter or other suita"le for( of written a)ree(ent that records the a)reed ter(s of the
en)a)e(ent' 6rovidin) those char)ed with )overnance with a co!# of that en)a)e(ent letter or
other suita"le for( of written a)ree(ent (a# "e an a!!ro!riate wa# to co((unicate with the(
re)ardin) such (atters as.
% G he auditor+s res!onsi"ilit# for !erfor(in) the audit in accordance with ISAs, which is
directed towards the e,!ression of an o!inion on the financial state(ents' he (atters that ISAs
re*uire to "e co((unicated, therefore, include si)nificant (atters arisin) fro( the audit of the
financial state(ents that are relevant to those char)ed with )overnance in overseein) the financial
re!ortin) !rocess'
% G he fact that ISAs do not re*uire the auditor to desi)n !rocedures for the !ur!ose of
identif#in) su!!le(entar# (atters to co((unicate with those char)ed with )overnance'
% G Lhen a!!lica"le, the auditor+s res!onsi"ilit# for co((unicatin) !articular (atters
re*uired "# law or re)ulation, "# a)ree(ent with the entit# or "# additional re*uire(ents
a!!lica"le to the en)a)e(ent, for e,a(!le, the standards of a national !rofessional accountanc#
"od#'
A10' Maw or re)ulation, an a)ree(ent with the entit# or additional re*uire(ents a!!lica"le to the
en)a)e(ent (a# !rovide for "roader co((unication with those char)ed with )overnance' For
e,a(!le, $a& an a)ree(ent with the entit# (a# !rovide for !articular (atters to "e co((unicated
when the# arise fro( services !rovided "# a fir( or network fir( other than the financial
state(ent audit? or $"& the (andate of a !u"lic sector auditor (a# !rovide for (atters to "e
co((unicated that co(e to the auditor+s attention as a result of other work, such as !erfor(ance
audits'
(lanned )cope and 1i$ing of the Audit $Aef. 6ara' 15& A11' %o((unication re)ardin) the !lanned sco!e
and ti(in) of the audit (a#.
1. $a& Assist those char)ed with )overnance to understand "etter the conse*uences of the
auditor+s work, to discuss issues of risk and the conce!t of (aterialit# with the auditor, and to
identif# an# areas in which the# (a# re*uest the auditor to undertake additional !rocedures? and
2. $"& Assist the auditor to understand "etter the entit# and its environ(ent'
A14' %are is re*uired when co((unicatin) with those char)ed with )overnance a"out the !lanned
sco!e and ti(in) of the audit so as not to co(!ro(ise the
491 ISA 4B0
effectiveness of the audit, !articularl# where so(e or all of those char)ed with )overnance are
involved in (ana)in) the entit#' For e,a(!le, co((unicatin) the nature and ti(in) of detailed
audit !rocedures (a# reduce the effectiveness of those !rocedures "# (akin) the( too
!redicta"le'
A19' Eatters co((unicated (a# include.
% G @ow the auditor !ro!oses to address the si)nificant risks of (aterial (isstate(ent,
whether due to fraud or error'
% G he auditor+s a!!roach to internal control relevant to the audit'
% G he a!!lication of the conce!t of (aterialit# in the conte,t of an audit'
B
A14' 7ther !lannin) (atters that it (a# "e a!!ro!riate to discuss with those char)ed with )overnance
include.
% G Lhere the entit# has an internal audit function, the e,tent to which the auditor will use
the work of internal audit, and how the e,ternal and internal auditors can "est work to)ether in a
constructive and co(!le(entar# (anner'
1G he views of those char)ed with )overnance of.
a. o he a!!ro!riate !erson$s& in the entit#+s )overnance structure with who( to
co((unicate'
b. o he allocation of res!onsi"ilities "etween those char)ed with )overnance and
(ana)e(ent'
c. o he entit#+s o";ectives and strate)ies, and the related "usiness risks that (a#
result in (aterial (isstate(ents'
d. o Eatters those char)ed with )overnance consider warrant !articular attention
durin) the audit, and an# areas where the# re*uest additional !rocedures to "e
undertaken'
e. o Si)nificant co((unications with re)ulators'
f. o 7ther (atters those char)ed with )overnance consider (a# influence the audit
of the financial state(ents'
% G he attitudes, awareness, and actions of those char)ed with )overnance concernin) $a&
the entit#+s internal control and its i(!ortance in the entit#, includin) how those char)ed with
)overnance oversee the effectiveness of internal control, and $"& the detection or !ossi"ilit# of
fraud'
ISA 4B0 494
% G he actions of those char)ed with )overnance in res!onse to develo!(ents in accountin)
standards, cor!orate )overnance !ractices, e,chan)e listin) rules, and related (atters'
% G he res!onses of those char)ed with )overnance to !revious co((unications with the
auditor'
A15' Lhile co((unication with those char)ed with )overnance (a# assist the auditor to !lan the sco!e
and ti(in) of the audit, it does not chan)e the auditor+s sole res!onsi"ilit# to esta"lish the overall
audit strate)# and the audit !lan, includin) the nature, ti(in) and e,tent of !rocedures necessar#
to o"tain sufficient a!!ro!riate audit evidence'
)ignificant Findings fro$ the Audit $Aef. 6ara' 1B&
A1B' he co((unication of findin)s fro( the audit (a# include re*uestin) further infor(ation fro(
those char)ed with )overnance in order to co(!lete the audit evidence o"tained' For e,a(!le, the
auditor (a# confir( that those char)ed with )overnance have the sa(e understandin) of the facts
and circu(stances relevant to s!ecific transactions or events'
Si)nificant :ualitative As!ects of Accountin) 6ractices $Aef. 6ara' 1B$a&&
A17' Financial re!ortin) fra(eworks ordinaril# allow for the entit# to (ake accountin) esti(ates, and
;ud)(ents a"out accountin) !olicies and financial state(ent disclosures' 7!en and constructive
co((unication a"out si)nificant *ualitative as!ects of the entit#+s accountin) !ractices (a#
include co((ent on the acce!ta"ilit# of si)nificant accountin) !ractices' A!!endi, 4 identifies
(atters that (a# "e included in this co((unication'
Si)nificant =ifficulties 0ncountered durin) the Audit $Aef. 6ara' 1B$"&&
A18' Si)nificant difficulties encountered durin) the audit (a# include such (atters as.
% G Si)nificant dela#s in (ana)e(ent !rovidin) re*uired infor(ation'
% G An unnecessaril# "rief ti(e within which to co(!lete the audit'
% G 0,tensive une,!ected effort re*uired to o"tain sufficient a!!ro!riate audit evidence'
% G he unavaila"ilit# of e,!ected infor(ation'
% G Aestrictions i(!osed on the auditor "# (ana)e(ent'
% G Eana)e(ent+s unwillin)ness to (ake or e,tend its assess(ent of the entit#+s a"ilit# to
continue as a )oin) concern when re*uested'
499 ISA 4B0
In so(e circu(stances, such difficulties (a# constitute a sco!e li(itation that leads to a
(odification of the auditor+s o!inion'
7
Si)nificant Eatters =iscussed, or Su";ect to %orres!ondence with Eana)e(ent $Aef. 6ara' 1B$c&$i&&
A15' Si)nificant (atters discussed, or su";ect to corres!ondence with (ana)e(ent (a# include such
(atters as.
1. G 1usiness conditions affectin) the entit#, and "usiness !lans and strate)ies that (a# affect
the risks of (aterial (isstate(ent'
2. G %oncerns a"out (ana)e(ent+s consultations with other accountants on accountin) or
auditin) (atters'
3. G =iscussions or corres!ondence in connection with the initial or recurrin) a!!oint(ent of
the auditor re)ardin) accountin) !ractices, the a!!lication of auditin) standards, or fees for audit
or other services'
7ther Si)nificant Eatters Aelevant to the Financial Ae!ortin) 6rocess $Aef. 6ara' 1B$d&&
A40' 7ther si)nificant (atters arisin) fro( the audit that are directl# relevant to those char)ed with
)overnance in overseein) the financial re!ortin) !rocess (a# include such (atters as (aterial
(isstate(ents of fact or (aterial inconsistencies in infor(ation acco(!an#in) the audited financial
state(ents that have "een corrected'
Auditor Independence $Aef. 6ara' 17&
A41' he auditor is re*uired to co(!l# with relevant ethical re*uire(ents, includin) those !ertainin) to
inde!endence, relatin) to financial state(ent audit en)a)e(ents'
8
A44' he relationshi!s and other (atters, and safe)uards to "e co((unicated, var# with the
circu(stances of the en)a)e(ent, "ut )enerall# address.
1. $a& hreats to inde!endence, which (a# "e cate)oriJed as. self-interest threats, self-review
threats, advocac# threats, fa(iliarit# threats, and inti(idation threats? and
2. $"& Safe)uards created "# the !rofession, le)islation or re)ulation, safe)uards within the entit#,
and safe)uards within the fir(+s own s#ste(s and !rocedures'
7
8
ISA 4B0 494
he co((unication re*uired "# !ara)ra!h 17$a& (a# include an inadvertent violation of relevant
ethical re*uire(ents as the# relate to auditor inde!endence, and an# re(edial action taken or
!ro!osed'
A49' he co((unication re*uire(ents relatin) to auditor inde!endence that a!!l# in the case of listed
entities (a# also "e relevant in the case of so(e other entities, !articularl# those that (a# "e of
si)nificant !u"lic interest "ecause, as a result of their "usiness, their siJe or their cor!orate status,
the# have a wide ran)e of stakeholders' 0,a(!les of entities that are not listed entities, "ut where
co((unication of auditor inde!endence (a# "e a!!ro!riate, include !u"lic sector entities, credit
institutions, insurance co(!anies, and retire(ent "enefit funds' 7n the other hand, there (a# "e
situations where co((unications re)ardin) inde!endence (a# not "e relevant, for e,a(!le,
where all of those char)ed with )overnance have "een infor(ed of relevant facts throu)h their
(ana)e(ent activities' his is !articularl# likel# where the entit# is owner-(ana)ed, and the
auditor+s fir( and network fir(s have little involve(ent with the entit# "e#ond a financial
state(ent audit'
)upple$entary <atters $Aef. 6ara' 9&
A44' he oversi)ht of (ana)e(ent "# those char)ed with )overnance includes ensurin) that the entit#
desi)ns, i(!le(ents and (aintains a!!ro!riate internal control with re)ard to relia"ilit# of
financial re!ortin), effectiveness and efficienc# of o!erations and co(!liance with a!!lica"le laws
and re)ulations'
A45' he auditor (a# "eco(e aware of su!!le(entar# (atters that do not necessaril# relate to the
oversi)ht of the financial re!ortin) !rocess "ut which are, nevertheless, likel# to "e si)nificant to
the res!onsi"ilities of those char)ed with )overnance in overseein) the strate)ic direction of the
entit# or the entit#+s o"li)ations related to accounta"ilit#' Such (atters (a# include, for e,a(!le,
si)nificant issues re)ardin) )overnance structures or !rocesses, and si)nificant decisions or
actions "# senior (ana)e(ent that lack a!!ro!riate authoriJation'
A4B' In deter(inin) whether to co((unicate su!!le(entar# (atters with those char)ed with
)overnance, the auditor (a# discuss (atters of this kind of which the auditor has "eco(e aware
with the a!!ro!riate level of (ana)e(ent, unless it is ina!!ro!riate to do so in the circu(stances'
A47' If a su!!le(entar# (atter is co((unicated, it (a# "e a!!ro!riate for the auditor to (ake those
char)ed with )overnance aware that.
1. $a& Identification and co((unication of such (atters is incidental to the !ur!ose of the audit,
which is to for( an o!inion on the financial state(ents?
2. $"& No !rocedures were carried out with res!ect to the (atter other than an# that were necessar# to
for( an o!inion on the financial state(ents? and
495 ISA 4B0
$c& No !rocedures were carried out to deter(ine whether other such (atters e,ist'
The Co..-"ic!tio" *'oce
/stablishing the Co$$unication (rocess $Aef. 6ara' 18&
A48' %lear co((unication of the auditor+s res!onsi"ilities, the !lanned sco!e and ti(in) of the audit,
and the e,!ected )eneral content of co((unications hel!s esta"lish the "asis for effective two-
wa# co((unication'
A45' Eatters that (a# also contri"ute to effective two-wa# co((unication include discussion of.
% G he !ur!ose of co((unications' Lhen the !ur!ose is clear, the auditor and those char)ed
with )overnance are "etter !laced to have a (utual understandin) of relevant issues and the
e,!ected actions arisin) fro( the co((unication !rocess'
% G he for( in which co((unications will "e (ade'
% G he !erson$s& in the audit tea( and a(on)st those char)ed with )overnance who will
co((unicate re)ardin) !articular (atters'
% G he auditor+s e,!ectation that co((unication will "e two-wa#, and that those char)ed
with )overnance will co((unicate with the auditor (atters the# consider relevant to the audit, for
e,a(!le, strate)ic decisions that (a# si)nificantl# affect the nature, ti(in) and e,tent of audit
!rocedures, the sus!icion or the detection of fraud, and concerns with the inte)rit# or co(!etence
of senior (ana)e(ent'
% G he !rocess for takin) action and re!ortin) "ack on (atters co((unicated "# the auditor'
% G he !rocess for takin) action and re!ortin) "ack on (atters co((unicated "# those
A90' he co((unication !rocess will var# with the circu(stances, includin) the siJe and )overnance
structure of the entit#, how those char)ed with )overnance o!erate, and the auditor+s view of the
si)nificance of (atters to "e co((unicated' =ifficult# in esta"lishin) effective two-wa#
co((unication (a# indicate that the co((unication "etween the auditor and those char)ed with
)overnance is not ade*uate for the !ur!ose of the audit $see !ara)ra!h A44&'
A91' In the case of audits of s(aller entities, the auditor (a# co((unicate in a less structured (anner
with those char)ed with )overnance than in the case of listed or lar)er entities'
ISA 4B0 49B
%o((unication with Eana)e(ent
A94' Ean# (atters (a# "e discussed with (ana)e(ent in the ordinar# course of an audit, includin)
(atters re*uired "# this ISA to "e co((unicated with those char)ed with )overnance' Such
discussions reco)niJe (ana)e(ent+s e,ecutive res!onsi"ilit# for the conduct of the entit#+s
o!erations and, in !articular, (ana)e(ent+s res!onsi"ilit# for the !re!aration of the financial
state(ents'
A99' 1efore co((unicatin) (atters with those char)ed with )overnance, the auditor (a# discuss the(
with (ana)e(ent, unless that is ina!!ro!riate' For e,a(!le, it (a# not "e a!!ro!riate to discuss
*uestions of (ana)e(ent+s co(!etence or inte)rit# with (ana)e(ent' In addition to reco)niJin)
(ana)e(ent+s e,ecutive res!onsi"ilit#, these initial discussions (a# clarif# facts and issues, and
)ive (ana)e(ent an o!!ortunit# to !rovide further infor(ation and e,!lanations' Si(ilarl#, when
the entit# has an internal audit function, the auditor (a# discuss (atters with the internal auditor
"efore co((unicatin) with those char)ed with )overnance'
%o((unication with hird 6arties
A94' hose char)ed with )overnance (a# wish to !rovide third !arties, for e,a(!le, "ankers or certain
re)ulator# authorities, with co!ies of a written co((unication fro( the auditor' In so(e cases,
disclosure to third !arties (a# "e ille)al or otherwise ina!!ro!riate' Lhen a written
co((unication !re!ared for those char)ed with )overnance is !rovided to third !arties, it (a# "e
i(!ortant in the circu(stances that the third !arties "e infor(ed that the co((unication was not
!re!ared with the( in (ind, for e,a(!le, "# statin) in written co((unications with those char)ed
with )overnance.
1. $a& hat the co((unication has "een !re!ared for the sole use of those char)ed with
)overnance and, where a!!lica"le, the )rou! (ana)e(ent and the )rou! auditor, and should not
"e relied u!on "# third !arties?
2. $"& hat no res!onsi"ilit# is assu(ed "# the auditor to third !arties? and
3. $c& An# restrictions on disclosure or distri"ution to third !arties'
A95' In so(e ;urisdictions the auditor (a# "e re*uired "# law or re)ulation to, for e,a(!le.
% G Notif# a re)ulator# or enforce(ent "od# of certain (atters co((unicated with those
char)ed with )overnance' For e,a(!le, in so(e countries the auditor has a dut# to re!ort
(isstate(ents to authorities where (ana)e(ent and those char)ed with )overnance fail to take
corrective action?
% G Su"(it co!ies of certain re!orts !re!ared for those char)ed with )overnance to relevant
re)ulator# or fundin) "odies, or other "odies such as a central authorit# in the case of so(e !u"lic
sector entities? or
497 ISA 4B0
G Eake re!orts !re!ared for those char)ed with )overnance !u"licl# availa"le'
A9B' Unless re*uired "# law or re)ulation to !rovide a third !art# with a co!# of the auditor+s written
co((unications with those char)ed with )overnance, the auditor (a# need the !rior consent of
those char)ed with )overnance "efore doin) so'
For$s of Co$$unication $Aef. 6ara' 15-40&
A97' 0ffective co((unication (a# involve structured !resentations and written re!orts as well as less
structured co((unications, includin) discussions' he auditor (a# co((unicate (atters other
than those identified in !ara)ra!hs 15 and 40 either orall# or in writin)' Lritten co((unications
(a# include an en)a)e(ent letter that is !rovided to those char)ed with )overnance'
A98' In addition to the si)nificance of a !articular (atter, the for( of co((unication $for e,a(!le,
whether to co((unicate orall# or in writin), the e,tent of detail or su((ariJation in the
co((unication, and whether to co((unicate in a structured or unstructured (anner& (a# "e
affected "# such factors as.
% G Lhether the (atter has "een satisfactoril# resolved'
% G Lhether (ana)e(ent has !reviousl# co((unicated the (atter'
% G he siJe, o!eratin) structure, control environ(ent, and le)al structure of the entit#'
% G In the case of an audit of s!ecial !ur!ose financial state(ents, whether the auditor also
audits the entit#+s )eneral !ur!ose financial state(ents'
% G Me)al re*uire(ents' In so(e ;urisdictions, a written co((unication with those char)ed
with )overnance is re*uired in a !rescri"ed for( "# local law'
% G he e,!ectations of those char)ed with )overnance, includin) arran)e(ents (ade for
!eriodic (eetin)s or co((unications with the auditor'
% G he a(ount of on)oin) contact and dialo)ue the auditor has with those char)ed with
)overnance'
% G Lhether there have "een si)nificant chan)es in the (e("ershi! of a )overnin) "od#'
A95' Lhen a si)nificant (atter is discussed with an individual (e("er of those char)ed with
)overnance, for e,a(!le, the chair of an audit co((ittee, it (a# "e a!!ro!riate for the auditor to
su((ariJe the (atter in later co((unications so that all of those char)ed with )overnance have
full and "alanced infor(ation'
ISA 4B0 498
1i$ing of Co$$unications $Aef. 6ara' 41&
A40' he a!!ro!riate ti(in) for co((unications will var# with the circu(stances of the en)a)e(ent'
Aelevant circu(stances include the si)nificance and nature of the (atter, and the action e,!ected
to "e taken "# those char)ed with )overnance' For e,a(!le.
1. G %o((unications re)ardin) !lannin) (atters (a# often "e (ade earl# in the audit
en)a)e(ent and, for an initial en)a)e(ent, (a# "e (ade as !art of a)reein) the ter(s of the
en)a)e(ent'
2. G It (a# "e a!!ro!riate to co((unicate a si)nificant difficult# encountered durin) the
audit as soon as !ractica"le if those char)ed with )overnance are a"le to assist the auditor to
overco(e the difficult#, or if it is likel# to lead to a (odified o!inion' Si(ilarl#, the auditor (a#
co((unicate orall# to those char)ed with )overnance as soon as !ractica"le si)nificant
deficiencies in internal control that the auditor has identified, !rior to co((unicatin) these in
writin) as re*uired "# ISA 4B5'
5
%o((unications re)ardin) inde!endence (a# "e a!!ro!riate
whenever si)nificant ;ud)(ents are (ade a"out threats to inde!endence and related safe)uards,
for e,a(!le, when acce!tin) an en)a)e(ent to !rovide non-audit services, and at a concludin)
discussion' A concludin) discussion (a# also "e an a!!ro!riate ti(e to co((unicate findin)s
fro( the audit, includin) the auditor+s views a"out the *ualitative as!ects of the entit#+s
accountin) !ractices'
3. G Lhen auditin) "oth )eneral !ur!ose and s!ecial !ur!ose financial state(ents, it (a# "e
a!!ro!riate to coordinate the ti(in) of co((unications'
A41' 7ther factors that (a# "e relevant to the ti(in) of co((unications include.
% G he siJe, o!eratin) structure, control environ(ent, and le)al structure of the entit# "ein)
audited'
% G An# le)al o"li)ation to co((unicate certain (atters within a s!ecified ti(efra(e'
% G he e,!ectations of those char)ed with )overnance, includin) arran)e(ents (ade for
!eriodic (eetin)s or co((unications with the auditor'
% G he ti(e at which the auditor identifies certain (atters, for e,a(!le, the auditor (a# not
identif# a !articular (atter $for e,a(!le, nonco(!liance with a law& in ti(e for !reventive action
to "e taken, "ut co((unication of the (atter (a# ena"le re(edial action to "e taken'
ISA 4B5, !ara)ra!hs 5 and A14'
495 ISA 4B0
Ade>uacy of the Co$$unication (rocess $Aef. 6ara' 44&
A44' he auditor need not desi)n s!ecific !rocedures to su!!ort the evaluation of the two-wa#
co((unication "etween the auditor and those char)ed with )overnance? rather, that evaluation
(a# "e "ased on o"servations resultin) fro( audit !rocedures !erfor(ed for other !ur!oses' Such
o"servations (a# include.
% G he a!!ro!riateness and ti(eliness of actions taken "# those char)ed with )overnance in
res!onse to (atters raised "# the auditor' Lhere si)nificant (atters raised in !revious
co((unications have not "een dealt with effectivel#, it (a# "e a!!ro!riate for the auditor to
in*uire as to wh# a!!ro!riate action has not "een taken, and to consider raisin) the !oint a)ain'
his avoids the risk of )ivin) an i(!ression that the auditor is satisfied that the (atter has "een
ade*uatel# addressed or is no lon)er si)nificant'
% G he a!!arent o!enness of those char)ed with )overnance in their co((unications with
the auditor'
% G he willin)ness and ca!acit# of those char)ed with )overnance to (eet with the auditor
without (ana)e(ent !resent'
% G he a!!arent a"ilit# of those char)ed with )overnance to full# co(!rehend (atters raised
"# the auditor, for e,a(!le, the e,tent to which those char)ed with )overnance !ro"e issues, and
*uestion reco((endations (ade to the('
% G =ifficult# in esta"lishin) with those char)ed with )overnance a (utual understandin) of
the for(, ti(in) and e,!ected )eneral content of co((unications'
% G Lhere all or so(e of those char)ed with )overnance are involved in (ana)in) the entit#,
their a!!arent awareness of how (atters discussed with the auditor affect their "roader )overnance
res!onsi"ilities, as well as their (ana)e(ent res!onsi"ilities'
% G Lhether the two-wa# co((unication "etween the auditor and those char)ed with
)overnance (eets a!!lica"le le)al and re)ulator# re*uire(ents'
A49' As noted in !ara)ra!h 4, effective two-wa# co((unication assists "oth the auditor and those
char)ed with )overnance' Further, ISA 915 identifies !artici!ation "# those char)ed with
)overnance, includin) their interaction with internal audit, if an#, and e,ternal auditors, as an
ele(ent of the entit#+s control environ(ent'
10
Inade*uate two-wa# co((unication (a# indicate
an unsatisfactor# control environ(ent and influence the auditor+s assess(ent of the
ISA 4B0 440
risks of (aterial (isstate(ents' here is also a risk that the auditor (a# not have o"tained
sufficient a!!ro!riate audit evidence to for( an o!inion on the financial state(ents'
A44' If the two-wa# co((unication "etween the auditor and those char)ed with )overnance is not
ade*uate and the situation cannot "e resolved, the auditor (a# take such actions as.
1. G Eodif#in) the auditor+s o!inion on the "asis of a sco!e li(itation'
2. G 7"tainin) le)al advice a"out the conse*uences of different courses of action'
3. G %o((unicatin) with third !arties $for e,a(!le, a re)ulator&, or a hi)her authorit# in the
)overnance structure that is outside the entit#, such as the owners of a "usiness $for e,a(!le,
shareholders in a )eneral (eetin)&, or the res!onsi"le )overn(ent (inister or !arlia(ent in the
!u"lic sector'
4. G Lithdrawin) fro( the en)a)e(ent, where withdrawal is !ossi"le under a!!lica"le law or
re)ulation'
A45' =ocu(entation of oral co((unication (a# include a co!# of (inutes !re!ared "# the entit#
retained as !art of the audit docu(entation where those (inutes are an a!!ro!riate record of the
co((unication'
441 ISA 4B0
Appe"#i5 7
$Aef. 6ara' 9&
Specific Re2-i'e.e"t i" ISQC 7 !"# Othe' ISA th!t Refe' to
Co..-"ic!tio" &ith Thoe Ch!'(e# =ith Go9e'"!"ce
his a!!endi, identifies !ara)ra!hs in IS:% 1
11
and other ISAs in effect for audits of financial state(ents
for !eriods "e)innin) on or after =ece("er 15, 4005 that re*uire co((unication of s!ecific (atters with
those char)ed with )overnance' he list is not a su"stitute for considerin) the re*uire(ents and related
a!!lication and other e,!lanator# (aterial in ISAs'
1. G IS:% 1, C:ualit# %ontrol for Fir(s that 6erfor( Audits and Aeviews of Financial
State(ents, and 7ther Assurance and Aelated Services 0n)a)e(entsD
2. K !ara)ra!h 90$a&
State(entsD K !ara)ra!hs 41, 98$c&$i& and 40-44
!ara)ra!hs 14, 15 and 44-44
4. G ISA 4B5, C%o((unicatin) =eficiencies in Internal %ontrol to hose %har)ed with
<overnance and Eana)e(entD K !ara)ra!h 5
5. G ISA 450, C0valuation of Eisstate(ents Identified durin) the AuditD K !ara)ra!hs 14-19
6. G ISA 505, C0,ternal %onfir(ationsD K !ara)ra!h 5
7. G ISA 510, CInitial Audit 0n)a)e(ents K 7!enin) 1alancesD K !ara)ra!h 7
8. G ISA 550, CAelated 6artiesD K !ara)ra!h 47
9. G ISA 5B0, CSu"se*uent 0ventsD K !ara)ra!hs 7$"&-$c&, 10$a&, 19$"&, 14$a& and 17
10. G ISA 570, C<oin) %oncernD K !ara)ra!h 49
1. G ISA B00, CS!ecial %onsiderations K Audits of <rou! Financial State(ents $Includin) the
Lork of %o(!onent Auditors&D K !ara)ra!h 45
2. G ISA 705, CEodifications to the 7!inion in the Inde!endent Auditor+s Ae!ortD K
!ara)ra!hs 14, 14, 15$a& and 48
11. G ISA 70B, C0(!hasis of Eatter 6ara)ra!hs and 7ther Eatter 6ara)ra!hs in the
Inde!endent Auditor+s Ae!ortD K !ara)ra!h 5
Services 0n)a)e(ents'D
ISA 4B0 A660N=II 444
G ISA 710, C%o(!arative Infor(ationN%orres!ondin) Fi)ures and %o(!arative
Financial State(entsD K !ara)ra!h 18
G ISA 740, Che Auditor+s Aes!onsi"ilities Aelatin) to 7ther Infor(ation in
=ocu(ents %ontainin) Audited Financial State(entsD K !ara)ra!hs 10, 19 and 1B
ISA 4B0 A660N=II
449
Appe"#i5 2
$Aef. 6ara' 1B$a&, A17&
Q-!0it!ti9e Apect of Acco-"ti"( *'!ctice
he co((unication re*uired "# !ara)ra!h 1B$a&, and discussed in !ara)ra!h A17, (a# include such
(atters as.
Acco-"ti"( *o0icie
1. G he a!!ro!riateness of the accountin) !olicies to the !articular circu(stances of the
entit#, havin) re)ard to the need to "alance the cost of !rovidin) infor(ation with the likel#
"enefit to users of the entit#+s financial state(ents' Lhere acce!ta"le alternative accountin)
!olicies e,ist, the co((unication (a# include identification of the financial state(ent ite(s that
are affected "# the choice of si)nificant accountin) !olicies as well as infor(ation on accountin)
!olicies used "# si(ilar entities'
2. G he initial selection of, and chan)es in si)nificant accountin) !olicies, includin) the
a!!lication of new accountin) !ronounce(ents' he co((unication (a# include. the effect of the
ti(in) and (ethod of ado!tion of a chan)e in accountin) !olic# on the current and future earnin)s
of the entit#? and the ti(in) of a chan)e in accountin) !olicies in relation to e,!ected new
accountin) !ronounce(ents'
3. G he effect of si)nificant accountin) !olicies in controversial or e(er)in) areas $or those
uni*ue to an industr#, !articularl# when there is a lack of authoritative )uidance or consensus&'
4. G he effect of the ti(in) of transactions in relation to the !eriod in which the# are
recorded'
Acco-"ti"( Eti.!te
G For ite(s for which esti(ates are si)nificant, issues discussed in ISA 540,
14
includin), for e,a(!le.
1. o Eana)e(ent+s identification of accountin) esti(ates'
2. o Eana)e(ent+s !rocess for (akin) accountin) esti(ates'
3. o Aisks of (aterial (isstate(ent'
4. o Indicators of !ossi"le (ana)e(ent "ias'
5. o=isclosure of esti(ation uncertaint# in the financial state(ents'
ISA 4B0 A660N=II 444
Fi"!"ci!0 St!te.e"t Dic0o-'e
% G he issues involved, and related ;ud)(ents (ade, in for(ulatin) !articularl# sensitive
financial state(ent disclosures $for e,a(!le, disclosures related to revenue reco)nition,
re(uneration, )oin) concern, su"se*uent events, and contin)enc# issues&'
% G he overall neutralit#, consistenc# and clarit# of the disclosures in the financial
state(ents'
Re0!te# )!tte'
1. G he !otential effect on the financial state(ents of si)nificant risks, e,!osures and
uncertainties, such as !endin) liti)ation, that are disclosed in the financial state(ents'
2. G he e,tent to which the financial state(ents are affected "# unusual transactions,
includin) non-recurrin) a(ounts reco)niJed durin) the !eriod, and the e,tent to which such
transactions are se!aratel# disclosed in the financial state(ents'
3. G he factors affectin) asset and lia"ilit# carr#in) values, includin) the entit#+s "ases for
deter(inin) useful lives assi)ned to tan)i"le and intan)i"le assets' he co((unication (a#
e,!lain how factors affectin) carr#in) values were selected and how alternative selections would
have affected the financial state(ents'
4. G he selective correction of (isstate(ents, for e,a(!le, correctin) (isstate(ents with the
effect of increasin) re!orted earnin)s, "ut not those that have the effect of decreasin) re!orted
earnin)s'
ISA 4B0 A660N=II
445
INTERNATIONAL STANDARD ON AUDITING 2A@
CO))UNICATING DEFICIENCIES IN INTERNAL CONTROL TO THOSE
CHARGED =ITH GO,ERNANCE AND )ANAGE)ENT
CONTENTS
6ara)ra!h
%o((unication of =eficiencies in Internal %ontrol ''''''''''''''''''''''''''''''''''' A14-A90
International Standard on Auditin) $ISA& 4B5, C%o((unicatin) =eficiencies in Internal %ontrol to hose
%har)ed with <overnance and Eana)e(entD should "e read in con;unction with ISA 400, C7verall
7";ectives of the Inde!endent Auditor and the %onduct of an Audit in Accordance with International
ISA 4B5 44B
co((unicate a!!ro!riatel# to those char)ed with )overnance and (ana)e(ent deficiencies in
internal control
1
that the auditor has identified in an audit of financial state(ents' his ISA does
not i(!ose additional res!onsi"ilities on the auditor re)ardin) o"tainin) an understandin) of
internal control and desi)nin) and !erfor(in) tests of controls over and a"ove the re*uire(ents of
ISA 915 and ISA 990'
4
ISA 4B0
9
esta"lishes further re*uire(ents and !rovides )uidance re)ardin)
the auditor+s res!onsi"ilit# to co((unicate with those char)ed with )overnance in relation to the
audit'
2. 4' he auditor is re*uired to o"tain an understandin) of internal control relevant to the audit
when identif#in) and assessin) the risks of (aterial (isstate(ent'
4
In (akin) those risk
assess(ents, the auditor considers internal control in order to desi)n audit !rocedures that are
a!!ro!riate in the circu(stances, "ut not for the !ur!ose of e,!ressin) an o!inion on the
effectiveness of internal control' he auditor (a# identif# deficiencies in internal control not onl#
durin) this risk assess(ent !rocess "ut also at an# other sta)e of the audit' his ISA s!ecifies
which identified deficiencies the auditor is re*uired to co((unicate to those char)ed with
)overnance and (ana)e(ent'
3. 9' Nothin) in this ISA !recludes the auditor fro( co((unicatin) to those char)ed with
)overnance and (ana)e(ent other internal control (atters that the auditor has identified durin)
the audit'
Effecti9e D!te
15, 4005'
O$1ecti9e
5' he o";ective of the auditor is to co((unicate a!!ro!riatel# to those char)ed with )overnance
and (ana)e(ent deficiencies in internal control that the auditor has identified durin) the audit and
that, in the auditor+s !rofessional ;ud)(ent, are of sufficient i(!ortance to (erit their res!ective
attentions'
1
ISA 915, CIdentif#in) and Assessin) the Aisks of Eaterial Eisstate(ent throu)h Understandin) the 0ntit#
and Its 0nviron(ent,D !ara)ra!hs 4 and 14' 4
9
ISA 4B0, C%o((unication with hose %har)ed with <overnance'D 4
ISA 915, !ara)ra!h 14' 6ara)ra!hs AB0-AB5 !rovide )uidance on controls relevant to the
audit'
447 ISA 4B5
Defi"itio"
1. $a& =eficienc# in internal control K his e,ists when.
2. $i& A control is desi)ned, i(!le(ented or o!erated in such a wa# that it is una"le to !revent,
or detect and correct, (isstate(ents in the financial state(ents on a ti(el# "asis? or
3. $ii& A control necessar# to !revent, or detect and correct, (isstate(ents in the financial
state(ents on a ti(el# "asis is (issin)'
2. $"& Si)nificant deficienc# in internal control K A deficienc# or co("ination of deficiencies in
internal control that, in the auditor+s !rofessional ;ud)(ent, is of sufficient i(!ortance to (erit the
attention of those char)ed with )overnance' $Aef. 6ara' A5&
Re2-i'e.e"t
1. 7' he auditor shall deter(ine whether, on the "asis of the audit work !erfor(ed, the
auditor has identified one or (ore deficiencies in internal control' $Aef. 6ara' A1-A4&
2. 8' If the auditor has identified one or (ore deficiencies in internal control, the auditor shall
deter(ine, on the "asis of the audit work !erfor(ed, whether, individuall# or in co("ination, the#
constitute si)nificant deficiencies' $Aef. 6ara' A5-A11&
3. 5' he auditor shall co((unicate in writin) si)nificant deficiencies in internal control
identified durin) the audit to those char)ed with )overnance on a ti(el# "asis' $Aef. 6ara' A14-
A18, A47&
1. 10' he auditor shall also co((unicate to (ana)e(ent at an a!!ro!riate level of
res!onsi"ilit# on a ti(el# "asis. $Aef. 6ara' A15, A47&
2. $a& In writin), si)nificant deficiencies in internal control that the auditor has co((unicated
or intends to co((unicate to those char)ed with )overnance, unless it would "e ina!!ro!riate
to co((unicate directl# to (ana)e(ent in the circu(stances? and $Aef. 6ara' A14, A40-A41&
3. $"& 7ther deficiencies in internal control identified durin) the audit that have not "een
co((unicated to (ana)e(ent "# other !arties and that, in the auditor+s !rofessional
;ud)(ent, are of sufficient i(!ortance to (erit (ana)e(ent+s attention' $Aef. 6ara' A44-A4B&
ISA 4B5 448
11' he auditor shall include in the written co((unication of si)nificant deficiencies in internal
control.
1. $a& A descri!tion of the deficiencies and an e,!lanation of their !otential effects? and $Aef.
6ara' A48&
1. $"& Sufficient infor(ation to ena"le those char)ed with )overnance and (ana)e(ent to
understand the conte,t of the co((unication' In !articular, the auditor shall e,!lain that.
2. $i& he !ur!ose of the audit was for the auditor to e,!ress an o!inion on the financial
state(ents?
3. $ii& he audit included consideration of internal control relevant to the !re!aration of the
financial state(ents in order to desi)n audit !rocedures that are a!!ro!riate in the
circu(stances, "ut not for the !ur!ose of e,!ressin) an o!inion on the effectiveness of
internal control? and
$iii& he (atters "ein) re!orted are li(ited to those deficiencies that the auditor has
identified durin) the audit and that the auditor has concluded are of sufficient
i(!ortance to (erit "ein) re!orted to those char)ed with )overnance'
OOO
Dete'.i"!tio" of =hethe' Deficie"cie i" I"te'"!0 Co"t'o0 H!9e Bee" I#e"tifie# $Aef. 6ara'
7&
A1' In deter(inin) whether the auditor has identified one or (ore deficiencies in internal control, the
auditor (a# discuss the relevant facts and circu(stances of the auditor+s findin)s with the
a!!ro!riate level of (ana)e(ent' his discussion !rovides an o!!ortunit# for the auditor to alert
(ana)e(ent on a ti(el# "asis to the e,istence of deficiencies of which (ana)e(ent (a# not have
"een !reviousl# aware' he level of (ana)e(ent with who( it is a!!ro!riate to discuss the
findin)s is one that is fa(iliar with the internal control area concerned and that has the authorit# to
take re(edial action on an# identified deficiencies in internal control' In so(e circu(stances, it
(a# not "e a!!ro!riate for the auditor to discuss the auditor+s findin)s directl# with (ana)e(ent,
for e,a(!le, if the findin)s a!!ear to call (ana)e(ent+s inte)rit# or co(!etence into *uestion
$see !ara)ra!h A40&'
A4' In discussin) the facts and circu(stances of the auditor+s findin)s with (ana)e(ent, the auditor
(a# o"tain other relevant infor(ation for further consideration, such as.
445 ISA 4B5
1. G Eana)e(ent+s understandin) of the actual or sus!ected causes of the deficiencies'
2. G 0,ce!tions arisin) fro( the deficiencies that (ana)e(ent (a# have noted, for e,a(!le,
(isstate(ents that were not !revented "# the relevant infor(ation technolo)# $I& controls'
3. G A !reli(inar# indication fro( (ana)e(ent of its res!onse to the findin)s'
Considerations )pecific to )$aller /ntities
A9' Lhile the conce!ts underl#in) control activities in s(aller entities are likel# to "e si(ilar to those
in lar)er entities, the for(alit# with which the# o!erate will var#' Further, s(aller entities (a#
find that certain t#!es of control activities are not necessar# "ecause of controls a!!lied "#
(ana)e(ent' For e,a(!le, (ana)e(ent+s sole authorit# for )rantin) credit to custo(ers and
a!!rovin) si)nificant !urchases can !rovide effective control over i(!ortant account "alances and
transactions, lessenin) or re(ovin) the need for (ore detailed control activities'
A4' Also, s(aller entities often have fewer e(!lo#ees which (a# li(it the e,tent to which se)re)ation
of duties is !ractica"le' @owever, in a s(all owner-(ana)ed entit#, the owner-(ana)er (a# "e
a"le to e,ercise (ore effective oversi)ht than in a lar)er entit#' his hi)her level of (ana)e(ent
oversi)ht needs to "e "alanced a)ainst the )reater !otential for (ana)e(ent override of controls'
Si("ific!"t Deficie"cie i" I"te'"!0 Co"t'o0 $Aef. 6ara' B$"&, 8&
A5' he si)nificance of a deficienc# or a co("ination of deficiencies in internal control de!ends not
onl# on whether a (isstate(ent has actuall# occurred, "ut also on the likelihood that a
(isstate(ent could occur and the !otential (a)nitude of the (isstate(ent' Si)nificant
deficiencies (a# therefore e,ist even thou)h the auditor has not identified (isstate(ents durin)
the audit'
AB' 0,a(!les of (atters that the auditor (a# consider in deter(inin) whether a deficienc# or
co("ination of deficiencies in internal control constitutes a si)nificant deficienc# include.
1. G he likelihood of the deficiencies leadin) to (aterial (isstate(ents in the financial
state(ents in the future'
2. G he susce!ti"ilit# to loss or fraud of the related asset or lia"ilit#'
3. G he su";ectivit# and co(!le,it# of deter(inin) esti(ated a(ounts, such as fair value
accountin) esti(ates'
4. G he financial state(ent a(ounts e,!osed to the deficiencies'
ISA 4B5 450
% G he volu(e of activit# that has occurred or could occur in the account "alance or class of
transactions e,!osed to the deficienc# or deficiencies'
1G he i(!ortance of the controls to the financial re!ortin) !rocess? for e,a(!le.
a. o <eneral (onitorin) controls $such as oversi)ht of (ana)e(ent&'
b. o %ontrols over the !revention and detection of fraud'
c. o %ontrols over the selection and a!!lication of si)nificant accountin) !olicies'
d. o %ontrols over si)nificant transactions with related !arties'
e. o %ontrols over si)nificant transactions outside the entit#+s nor(al course of
"usiness'
f. o %ontrols over the !eriod-end financial re!ortin) !rocess $such as controls over
non-recurrin) ;ournal entries&'
% G he cause and fre*uenc# of the e,ce!tions detected as a result of the deficiencies in the
controls'
% G he interaction of the deficienc# with other deficiencies in internal control'
A7' Indicators of si)nificant deficiencies in internal control include, for e,a(!le.
1. G 0vidence of ineffective as!ects of the control environ(ent, such as.
1. o Indications that si)nificant transactions in which (ana)e(ent is financiall#
interested are not "ein) a!!ro!riatel# scrutiniJed "# those char)ed with )overnance'
2. o Identification of (ana)e(ent fraud, whether or not (aterial, that was not
!revented "# the entit#+s internal control'
3. o Eana)e(ent+s failure to i(!le(ent a!!ro!riate re(edial action on si)nificant
deficiencies !reviousl# co((unicated'
2. G A"sence of a risk assess(ent !rocess within the entit# where such a !rocess would
ordinaril# "e e,!ected to have "een esta"lished'
3. G 0vidence of an ineffective entit# risk assess(ent !rocess, such as (ana)e(ent+s failure
to identif# a risk of (aterial (isstate(ent that the auditor would e,!ect the entit#+s risk
assess(ent !rocess to have identified'
4. G 0vidence of an ineffective res!onse to identified si)nificant risks $for e,a(!le, a"sence
of controls over such a risk&'
451 ISA 4B5
1. G Eisstate(ents detected "# the auditor+s !rocedures that were not !revented, or detected
and corrected, "# the entit#+s internal control'
2. G Aestate(ent of !reviousl# issued financial state(ents to reflect the correction of a
(aterial (isstate(ent due to error or fraud'
3. G 0vidence of (ana)e(ent+s ina"ilit# to oversee the !re!aration of the financial
state(ents'
A8' %ontrols (a# "e desi)ned to o!erate individuall# or in co("ination to effectivel# !revent, or
detect and correct, (isstate(ents'
5
For e,a(!le, controls over accounts receiva"le (a# consist of
"oth auto(ated and (anual controls desi)ned to o!erate to)ether to !revent, or detect and correct,
(isstate(ents in the account "alance' A deficienc# in internal control on its own (a# not "e
sufficientl# i(!ortant to constitute a si)nificant deficienc#' @owever, a co("ination of
deficiencies affectin) the sa(e account "alance or disclosure, relevant assertion, or co(!onent of
internal control (a# increase the risks of (isstate(ent to such an e,tent as to )ive rise to a
si)nificant deficienc#'
A5' Maw or re)ulation in so(e ;urisdictions (a# esta"lish a re*uire(ent $!articularl# for audits of
listed entities& for the auditor to co((unicate to those char)ed with )overnance or to other
relevant !arties $such as re)ulators& one or (ore s!ecific t#!es of deficienc# in internal control
that the auditor has identified durin) the audit' Lhere law or re)ulation has esta"lished s!ecific
ter(s and definitions for these t#!es of deficienc# and re*uires the auditor to use these ter(s and
definitions for the !ur!ose of the co((unication, the auditor uses such ter(s and definitions when
co((unicatin) in accordance with the le)al or re)ulator# re*uire(ent'
A10' Lhere the ;urisdiction has esta"lished s!ecific ter(s for the t#!es of deficienc# in internal control
to "e co((unicated "ut has not defined such ter(s, it (a# "e necessar# for the auditor to use
;ud)(ent to deter(ine the (atters to "e co((unicated further to the le)al or re)ulator#
re*uire(ent' In doin) so, the auditor (a# consider it a!!ro!riate to have re)ard to the
re*uire(ents and )uidance in this ISA' For e,a(!le, if the !ur!ose of the le)al or re)ulator#
re*uire(ent is to "rin) to the attention of those char)ed with )overnance certain internal control
(atters of which the# should "e aware, it (a# "e a!!ro!riate to re)ard such (atters as "ein)
)enerall# e*uivalent to the si)nificant deficiencies re*uired "# this ISA to "e co((unicated to
those char)ed with )overnance'
A11' he re*uire(ents of this ISA re(ain a!!lica"le notwithstandin) that law or re)ulation (a# re*uire
the auditor to use s!ecific ter(s or definitions'
ISA 915, !ara)ra!h ABB'
ISA 4B5 454
Co..-"ic!tio" of Deficie"cie i" I"te'"!0 Co"t'o0
Co$$unication of )ignificant ?eficiencies in Internal Control to 1hose Charged #ith 2o!ernance
$Aef. 6ara' 5&
A14' %o((unicatin) si)nificant deficiencies in writin) to those char)ed with )overnance reflects the
i(!ortance of these (atters, and assists those char)ed with )overnance in fulfillin) their oversi)ht
res!onsi"ilities' ISA 4B0 esta"lishes relevant considerations re)ardin) co((unication with those
char)ed with )overnance when all of the( are involved in (ana)in) the entit#'
B
A19' In deter(inin) when to issue the written co((unication, the auditor (a# consider whether recei!t
of such co((unication would "e an i(!ortant factor in ena"lin) those char)ed with )overnance
to dischar)e their oversi)ht res!onsi"ilities' In addition, for listed entities in certain ;urisdictions,
those char)ed with )overnance (a# need to receive the auditor+s written co((unication "efore
the date of a!!roval of the financial state(ents in order to dischar)e s!ecific res!onsi"ilities in
relation to internal control for re)ulator# or other !ur!oses' For other entities, the auditor (a#
issue the written co((unication at a later date' Nevertheless, in the latter case, as the auditor+s
written co((unication of si)nificant deficiencies for(s !art of the final audit file, the written
co((unication is su";ect to the overridin) re*uire(ent
7
for the auditor to co(!lete the asse("l#
of the final audit file on a ti(el# "asis' ISA 490 states that an a!!ro!riate ti(e li(it within which
to co(!lete the asse("l# of the final audit file is ordinaril# not (ore than B0 da#s after the date of
8
A14' Ae)ardless of the ti(in) of the written co((unication of si)nificant deficiencies, the auditor (a#
co((unicate these orall# in the first instance to (ana)e(ent and, when a!!ro!riate, to those
char)ed with )overnance to assist the( in takin) ti(el# re(edial action to (ini(iJe the risks of
(aterial (isstate(ent' =oin) so, however, does not relieve the auditor of the res!onsi"ilit# to
co((unicate the si)nificant deficiencies in writin), as this ISA re*uires'
A15' he level of detail at which to co((unicate si)nificant deficiencies is a (atter of the auditor+s
!rofessional ;ud)(ent in the circu(stances' Factors that the auditor (a# consider in deter(inin)
an a!!ro!riate level of detail for the co((unication include, for e,a(!le.
B
ISA 4B0, !ara)ra!h 19'
7
ISA 490, CAudit =ocu(entation,D !ara)ra!h 14' 8
459 ISA 4B5
1. G he nature of the entit#' For instance, the co((unication re*uired for a !u"lic interest
entit# (a# "e different fro( that for a non-!u"lic interest entit#'
2. G he siJe and co(!le,it# of the entit#' For instance, the co((unication re*uired for a
co(!le, entit# (a# "e different fro( that for an entit# o!eratin) a si(!le "usiness'
3. G he nature of si)nificant deficiencies that the auditor has identified'
4. G he entit#+s )overnance co(!osition' For instance, (ore detail (a# "e needed if those
char)ed with )overnance include (e("ers who do not have si)nificant e,!erience in the entit#+s
industr# or in the affected areas'
5. G Me)al or re)ulator# re*uire(ents re)ardin) the co((unication of s!ecific t#!es of
deficienc# in internal control'
A1B' Eana)e(ent and those char)ed with )overnance (a# alread# "e aware of si)nificant deficiencies
that the auditor has identified durin) the audit and (a# have chosen not to re(ed# the( "ecause
of cost or other considerations' he res!onsi"ilit# for evaluatin) the costs and "enefits of
i(!le(entin) re(edial action rests with (ana)e(ent and those char)ed with )overnance'
Accordin)l#, the re*uire(ent in !ara)ra!h 5 a!!lies re)ardless of cost or other considerations that
(ana)e(ent and those char)ed with )overnance (a# consider relevant in deter(inin) whether to
re(ed# such deficiencies'
A17' he fact that the auditor co((unicated a si)nificant deficienc# to those char)ed with )overnance
and (ana)e(ent in a !revious audit does not eli(inate the need for the auditor to re!eat the
co((unication if re(edial action has not #et "een taken' If a !reviousl# co((unicated
si)nificant deficienc# re(ains, the current #ear+s co((unication (a# re!eat the descri!tion fro(
the !revious co((unication, or si(!l# reference the !revious co((unication' he auditor (a#
ask (ana)e(ent or, where a!!ro!riate, those char)ed with )overnance, wh# the si)nificant
deficienc# has not #et "een re(edied' A failure to act, in the a"sence of a rational e,!lanation,
(a# in itself re!resent a si)nificant deficienc#'
A18' In the case of audits of s(aller entities, the auditor (a# co((unicate in a less structured (anner
with those char)ed with )overnance than in the case of lar)er entities'
Co$$unication of ?eficiencies in Internal Control to <anage$ent $Aef. 6ara' 10&
A15' 7rdinaril#, the a!!ro!riate level of (ana)e(ent is the one that has res!onsi"ilit# and authorit# to
evaluate the deficiencies in internal control and to take the necessar# re(edial action' For
si)nificant deficiencies, the
ISA 4B5 454
a!!ro!riate level is likel# to "e the chief e,ecutive officer or chief financial officer $or e*uivalent&
as these (atters are also re*uired to "e co((unicated to those char)ed with )overnance' For other
deficiencies in internal control, the a!!ro!riate level (a# "e o!erational (ana)e(ent with (ore
direct involve(ent in the control areas affected and with the authorit# to take a!!ro!riate re(edial
action'
%o((unication of Si)nificant =eficiencies in Internal %ontrol to Eana)e(ent $Aef. 6ara' 10$a&&
A40' %ertain identified si)nificant deficiencies in internal control (a# call into *uestion the inte)rit# or
co(!etence of (ana)e(ent' For e,a(!le, there (a# "e evidence of fraud or intentional non-
co(!liance with laws and re)ulations "# (ana)e(ent, or (ana)e(ent (a# e,hi"it an ina"ilit# to
oversee the !re!aration of ade*uate financial state(ents that (a# raise dou"t a"out (ana)e(ent+s
co(!etence' Accordin)l#, it (a# not "e a!!ro!riate to co((unicate such deficiencies directl# to
(ana)e(ent'
A41' ISA 450 esta"lishes re*uire(ents and !rovides )uidance on the re!ortin) of identified or
sus!ected non-co(!liance with laws and re)ulations, includin) when those char)ed with
)overnance are the(selves involved in such non-co(!liance'
5
ISA 440 esta"lishes re*uire(ents
and !rovides )uidance re)ardin) co((unication to those char)ed with )overnance when the
auditor has identified fraud or sus!ected fraud involvin) (ana)e(ent'
10
%o((unication of 7ther =eficiencies in Internal %ontrol to Eana)e(ent $Aef. 6ara' 10$"&&
A44' =urin) the audit, the auditor (a# identif# other deficiencies in internal control that are not
si)nificant deficiencies "ut that (a# "e of sufficient i(!ortance to (erit (ana)e(ent+s attention'
he deter(ination as to which other deficiencies in internal control (erit (ana)e(ent+s attention
is a (atter of !rofessional ;ud)(ent in the circu(stances, takin) into account the likelihood and
!otential (a)nitude of (isstate(ents that (a# arise in the financial state(ents as a result of those
deficiencies'
A49' he co((unication of other deficiencies in internal control that (erit (ana)e(ent+s attention
need not "e in writin) "ut (a# "e oral' Lhere the auditor has discussed the facts and
circu(stances of the auditor+s findin)s with (ana)e(ent, the auditor (a# consider an oral
co((unication of the other deficiencies to have "een (ade to (ana)e(ent at the ti(e of these
discussions' Accordin)l#, a for(al co((unication need not "e (ade su"se*uentl#'
5
ISA 450, C%onsideration of Maws and Ae)ulations in an Audit of Financial State(ents,D !ara)ra!hs 44-48'
10
ISA 440, Che Auditor+s Aes!onsi"ilities Aelatin) to Fraud in an Audit of Financial State(ents,D !ara)ra!h 41'
455 ISA 4B5
A44' If the auditor has co((unicated deficiencies in internal control other than si)nificant deficiencies
to (ana)e(ent in a !rior !eriod and (ana)e(ent has chosen not to re(ed# the( for cost or other
reasons, the auditor need not re!eat the co((unication in the current !eriod' he auditor is also
not re*uired to re!eat infor(ation a"out such deficiencies if it has "een !reviousl# co((unicated
to (ana)e(ent "# other !arties, such as internal auditors or re)ulators' It (a#, however, "e
a!!ro!riate for the auditor to re-co((unicate these other deficiencies if there has "een a chan)e
of (ana)e(ent, or if new infor(ation has co(e to the auditor+s attention that alters the !rior
understandin) of the auditor and (ana)e(ent re)ardin) the deficiencies' Nevertheless, the failure
of (ana)e(ent to re(ed# other deficiencies in internal control that were !reviousl#
co((unicated (a# "eco(e a si)nificant deficienc# re*uirin) co((unication with those char)ed
with )overnance' Lhether this is the case de!ends on the auditor+s ;ud)(ent in the circu(stances'
A45' In so(e circu(stances, those char)ed with )overnance (a# wish to "e (ade aware of the details
of other deficiencies in internal control the auditor has co((unicated to (ana)e(ent, or "e
"riefl# infor(ed of the nature of the other deficiencies' Alternativel#, the auditor (a# consider it
a!!ro!riate to infor( those char)ed with )overnance of the co((unication of the other
deficiencies to (ana)e(ent' In either case, the auditor (a# re!ort orall# or in writin) to those
char)ed with )overnance as a!!ro!riate'
A4B' ISA 4B0 esta"lishes relevant considerations re)ardin) co((unication with those char)ed with
)overnance when all of the( are involved in (ana)in) the entit#'
11
Considerations )pecific to (ublic )ector /ntities $Aef. 6ara' 5-10&
A47' 6u"lic sector auditors (a# have additional res!onsi"ilities to co((unicate deficiencies in internal
control that the auditor has identified durin) the audit, in wa#s, at a level of detail and to !arties
not envisa)ed in this ISA' For e,a(!le, si)nificant deficiencies (a# have to "e co((unicated to
the le)islature or other )overnin) "od#' Maw, re)ulation or other authorit# (a# also (andate that
!u"lic sector auditors re!ort deficiencies in internal control, irres!ective of the si)nificance of the
!otential effects of those deficiencies' Further, le)islation (a# re*uire !u"lic sector auditors to
re!ort on "roader internal control-related (atters than the deficiencies in internal control re*uired
to "e co((unicated "# this ISA, for e,a(!le, controls related to co(!liance with le)islative
authorities, re)ulations, or !rovisions of contracts or )rant a)ree(ents'
ISA 4B5 45B
Content of Dritten Co$$unication of )ignificant ?eficiencies in Internal Control
$Aef. 6ara' 11&
A48' In e,!lainin) the !otential effects of the si)nificant deficiencies, the auditor need not *uantif#
those effects' he si)nificant deficiencies (a# "e )rou!ed to)ether for re!ortin) !ur!oses where it
is a!!ro!riate to do so' he auditor (a# also include in the written co((unication su))estions for
re(edial action on the deficiencies, (ana)e(ent+s actual or !ro!osed res!onses, and a state(ent
as to whether or not the auditor has undertaken an# ste!s to verif# whether (ana)e(ent+s
res!onses have "een i(!le(ented'
A45' he auditor (a# consider it a!!ro!riate to include the followin) infor(ation as additional conte,t
for the co((unication.
1. G An indication that if the auditor had !erfor(ed (ore e,tensive !rocedures on internal
control, the auditor (i)ht have identified (ore deficiencies to "e re!orted, or concluded that so(e
of the re!orted deficiencies need not, in fact, have "een re!orted'
2. G An indication that such co((unication has "een !rovided for the !ur!oses of those
char)ed with )overnance, and that it (a# not "e suita"le for other !ur!oses'
A90' Maw or re)ulation (a# re*uire the auditor or (ana)e(ent to furnish a co!# of the auditor+s
written co((unication on si)nificant deficiencies to a!!ro!riate re)ulator# authorities' Lhere this
is the case, the auditor+s written co((unication (a# identif# such re)ulator# authorities'
457 ISA 4B5
*LANNING AN AUDIT OF FINANCIAL STATE)ENTS
CONTENTS
6ara)ra!h
I"t'o#-ctio"
Sco!e of this ISA ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1
he Aole and i(in) of 6lannin) '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
0ffective =ate '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 9
O$1ecti9e ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
Re2-i'e.e"t
Involve(ent of Se# 0n)a)e(ent ea( Ee("ers '''''''''''''''''''''''''''''''''''''' 5
6reli(inar# 0n)a)e(ent Activities ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' B
6lannin) Activities ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 7-11
=ocu(entation ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 14
Additional %onsiderations in Initial Audit 0n)a)e(ents ''''''''''''''''''''''''''''' 19
he Aole and i(in) of 6lannin) '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1-A9
Involve(ent of Se# 0n)a)e(ent ea( Ee("ers '''''''''''''''''''''''''''''''''''''' A4
6reli(inar# 0n)a)e(ent Activities ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A5-A7
6lannin) Activities ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A8-A15
=ocu(entation ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1B-A15
Additional %onsiderations in Initial Audit 0n)a)e(ents ''''''''''''''''''''''''''''' A40
A!!endi,. %onsiderations in 0sta"lishin) the 7verall Audit Strate)#
International Standard on Auditin) $ISA& 900, C6lannin) an Audit of Financial State(entsD should "e read
in con;unction with ISA 400, C7verall 7";ectives of the Inde!endent Auditor and the %onduct of an Audit
in Accordance with International Standards on Auditin)'D
ISA 900 458
1' his International Standard on Auditin) $ISA& deals with the auditor+s res!onsi"ilit# to !lan an
audit of financial state(ents' his ISA is written in the conte,t of recurrin) audits' Additional
considerations in an initial audit en)a)e(ent are se!aratel# identified'
The Ro0e !"# Ti.i"( of *0!""i"(
4' 6lannin) an audit involves esta"lishin) the overall audit strate)# for the en)a)e(ent and
develo!in) an audit !lan' Ade*uate !lannin) "enefits the audit of financial state(ents in several
wa#s, includin) the followin). $Aef. 6ara' A1-A9&
1. G @el!in) the auditor to devote a!!ro!riate attention to i(!ortant areas of the audit'
2. G @el!in) the auditor identif# and resolve !otential !ro"le(s on a ti(el# "asis'
3. G @el!in) the auditor !ro!erl# or)aniJe and (ana)e the audit en)a)e(ent so that it is
!erfor(ed in an effective and efficient (anner'
4. G Assistin) in the selection of en)a)e(ent tea( (e("ers with a!!ro!riate levels of
ca!a"ilities and co(!etence to res!ond to antici!ated risks, and the !ro!er assi)n(ent of work to
the('
5. G Facilitatin) the direction and su!ervision of en)a)e(ent tea( (e("ers and the review of
their work'
6. G Assistin), where a!!lica"le, in coordination of work done "# auditors of co(!onents and
e,!erts'
Effecti9e D!te
15, 4005'
O$1ecti9e
4' he o";ective of the auditor is to !lan the audit so that it will "e !erfor(ed in an effective (anner'
Re2-i'e.e"t I"9o09e.e"t of Ke/ E"(!(e.e"t Te!. )e.$e'
5' he en)a)e(ent !artner and other ke# (e("ers of the en)a)e(ent tea( shall "e involved in
!lannin) the audit, includin) !lannin) and !artici!atin) in the discussion a(on) en)a)e(ent tea(
(e("ers' $Aef. 6ara' A4&
455 ISA 900
*'e0i.i"!'/ E"(!(e.e"t Acti9itie
B' he auditor shall undertake the followin) activities at the "e)innin) of the current audit
en)a)e(ent.
1. $a& 6erfor(in) !rocedures re*uired "# ISA 440 re)ardin) the continuance of the client
relationshi! and the s!ecific audit en)a)e(ent?
1
2. $"& 0valuatin) co(!liance with relevant ethical re*uire(ents, includin) inde!endence, in
accordance with ISA 440?
4
and
3. $c& 0sta"lishin) an understandin) of the ter(s of the en)a)e(ent, as re*uired "# ISA 410'
9

$Aef. 6ara' A5-A7&
*0!""i"( Acti9itie
1. 7' he auditor shall esta"lish an overall audit strate)# that sets the sco!e, ti(in) and
direction of the audit, and that )uides the develo!(ent of the audit !lan'
1. 8' In esta"lishin) the overall audit strate)#, the auditor shall.
2. $a& Identif# the characteristics of the en)a)e(ent that define its sco!e?
3. $"& Ascertain the re!ortin) o";ectives of the en)a)e(ent to !lan the ti(in) of the audit and
the nature of the co((unications re*uired?
4. $c& %onsider the factors that, in the auditor+s !rofessional ;ud)(ent, are si)nificant in
directin) the en)a)e(ent tea(+s efforts?
5. $d& %onsider the results of !reli(inar# en)a)e(ent activities and, where a!!lica"le, whether
knowled)e )ained on other en)a)e(ents !erfor(ed "# the en)a)e(ent !artner for the entit#
is relevant? and
6. $e& Ascertain the nature, ti(in) and e,tent of resources necessar# to !erfor( the
en)a)e(ent' $Aef. 6ara' A8-A11&
7. 5' he auditor shall develo! an audit !lan that shall include a descri!tion of.
8. $a& he nature, ti(in) and e,tent of !lanned risk assess(ent !rocedures, as deter(ined under
ISA 915'
4
9. $"& he nature, ti(in) and e,tent of !lanned further audit !rocedures at the assertion level, as
deter(ined under ISA 990'
5
1
ISA 440, C:ualit# %ontrol for an Audit of Financial State(ents,D !ara)ra!hs 14-19' 4
9
ISA 410, CA)reein) the er(s of Audit 0n)a)e(ents,D !ara)ra!hs 5-19' 4
5
ISA 900 4B0
$c& 7ther !lanned audit !rocedures that are re*uired to "e carried out so that the en)a)e(ent
co(!lies with ISAs' $Aef. 6ara' A14&
1. 10' he auditor shall u!date and chan)e the overall audit strate)# and the audit !lan as
necessar# durin) the course of the audit' $Aef. 6ara' A19&
2. 11' he auditor shall !lan the nature, ti(in) and e,tent of direction and su!ervision of
en)a)e(ent tea( (e("ers and the review of their work' $Aef. 6ara' A14A15&
Doc-.e"t!tio"
14' he auditor shall include in the audit docu(entation.
B
1. $a& he overall audit strate)#?
2. $"& he audit !lan? and
3. $c& An# si)nificant chan)es (ade durin) the audit en)a)e(ent to the overall audit strate)#
or the audit !lan, and the reasons for such chan)es' $Aef. 6ara' A1B-A15&
A##itio"!0 Co"i#e'!tio" i" I"iti!0 A-#it E"(!(e.e"t
19' he auditor shall undertake the followin) activities !rior to startin) an initial audit.
1$a& 6erfor(in) !rocedures re*uired "# ISA 440 re)ardin) the acce!tance of the client relationshi!
and the s!ecific audit en)a)e(ent?
7
and
2$"& %o((unicatin) with the !redecessor auditor, where there has "een a chan)e of auditors,
in co(!liance with relevant ethical re*uire(ents' $Aef. 6ara' A40&
OOO
App0ic!tio" !"# Othe' E5p0!"!to'/ )!te'i!0 The Ro0e !"#
Ti.i"( of *0!""i"( $Aef. 6ara' 4&
A1' he nature and e,tent of !lannin) activities will var# accordin) to the siJe and co(!le,it# of the
entit#, the ke# en)a)e(ent tea( (e("ers+ !revious e,!erience with the entit#, and chan)es in
circu(stances that occur durin) the audit en)a)e(ent'
A4' 6lannin) is not a discrete !hase of an audit, "ut rather a continual and iterative !rocess that often
"e)ins shortl# after $or in connection with& the co(!letion of
B
7
ISA 440, !ara)ra!hs 14-19'
4B1 ISA 900
the !revious audit and continues until the co(!letion of the current audit en)a)e(ent' 6lannin),
however, includes consideration of the ti(in) of certain activities and audit !rocedures that need
to "e co(!leted !rior to the !erfor(ance of further audit !rocedures' For e,a(!le, !lannin)
includes the need to consider, !rior to the auditor+s identification and assess(ent of the risks of
(aterial (isstate(ent, such (atters as.
% G he anal#tical !rocedures to "e a!!lied as risk assess(ent !rocedures'
% G 7"tainin) a )eneral understandin) of the le)al and re)ulator# fra(ework a!!lica"le to
the entit# and how the entit# is co(!l#in) with that fra(ework'
% G he deter(ination of (aterialit#'
% G he involve(ent of e,!erts'
% G he !erfor(ance of other risk assess(ent !rocedures'
A9' he auditor (a# decide to discuss ele(ents of !lannin) with the entit#+s (ana)e(ent to facilitate
the conduct and (ana)e(ent of the audit en)a)e(ent $for e,a(!le, to coordinate so(e of the
!lanned audit !rocedures with the work of the entit#+s !ersonnel&' Althou)h these discussions
often occur, the overall audit strate)# and the audit !lan re(ain the auditor+s res!onsi"ilit#' Lhen
discussin) (atters included in the overall audit strate)# or audit !lan, care is re*uired in order not
to co(!ro(ise the effectiveness of the audit' For e,a(!le, discussin) the nature and ti(in) of
detailed audit !rocedures with (ana)e(ent (a# co(!ro(ise the effectiveness of the audit "#
(akin) the audit !rocedures too !redicta"le'
I"9o09e.e"t of Ke/ E"(!(e.e"t Te!. )e.$e' $Aef. 6ara' 5&
A4' he involve(ent of the en)a)e(ent !artner and other ke# (e("ers of the en)a)e(ent tea( in
!lannin) the audit draws on their e,!erience and insi)ht, there"# enhancin) the effectiveness and
efficienc# of the !lannin) !rocess'
8
*'e0i.i"!'/ E"(!(e.e"t Acti9itie $Aef. 6ara' B&
A5' 6erfor(in) the !reli(inar# en)a)e(ent activities s!ecified in !ara)ra!h B at the "e)innin) of the
current audit en)a)e(ent assists the auditor in identif#in) and evaluatin) events or circu(stances
that (a# adversel# affect the auditor+s a"ilit# to !lan and !erfor( the audit en)a)e(ent'
ISA 915, !ara)ra!h 10, esta"lishes re*uire(ents and !rovides )uidance on the en)a)e(ent tea(+s discussion of the
susce!ti"ilit# of the entit# to (aterial (isstate(ents of the financial state(ents' ISA 440, Che Auditor+s Aes!onsi"ilities
Aelatin) to Fraud in an Audit of Financial State(ents,D !ara)ra!h 15, !rovides )uidance on the e(!hasis )iven durin) this
discussion to the susce!ti"ilit# of the entit#+s financial state(ents to (aterial (isstate(ent due to fraud'
ISA 900 4B4
AB' 6erfor(in) these !reli(inar# en)a)e(ent activities ena"les the auditor to !lan an audit
en)a)e(ent for which, for e,a(!le.
1. G he auditor (aintains the necessar# inde!endence and a"ilit# to !erfor( the en)a)e(ent'
2. G here are no issues with (ana)e(ent inte)rit# that (a# affect the auditor+s willin)ness
to continue the en)a)e(ent'
3. G here is no (isunderstandin) with the client as to the ter(s of the en)a)e(ent'
A7' he auditor+s consideration of client continuance and relevant ethical re*uire(ents, includin)
inde!endence, occurs throu)hout the audit en)a)e(ent as conditions and chan)es in
circu(stances occur' 6erfor(in) initial !rocedures on "oth client continuance and evaluation of
relevant ethical re*uire(ents $includin) inde!endence& at the "e)innin) of the current audit
en)a)e(ent (eans that the# are co(!leted !rior to the !erfor(ance of other si)nificant activities
for the current audit en)a)e(ent' For continuin) audit en)a)e(ents, such initial !rocedures often
occur shortl# after $or in connection with& the co(!letion of the !revious audit'
*0!""i"( Acti9itie
1he ,!erall Audit )trategy $Aef. 6ara' 7-8&
A8' he !rocess of esta"lishin) the overall audit strate)# assists the auditor to deter(ine, su";ect to the
co(!letion of the auditor+s risk assess(ent !rocedures, such (atters as.
% G he resources to de!lo# for s!ecific audit areas, such as the use of a!!ro!riatel#
e,!erienced tea( (e("ers for hi)h risk areas or the involve(ent of e,!erts on co(!le, (atters?
% G he a(ount of resources to allocate to s!ecific audit areas, such as the nu("er of tea(
(e("ers assi)ned to o"serve the inventor# count at (aterial locations, the e,tent of review of
other auditors+ work in the case of )rou! audits, or the audit "ud)et in hours to allocate to hi)h risk
areas?
% G Lhen these resources are to "e de!lo#ed, such as whether at an interi( audit sta)e or at
ke# cut-off dates? and
% G @ow such resources are (ana)ed, directed and su!ervised, such as when tea( "riefin)
and de"riefin) (eetin)s are e,!ected to "e held, how en)a)e(ent !artner and (ana)er reviews
are e,!ected to take !lace $for e,a(!le, on-site or off-site&, and whether to co(!lete en)a)e(ent
*ualit# control reviews'
4B9 ISA 900
A5' he A!!endi, lists e,a(!les of considerations in esta"lishin) the overall audit strate)#'
A10' 7nce the overall audit strate)# has "een esta"lished, an audit !lan can "e develo!ed to address the
various (atters identified in the overall audit strate)#, takin) into account the need to achieve the
audit o";ectives throu)h the efficient use of the auditor+s resources' he esta"lish(ent of the
overall audit strate)# and the detailed audit !lan are not necessaril# discrete or se*uential
!rocesses, "ut are closel# inter-related since chan)es in one (a# result in conse*uential chan)es to
the other'
A11' In audits of s(all entities, the entire audit (a# "e conducted "# a ver# s(all audit tea(' Ean#
audits of s(all entities involve the en)a)e(ent !artner $who (a# "e a sole !ractitioner& workin)
with one en)a)e(ent tea( (e("er $or without an# en)a)e(ent tea( (e("ers&' Lith a s(aller
tea(, co-ordination of, and co((unication "etween, tea( (e("ers are easier' 0sta"lishin) the
overall audit strate)# for the audit of a s(all entit# need not "e a co(!le, or ti(e-consu(in)
e,ercise? it varies accordin) to the siJe of the entit#, the co(!le,it# of the audit, and the siJe of the
en)a)e(ent tea(' For e,a(!le, a "rief (e(orandu( !re!ared at the co(!letion of the !revious
audit, "ased on a review of the workin) !a!ers and hi)hli)htin) issues identified in the audit ;ust
co(!leted, u!dated in the current !eriod "ased on discussions with the owner-(ana)er, can serve
as the docu(ented audit strate)# for the current audit en)a)e(ent if it covers the (atters noted in
!ara)ra!h 8'
1he Audit (lan $Aef. 6ara' 5&
A14' he audit !lan is (ore detailed than the overall audit strate)# in that it includes the nature, ti(in)
and e,tent of audit !rocedures to "e !erfor(ed "# en)a)e(ent tea( (e("ers' 6lannin) for these
audit !rocedures takes !lace over the course of the audit as the audit !lan for the en)a)e(ent
develo!s' For e,a(!le, !lannin) of the auditor+s risk assess(ent !rocedures occurs earl# in the
audit !rocess' @owever, !lannin) the nature, ti(in) and e,tent of s!ecific further audit !rocedures
de!ends on the outco(e of those risk assess(ent !rocedures' In addition, the auditor (a# "e)in
the e,ecution of further audit !rocedures for so(e classes of transactions, account "alances and
disclosures "efore !lannin) all re(ainin) further audit !rocedures'
Changes to (lanning ?ecisions during the Course of the Audit $Aef. 6ara' 10)
A19' As a result of une,!ected events, chan)es in conditions, or the audit evidence o"tained fro( the
results of audit !rocedures, the auditor (a# need to (odif# the overall audit strate)# and audit
!lan and there"# the resultin) !lanned nature, ti(in) and e,tent of further audit !rocedures, "ased
on the revised consideration of assessed risks' his (a# "e the case when infor(ation co(es
ISA 900 4B4
to the auditor+s attention that differs si)nificantl# fro( the infor(ation availa"le when the auditor
!lanned the audit !rocedures' For e,a(!le, audit evidence o"tained throu)h the !erfor(ance of
su"stantive !rocedures (a# contradict the audit evidence o"tained throu)h tests of controls'
?irection& )uper!ision and +e!ie# $Aef. 6ara' 11&
A14' he nature, ti(in) and e,tent of the direction and su!ervision of en)a)e(ent tea( (e("ers and
review of their work var# de!endin) on (an# factors, includin).
1. G he siJe and co(!le,it# of the entit#'
2. G he area of the audit'
3. G he assessed risks of (aterial (isstate(ent $for e,a(!le, an increase in the assessed risk
of (aterial (isstate(ent for a )iven area of the audit ordinaril# re*uires a corres!ondin) increase
in the e,tent and ti(eliness of direction and su!ervision of en)a)e(ent tea( (e("ers, and a
(ore detailed review of their work&'
4. G he ca!a"ilities and co(!etence of the individual tea( (e("ers !erfor(in) the audit
work'
ISA 440 contains further )uidance on the direction, su!ervision and review of audit work'
5
A15' If an audit is carried out entirel# "# the en)a)e(ent !artner, *uestions of direction and su!ervision
of en)a)e(ent tea( (e("ers and review of their work do not arise' In such cases, the
en)a)e(ent !artner, havin) !ersonall# conducted all as!ects of the work, will "e aware of all
(aterial issues' For(in) an o";ective view on the a!!ro!riateness of the ;ud)(ents (ade in the
course of the audit can !resent !ractical !ro"le(s when the sa(e individual also !erfor(s the
entire audit' If !articularl# co(!le, or unusual issues are involved, and the audit is !erfor(ed "# a
sole !ractitioner, it (a# "e desira"le to consult with other suita"l#-e,!erienced auditors or the
auditor+s !rofessional "od#'
A1B' he docu(entation of the overall audit strate)# is a record of the ke# decisions considered
necessar# to !ro!erl# !lan the audit and to co((unicate si)nificant (atters to the en)a)e(ent
tea(' For e,a(!le, the auditor (a# su((ariJe the overall audit strate)# in the for( of a
(e(orandu( that contains ke# decisions re)ardin) the overall sco!e, ti(in) and conduct of the
audit'
ISA 440, !ara)ra!hs 15-17'
4B5 ISA 900
A17' he docu(entation of the audit !lan is a record of the !lanned nature, ti(in) and e,tent of risk
assess(ent !rocedures and further audit !rocedures at the assertion level in res!onse to the
assessed risks' It also serves as a record of the !ro!er !lannin) of the audit !rocedures that can "e
reviewed and a!!roved !rior to their !erfor(ance' he auditor (a# use standard audit !ro)ra(s
or audit co(!letion checklists, tailored as needed to reflect the !articular en)a)e(ent
circu(stances'
A18' A record of the si)nificant chan)es to the overall audit strate)# and the audit !lan, and resultin)
chan)es to the !lanned nature, ti(in) and e,tent of audit !rocedures, e,!lains wh# the si)nificant
chan)es were (ade, and the overall strate)# and audit !lan finall# ado!ted for the audit' It also
reflects the a!!ro!riate res!onse to the si)nificant chan)es occurrin) durin) the audit'
Considerations )pecific to )$aller /ntities
A15' As discussed in !ara)ra!h A11, a suita"le, "rief (e(orandu( (a# serve as the docu(ented
strate)# for the audit of a s(aller entit#' For the audit !lan, standard audit !ro)ra(s or checklists
$see !ara)ra!h A17& drawn u! on the assu(!tion of few relevant control activities, as is likel# to
"e the case in a s(aller entit#, (a# "e used !rovided that the# are tailored to the circu(stances of
the en)a)e(ent, includin) the auditor+s risk assess(ents'
A##itio"!0 Co"i#e'!tio" i" I"iti!0 A-#it E"(!(e.e"t $Aef. 6ara' 19&
A40' he !ur!ose and o";ective of !lannin) the audit are the sa(e whether the audit is an initial or
recurrin) en)a)e(ent' @owever, for an initial audit, the auditor (a# need to e,!and the !lannin)
activities "ecause the auditor does not ordinaril# have the !revious e,!erience with the entit# that
is considered when !lannin) recurrin) en)a)e(ents' For an initial audit en)a)e(ent, additional
(atters the auditor (a# consider in esta"lishin) the overall audit strate)# and audit !lan include
the followin).
1. G Unless !rohi"ited "# law or re)ulation, arran)e(ents to "e (ade with the !redecessor
auditor, for e,a(!le, to review the !redecessor auditor+s workin) !a!ers'
2. G An# (a;or issues $includin) the a!!lication of accountin) !rinci!les or of auditin) and
re!ortin) standards& discussed with (ana)e(ent in connection with the initial selection as auditor,
the co((unication of these (atters to those char)ed with )overnance and how these (atters
affect the overall audit strate)# and audit !lan'
3. G he audit !rocedures necessar# to o"tain sufficient a!!ro!riate audit evidence re)ardin)
o!enin) "alances'
10
ISA 510, CInitial Audit 0n)a)e(entsN7!enin) 1alances'D
ISA 900 4BB
G 7ther !rocedures re*uired "# the fir(+s s#ste( of *ualit# control for initial audit en)a)e(ents $for
e,a(!le, the fir(+s s#ste( of *ualit# control (a# re*uire the involve(ent of another !artner or
senior individual to review the overall audit strate)# !rior to co((encin) si)nificant audit
!rocedures or to review re!orts !rior to their issuance&'
4B7 ISA 900
Appe"#i5
$Aef. 6ara' 7-8, A8-A11&
Co"i#e'!tio" i" Et!$0ihi"( the O9e'!00 A-#it St'!te(/
his a!!endi, !rovides e,a(!les of (atters the auditor (a# consider in esta"lishin) the overall audit
strate)#' Ean# of these (atters will also influence the auditor+s detailed audit !lan' he e,a(!les !rovided
cover a "road ran)e of (atters a!!lica"le to (an# en)a)e(ents' Lhile so(e of the (atters referred to
"elow (a# "e re*uired "# other ISAs, not all (atters are relevant to ever# audit en)a)e(ent and the list is
not necessaril# co(!lete'
Ch!'!cte'itic of the E"(!(e.e"t
1. G he financial re!ortin) fra(ework on which the financial infor(ation to "e audited has
"een !re!ared, includin) an# need for reconciliations to another financial re!ortin) fra(ework'
2. G Industr#-s!ecific re!ortin) re*uire(ents such as re!orts (andated "# industr# re)ulators'
3. G he e,!ected audit covera)e, includin) the nu("er and locations of co(!onents to "e
included'
4. G he nature of the control relationshi!s "etween a !arent and its co(!onents that
deter(ine how the )rou! is to "e consolidated'
5. G he e,tent to which co(!onents are audited "# other auditors'
6. G he nature of the "usiness se)(ents to "e audited, includin) the need for s!ecialiJed
knowled)e'
7. G he re!ortin) currenc# to "e used, includin) an# need for currenc# translation for the
financial infor(ation audited'
8. G he need for a statutor# audit of standalone financial state(ents in addition to an audit
for consolidation !ur!oses'
9. G he availa"ilit# of the work of internal auditors and the e,tent of the auditor+s !otential
reliance on such work'
10. G he entit#+s use of service or)aniJations and how the auditor (a# o"tain evidence
concernin) the desi)n or o!eration of controls !erfor(ed "# the('
11. G he e,!ected use of audit evidence o"tained in !revious audits, for e,a(!le, audit
evidence related to risk assess(ent !rocedures and tests of controls'
12. G he effect of infor(ation technolo)# on the audit !rocedures, includin) the availa"ilit#
of data and the e,!ected use of co(!uter-assisted audit techni*ues'
% G he coordination of the e,!ected covera)e and ti(in) of the audit work with an# reviews
of interi( financial infor(ation and the effect on the audit of the infor(ation o"tained durin) such
reviews'
% G he availa"ilit# of client !ersonnel and data'
Repo'ti"( O$1ecti9e4 Ti.i"( of the A-#it4 !"# N!t-'e of Co..-"ic!tio"
1. G he entit#+s ti(eta"le for re!ortin), such as at interi( and final sta)es'
2. G he or)aniJation of (eetin)s with (ana)e(ent and those char)ed with )overnance to
discuss the nature, ti(in) and e,tent of the audit work'
3. G he discussion with (ana)e(ent and those char)ed with )overnance re)ardin) the
e,!ected t#!e and ti(in) of re!orts to "e issued and other co((unications, "oth written and oral,
includin) the auditor+s re!ort, (ana)e(ent letters and co((unications to those char)ed with
)overnance'
4. G he discussion with (ana)e(ent re)ardin) the e,!ected co((unications on the status of
audit work throu)hout the en)a)e(ent'
5. G %o((unication with auditors of co(!onents re)ardin) the e,!ected t#!es and ti(in) of
re!orts to "e issued and other co((unications in connection with the audit of co(!onents'
6. G he e,!ected nature and ti(in) of co((unications a(on) en)a)e(ent tea( (e("ers,
includin) the nature and ti(in) of tea( (eetin)s and ti(in) of the review of work !erfor(ed'
7. G Lhether there are an# other e,!ected co((unications with third !arties, includin) an#
statutor# or contractual re!ortin) res!onsi"ilities arisin) fro( the audit'
Si("ific!"t F!cto'4 *'e0i.i"!'/ E"(!(e.e"t Acti9itie4 !"# K"o&0e#(e G!i"e# o" Othe'
E"(!(e.e"t
G he deter(ination of (aterialit# in accordance with ISA 940
11
and, where a!!lica"le.
a. o he deter(ination of (aterialit# for co(!onents and co((unication thereof to
co(!onent auditors in accordance with ISA B00'
14
b. o he !reli(inar# identification of si)nificant co(!onents and (aterial classes of
transactions, account "alances and disclosures'
G 6reli(inar# identification of areas where there (a# "e a hi)her risk of (aterial (isstate(ent'
11
ISA 940, CEaterialit# in 6lannin) and 6erfor(in) an Audit'D 14
ISA B00, CS!ecial %onsiderationsNAudits of <rou! Financial State(ents $Includin) the Lork of %o(!onent Auditors&,
!ara)ra!hs 41-49 and 40$c&'
4B5 ISA 900 A660N=II
% G he i(!act of the assessed risk of (aterial (isstate(ent at the overall financial state(ent
level on direction, su!ervision and review'
% G he (anner in which the auditor e(!hasiJes to en)a)e(ent tea( (e("ers the need to
(aintain a *uestionin) (ind and to e,ercise !rofessional ske!ticis( in )atherin) and evaluatin)
audit evidence'
% G Aesults of !revious audits that involved evaluatin) the o!eratin) effectiveness of internal
control, includin) the nature of identified deficiencies and action taken to address the('
% G he discussion of (atters that (a# affect the audit with fir( !ersonnel res!onsi"le for
!erfor(in) other services to the entit#'
% G 0vidence of (ana)e(ent+s co((it(ent to the desi)n, i(!le(entation and (aintenance
of sound internal control, includin) evidence of a!!ro!riate docu(entation of such internal
control'
% G Folu(e of transactions, which (a# deter(ine whether it is (ore efficient for the auditor
to rel# on internal control'
% G I(!ortance attached to internal control throu)hout the entit# to the successful o!eration
of the "usiness'
% G Si)nificant "usiness develo!(ents affectin) the entit#, includin) chan)es in infor(ation
technolo)# and "usiness !rocesses, chan)es in ke# (ana)e(ent, and ac*uisitions, (er)ers and
divest(ents'
% G Si)nificant industr# develo!(ents such as chan)es in industr# re)ulations and new
re!ortin) re*uire(ents'
% G Si)nificant chan)es in the financial re!ortin) fra(ework, such as chan)es in accountin)
standards'
% G 7ther si)nificant relevant develo!(ents, such as chan)es in the le)al environ(ent
affectin) the entit#'
N!t-'e4 Ti.i"( !"# E5te"t of Reo-'ce
% G he selection of the en)a)e(ent tea( $includin), where necessar#, the en)a)e(ent
*ualit# control reviewer& and the assi)n(ent of audit work to the tea( (e("ers, includin) the
assi)n(ent of a!!ro!riatel# e,!erienced tea( (e("ers to areas where there (a# "e hi)her risks
of (aterial (isstate(ent'
% G 0n)a)e(ent "ud)etin), includin) considerin) the a!!ro!riate a(ount of ti(e to set aside
for areas where there (a# "e hi)her risks of (aterial (isstate(ent'
ISA 900 A660N=II 470
INTERNATIONAL STANDARD ON AUDITING 37@
IDENTIFYING AND ASSESSING THE RISKS OF )ATERIAL )ISSTATE)ENT
THROUGH UNDERSTANDING THE ENTITY AND ITS EN,IRON)ENT
CONTENTS
6ara)ra!h
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 9
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
Re2-i'e.e"t
Aisk Assess(ent 6rocedures and Aelated Activities '''''''''''''''''''''''''''''''' 5-10 he Ae*uired Understandin)
of the 0ntit# and Its 0nviron(ent,
Includin) the 0ntit#+s Internal %ontrol '''''''''''''''''''''''''''''''''''''''''''' 11-44 Identif#in) and Assessin) the
Aisks of Eaterial Eisstate(ent '''''''''''' 45-91
=ocu(entation '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 94 App0ic!tio" !"# Othe'
E5p0!"!to'/ )!te'i!0 Aisk Assess(ent 6rocedures and Aelated Activities '''''''''''''''''''''''''''' A1-A1B he
Ae*uired Understandin) of the 0ntit# and Its 0nviron(ent,
Includin) the 0ntit#+s Internal %ontrol '''''''''''''''''''''''''''''''''''''''''''' A17-A104 Identif#in) and
Assessin) the Aisks of Eaterial Eisstate(ent '''''''''''' A105-A190
=ocu(entation '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A191-A194 A!!endi, 1. Internal
%ontrol %o(!onents A!!endi, 4. %onditions and 0vents hat Ea# Indicate Aisks of
Eaterial Eisstate(ent
471 ISA 915
International Standard on Auditin) $ISA& 915, CIdentif#in) and Assessin) the Aisks of Eaterial
Eisstate(ent throu)h Understandin) the 0ntit# and Its 0nviron(entD should "e read in con;unction with
ISA 915 474
1' his International Standard on Auditin) $ISA& deals with the auditor+s res!onsi"ilit# to identif#
and assess the risks of (aterial (isstate(ent in the financial state(ents, throu)h understandin)
the entit# and its environ(ent, includin) the entit#+s internal control'
Effecti9e D!te
15, 4005'
O$1ecti9e
9' he o";ective of the auditor is to identif# and assess the risks of (aterial (isstate(ent, whether
due to fraud or error, at the financial state(ent and assertion levels, throu)h understandin) the
entit# and its environ(ent, includin) the entit#+s internal control, there"# !rovidin) a "asis for
desi)nin) and i(!le(entin) res!onses to the assessed risks of (aterial (isstate(ent'
Defi"itio"
1$a& Assertions K Ae!resentations "# (ana)e(ent, e,!licit or otherwise, that are e("odied in the
financial state(ents, as used "# the auditor to consider the different t#!es of !otential
(isstate(ents that (a# occur'
2$"& 1usiness risk K A risk resultin) fro( si)nificant conditions, events, circu(stances,
actions or inactions that could adversel# affect an entit#+s a"ilit# to achieve its o";ectives and
e,ecute its strate)ies, or fro( the settin) of ina!!ro!riate o";ectives and strate)ies'
3$c&Internal control K he !rocess desi)ned, i(!le(ented and (aintained "# those char)ed with
)overnance, (ana)e(ent and other !ersonnel to !rovide reasona"le assurance a"out the
achieve(ent of an entit#+s o";ectives with re)ard to relia"ilit# of financial re!ortin), effectiveness
and efficienc# of o!erations, and co(!liance with a!!lica"le laws and re)ulations' he ter(
CcontrolsD refers to an# as!ects of one or (ore of the co(!onents of internal control'
4$d&Aisk assess(ent !rocedures K he audit !rocedures !erfor(ed to o"tain an understandin) of the
entit# and its environ(ent, includin) the entit#+s internal control, to identif# and assess the risks of
(aterial (isstate(ent, whether due to fraud or error, at the financial state(ent and assertion
levels'
479 ISA 915
$e& Si)nificant risk K An identified and assessed risk of (aterial (isstate(ent that, in the
auditor+s ;ud)(ent, re*uires s!ecial audit consideration'
Re2-i'e.e"t Ri% Ae.e"t *'oce#-'e !"# Re0!te# Acti9itie
1. 5' he auditor shall !erfor( risk assess(ent !rocedures to !rovide a "asis for the
identification and assess(ent of risks of (aterial (isstate(ent at the financial state(ent and
assertion levels' Aisk assess(ent !rocedures "# the(selves, however, do not !rovide sufficient
a!!ro!riate audit evidence on which to "ase the audit o!inion' $Aef. 6ara' A1-A5&
1B' he risk assess(ent !rocedures shall include the followin).
2$a& In*uiries of (ana)e(ent, and of others within the entit# who in the auditor+s ;ud)(ent
(a# have infor(ation that is likel# to assist in identif#in) risks of (aterial (isstate(ent due
to fraud or error' $Aef. 6ara' AB&
3$"& Anal#tical !rocedures' $Aef. 6ara' A7-A10&
4$c&7"servation and ins!ection' $Aef. 6ara' A11&
2. 7' he auditor shall consider whether infor(ation o"tained fro( the auditor+s client
acce!tance or continuance !rocess is relevant to identif#in) risks of (aterial (isstate(ent'
3. 8' If the en)a)e(ent !artner has !erfor(ed other en)a)e(ents for the entit#, the
en)a)e(ent !artner shall consider whether infor(ation o"tained is relevant to identif#in) risks of
(aterial (isstate(ent'
4. 5' Lhere the auditor intends to use infor(ation o"tained fro( the auditor+s !revious
e,!erience with the entit# and fro( audit !rocedures !erfor(ed in !revious audits, the auditor
shall deter(ine whether chan)es have occurred since the !revious audit that (a# affect its
relevance to the current audit' $Aef. 6ara' A14-A19&
5. 10' he en)a)e(ent !artner and other ke# en)a)e(ent tea( (e("ers shall discuss the
susce!ti"ilit# of the entit#+s financial state(ents to (aterial (isstate(ent, and the a!!lication of
the a!!lica"le financial re!ortin) fra(ework to the entit#+s facts and circu(stances' he
en)a)e(ent !artner shall deter(ine which (atters are to "e co((unicated to en)a)e(ent tea(
(e("ers not involved in the discussion' $Aef. 6ara' A14-A1B&
ISA 915 474
The Re2-i'e# U"#e't!"#i"( of the E"tit/ !"# It E"9i'o".e"t4 I"c0-#i"( the E"tit/> I"te'"!0
Co"t'o0
1he /ntity and Its /n!iron$ent
11' he auditor shall o"tain an understandin) of the followin).
1$a&Aelevant industr#, re)ulator#, and other e,ternal factors includin) the a!!lica"le financial
re!ortin) fra(ework' $Aef. 6ara' A17-A44&
1$"& he nature of the entit#, includin).
2$i& its o!erations?
3$ii& its ownershi! and )overnance structures?
$iii& the t#!es of invest(ents that the entit# is (akin) and !lans to (ake, includin)
invest(ents in s!ecial-!ur!ose entities? and
$iv& the wa# that the entit# is structured and how it is financed
to ena"le the auditor to understand the classes of transactions, account "alances, and
disclosures to "e e,!ected in the financial state(ents' $Aef. 6ara' A49-A47&
1. $c& he entit#+s selection and a!!lication of accountin) !olicies, includin) the reasons for
chan)es thereto' he auditor shall evaluate whether the entit#+s accountin) !olicies are a!!ro!riate
for its "usiness and consistent with the a!!lica"le financial re!ortin) fra(ework and accountin)
!olicies used in the relevant industr#' $Aef. 6ara' A48&
2. $d& he entit#+s o";ectives and strate)ies, and those related "usiness risks that (a# result in
risks of (aterial (isstate(ent' $Aef. 6ara' A45-A95&
3. $e& he (easure(ent and review of the entit#+s financial !erfor(ance' $Aef. 6ara' A9B-A41&
1he /ntity8s Internal Control
14' he auditor shall o"tain an understandin) of internal control relevant to the audit' Althou)h (ost
controls relevant to the audit are likel# to relate to financial re!ortin), not all controls that relate to
financial re!ortin) are relevant to the audit' It is a (atter of the auditor+s !rofessional ;ud)(ent
whether a control, individuall# or in co("ination with others, is relevant to the audit' $Aef. 6ara'
A44-AB5&
Nature and 0,tent of the Understandin) of Aelevant %ontrols
19' Lhen o"tainin) an understandin) of controls that are relevant to the audit, the auditor shall
evaluate the desi)n of those controls and deter(ine whether the# have "een i(!le(ented, "#
!erfor(in) !rocedures in addition to in*uir# of the entit#+s !ersonnel' $Aef. 6ara' ABB-AB8&
475 ISA 915
%o(!onents of Internal %ontrol %ontrol environ(ent
14' he auditor shall o"tain an understandin) of the control environ(ent' As !art of o"tainin) this
understandin), the auditor shall evaluate whether.
1. $a& Eana)e(ent, with the oversi)ht of those char)ed with )overnance, has created and (aintained
a culture of honest# and ethical "ehavior? and
2. $"& he stren)ths in the control environ(ent ele(ents collectivel# !rovide an a!!ro!riate
foundation for the other co(!onents of internal control, and whether those other co(!onents are
not under(ined "# deficiencies in the control environ(ent' $Aef. 6ara' AB5-A78&
he entit#+s risk assess(ent !rocess
115' he auditor shall o"tain an understandin) of whether the entit# has a !rocess for.
2$a&Identif#in) "usiness risks relevant to financial re!ortin) o";ectives?
3$"&0sti(atin) the si)nificance of the risks?
4$c&Assessin) the likelihood of their occurrence? and
5$d&=ecidin) a"out actions to address those risks' $Aef. 6ara' A75&
2. 1B' If the entit# has esta"lished such a !rocess $referred to hereafter as the Centit#+s risk
assess(ent !rocessD&, the auditor shall o"tain an understandin) of it, and the results thereof' If the
auditor identifies risks of (aterial (isstate(ent that (ana)e(ent failed to identif#, the auditor
shall evaluate whether there was an underl#in) risk of a kind that the auditor e,!ects would have
"een identified "# the entit#+s risk assess(ent !rocess' If there is such a risk, the auditor shall
o"tain an understandin) of wh# that !rocess failed to identif# it, and evaluate whether the !rocess
is a!!ro!riate to its circu(stances or deter(ine if there is a si)nificant deficienc# in internal
control with re)ard to the entit#+s risk assess(ent !rocess'
3. 17' If the entit# has not esta"lished such a !rocess or has an ad hoc !rocess, the auditor shall
discuss with (ana)e(ent whether "usiness risks relevant to financial re!ortin) o";ectives have
"een identified and how the# have "een addressed' he auditor shall evaluate whether the a"sence
of a docu(ented risk assess(ent !rocess is a!!ro!riate in the circu(stances, or deter(ine whether
it re!resents a si)nificant deficienc# in internal control' $Aef. 6ara' A80&
ISA 915 47B
he infor(ation s#ste(, includin) the related "usiness !rocesses, relevant to financial re!ortin), and
co((unication
1. 18' he auditor shall o"tain an understandin) of the infor(ation s#ste(, includin) the related
"usiness !rocesses, relevant to financial re!ortin), includin) the followin) areas.
2. $a& he classes of transactions in the entit#+s o!erations that are si)nificant to the financial
state(ents?
3. $"& he !rocedures, within "oth infor(ation technolo)# $I& and (anual s#ste(s, "# which
those transactions are initiated, recorded, !rocessed, corrected as necessar#, transferred to the
)eneral led)er and re!orted in the financial state(ents?
4. $c& he related accountin) records, su!!ortin) infor(ation and s!ecific accounts in the
financial state(ents that are used to initiate, record, !rocess and re!ort transactions? this
includes the correction of incorrect infor(ation and how infor(ation is transferred to the
)eneral led)er' he records (a# "e in either (anual or electronic for(?
5. $d& @ow the infor(ation s#ste( ca!tures events and conditions, other than transactions, that
are si)nificant to the financial state(ents?
6. $e& he financial re!ortin) !rocess used to !re!are the entit#+s financial state(ents, includin)
si)nificant accountin) esti(ates and disclosures? and
7. $f& %ontrols surroundin) ;ournal entries, includin) non-standard ;ournal entries used to
record non-recurrin), unusual transactions or ad;ust(ents' $Aef. 6ara' A81-A85&
8. 15' he auditor shall o"tain an understandin) of how the entit# co((unicates financial
re!ortin) roles and res!onsi"ilities and si)nificant (atters relatin) to financial re!ortin),
includin). $Aef. 6ara' A8B-A87&
9. $a& %o((unications "etween (ana)e(ent and those char)ed with )overnance? and
10. $"& 0,ternal co((unications, such as those with re)ulator# authorities'
%ontrol activities relevant to the audit
40' he auditor shall o"tain an understandin) of control activities relevant to the audit, "ein) those the
auditor ;ud)es it necessar# to understand in order to assess the risks of (aterial (isstate(ent at
the assertion level and desi)n further audit !rocedures res!onsive to assessed risks' An audit does
not re*uire an understandin) of all the control activities related to each si)nificant class of
transactions, account "alance, and disclosure in the financial state(ents or to ever# assertion
relevant to the(' $Aef. 6ara' A88-A54&
477 ISA 915
41' In understandin) the entit#+s control activities, the auditor shall o"tain an understandin) of how
the entit# has res!onded to risks arisin) fro( I' $Aef. 6ara' A55-A57&
Eonitorin) of controls
1. 44' he auditor shall o"tain an understandin) of the (a;or activities that the entit# uses to
(onitor internal control over financial re!ortin), includin) those related to those control activities
relevant to the audit, and how the entit# initiates re(edial actions to deficiencies in its controls'
$Aef. 6ara' A58-A100&
149' If the entit# has an internal audit function,
1
the auditor shall o"tain an understandin) of
the followin) in order to deter(ine whether the internal audit function is likel# to "e relevant
to the audit.
2$a& he nature of the internal audit function+s res!onsi"ilities and how the internal audit
function fits in the entit#+s or)aniJational structure? and
3$"& he activities !erfor(ed, or to "e !erfor(ed, "# the internal audit function' $Aef. 6ara'
A101-A109&
2. 44' he auditor shall o"tain an understandin) of the sources of the infor(ation used in the
entit#+s (onitorin) activities, and the "asis u!on which (ana)e(ent considers the infor(ation to
"e sufficientl# relia"le for the !ur!ose' $Aef. 6ara' A104&
I#e"tif/i"( !"# Aei"( the Ri% of )!te'i!0 )it!te.e"t
45' he auditor shall identif# and assess the risks of (aterial (isstate(ent at.
1. $a& the financial state(ent level? and $Aef. 6ara' A105-A108&
2. $"& the assertion level for classes of transactions, account "alances, and disclosures $Aef. 6ara'
A105-A119&
to !rovide a "asis for desi)nin) and !erfor(in) further audit !rocedures'
4B' For this !ur!ose, the auditor shall.
$a& Identif# risks throu)hout the !rocess of o"tainin) an understandin) of the entit# and its
environ(ent, includin) relevant controls that relate to the risks, and "# considerin) the
classes of transactions, account "alances, and disclosures in the financial state(ents? $Aef.
6ara' A114-A115&
he ter( Cinternal audit functionD is defined in ISA B10, CUsin) the Lork of Internal Auditors,D !ara)ra!h 7$a&, as. CAn
a!!raisal activit# esta"lished or !rovided as a service to the entit#' Its functions include, a(on)st other thin)s, e,a(inin),
evaluatin) and (onitorin) the ade*uac# and effectiveness of internal control'D
ISA 915 478
1$"& Assess the identified risks, and evaluate whether the# relate (ore !ervasivel# to the
financial state(ents as a whole and !otentiall# affect (an# assertions?
2$c& Aelate the identified risks to what can )o wron) at the assertion level, takin) account of
relevant controls that the auditor intends to test? and $Aef. 6ara' A11B-A118&
3$d& %onsider the likelihood of (isstate(ent, includin) the !ossi"ilit# of (ulti!le
(isstate(ents, and whether the !otential (isstate(ent is of a (a)nitude that could result in a
+is.s 1hat +e>uire )pecial Audit Consideration
1. 47' As !art of the risk assess(ent as descri"ed in !ara)ra!h 45, the auditor shall deter(ine
whether an# of the risks identified are, in the auditor+s ;ud)(ent, a si)nificant risk' In e,ercisin)
this ;ud)(ent, the auditor shall e,clude the effects of identified controls related to the risk'
148' In e,ercisin) ;ud)(ent as to which risks are si)nificant risks, the auditor shall consider at
least the followin).
2$a&Lhether the risk is a risk of fraud?
3$"& Lhether the risk is related to recent si)nificant econo(ic, accountin) or other develo!(ents
and, therefore, re*uires s!ecific attention?
4$c&he co(!le,it# of transactions?
5$d&Lhether the risk involves si)nificant transactions with related !arties?
6$e&he de)ree of su";ectivit# in the (easure(ent of financial infor(ation related to the risk,
es!eciall# those (easure(ents involvin) a wide ran)e of (easure(ent uncertaint#? and
7$f& Lhether the risk involves si)nificant transactions that are outside the nor(al course of
"usiness for the entit#, or that otherwise a!!ear to "e unusual' $Aef. 6ara' A115-A149&
2. 45' If the auditor has deter(ined that a si)nificant risk e,ists, the auditor shall o"tain an
understandin) of the entit#+s controls, includin) control activities, relevant to that risk' $Aef. 6ara'
A144-A14B&
+is.s for Dhich )ubstanti!e (rocedures Alone ?o Aot (ro!ide )ufficient Appropriate Audit
/!idence
90' In res!ect of so(e risks, the auditor (a# ;ud)e that it is not !ossi"le or !ractica"le to o"tain
sufficient a!!ro!riate audit evidence onl# fro( su"stantive !rocedures' Such risks (a# relate to
the inaccurate or inco(!lete recordin) of routine and si)nificant classes of transactions or account
"alances, the characteristics of which often !er(it hi)hl# auto(ated !rocessin) with
475 ISA 915
little or no (anual intervention' In such cases, the entit#+s controls over such risks are relevant to
the audit and the auditor shall o"tain an understandin) of the(' $Aef. 6ara' A147-A145&
+e!ision of +is. Assess$ent
91' he auditor+s assess(ent of the risks of (aterial (isstate(ent at the assertion level (a# chan)e
durin) the course of the audit as additional audit evidence is o"tained' In circu(stances where the
auditor o"tains audit evidence fro( !erfor(in) further audit !rocedures, or if new infor(ation is
o"tained, either of which is inconsistent with the audit evidence on which the auditor ori)inall#
"ased the assess(ent, the auditor shall revise the assess(ent and (odif# the further !lanned audit
!rocedures accordin)l#' $Aef. 6ara' A190&
Doc-.e"t!tio"
4
1$a&he discussion a(on) the en)a)e(ent tea( where re*uired "# !ara)ra!h 10, and the si)nificant
decisions reached?
2$"& Se# ele(ents of the understandin) o"tained re)ardin) each of the as!ects of the entit# and its
environ(ent s!ecified in !ara)ra!h 11 and of each of the internal control co(!onents s!ecified in
!ara)ra!hs 1444? the sources of infor(ation fro( which the understandin) was o"tained? and the
risk assess(ent !rocedures !erfor(ed?
3$c&he identified and assessed risks of (aterial (isstate(ent at the financial state(ent level and at
the assertion level as re*uired "# !ara)ra!h 45? and
4$d& he risks identified, and related controls a"out which the auditor has o"tained an understandin),
as a result of the re*uire(ents in !ara)ra!hs 47-90' $Aef. 6ara' A191-A194&
OOO
Ri% Ae.e"t *'oce#-'e !"# Re0!te# Acti9itie $Aef. 6ara' 5&
A1' 7"tainin) an understandin) of the entit# and its environ(ent, includin) the entit#+s internal
control $referred to hereafter as an Cunderstandin) of the entit#D&, is a continuous, d#na(ic
!rocess of )atherin), u!datin) and anal#Jin) infor(ation throu)hout the audit' he understandin)
esta"lishes a fra(e of
ISA 915 480
reference within which the auditor !lans the audit and e,ercises !rofessional ;ud)(ent throu)hout
the audit, for e,a(!le, when.
1. G Assessin) risks of (aterial (isstate(ent of the financial state(ents?
2. G =eter(inin) (aterialit# in accordance with ISA 940?
9
3. G %onsiderin) the a!!ro!riateness of the selection and a!!lication of accountin) !olicies,
and the ade*uac# of financial state(ent disclosures?
4. G Identif#in) areas where s!ecial audit consideration (a# "e necessar#, for e,a(!le,
related !art# transactions, the a!!ro!riateness of (ana)e(ent+s use of the )oin) concern
assu(!tion, or considerin) the "usiness !ur!ose of transactions?
5. G =evelo!in) e,!ectations for use when !erfor(in) anal#tical !rocedures?
6. G Aes!ondin) to the assessed risks of (aterial (isstate(ent, includin) desi)nin) and
!erfor(in) further audit !rocedures to o"tain sufficient a!!ro!riate audit evidence? and
7. G 0valuatin) the sufficienc# and a!!ro!riateness of audit evidence o"tained, such as the
a!!ro!riateness of assu(!tions and of (ana)e(ent+s oral and written re!resentations'
A4' Infor(ation o"tained "# !erfor(in) risk assess(ent !rocedures and related activities (a# "e used
"# the auditor as audit evidence to su!!ort assess(ents of the risks of (aterial (isstate(ent' In
addition, the auditor (a# o"tain audit evidence a"out classes of transactions, account "alances, or
disclosures and related assertions and a"out the o!eratin) effectiveness of controls, even thou)h
such !rocedures were not s!ecificall# !lanned as su"stantive !rocedures or as tests of controls'
he auditor also (a# choose to !erfor( su"stantive !rocedures or tests of controls concurrentl#
with risk assess(ent !rocedures "ecause it is efficient to do so'
A9' he auditor uses !rofessional ;ud)(ent to deter(ine the e,tent of the understandin) re*uired' he
auditor+s !ri(ar# consideration is whether the understandin) that has "een o"tained is sufficient to
(eet the o";ective stated in this ISA' he de!th of the overall understandin) that is re*uired "# the
auditor is less than that !ossessed "# (ana)e(ent in (ana)in) the entit#'
A4' he risks to "e assessed include "oth those due to error and those due to fraud, and "oth are
covered "# this ISA' @owever, the si)nificance of fraud is such that further re*uire(ents and
)uidance are included in ISA 440 in relation to
481 ISA 915
risk assess(ent !rocedures and related activities to o"tain infor(ation that is used to identif# the
risks of (aterial (isstate(ent due to fraud'
4
A5' Althou)h the auditor is re*uired to !erfor( all the risk assess(ent !rocedures descri"ed in
!ara)ra!h B in the course of o"tainin) the re*uired understandin) of the entit# $see !ara)ra!hs 11-
44&, the auditor is not re*uired to !erfor( all of the( for each as!ect of that understandin)' 7ther
!rocedures (a# "e !erfor(ed where the infor(ation to "e o"tained therefro( (a# "e hel!ful in
identif#in) risks of (aterial (isstate(ent' 0,a(!les of such !rocedures include.
1. G Aeviewin) infor(ation o"tained fro( e,ternal sources such as trade and econo(ic
;ournals? re!orts "# anal#sts, "anks, or ratin) a)encies? or re)ulator# or financial !u"lications'
2. G Eakin) in*uiries of the entit#+s e,ternal le)al counsel or of valuation e,!erts that the
entit# has used'
In>uiries of <anage$ent and ,thers #ithin the /ntity $Aef. 6ara' B$a&&
AB' Euch of the infor(ation o"tained "# the auditor+s in*uiries is o"tained fro( (ana)e(ent and
those res!onsi"le for financial re!ortin)' @owever, the auditor (a# also o"tain infor(ation, or a
different !ers!ective in identif#in) risks of (aterial (isstate(ent, throu)h in*uiries of others
within the entit# and other e(!lo#ees with different levels of authorit#' For e,a(!le.
% G In*uiries directed towards those char)ed with )overnance (a# hel! the auditor
understand the environ(ent in which the financial state(ents are !re!ared'
% G In*uiries directed toward internal audit !ersonnel (a# !rovide infor(ation a"out internal
audit !rocedures !erfor(ed durin) the #ear relatin) to the desi)n and effectiveness of the entit#+s
internal control and whether (ana)e(ent has satisfactoril# res!onded to findin)s fro( those
!rocedures'
% G In*uiries of e(!lo#ees involved in initiatin), !rocessin) or recordin) co(!le, or unusual
transactions (a# hel! the auditor to evaluate the a!!ro!riateness of the selection and a!!lication
of certain accountin) !olicies'
% G In*uiries directed toward in-house le)al counsel (a# !rovide infor(ation a"out such
(atters as liti)ation, co(!liance with laws and re)ulations, knowled)e of fraud or sus!ected fraud
affectin) the entit#, warranties, !ost-sales o"li)ations, arran)e(ents $such as ;oint ventures& with
"usiness !artners and the (eanin) of contract ter(s'
ISA 440, Che Auditor+s Aes!onsi"ilities Aelatin) to Fraud in an Audit of Financial State(ents,D !ara)ra!hs 14-44'
ISA 915 484
G In*uiries directed towards (arketin) or sales !ersonnel (a# !rovide infor(ation a"out
chan)es in the entit#+s (arketin) strate)ies, sales trends, or contractual arran)e(ents with
its custo(ers'
Analytical (rocedures $Aef. 6ara' B$"&&
A7' Anal#tical !rocedures !erfor(ed as risk assess(ent !rocedures (a# identif# as!ects of the entit#
of which the auditor was unaware and (a# assist in assessin) the risks of (aterial (isstate(ent in
order to !rovide a "asis for desi)nin) and i(!le(entin) res!onses to the assessed risks' Anal#tical
!rocedures !erfor(ed as risk assess(ent !rocedures (a# include "oth financial and non-financial
infor(ation, for e,a(!le, the relationshi! "etween sales and s*uare foota)e of sellin) s!ace or
volu(e of )oods sold'
A8' Anal#tical !rocedures (a# hel! identif# the e,istence of unusual transactions or events, and
a(ounts, ratios, and trends that (i)ht indicate (atters that have audit i(!lications' Unusual or
une,!ected relationshi!s that are identified (a# assist the auditor in identif#in) risks of (aterial
(isstate(ent, es!eciall# risks of (aterial (isstate(ent due to fraud'
A5' @owever, when such anal#tical !rocedures use data a))re)ated at a hi)h level $which (a# "e the
situation with anal#tical !rocedures !erfor(ed as risk assess(ent !rocedures&, the results of those
anal#tical !rocedures onl# !rovide a "road initial indication a"out whether a (aterial
(isstate(ent (a# e,ist' Accordin)l#, in such cases, consideration of other infor(ation that has
"een )athered when identif#in) the risks of (aterial (isstate(ent to)ether with the results of such
anal#tical !rocedures (a# assist the auditor in understandin) and evaluatin) the results of the
anal#tical !rocedures'
A10' So(e s(aller entities (a# not have interi( or (onthl# financial infor(ation that can "e used for
!ur!oses of anal#tical !rocedures' In these circu(stances, althou)h the auditor (a# "e a"le to
!erfor( li(ited anal#tical !rocedures for !ur!oses of !lannin) the audit or o"tain so(e
infor(ation throu)h in*uir#, the auditor (a# need to !lan to !erfor( anal#tical !rocedures to
identif# and assess the risks of (aterial (isstate(ent when an earl# draft of the entit#+s financial
state(ents is availa"le'
,bser!ation and Inspection $Aef. 6ara' B$c&&
A11' 7"servation and ins!ection (a# su!!ort in*uiries of (ana)e(ent and others, and (a# also
!rovide infor(ation a"out the entit# and its environ(ent' 0,a(!les of such audit !rocedures
include o"servation or ins!ection of the followin).
G he entit#+s o!erations'
489 ISA 915
1. G =ocu(ents $such as "usiness !lans and strate)ies&, records, and internal control (anuals'
2. G Ae!orts !re!ared "# (ana)e(ent $such as *uarterl# (ana)e(ent re!orts and interi(
financial state(ents& and those char)ed with )overnance $such as (inutes of "oard of directors+
(eetin)s&'
3. G he entit#+s !re(ises and !lant facilities'
Infor$ation ,btained in (rior (eriods $Aef. 6ara' 5&
A14' he auditor+s !revious e,!erience with the entit# and audit !rocedures !erfor(ed in !revious
audits (a# !rovide the auditor with infor(ation a"out such (atters as.
1. G 6ast (isstate(ents and whether the# were corrected on a ti(el# "asis'
2. G he nature of the entit# and its environ(ent, and the entit#+s internal control $includin)
deficiencies in internal control&'
3. G Si)nificant chan)es that the entit# or its o!erations (a# have under)one since the !rior
financial !eriod, which (a# assist the auditor in )ainin) a sufficient understandin) of the entit# to
identif# and assess risks of (aterial (isstate(ent'
A19' he auditor is re*uired to deter(ine whether infor(ation o"tained in !rior !eriods re(ains
relevant, if the auditor intends to use that infor(ation for the !ur!oses of the current audit' his is
"ecause chan)es in the control environ(ent, for e,a(!le, (a# affect the relevance of infor(ation
o"tained in the !rior #ear' o deter(ine whether chan)es have occurred that (a# affect the
relevance of such infor(ation, the auditor (a# (ake in*uiries and !erfor( other a!!ro!riate audit
!rocedures, such as walk-throu)hs of relevant s#ste(s'
?iscussion a$ong the /ngage$ent 1ea$ $Aef. 6ara' 10&
A14' he discussion a(on) the en)a)e(ent tea( a"out the susce!ti"ilit# of the entit#+s financial
state(ents to (aterial (isstate(ent.
% G 6rovides an o!!ortunit# for (ore e,!erienced en)a)e(ent tea( (e("ers, includin) the
en)a)e(ent !artner, to share their insi)hts "ased on their knowled)e of the entit#'
% G Allows the en)a)e(ent tea( (e("ers to e,chan)e infor(ation a"out the "usiness risks
to which the entit# is su";ect and a"out how and where the financial state(ents (i)ht "e
susce!ti"le to (aterial (isstate(ent due to fraud or error'
% G Assists the en)a)e(ent tea( (e("ers to )ain a "etter understandin) of the !otential for
(aterial (isstate(ent of the financial state(ents in the s!ecific areas assi)ned to the(, and to
understand how the results of the
ISA 915 484
audit !rocedures that the# !erfor( (a# affect other as!ects of the audit includin) the
decisions a"out the nature, ti(in), and e,tent of further audit !rocedures'
G 6rovides a "asis u!on which en)a)e(ent tea( (e("ers co((unicate and share new
infor(ation o"tained throu)hout the audit that (a# affect the assess(ent of risks of
(aterial (isstate(ent or the audit !rocedures !erfor(ed to address these risks'
ISA 440 !rovides further re*uire(ents and )uidance in relation to the discussion a(on) the
en)a)e(ent tea( a"out the risks of fraud'
5
A15' It is not alwa#s necessar# or !ractical for the discussion to include all (e("ers in a sin)le
discussion $as, for e,a(!le, in a (ulti-location audit&, nor is it necessar# for all of the (e("ers of
the en)a)e(ent tea( to "e infor(ed of all of the decisions reached in the discussion' he
en)a)e(ent !artner (a# discuss (atters with ke# (e("ers of the en)a)e(ent tea( includin), if
considered a!!ro!riate, s!ecialists and those res!onsi"le for the audits of co(!onents, while
dele)atin) discussion with others, takin) account of the e,tent of co((unication considered
necessar# throu)hout the en)a)e(ent tea(' A co((unications !lan, a)reed "# the en)a)e(ent
!artner, (a# "e useful'
A1B' Ean# s(all audits are carried out entirel# "# the en)a)e(ent !artner $who (a# "e a sole
!ractitioner&' In such situations, it is the en)a)e(ent !artner who, havin) !ersonall# conducted the
!lannin) of the audit, would "e res!onsi"le for considerin) the susce!ti"ilit# of the entit#+s
financial state(ents to (aterial (isstate(ent due to fraud or error'
The Re2-i'e# U"#e't!"#i"( of the E"tit/ !"# It E"9i'o".e"t4 I"c0-#i"( the E"tit/> I"te'"!0
Co"t'o0
The E"tit/ !"# It E"9i'o".e"t
Industry& +egulatory and ,ther /4ternal Factors $Aef. 6ara' 11$a&&
Industr# Factors
A17' Aelevant industr# factors include industr# conditions such as the co(!etitive environ(ent,
su!!lier and custo(er relationshi!s, and technolo)ical develo!(ents' 0,a(!les of (atters the
auditor (a# consider include.
% G he (arket and co(!etition, includin) de(and, ca!acit#, and !rice co(!etition'
% G %#clical or seasonal activit#'
485 ISA 915
1. G 6roduct technolo)# relatin) to the entit#+s !roducts'
2. G 0ner)# su!!l# and cost'
A18' he industr# in which the entit# o!erates (a# )ive rise to s!ecific risks of (aterial (isstate(ent
arisin) fro( the nature of the "usiness or the de)ree of re)ulation' For e,a(!le, lon)-ter(
contracts (a# involve si)nificant esti(ates of revenues and e,!enses that )ive rise to risks of
(aterial (isstate(ent' In such cases, it is i(!ortant that the en)a)e(ent tea( include (e("ers
with sufficient relevant knowled)e and e,!erience'
B
Ae)ulator# Factors
A15' Aelevant re)ulator# factors include the re)ulator# environ(ent' he re)ulator# environ(ent
enco(!asses, a(on) other (atters, the a!!lica"le financial re!ortin) fra(ework and the le)al and
!olitical environ(ent' 0,a(!les of (atters the auditor (a# consider include.
% G Accountin) !rinci!les and industr# s!ecific !ractices'
% G Ae)ulator# fra(ework for a re)ulated industr#'
% G Me)islation and re)ulation that si)nificantl# affect the entit#+s o!erations, includin) direct
su!ervisor# activities'
% G a,ation $cor!orate and other&'
% G <overn(ent !olicies currentl# affectin) the conduct of the entit#+s "usiness, such as
(onetar#, includin) forei)n e,chan)e controls, fiscal, financial incentives $for e,a(!le,
)overn(ent aid !ro)ra(s&, and tariffs or trade restrictions !olicies'
% G 0nviron(ental re*uire(ents affectin) the industr# and the entit#+s "usiness'
A40' ISA 450 includes so(e s!ecific re*uire(ents related to the le)al and re)ulator# fra(ework
a!!lica"le to the entit# and the industr# or sector in which the entit# o!erates'
7
A41' For the audits of !u"lic sector entities, law, re)ulation or other authorit# (a# affect the entit#+s
o!erations' Such ele(ents are essential to consider when o"tainin) an understandin) of the entit#
and its environ(ent'
B
ISA 440, C:ualit# %ontrol for an Audit of Financial State(ents,D !ara)ra!h 14'
7
ISA 450, C%onsideration of Maws and Ae)ulations in an Audit of Financial State(ents,D !ara)ra!h 14'
ISA 915 48B
7ther 0,ternal Factors
A44' 0,a(!les of other e,ternal factors affectin) the entit# that the auditor (a# consider include the
)eneral econo(ic conditions, interest rates and availa"ilit# of financin), and inflation or currenc#
revaluation'
Aature of the /ntity $Aef. 6ara' 11$"&&
A49' An understandin) of the nature of an entit# ena"les the auditor to understand such (atters as.
1. G Lhether the entit# has a co(!le, structure, for e,a(!le with su"sidiaries or other
co(!onents in (ulti!le locations' %o(!le, structures often introduce issues that (a# )ive rise to
risks of (aterial (isstate(ent' Such issues (a# include whether )oodwill, ;oint ventures,
invest(ents, or s!ecial-!ur!ose entities are accounted for a!!ro!riatel#'
2. G he ownershi!, and relations "etween owners and other !eo!le or entities' his
understandin) assists in deter(inin) whether related !art# transactions have "een identified and
accounted for a!!ro!riatel#' ISA 550
8
esta"lishes re*uire(ents and !rovides )uidance on the
auditor+s considerations relevant to related !arties'
A44' 0,a(!les of (atters that the auditor (a# consider when o"tainin) an understandin) of the nature
of the entit# include.
G 1usiness o!erations such as.
1. Nature of revenue sources, !roducts or services, and (arkets, includin) involve(ent in
electronic co((erce such as Internet sales and (arketin) activities'
2. %onduct of o!erations $for e,a(!le, sta)es and (ethods of !roduction, or activities
e,!osed to environ(ental risks&'
3. Alliances, ;oint ventures, and outsourcin) activities'
4. <eo)ra!hic dis!ersion and industr# se)(entation'
5. Mocation of !roduction facilities, warehouses, and offices, and location and *uantities of
inventories'
6. Se# custo(ers and i(!ortant su!!liers of )oods and services, e(!lo#(ent arran)e(ents
$includin) the e,istence of union contracts, !ension and other !ost e(!lo#(ent "enefits, stock
o!tion or incentive "onus arran)e(ents, and )overn(ent re)ulation related to e(!lo#(ent
(atters&'
487 ISA 915
% Aesearch and develo!(ent activities and e,!enditures'
% ransactions with related !arties'
1. G Invest(ents and invest(ent activities such as.
1. 6lanned or recentl# e,ecuted ac*uisitions or divestitures'
2. Invest(ents and dis!ositions of securities and loans'
3. %a!ital invest(ent activities'
4. Invest(ents in non-consolidated entities, includin) !artnershi!s, ;oint ventures
and s!ecial-!ur!ose entities'
2. G Financin) and financin) activities such as.
1. Ea;or su"sidiaries and associated entities, includin) consolidated and non-
consolidated structures'
2. =e"t structure and related ter(s, includin) off-"alance-sheet financin)
arran)e(ents and leasin) arran)e(ents'
3. 1eneficial owners $local, forei)n, "usiness re!utation and e,!erience& and
related !arties'
4. Use of derivative financial instru(ents'
3. G Financial re!ortin) such as.
1. Accountin) !rinci!les and industr# s!ecific !ractices, includin) industr#-
s!ecific si)nificant cate)ories $for e,a(!le, loans and invest(ents for "anks, or research
and develo!(ent for !har(aceuticals&'
2. Aevenue reco)nition !ractices'
3. Accountin) for fair values'
4. Forei)n currenc# assets, lia"ilities and transactions'
5. Accountin) for unusual or co(!le, transactions includin) those in controversial
or e(er)in) areas $for e,a(!le, accountin) for stock-"ased co(!ensation&'
A45' Si)nificant chan)es in the entit# fro( !rior !eriods (a# )ive rise to, or chan)e, risks of (aterial
(isstate(ent'
Nature of S!ecial-6ur!ose 0ntities
A4B' A s!ecial-!ur!ose entit# $so(eti(es referred to as a s!ecial-!ur!ose vehicle& is an entit# that is
)enerall# esta"lished for a narrow and well-defined !ur!ose, such as to effect a lease or a
securitiJation of financial assets, or to carr# out research and develo!(ent activities' It (a# take
the for( of a cor!oration, trust, !artnershi! or unincor!orated entit#' he entit# on "ehalf of which
the s!ecial-
ISA 915 488
!ur!ose entit# has "een created (a# often transfer assets to the latter $for e,a(!le, as !art of a
dereco)nition transaction involvin) financial assets&, o"tain the ri)ht to use the latter+s assets, or
!erfor( services for the latter, while other !arties (a# !rovide the fundin) to the latter' As ISA
550 indicates, in so(e circu(stances, a s!ecial-!ur!ose entit# (a# "e a related !art# of the entit#'
5
A47' Financial re!ortin) fra(eworks often s!ecif# detailed conditions that are dee(ed to a(ount to
control, or circu(stances under which the s!ecial-!ur!ose entit# should "e considered for
consolidation' he inter!retation of the re*uire(ents of such fra(eworks often de(ands a detailed
knowled)e of the relevant a)ree(ents involvin) the s!ecial-!ur!ose entit#'
1he /ntity8s )election and Application of Accounting (olicies $Aef. 6ara' 11$c&&
A48' An understandin) of the entit#+s selection and a!!lication of accountin) !olicies (a# enco(!ass
such (atters as.
1. G he (ethods the entit# uses to account for si)nificant and unusual transactions'
2. G he effect of si)nificant accountin) !olicies in controversial or e(er)in) areas for which
there is a lack of authoritative )uidance or consensus'
3. G %han)es in the entit#+s accountin) !olicies'
4. G Financial re!ortin) standards and laws and re)ulations that are new to the entit# and
when and how the entit# will ado!t such re*uire(ents'
,b9ecti!es and )trategies and +elated =usiness +is.s $Aef' 6ara' 11$d&&
A45' he entit# conducts its "usiness in the conte,t of industr#, re)ulator# and other internal and
e,ternal factors' o res!ond to these factors, the entit#+s (ana)e(ent or those char)ed with
)overnance define o";ectives, which are the overall !lans for the entit#' Strate)ies are the
a!!roaches "# which (ana)e(ent intends to achieve its o";ectives' he entit#+s o";ectives and
strate)ies (a# chan)e over ti(e'
A90' 1usiness risk is "roader than the risk of (aterial (isstate(ent of the financial state(ents, thou)h
it includes the latter' 1usiness risk (a# arise fro( chan)e or co(!le,it#' A failure to reco)niJe the
need for chan)e (a# also )ive rise to "usiness risk' 1usiness risk (a# arise, for e,a(!le, fro(.
% G he develo!(ent of new !roducts or services that (a# fail?
% G A (arket which, even if successfull# develo!ed, is inade*uate to su!!ort a !roduct or
service? or
485 ISA 915
G Flaws in a !roduct or service that (a# result in lia"ilities and re!utational risk'
A91' An understandin) of the "usiness risks facin) the entit# increases the likelihood of identif#in)
risks of (aterial (isstate(ent, since (ost "usiness risks will eventuall# have financial
conse*uences and, therefore, an effect on the financial state(ents' @owever, the auditor does not
have a res!onsi"ilit# to identif# or assess all "usiness risks "ecause not all "usiness risks )ive rise
to risks of (aterial (isstate(ent'
A94' 0,a(!les of (atters that the auditor (a# consider when o"tainin) an understandin) of the entit#+s
o";ectives, strate)ies and related "usiness risks that (a# result in a risk of (aterial (isstate(ent
of the financial state(ents include.
1. G Industr# develo!(ents $a !otential related "usiness risk (i)ht "e, for e,a(!le, that the
entit# does not have the !ersonnel or e,!ertise to deal with the chan)es in the industr#&'
2. G New !roducts and services $a !otential related "usiness risk (i)ht "e, for e,a(!le, that
there is increased !roduct lia"ilit#&'
3. G 0,!ansion of the "usiness $a !otential related "usiness risk (i)ht "e, for e,a(!le, that
the de(and has not "een accuratel# esti(ated&'
4. G New accountin) re*uire(ents $a !otential related "usiness risk (i)ht "e, for e,a(!le,
inco(!lete or i(!ro!er i(!le(entation, or increased costs&'
5. G Ae)ulator# re*uire(ents $a !otential related "usiness risk (i)ht "e, for e,a(!le, that
there is increased le)al e,!osure&'
6. G %urrent and !ros!ective financin) re*uire(ents $a !otential related "usiness risk (i)ht
"e, for e,a(!le, the loss of financin) due to the entit#+s ina"ilit# to (eet re*uire(ents&'
7. G Use of I $a !otential related "usiness risk (i)ht "e, for e,a(!le, that s#ste(s and
!rocesses are inco(!ati"le&'
8. G he effects of i(!le(entin) a strate)#, !articularl# an# effects that will lead to new
accountin) re*uire(ents $a !otential related "usiness risk (i)ht "e, for e,a(!le, inco(!lete or
i(!ro!er i(!le(entation&'
A99' A "usiness risk (a# have an i((ediate conse*uence for the risk of (aterial (isstate(ent for
classes of transactions, account "alances, and disclosures at the assertion level or the financial
state(ent level' For e,a(!le, the "usiness risk arisin) fro( a contractin) custo(er "ase (a#
increase the risk of (aterial (isstate(ent associated with the valuation of receiva"les' @owever,
the sa(e risk, !articularl# in co("ination with a contractin) econo(#, (a# also have a lon)er-
ter( conse*uence, which the auditor considers when assessin) the
ISA 915 450
a!!ro!riateness of the )oin) concern assu(!tion' Lhether a "usiness risk (a# result in a risk of
(aterial (isstate(ent is, therefore, considered in li)ht of the entit#+s circu(stances' 0,a(!les of
conditions and events that (a# indicate risks of (aterial (isstate(ent are indicated in A!!endi, 4'
A94' Usuall#, (ana)e(ent identifies "usiness risks and develo!s a!!roaches to address the(' Such a
risk assess(ent !rocess is !art of internal control and is discussed in !ara)ra!h 15 and !ara)ra!hs
A75-A80'
A95' For the audits of !u"lic sector entities, C(ana)e(ent o";ectivesD (a# "e influenced "# concerns
re)ardin) !u"lic accounta"ilit# and (a# include o";ectives which have their source in law,
re)ulation or other authorit#'
<easure$ent and +e!ie# of the /ntity8s Financial (erfor$ance $Aef. 6ara'11$e&&
A9B' Eana)e(ent and others will (easure and review those thin)s the# re)ard as i(!ortant'
6erfor(ance (easures, whether e,ternal or internal, create !ressures on the entit#' hese
!ressures, in turn, (a# (otivate (ana)e(ent to take action to i(!rove the "usiness !erfor(ance
or to (isstate the financial state(ents' Accordin)l#, an understandin) of the entit#+s !erfor(ance
(easures assists the auditor in considerin) whether !ressures to achieve !erfor(ance tar)ets (a#
result in (ana)e(ent actions that increase the risks of (aterial (isstate(ent, includin) those due
to fraud' See ISA 440 for re*uire(ents and )uidance in relation to the risks of fraud'
A97' he (easure(ent and review of financial !erfor(ance is not the sa(e as the (onitorin) of
controls $discussed as a co(!onent of internal control in !ara)ra!hs A58-A104&, thou)h their
!ur!oses (a# overla!.
1. G he (easure(ent and review of !erfor(ance is directed at whether "usiness !erfor(ance
is (eetin) the o";ectives set "# (ana)e(ent $or third !arties&'
2. G Eonitorin) of controls is s!ecificall# concerned with the effective o!eration of internal
control'
In so(e cases, however, !erfor(ance indicators also !rovide infor(ation that ena"les
(ana)e(ent to identif# deficiencies in internal control'
A98' 0,a(!les of internall#-)enerated infor(ation used "# (ana)e(ent for (easurin) and reviewin)
financial !erfor(ance, and which the auditor (a# consider, include.
% G Se# !erfor(ance indicators $financial and non-financial& and ke# ratios, trends and
o!eratin) statistics'
% G 6eriod-on-!eriod financial !erfor(ance anal#ses'
451 ISA 915
1. G 1ud)ets, forecasts, variance anal#ses, se)(ent infor(ation and divisional, de!art(ental
or other level !erfor(ance re!orts'
2. G 0(!lo#ee !erfor(ance (easures and incentive co(!ensation !olicies'
3. G %o(!arisons of an entit#+s !erfor(ance with that of co(!etitors'
A95' 0,ternal !arties (a# also (easure and review the entit#+s financial !erfor(ance' For e,a(!le,
e,ternal infor(ation such as anal#sts+ re!orts and credit ratin) a)enc# re!orts (a# re!resent
useful infor(ation for the auditor' Such re!orts can often "e o"tained fro( the entit# "ein)
audited'
A40' Internal (easures (a# hi)hli)ht une,!ected results or trends re*uirin) (ana)e(ent to deter(ine
their cause and take corrective action $includin), in so(e cases, the detection and correction of
(isstate(ents on a ti(el# "asis&' 6erfor(ance (easures (a# also indicate to the auditor that risks
of (isstate(ent of related financial state(ent infor(ation do e,ist' For e,a(!le, !erfor(ance
(easures (a# indicate that the entit# has unusuall# ra!id )rowth or !rofita"ilit# when co(!ared
to that of other entities in the sa(e industr#' Such infor(ation, !articularl# if co("ined with other
factors such as !erfor(ance-"ased "onus or incentive re(uneration, (a# indicate the !otential
risk of (ana)e(ent "ias in the !re!aration of the financial state(ents'
A41' S(aller entities often do not have !rocesses to (easure and review financial !erfor(ance' In*uir#
of (ana)e(ent (a# reveal that it relies on certain ke# indicators for evaluatin) financial
!erfor(ance and takin) a!!ro!riate action' If such in*uir# indicates an a"sence of !erfor(ance
(easure(ent or review, there (a# "e an increased risk of (isstate(ents not "ein) detected and
corrected'
The E"tit/> I"te'"!0 Co"t'o0 $Aef. 6ara' 14&
A44' An understandin) of internal control assists the auditor in identif#in) t#!es of !otential
(isstate(ents and factors that affect the risks of (aterial (isstate(ent, and in desi)nin) the
nature, ti(in), and e,tent of further audit !rocedures'
A49' he followin) a!!lication (aterial on internal control is !resented in four sections, as follows.
% G <eneral Nature and %haracteristics of Internal %ontrol'
% G %ontrols Aelevant to the Audit'
% G Nature and 0,tent of the Understandin) of Aelevant %ontrols'
% G %o(!onents of Internal %ontrol'
ISA 915 454
2eneral Aature and Characteristics of Internal Control
6ur!ose of Internal %ontrol
A44' Internal control is desi)ned, i(!le(ented and (aintained to address identified "usiness risks that
threaten the achieve(ent of an# of the entit#+s o";ectives that concern.
1. G he relia"ilit# of the entit#+s financial re!ortin)?
2. G he effectiveness and efficienc# of its o!erations? and
3. G Its co(!liance with a!!lica"le laws and re)ulations'
he wa# in which internal control is desi)ned, i(!le(ented and (aintained varies with an entit#+s
siJe and co(!le,it#'
A45' S(aller entities (a# use less structured (eans and si(!ler !rocesses and !rocedures to achieve
their o";ectives'
Mi(itations of Internal %ontrol
A4B' Internal control, no (atter how effective, can !rovide an entit# with onl# reasona"le assurance
a"out achievin) the entit#+s financial re!ortin) o";ectives' he likelihood of their achieve(ent is
affected "# the inherent li(itations of internal control' hese include the realities that hu(an
;ud)(ent in decision-(akin) can "e fault# and that "reakdowns in internal control can occur
"ecause of hu(an error' For e,a(!le, there (a# "e an error in the desi)n of, or in the chan)e to, a
control' 0*uall#, the o!eration of a control (a# not "e effective, such as where infor(ation
!roduced for the !ur!oses of internal control $for e,a(!le, an e,ce!tion re!ort& is not effectivel#
used "ecause the individual res!onsi"le for reviewin) the infor(ation does not understand its
!ur!ose or fails to take a!!ro!riate action'
A47' Additionall#, controls can "e circu(vented "# the collusion of two or (ore !eo!le or
ina!!ro!riate (ana)e(ent override of internal control' For e,a(!le, (ana)e(ent (a# enter into
side a)ree(ents with custo(ers that alter the ter(s and conditions of the entit#+s standard sales
contracts, which (a# result in i(!ro!er revenue reco)nition' Also, edit checks in a software
!ro)ra( that are desi)ned to identif# and re!ort transactions that e,ceed s!ecified credit li(its
(a# "e overridden or disa"led'
A48' Further, in desi)nin) and i(!le(entin) controls, (ana)e(ent (a# (ake ;ud)(ents on the nature
and e,tent of the controls it chooses to i(!le(ent, and the nature and e,tent of the risks it chooses
to assu(e'
459 ISA 915
A45' S(aller entities often have fewer e(!lo#ees which (a# li(it the e,tent to which se)re)ation of
duties is !ractica"le' @owever, in a s(all owner-(ana)ed entit#, the owner-(ana)er (a# "e a"le
to e,ercise (ore effective oversi)ht than in a lar)er entit#' his oversi)ht (a# co(!ensate for the
)enerall# (ore li(ited o!!ortunities for se)re)ation of duties'
A50' 7n the other hand, the owner-(ana)er (a# "e (ore a"le to override controls "ecause the s#ste(
of internal control is less structured' his is taken into account "# the auditor when identif#in) the
risks of (aterial (isstate(ent due to fraud'
=ivision of Internal %ontrol into %o(!onents
A51' he division of internal control into the followin) five co(!onents, for !ur!oses of the ISAs,
!rovides a useful fra(ework for auditors to consider how different as!ects of an entit#+s internal
control (a# affect the audit.
1$a&he control environ(ent?
2$"& he entit#+s risk assess(ent !rocess?
3$c& he infor(ation s#ste(, includin) the related "usiness !rocesses, relevant to financial
re!ortin), and co((unication?
4$d& %ontrol activities? and
5$e&Eonitorin) of controls'
he division does not necessaril# reflect how an entit# desi)ns, i(!le(ents and (aintains internal
control, or how it (a# classif# an# !articular co(!onent' Auditors (a# use different ter(inolo)#
or fra(eworks to descri"e the various as!ects of internal control, and their effect on the audit than
those used in this ISA, !rovided all the co(!onents descri"ed in this ISA are addressed'
A54' A!!lication (aterial relatin) to the five co(!onents of internal control as the# relate to a financial
state(ent audit is set out in !ara)ra!hs AB5-A104 "elow' A!!endi, 1 !rovides further e,!lanation
of these co(!onents of internal control'
%haracteristics of Eanual and Auto(ated 0le(ents of Internal %ontrol Aelevant to the Auditor+s Aisk
Assess(ent
A59' An entit#+s s#ste( of internal control contains (anual ele(ents and often contains auto(ated
ele(ents' he characteristics of (anual or auto(ated ele(ents are relevant to the auditor+s risk
assess(ent and further audit !rocedures "ased thereon'
ISA 915 454
A54' he use of (anual or auto(ated ele(ents in internal control also affects the (anner in which
transactions are initiated, recorded, !rocessed, and re!orted.
1. G %ontrols in a (anual s#ste( (a# include such !rocedures as a!!rovals and reviews of
transactions, and reconciliations and follow-u! of reconcilin) ite(s' Alternativel#, an entit# (a#
use auto(ated !rocedures to initiate, record, !rocess, and re!ort transactions, in which case
records in electronic for(at re!lace !a!er docu(ents'
2. G %ontrols in I s#ste(s consist of a co("ination of auto(ated controls $for e,a(!le,
controls e("edded in co(!uter !ro)ra(s& and (anual controls' Further, (anual controls (a# "e
inde!endent of I, (a# use infor(ation !roduced "# I, or (a# "e li(ited to (onitorin) the
effective functionin) of I and of auto(ated controls, and to handlin) e,ce!tions' Lhen I is used
to initiate, record, !rocess or re!ort transactions, or other financial data for inclusion in financial
state(ents, the s#ste(s and !ro)ra(s (a# include controls related to the corres!ondin) assertions
for (aterial accounts or (a# "e critical to the effective functionin) of (anual controls that de!end
on I'
An entit#+s (i, of (anual and auto(ated ele(ents in internal control varies with the nature and
co(!le,it# of the entit#+s use of I'
A55' <enerall#, I "enefits an entit#+s internal control "# ena"lin) an entit# to.
1. G %onsistentl# a!!l# !redefined "usiness rules and !erfor( co(!le, calculations in
!rocessin) lar)e volu(es of transactions or data?
2. G 0nhance the ti(eliness, availa"ilit#, and accurac# of infor(ation?
3. G Facilitate the additional anal#sis of infor(ation?
4. G 0nhance the a"ilit# to (onitor the !erfor(ance of the entit#+s activities and its !olicies
and !rocedures?
5. G Aeduce the risk that controls will "e circu(vented? and
6. G 0nhance the a"ilit# to achieve effective se)re)ation of duties "# i(!le(entin) securit#
controls in a!!lications, data"ases, and o!eratin) s#ste(s'
A5B' I also !oses s!ecific risks to an entit#+s internal control, includin), for e,a(!le.
1. G Aeliance on s#ste(s or !ro)ra(s that are inaccuratel# !rocessin) data, !rocessin)
inaccurate data, or "oth'
2. G UnauthoriJed access to data that (a# result in destruction of data or i(!ro!er chan)es to
data, includin) the recordin) of unauthoriJed or non-e,istent transactions, or inaccurate recordin)
of transactions'
455 ISA 915
6articular risks (a# arise where (ulti!le users access a co((on data"ase'
1. G he !ossi"ilit# of I !ersonnel )ainin) access !rivile)es "e#ond those necessar# to
!erfor( their assi)ned duties there"# "reakin) down se)re)ation of duties'
2. G UnauthoriJed chan)es to data in (aster files'
3. G UnauthoriJed chan)es to s#ste(s or !ro)ra(s'
4. G Failure to (ake necessar# chan)es to s#ste(s or !ro)ra(s'
5. G Ina!!ro!riate (anual intervention'
6. G 6otential loss of data or ina"ilit# to access data as re*uired'
A57' Eanual ele(ents in internal control (a# "e (ore suita"le where ;ud)(ent and discretion are
re*uired such as for the followin) circu(stances.
% G Mar)e, unusual or non-recurrin) transactions'
% G %ircu(stances where errors are difficult to define, antici!ate or !redict'
% G In chan)in) circu(stances that re*uire a control res!onse outside the sco!e of an e,istin)
auto(ated control'
% G In (onitorin) the effectiveness of auto(ated controls'
A58' Eanual ele(ents in internal control (a# "e less relia"le than auto(ated ele(ents "ecause the#
can "e (ore easil# "#!assed, i)nored, or overridden and the# are also (ore !rone to si(!le errors
and (istakes' %onsistenc# of a!!lication of a (anual control ele(ent cannot therefore "e
assu(ed' Eanual control ele(ents (a# "e less suita"le for the followin) circu(stances.
% G @i)h volu(e or recurrin) transactions, or in situations where errors that can "e
antici!ated or !redicted can "e !revented, or detected and corrected, "# control !ara(eters that are
auto(ated'
% G %ontrol activities where the s!ecific wa#s to !erfor( the control can "e ade*uatel#
desi)ned and auto(ated'
A55' he e,tent and nature of the risks to internal control var# de!endin) on the nature and
characteristics of the entit#+s infor(ation s#ste(' he entit# res!onds to the risks arisin) fro( the
use of I or fro( use of (anual ele(ents in internal control "# esta"lishin) effective controls in
li)ht of the characteristics of the entit#+s infor(ation s#ste('
Controls +ele!ant to the Audit
AB0' here is a direct relationshi! "etween an entit#+s o";ectives and the controls it i(!le(ents to
!rovide reasona"le assurance a"out their achieve(ent' he
ISA 915 45B
entit#+s o";ectives, and therefore controls, relate to financial re!ortin), o!erations and co(!liance?
however, not all of these o";ectives and controls are relevant to the auditor+s risk assess(ent'
AB1' Factors relevant to the auditor+s ;ud)(ent a"out whether a control, individuall# or in co("ination
with others, is relevant to the audit (a# include such (atters as the followin).
% G Eaterialit#'
% G he si)nificance of the related risk'
% G he siJe of the entit#'
% G he nature of the entit#+s "usiness, includin) its or)aniJation and ownershi!
characteristics'
% G he diversit# and co(!le,it# of the entit#+s o!erations'
% G A!!lica"le le)al and re)ulator# re*uire(ents'
% G he circu(stances and the a!!lica"le co(!onent of internal control'
% G he nature and co(!le,it# of the s#ste(s that are !art of the entit#+s internal control,
includin) the use of service or)aniJations'
% G Lhether, and how, a s!ecific control, individuall# or in co("ination with others,
!revents, or detects and corrects, (aterial (isstate(ent'
AB4' %ontrols over the co(!leteness and accurac# of infor(ation !roduced "# the entit# (a# "e relevant
to the audit if the auditor intends to (ake use of the infor(ation in desi)nin) and !erfor(in) further
!rocedures' %ontrols relatin) to o!erations and co(!liance o";ectives (a# also "e relevant to an
audit if the# relate to data the auditor evaluates or uses in a!!l#in) audit !rocedures'
AB9' Internal control over safe)uardin) of assets a)ainst unauthoriJed ac*uisition, use, or dis!osition (a#
include controls relatin) to "oth financial re!ortin) and o!erations o";ectives' he auditor+s
consideration of such controls is )enerall# li(ited to those relevant to the relia"ilit# of financial
re!ortin)'
AB4' An entit# )enerall# has controls relatin) to o";ectives that are not relevant to an audit and therefore
need not "e considered' For e,a(!le, an entit# (a# rel# on a so!histicated s#ste( of auto(ated
controls to !rovide efficient and effective o!erations $such as an airline+s s#ste( of auto(ated
controls to (aintain fli)ht schedules&, "ut these controls ordinaril# would not "e relevant to the
audit' Further, althou)h internal control a!!lies to the entire entit# or to an# of its o!eratin) units or
"usiness !rocesses, an understandin) of internal control relatin) to each of the entit#+s o!eratin)
units and "usiness !rocesses (a# not "e relevant to the audit'
457 ISA 915
AB5' 6u"lic sector auditors often have additional res!onsi"ilities with res!ect to internal control, for
e,a(!le to re!ort on co(!liance with an esta"lished code of !ractice' 6u"lic sector auditors can
also have res!onsi"ilities to re!ort on co(!liance with law, re)ulation or other authorit#' As a
result, their review of internal control (a# "e "roader and (ore detailed'
Aature and /4tent of the "nderstanding of +ele!ant Controls $Aef. 6ara' 19&
ABB' 0valuatin) the desi)n of a control involves considerin) whether the control& individuall# or in
co("ination with other controls, is ca!a"le of effectivel# !reventin), or detectin) and correctin),
(aterial (isstate(ents' I(!le(entation of a control (eans that the control e,ists and that the
entit# is usin) it' here is little !oint in assessin) the i(!le(entation of a control that is not
effective, and so the desi)n of a control is considered first' An i(!ro!erl# desi)ned control (a#
re!resent a si)nificant deficienc# in internal control'
AB7' Aisk assess(ent !rocedures to o"tain audit evidence a"out the desi)n and i(!le(entation of
relevant controls (a# include.
1. G In*uirin) of entit# !ersonnel'
2. G 7"servin) the a!!lication of s!ecific controls'
3. G Ins!ectin) docu(ents and re!orts'
4. G racin) transactions throu)h the infor(ation s#ste( relevant to financial re!ortin)'
In*uir# alone, however, is not sufficient for such !ur!oses'
AB8' 7"tainin) an understandin) of an entit#+s controls is not sufficient to test their o!eratin)
effectiveness, unless there is so(e auto(ation that !rovides for the consistent o!eration of the
controls' For e,a(!le, o"tainin) audit evidence a"out the i(!le(entation of a (anual control at a
!oint in ti(e does not !rovide audit evidence a"out the o!eratin) effectiveness of the control at
other ti(es durin) the !eriod under audit' @owever, "ecause of the inherent consistenc# of I
!rocessin) $see !ara)ra!h A55&, !erfor(in) audit !rocedures to deter(ine whether an auto(ated
control has "een i(!le(ented (a# serve as a test of that control+s o!eratin) effectiveness,
de!endin) on the auditor+s assess(ent and testin) of controls such as those over !ro)ra( chan)es'
ests of the o!eratin) effectiveness of controls are further descri"ed in ISA 990'
10
ISA 915 458
Co$ponents of Internal Control0Control /n!iron$ent $Aef. 6ara' 14&
AB5' he control environ(ent includes the )overnance and (ana)e(ent functions and the attitudes,
awareness, and actions of those char)ed with )overnance and (ana)e(ent concernin) the entit#+s
internal control and its i(!ortance in the entit#' he control environ(ent sets the tone of an
or)aniJation, influencin) the control consciousness of its !eo!le'
A70' 0le(ents of the control environ(ent that (a# "e relevant when o"tainin) an understandin) of the
control environ(ent include the followin).
1$a&Co$$unication and enforce$ent of integrity and ethical !alues K hese are essential ele(ents that
influence the effectiveness of the desi)n, ad(inistration and (onitorin) of controls'
2$"& Co$$it$ent to co$petence K Eatters such as (ana)e(ent+s consideration of the co(!etence
levels for !articular ;o"s and how those levels translate into re*uisite skills and knowled)e'
1$c&(articipation by those charged #ith go!ernance I Attri"utes of those char)ed with
)overnance such as.
% G heir inde!endence fro( (ana)e(ent'
% G heir e,!erience and stature'
% G he e,tent of their involve(ent and the infor(ation the# receive, and the
scrutin# of activities'
% G he a!!ro!riateness of their actions, includin) the de)ree to which difficult
*uestions are raised and !ursued with (ana)e(ent, and their interaction with internal and
e,ternal auditors'
2$d& <anage$ent8s philosophy and operating style K %haracteristics such as (ana)e(ent+s.
% G A!!roach to takin) and (ana)in) "usiness risks'
% G Attitudes and actions toward financial re!ortin)'
% G Attitudes toward infor(ation !rocessin) and accountin) functions and
!ersonnel'
3$e& ,rganiBational structure I he fra(ework within which an entit#+s activities for achievin) its
o";ectives are !lanned, e,ecuted, controlled, and reviewed'
4$f& Assign$ent of authority and responsibility I Eatters such as how authorit# and res!onsi"ilit# for
o!eratin) activities are assi)ned and how re!ortin) relationshi!s and authoriJation hierarchies are
esta"lished'
455 ISA 915
$)& -u$an resource policies and practices I 6olicies and !ractices that relate to, for e,a(!le,
recruit(ent, orientation, trainin), evaluation, counsellin), !ro(otion, co(!ensation, and
re(edial actions'
Audit 0vidence for 0le(ents of the %ontrol 0nviron(ent
A71' Aelevant audit evidence (a# "e o"tained throu)h a co("ination of in*uiries and other risk
assess(ent !rocedures such as corro"oratin) in*uiries throu)h o"servation or ins!ection of
docu(ents' For e,a(!le, throu)h in*uiries of (ana)e(ent and e(!lo#ees, the auditor (a# o"tain
an understandin) of how (ana)e(ent co((unicates to e(!lo#ees its views on "usiness !ractices
and ethical "ehavior' he auditor (a# then deter(ine whether relevant controls have "een
i(!le(ented "# considerin), for e,a(!le, whether (ana)e(ent has a written code of conduct and
whether it acts in a (anner that su!!orts the code'
0ffect of the %ontrol 0nviron(ent on the Assess(ent of the Aisks of Eaterial Eisstate(ent
A74' So(e ele(ents of an entit#+s control environ(ent have a !ervasive effect on assessin) the risks of
(aterial (isstate(ent' For e,a(!le, an entit#+s control consciousness is influenced si)nificantl#
"# those char)ed with )overnance, "ecause one of their roles is to counter"alance !ressures on
(ana)e(ent in relation to financial re!ortin) that (a# arise fro( (arket de(ands or
re(uneration sche(es' he effectiveness of the desi)n of the control environ(ent in relation to
!artici!ation "# those char)ed with )overnance is therefore influenced "# such (atters as.
1. G heir inde!endence fro( (ana)e(ent and their a"ilit# to evaluate the actions of
(ana)e(ent'
2. G Lhether the# understand the entit#+s "usiness transactions'
3. G he e,tent to which the# evaluate whether the financial state(ents are !re!ared in
accordance with the a!!lica"le financial re!ortin) fra(ework'
A79' An active and inde!endent "oard of directors (a# influence the !hiloso!h# and o!eratin) st#le of
senior (ana)e(ent' @owever, other ele(ents (a# "e (ore li(ited in their effect' For e,a(!le,
althou)h hu(an resource !olicies and !ractices directed toward hirin) co(!etent financial,
accountin), and I !ersonnel (a# reduce the risk of errors in !rocessin) financial infor(ation,
the# (a# not (iti)ate a stron) "ias "# to! (ana)e(ent to overstate earnin)s'
A74' he e,istence of a satisfactor# control environ(ent can "e a !ositive factor when the auditor
assesses the risks of (aterial (isstate(ent' @owever, althou)h it (a# hel! reduce the risk of
fraud, a satisfactor# control environ(ent is not an a"solute deterrent to fraud' %onversel#,
deficiencies in
ISA 915 900
the control environ(ent (a# under(ine the effectiveness of controls, in !articular in relation to
fraud' For e,a(!le, (ana)e(ent+s failure to co((it sufficient resources to address I securit#
risks (a# adversel# affect internal control "# allowin) i(!ro!er chan)es to "e (ade to co(!uter
!ro)ra(s or to data, or unauthoriJed transactions to "e !rocessed' As e,!lained in ISA 990, the
control environ(ent also influences the nature, ti(in), and e,tent of the auditor+s further
!rocedures'
11
A75' he control environ(ent in itself does not !revent, or detect and correct, a (aterial (isstate(ent'
It (a#, however, influence the auditor+s evaluation of the effectiveness of other controls $for
e,a(!le, the (onitorin) of controls and the o!eration of s!ecific control activities& and there"#,
the auditor+s assess(ent of the risks of (aterial (isstate(ent'
A7B' he control environ(ent within s(all entities is likel# to differ fro( lar)er entities' For e,a(!le,
those char)ed with )overnance in s(all entities (a# not include an inde!endent or outside
(e("er, and the role of )overnance (a# "e undertaken directl# "# the owner-(ana)er where
there are no other owners' he nature of the control environ(ent (a# also influence the
si)nificance of other controls, or their a"sence' For e,a(!le, the active involve(ent of an owner-
(ana)er (a# (iti)ate certain of the risks arisin) fro( a lack of se)re)ation of duties in a s(all
"usiness? it (a#, however, increase other risks, for e,a(!le, the risk of override of controls'
A77' In addition, audit evidence for ele(ents of the control environ(ent in s(aller entities (a# not "e
availa"le in docu(entar# for(, in !articular where co((unication "etween (ana)e(ent and
other !ersonnel (a# "e infor(al, #et effective' For e,a(!le, s(all entities (i)ht not have a
written code of conduct "ut, instead, develo! a culture that e(!hasiJes the i(!ortance of inte)rit#
and ethical "ehavior throu)h oral co((unication and "# (ana)e(ent e,a(!le'
A78' %onse*uentl#, the attitudes, awareness and actions of (ana)e(ent or the owner-(ana)er are of
!articular i(!ortance to the auditor+s understandin) of a s(aller entit#+s control environ(ent'
Co$ponents of Internal Control01he /ntity8s +is. Assess$ent (rocess $Aef. 6ara' 15&
A75' he entit#+s risk assess(ent !rocess for(s the "asis for how (ana)e(ent deter(ines the risks to
"e (ana)ed' If that !rocess is a!!ro!riate to the circu(stances, includin) the nature, siJe and
co(!le,it# of the entit#, it assists the auditor in identif#in) risks of (aterial (isstate(ent'
Lhether the entit#+s risk assess(ent !rocess is a!!ro!riate to the circu(stances is a (atter of
;ud)(ent'
ISA 990, !ara)ra!hs A4-A9'
901 ISA 915
%onsiderations S!ecific to S(aller 0ntities $Aef. 6ara' 17&
A80' here is unlikel# to "e an esta"lished risk assess(ent !rocess in a s(all entit#' In such cases, it is
likel# that (ana)e(ent will identif# risks throu)h direct !ersonal involve(ent in the "usiness'
Irres!ective of the circu(stances, however, in*uir# a"out identified risks and how the# are
addressed "# (ana)e(ent is still necessar#'
Co$ponents of Internal Control01he Infor$ation )yste$& Including the +elated =usiness (rocesses&
+ele!ant to Financial +eporting& and Co$$unication
he Infor(ation S#ste(, Includin) Aelated 1usiness 6rocesses, Aelevant to Financial Ae!ortin) $Aef.
6ara' 18&
A81' he infor(ation s#ste( relevant to financial re!ortin) o";ectives, which includes the accountin)
s#ste(, consists of the !rocedures and records desi)ned and esta"lished to.
1. G Initiate, record, !rocess, and re!ort entit# transactions $as well as events and conditions&
and to (aintain accounta"ilit# for the related assets, lia"ilities, and e*uit#?
2. G Aesolve incorrect !rocessin) of transactions, for e,a(!le, auto(ated sus!ense files and
!rocedures followed to clear sus!ense ite(s out on a ti(el# "asis?
3. G 6rocess and account for s#ste( overrides or "#!asses to controls?
4. G ransfer infor(ation fro( transaction !rocessin) s#ste(s to the )eneral led)er?
5. G %a!ture infor(ation relevant to financial re!ortin) for events and conditions other than
transactions, such as the de!reciation and a(ortiJation of assets and chan)es in the recovera"ilit#
of accounts receiva"les? and
6. G 0nsure infor(ation re*uired to "e disclosed "# the a!!lica"le financial re!ortin)
fra(ework is accu(ulated, recorded, !rocessed, su((ariJed and a!!ro!riatel# re!orted in the
>ournal entries
A84' An entit#+s infor(ation s#ste( t#!icall# includes the use of standard ;ournal entries that are
re*uired on a recurrin) "asis to record transactions' 0,a(!les (i)ht "e ;ournal entries to record
sales, !urchases, and cash dis"urse(ents in the )eneral led)er, or to record accountin) esti(ates
that are !eriodicall# (ade "# (ana)e(ent, such as chan)es in the esti(ate of uncollecti"le
accounts receiva"le'
ISA 915 904
A89' An entit#+s financial re!ortin) !rocess also includes the use of non-standard ;ournal entries to
record non-recurrin), unusual transactions or ad;ust(ents' 0,a(!les of such entries include
consolidatin) ad;ust(ents and entries for a "usiness co("ination or dis!osal or non-recurrin)
esti(ates such as the i(!air(ent of an asset' In (anual )eneral led)er s#ste(s, non-standard
;ournal entries (a# "e identified throu)h ins!ection of led)ers, ;ournals, and su!!ortin)
docu(entation' Lhen auto(ated !rocedures are used to (aintain the )eneral led)er and !re!are
financial state(ents, such entries (a# e,ist onl# in electronic for( and (a# therefore "e (ore
easil# identified throu)h the use of co(!uter-assisted audit techni*ues'
Aelated "usiness !rocesses A84' An entit#+s "usiness !rocesses are the activities desi)ned to.
1. G =evelo!, !urchase, !roduce, sell and distri"ute an entit#+s !roducts and services?
2. G 0nsure co(!liance with laws and re)ulations? and
3. G Aecord infor(ation, includin) accountin) and financial re!ortin) infor(ation'
1usiness !rocesses result in the transactions that are recorded, !rocessed and re!orted "# the
infor(ation s#ste(' 7"tainin) an understandin) of the entit#+s "usiness !rocesses, which include
how transactions are ori)inated, assists the auditor o"tain an understandin) of the entit#+s
infor(ation s#ste( relevant to financial re!ortin) in a (anner that is a!!ro!riate to the entit#+s
circu(stances'
A85' Infor(ation s#ste(s and related "usiness !rocesses relevant to financial re!ortin) in s(all entities
are likel# to "e less so!histicated than in lar)er entities, "ut their role is ;ust as si)nificant' S(all
entities with active (ana)e(ent involve(ent (a# not need e,tensive descri!tions of accountin)
!rocedures, so!histicated accountin) records, or written !olicies' Understandin) the entit#+s
s#ste(s and !rocesses (a# therefore "e easier in an audit of s(aller entities, and (a# "e (ore
de!endent on in*uir# than on review of docu(entation' he need to o"tain an understandin),
however, re(ains i(!ortant'
%o((unication $Aef. 6ara' 15&
A8B' %o((unication "# the entit# of the financial re!ortin) roles and res!onsi"ilities and of si)nificant
(atters relatin) to financial re!ortin) involves !rovidin) an understandin) of individual roles and
res!onsi"ilities !ertainin) to internal control over financial re!ortin)' It includes such (atters as
the e,tent to which !ersonnel understand how their activities in the financial re!ortin) infor(ation
s#ste( relate to the work of others and the (eans of
909 ISA 915
re!ortin) e,ce!tions to an a!!ro!riate hi)her level within the entit#' %o((unication (a# take
such for(s as !olic# (anuals and financial re!ortin) (anuals' 7!en co((unication channels hel!
ensure that e,ce!tions are re!orted and acted on'
A87' %o((unication (a# "e less structured and easier to achieve in a s(all entit# than in a lar)er
entit# due to fewer levels of res!onsi"ilit# and (ana)e(ent+s )reater visi"ilit# and availa"ilit#'
Co$ponents of Internal Control0Control Acti!ities $Aef. 6ara' 40&
A88' %ontrol activities are the !olicies and !rocedures that hel! ensure that (ana)e(ent directives are
carried out' %ontrol activities, whether within I or (anual s#ste(s, have various o";ectives and
are a!!lied at various or)aniJational and functional levels' 0,a(!les of s!ecific control activities
include those relatin) to the followin).
1. G AuthoriJation'
2. G 6erfor(ance reviews'
3. G Infor(ation !rocessin)'
4. G 6h#sical controls'
G Se)re)ation of duties'
A85' %ontrol activities that are relevant to the audit are.
1. G hose that are re*uired to "e treated as such, "ein) control activities that relate to
si)nificant risks and those that relate to risks for which su"stantive !rocedures alone do not
!rovide sufficient a!!ro!riate audit evidence, as re*uired "# !ara)ra!hs 45 and 90, res!ectivel#?
or
2. G hose that are considered to "e relevant in the ;ud)(ent of the auditor'
A50' he auditor+s ;ud)(ent a"out whether a control activit# is relevant to the audit is influenced "#
the risk that the auditor has identified that (a# )ive rise to a (aterial (isstate(ent and whether
the auditor thinks it is likel# to "e a!!ro!riate to test the o!eratin) effectiveness of the control in
deter(inin) the e,tent of su"stantive testin)'
A51' he auditor+s e(!hasis (a# "e on identif#in) and o"tainin) an understandin) of control activities
that address the areas where the auditor considers that risks of (aterial (isstate(ent are likel# to
"e hi)her' Lhen (ulti!le control activities each achieve the sa(e o";ective, it is unnecessar# to
o"tain an understandin) of each of the control activities related to such o";ective'
ISA 915 904
A54' he auditor+s knowled)e a"out the !resence or a"sence of control activities o"tained fro( the
understandin) of the other co(!onents of internal control assists the auditor in deter(inin)
whether it is necessar# to devote additional attention to o"tainin) an understandin) of control
activities'
A59' he conce!ts underl#in) control activities in s(all entities are likel# to "e si(ilar to those in
lar)er entities, "ut the for(alit# with which the# o!erate (a# var#' Further, s(all entities (a# find
that certain t#!es of control activities are not relevant "ecause of controls a!!lied "# (ana)e(ent'
For e,a(!le, (ana)e(ent+s sole authorit# for )rantin) credit to custo(ers and a!!rovin)
si)nificant !urchases can !rovide stron) control over i(!ortant account "alances and transactions,
lessenin) or re(ovin) the need for (ore detailed control activities'
A54' %ontrol activities relevant to the audit of a s(aller entit# are likel# to relate to the (ain transaction
c#cles such as revenues, !urchases and e(!lo#(ent e,!enses'
Aisks Arisin) fro( I (Aef. 6ara' 41&
A55' he use of I affects the wa# that control activities are i(!le(ented' Fro( the auditor+s
!ers!ective, controls over I s#ste(s are effective when the# (aintain the inte)rit# of infor(ation
and the securit# of the data such s#ste(s !rocess, and include effective )eneral I-controls and
a!!lication controls'
A5B' <eneral I-controls are !olicies and !rocedures that relate to (an# a!!lications and su!!ort the
effective functionin) of a!!lication controls' he# a!!l# to (ainfra(e, (inifra(e, and end-user
environ(ents' <eneral I-controls that (aintain the inte)rit# of infor(ation and securit# of data
co((onl# include controls over the followin).
1. G =ata center and network o!erations'
2. G S#ste( software ac*uisition, chan)e and (aintenance'
3. G 6ro)ra( chan)e'
4. G Access securit#'
5. G A!!lication s#ste( ac*uisition, develo!(ent, and (aintenance'
he# are )enerall# i(!le(ented to deal with the risks referred to in !ara)ra!h A5B a"ove'
A57' A!!lication controls are (anual or auto(ated !rocedures that t#!icall# o!erate at a "usiness
!rocess level and a!!l# to the !rocessin) of transactions "# individual a!!lications' A!!lication
controls can "e !reventive or detective in nature and are desi)ned to ensure the inte)rit# of the
accountin) records'
905 ISA 915
Accordin)l#, a!!lication controls relate to !rocedures used to initiate, record, !rocess and re!ort
transactions or other financial data' hese controls hel! ensure that transactions occurred, are
authoriJed, and are co(!letel# and accuratel# recorded and !rocessed' 0,a(!les include edit
checks of in!ut data, and nu(erical se*uence checks with (anual follow-u! of e,ce!tion re!orts
or correction at the !oint of data entr#'
Co$ponents of Internal Control0<onitoring of Controls $Aef. 6ara' 44&
A58' Eonitorin) of controls is a !rocess to assess the effectiveness of internal control !erfor(ance over
ti(e' It involves assessin) the effectiveness of controls on a ti(el# "asis and takin) necessar#
re(edial actions' Eana)e(ent acco(!lishes (onitorin) of controls throu)h on)oin) activities,
se!arate evaluations, or a co("ination of the two' 7n)oin) (onitorin) activities are often "uilt
into the nor(al recurrin) activities of an entit# and include re)ular (ana)e(ent and su!ervisor#
activities'
A55' Eana)e(ent+s (onitorin) activities (a# include usin) infor(ation fro( co((unications fro(
e,ternal !arties such as custo(er co(!laints and re)ulator co((ents that (a# indicate !ro"le(s
or hi)hli)ht areas in need of i(!rove(ent'
A100' Eana)e(ent+s (onitorin) of control is often acco(!lished "# (ana)e(ent+s or the owner-
(ana)er+s close involve(ent in o!erations' his involve(ent often will identif# si)nificant
variances fro( e,!ectations and inaccuracies in financial data leadin) to re(edial action to the
control'
Internal Audit Functions $Aef. 6ara' 49&
A101' he entit#+s internal audit function is likel# to "e relevant to the audit if the nature of the internal
audit function+s res!onsi"ilities and activities are related to the entit#+s financial re!ortin), and the
auditor e,!ects to use the work of the internal auditors to (odif# the nature or ti(in), or reduce
the e,tent, of audit !rocedures to "e !erfor(ed' If the auditor deter(ines that the internal audit
function is likel# to "e relevant to the audit, ISA B10 a!!lies'
A104' he o";ectives of an internal audit function, and therefore the nature of its res!onsi"ilities and its
status within the or)aniJation, var# widel# and de!end on the siJe and structure of the entit# and
the re*uire(ents of (ana)e(ent and, where a!!lica"le, those char)ed with )overnance' he
res!onsi"ilities of an internal audit function (a# include, for e,a(!le, (onitorin) of internal
control, risk (ana)e(ent, and review of co(!liance with laws and re)ulations' 7n the other hand,
the res!onsi"ilities of the internal audit function (a# "e li(ited to the review of the econo(#,
efficienc# and
ISA 915 90B
effectiveness of o!erations, for e,a(!le, and accordin)l#, (a# not relate to the entit#+s financial
re!ortin)'
A109' If the nature of the internal audit function+s res!onsi"ilities are related to the entit#+s financial
re!ortin), the e,ternal auditor+s consideration of the activities !erfor(ed, or to "e !erfor(ed "#,
the internal audit function (a# include review of the internal audit function+s audit !lan for the
!eriod, if an#, and discussion of that !lan with the internal auditors'
Sources of Infor(ation $Aef. 6ara' 44&
A104' Euch of the infor(ation used in (onitorin) (a# "e !roduced "# the entit#+s infor(ation s#ste('
If (ana)e(ent assu(es that data used for (onitorin) are accurate without havin) a "asis for that
assu(!tion, errors that (a# e,ist in the infor(ation could !otentiall# lead (ana)e(ent to
incorrect conclusions fro( its (onitorin) activities' Accordin)l#, an understandin) of.
1. G the sources of the infor(ation related to the entit#+s (onitorin) activities? and
2. G the "asis u!on which (ana)e(ent considers the infor(ation to "e sufficientl# relia"le for
the !ur!ose
is re*uired as !art of the auditor+s understandin) of the entit#+s (onitorin) activities as a
co(!onent of internal control'
Assess$ent of +is.s of <aterial <isstate$ent at the Financial )tate$ent :e!el $Aef. 6ara' 45$a&&
A105' Aisks of (aterial (isstate(ent at the financial state(ent level refer to risks that relate !ervasivel#
to the financial state(ents as a whole and !otentiall# affect (an# assertions' Aisks of this nature
are not necessaril# risks identifia"le with s!ecific assertions at the class of transactions, account
"alance, or disclosure level' Aather, the# re!resent circu(stances that (a# increase the risks of
(aterial (isstate(ent at the assertion level, for e,a(!le, throu)h (ana)e(ent override of internal
control' Financial state(ent level risks (a# "e es!eciall# relevant to the auditor+s consideration of
the risks of (aterial (isstate(ent arisin) fro( fraud'
A10B' Aisks at the financial state(ent level (a# derive in !articular fro( a deficient control environ(ent
$althou)h these risks (a# also relate to other factors, such as declinin) econo(ic conditions&' For
e,a(!le, deficiencies such as (ana)e(ent+s lack of co(!etence (a# have a (ore !ervasive effect
on the financial state(ents and (a# re*uire an overall res!onse "# the auditor'
A107' he auditor+s understandin) of internal control (a# raise dou"ts a"out the audita"ilit# of an
entit#+s financial state(ents' For e,a(!le.
907 ISA 915
1. G %oncerns a"out the inte)rit# of the entit#+s (ana)e(ent (a# "e so serious as to cause the
auditor to conclude that the risk of (ana)e(ent (isre!resentation in the financial state(ents is
such that an audit cannot "e conducted'
2. G %oncerns a"out the condition and relia"ilit# of an entit#+s records (a# cause the auditor
to conclude that it is unlikel# that sufficient a!!ro!riate audit evidence will "e availa"le to su!!ort
an un(odified o!inion on the financial state(ents'
A108' ISA 705
14
esta"lishes re*uire(ents and !rovides )uidance in deter(inin) whether there is a need
for the auditor to e,!ress a *ualified o!inion or disclai( an o!inion or, as (a# "e re*uired in so(e
cases, to withdraw fro( the en)a)e(ent where withdrawal is !ossi"le under a!!lica"le law or
re)ulation'
Assess$ent of +is.s of <aterial <isstate$ent at the Assertion :e!el $Aef. 6ara' 45$"&&
A105' Aisks of (aterial (isstate(ent at the assertion level for classes of transactions, account "alances,
and disclosures need to "e considered "ecause such consideration directl# assists in deter(inin)
the nature, ti(in), and e,tent of further audit !rocedures at the assertion level necessar# to o"tain
sufficient a!!ro!riate audit evidence' In identif#in) and assessin) risks of (aterial (isstate(ent at
the assertion level, the auditor (a# conclude that the identified risks relate (ore !ervasivel# to the
financial state(ents as a whole and !otentiall# affect (an# assertions'
he Use of Assertions
A110' In re!resentin) that the financial state(ents are in accordance with the a!!lica"le financial
re!ortin) fra(ework, (ana)e(ent i(!licitl# or e,!licitl# (akes assertions re)ardin) the
reco)nition, (easure(ent, !resentation and disclosure of the various ele(ents of financial
state(ents and related disclosures'
A111' Assertions used "# the auditor to consider the different t#!es of !otential (isstate(ents that (a#
occur fall into the followin) three cate)ories and (a# take the followin) for(s.
$a& Assertions a"out classes of transactions and events for the !eriod under audit.
1$i& 7ccurrenceNtransactions and events that have "een recorded have occurred and !ertain to the
entit#'
1$ii& %o(!letenessNall transactions and events that should have "een recorded have "een
recorded'
2$iii& Accurac#Na(ounts and other data relatin) to recorded transactions and events have
"een recorded a!!ro!riatel#'
3$iv& %utoffNtransactions and events have "een recorded in the correct accountin) !eriod'
4$v& %lassificationNtransactions and events have "een recorded in the !ro!er accounts'
5$"& Assertions a"out account "alances at the !eriod end.
6$i& 0,istenceNassets, lia"ilities, and e*uit# interests e,ist'
7$ii& Ai)hts and o"li)ationsNthe entit# holds or controls the ri)hts to assets, and lia"ilities are
the o"li)ations of the entit#'
8$iii& %o(!letenessNall assets, lia"ilities and e*uit# interests that should have "een recorded
have "een recorded'
9$iv& Faluation and allocationNassets, lia"ilities, and e*uit# interests are included in the financial
state(ents at a!!ro!riate a(ounts and an# resultin) valuation or allocation ad;ust(ents are
a!!ro!riatel# recorded'
10$c& Assertions a"out !resentation and disclosure.
11$i& 7ccurrence and ri)hts and o"li)ationsNdisclosed events, transactions, and other (atters
have occurred and !ertain to the entit#'
12$ii& %o(!letenessNall disclosures that should have "een included in the financial state(ents
have "een included'
ISA 915 908
$iii& %lassification and understanda"ilit#Nfinancial infor(ation is a!!ro!riatel#
!resented and descri"ed, and disclosures are clearl# e,!ressed'
$iv& Accurac# and valuationNfinancial and other infor(ation are disclosed fairl# and at
a!!ro!riate a(ounts'
A114' he auditor (a# use the assertions as descri"ed a"ove or (a# e,!ress the( differentl# !rovided
all as!ects descri"ed a"ove have "een covered' For e,a(!le, the auditor (a# choose to co("ine
the assertions a"out transactions and events with the assertions a"out account "alances'
A119' Lhen (akin) assertions a"out the financial state(ents of !u"lic sector entities, in addition to
those assertions set out in !ara)ra!h A111, (ana)e(ent (a# often assert that transactions and
events have "een carried out in
905 ISA 915
accordance with law, re)ulation or other authorit#' Such assertions (a# fall within the sco!e of the
financial state(ent audit'
(rocess of Identifying +is.s of <aterial <isstate$ent $Aef. 6ara' 4B$a&&
A114' Infor(ation )athered "# !erfor(in) risk assess(ent !rocedures, includin) the audit evidence
o"tained in evaluatin) the desi)n of controls and deter(inin) whether the# have "een
i(!le(ented, is used as audit evidence to su!!ort the risk assess(ent' he risk assess(ent
deter(ines the nature, ti(in), and e,tent of further audit !rocedures to "e !erfor(ed'
A115' A!!endi, 4 !rovides e,a(!les of conditions and events that (a# indicate the e,istence of risks of
+elating Controls to Assertions $Aef. 6ara' 4B$c&&
A11B' In (akin) risk assess(ents, the auditor (a# identif# the controls that are likel# to !revent, or
detect and correct, (aterial (isstate(ent in s!ecific assertions' <enerall#, it is useful to o"tain an
understandin) of controls and relate the( to assertions in the conte,t of !rocesses and s#ste(s in
which the# e,ist "ecause individual control activities often do not in the(selves address a risk'
7ften, onl# (ulti!le control activities, to)ether with other co(!onents of internal control, will "e
sufficient to address a risk'
A117' %onversel#, so(e control activities (a# have a s!ecific effect on an individual assertion e("odied
in a !articular class of transactions or account "alance' For e,a(!le, the control activities that an
entit# esta"lished to ensure that its !ersonnel are !ro!erl# countin) and recordin) the annual
!h#sical inventor# relate directl# to the e,istence and co(!leteness assertions for the inventor#
account "alance'
A118' %ontrols can "e either directl# or indirectl# related to an assertion' he (ore indirect the
relationshi!, the less effective that control (a# "e in !reventin), or detectin) and correctin),
(isstate(ents in that assertion' For e,a(!le, a sales (ana)er+s review of a su((ar# of sales
activit# for s!ecific stores "# re)ion ordinaril# is onl# indirectl# related to the co(!leteness
assertion for sales revenue' Accordin)l#, it (a# "e less effective in reducin) risk for that assertion
than controls (ore directl# related to that assertion, such as (atchin) shi!!in) docu(ents with
"illin) docu(ents'
)ignificant +is.s
Identif#in) Si)nificant Aisks $Aef. 6ara' 48&
A115' Si)nificant risks often relate to si)nificant non-routine transactions or ;ud)(ental (atters' Non-
routine transactions are transactions that are unusual, due to either siJe or nature, and that
therefore occur infre*uentl#' >ud)(ental (atters (a# include the develo!(ent of accountin)
esti(ates for which there
ISA 915 910
is si)nificant (easure(ent uncertaint#' Aoutine, non-co(!le, transactions that are su";ect to
s#ste(atic !rocessin) are less likel# to )ive rise to si)nificant risks'
A140' Aisks of (aterial (isstate(ent (a# "e )reater for si)nificant non-routine transactions arisin) fro(
(atters such as the followin).
% G <reater (ana)e(ent intervention to s!ecif# the accountin) treat(ent'
% G <reater (anual intervention for data collection and !rocessin)'
% G %o(!le, calculations or accountin) !rinci!les'
% G he nature of non-routine transactions, which (a# (ake it difficult for the entit# to
i(!le(ent effective controls over the risks'
A141' Aisks of (aterial (isstate(ent (a# "e )reater for si)nificant ;ud)(ental (atters that re*uire the
develo!(ent of accountin) esti(ates, arisin) fro( (atters such as the followin).
% G Accountin) !rinci!les for accountin) esti(ates or revenue reco)nition (a# "e su";ect to
differin) inter!retation'
% G Ae*uired ;ud)(ent (a# "e su";ective or co(!le,, or re*uire assu(!tions a"out the
effects of future events, for e,a(!le, ;ud)(ent a"out fair value'
A144' ISA 990 descri"es the conse*uences for further audit !rocedures of identif#in) a risk as
si)nificant'
19
Si)nificant risks relatin) to the risks of (aterial (isstate(ent due to fraud
A149' ISA 440 !rovides further re*uire(ents and )uidance in relation to the identification and
assess(ent of the risks of (aterial (isstate(ent due to fraud'
14
Understandin) %ontrols Aelated to Si)nificant Aisks $Aef. 6ara' 45&
A144' Althou)h risks relatin) to si)nificant non-routine or ;ud)(ental (atters are often less likel# to "e
su";ect to routine controls, (ana)e(ent (a# have other res!onses intended to deal with such
risks' Accordin)l#, the auditor+s understandin) of whether the entit# has desi)ned and
i(!le(ented controls for si)nificant risks arisin) fro( non-routine or ;ud)(ental (atters includes
whether and how (ana)e(ent res!onds to the risks' Such res!onses (i)ht include.
% G %ontrol activities such as a review of assu(!tions "# senior (ana)e(ent or e,!erts'
% G =ocu(ented !rocesses for esti(ations'
19
ISA 990, !ara)ra!hs 15 and 41'
14
ISA 440, !ara)ra!hs 45-47'
911 ISA 915
G A!!roval "# those char)ed with )overnance'
A145' For e,a(!le, where there are one-off events such as the recei!t of notice of a si)nificant lawsuit,
consideration of the entit#+s res!onse (a# include such (atters as whether it has "een referred to
a!!ro!riate e,!erts $such as internal or e,ternal le)al counsel&, whether an assess(ent has "een
(ade of the !otential effect, and how it is !ro!osed that the circu(stances are to "e disclosed in
the financial state(ents'
A14B' In so(e cases, (ana)e(ent (a# not have a!!ro!riatel# res!onded to si)nificant risks of
(aterial (isstate(ent "# i(!le(entin) controls over these si)nificant risks' Failure "#
(ana)e(ent to i(!le(ent such controls is an indicator of a si)nificant deficienc# in internal
control'
15
+is.s for Dhich )ubstanti!e (rocedures Alone ?o Aot (ro!ide )ufficient Appropriate Audit /!idence $Aef.
6ara' 90&
A147' Aisks of (aterial (isstate(ent (a# relate directl# to the recordin) of routine classes of
transactions or account "alances, and the !re!aration of relia"le financial state(ents' Such risks
(a# include risks of inaccurate or inco(!lete !rocessin) for routine and si)nificant classes of
transactions such as an entit#+s revenue, !urchases, and cash recei!ts or cash !a#(ents'
A148' Lhere such routine "usiness transactions are su";ect to hi)hl# auto(ated !rocessin) with little or
no (anual intervention, it (a# not "e !ossi"le to !erfor( onl# su"stantive !rocedures in relation
to the risk' For e,a(!le, the auditor (a# consider this to "e the case in circu(stances where a
si)nificant a(ount of an entit#+s infor(ation is initiated, recorded, !rocessed, or re!orted onl# in
electronic for( such as in an inte)rated s#ste(' In such cases.
% G Audit evidence (a# "e availa"le onl# in electronic for(, and its sufficienc# and
a!!ro!riateness usuall# de!end on the effectiveness of controls over its accurac# and
co(!leteness'
% G he !otential for i(!ro!er initiation or alteration of infor(ation to occur and not "e
detected (a# "e )reater if a!!ro!riate controls are not o!eratin) effectivel#'
A145' he conse*uences for further audit !rocedures of identif#in) such risks are descri"ed in ISA 990'
1B
+e!ision of +is. Assess$ent $Aef. 6ara' 91&
A190' =urin) the audit, infor(ation (a# co(e to the auditor+s attention that differs si)nificantl# fro( the
infor(ation on which the risk assess(ent was "ased' For
15
ISA 4B5, C%o((unicatin) =eficiencies in Internal %ontrol to hose %har)ed with <overnance and Eana)e(ent,D !ara)ra!h
A7'
1B
ISA 915 914
e,a(!le, the risk assess(ent (a# "e "ased on an e,!ectation that certain controls are o!eratin)
effectivel#' In !erfor(in) tests of those controls, the auditor (a# o"tain audit evidence that the#
were not o!eratin) effectivel# at relevant ti(es durin) the audit' Si(ilarl#, in !erfor(in)
su"stantive !rocedures the auditor (a# detect (isstate(ents in a(ounts or fre*uenc# )reater than
is consistent with the auditor+s risk assess(ents' In such circu(stances, the risk assess(ent (a#
not a!!ro!riatel# reflect the true circu(stances of the entit# and the further !lanned audit
!rocedures (a# not "e effective in detectin) (aterial (isstate(ents' See ISA 990 for further
)uidance'
A191' he (anner in which the re*uire(ents of !ara)ra!h 94 are docu(ented is for the auditor to
deter(ine usin) !rofessional ;ud)(ent' For e,a(!le, in audits of s(all entities the docu(entation
(a# "e incor!orated in the auditor+s docu(entation of the overall strate)# and audit !lan'
17
Si(ilarl#, for e,a(!le, the results of the risk assess(ent (a# "e docu(ented se!aratel#, or (a#
"e docu(ented as !art of the auditor+s docu(entation of further !rocedures'
18
he for( and e,tent
of the docu(entation is influenced "# the nature, siJe and co(!le,it# of the entit# and its internal
control, availa"ilit# of infor(ation fro( the entit# and the audit (ethodolo)# and technolo)# used
in the course of the audit'
A194' For entities that have unco(!licated "usinesses and !rocesses relevant to financial re!ortin), the
docu(entation (a# "e si(!le in for( and relativel# "rief' It is not necessar# to docu(ent the
entiret# of the auditor+s understandin) of the entit# and (atters related to it' Se# ele(ents of
understandin) docu(ented "# the auditor include those on which the auditor "ased the assess(ent
of the risks of (aterial (isstate(ent'
A199' he e,tent of docu(entation (a# also reflect the e,!erience and ca!a"ilities of the (e("ers of the
audit en)a)e(ent tea(' 6rovided the re*uire(ents of ISA 490 are alwa#s (et, an audit
undertaken "# an en)a)e(ent tea( co(!risin) less e,!erienced individuals (a# re*uire (ore
detailed docu(entation to assist the( to o"tain an a!!ro!riate understandin) of the entit# than one
that includes e,!erienced individuals'
A194' For recurrin) audits, certain docu(entation (a# "e carried forward, u!dated as necessar# to reflect
chan)es in the entit#+s "usiness or !rocesses'
Appe"#i5 7
$Aef. 6aras' 4$c&, 14-44, AB5-A104&
I"te'"!0 Co"t'o0 Co.po"e"t
1' his a!!endi, further e,!lains the co(!onents of internal control, as set out in !ara)ra!hs 4$c&,
14-44 and AB5-A104, as the# relate to a financial state(ent audit'
Co"t'o0 E"9i'o".e"t
4' he control environ(ent enco(!asses the followin) ele(ents.
1$a&Co$$unication and enforce$ent of integrity and ethical !alues' he effectiveness of controls
cannot rise a"ove the inte)rit# and ethical values of the !eo!le who create, ad(inister, and
(onitor the(' Inte)rit# and ethical "ehavior are the !roduct of the entit#+s ethical and "ehavioral
standards, how the# are co((unicated, and how the# are reinforced in !ractice' he enforce(ent
of inte)rit# and ethical values includes, for e,a(!le, (ana)e(ent actions to eli(inate or (iti)ate
incentives or te(!tations that (i)ht !ro(!t !ersonnel to en)a)e in dishonest, ille)al, or unethical
acts' he co((unication of entit# !olicies on inte)rit# and ethical values (a# include the
co((unication of "ehavioral standards to !ersonnel throu)h !olic# state(ents and codes of
conduct and "# e,a(!le'
2$"& Co$$it$ent to co$petence' %o(!etence is the knowled)e and skills necessar# to acco(!lish
tasks that define the individual+s ;o"'
3$c&(articipation by those charged #ith go!ernance' An entit#+s control consciousness is influenced
si)nificantl# "# those char)ed with )overnance' he i(!ortance of the res!onsi"ilities of those
char)ed with )overnance is reco)niJed in codes of !ractice and other laws and re)ulations or
)uidance !roduced for the "enefit of those char)ed with )overnance' 7ther res!onsi"ilities of
those char)ed with )overnance include oversi)ht of the desi)n and effective o!eration of whistle
"lower !rocedures and the !rocess for reviewin) the effectiveness of the entit#+s internal control'
4$d& <anage$ent8s philosophy and operating style' Eana)e(ent+s !hiloso!h# and o!eratin) st#le
enco(!ass a "road ran)e of characteristics' For e,a(!le, (ana)e(ent+s attitudes and actions
toward financial re!ortin) (a# (anifest the(selves throu)h conservative or a))ressive selection
fro( availa"le alternative accountin) !rinci!les, or conscientiousness and conservatis( with
which accountin) esti(ates are develo!ed'
ISA 915 A660N=II 914
1. $e& ,rganiBational structure' 0sta"lishin) a relevant or)aniJational structure includes
considerin) ke# areas of authorit# and res!onsi"ilit# and a!!ro!riate lines of re!ortin)' he
a!!ro!riateness of an entit#+s or)aniJational structure de!ends, in !art, on its siJe and the nature of
its activities'
2. $f& Assign$ent of authority and responsibility' he assi)n(ent of authorit# and res!onsi"ilit# (a#
include !olicies relatin) to a!!ro!riate "usiness !ractices, knowled)e and e,!erience of ke#
!ersonnel, and resources !rovided for carr#in) out duties' In addition, it (a# include !olicies and
co((unications directed at ensurin) that all !ersonnel understand the entit#+s o";ectives, know
how their individual actions interrelate and contri"ute to those o";ectives, and reco)niJe how and
for what the# will "e held accounta"le'
3. $)& -u$an resource policies and practices' @u(an resource !olicies and !ractices often
de(onstrate i(!ortant (atters in relation to the control consciousness of an entit#' For e,a(!le,
standards for recruitin) the (ost *ualified individuals K with e(!hasis on educational "ack)round,
!rior work e,!erience, !ast acco(!lish(ents, and evidence of inte)rit# and ethical "ehavior K
de(onstrate an entit#+s co((it(ent to co(!etent and trustworth# !eo!le' rainin) !olicies that
co((unicate !ros!ective roles and res!onsi"ilities and include !ractices such as trainin) schools
and se(inars illustrate e,!ected levels of !erfor(ance and "ehavior' 6ro(otions driven "#
!eriodic !erfor(ance a!!raisals de(onstrate the entit#+s co((it(ent to the advance(ent of
*ualified !ersonnel to hi)her levels of res!onsi"ilit#'
E"tit/> Ri% Ae.e"t *'oce
1. 9' For financial re!ortin) !ur!oses, the entit#+s risk assess(ent !rocess includes how
(ana)e(ent identifies "usiness risks relevant to the !re!aration of financial state(ents in
accordance with the entit#+s a!!lica"le financial re!ortin) fra(ework, esti(ates their si)nificance,
assesses the likelihood of their occurrence, and decides u!on actions to res!ond to and (ana)e
the( and the results thereof' For e,a(!le, the entit#+s risk assess(ent !rocess (a# address how
the entit# considers the !ossi"ilit# of unrecorded transactions or identifies and anal#Jes si)nificant
esti(ates recorded in the financial state(ents'
2. 4' Aisks relevant to relia"le financial re!ortin) include e,ternal and internal events,
transactions or circu(stances that (a# occur and adversel# affect an entit#+s a"ilit# to initiate,
record, !rocess, and re!ort financial data consistent with the assertions of (ana)e(ent in the
financial state(ents' Eana)e(ent (a# initiate !lans, !ro)ra(s, or actions to address s!ecific risks
or it (a#
915 ISA 915 A660N=II
decide to acce!t a risk "ecause of cost or other considerations' Aisks can arise or chan)e due to
circu(stances such as the followin).
1. G Changes in operating en!iron$ent' %han)es in the re)ulator# or o!eratin) environ(ent
can result in chan)es in co(!etitive !ressures and si)nificantl# different risks'
2. G Ae# personnel' New !ersonnel (a# have a different focus on or understandin) of
internal control'
3. G Ae# or re!a$ped infor$ation syste$s' Si)nificant and ra!id chan)es in infor(ation
s#ste(s can chan)e the risk relatin) to internal control'
4. G +apid gro#th' Si)nificant and ra!id e,!ansion of o!erations can strain controls and
increase the risk of a "reakdown in controls'
5. G Ae# technology' Incor!oratin) new technolo)ies into !roduction !rocesses or
infor(ation s#ste(s (a# chan)e the risk associated with internal control'
6. G Ae# business $odels, products& or acti!ities' 0nterin) into "usiness areas or transactions
with which an entit# has little e,!erience (a# introduce new risks associated with internal control'
7. G Corporate restructurings' Aestructurin)s (a# "e acco(!anied "# staff reductions and
chan)es in su!ervision and se)re)ation of duties that (a# chan)e the risk associated with internal
control'
8. G /4panded foreign operations' he e,!ansion or ac*uisition of forei)n o!erations carries
new and often uni*ue risks that (a# affect internal control, for e,a(!le, additional or chan)ed
risks fro( forei)n currenc# transactions'
9. G Ae# accounting pronounce$ents' Ado!tion of new accountin) !rinci!les or chan)in)
accountin) !rinci!les (a# affect risks in !re!arin) financial state(ents'
I"fo'.!tio" S/te.4 I"c0-#i"( the Re0!te# B-i"e *'ocee4 Re0e9!"t to Fi"!"ci!0 Repo'ti"(4
!"# Co..-"ic!tio"
1. 5' An infor(ation s#ste( consists of infrastructure $!h#sical and hardware co(!onents&,
software, !eo!le, !rocedures, and data' Ean# infor(ation s#ste(s (ake e,tensive use of
infor(ation technolo)# $I&'
1B' he infor(ation s#ste( relevant to financial re!ortin) o";ectives, which includes the financial
re!ortin) s#ste(, enco(!asses (ethods and records that.
% G Identif# and record all valid transactions'
% G =escri"e on a ti(el# "asis the transactions in sufficient detail to !er(it !ro!er
classification of transactions for financial re!ortin)'
% G Eeasure the value of transactions in a (anner that !er(its recordin) their !ro!er
(onetar# value in the financial state(ents'
% G =eter(ine the ti(e !eriod in which transactions occurred to !er(it recordin) of
transactions in the !ro!er accountin) !eriod'
% G 6resent !ro!erl# the transactions and related disclosures in the financial state(ents'
1. 7' he *ualit# of s#ste(-)enerated infor(ation affects (ana)e(ent+s a"ilit# to (ake
a!!ro!riate decisions in (ana)in) and controllin) the entit#+s activities and to !re!are relia"le
financial re!orts'
2. 8' %o((unication, which involves !rovidin) an understandin) of individual roles and
res!onsi"ilities !ertainin) to internal control over financial re!ortin), (a# take such for(s as
!olic# (anuals, accountin) and financial re!ortin) (anuals, and (e(oranda' %o((unication
also can "e (ade electronicall#, orall#, and throu)h the actions of (ana)e(ent'
Co"t'o0 Acti9itie
5' <enerall#, control activities that (a# "e relevant to an audit (a# "e cate)oriJed as !olicies and
!rocedures that !ertain to the followin).
1. G (erfor$ance re!ie#s hese control activities include reviews and anal#ses of actual
!erfor(ance versus "ud)ets, forecasts, and !rior !eriod !erfor(ance? relatin) different sets of data
K o!eratin) or financial K to one another, to)ether with anal#ses of the relationshi!s and
investi)ative and corrective actions? co(!arin) internal data with e,ternal sources of infor(ation?
and review of functional or activit# !erfor(ance'
2. G Infor$ation processing' he two "road )rou!in)s of infor(ation s#ste(s control
activities are a!!lication controls, which a!!l# to the !rocessin) of individual a!!lications, and
)eneral I-controls, which are !olicies and !rocedures that relate to (an# a!!lications and su!!ort
the effective functionin) of a!!lication controls "# hel!in) to ensure the continued !ro!er
o!eration of infor(ation s#ste(s' 0,a(!les of a!!lication controls include checkin) the
arith(etical accurac# of records, (aintainin) and reviewin) accounts and trial "alances,
auto(ated controls such as edit checks of in!ut data and nu(erical se*uence checks, and (anual
follow-u! of e,ce!tion re!orts' 0,a(!les of )eneral I-controls are !ro)ra( chan)e controls,
controls that restrict access to !ro)ra(s or data, controls over the i(!le(entation of new releases
of !acka)ed software a!!lications, and controls over s#ste( software that restrict access to or
(onitor the use of s#ste( utilities that could chan)e financial data or records without leavin) an
audit trail'
917 ISA 915 A660N=II
G (hysical controls' %ontrols that enco(!ass.
1. he !h#sical securit# of assets, includin) ade*uate safe)uards such as secured facilities
over access to assets and records'
2. he authoriJation for access to co(!uter !ro)ra(s and data files'
3. he !eriodic countin) and co(!arison with a(ounts shown on control records $for
e,a(!le, co(!arin) the results of cash, securit# and inventor# counts with accountin) records&'
he e,tent to which !h#sical controls intended to !revent theft of assets are relevant to the
relia"ilit# of financial state(ent !re!aration, and therefore the audit, de!ends on
circu(stances such as when assets are hi)hl# susce!ti"le to (isa!!ro!riation'
G )egregation of duties Assi)nin) different !eo!le the res!onsi"ilities of authoriJin)
transactions, recordin) transactions, and (aintainin) custod# of assets' Se)re)ation of
duties is intended to reduce the o!!ortunities to allow an# !erson to "e in a !osition to "oth
!er!etrate and conceal errors or fraud in the nor(al course of the !erson+s duties'
10' %ertain control activities (a# de!end on the e,istence of a!!ro!riate hi)her level !olicies
esta"lished "# (ana)e(ent or those char)ed with )overnance' For e,a(!le, authoriJation controls
(a# "e dele)ated under esta"lished )uidelines, such as invest(ent criteria set "# those char)ed
with )overnance? alternativel#, non-routine transactions such as (a;or ac*uisitions or divest(ents
(a# re*uire s!ecific hi)h level a!!roval, includin) in so(e cases that of shareholders'
)o"ito'i"( of Co"t'o0
1. 11' An i(!ortant (ana)e(ent res!onsi"ilit# is to esta"lish and (aintain internal control on
an on)oin) "asis' Eana)e(ent+s (onitorin) of controls includes considerin) whether the# are
o!eratin) as intended and that the# are (odified as a!!ro!riate for chan)es in conditions'
Eonitorin) of controls (a# include activities such as (ana)e(ent+s review of whether "ank
reconciliations are "ein) !re!ared on a ti(el# "asis, internal auditors+ evaluation of sales
!ersonnel+s co(!liance with the entit#+s !olicies on ter(s of sales contracts, and a le)al
de!art(ent+s oversi)ht of co(!liance with the entit#+s ethical or "usiness !ractice !olicies'
Eonitorin) is done also to ensure that controls continue to o!erate effectivel# over ti(e' For
e,a(!le, if the ti(eliness and accurac# of "ank reconciliations are not (onitored, !ersonnel are
likel# to sto! !re!arin) the('
2. 14' Internal auditors or !ersonnel !erfor(in) si(ilar functions (a# contri"ute to the
(onitorin) of an entit#+s controls throu)h se!arate evaluations' 7rdinaril#, the# re)ularl# !rovide
infor(ation a"out the functionin) of internal control,
ISA 915 A660N=II 918
focusin) considera"le attention on evaluatin) the effectiveness of internal control, and co((unicate
infor(ation a"out stren)ths and deficiencies in internal control and reco((endations for i(!rovin)
internal control'
19' Eonitorin) activities (a# include usin) infor(ation fro( co((unications fro( e,ternal !arties that
(a# indicate !ro"le(s or hi)hli)ht areas in need of i(!rove(ent' %usto(ers i(!licitl# corro"orate
"illin) data "# !a#in) their invoices or co(!lainin) a"out their char)es' In addition, re)ulators (a#
co((unicate with the entit# concernin) (atters that affect the functionin) of internal control, for
e,a(!le, co((unications concernin) e,a(inations "# "ank re)ulator# a)encies' Also, (ana)e(ent
(a# consider co((unications relatin) to internal control fro( e,ternal auditors in !erfor(in)
(onitorin) activities'
915 ISA 915 A660N=II
Appe"#i5 2
$Aef. 6ara' A99, A115&
Co"#itio" !"# E9e"t Th!t )!/ I"#ic!te Ri% of )!te'i!0 )it!te.e"t
he followin) are e,a(!les of conditions and events that (a# indicate the e,istence of risks of (aterial
(isstate(ent' he e,a(!les !rovided cover a "road ran)e of conditions and events? however, not all
conditions and events are relevant to ever# audit en)a)e(ent and the list of e,a(!les is not necessaril#
co(!lete'
1. G 7!erations in re)ions that are econo(icall# unsta"le, for e,a(!le, countries with
si)nificant currenc# devaluation or hi)hl# inflationar# econo(ies'
2. G 7!erations e,!osed to volatile (arkets, for e,a(!le, futures tradin)'
3. G 7!erations that are su";ect to a hi)h de)ree of co(!le, re)ulation'
4. G <oin) concern and li*uidit# issues includin) loss of si)nificant custo(ers'
5. G %onstraints on the availa"ilit# of ca!ital and credit'
6. G %han)es in the industr# in which the entit# o!erates'
7. G %han)es in the su!!l# chain'
8. G =evelo!in) or offerin) new !roducts or services, or (ovin) into new lines of "usiness'
9. G 0,!andin) into new locations'
10. G %han)es in the entit# such as lar)e ac*uisitions or reor)aniJations or other unusual
events'
11. G 0ntities or "usiness se)(ents likel# to "e sold'
12. G he e,istence of co(!le, alliances and ;oint ventures'
13. G Use of off-"alance-sheet finance, s!ecial-!ur!ose entities, and other co(!le, financin)
arran)e(ents'
14. G Si)nificant transactions with related !arties'
15. G Mack of !ersonnel with a!!ro!riate accountin) and financial re!ortin) skills'
16. G %han)es in ke# !ersonnel includin) de!arture of ke# e,ecutives'
17. G =eficiencies in internal control, es!eciall# those not addressed "# (ana)e(ent'
18. G Inconsistencies "etween the entit#+s I strate)# and its "usiness strate)ies'
19. G %han)es in the I environ(ent'
ISA 915 A660N=II 940
1. G Installation of si)nificant new I s#ste(s related to financial re!ortin)'
2. G In*uiries into the entit#+s o!erations or financial results "# re)ulator# or )overn(ent
"odies'
3. G 6ast (isstate(ents, histor# of errors or a si)nificant a(ount of ad;ust(ents at !eriod end'
4. G Si)nificant a(ount of non-routine or non-s#ste(atic transactions includin) interco(!an#
transactions and lar)e revenue transactions at !eriod end'
5. G ransactions that are recorded "ased on (ana)e(ent+s intent, for e,a(!le, de"t
refinancin), assets to "e sold and classification of (arketa"le securities'
6. G A!!lication of new accountin) !ronounce(ents'
7. G Accountin) (easure(ents that involve co(!le, !rocesses'
8. G 0vents or transactions that involve si)nificant (easure(ent uncertaint#, includin)
9. G 6endin) liti)ation and contin)ent lia"ilities, for e,a(!le, sales warranties, financial
)uarantees and environ(ental re(ediation'
941 ISA 915 A660N=II
)ATERIALITY IN *LANNING AND *ERFOR)ING AN AUDIT
$0ffective for audits of financial state(ents for !eriods "e)innin) on or after =ece("er 15,
4005&
CONTENTS
6ara)ra!h
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1
Eaterialit# in the %onte,t of an Audit '''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4TB
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 7
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 8
Defi"itio" ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
Re2-i'e.e"t
=eter(inin) Eaterialit# and 6erfor(ance Eaterialit# Lhen 6lannin)
the Audit '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 10T11
Aevision as the Audit 6ro)resses '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 14T19
=ocu(entation '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 14
Eaterialit# and Audit Aisk '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1 =eter(inin) Eaterialit# and
6erfor(ance Eaterialit# Lhen 6lannin)
the Audit '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A4TA14
Aevision as the Audit 6ro)resses '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A19
International Standard on Auditin) $ISA& 940, CEaterialit# in 6lannin) and 6erfor(in) an AuditD should "e
read in the conte,t of ISA 400, C7verall 7";ectives of the Inde!endent Auditor and the %onduct of an Audit
ISA 940 944
1' his International Standard on Auditin) $ISA& deals with the auditor+s res!onsi"ilit# to a!!l# the
conce!t of (aterialit# in !lannin) and !erfor(in) an audit of financial state(ents' ISA 450
1
e,!lains how (aterialit# is a!!lied in evaluatin) the effect of identified (isstate(ents on the audit
and of uncorrected (isstate(ents, if an#, on the financial state(ents'
)!te'i!0it/ i" the Co"te5t of !" A-#it
1. 4' Financial re!ortin) fra(eworks often discuss the conce!t of (aterialit# in the conte,t of
the !re!aration and !resentation of financial state(ents' Althou)h financial re!ortin)
fra(eworks (a# discuss (aterialit# in different ter(s, the# )enerall# e,!lain that.
1. G Eisstate(ents, includin) o(issions, are considered to "e (aterial if the#,
individuall# or in the a))re)ate, could reasona"l# "e e,!ected to influence the econo(ic
decisions of users taken on the "asis of the financial state(ents?
2. G >ud)(ents a"out (aterialit# are (ade in li)ht of surroundin) circu(stances, and
are affected "# the siJe or nature of a (isstate(ent, or a co("ination of "oth? and
3. G >ud)(ents a"out (atters that are (aterial to users of the financial state(ents are
"ased on a consideration of the co((on financial infor(ation needs of users as a )rou!'
4
he !ossi"le effect of (isstate(ents on s!ecific individual users, whose needs (a# var#
widel#, is not considered'
2. 9' Such a discussion, if !resent in the a!!lica"le financial re!ortin) fra(ework, !rovides a
fra(e of reference to the auditor in deter(inin) (aterialit# for the audit' If the a!!lica"le financial
re!ortin) fra(ework does not include a discussion of the conce!t of (aterialit#, the characteristics
referred to in !ara)ra!h 4 !rovide the auditor with such a fra(e of reference'
3. 4' he auditor+s deter(ination of (aterialit# is a (atter of !rofessional ;ud)(ent, and is
affected "# the auditor+s !erce!tion of the financial infor(ation needs of
1
ISA 450, C0valuation of Eisstate(ents Identified durin) the Audit'D 4
For e,a(!le, the CFra(ework for the 6re!aration and 6resentation of Financial State(ents,D ado!ted "# the International
Accountin) Standards 1oard in A!ril 4001, indicates that, for a !rofit-oriented entit#, as investors are !roviders of risk ca!ital to
the enter!rise, the !rovision of financial state(ents that (eet their needs will also (eet (ost of the needs of other users that
financial state(ents can satisf#'
949 ISA 940
users of the financial state(ents' In this conte,t, it is reasona"le for the auditor to assu(e that
users.
1$a& @ave a reasona"le knowled)e of "usiness and econo(ic activities and accountin) and a
willin)ness to stud# the infor(ation in the financial state(ents with reasona"le dili)ence?
2$"& Understand that financial state(ents are !re!ared, !resented and audited to levels of (aterialit#?
3$c& Aeco)niJe the uncertainties inherent in the (easure(ent of a(ounts "ased on the use of
esti(ates, ;ud)(ent and the consideration of future events? and
4$d& Eake reasona"le econo(ic decisions on the "asis of the infor(ation in the financial state(ents'
1. 5' he conce!t of (aterialit# is a!!lied "# the auditor "oth in !lannin) and !erfor(in) the
audit, and in evaluatin) the effect of identified (isstate(ents on the audit and of uncorrected
(isstate(ents, if an#, on the financial state(ents and in for(in) the o!inion in the auditor+s
re!ort' $Aef. 6ara' A1&
1. B' In !lannin) the audit, the auditor (akes ;ud)(ents a"out the siJe of (isstate(ents that
will "e considered (aterial' hese ;ud)(ents !rovide a "asis for.
2. $a& =eter(inin) the nature, ti(in) and e,tent of risk assess(ent !rocedures?
3. $"& Identif#in) and assessin) the risks of (aterial (isstate(ent? and
4. $c& =eter(inin) the nature, ti(in) and e,tent of further audit !rocedures'
he (aterialit# deter(ined when !lannin) the audit does not necessaril# esta"lish an a(ount
"elow which uncorrected (isstate(ents, individuall# or in the a))re)ate, will alwa#s "e evaluated
as i((aterial' he circu(stances related to so(e (isstate(ents (a# cause the auditor to evaluate
the( as (aterial even if the# are "elow (aterialit#' Althou)h it is not !ractica"le to desi)n audit
!rocedures to detect (isstate(ents that could "e (aterial solel# "ecause of their nature, the
auditor considers not onl# the siJe "ut also the nature of uncorrected (isstate(ents, and the
!articular circu(stances of their occurrence, when evaluatin) their effect on the financial
state(ents'
9
ISA 940 944
Effecti9e D!te
15, 4005'
O$1ecti9e
8' he o";ective of the auditor is to a!!l# the conce!t of (aterialit# a!!ro!riatel# in !lannin) and
!erfor(in) the audit'
Defi"itio"
5' For !ur!oses of the ISAs, !erfor(ance (aterialit# (eans the a(ount or a(ounts set "# the auditor
at less than (aterialit# for the financial state(ents as a whole to reduce to an a!!ro!riatel# low
level the !ro"a"ilit# that the a))re)ate of uncorrected and undetected (isstate(ents e,ceeds
(aterialit# for the financial state(ents as a whole' If a!!lica"le, !erfor(ance (aterialit# also
refers to the a(ount or a(ounts set "# the auditor at less than the (aterialit# level or levels for
!articular classes of transactions, account "alances or disclosures'
Re2-i'e.e"t Dete'.i"i"( )!te'i!0it/ !"# *e'fo'.!"ce )!te'i!0it/ =he" *0!""i"( the A-#it
1. 10' Lhen esta"lishin) the overall audit strate)#, the auditor shall deter(ine (aterialit# for
the financial state(ents as a whole' If, in the s!ecific circu(stances of the entit#, there is one or
(ore !articular classes of transactions, account "alances or disclosures for which (isstate(ents of
lesser a(ounts than (aterialit# for the financial state(ents as a whole could reasona"l# "e
e,!ected to influence the econo(ic decisions of users taken on the "asis of the financial
state(ents, the auditor shall also deter(ine the (aterialit# level or levels to "e a!!lied to those
!articular classes of transactions, account "alances or disclosures' $Aef. 6ara' A4-A11&
2. 11' he auditor shall deter(ine !erfor(ance (aterialit# for !ur!oses of assessin) the risks of
(aterial (isstate(ent and deter(inin) the nature, ti(in) and e,tent of further audit !rocedures'
$Aef. 6ara' A14&
Re9iio" ! the A-#it *'o('ee
1. 14' he auditor shall revise (aterialit# for the financial state(ents as a whole $and, if
a!!lica"le, the (aterialit# level or levels for !articular classes of transactions, account "alances or
disclosures& in the event of "eco(in) aware of infor(ation durin) the audit that would have
caused the auditor to have deter(ined a different a(ount $or a(ounts& initiall#' $Aef. 6ara' A19&
2. 19' If the auditor concludes that a lower (aterialit# for the financial state(ents as a whole
$and, if a!!lica"le, (aterialit# level or levels for !articular classes of
945 ISA 940
transactions, account "alances or disclosures& than that initiall# deter(ined is a!!ro!riate, the
auditor shall deter(ine whether it is necessar# to revise !erfor(ance (aterialit#, and whether the
nature, ti(in) and e,tent of the further audit !rocedures re(ain a!!ro!riate'
Doc-.e"t!tio"
14' he auditor shall include in the audit docu(entation the followin) a(ounts and the factors
considered in their deter(ination.
4
1$a& Eaterialit# for the financial state(ents as a whole $see !ara)ra!h 10&?
2$"& If a!!lica"le, the (aterialit# level or levels for !articular classes of transactions, account
"alances or disclosures $see !ara)ra!h 10&?
3$c& 6erfor(ance (aterialit# $see !ara)ra!h 11&? and
4$d&An# revision of $a&-$c& as the audit !ro)ressed $see !ara)ra!hs 14-19&'
OOO
)!te'i!0it/ !"# A-#it Ri% $Aef. 6ara' 5&
A1' In conductin) an audit of financial state(ents, the overall o";ectives of the auditor are to o"tain
reasona"le assurance a"out whether the financial state(ents as a whole are free fro( (aterial
(isstate(ent, whether due to fraud or error, there"# ena"lin) the auditor to e,!ress an o!inion on
whether the financial state(ents are !re!ared, in all (aterial res!ects, in accordance with an
a!!lica"le financial re!ortin) fra(ework? and to re!ort on the financial state(ents, and
co((unicate as re*uired "# the ISAs, in accordance with the auditor+s findin)s'
5
he auditor
o"tains reasona"le assurance "# o"tainin) sufficient a!!ro!riate audit evidence to reduce audit
risk to an acce!ta"l# low level'
B
Audit risk is the risk that the auditor e,!resses an ina!!ro!riate
audit o!inion when the financial state(ents are (ateriall# (isstated' Audit risk is a function of the
risks of (aterial (isstate(ent and detection risk'
7
Eaterialit# and audit risk are considered
throu)hout the audit, in !articular, when.
4
International Standards on Auditin),D !ara)ra!h 11' B
ISA 400, !ara)ra!h 17' 7
ISA 940 94B
1$a& Identif#in) and assessin) the risks of (aterial (isstate(ent?
8
2$"& =eter(inin) the nature, ti(in) and e,tent of further audit !rocedures?
5
and
3$c& 0valuatin) the effect of uncorrected (isstate(ents, if an#, on the financial state(ents
10

and in for(in) the o!inion in the auditor+s re!ort'
11
Dete'.i"i"( )!te'i!0it/ !"# *e'fo'.!"ce )!te'i!0it/ =he" *0!""i"( the A-#it
Considerations )pecific to (ublic )ector /ntities $Aef. 6ara' 10&
A4' In the case of a !u"lic sector entit#, le)islators and re)ulators are often the !ri(ar# users of its
financial state(ents' Further(ore, the financial state(ents (a# "e used to (ake decisions other
than econo(ic decisions' he deter(ination of (aterialit# for the financial state(ents as a whole
$and, if a!!lica"le, (aterialit# level or levels for !articular classes of transactions, account
"alances or disclosures& in an audit of the financial state(ents of a !u"lic sector entit# is therefore
influenced "# law, re)ulation or other authorit#, and "# the financial infor(ation needs of
le)islators and the !u"lic in relation to !u"lic sector !ro)ra(s'
"se of =ench$ar.s in ?eter$ining <ateriality for the Financial )tate$ents as a Dhole $Aef. 6ara' 10&
A9' =eter(inin) (aterialit# involves the e,ercise of !rofessional ;ud)(ent' A !ercenta)e is often
a!!lied to a chosen "ench(ark as a startin) !oint in deter(inin) (aterialit# for the financial
state(ents as a whole' Factors that (a# affect the identification of an a!!ro!riate "ench(ark
1. G he ele(ents of the financial state(ents $for e,a(!le, assets, lia"ilities, e*uit#, revenue,
e,!enses&?
2. G Lhether there are ite(s on which the attention of the users of the !articular entit#+s
financial state(ents tends to "e focused $for e,a(!le, for the !ur!ose of evaluatin) financial
!erfor(ance users (a# tend to focus on !rofit, revenue or net assets&?
8
5
ISA 450' 11
947 ISA 940
% G he nature of the entit#, where the entit# is in its life c#cle, and the industr# and
econo(ic environ(ent in which the entit# o!erates?
% G he entit#+s ownershi! structure and the wa# it is financed $for e,a(!le, if an entit# is
financed solel# "# de"t rather than e*uit#, users (a# !ut (ore e(!hasis on assets, and clai(s on
the(, than on the entit#+s earnin)s&? and
% G he relative volatilit# of the "ench(ark'
A4' 0,a(!les of "ench(arks that (a# "e a!!ro!riate, de!endin) on the circu(stances of the entit#,
include cate)ories of re!orted inco(e such as !rofit "efore ta,, total revenue, )ross !rofit and total
e,!enses, total e*uit# or net asset value' 6rofit "efore ta, fro( continuin) o!erations is often used
for !rofit-oriented entities' Lhen !rofit "efore ta, fro( continuin) o!erations is volatile, other
"ench(arks (a# "e (ore a!!ro!riate, such as )ross !rofit or total revenues'
A5' In relation to the chosen "ench(ark, relevant financial data ordinaril# includes !rior !eriods+
financial results and financial !ositions, the !eriod-to-date financial results and financial !osition,
and "ud)ets or forecasts for the current !eriod, ad;usted for si)nificant chan)es in the
circu(stances of the entit# $for e,a(!le, a si)nificant "usiness ac*uisition& and relevant chan)es
of conditions in the industr# or econo(ic environ(ent in which the entit# o!erates' For e,a(!le,
when, as a startin) !oint, (aterialit# for the financial state(ents as a whole is deter(ined for a
!articular entit# "ased on a !ercenta)e of !rofit "efore ta, fro( continuin) o!erations,
circu(stances that )ive rise to an e,ce!tional decrease or increase in such !rofit (a# lead the
auditor to conclude that (aterialit# for the financial state(ents as a whole is (ore a!!ro!riatel#
deter(ined usin) a nor(aliJed !rofit "efore ta, fro( continuin) o!erations fi)ure "ased on !ast
results'
AB' Eaterialit# relates to the financial state(ents on which the auditor is re!ortin)' Lhere the
financial state(ents are !re!ared for a financial re!ortin) !eriod of (ore or less than twelve
(onths, such as (a# "e the case for a new entit# or a chan)e in the financial re!ortin) !eriod,
(aterialit# relates to the financial state(ents !re!ared for that financial re!ortin) !eriod'
A7' =eter(inin) a !ercenta)e to "e a!!lied to a chosen "ench(ark involves the e,ercise of
!rofessional ;ud)(ent' here is a relationshi! "etween the !ercenta)e and the chosen "ench(ark,
such that a !ercenta)e a!!lied to !rofit "efore ta, fro( continuin) o!erations will nor(all# "e
hi)her than a !ercenta)e a!!lied to total revenue' For e,a(!le, the auditor (a# consider five
!ercent of !rofit "efore ta, fro( continuin) o!erations to "e a!!ro!riate for a !rofit-oriented
entit# in a (anufacturin) industr#, while the auditor (a# consider one !ercent of total revenue or
total e,!enses to "e a!!ro!riate for a
ISA 940 948
not-for-!rofit entit#' @i)her or lower !ercenta)es, however, (a# "e dee(ed a!!ro!riate in the
circu(stances'
%onsiderations S!ecific to S(all 0ntities
A8' Lhen an entit#+s !rofit "efore ta, fro( continuin) o!erations is consistentl# no(inal, as (i)ht "e
the case for an owner-(ana)ed "usiness where the owner takes (uch of the !rofit "efore ta, in
the for( of re(uneration, a "ench(ark such as !rofit "efore re(uneration and ta, (a# "e (ore
relevant'
A5' In an audit of a !u"lic sector entit#, total cost or net cost $e,!enses less revenues or e,!enditure
less recei!ts& (a# "e a!!ro!riate "ench(arks for !ro)ra( activities' Lhere a !u"lic sector entit#
has custod# of !u"lic assets, assets (a# "e an a!!ro!riate "ench(ark'
<ateriality :e!el or :e!els for (articular Classes of 1ransactions& Account =alances or ?isclosures $Aef.
6ara' 10&
A10' Factors that (a# indicate the e,istence of one or (ore !articular classes of transactions, account
"alances or disclosures for which (isstate(ents of lesser a(ounts than (aterialit# for the
financial state(ents as a whole could reasona"l# "e e,!ected to influence the econo(ic decisions
of users taken on the "asis of the financial state(ents include the followin).
% G Lhether law, re)ulation or the a!!lica"le financial re!ortin) fra(ework affect users+
e,!ectations re)ardin) the (easure(ent or disclosure of certain ite(s $for e,a(!le, related !art#
transactions, and the re(uneration of (ana)e(ent and those char)ed with )overnance&'
% G he ke# disclosures in relation to the industr# in which the entit# o!erates $for e,a(!le,
research and develo!(ent costs for a !har(aceutical co(!an#&'
% G Lhether attention is focused on a !articular as!ect of the entit#+s "usiness that is
se!aratel# disclosed in the financial state(ents $for e,a(!le, a newl# ac*uired "usiness&'
A11' In considerin) whether, in the s!ecific circu(stances of the entit#, such classes of transactions,
account "alances or disclosures e,ist, the auditor (a# find it useful to o"tain an understandin) of
the views and e,!ectations of those char)ed with )overnance and (ana)e(ent'
(erfor$ance <ateriality $Aef. 6ara' 11&
A14' 6lannin) the audit solel# to detect individuall# (aterial (isstate(ents overlooks the fact that the
a))re)ate of individuall# i((aterial (isstate(ents (a# cause the financial state(ents to "e
(ateriall# (isstated, and leaves no
945 ISA 940
(ar)in for !ossi"le undetected (isstate(ents' 6erfor(ance (aterialit# $which, as defined, is one
or (ore a(ounts& is set to reduce to an a!!ro!riatel# low level the !ro"a"ilit# that the a))re)ate of
uncorrected and undetected (isstate(ents in the financial state(ents e,ceeds (aterialit# for the
financial state(ents as a whole' Si(ilarl#, !erfor(ance (aterialit# relatin) to a (aterialit# level
deter(ined for a !articular class of transactions, account "alance or disclosure is set to reduce to
an a!!ro!riatel# low level the !ro"a"ilit# that the a))re)ate of uncorrected and undetected
(isstate(ents in that !articular class of transactions, account "alance or disclosure e,ceeds the
(aterialit# level for that !articular class of transactions, account "alance or disclosure' he
deter(ination of !erfor(ance (aterialit# is not a si(!le (echanical calculation and involves the
e,ercise of !rofessional ;ud)(ent' It is affected "# the auditor+s understandin) of the entit#,
u!dated durin) the !erfor(ance of the risk assess(ent !rocedures? and the nature and e,tent of
(isstate(ents identified in !revious audits and there"# the auditor+s e,!ectations in relation to
(isstate(ents in the current !eriod'
Re9iio" ! the A-#it *'o('ee $Aef. 6ara' 14&
A19' Eaterialit# for the financial state(ents as a whole $and, if a!!lica"le, the (aterialit# level or
levels for !articular classes of transactions, account "alances or disclosures& (a# need to "e
revised as a result of a chan)e in circu(stances that occurred durin) the audit $for e,a(!le, a
decision to dis!ose of a (a;or !art of the entit#+s "usiness&, new infor(ation, or a chan)e in the
auditor+s understandin) of the entit# and its o!erations as a result of !erfor(in) further audit
!rocedures' For e,a(!le, if durin) the audit it a!!ears as thou)h actual financial results are likel#
to "e su"stantiall# different fro( the antici!ated !eriod end financial results that were used
initiall# to deter(ine (aterialit# for the financial state(ents as a whole, the auditor revises that
(aterialit#'
ISA 940 990
THE AUDITOR>S RES*ONSES TO ASSESSED RISKS
CONTENTS
6ara)ra!h
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 9
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
Re2-i'e.e"t
7verall Aes!onses '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
Audit 6rocedures Aes!onsive to the Assessed Aisks of Eaterial
Eisstate(ent at the Assertion Mevel '''''''''''''''''''''''''''''''''''''''''''''''''''' B-49
7verall Aes!onses '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1-A9
Audit 6rocedures Aes!onsive to the Assessed Aisks of Eaterial
Ade*uac# of 6resentation and =isclosure '''''''''''''''''''''''''''''''''''''''''''''''''' 44
0valuatin) the Sufficienc# and A!!ro!riateness of Audit 0vidence '''''''''' 45-47
=ocu(entation '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 48-90
Eisstate(ent at the Assertion Mevel '''''''''''''''''''''''''''''''''''''''''''''''''''' A4-A58
Ade*uac# of 6resentation and =isclosure '''''''''''''''''''''''''''''''''''''''''''''''''' A55
0valuatin) the Sufficienc# and A!!ro!riateness of Audit 0vidence '''''''''' AB0-AB4
=ocu(entation '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' AB9
International Standard on Auditin) $ISA& 990, Che Auditor+s Aes!onses to Assessed AisksD should "e read
in con;unction with ISA 400, C7verall 7";ectives of the Inde!endent Auditor and the %onduct of an Audit
991 ISA 990
1' his International Standard on Auditin) $ISA& deals with the auditor+s res!onsi"ilit# to desi)n and
i(!le(ent res!onses to the risks of (aterial (isstate(ent identified and assessed "# the auditor in
accordance with ISA 915
1
in an audit of financial state(ents'
Effecti9e D!te
15, 4005'
O$1ecti9e
9' he o";ective of the auditor is to o"tain sufficient a!!ro!riate audit evidence re)ardin) the
assessed risks of (aterial (isstate(ent, throu)h desi)nin) and i(!le(entin) a!!ro!riate
res!onses to those risks'
Defi"itio"
1. $a& Su"stantive !rocedure K An audit !rocedure desi)ned to detect (aterial (isstate(ents at
the assertion level' Su"stantive !rocedures co(!rise.
2. $i& ests of details $of classes of transactions, account "alances, and disclosures&? and
3. $ii& Su"stantive anal#tical !rocedures'
2. $"& est of controls K An audit !rocedure desi)ned to evaluate the o!eratin) effectiveness of
controls in !reventin), or detectin) and correctin), (aterial (isstate(ents at the assertion level'
Re2-i'e.e"t O9e'!00 Repo"e
5' he auditor shall desi)n and i(!le(ent overall res!onses to address the assessed risks of (aterial
(isstate(ent at the financial state(ent level' $Aef. 6ara' A1-A9&
ISA 990 994
A-#it *'oce#-'e Repo"i9e to the Aee# Ri% of )!te'i!0 )it!te.e"t !t the
Ae'tio" Le9e0
1. B' he auditor shall desi)n and !erfor( further audit !rocedures whose nature, ti(in), and
e,tent are "ased on and are res!onsive to the assessed risks of (aterial (isstate(ent at the
assertion level' $Aef. 6ara' A4-A8&
17' In desi)nin) the further audit !rocedures to "e !erfor(ed, the auditor shall.
2$a& %onsider the reasons for the assess(ent )iven to the risk of (aterial (isstate(ent at the
assertion level for each class of transactions, account "alance, and disclosure, includin).
3$i& he likelihood of (aterial (isstate(ent due to the !articular characteristics of the relevant
class of transactions, account "alance, or disclosure $that is, the inherent risk&? and
4$ii& Lhether the risk assess(ent takes account of relevant controls $that is, the control risk&,
there"# re*uirin) the auditor to o"tain audit evidence to deter(ine whether the controls are
o!eratin) effectivel# $that is, the auditor intends to rel# on the o!eratin) effectiveness of
controls in deter(inin) the nature, ti(in) and e,tent of su"stantive !rocedures&? and $Aef.
6ara' A5-A18&
5$"& 7"tain (ore !ersuasive audit evidence the hi)her the auditor+s assess(ent of risk' $Aef.
6ara' A15&
1ests of Controls
18' he auditor shall desi)n and !erfor( tests of controls to o"tain sufficient a!!ro!riate audit
evidence as to the o!eratin) effectiveness of relevant controls if.
2$a& he auditor+s assess(ent of risks of (aterial (isstate(ent at the assertion level includes
an e,!ectation that the controls are o!eratin) effectivel# $that is, the auditor intends to rel# on
the o!eratin) effectiveness of controls in deter(inin) the nature, ti(in) and e,tent of
su"stantive !rocedures&? or
3$"& Su"stantive !rocedures alone cannot !rovide sufficient a!!ro!riate audit evidence at the
assertion level' $Aef. 6ara' A40-A44&
2. 5' In desi)nin) and !erfor(in) tests of controls, the auditor shall o"tain (ore !ersuasive
audit evidence the )reater the reliance the auditor !laces on the effectiveness of a control' $Aef.
6ara' A45&
999 ISA 990
Nature and 0,tent of ests of %ontrols
10' In desi)nin) and !erfor(in) tests of controls, the auditor shall.
1. $a& 6erfor( other audit !rocedures in co("ination with in*uir# to o"tain audit evidence
a"out the o!eratin) effectiveness of the controls, includin).
2. $i& @ow the controls were a!!lied at relevant ti(es durin) the !eriod under audit?
3. $ii& he consistenc# with which the# were a!!lied? and
4. $iii& 1# who( or "# what (eans the# were a!!lied' $Aef. 6ara' A4BA45&
2. $"& =eter(ine whether the controls to "e tested de!end u!on other controls $indirect controls& and,
if so, whether it is necessar# to o"tain audit evidence su!!ortin) the effective o!eration of those
indirect controls' $Aef. 6ara' A90-A91&
i(in) of ests of %ontrols
11' he auditor shall test controls for the !articular ti(e, or throu)hout the !eriod, for which the
auditor intends to rel# on those controls, su";ect to !ara)ra!hs 14 and 15 "elow, in order to
!rovide an a!!ro!riate "asis for the auditor+s intended reliance' $Aef. 6ara' A94&
Usin) audit evidence o"tained durin) an interi( !eriod
14' If the auditor o"tains audit evidence a"out the o!eratin) effectiveness of controls durin) an interi(
!eriod, the auditor shall.
1$a&7"tain audit evidence a"out si)nificant chan)es to those controls su"se*uent to the interi( !eriod?
and
2$"& =eter(ine the additional audit evidence to "e o"tained for the re(ainin) !eriod' $Aef.
6ara' A99-A94&
Usin) audit evidence o"tained in !revious audits
19' In deter(inin) whether it is a!!ro!riate to use audit evidence a"out the o!eratin) effectiveness of
controls o"tained in !revious audits, and, if so, the len)th of the ti(e !eriod that (a# ela!se
"efore retestin) a control, the auditor shall consider the followin).
1$a& he effectiveness of other ele(ents of internal control, includin) the control
environ(ent, the entit#+s (onitorin) of controls, and the entit#+s risk assess(ent !rocess?
2$"& he risks arisin) fro( the characteristics of the control, includin) whether it is (anual or
auto(ated?
ISA 990 994
1. $c& he effectiveness of )eneral I-controls?
2. $d& he effectiveness of the control and its a!!lication "# the entit#, includin) the nature and
e,tent of deviations in the a!!lication of the control noted in !revious audits, and whether there
have "een !ersonnel chan)es that si)nificantl# affect the a!!lication of the control?
3. $e& Lhether the lack of a chan)e in a !articular control !oses a risk due to chan)in)
circu(stances? and
4. $f& he risks of (aterial (isstate(ent and the e,tent of reliance on the control' $Aef. 6ara'
A95&
14' If the auditor !lans to use audit evidence fro( a !revious audit a"out the o!eratin) effectiveness of
s!ecific controls, the auditor shall esta"lish the continuin) relevance of that evidence "# o"tainin)
audit evidence a"out whether si)nificant chan)es in those controls have occurred su"se*uent to
the !revious audit' he auditor shall o"tain this evidence "# !erfor(in) in*uir# co("ined with
o"servation or ins!ection, to confir( the understandin) of those s!ecific controls, and.
1. $a& If there have "een chan)es that affect the continuin) relevance of the audit evidence fro(
the !revious audit, the auditor shall test the controls in the current audit' $Aef. 6ara' A9B&
2. $"& If there have not "een such chan)es, the auditor shall test the controls at least once in ever#
third audit, and shall test so(e controls each audit to avoid the !ossi"ilit# of testin) all the
controls on which the auditor intends to rel# in a sin)le audit !eriod with no testin) of controls in
the su"se*uent two audit !eriods' $Aef. 6ara' A97-A95&
%ontrols over si)nificant risks
15' If the auditor !lans to rel# on controls over a risk the auditor has deter(ined to "e a si)nificant
risk, the auditor shall test those controls in the current !eriod'
0valuatin) the 7!eratin) 0ffectiveness of %ontrols
1. 1B' Lhen evaluatin) the o!eratin) effectiveness of relevant controls, the auditor shall
evaluate whether (isstate(ents that have "een detected "# su"stantive !rocedures indicate that
controls are not o!eratin) effectivel#' he a"sence of (isstate(ents detected "# su"stantive
!rocedures, however, does not !rovide audit evidence that controls related to the assertion "ein)
tested are effective' $Aef. 6ara' A40&
2. 17' If deviations fro( controls u!on which the auditor intends to rel# are detected, the
auditor shall (ake s!ecific in*uiries to understand these (atters and their !otential conse*uences,
and shall deter(ine whether. $Aef. 6ara' A41&
995 ISA 990
1$a&he tests of controls that have "een !erfor(ed !rovide an a!!ro!riate "asis for reliance on the
controls?
2$"& Additional tests of controls are necessar#? or
3$c& he !otential risks of (isstate(ent need to "e addressed usin) su"stantive !rocedures'
)ubstanti!e (rocedures
1. 18' Irres!ective of the assessed risks of (aterial (isstate(ent, the auditor shall desi)n and
!erfor( su"stantive !rocedures for each (aterial class of transactions, account "alance, and
disclosure' $Aef. 6ara' A44-A47&
2. 15' he auditor shall consider whether e,ternal confir(ation !rocedures are to "e !erfor(ed
as su"stantive audit !rocedures' $Aef. 6ara' A48-A51&
Su"stantive 6rocedures Aelated to the Financial State(ent %losin) 6rocess
40' he auditor+s su"stantive !rocedures shall include the followin) audit !rocedures related to the
financial state(ent closin) !rocess.
1. $a& A)reein) or reconcilin) the financial state(ents with the underl#in) accountin) records?
and
2. $"& 0,a(inin) (aterial ;ournal entries and other ad;ust(ents (ade durin) the course of !re!arin)
the financial state(ents' $Aef. 6ara' A54&
Su"stantive 6rocedures Aes!onsive to Si)nificant Aisks
41' If the auditor has deter(ined that an assessed risk of (aterial (isstate(ent at the assertion level is
a si)nificant risk, the auditor shall !erfor( su"stantive !rocedures that are s!ecificall# res!onsive
to that risk' Lhen the a!!roach to a si)nificant risk consists onl# of su"stantive !rocedures, those
!rocedures shall include tests of details' $Aef. 6ara' A59&
i(in) of Su"stantive 6rocedures
44' If su"stantive !rocedures are !erfor(ed at an interi( date, the auditor shall cover the re(ainin)
!eriod "# !erfor(in).
1$a& su"stantive !rocedures, co("ined with tests of controls for the intervenin) !eriod? or
2$"& if the auditor deter(ines that it is sufficient, further su"stantive !rocedures onl#,
that !rovide a reasona"le "asis for e,tendin) the audit conclusions fro( the interi( date to the
!eriod end' $Aef. 6ara' A54-A57&
49' If (isstate(ents that the auditor did not e,!ect when assessin) the risks of (aterial (isstate(ent
are detected at an interi( date, the auditor shall evaluate
ISA 990 99B
whether the related assess(ent of risk and the !lanned nature, ti(in), or e,tent of su"stantive
!rocedures coverin) the re(ainin) !eriod need to "e (odified' $Aef. 6ara' A58&
A#e2-!c/ of *'ee"t!tio" !"# Dic0o-'e
44' he auditor shall !erfor( audit !rocedures to evaluate whether the overall !resentation of the
financial state(ents, includin) the related disclosures, is in accordance with the a!!lica"le
financial re!ortin) fra(ework' $Aef. 6ara' A55&
E9!0-!ti"( the S-fficie"c/ !"# App'op'i!te"e of A-#it E9i#e"ce
1. 45' 1ased on the audit !rocedures !erfor(ed and the audit evidence o"tained, the auditor
shall evaluate "efore the conclusion of the audit whether the assess(ents of the risks of (aterial
(isstate(ent at the assertion level re(ain a!!ro!riate' $Aef. 6ara' AB0-AB1&
2. 4B' he auditor shall conclude whether sufficient a!!ro!riate audit evidence has "een
o"tained' In for(in) an o!inion, the auditor shall consider all relevant audit evidence, re)ardless
of whether it a!!ears to corro"orate or to contradict the assertions in the financial state(ents'
$Aef. 6ara' AB4&
3. 47' If the auditor has not o"tained sufficient a!!ro!riate audit evidence as to a (aterial
financial state(ent assertion, the auditor shall atte(!t to o"tain further audit evidence' If the
auditor is una"le to o"tain sufficient a!!ro!riate audit evidence, the auditor shall e,!ress a
*ualified o!inion or disclai( an o!inion on the financial state(ents'
Doc-.e"t!tio"
1. 48' he auditor shall include in the audit docu(entation.
4
2. $a& he overall res!onses to address the assessed risks of (aterial (isstate(ent at the
financial state(ent level, and the nature, ti(in), and e,tent of the further audit !rocedures
!erfor(ed?
3. $"& he linka)e of those !rocedures with the assessed risks at the assertion level? and
4. $c& he results of the audit !rocedures, includin) the conclusions where these are not
otherwise clear' $Aef. 6ara' AB9&
2. 45' If the auditor !lans to use audit evidence a"out the o!eratin) effectiveness of controls
o"tained in !revious audits, the auditor shall include in the audit docu(entation the conclusions
reached a"out rel#in) on such controls that were tested in a !revious audit'
997 ISA 990
90' he auditor+s docu(entation shall de(onstrate that the financial state(ents a)ree or reconcile
with the underl#in) accountin) records'
OOO
App0ic!tio" !"# Othe' E5p0!"!to'/ )!te'i!0 O9e'!00 Repo"e
$Aef. 6ara' 5& A1' 7verall res!onses to address the assessed risks of (aterial
(isstate(ent at the financial state(ent level (a# include.
% G 0(!hasiJin) to the audit tea( the need to (aintain !rofessional ske!ticis('
% G Assi)nin) (ore e,!erienced staff or those with s!ecial skills or usin) e,!erts'
% G 6rovidin) (ore su!ervision'
% G Incor!oratin) additional ele(ents of un!redicta"ilit# in the selection of further audit
!rocedures to "e !erfor(ed'
% G Eakin) )eneral chan)es to the nature, ti(in), or e,tent of audit !rocedures, for e,a(!le.
!erfor(in) su"stantive !rocedures at the !eriod end instead of at an interi( date? or (odif#in) the
nature of audit !rocedures to o"tain (ore !ersuasive audit evidence'
A4' he assess(ent of the risks of (aterial (isstate(ent at the financial state(ent level, and there"#
the auditor+s overall res!onses, is affected "# the auditor+s understandin) of the control
environ(ent' An effective control environ(ent (a# allow the auditor to have (ore confidence in
internal control and the relia"ilit# of audit evidence )enerated internall# within the entit# and thus,
for e,a(!le, allow the auditor to conduct so(e audit !rocedures at an interi( date rather than at
the !eriod end' =eficiencies in the control environ(ent, however, have the o!!osite effect? for
e,a(!le, the auditor (a# res!ond to an ineffective control environ(ent "#.
1. G %onductin) (ore audit !rocedures as of the !eriod end rather than at an interi( date'
2. G 7"tainin) (ore e,tensive audit evidence fro( su"stantive !rocedures'
3. G Increasin) the nu("er of locations to "e included in the audit sco!e'
A9' Such considerations, therefore, have a si)nificant "earin) on the auditor+s )eneral a!!roach, for
e,a(!le, an e(!hasis on su"stantive !rocedures $su"stantive a!!roach&, or an a!!roach that uses
tests of controls as well as su"stantive !rocedures $co("ined a!!roach&'
ISA 990 998
A-#it *'oce#-'e Repo"i9e to the Aee# Ri% of )!te'i!0 )it!te.e"t !t the
Ae'tio" Le9e0
1he Aature& 1i$ing& and /4tent of Further Audit (rocedures $Aef. 6ara' B&
A4' he auditor+s assess(ent of the identified risks at the assertion level !rovides a "asis for
considerin) the a!!ro!riate audit a!!roach for desi)nin) and !erfor(in) further audit !rocedures'
For e,a(!le, the auditor (a# deter(ine that.
1. $a& 7nl# "# !erfor(in) tests of controls (a# the auditor achieve an effective res!onse to the
assessed risk of (aterial (isstate(ent for a !articular assertion?
2. $"& 6erfor(in) onl# su"stantive !rocedures is a!!ro!riate for !articular assertions and, therefore,
the auditor e,cludes the effect of controls fro( the relevant risk assess(ent' his (a# "e "ecause
the auditor+s risk assess(ent !rocedures have not identified an# effective controls relevant to the
assertion, or "ecause testin) controls would "e inefficient and therefore the auditor does not intend
to rel# on the o!eratin) effectiveness of controls in deter(inin) the nature, ti(in) and e,tent of
su"stantive !rocedures? or
3. $c& A co("ined a!!roach usin) "oth tests of controls and su"stantive !rocedures is an
effective a!!roach'
@owever, as re*uired "# !ara)ra!h 18, irres!ective of the a!!roach selected, the auditor desi)ns
and !erfor(s su"stantive !rocedures for each (aterial class of transactions, account "alance, and
disclosure'
A5' he nature of an audit !rocedure refers to its !ur!ose $that is, test of controls or su"stantive
!rocedure& and its t#!e $that is, ins!ection, o"servation, in*uir#, confir(ation, recalculation,
re!erfor(ance, or anal#tical !rocedure&' he nature of the audit !rocedures is of (ost i(!ortance
in res!ondin) to the assessed risks'
AB' i(in) of an audit !rocedure refers to when it is !erfor(ed, or the !eriod or date to which the
audit evidence a!!lies'
A7' 0,tent of an audit !rocedure refers to the *uantit# to "e !erfor(ed, for e,a(!le, a sa(!le siJe or
the nu("er of o"servations of a control activit#'
A8' =esi)nin) and !erfor(in) further audit !rocedures whose nature, ti(in), and e,tent are "ased on
and are res!onsive to the assessed risks of (aterial (isstate(ent at the assertion level !rovides a
clear linka)e "etween the auditor+s further audit !rocedures and the risk assess(ent'
995 ISA 990
Aes!ondin) to the Assessed Aisks at the Assertion Mevel $Aef. 6ara' 7$a&&
Nature
A5' he auditor+s assessed risks (a# affect "oth the t#!es of audit !rocedures to "e !erfor(ed and
their co("ination' For e,a(!le, when an assessed risk is hi)h, the auditor (a# confir( the
co(!leteness of the ter(s of a contract with the counter!art#, in addition to ins!ectin) the
docu(ent' Further, certain audit !rocedures (a# "e (ore a!!ro!riate for so(e assertions than
others' For e,a(!le, in relation to revenue, tests of controls (a# "e (ost res!onsive to the
assessed risk of (isstate(ent of the co(!leteness assertion, whereas su"stantive !rocedures (a#
"e (ost res!onsive to the assessed risk of (isstate(ent of the occurrence assertion'
A10' he reasons for the assess(ent )iven to a risk are relevant in deter(inin) the nature of audit
!rocedures' For e,a(!le, if an assessed risk is lower "ecause of the !articular characteristics of a
class of transactions without consideration of the related controls, then the auditor (a# deter(ine
that su"stantive anal#tical !rocedures alone !rovide sufficient a!!ro!riate audit evidence' 7n the
other hand, if the assessed risk is lower "ecause of internal controls, and the auditor intends to
"ase the su"stantive !rocedures on that low assess(ent, then the auditor !erfor(s tests of those
controls, as re*uired "# !ara)ra!h 8$a&' his (a# "e the case, for e,a(!le, for a class of
transactions of reasona"l# unifor(, non-co(!le, characteristics that are routinel# !rocessed and
controlled "# the entit#+s infor(ation s#ste('
i(in)
A11' he auditor (a# !erfor( tests of controls or su"stantive !rocedures at an interi( date or at the
!eriod end' he hi)her the risk of (aterial (isstate(ent, the (ore likel# it is that the auditor (a#
decide it is (ore effective to !erfor( su"stantive !rocedures nearer to, or at, the !eriod end rather
than at an earlier date, or to !erfor( audit !rocedures unannounced or at un!redicta"le ti(es$for
e,a(!le, !erfor(in) audit !rocedures at selected locations on an unannounced "asis&' his is
!articularl# relevant when considerin) the res!onse to the risks of fraud' For e,a(!le, the auditor
(a# conclude that, when the risks of intentional (isstate(ent or (ani!ulation have "een
identified, audit !rocedures to e,tend audit conclusions fro( interi( date to the !eriod end would
not "e effective'
A14' 7n the other hand, !erfor(in) audit !rocedures "efore the !eriod end (a# assist the auditor in
identif#in) si)nificant (atters at an earl# sta)e of the audit, and conse*uentl# resolvin) the( with
the assistance of (ana)e(ent or develo!in) an effective audit a!!roach to address such (atters'
A19' In addition, certain audit !rocedures can "e !erfor(ed onl# at or after the !eriod end, for e,a(!le.
ISA 990 940
1. G A)reein) the financial state(ents to the accountin) records?
2. G 0,a(inin) ad;ust(ents (ade durin) the course of !re!arin) the financial state(ents? and
3. G 6rocedures to res!ond to a risk that, at the !eriod end, the entit# (a# have entered into
i(!ro!er sales contracts, or transactions (a# not have "een finaliJed'
A14' Further relevant factors that influence the auditor+s consideration of when to !erfor( audit
!rocedures include the followin).
% G he control environ(ent'
% G Lhen relevant infor(ation is availa"le $for e,a(!le, electronic files (a# su"se*uentl#
"e overwritten, or !rocedures to "e o"served (a# occur onl# at certain ti(es&'
% G he nature of the risk $for e,a(!le, if there is a risk of inflated revenues to (eet earnin)s
e,!ectations "# su"se*uent creation of false sales a)ree(ents, the auditor (a# wish to e,a(ine
contracts availa"le on the date of the !eriod end&'
% G he !eriod or date to which the audit evidence relates'
0,tent
A15' he e,tent of an audit !rocedure ;ud)ed necessar# is deter(ined after considerin) the (aterialit#,
the assessed risk, and the de)ree of assurance the auditor !lans to o"tain' Lhen a sin)le !ur!ose is
(et "# a co("ination of !rocedures, the e,tent of each !rocedure is considered se!aratel#' In
)eneral, the e,tent of audit !rocedures increases as the risk of (aterial (isstate(ent increases' For
e,a(!le, in res!onse to the assessed risk of (aterial (isstate(ent due to fraud, increasin) sa(!le
siJes or !erfor(in) su"stantive anal#tical !rocedures at a (ore detailed level (a# "e a!!ro!riate'
@owever, increasin) the e,tent of an audit !rocedure is effective onl# if the audit !rocedure itself
is relevant to the s!ecific risk'
A1B' he use of co(!uter-assisted audit techni*ues $%AAs& (a# ena"le (ore e,tensive testin) of
electronic transactions and account files, which (a# "e useful when the auditor decides to (odif#
the e,tent of testin), for e,a(!le, in res!ondin) to the risks of (aterial (isstate(ent due to fraud'
Such techni*ues can "e used to select sa(!le transactions fro( ke# electronic files, to sort
transactions with s!ecific characteristics, or to test an entire !o!ulation instead of a sa(!le'
941 ISA 990
A17' For the audits of !u"lic sector entities, the audit (andate and an# other s!ecial auditin)
re*uire(ents (a# affect the auditor+s consideration of the nature, ti(in) and e,tent of further
audit !rocedures'
A18' In the case of ver# s(all entities, there (a# not "e (an# control activities that could "e identified
"# the auditor, or the e,tent to which their e,istence or o!eration have "een docu(ented "# the
entit# (a# "e li(ited' In such cases, it (a# "e (ore efficient for the auditor to !erfor( further
audit !rocedures that are !ri(aril# su"stantive !rocedures' In so(e rare cases, however, the
a"sence of control activities or of other co(!onents of control (a# (ake it i(!ossi"le to o"tain
sufficient a!!ro!riate audit evidence'
@i)her Assess(ents of Aisk $Aef. 6ara 7$"&&
A15' Lhen o"tainin) (ore !ersuasive audit evidence "ecause of a hi)her assess(ent of risk, the auditor
(a# increase the *uantit# of the evidence, or o"tain evidence that is (ore relevant or relia"le, for
e,a(!le, "# !lacin) (ore e(!hasis on o"tainin) third !art# evidence or "# o"tainin)
corro"oratin) evidence fro( a nu("er of inde!endent sources'
1ests of Controls
=esi)nin) and 6erfor(in) ests of %ontrols $Aef. 6ara' 8&
A40' ests of controls are !erfor(ed onl# on those controls that the auditor has deter(ined are suita"l#
desi)ned to !revent, or detect and correct, a (aterial (isstate(ent in an assertion' If su"stantiall#
different controls were used at different ti(es durin) the !eriod under audit, each is considered
se!aratel#'
A41' estin) the o!eratin) effectiveness of controls is different fro( o"tainin) an understandin) of and
evaluatin) the desi)n and i(!le(entation of controls' @owever, the sa(e t#!es of audit
!rocedures are used' he auditor (a#, therefore, decide it is efficient to test the o!eratin)
effectiveness of controls at the sa(e ti(e as evaluatin) their desi)n and deter(inin) that the#
have "een i(!le(ented'
A44' Further, althou)h so(e risk assess(ent !rocedures (a# not have "een s!ecificall# desi)ned as
tests of controls, the# (a# nevertheless !rovide audit evidence a"out the o!eratin) effectiveness
of the controls and, conse*uentl#, serve as tests of controls' For e,a(!le, the auditor+s risk
assess(ent !rocedures (a# have included.
% G In*uirin) a"out (ana)e(ent+s use of "ud)ets'
% G 7"servin) (ana)e(ent+s co(!arison of (onthl# "ud)eted and actual e,!enses'
ISA 990 944
G Ins!ectin) re!orts !ertainin) to the investi)ation of variances "etween "ud)eted and actual
a(ounts'
hese audit !rocedures !rovide knowled)e a"out the desi)n of the entit#+s "ud)etin) !olicies and
whether the# have "een i(!le(ented, "ut (a# also !rovide audit evidence a"out the effectiveness
of the o!eration of "ud)etin) !olicies in !reventin) or detectin) (aterial (isstate(ents in the
classification of e,!enses'
A49' In addition, the auditor (a# desi)n a test of controls to "e !erfor(ed concurrentl# with a test of
details on the sa(e transaction' Althou)h the !ur!ose of a test of controls is different fro( the
!ur!ose of a test of details, "oth (a# "e acco(!lished concurrentl# "# !erfor(in) a test of
controls and a test of details on the sa(e transaction, also known as a dual-!ur!ose test' For
e,a(!le, the auditor (a# desi)n, and evaluate the results of, a test to e,a(ine an invoice to
deter(ine whether it has "een a!!roved and to !rovide su"stantive audit evidence of a transaction'
A dual-!ur!ose test is desi)ned and evaluated "# considerin) each !ur!ose of the test se!aratel#'
A44' In so(e cases, the auditor (a# find it i(!ossi"le to desi)n effective su"stantive !rocedures that
"# the(selves !rovide sufficient a!!ro!riate audit evidence at the assertion level'
9
his (a# occur
when an entit# conducts its "usiness usin) I and no docu(entation of transactions is !roduced or
(aintained, other than throu)h the I s#ste(' In such cases, !ara)ra!h 8$"& re*uires the auditor to
!erfor( tests of relevant controls'
Audit 0vidence and Intended Aeliance $Aef. 6ara' 5&
A45' A hi)her level of assurance (a# "e sou)ht a"out the o!eratin) effectiveness of controls when the
a!!roach ado!ted consists !ri(aril# of tests of controls, in !articular where it is not !ossi"le or
!ractica"le to o"tain sufficient a!!ro!riate audit evidence onl# fro( su"stantive !rocedures'
Nature and 0,tent of ests of %ontrols
7ther audit !rocedures in co("ination with in*uir# $Aef. 6ara' 10$a&&
A4B' In*uir# alone is not sufficient to test the o!eratin) effectiveness of controls' Accordin)l#, other
audit !rocedures are !erfor(ed in co("ination with in*uir#' In this re)ard, in*uir# co("ined with
ins!ection or re!erfor(ance (a# !rovide (ore assurance than in*uir# and o"servation, since an
o"servation is !ertinent onl# at the !oint in ti(e at which it is (ade'
A47' he nature of the !articular control influences the t#!e of !rocedure re*uired to o"tain audit
evidence a"out whether the control was o!eratin) effectivel#' For e,a(!le, if o!eratin)
effectiveness is evidenced "# docu(entation, the auditor
949 ISA 990
(a# decide to ins!ect it to o"tain audit evidence a"out o!eratin) effectiveness' For other controls,
however, docu(entation (a# not "e availa"le or relevant' For e,a(!le, docu(entation of
o!eration (a# not e,ist for so(e factors in the control environ(ent, such as assi)n(ent of
authorit# and res!onsi"ilit#, or for so(e t#!es of control activities, such as control activities
!erfor(ed "# a co(!uter' In such circu(stances, audit evidence a"out o!eratin) effectiveness (a#
"e o"tained throu)h in*uir# in co("ination with other audit !rocedures such as o"servation or the
use of %AAs'
0,tent of tests of controls
A48' Lhen (ore !ersuasive audit evidence is needed re)ardin) the effectiveness of a control, it (a# "e
a!!ro!riate to increase the e,tent of testin) of the control' As well as the de)ree of reliance on
controls, (atters the auditor (a# consider in deter(inin) the e,tent of tests of controls include the
followin).
% G he fre*uenc# of the !erfor(ance of the control "# the entit# durin) the !eriod'
% G he len)th of ti(e durin) the audit !eriod that the auditor is rel#in) on the o!eratin)
effectiveness of the control'
% G he e,!ected rate of deviation fro( a control'
% G he relevance and relia"ilit# of the audit evidence to "e o"tained re)ardin) the o!eratin)
effectiveness of the control at the assertion level'
% G he e,tent to which audit evidence is o"tained fro( tests of other controls related to the
assertion'
ISA 590
4
contains further )uidance on the e,tent of testin)'
A45' 1ecause of the inherent consistenc# of I !rocessin), it (a# not "e necessar# to increase the
e,tent of testin) of an auto(ated control' An auto(ated control can "e e,!ected to function
consistentl# unless the !ro)ra( $includin) the ta"les, files, or other !er(anent data used "# the
!ro)ra(& is chan)ed' 7nce the auditor deter(ines that an auto(ated control is functionin) as
intended $which could "e done at the ti(e the control is initiall# i(!le(ented or at so(e other
date&, the auditor (a# consider !erfor(in) tests to deter(ine that the control continues to function
effectivel#' Such tests (i)ht include deter(inin) that.
% G %han)es to the !ro)ra( are not (ade without "ein) su";ect to the a!!ro!riate !ro)ra(
chan)e controls?
% G he authoriJed version of the !ro)ra( is used for !rocessin) transactions? and
ISA 590, CAudit Sa(!lin)'D
ISA 990 944
G 7ther relevant )eneral controls are effective'
Such tests also (i)ht include deter(inin) that chan)es to the !ro)ra(s have not "een (ade, as
(a# "e the case when the entit# uses !acka)ed software a!!lications without (odif#in) or
(aintainin) the(' For e,a(!le, the auditor (a# ins!ect the record of the ad(inistration of I
securit# to o"tain audit evidence that unauthoriJed access has not occurred durin) the !eriod'
estin) of indirect controls $Aef. 6ara' 10$"&&
A90' In so(e circu(stances, it (a# "e necessar# to o"tain audit evidence su!!ortin) the effective
o!eration of indirect controls' For e,a(!le, when the auditor decides to test the effectiveness of a
user review of e,ce!tion re!orts detailin) sales in e,cess of authoriJed credit li(its, the user
review and related follow u! is the control that is directl# of relevance to the auditor' %ontrols
over the accurac# of the infor(ation in the re!orts $for e,a(!le, the )eneral I-controls& are
descri"ed as CindirectD controls'
A91' 1ecause of the inherent consistenc# of I !rocessin), audit evidence a"out the i(!le(entation of
an auto(ated a!!lication control, when considered in co("ination with audit evidence a"out the
o!eratin) effectiveness of the entit#+s )eneral controls $in !articular, chan)e controls&, (a# also
!rovide su"stantial audit evidence a"out its o!eratin) effectiveness'
i(in) of ests of %ontrols
Intended !eriod of reliance $Aef. 6ara' 11&
A94' Audit evidence !ertainin) onl# to a !oint in ti(e (a# "e sufficient for the auditor+s !ur!ose, for
e,a(!le, when testin) controls over the entit#+s !h#sical inventor# countin) at the !eriod end' If,
on the other hand, the auditor intends to rel# on a control over a !eriod, tests that are ca!a"le of
!rovidin) audit evidence that the control o!erated effectivel# at relevant ti(es durin) that !eriod
are a!!ro!riate' Such tests (a# include tests of the entit#+s (onitorin) of controls'
Usin) audit evidence o"tained durin) an interi( !eriod $Aef. 6ara' 14$"&& A99' Aelevant factors
in deter(inin) what additional audit evidence to o"tain a"out controls that were o!eratin)
durin) the !eriod re(ainin) after an interi( !eriod, include.
1. G he si)nificance of the assessed risks of (aterial (isstate(ent at the assertion level'
2. G he s!ecific controls that were tested durin) the interi( !eriod, and si)nificant chan)es
to the( since the# were tested, includin) chan)es in the infor(ation s#ste(, !rocesses, and
!ersonnel'
945 ISA 990
% G he de)ree to which audit evidence a"out the o!eratin) effectiveness of those controls
was o"tained'
% G he len)th of the re(ainin) !eriod'
% G he e,tent to which the auditor intends to reduce further su"stantive !rocedures "ased on
the reliance of controls'
% G he control environ(ent'
A94' Additional audit evidence (a# "e o"tained, for e,a(!le, "# e,tendin) tests of controls over the
re(ainin) !eriod or testin) the entit#+s (onitorin) of controls'
Usin) audit evidence o"tained in !revious audits $Aef. 6ara' 19&
A95' In certain circu(stances, audit evidence o"tained fro( !revious audits (a# !rovide audit evidence
where the auditor !erfor(s audit !rocedures to esta"lish its continuin) relevance' For e,a(!le, in
!erfor(in) a !revious audit, the auditor (a# have deter(ined that an auto(ated control was
functionin) as intended' he auditor (a# o"tain audit evidence to deter(ine whether chan)es to
the auto(ated control have "een (ade that affect its continued effective functionin) throu)h, for
e,a(!le, in*uiries of (ana)e(ent and the ins!ection of lo)s to indicate what controls have "een
chan)ed' %onsideration of audit evidence a"out these chan)es (a# su!!ort either increasin) or
decreasin) the e,!ected audit evidence to "e o"tained in the current !eriod a"out the o!eratin)
effectiveness of the controls'
%ontrols that have chan)ed fro( !revious audits $Aef. 6ara' 14$a&&
A9B' %han)es (a# affect the relevance of the audit evidence o"tained in !revious audits such that there
(a# no lon)er "e a "asis for continued reliance' For e,a(!le, chan)es in a s#ste( that ena"le an
entit# to receive a new re!ort fro( the s#ste( !ro"a"l# do not affect the relevance of audit
evidence fro( a !revious audit? however, a chan)e that causes data to "e accu(ulated or
calculated differentl# does affect it'
%ontrols that have not chan)ed fro( !revious audits $Aef. 6ara' 14$"&&
A97' he auditor+s decision on whether to rel# on audit evidence o"tained in !revious audits for controls
that.
1$a& have not chan)ed since the# were last tested? and
2$"& are not controls that (iti)ate a si)nificant risk,
is a (atter of !rofessional ;ud)(ent' In addition, the len)th of ti(e "etween retestin) such
controls is also a (atter of !rofessional ;ud)(ent, "ut is re*uired "# !ara)ra!h 14 $"& to "e at least
once in ever# third #ear'
ISA 990 94B
A98' In )eneral, the hi)her the risk of (aterial (isstate(ent, or the )reater the reliance on controls, the
shorter the ti(e !eriod ela!sed, if an#, is likel# to "e' Factors that (a# decrease the !eriod for
retestin) a control, or result in not rel#in) on audit evidence o"tained in !revious audits at all,
1. G A deficient control environ(ent'
2. G =eficient (onitorin) of controls'
3. G A si)nificant (anual ele(ent to the relevant controls'
4. G 6ersonnel chan)es that si)nificantl# affect the a!!lication of the control'
5. G %han)in) circu(stances that indicate the need for chan)es in the control'
6. G =eficient )eneral I-controls'
A95' Lhen there are a nu("er of controls for which the auditor intends to rel# on audit evidence
o"tained in !revious audits, testin) so(e of those controls in each audit !rovides corro"oratin)
infor(ation a"out the continuin) effectiveness of the control environ(ent' his contri"utes to the
auditor+s decision a"out whether it is a!!ro!riate to rel# on audit evidence o"tained in !revious
audits'
0valuatin) the 7!eratin) 0ffectiveness of %ontrols $Aef. 6ara' 1B-17&
A40' A (aterial (isstate(ent detected "# the auditor+s !rocedures is a stron) indicator of the e,istence of
a si)nificant deficienc# in internal control'
A41' he conce!t of effectiveness of the o!eration of controls reco)niJes that so(e deviations in the
wa# controls are a!!lied "# the entit# (a# occur' =eviations fro( !rescri"ed controls (a# "e
caused "# such factors as chan)es in ke# !ersonnel, si)nificant seasonal fluctuations in volu(e of
transactions and hu(an error' he detected rate of deviation, in !articular in co(!arison with the
e,!ected rate, (a# indicate that the control cannot "e relied on to reduce risk at the assertion level
to that assessed "# the auditor'
)ubstanti!e (rocedures $Aef. 6ara' 18&
A44' 6ara)ra!h 18 re*uires the auditor to desi)n and !erfor( su"stantive !rocedures for each (aterial
class of transactions, account "alance, and disclosure, irres!ective of the assessed risks of (aterial
(isstate(ent' his re*uire(ent reflects the facts that.
$a& the auditor+s assess(ent of risk is ;ud)(ental and so (a# not identif# all risks of (aterial
(isstate(ent? and $"& there are inherent li(itations to internal control, includin) (ana)e(ent
override'
947 ISA 990
Nature and 0,tent of Su"stantive 6rocedures A49' =e!endin) on the circu(stances, the auditor (a#
deter(ine that.
% G 6erfor(in) onl# su"stantive anal#tical !rocedures will "e sufficient to reduce audit risk
to an acce!ta"l# low level' For e,a(!le, where the auditor+s assess(ent of risk is su!!orted "#
audit evidence fro( tests of controls'
% G 7nl# tests of details are a!!ro!riate'
% G A co("ination of su"stantive anal#tical !rocedures and tests of details are (ost
res!onsive to the assessed risks'
A44' Su"stantive anal#tical !rocedures are )enerall# (ore a!!lica"le to lar)e volu(es of transactions
that tend to "e !redicta"le over ti(e' ISA 540
5
esta"lishes re*uire(ents and !rovides )uidance on
the a!!lication of anal#tical !rocedures durin) an audit'
A45' he nature of the risk and assertion is relevant to the desi)n of tests of details' For e,a(!le, tests
of details related to the e,istence or occurrence assertion (a# involve selectin) fro( ite(s
contained in a financial state(ent a(ount and o"tainin) the relevant audit evidence' 7n the other
hand, tests of details related to the co(!leteness assertion (a# involve selectin) fro( ite(s that
are e,!ected to "e included in the relevant financial state(ent a(ount and investi)atin) whether
the# are included'
A4B' 1ecause the assess(ent of the risk of (aterial (isstate(ent takes account of internal control, the
e,tent of su"stantive !rocedures (a# need to "e increased when the results fro( tests of controls
are unsatisfactor#' @owever, increasin) the e,tent of an audit !rocedure is a!!ro!riate onl# if the
audit !rocedure itself is relevant to the s!ecific risk'
A47' In desi)nin) tests of details, the e,tent of testin) is ordinaril# thou)ht of in ter(s of the sa(!le
siJe' @owever, other (atters are also relevant, includin) whether it is (ore effective to use other
selective (eans of testin)' See ISA 500'
B
%onsiderin) Lhether 0,ternal %onfir(ation 6rocedures Are to 1e 6erfor(ed $Aef. 6ara' 15&
A48' 0,ternal confir(ation !rocedures fre*uentl# are relevant when addressin) assertions associated
with account "alances and their ele(ents, "ut need not "e restricted to these ite(s' For e,a(!le,
the auditor (a# re*uest e,ternal confir(ation of the ter(s of a)ree(ents, contracts, or
transactions "etween an entit# and other !arties' 0,ternal confir(ation !rocedures also (a# "e
!erfor(ed
5
ISA 540, CAnal#tical 6rocedures'D
B
ISA 500, CAudit 0vidence,D !ara)ra!h 10'
ISA 990 948
to o"tain audit evidence a"out the a"sence of certain conditions' For e,a(!le, a re*uest (a#
s!ecificall# seek confir(ation that no Cside a)ree(entD e,ists that (a# "e relevant to an entit#+s
revenue cut-off assertion' 7ther situations where e,ternal confir(ation !rocedures (a# !rovide
relevant audit evidence in res!ondin) to assessed risks of (aterial (isstate(ent include.
% G 1ank "alances and other infor(ation relevant to "ankin) relationshi!s'
% G Accounts receiva"le "alances and ter(s'
% G Inventories held "# third !arties at "onded warehouses for !rocessin) or on consi)n(ent'
% G 6ro!ert# title deeds held "# law#ers or financiers for safe custod# or as securit#'
% G Invest(ents held for safekee!in) "# third !arties, or !urchased fro( stock"rokers "ut not
delivered at the "alance sheet date'
% G A(ounts due to lenders, includin) relevant ter(s of re!a#(ent and restrictive covenants'
% G Accounts !a#a"le "alances and ter(s'
A45' Althou)h e,ternal confir(ations (a# !rovide relevant audit evidence relatin) to certain assertions,
there are so(e assertions for which e,ternal confir(ations !rovide less relevant audit evidence' For
e,a(!le, e,ternal confir(ations !rovide less relevant audit evidence relatin) to the recovera"ilit# of
accounts receiva"le "alances, than the# do of their e,istence'
A50' he auditor (a# deter(ine that e,ternal confir(ation !rocedures !erfor(ed for one !ur!ose !rovide
an o!!ortunit# to o"tain audit evidence a"out other (atters' For e,a(!le, confir(ation re*uests for
"ank "alances often include re*uests for infor(ation relevant to other financial state(ent assertions'
Such considerations (a# influence the auditor+s decision a"out whether to !erfor( e,ternal
confir(ation !rocedures'
A51' Factors that (a# assist the auditor in deter(inin) whether e,ternal confir(ation !rocedures are to "e
!erfor(ed as su"stantive audit !rocedures include.
G he confir(in) !art#+s knowled)e of the su";ect (atter K res!onses (a# "e (ore relia"le if
!rovided "# a !erson at the confir(in) !art# who has the re*uisite knowled)e a"out the
infor(ation "ein) confir(ed'
G he a"ilit# or willin)ness of the intended confir(in) !art# to res!ond K for e,a(!le, the
confir(in) !art#.
a. o Ea# not acce!t res!onsi"ilit# for res!ondin) to a confir(ation re*uest?
b. o Ea# consider res!ondin) too costl# or ti(e consu(in)?
945 ISA 990
a. o Ea# have concerns a"out the !otential le)al lia"ilit# resultin) fro( res!ondin)?
b. o Ea# account for transactions in different currencies? or
c. o Ea# o!erate in an environ(ent where res!ondin) to confir(ation re*uests is not a
si)nificant as!ect of da#-to-da# o!erations'
In such situations, confir(in) !arties (a# not res!ond, (a# res!ond in a casual (anner or
(a# atte(!t to restrict the reliance !laced on the res!onse'
G he o";ectivit# of the intended confir(in) !art# K if the confir(in) !art# is a related !art#
of the entit#, res!onses to confir(ation re*uests (a# "e less relia"le'
Su"stantive 6rocedures Aelated to the Financial State(ent %losin) 6rocess $Aef. 6ara' 40$"&&
A54' he nature, and also the e,tent, of the auditor+s e,a(ination of ;ournal entries and other
ad;ust(ents de!ends on the nature and co(!le,it# of the entit#+s financial re!ortin) !rocess and
the related risks of (aterial (isstate(ent'
Su"stantive 6rocedures Aes!onsive to Si)nificant Aisks $Aef. 6ara' 41&
A59' 6ara)ra!h 41 of this ISA re*uires the auditor to !erfor( su"stantive !rocedures that are
s!ecificall# res!onsive to risks the auditor has deter(ined to "e si)nificant risks' Audit evidence
in the for( of e,ternal confir(ations received directl# "# the auditor fro( a!!ro!riate
confir(in) !arties (a# assist the auditor in o"tainin) audit evidence with the hi)h level of
relia"ilit# that the auditor re*uires to res!ond to si)nificant risks of (aterial (isstate(ent,
whether due to fraud or error' For e,a(!le, if the auditor identifies that (ana)e(ent is under
!ressure to (eet earnin)s e,!ectations, there (a# "e a risk that (ana)e(ent is inflatin) sales "#
i(!ro!erl# reco)niJin) revenue related to sales a)ree(ents with ter(s that !reclude revenue
reco)nition or "# invoicin) sales "efore shi!(ent' In these circu(stances, the auditor (a#, for
e,a(!le, desi)n e,ternal confir(ation !rocedures not onl# to confir( outstandin) a(ounts, "ut
also to confir( the details of the sales a)ree(ents, includin) date, an# ri)hts of return and
deliver# ter(s' In addition, the auditor (a# find it effective to su!!le(ent such e,ternal
confir(ation !rocedures with in*uiries of non-financial !ersonnel in the entit# re)ardin) an#
chan)es in sales a)ree(ents and deliver# ter(s'
ISA 990 950
i(in) of Su"stantive 6rocedures $Aef. 6ara' 44-49&
A54' In (ost cases, audit evidence fro( a !revious audit+s su"stantive !rocedures !rovides little or no
audit evidence for the current !eriod' here are, however, e,ce!tions, for e,a(!le, a le)al o!inion
o"tained in a !revious audit related to the structure of a securitiJation to which no chan)es have
occurred, (a# "e relevant in the current !eriod' In such cases, it (a# "e a!!ro!riate to use audit
evidence fro( a !revious audit+s su"stantive !rocedures if that evidence and the related su";ect
(atter have not funda(entall# chan)ed, and audit !rocedures have "een !erfor(ed durin) the
current !eriod to esta"lish its continuin) relevance'
Usin) audit evidence o"tained durin) an interi( !eriod $Aef. 6ara' 44&
A55' In so(e circu(stances, the auditor (a# deter(ine that it is effective to !erfor( su"stantive
!rocedures at an interi( date, and to co(!are and reconcile infor(ation concernin) the "alance at
the !eriod end with the co(!ara"le infor(ation at the interi( date to.
1. $a& Identif# a(ounts that a!!ear unusual?
2. $"& Investi)ate an# such a(ounts? and
3. $c& 6erfor( su"stantive anal#tical !rocedures or tests of details to test the intervenin) !eriod'
A5B' 6erfor(in) su"stantive !rocedures at an interi( date without undertakin) additional !rocedures at
a later date increases the risk that the auditor will not detect (isstate(ents that (a# e,ist at the
!eriod end' his risk increases as the re(ainin) !eriod is len)thened' Factors such as the
followin) (a# influence whether to !erfor( su"stantive !rocedures at an interi( date.
% G he control environ(ent and other relevant controls'
% G he availa"ilit# at a later date of infor(ation necessar# for the auditor+s !rocedures'
% G he !ur!ose of the su"stantive !rocedure'
% G he assessed risk of (aterial (isstate(ent'
% G he nature of the class of transactions or account "alance and related assertions'
% G he a"ilit# of the auditor to !erfor( a!!ro!riate su"stantive !rocedures or su"stantive
!rocedures co("ined with tests of controls to cover the re(ainin) !eriod in order to reduce the
risk that (isstate(ents that (a# e,ist at the !eriod end will not "e detected'
A57' Factors such as the followin) (a# influence whether to !erfor( su"stantive anal#tical !rocedures
with res!ect to the !eriod "etween the interi( date and the !eriod end.
951 ISA 990
1. G Lhether the !eriod end "alances of the !articular classes of transactions or account
"alances are reasona"l# !redicta"le with res!ect to a(ount, relative si)nificance, and co(!osition'
2. G Lhether the entit#+s !rocedures for anal#Jin) and ad;ustin) such classes of transactions
or account "alances at interi( dates and for esta"lishin) !ro!er accountin) cutoffs are a!!ro!riate'
1. G Lhether the infor(ation s#ste( relevant to financial re!ortin) will !rovide infor(ation
concernin) the "alances at the !eriod end and the transactions in the re(ainin) !eriod that is
sufficient to !er(it investi)ation of.
2. $a& Si)nificant unusual transactions or entries $includin) those at or near the !eriod end&?
3. $"& 7ther causes of si)nificant fluctuations, or e,!ected fluctuations that did not occur? and
4. $c& %han)es in the co(!osition of the classes of transactions or account "alances'
Eisstate(ents detected at an interi( date $Aef. 6ara' 49&
A58' Lhen the auditor concludes that the !lanned nature, ti(in), or e,tent of su"stantive !rocedures
coverin) the re(ainin) !eriod need to "e (odified as a result of une,!ected (isstate(ents
detected at an interi( date, such (odification (a# include e,tendin) or re!eatin) the !rocedures
!erfor(ed at the interi( date at the !eriod end'
A#e2-!c/ of *'ee"t!tio" !"# Dic0o-'e $Aef. 6ara' 44&
A55' 0valuatin) the overall !resentation of the financial state(ents, includin) the related disclosures,
relates to whether the individual financial state(ents are !resented in a (anner that reflects the
a!!ro!riate classification and descri!tion of financial infor(ation, and the for(, arran)e(ent, and
content of the financial state(ents and their a!!ended notes' his includes, for e,a(!le, the
ter(inolo)# used, the a(ount of detail )iven, the classification of ite(s in the state(ents, and the
"ases of a(ounts set forth'
E9!0-!ti"( the S-fficie"c/ !"# App'op'i!te"e of A-#it E9i#e"ce $Aef. 6ara' 45-47&
AB0' An audit of financial state(ents is a cu(ulative and iterative !rocess' As the auditor !erfor(s
!lanned audit !rocedures, the audit evidence o"tained (a# cause the auditor to (odif# the nature,
ti(in) or e,tent of other !lanned audit !rocedures' Infor(ation (a# co(e to the auditor+s
attention that differs si)nificantl# fro( the infor(ation on which the risk assess(ent was "ased'
For e,a(!le.
ISA 990 954
% G he e,tent of (isstate(ents that the auditor detects "# !erfor(in) su"stantive !rocedures
(a# alter the auditor+s ;ud)(ent a"out the risk assess(ents and (a# indicate a si)nificant
deficienc# in internal control'
% G he auditor (a# "eco(e aware of discre!ancies in accountin) records, or conflictin) or
(issin) evidence'
% G Anal#tical !rocedures !erfor(ed at the overall review sta)e of the audit (a# indicate a
!reviousl# unreco)niJed risk of (aterial (isstate(ent'
In such circu(stances, the auditor (a# need to reevaluate the !lanned audit !rocedures, "ased on
the revised consideration of assessed risks for all or so(e of the classes of transactions, account
"alances, or disclosures and related assertions' ISA 915 contains further )uidance on revisin) the
auditor+s risk assess(ent'
7
AB1' he auditor cannot assu(e that an instance of fraud or error is an isolated occurrence' herefore,
the consideration of how the detection of a (isstate(ent affects the assessed risks of (aterial
(isstate(ent is i(!ortant in deter(inin) whether the assess(ent re(ains a!!ro!riate'
AB4' he auditor+s ;ud)(ent as to what constitutes sufficient a!!ro!riate audit evidence is influenced
"# such factors as the followin).
1. G Si)nificance of the !otential (isstate(ent in the assertion and the likelihood of its havin)
a (aterial effect, individuall# or a))re)ated with other !otential (isstate(ents, on the financial
state(ents'
2. G 0ffectiveness of (ana)e(ent+s res!onses and controls to address the risks'
3. G 0,!erience )ained durin) !revious audits with res!ect to si(ilar !otential (isstate(ents'
4. G Aesults of audit !rocedures !erfor(ed, includin) whether such audit !rocedures
identified s!ecific instances of fraud or error'
5. G Source and relia"ilit# of the availa"le infor(ation'
6. G 6ersuasiveness of the audit evidence'
7. G Understandin) of the entit# and its environ(ent, includin) the entit#+s internal control'
AB9' he for( and e,tent of audit docu(entation is a (atter of !rofessional ;ud)(ent, and is
influenced "# the nature, siJe and co(!le,it# of the entit# and
959 ISA 990
its internal control, availa"ilit# of infor(ation fro( the entit# and the audit (ethodolo)# and technolo)#
used in the audit'
ISA 990 954
AUDIT CONSIDERATIONS RELATING TO AN ENTITY USING A SER,ICE
ORGANICATION
CONTENTS
I"t'o#-ctio" 6ara)ra!h Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1-5
0ffective =ate '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' B O$1ecti9e
''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 7
Defi"itio"''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 8 Re2-i'e.e"t
7"tainin) an Understandin) of the Services 6rovided "# a Service 7r)aniJation, Includin) Internal
%ontrol '''''''''''''''''''''''''''''''''''''''''''''' 5-14
Aes!ondin) to the Assessed Aisks of Eaterial Eisstate(ent '''''''''''''''''''''' 15-17
#!e 1 and #!e 4 Ae!orts that 0,clude the Services of a Su"service
7r)aniJation ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 18
Fraud, Non-%o(!liance with Maws and Ae)ulations and
Uncorrected Eisstate(ents in Aelation to Activities at the Service
7r)aniJation ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 15
Ae!ortin) "# the User Auditor''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 40-44
7"tainin) an Understandin) of the Services 6rovided "# a Service
7r)aniJation, Includin) Internal %ontrol '''''''''''''''''''''''''''''''''''''''''''''' A1-A49 Aes!ondin) to the
Assessed Aisks of Eaterial Eisstate(ent '''''''''''''''''''''' A44-A95 #!e 1 and #!e 4 Ae!orts that 0,clude
the Services of a Su"service
7r)aniJation ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A40 Fraud, Non-%o(!liance
with Maws and Ae)ulations and Uncorrected
Eisstate(ents in Aelation to Activities at the Service 7r)aniJation '''' A41 Ae!ortin) "# the User
Auditor''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A44-A44
955 ISA 404
International Standard on Auditin) $ISA& 404, CAudit %onsiderations Aelatin) to an
0ntit# Usin) a Service 7r)aniJationD should "e read in con;unction with ISA 400,
C7verall 7";ectives of the Inde!endent Auditor and the %onduct of an Audit in
ISA 404 95B
1. 1' his International Standard on Auditin) $ISA& deals with the user auditor+s res!onsi"ilit#
to o"tain sufficient a!!ro!riate audit evidence when a user entit# uses the services of one or (ore
service or)aniJations' S!ecificall#, it e,!ands on how the user auditor a!!lies ISA 915
1
and ISA
990
4
in o"tainin) an understandin) of the user entit#, includin) internal control relevant to the
audit, sufficient to identif# and assess the risks of (aterial (isstate(ent and in desi)nin) and
!erfor(in) further audit !rocedures res!onsive to those risks'
2. 4' Ean# entities outsource as!ects of their "usiness to or)aniJations that !rovide services
ran)in) fro( !erfor(in) a s!ecific task under the direction of an entit# to re!lacin) an entit#+s
entire "usiness units or functions, such as the ta, co(!liance function' Ean# of the services
!rovided "# such or)aniJations are inte)ral to the entit#+s "usiness o!erations? however, not all
those services are relevant to the audit'
1. 9' Services !rovided "# a service or)aniJation are relevant to the audit of a user entit#+s
financial state(ents when those services, and the controls over the(, are !art of the user
entit#+s infor(ation s#ste(, includin) related "usiness !rocesses, relevant to financial
re!ortin)' Althou)h (ost controls at the service or)aniJation are likel# to relate to financial
re!ortin), there (a# "e other controls that (a# also "e relevant to the audit, such as controls
over the safe)uardin) of assets' A service or)aniJation+s services are !art of a user entit#+s
infor(ation s#ste(, includin) related "usiness !rocesses, relevant to financial re!ortin) if
these services affect an# of the followin).
2. $a& he classes of transactions in the user entit#+s o!erations that are si)nificant to the user
entit#+s financial state(ents?
3. $"& he !rocedures, within "oth infor(ation technolo)# $I& and (anual s#ste(s, "# which
the user entit#+s transactions are initiated, recorded, !rocessed, corrected as necessar#,
transferred to the )eneral led)er and re!orted in the financial state(ents?
4. $c& he related accountin) records, either in electronic or (anual for(, su!!ortin)
infor(ation and s!ecific accounts in the user entit#+s financial state(ents that are used to
initiate, record, !rocess and re!ort the user entit#+s transactions? this includes the correction of
incorrect infor(ation and how infor(ation is transferred to the )eneral led)er?
1
ISA 915, CIdentif#in) and Assessin) the Aisks of Eaterial Eisstate(ent throu)h Understandin)
the 0ntit# and Its 0nviron(ent'D 4
957 ISA 404
1$d&@ow the user entit#+s infor(ation s#ste( ca!tures events and conditions, other than transactions,
that are si)nificant to the financial state(ents?
2$e& he financial re!ortin) !rocess used to !re!are the user entit#+s financial state(ents,
includin) si)nificant accountin) esti(ates and disclosures? and
3$f& %ontrols surroundin) ;ournal entries, includin) non-standard ;ournal entries used to record non-
recurrin), unusual transactions or ad;ust(ents'
1. 4' he nature and e,tent of work to "e !erfor(ed "# the user auditor re)ardin) the services
!rovided "# a service or)aniJation de!end on the nature and si)nificance of those services to the
user entit# and the relevance of those services to the audit'
2. 5' his ISA does not a!!l# to services !rovided "# financial institutions that are li(ited to
!rocessin), for an entit#+s account held at the financial institution, transactions that are s!ecificall#
authoriJed "# the entit#, such as the !rocessin) of checkin) account transactions "# a "ank or the
!rocessin) of securities transactions "# a "roker' In addition, this ISA does not a!!l# to the audit
of transactions arisin) fro( !ro!rietar# financial interests in other entities, such as !artnershi!s,
cor!orations and ;oint ventures, when !ro!rietar# interests are accounted for and re!orted to
interest holders'
Effecti9e D!te
B' his ISA is effective for audits of financial state(ents for !eriods "e)innin) on or after =ece("er
15, 4005'
O$1ecti9e
7' he o";ectives of the user auditor, when the user entit# uses the services of a service or)aniJation,
are.
1. $a& o o"tain an understandin) of the nature and si)nificance of the services !rovided "# the
service or)aniJation and their effect on the user entit#+s internal control relevant to the audit,
sufficient to identif# and assess the risks of (aterial (isstate(ent? and
2. $"& o desi)n and !erfor( audit !rocedures res!onsive to those risks'
Defi"itio"
$a& %o(!le(entar# user entit# controls K %ontrols that the service or)aniJation assu(es, in
the desi)n of its service, will "e
ISA 404 958
i(!le(ented "# user entities, and which, if necessar# to achieve control o";ectives, are identified in
the descri!tion of its s#ste('
1$"& Ae!ort on the descri!tion and desi)n of controls at a service or)aniJation $referred to in this
ISA as a t#!e 1 re!ort& K A re!ort that co(!rises.
2$i& A descri!tion, !re!ared "# (ana)e(ent of the service or)aniJation, of the service
or)aniJation+s s#ste(, control o";ectives and related controls that have "een desi)ned and
i(!le(ented as at a s!ecified date? and
3$ii& A re!ort "# the service auditor with the o";ective of conve#in) reasona"le assurance that
includes the service auditor+s o!inion on the descri!tion of the service or)aniJation+s s#ste(,
control o";ectives and related controls and the suita"ilit# of the desi)n of the controls to
achieve the s!ecified control o";ectives'
4$c&Ae!ort on the descri!tion, desi)n, and o!eratin) effectiveness of controls at a service
or)aniJation $referred to in this ISA as a t#!e 4 re!ort& K A re!ort that co(!rises.
5$i& A descri!tion, !re!ared "# (ana)e(ent of the service or)aniJation, of the service
or)aniJation+s s#ste(, control o";ectives and related controls, their desi)n and
i(!le(entation as at a s!ecified date or throu)hout a s!ecified !eriod and, in so(e cases,
their o!eratin) effectiveness throu)hout a s!ecified !eriod? and
6$ii& A re!ort "# the service auditor with the o";ective of conve#in) reasona"le assurance that
includes.
7a' he service auditor+s o!inion on the descri!tion of the service or)aniJation+s s#ste(, control
o";ectives and related controls, the suita"ilit# of the desi)n of the controls to achieve the
s!ecified control o";ectives, and the o!eratin) effectiveness of the controls? and
8"' A descri!tion of the service auditor+s tests of the controls and the results thereof'
2$d&Service auditor K An auditor who, at the re*uest of the service or)aniJation, !rovides an assurance
re!ort on the controls of a service or)aniJation'
3$e& Service or)aniJation K A third-!art# or)aniJation $or se)(ent of a third-!art#
or)aniJation& that !rovides services to user entities that are !art of those entities+ infor(ation
s#ste(s relevant to financial re!ortin)'
955 ISA 404
1. $f& Service or)aniJation+s s#ste( K he !olicies and !rocedures desi)ned, i(!le(ented and
(aintained "# the service or)aniJation to !rovide user entities with the services covered "# the
service auditor+s re!ort'
2. $)& Su"service or)aniJation K A service or)aniJation used "# another service or)aniJation to
!erfor( so(e of the services !rovided to user entities that are !art of those user entities+
3. $h& User auditor K An auditor who audits and re!orts on the financial state(ents of a user
entit#'
4. $i& User entit# K An entit# that uses a service or)aniJation and whose financial state(ents are
"ein) audited'
Re2-i'e.e"t
O$t!i"i"( !" U"#e't!"#i"( of the Se'9ice *'o9i#e# $/ ! Se'9ice O'(!"i;!tio"4
I"c0-#i"( I"te'"!0 Co"t'o0
15' Lhen o"tainin) an understandin) of the user entit# in accordance with ISA 915,
9
the user
auditor shall o"tain an understandin) of how a user entit# uses the services of a service
or)aniJation in the user entit#+s o!erations, includin). $Aef. 6ara' A1-A4&
2$a&he nature of the services !rovided "# the service or)aniJation and the si)nificance of those
services to the user entit#, includin) the effect thereof on the user entit#+s internal control?
$Aef. 6ara' A9-A5&
3$"& he nature and (aterialit# of the transactions !rocessed or accounts or financial re!ortin)
!rocesses affected "# the service or)aniJation? $Aef. 6ara' AB&
4$c&he de)ree of interaction "etween the activities of the service or)aniJation and those of the
user entit#? and $Aef. 6ara' A7&
5$d&he nature of the relationshi! "etween the user entit# and the service or)aniJation, includin)
the relevant contractual ter(s for the activities undertaken "# the service or)aniJation' $Aef.
6ara' A8-A11&
2. 10' Lhen o"tainin) an understandin) of internal control relevant to the audit in accordance
with ISA 915,
4
the user auditor shall evaluate the desi)n and i(!le(entation of relevant controls
at the user entit# that relate to the services !rovided "# the service or)aniJation, includin) those
that are a!!lied to the transactions !rocessed "# the service or)aniJation' $Aef. 6ara' A14-A14&
9
ISA 915, !ara)ra!h 11' 4
ISA 404 9B0
1. 11' he user auditor shall deter(ine whether a sufficient understandin) of the nature and
si)nificance of the services !rovided "# the service or)aniJation and their effect on the user
entit#+s internal control relevant to the audit has "een o"tained to !rovide a "asis for the
identification and assess(ent of risks of (aterial (isstate(ent'
114' If the user auditor is una"le to o"tain a sufficient understandin) fro( the user entit#, the
user auditor shall o"tain that understandin) fro( one or (ore of the followin) !rocedures.
2$a&7"tainin) a t#!e 1 or t#!e 4 re!ort, if availa"le?
3$"& %ontactin) the service or)aniJation, throu)h the user entit#, to o"tain s!ecific
infor(ation?
4$c& Fisitin) the service or)aniJation and !erfor(in) !rocedures that will !rovide the
necessar# infor(ation a"out the relevant controls at the service or)aniJation? or
5$d& Usin) another auditor to !erfor( !rocedures that will !rovide the necessar# infor(ation
a"out the relevant controls at the service or)aniJation' $Aef. 6ara' A15-A40&
"sing a 1ype 6 or 1ype 2 +eport to )upport the "ser Auditor8s "nderstanding of the )er!ice ,rganiBation
119' In deter(inin) the sufficienc# and a!!ro!riateness of the audit evidence !rovided "# a
t#!e 1 or t#!e 4 re!ort, the user auditor shall "e satisfied as to.
2$a&he service auditor+s !rofessional co(!etence and inde!endence fro( the service
or)aniJation? and
3$"& he ade*uac# of the standards under which the t#!e 1 or t#!e 4 re!ort was issued' $Aef. 6ara'
A 41&
414' If the user auditor !lans to use a t#!e 1 or t#!e 4 re!ort as audit evidence to su!!ort the
user auditor+s understandin) a"out the desi)n and i(!le(entation of controls at the service
or)aniJation, the user auditor shall.
5$a&0valuate whether the descri!tion and desi)n of controls at the service or)aniJation is at a date
or for a !eriod that is a!!ro!riate for the user auditor+s !ur!oses?
6$"& 0valuate the sufficienc# and a!!ro!riateness of the evidence !rovided "# the re!ort for the
understandin) of the user entit#+s internal control relevant to the audit? and
7$c& =eter(ine whether co(!le(entar# user entit# controls identified "# the service or)aniJation
are relevant to the user entit# and, if so, o"tain an understandin) of whether the user entit# has
desi)ned and i(!le(ented such controls' $Aef. 6ara' A44-A49&
9B1 ISA 404
Repo"#i"( to the Aee# Ri% of )!te'i!0 )it!te.e"t
15' In res!ondin) to assessed risks in accordance with ISA 990, the user auditor
1ests of Controls
1B' Lhen the user auditor+s risk assess(ent includes an e,!ectation that controls at the service
or)aniJation are o!eratin) effectivel#, the user auditor shall o"tain audit evidence a"out the
o!eratin) effectiveness of those controls fro( one or (ore of the followin) !rocedures.
1$a& 7"tainin) a t#!e 4 re!ort, if availa"le?
2$"& 6erfor(in) a!!ro!riate tests of controls at the service or)aniJation? or
3$c&Usin) another auditor to !erfor( tests of controls at the service or)aniJation on "ehalf of the user
auditor' $Aef. 6ara' A45-A90&
Usin) a #!e 4 Ae!ort as Audit 0vidence that %ontrols at the Service 7r)aniJation Are 7!eratin)
0ffectivel#
17' If, in accordance with !ara)ra!h 1B$a&, the user auditor !lans to use a t#!e 4 re!ort as audit
evidence that controls at the service or)aniJation are o!eratin) effectivel#, the user auditor shall
deter(ine whether the service auditor+s re!ort !rovides sufficient a!!ro!riate audit evidence a"out
the effectiveness of the controls to su!!ort the user auditor+s risk assess(ent "#.
1$a& 0valuatin) whether the descri!tion, desi)n and o!eratin) effectiveness of controls at the
service or)aniJation is at a date or for a !eriod that is a!!ro!riate for the user auditor+s !ur!oses?
2$"& =eter(inin) whether co(!le(entar# user entit# controls identified "# the service or)aniJation
are relevant to the user entit# and, if so, o"tainin) an understandin) of whether the user entit# has
desi)ned and i(!le(ented such controls and, if so, testin) their o!eratin) effectiveness?
ISA 404 9B4
1$c& 0valuatin) the ade*uac# of the ti(e !eriod covered "# the tests of controls and the ti(e
ela!sed since the !erfor(ance of the tests of controls? and
2$d& 0valuatin) whether the tests of controls !erfor(ed "# the service auditor and the results thereof,
as descri"ed in the service auditor+s re!ort, are relevant to the assertions in the user entit#+s
financial state(ents and !rovide sufficient a!!ro!riate audit evidence to su!!ort the user auditor+s
risk assess(ent' $Aef. 6ara' A91-A95&
T/pe 7 !"# T/pe 2 Repo't th!t E5c0-#e the Se'9ice of ! S-$e'9ice O'(!"i;!tio"
18' If the user auditor !lans to use a t#!e 1 or a t#!e 4 re!ort that e,cludes the services !rovided "# a
su"service or)aniJation and those services are relevant to the audit of the user entit#+s financial
state(ents, the user auditor shall a!!l# the re*uire(ents of this ISA with res!ect to the services
!rovided "# the su"service or)aniJation' $Aef. 6ara' A40&
F'!-#4 No"<Co.p0i!"ce &ith L!& !"# Re(-0!tio" !"# U"co''ecte# )it!te.e"t i"
Re0!tio" to Acti9itie !t the Se'9ice O'(!"i;!tio"
15' he user auditor shall in*uire of (ana)e(ent of the user entit# whether the service or)aniJation
has re!orted to the user entit#, or whether the user entit# is otherwise aware of, an# fraud, non-
co(!liance with laws and re)ulations or uncorrected (isstate(ents affectin) the financial
state(ents of the user entit#' he user auditor shall evaluate how such (atters affect the nature,
ti(in) and e,tent of the user auditor+s further audit !rocedures, includin) the effect on the user
auditor+s conclusions and user auditor+s re!ort' $Aef. 6ara' A41&
Repo'ti"( $/ the Ue' A-#ito'
1. 40' he user auditor shall (odif# the o!inion in the user auditor+s re!ort in accordance with
ISA 705
5
if the user auditor is una"le to o"tain sufficient a!!ro!riate audit evidence re)ardin) the
services !rovided "# the service or)aniJation relevant to the audit of the user entit#+s financial
state(ents' $Aef. 6ara' A44&
2. 41' he user auditor shall not refer to the work of a service auditor in the user auditor+s re!ort
containin) an un(odified o!inion unless re*uired "# law or re)ulation to do so' If such reference
is re*uired "# law or re)ulation, the user auditor+s re!ort shall indicate that the reference does not
di(inish the user auditor+s res!onsi"ilit# for the audit o!inion' $Aef. 6ara' A49&
ISA 705, CEodifications to the 7!inion in the Inde!endent Auditor+s Ae!ort,D !ara)ra!h B'
9B9 ISA 404
44' If reference to the work of a service auditor is relevant to an understandin) of a (odification to the
user auditor+s o!inion, the user auditor+s re!ort shall indicate that such reference does not di(inish
the user auditor+s res!onsi"ilit# for that o!inion' $Aef. 6ara' A44&
OOO
O$t!i"i"( !" U"#e't!"#i"( of the Se'9ice *'o9i#e# $/ ! Se'9ice O'(!"i;!tio"4
I"c0-#i"( I"te'"!0 Co"t'o0
)ources of Infor$ation $Aef. 6ara' 5&
A1' Infor(ation on the nature of the services !rovided "# a service or)aniJation (a# "e availa"le fro(
a wide variet# of sources, such as.
1. G User (anuals'
2. G S#ste( overviews'
3. G echnical (anuals'
4. G he contract or service level a)ree(ent "etween the user entit# and the service
or)aniJation'
5. G Ae!orts "# service or)aniJations, internal auditors or re)ulator# authorities on controls at
the service or)aniJation'
6. G Ae!orts "# the service auditor, includin) (ana)e(ent letters, if availa"le'
A4' Snowled)e o"tained throu)h the user auditor+s e,!erience with the service or)aniJation, for
e,a(!le throu)h e,!erience with other audit en)a)e(ents, (a# also "e hel!ful in o"tainin) an
understandin) of the nature of the services !rovided "# the service or)aniJation' his (a# "e
!articularl# hel!ful if the services and controls at the service or)aniJation over those services are
hi)hl# standardiJed'
Aature of the )er!ices (ro!ided by the )er!ice ,rganiBation $Aef. 6ara' 5$a&&
A9' A user entit# (a# use a service or)aniJation such as one that !rocesses transactions and (aintains
related accounta"ilit#, or records transactions and !rocesses related data' Service or)aniJations
that !rovide such services include, for e,a(!le, "ank trust de!art(ents that invest and service
assets for e(!lo#ee "enefit !lans or for others? (ort)a)e "ankers that service (ort)a)es for
others? and a!!lication service !roviders that !rovide !acka)ed software a!!lications and a
technolo)# environ(ent that ena"les custo(ers to !rocess financial and o!erational transactions'
ISA 404 9B4
A4' 0,a(!les of service or)aniJation services that are relevant to the audit include.
1. G Eaintenance of the user entit#+s accountin) records'
2. G Eana)e(ent of assets'
3. G Initiatin), recordin) or !rocessin) transactions as a)ent of the user entit#'
A5' S(aller entities (a# use e,ternal "ookkee!in) services ran)in) fro( the !rocessin) of certain
transactions $for e,a(!le, !a#(ent of !a#roll ta,es& and (aintenance of their accountin) records
to the !re!aration of their financial state(ents' he use of such a service or)aniJation for the
!re!aration of its financial state(ents does not relieve (ana)e(ent of the s(aller entit# and,
where a!!ro!riate, those char)ed with )overnance of their res!onsi"ilities for the financial
state(ents'
B
Aature and <ateriality of 1ransactions (rocessed by the )er!ice ,rganiBation $Aef. 6ara' 5$"&&
AB' A service or)aniJation (a# esta"lish !olicies and !rocedures that affect the user entit#+s internal
control' hese !olicies and !rocedures are at least in !art !h#sicall# and o!erationall# se!arate
fro( the user entit#' he si)nificance of the controls of the service or)aniJation to those of the
user entit# de!ends on the nature of the services !rovided "# the service or)aniJation, includin)
the nature and (aterialit# of the transactions it !rocesses for the user entit#' In certain situations,
the transactions !rocessed and the accounts affected "# the service or)aniJation (a# not a!!ear to
"e (aterial to the user entit#+s financial state(ents, "ut the nature of the transactions !rocessed
(a# "e si)nificant and the user auditor (a# deter(ine that an understandin) of those controls is
necessar# in the circu(stances'
1he ?egree of Interaction bet#een the Acti!ities of the )er!ice ,rganiBation and the "ser /ntity $Aef.
6ara' 5$c&&
A7' he si)nificance of the controls of the service or)aniJation to those of the user entit# also de!ends
on the de)ree of interaction "etween its activities and those of the user entit#' he de)ree of
interaction refers to the e,tent to which a user entit# is a"le to and elects to i(!le(ent effective
controls over the !rocessin) !erfor(ed "# the service or)aniJation' For e,a(!le, a hi)h de)ree of
interaction e,ists "etween the activities of the user entit# and those at the service or)aniJation
when the user entit# authoriJes transactions and the
Standards on Auditin),D !ara)ra!hs 4 and A4-A9'
9B5 ISA 404
service or)aniJation !rocesses and does the accountin) for those transactions' In these
circu(stances, it (a# "e !ractica"le for the user entit# to i(!le(ent effective controls over those
transactions' 7n the other hand, when the service or)aniJation initiates or initiall# records,
!rocesses, and does the accountin) for the user entit#+s transactions, there is a lower de)ree of
interaction "etween the two or)aniJations' In these circu(stances, the user entit# (a# "e una"le
to, or (a# elect not to, i(!le(ent effective controls over these transactions at the user entit# and
(a# rel# on controls at the service or)aniJation'
Aature of the +elationship bet#een the "ser /ntity and the )er!ice ,rganiBation
$Aef. 6ara' 5$d&&
A8' he contract or service level a)ree(ent "etween the user entit# and the service or)aniJation (a#
!rovide for (atters such as.
% G he infor(ation to "e !rovided to the user entit# and res!onsi"ilities for initiatin)
transactions relatin) to the activities undertaken "# the service or)aniJation?
% G he a!!lication of re*uire(ents of re)ulator# "odies concernin) the for( of records to "e
(aintained, or access to the(?
% G he inde(nification, if an#, to "e !rovided to the user entit# in the event of a
!erfor(ance failure?
% G Lhether the service or)aniJation will !rovide a re!ort on its controls and, if so, whether
such re!ort would "e a t#!e 1 or t#!e 4 re!ort?
% G Lhether the user auditor has ri)hts of access to the accountin) records of the user entit#
(aintained "# the service or)aniJation and other infor(ation necessar# for the conduct of the
audit? and
% G Lhether the a)ree(ent allows for direct co((unication "etween the user auditor and the
service auditor'
A5' here is a direct relationshi! "etween the service or)aniJation and the user entit# and "etween the
service or)aniJation and the service auditor' hese relationshi!s do not necessaril# create a direct
relationshi! "etween the user auditor and the service auditor' Lhen there is no direct relationshi!
"etween the user auditor and the service auditor, co((unications "etween the user auditor and the
service auditor are usuall# conducted throu)h the user entit# and the service or)aniJation' A direct
relationshi! (a# also "e created "etween a user auditor and a service auditor, takin) into account
the relevant ethical and confidentialit# considerations' A user auditor, for e,a(!le, (a# use a
service auditor to !erfor( !rocedures on the user auditor+s "ehalf, such as.
1. $a& ests of controls at the service or)aniJation? or
2. $"& Su"stantive !rocedures on the user entit#+s financial state(ent transactions and "alances
(aintained "# a service or)aniJation'
ISA 404 9BB
A10' 6u"lic sector auditors )enerall# have "road ri)hts of access esta"lished "# le)islation' @owever,
there (a# "e situations where such ri)hts of access are not availa"le, for e,a(!le when the service
or)aniJation is located in a different ;urisdiction' In such cases, a !u"lic sector auditor (a# need to
o"tain an understandin) of the le)islation a!!lica"le in the different ;urisdiction to deter(ine
whether a!!ro!riate access ri)hts can "e o"tained' A !u"lic sector auditor (a# also o"tain or ask
the user entit# to incor!orate ri)hts of access in an# contractual arran)e(ents "etween the user
entit# and the service or)aniJation'
A11' 6u"lic sector auditors (a# also use another auditor to !erfor( tests of controls or su"stantive
!rocedures in relation to co(!liance with law, re)ulation or other authorit#'
"nderstanding the Controls +elating to )er!ices (ro!ided by the )er!ice ,rganiBation
$Aef. 6ara' 10&
A14' he user entit# (a# esta"lish controls over the service or)aniJation+s services that (a# "e tested
"# the user auditor and that (a# ena"le the user auditor to conclude that the user entit#+s controls
are o!eratin) effectivel# for so(e or all of the related assertions, re)ardless of the controls in !lace
at the service or)aniJation' If a user entit#, for e,a(!le, uses a service or)aniJation to !rocess its
!a#roll transactions, the user entit# (a# esta"lish controls over the su"(ission and recei!t of
!a#roll infor(ation that could !revent or detect (aterial (isstate(ents' hese controls (a#
include.
% G %o(!arin) the data su"(itted to the service or)aniJation with re!orts of infor(ation
received fro( the service or)aniJation after the data has "een !rocessed'
% G Aeco(!utin) a sa(!le of the !a#roll a(ounts for clerical accurac# and reviewin) the
total a(ount of the !a#roll for reasona"leness'
A19' In this situation, the user auditor (a# !erfor( tests of the user entit#+s controls over !a#roll
!rocessin) that would !rovide a "asis for the user auditor to conclude that the user entit#+s
controls are o!eratin) effectivel# for the assertions related to !a#roll transactions'
A14' As noted in ISA 915,
7
in res!ect of so(e risks, the user auditor (a# ;ud)e that it is not !ossi"le or
!ractica"le to o"tain sufficient a!!ro!riate audit evidence onl# fro( su"stantive !rocedures' Such
risks (a# relate to the inaccurate or inco(!lete recordin) of routine and si)nificant classes of
transactions and account "alances, the characteristics of which often !er(it hi)hl# auto(ated
!rocessin) with little or no (anual intervention' Such
9B7 ISA 404
auto(ated !rocessin) characteristics (a# "e !articularl# !resent when the user entit# uses service
or)aniJations' In such cases, the user entit#+s controls over such risks are relevant to the audit and
the user auditor is re*uired to o"tain an understandin) of, and to evaluate, such controls in
accordance with !ara)ra!hs 5 and 10 of this ISA'
Further (rocedures Dhen a )ufficient "nderstanding Cannot =e ,btained fro$ the "ser /ntity $Aef.
6ara' 14&
A15' he user auditor+s decision as to which !rocedure, individuall# or in co("ination, in !ara)ra!h 14
to undertake, in order to o"tain the infor(ation necessar# to !rovide a "asis for the identification
and assess(ent of the risks of (aterial (isstate(ent in relation to the user entit#+s use of the
service or)aniJation, (a# "e influenced "# such (atters as.
% G he siJe of "oth the user entit# and the service or)aniJation?
% G he co(!le,it# of the transactions at the user entit# and the co(!le,it# of the services
!rovided "# the service or)aniJation?
% G he location of the service or)aniJation $for e,a(!le, the user auditor (a# decide to use
another auditor to !erfor( !rocedures at the service or)aniJation on the user auditor+s "ehalf if the
service or)aniJation is in a re(ote location&?
% G Lhether the !rocedure$s& is e,!ected to effectivel# !rovide the user auditor with
sufficient a!!ro!riate audit evidence? and
% G he nature of the relationshi! "etween the user entit# and the service or)aniJation'
A1B' A service or)aniJation (a# en)a)e a service auditor to re!ort on the descri!tion and desi)n of its
controls $t#!e 1 re!ort& or on the descri!tion and desi)n of its controls and their o!eratin)
effectiveness $t#!e 4 re!ort&' #!e 1 or t#!e 4 re!orts (a# "e issued under U!ro!osedV
International Standard on Assurance 0n)a)e(ents $ISA0& 9404
8
or under standards esta"lished "#
an authoriJed or reco)niJed standards settin) or)aniJation $which (a# identif# the( "# different
na(es, such as #!e A or #!e 1 re!orts&'
A17' he availa"ilit# of a t#!e 1 or t#!e 4 re!ort will )enerall# de!end on whether the contract "etween
a service or)aniJation and a user entit# includes the !rovision of such a re!ort "# the service
or)aniJation' A service or)aniJation (a# also elect, for !ractical reasons, to (ake a t#!e 1 or t#!e
4 re!ort availa"le to the user entities' @owever, in so(e cases, a t#!e 1 or t#!e 4 re!ort (a# not "e
availa"le to user entities'
U6ro!osedV ISA0 9404, CAssurance Ae!orts on %ontrols at a hird 6art# Service 7r)aniJation'D
ISA 404 9B8
A18' In so(e circu(stances, a user entit# (a# outsource one or (ore si)nificant "usiness units or
functions, such as its entire ta, !lannin) and co(!liance functions, or finance and accountin) or
the controllershi! function to one or (ore service or)aniJations' As a re!ort on controls at the
service or)aniJation (a# not "e availa"le in these circu(stances, visitin) the service or)aniJation
(a# "e the (ost effective !rocedure for the user auditor to )ain an understandin) of controls at the
service or)aniJation, as there is likel# to "e direct interaction of (ana)e(ent of the user entit#
with (ana)e(ent at the service or)aniJation'
A15' Another auditor (a# "e used to !erfor( !rocedures that will !rovide the necessar# infor(ation
a"out the relevant controls at the service or)aniJation' If a t#!e 1 or t#!e 4 re!ort has "een issued,
the user auditor (a# use the service auditor to !erfor( these !rocedures as the service auditor has
an e,istin) relationshi! with the service or)aniJation' he user auditor usin) the work of another
auditor (a# find the )uidance in ISA B00
5
useful as it relates to understandin) another auditor
$includin) that auditor+s inde!endence and !rofessional co(!etence&, involve(ent in the work of
another auditor in !lannin) the nature, e,tent and ti(in) of such work, and in evaluatin) the
sufficienc# and a!!ro!riateness of the audit evidence o"tained'
A40' A user entit# (a# use a service or)aniJation that in turn uses a su"service or)aniJation to !rovide
so(e of the services !rovided to a user entit# that are !art of the user entit#+s infor(ation s#ste(
relevant to financial re!ortin)' he su"service or)aniJation (a# "e a se!arate entit# fro( the
service or)aniJation or (a# "e related to the service or)aniJation' A user auditor (a# need to
consider controls at the su"service or)aniJation' In situations where one or (ore su"service
or)aniJations are used, the interaction "etween the activities of the user entit# and those of the
service or)aniJation is e,!anded to include the interaction "etween the user entit#, the service
or)aniJation and the su"service or)aniJations' he de)ree of this interaction, as well as the nature
and (aterialit# of the transactions !rocessed "# the service or)aniJation and the su"service
or)aniJations are the (ost i(!ortant factors for the user auditor to consider in deter(inin) the
si)nificance of the service or)aniJation+s and su"service or)aniJation+s controls to the user entit#+s
controls'
"sing a 1ype 6 or 1ype 2 +eport to )upport the "ser Auditor8s "nderstanding of the )er!ice ,rganiBation
$Aef. 6ara' 19-14&
A41' he user auditor (a# (ake in*uiries a"out the service auditor to the service auditor+s !rofessional
or)aniJation or other !ractitioners and in*uire whether the service auditor is su";ect to re)ulator#
oversi)ht' he service
ISA B00, DS!ecial %onsiderationsNAudits of <rou! Financial State(ents $Includin) the Lork of %o(!onent Auditors&,
!ara)ra!h 4, states. CAn auditor (a# find this ISA, ada!ted as necessar# in the circu(stances, useful when that auditor involves
other auditors in the audit of financial state(ents that are not )rou! financial state(ents HD See also !ara)ra!h 15 of ISA B00'
9B5 ISA 404
auditor (a# "e !racticin) in a ;urisdiction where different standards are followed in res!ect of
re!orts on controls at a service or)aniJation, and the user auditor (a# o"tain infor(ation a"out the
standards used "# the service auditor fro( the standard settin) or)aniJation'
A44' A t#!e 1 or t#!e 4 re!ort, alon) with infor(ation a"out the user entit#, (a# assist the user auditor
in o"tainin) an understandin) of.
1. $a& he as!ects of controls at the service or)aniJation that (a# affect the !rocessin) of the
user entit#+s transactions, includin) the use of su"service or)aniJations?
2. $"& he flow of si)nificant transactions throu)h the service or)aniJation to deter(ine the
!oints in the transaction flow where (aterial (isstate(ents in the user entit#+s financial
state(ents could occur?
3. $c& he control o";ectives at the service or)aniJation that are relevant to the user entit#+s
financial state(ent assertions? and
4. $d& Lhether controls at the service or)aniJation are suita"l# desi)ned and i(!le(ented to !revent
or detect !rocessin) errors that could result in (aterial (isstate(ents in the user entit#+s financial
state(ents'
A t#!e 1 or t#!e 4 re!ort (a# assist the user auditor in o"tainin) a sufficient understandin) to
identif# and assess the risks of (aterial (isstate(ent' A t#!e 1 re!ort, however, does not !rovide
an# evidence of the o!eratin) effectiveness of the relevant controls'
A49' A t#!e 1 or t#!e 4 re!ort that is as of a date or for a !eriod that is outside of the re!ortin) !eriod of
a user entit# (a# assist the user auditor in o"tainin) a !reli(inar# understandin) of the controls
i(!le(ented at the service or)aniJation if the re!ort is su!!le(ented "# additional current
infor(ation fro( other sources' If the service or)aniJation+s descri!tion of controls is as of a date
or for a !eriod that !recedes the "e)innin) of the !eriod under audit, the user auditor (a# !erfor(
!rocedures to u!date the infor(ation in a t#!e 1 or t#!e 4 re!ort, such as.
% G =iscussin) the chan)es at the service or)aniJation with user entit# !ersonnel who would
"e in a !osition to know of such chan)es?
% G Aeviewin) current docu(entation and corres!ondence issued "# the service or)aniJation?
or
% G =iscussin) the chan)es with service or)aniJation !ersonnel'
Repo"#i"( to the Aee# Ri% of )!te'i!0 )it!te.e"t $Aef. 6ara' 15&
A44' Lhether the use of a service or)aniJation increases a user entit#+s risk of (aterial (isstate(ent
de!ends on the nature of the services !rovided and the
ISA 404 970
controls over these services? in so(e cases, the use of a service or)aniJation (a# decrease a user
entit#+s risk of (aterial (isstate(ent, !articularl# if the user entit# itself does not !ossess the
e,!ertise necessar# to undertake !articular activities, such as initiatin), !rocessin), and recordin)
transactions, or does not have ade*uate resources $for e,a(!le, an I s#ste(&'
A45' Lhen the service or)aniJation (aintains (aterial ele(ents of the accountin) records of the user
entit#, direct access to those records (a# "e necessar# in order for the user auditor to o"tain
sufficient a!!ro!riate audit evidence relatin) to the o!erations of controls over those records or to
su"stantiate transactions and "alances recorded in the(, or "oth' Such access (a# involve either
!h#sical ins!ection of records at the service or)aniJation+s !re(ises or interro)ation of records
(aintained electronicall# fro( the user entit# or another location, or "oth' Lhere direct access is
achieved electronicall#, the user auditor (a# there"# o"tain evidence as to the ade*uac# of controls
o!erated "# the service or)aniJation over the co(!leteness and inte)rit# of the user entit#+s data for
which the service or)aniJation is res!onsi"le'
A4B' In deter(inin) the nature and e,tent of audit evidence to "e o"tained in relation to "alances
re!resentin) assets held or transactions undertaken "# a service or)aniJation on "ehalf of the user
entit#, the followin) !rocedures (a# "e considered "# the user auditor.
1$a& Ins!ectin) records and docu(ents held "# the user entit#. the relia"ilit# of this source of
evidence is deter(ined "# the nature and e,tent of the accountin) records and su!!ortin)
docu(entation retained "# the user entit#' In so(e cases, the user entit# (a# not (aintain
inde!endent detailed records or docu(entation of s!ecific transactions undertaken on its "ehalf'
2$"& Ins!ectin) records and docu(ents held "# the service or)aniJation. the user auditor+s access to
the records of the service or)aniJation (a# "e esta"lished as !art of the contractual arran)e(ents
"etween the user entit# and the service or)aniJation' he user auditor (a# also use another
auditor, on its "ehalf, to )ain access to the user entit#+s records (aintained "# the service
or)aniJation'
3$c& 7"tainin) confir(ations of "alances and transactions fro( the service or)aniJation.
where the user entit# (aintains inde!endent records of "alances and transactions, confir(ation
fro( the service or)aniJation corro"oratin) the user entit#+s records (a# constitute relia"le audit
evidence concernin) the e,istence of the transactions and assets concerned' For e,a(!le, when
(ulti!le service or)aniJations are used, such as an invest(ent (ana)er and a custodian, and these
service or)aniJations (aintain inde!endent records, the user auditor (a# confir( "alances with
these
971 ISA 404
or)aniJations in order to co(!are this infor(ation with the inde!endent records of the user
entit#'
If the user entit# does not (aintain inde!endent records, infor(ation o"tained in
confir(ations fro( the service or)aniJation is (erel# a state(ent of what is reflected in the
records (aintained "# the service or)aniJation' herefore, such confir(ations do not, taken
alone, constitute relia"le audit evidence' In these circu(stances, the user auditor (a#
consider whether an alternative source of inde!endent evidence can "e identified'
$d& 6erfor(in) anal#tical !rocedures on the records (aintained "# the user entit# or on the
re!orts received fro( the service or)aniJation. the effectiveness of anal#tical !rocedures is
likel# to var# "# assertion and will "e affected "# the e,tent and detail of infor(ation
availa"le'
A47' Another auditor (a# !erfor( !rocedures that are su"stantive in nature for the "enefit of user
auditors' Such an en)a)e(ent (a# involve the !erfor(ance, "# another auditor, of !rocedures
a)reed u!on "# the user entit# and its user auditor and "# the service or)aniJation and its service
auditor' he findin)s resultin) fro( the !rocedures !erfor(ed "# another auditor are reviewed "#
the user auditor to deter(ine whether the# constitute sufficient a!!ro!riate audit evidence' In
addition, there (a# "e re*uire(ents i(!osed "# )overn(ental authorities or throu)h contractual
arran)e(ents where"# a service auditor !erfor(s desi)nated !rocedures that are su"stantive in
nature' he results of the a!!lication of the re*uired !rocedures to "alances and transactions
!rocessed "# the service or)aniJation (a# "e used "# user auditors as !art of the evidence
necessar# to su!!ort their audit o!inions' In these circu(stances, it (a# "e useful for the user
auditor and the service auditor to a)ree, !rior to the !erfor(ance of the !rocedures, to the audit
docu(entation or access to audit docu(entation that will "e !rovided to the user auditor'
A48' In certain circu(stances, in !articular when a user entit# outsources so(e or all of its finance
function to a service or)aniJation, the user auditor (a# face a situation where a si)nificant !ortion
of the audit evidence resides at the service or)aniJation' Su"stantive !rocedures (a# need to "e
!erfor(ed at the service or)aniJation "# the user auditor or another auditor on its "ehalf' A service
auditor (a# !rovide a t#!e 4 re!ort and, in addition, (a# !erfor( su"stantive !rocedures on
"ehalf of the user auditor' he involve(ent of another auditor does not alter the user auditor+s
res!onsi"ilit# to o"tain sufficient a!!ro!riate audit evidence to afford a reasona"le "asis to su!!ort
the user auditor+s o!inion' Accordin)l#, the user auditor+s consideration of whether sufficient
a!!ro!riate audit evidence has "een o"tained and whether the user auditor needs to !erfor(
further su"stantive !rocedures includes the
ISA 404 974
user auditor+s involve(ent with, or evidence of, the direction, su!ervision and !erfor(ance of the
su"stantive !rocedures !erfor(ed "# another auditor'
1ests of Controls $Aef. 6ara' 1B&
A45' he user auditor is re*uired "# ISA 990
10
to desi)n and !erfor( tests of controls to o"tain
sufficient a!!ro!riate audit evidence as to the o!eratin) effectiveness of relevant controls in
certain circu(stances' In the conte,t of a service or)aniJation, this re*uire(ent a!!lies when.
1. $a& he user auditor+s assess(ent of risks of (aterial (isstate(ent includes an e,!ectation that the
controls at the service or)aniJation are o!eratin) effectivel# $that is, the user auditor intends to
rel# on the o!eratin) effectiveness of controls at the service or)aniJation in deter(inin) the
nature, ti(in) and e,tent of su"stantive !rocedures&? or
2. $"& Su"stantive !rocedures alone, or in co("ination with tests of the o!eratin) effectiveness
of controls at the user entit#, cannot !rovide sufficient a!!ro!riate audit evidence at the assertion
level'
A90' If a t#!e 4 re!ort is not availa"le, a user auditor (a# contact the service or)aniJation, throu)h the
user entit#, to re*uest that a service auditor "e en)a)ed to !rovide a t#!e 4 re!ort that includes
tests of the o!eratin) effectiveness of the relevant controls or the user auditor (a# use another
auditor to !erfor( !rocedures at the service or)aniJation that test the o!eratin) effectiveness of
those controls' A user auditor (a# also visit the service or)aniJation and !erfor( tests of relevant
controls if the service or)aniJation a)rees to it' he user auditor+s risk assess(ents are "ased on
the co("ined evidence !rovided "# the work of another auditor and the user auditor+s own
!rocedures'
Usin) a #!e 4 Ae!ort as Audit 0vidence that %ontrols at the Service 7r)aniJation Are 7!eratin)
0ffectivel# $Aef. 6ara' 17&
A91' A t#!e 4 re!ort (a# "e intended to satisf# the needs of several different user auditors? therefore
tests of controls and results descri"ed in the service auditor+s re!ort (a# not "e relevant to
assertions that are si)nificant in the user entit#+s financial state(ents' he relevant tests of controls
and results are evaluated to deter(ine that the service auditor+s re!ort !rovides sufficient
a!!ro!riate audit evidence a"out the effectiveness of the controls to su!!ort the user auditor+s risk
assess(ent' In doin) so, the user auditor (a# consider the followin) factors.
$a& he ti(e !eriod covered "# the tests of controls and the ti(e ela!sed since the !erfor(ance
of the tests of controls?
979 ISA 404
1. $"& he sco!e of the service auditor+s work and the services and !rocesses covered, the controls
tested and tests that were !erfor(ed, and the wa# in which tested controls relate to the user
entit#+s controls? and
2. $c& he results of those tests of controls and the service auditor+s o!inion on the o!eratin)
effectiveness of the controls'
A94' For certain assertions, the shorter the !eriod covered "# a s!ecific test and the lon)er the ti(e
ela!sed since the !erfor(ance of the test, the less audit evidence the test (a# !rovide' In
co(!arin) the !eriod covered "# the t#!e 4 re!ort to the user entit#+s financial re!ortin) !eriod,
the user auditor (a# conclude that the t#!e 4 re!ort offers less audit evidence if there is little
overla! "etween the !eriod covered "# the t#!e 4 re!ort and the !eriod for which the user auditor
intends to rel# on the re!ort' Lhen this is the case, a t#!e 4 re!ort coverin) a !recedin) or
su"se*uent !eriod (a# !rovide additional audit evidence' In other cases, the user auditor (a#
deter(ine it is necessar# to !erfor(, or use another auditor to !erfor(, tests of controls at the
service or)aniJation in order to o"tain sufficient a!!ro!riate audit evidence a"out the o!eratin)
effectiveness of those controls'
A99' It (a# also "e necessar# for the user auditor to o"tain additional evidence a"out si)nificant
chan)es to the relevant controls at the service or)aniJation outside of the !eriod covered "# the
t#!e 4 re!ort or deter(ine additional audit !rocedures to "e !erfor(ed' Aelevant factors in
deter(inin) what additional audit evidence to o"tain a"out controls at the service or)aniJation that
were o!eratin) outside of the !eriod covered "# the service auditor+s re!ort (a# include.
1. G he si)nificance of the assessed risks of (aterial (isstate(ent at the assertion level?
2. G he s!ecific controls that were tested durin) the interi( !eriod, and si)nificant chan)es
to the( since the# were tested, includin) chan)es in the infor(ation s#ste(, !rocesses, and
!ersonnel?
3. G he de)ree to which audit evidence a"out the o!eratin) effectiveness of those controls
was o"tained?
4. G he len)th of the re(ainin) !eriod?
5. G he e,tent to which the user auditor intends to reduce further su"stantive !rocedures
"ased on the reliance on controls? and
6. G he effectiveness of the control environ(ent and (onitorin) of controls at the user entit#'
ISA 404 974
A94' Additional audit evidence (a# "e o"tained, for e,a(!le, "# e,tendin) tests of controls over the
re(ainin) !eriod or testin) the user entit#+s (onitorin) of controls'
A95' If the service auditor+s testin) !eriod is co(!letel# outside the user entit#+s financial re!ortin)
!eriod, the user auditor will "e una"le to rel# on such tests for the user auditor to conclude that the
user entit#+s controls are o!eratin) effectivel# "ecause the# do not !rovide current audit !eriod
evidence of the effectiveness of the controls, unless other !rocedures are !erfor(ed'
A9B' In certain circu(stances, a service !rovided "# the service or)aniJation (a# "e desi)ned with the
assu(!tion that certain controls will "e i(!le(ented "# the user entit#' For e,a(!le, the service
(a# "e desi)ned with the assu(!tion that the user entit# will have controls in !lace for authoriJin)
transactions "efore the# are sent to the service or)aniJation for !rocessin)' In such a situation, the
service or)aniJation+s descri!tion of controls (a# include a descri!tion of those co(!le(entar# user
entit# controls' he user auditor considers whether those co(!le(entar# user entit# controls are
relevant to the service !rovided to the user entit#'
A97' If the user auditor "elieves that the service auditor+s re!ort (a# not !rovide sufficient a!!ro!riate
audit evidence, for e,a(!le, if a service auditor+s re!ort does not contain a descri!tion of the service
auditor+s tests of controls and results thereon, the user auditor (a# su!!le(ent the understandin) of
the service auditor+s !rocedures and conclusions "# contactin) the service or)aniJation, throu)h the
user entit#, to re*uest a discussion with the service auditor a"out the sco!e and results of the service
auditor+s work' Also, if the user auditor "elieves it is necessar#, the user auditor (a# contact the
service or)aniJation, throu)h the user entit#, to re*uest that the service auditor !erfor( !rocedures at
the service or)aniJation' Alternativel#, the user auditor, or another auditor at the re*uest of the user
auditor, (a# !erfor( such !rocedures'
A98' he service auditor+s t#!e 4 re!ort identifies results of tests, includin) e,ce!tions and other
infor(ation that could affect the user auditor+s conclusions' 0,ce!tions noted "# the service auditor
or a (odified o!inion in the service auditor+s t#!e 4 re!ort do not auto(aticall# (ean that the
service auditor+s t#!e 4 re!ort will not "e useful for the audit of the user entit#+s financial state(ents
in assessin) the risks of (aterial (isstate(ent' Aather, the e,ce!tions and the (atter )ivin) rise to a
(odified o!inion in the service auditor+s t#!e 4 re!ort are considered in the user auditor+s
assess(ent of the testin) of controls !erfor(ed "# the service auditor' In considerin) the e,ce!tions
and (atters )ivin) rise to a (odified o!inion, the user auditor (a# discuss such (atters with the
service auditor' Such co((unication is de!endent u!on the user entit# contactin) the service
975 ISA 404
or)aniJation, and o"tainin) the service or)aniJation+s a!!roval for the co((unication to take
!lace'
%o((unication of deficiencies in internal control identified durin) the audit
A95' he user auditor is re*uired to co((unicate in writin) si)nificant deficiencies identified durin)
the audit to "oth (ana)e(ent and those char)ed with )overnance on a ti(el# "asis'
11
he user
auditor is also re*uired to co((unicate to (ana)e(ent at an a!!ro!riate level of res!onsi"ilit# on
a ti(el# "asis other deficiencies in internal control identified durin) the audit that, in the user
auditor+s !rofessional ;ud)(ent, are of sufficient i(!ortance to (erit (ana)e(ent+s attention'
14
Eatters that the user auditor (a# identif# durin) the audit and (a# co((unicate to (ana)e(ent
and those char)ed with )overnance of the user entit# include.
1. G An# (onitorin) of controls that could "e i(!le(ented "# the user entit#, includin) those
identified as a result of o"tainin) a t#!e 1 or t#!e 4 re!ort?
2. G Instances where co(!le(entar# user entit# controls are noted in the t#!e 1 or t#!e 4
re!ort and are not i(!le(ented at the user entit#? and
3. G %ontrols that (a# "e needed at the service or)aniJation that do not a!!ear to have "een
i(!le(ented or that are not s!ecificall# covered "# a t#!e 4 re!ort'
T/pe 7 !"# T/pe 2 Repo't th!t E5c0-#e the Se'9ice of ! S-$e'9ice O'(!"i;!tio"
$Aef. 6ara' 18&
A40' If a service or)aniJation uses a su"service or)aniJation, the service auditor+s re!ort (a# either
include or e,clude the su"service or)aniJation+s relevant control o";ectives and related controls in
the service or)aniJation+s descri!tion of its s#ste( and in the sco!e of the service auditor+s
en)a)e(ent' hese two (ethods of re!ortin) are known as the inclusive (ethod and the carve-out
(ethod, res!ectivel#' If the t#!e 1 or t#!e 4 re!ort e,cludes the controls at a su"service
or)aniJation, and the services !rovided "# the su"service or)aniJation are relevant to the audit of
the user entit#+s financial state(ents, the user auditor is re*uired to a!!l# the re*uire(ents of this
ISA in res!ect of the su"service or)aniJation' he nature and e,tent of work to "e !erfor(ed "#
the user auditor re)ardin) the services !rovided "# a su"service or)aniJation de!end on the nature
and si)nificance of those services to the user entit# and the relevance of those services to the audit'
11
ISA 4B5, C%o((unicatin) =eficiencies in Internal %ontrol to hose %har)ed with <overnance and Eana)e(ent,D !ara)ra!hs 5-
10'
14
ISA 404 97B
he a!!lication of the re*uire(ent in !ara)ra!h 5 assists the user auditor in deter(inin) the effect
of the su"service or)aniJation and the nature and e,tent of work to "e !erfor(ed'
F'!-#4 No"<Co.p0i!"ce &ith L!& !"# Re(-0!tio" !"# U"co''ecte# )it!te.e"t i"
Re0!tio" to Acti9itie !t the Se'9ice O'(!"i;!tio"
$Aef. 6ara' 15&
A41' A service or)aniJation (a# "e re*uired under the ter(s of the contract with user entities to
disclose to affected user entities an# fraud, non-co(!liance with laws and re)ulations or
uncorrected (isstate(ents attri"uta"le to the service or)aniJation+s (ana)e(ent or e(!lo#ees' As
re*uired "# !ara)ra!h 15, the user auditor (akes in*uiries of the user entit# (ana)e(ent
re)ardin) whether the service or)aniJation has re!orted an# such (atters and evaluates whether
an# (atters re!orted "# the service or)aniJation affect the nature, ti(in) and e,tent of the user
auditor+s further audit !rocedures' In certain circu(stances, the user auditor (a# re*uire
additional infor(ation to !erfor( this evaluation, and (a# re*uest the user entit# to contact the
service or)aniJation to o"tain the necessar# infor(ation'
Repo'ti"( $/ the Ue' A-#ito' $Aef. 6ara' 40&
A44' Lhen a user auditor is una"le to o"tain sufficient a!!ro!riate audit evidence re)ardin) the services
!rovided "# the service or)aniJation relevant to the audit of the user entit#+s financial state(ents,
a li(itation on the sco!e of the audit e,ists' his (a# "e the case when.
% G he user auditor is una"le to o"tain a sufficient understandin) of the services !rovided "#
the service or)aniJation and does not have a "asis for the identification and assess(ent of the risks
of (aterial (isstate(ent?
% G A user auditor+s risk assess(ent includes an e,!ectation that controls at the service
or)aniJation are o!eratin) effectivel# and the user auditor is una"le to o"tain sufficient a!!ro!riate
audit evidence a"out the o!eratin) effectiveness of these controls? or
% G Sufficient a!!ro!riate audit evidence is onl# availa"le fro( records held at the service
or)aniJation, and the user auditor is una"le to o"tain direct access to these records'
Lhether the user auditor e,!resses a *ualified o!inion or disclai(s an o!inion de!ends on the user
auditor+s conclusion as to whether the !ossi"le effects on the financial state(ents are (aterial or
!ervasive'
+eference to the Dor. of a )er!ice Auditor $Aef. 6ara' 41-44&
A49' In so(e cases, law or re)ulation (a# re*uire a reference to the work of a service auditor in the
user auditor+s re!ort, for e,a(!le, for the !ur!oses of
977 ISA 404
trans!arenc# in the !u"lic sector' In such circu(stances, the user auditor (a# need the consent of the
service auditor "efore (akin) such a reference'
A44' he fact that a user entit# uses a service or)aniJation does not alter the user auditor+s res!onsi"ilit#
under ISAs to o"tain sufficient a!!ro!riate audit evidence to afford a reasona"le "asis to su!!ort the
user auditor+s o!inion' herefore, the user auditor does not (ake reference to the service auditor+s
re!ort as a "asis, in !art, for the user auditor+s o!inion on the user entit#+s financial state(ents'
@owever, when the user auditor e,!resses a (odified o!inion "ecause of a (odified o!inion in a
service auditor+s re!ort, the user auditor is not !recluded fro( referrin) to the service auditor+s
re!ort if such reference assists in e,!lainin) the reason for the user auditor+s (odified o!inion' In
such circu(stances, the user auditor (a# need the consent of the service auditor "efore (akin) such
a reference'
ISA 404 978
INTERNATIONAL STANDARD ON AUDITING 6@0
E,ALUATION OF )ISSTATE)ENTS IDENTIFIED DURING THE AUDIT
$0ffective for audits of financial state(ents for !eriods "e)innin) on or after
=ece("er 15, 4005&
CONTENTS
975 ISA 450
International Standard on Auditin) $ISA& 450, C0valuation of Eisstate(ents Identified durin) the AuditD
should "e read in the conte,t of ISA 400, C7verall 7";ectives of the Inde!endent Auditor and the %onduct
of an Audit in Accordance with International Standards on Auditin)'D
ISA 450 980
1' his International Standard on Auditin) $ISA& deals with the auditor+s res!onsi"ilit# to evaluate
the effect of identified (isstate(ents on the audit and of uncorrected (isstate(ents, if an#, on the
financial state(ents' ISA 700 deals with the auditor+s res!onsi"ilit#, in for(in) an o!inion on the
financial state(ents, to conclude whether reasona"le assurance has "een o"tained a"out whether
the financial state(ents as a whole are free fro( (aterial (isstate(ent' he auditor+s conclusion
re*uired "# ISA 700 takes into account the auditor+s evaluation of uncorrected (isstate(ents, if
an#, on the financial state(ents, in accordance with this ISA'
1
ISA 940
4
deals with the auditor+s
res!onsi"ilit# to a!!l# the conce!t of (aterialit# a!!ro!riatel# in !lannin) and !erfor(in) an
audit of financial state(ents'
Effecti9e D!te
15, 4005'
O$1ecti9e
9' he o";ective of the auditor is to evaluate.
1. $a& he effect of identified (isstate(ents on the audit? and
2. $"& he effect of uncorrected (isstate(ents, if an#, on the financial state(ents'
Defi"itio"
$a& Eisstate(ent K A difference "etween the a(ount, classification, !resentation, or disclosure
of a re!orted financial state(ent ite( and the a(ount, classification, !resentation, or
disclosure that is re*uired for the ite( to "e in accordance with the a!!lica"le financial
re!ortin) fra(ework' Eisstate(ents can arise fro( error or fraud' $Aef. 6ara' A1&
Lhen the auditor e,!resses an o!inion on whether the financial state(ents are !resented
fairl#, in all (aterial res!ects, or )ive a true and fair view, (isstate(ents also include those
ad;ust(ents of a(ounts,
1
ISA 700, CFor(in) an 7!inion and Ae!ortin) on Financial State(ents,D !ara)ra!hs 10-11' 4
981 ISA 450
classifications, !resentation, or disclosures that, in the auditor+s ;ud)(ent, are necessar# for
the financial state(ents to "e !resented fairl#, in all (aterial res!ects, or to )ive a true and
fair view'
$"& Uncorrected (isstate(ents K Eisstate(ents that the auditor has accu(ulated durin) the
audit and that have not "een corrected'
Re2-i'e.e"t Acc-.-0!tio" of I#e"tifie# )it!te.e"t
5' he auditor shall accu(ulate (isstate(ents identified durin) the audit, other than those that are
clearl# trivial' $Aef. 6ara' A4-A9&
Co"i#e'!tio" of I#e"tifie# )it!te.e"t ! the A-#it *'o('ee
1. B' he auditor shall deter(ine whether the overall audit strate)# and audit !lan need to "e
revised if.
2. $a& he nature of identified (isstate(ents and the circu(stances of their occurrence indicate
that other (isstate(ents (a# e,ist that, when a))re)ated with (isstate(ents accu(ulated
durin) the audit, could "e (aterial? or $Aef. 6ara' A4&
3. $"& he a))re)ate of (isstate(ents accu(ulated durin) the audit a!!roaches (aterialit#
deter(ined in accordance with ISA 940' $Aef. 6ara' A5&
2. 7' If, at the auditor+s re*uest, (ana)e(ent has e,a(ined a class of transactions, account
"alance or disclosure and corrected (isstate(ents that were detected, the auditor shall !erfor(
additional audit !rocedures to deter(ine whether (isstate(ents re(ain' $Aef. 6ara' AB&
Co..-"ic!tio" !"# Co''ectio" of )it!te.e"t
1. 8' he auditor shall co((unicate on a ti(el# "asis all (isstate(ents accu(ulated durin)
the audit with the a!!ro!riate level of (ana)e(ent, unless !rohi"ited "# law or re)ulation'
9
he
auditor shall re*uest (ana)e(ent to correct those (isstate(ents' $Aef. 6ara' A7-A5&
2. 5' If (ana)e(ent refuses to correct so(e or all of the (isstate(ents co((unicated "# the
auditor, the auditor shall o"tain an understandin) of (ana)e(ent+s reasons for not (akin) the
corrections and shall take that understandin) into account when evaluatin) whether the financial
state(ents as a whole are free fro( (aterial (isstate(ent' $Aef. 6ara' A10&
ISA 450 984
E9!0-!ti"( the Effect of U"co''ecte# )it!te.e"t
1. 10' 6rior to evaluatin) the effect of uncorrected (isstate(ents, the auditor shall reassess
(aterialit# deter(ined in accordance with ISA 940 to confir( whether it re(ains a!!ro!riate in
the conte,t of the entit#+s actual financial results' $Aef. 6ara' A11-A14&
1. 11' he auditor shall deter(ine whether uncorrected (isstate(ents are (aterial, individuall#
or in a))re)ate' In (akin) this deter(ination, the auditor shall consider.
2. $a& he siJe and nature of the (isstate(ents, "oth in relation to !articular classes of
transactions, account "alances or disclosures and the financial state(ents as a whole, and the
!articular circu(stances of their occurrence? and $Aef. 6ara' A19-A17, A15-A40&
3. $"& he effect of uncorrected (isstate(ents related to !rior !eriods on the relevant classes of
transactions, account "alances or disclosures, and the financial state(ents as a whole' $Aef.
6ara' A18&
Co$$unication #ith 1hose Charged #ith 2o!ernance
1. 14' he auditor shall co((unicate with those char)ed with )overnance uncorrected
(isstate(ents and the effect that the#, individuall# or in a))re)ate, (a# have on the o!inion in the
auditor+s re!ort, unless !rohi"ited "# law or re)ulation'
4
he auditor+s co((unication shall
identif# (aterial uncorrected (isstate(ents individuall#' he auditor shall re*uest that
uncorrected (isstate(ents "e corrected' $Aef. 6ara' A41-A49&
2. 19' he auditor shall also co((unicate with those char)ed with )overnance the effect of
uncorrected (isstate(ents related to !rior !eriods on the relevant classes of transactions, account
"alances or disclosures, and the financial state(ents as a whole'
14' he auditor shall re*uest a written re!resentation fro( (ana)e(ent and, where a!!ro!riate, those
char)ed with )overnance whether the# "elieve the effects of uncorrected (isstate(ents are
i((aterial, individuall# and in a))re)ate, to the financial state(ents as a whole' A su((ar# of
such ite(s shall "e included in or attached to the written re!resentation' $Aef. 6ara' A44&
See footnote 9'
989 ISA 450
Doc-.e"t!tio"
5
$Aef. 6ara' A45&
1. $a& he a(ount "elow which (isstate(ents would "e re)arded as clearl# trivial $!ara)ra!h
5&?
2. $"& All (isstate(ents accu(ulated durin) the audit and whether the# have "een corrected
$!ara)ra!hs 5, 8 and 14&? and
3. $c& he auditor+s conclusion as to whether uncorrected (isstate(ents are (aterial,
individuall# or in a))re)ate, and the "asis for that conclusion $!ara)ra!h 11&'
OOO
App0ic!tio" !"# Othe' E5p0!"!to'/ )!te'i!0 Defi"itio" of )it!te.e"t $Aef. 6ara'
4$a&& A1' Eisstate(ents (a# result fro(.
1. $a& An inaccurac# in )atherin) or !rocessin) data fro( which the financial state(ents are
!re!ared?
2. $"& An o(ission of an a(ount or disclosure?
3. $c& An incorrect accountin) esti(ate arisin) fro( overlookin), or clear (isinter!retation of,
facts? and
4. $d& >ud)(ents of (ana)e(ent concernin) accountin) esti(ates that the auditor considers
unreasona"le or the selection and a!!lication of accountin) !olicies that the auditor considers
ina!!ro!riate'
0,a(!les of (isstate(ents arisin) fro( fraud are !rovided in ISA 440'
B
Acc-.-0!tio" of I#e"tifie# )it!te.e"t $Aef. 6ara' 5&
A4' he auditor (a# desi)nate an a(ount "elow which (isstate(ents would "e clearl# trivial and
would not need to "e accu(ulated "ecause the auditor e,!ects that the accu(ulation of such
a(ounts clearl# would not have a (aterial effect on the financial state(ents' C%learl# trivialD is
not another e,!ression for Cnot (aterial'D Eatters that are clearl# trivial will "e of a wholl#
different $s(aller& order of (a)nitude than (aterialit# deter(ined in
5
ISA 490, CAudit =ocu(entation,D !ara)ra!hs 8-11, and !ara)ra!h AB' B
ISA 440, Che Auditor+s Aes!onsi"ilities Aelatin) to Fraud in an Audit of Financial State(ents,D !ara)ra!hs A1-AB'
ISA 450 984
accordance with ISA 940, and will "e (atters that are clearl# inconse*uential, whether taken
individuall# or in a))re)ate and whether ;ud)ed "# an# criteria of siJe, nature or circu(stances'
Lhen there is an# uncertaint# a"out whether one or (ore ite(s are clearl# trivial, the (atter is
considered not to "e clearl# trivial'
A9' o assist the auditor in evaluatin) the effect of (isstate(ents accu(ulated durin) the audit and in
co((unicatin) (isstate(ents to (ana)e(ent and those char)ed with )overnance, it (a# "e
useful to distin)uish "etween factual (isstate(ents, ;ud)(ental (isstate(ents and !ro;ected
(isstate(ents'
% G Factual (isstate(ents are (isstate(ents a"out which there is no dou"t'
% G >ud)(ental (isstate(ents are differences arisin) fro( the ;ud)(ents of (ana)e(ent
concernin) accountin) esti(ates that the auditor considers unreasona"le, or the selection or
a!!lication of accountin) !olicies that the auditor considers ina!!ro!riate'
% G 6ro;ected (isstate(ents are the auditor+s "est esti(ate of (isstate(ents in !o!ulations,
involvin) the !ro;ection of (isstate(ents identified in audit sa(!les to the entire !o!ulations fro(
which the sa(!les were drawn' <uidance on the deter(ination of !ro;ected (isstate(ents and
evaluation of the results is set out in ISA 590'
7
Co"i#e'!tio" of I#e"tifie# )it!te.e"t ! the A-#it *'o('ee $Aef. 6ara' B-7&
A4' A (isstate(ent (a# not "e an isolated occurrence' 0vidence that other (isstate(ents (a# e,ist
include, for e,a(!le, where the auditor identifies that a (isstate(ent arose fro( a "reakdown in
internal control or fro( ina!!ro!riate assu(!tions or valuation (ethods that have "een widel#
a!!lied "# the entit#'
A5' If the a))re)ate of (isstate(ents accu(ulated durin) the audit a!!roaches (aterialit# deter(ined
in accordance with ISA 940, there (a# "e a )reater than acce!ta"l# low level of risk that !ossi"le
undetected (isstate(ents, when taken with the a))re)ate of (isstate(ents accu(ulated durin)
the audit, could e,ceed (aterialit#' Undetected (isstate(ents could e,ist "ecause of the !resence
of sa(!lin) risk and non-sa(!lin) risk'
8
AB' he auditor (a# re*uest (ana)e(ent to e,a(ine a class of transactions, account "alance or
disclosure in order for (ana)e(ent to understand the cause of a (isstate(ent identified "# the
auditor, !erfor( !rocedures to deter(ine the a(ount of the actual (isstate(ent in the class of
transactions, account "alance or disclosure, and to (ake a!!ro!riate ad;ust(ents to the financial
7
ISA 590, CAudit Sa(!lin),D !ara)ra!hs 14-15' 8
ISA 590, !ara)ra!h 5$c&-$d&'
985 ISA 450
state(ents' Such a re*uest (a# "e (ade, for e,a(!le, "ased on the auditor+s !ro;ection of
(isstate(ents identified in an audit sa(!le to the entire !o!ulation fro( which it was drawn'
Co..-"ic!tio" !"# Co''ectio" of )it!te.e"t $Aef. 6ara' 8-5&
A7' i(el# co((unication of (isstate(ents to the a!!ro!riate level of (ana)e(ent is i(!ortant as it
ena"les (ana)e(ent to evaluate whether the ite(s are (isstate(ents, infor( the auditor if it
disa)rees, and take action as necessar#' 7rdinaril#, the a!!ro!riate level of (ana)e(ent is the one
that has res!onsi"ilit# and authorit# to evaluate the (isstate(ents and to take the necessar# action'
A8' Maw or re)ulation (a# restrict the auditor+s co((unication of certain (isstate(ents to
(ana)e(ent, or others, within the entit#' For e,a(!le, laws or re)ulations (a# s!ecificall#
!rohi"it a co((unication, or other action, that (i)ht !re;udice an investi)ation "# an a!!ro!riate
authorit# into an actual, or sus!ected, ille)al act' In so(e circu(stances, !otential conflicts
"etween the auditor+s o"li)ations of confidentialit# and o"li)ations to co((unicate (a# "e
co(!le,' In such cases, the auditor (a# consider seekin) le)al advice'
A5' he correction "# (ana)e(ent of all (isstate(ents, includin) those co((unicated "# the auditor,
ena"les (ana)e(ent to (aintain accurate accountin) "ooks and records and reduces the risks of
(aterial (isstate(ent of future financial state(ents "ecause of the cu(ulative effect of i((aterial
uncorrected (isstate(ents related to !rior !eriods'
A10' ISA 700 re*uires the auditor to evaluate whether the financial state(ents are !re!ared and
!resented, in all (aterial res!ects, in accordance with the re*uire(ents of the a!!lica"le financial
re!ortin) fra(ework' his evaluation includes consideration of the *ualitative as!ects of the
entit#+s accountin) !ractices, includin) indicators of !ossi"le "ias in (ana)e(ent+s ;ud)(ents,
5
which (a# "e affected "# the auditor+s understandin) of (ana)e(ent+s reasons for not (akin) the
corrections'
E9!0-!ti"( the Effect of U"co''ecte# )it!te.e"t $Aef. 6ara' 10-11&
A11' he auditor+s deter(ination of (aterialit# in accordance with ISA 940 is often "ased on esti(ates
of the entit#+s financial results, "ecause the actual financial results (a# not #et "e known'
herefore, !rior to the auditor+s evaluation of the effect of uncorrected (isstate(ents, it (a# "e
necessar# to revise (aterialit# deter(ined in accordance with ISA 940 "ased on the actual
financial results'
ISA 450 98B
A14' ISA 940 e,!lains that, as the audit !ro)resses, (aterialit# for the financial state(ents as a whole
$and, if a!!lica"le, the (aterialit# level or levels for !articular classes of transactions, account
"alances or disclosures& is revised in the event of the auditor "eco(in) aware of infor(ation
durin) the audit that would have caused the auditor to have deter(ined a different a(ount $or
a(ounts& initiall#'
10
hus, an# si)nificant revision is likel# to have "een (ade "efore the auditor
evaluates the effect of uncorrected (isstate(ents' @owever, if the auditor+s reassess(ent of
(aterialit# deter(ined in accordance with ISA 940 $see !ara)ra!h 10 of this ISA& )ives rise to a
lower a(ount $or a(ounts&, then !erfor(ance (aterialit# and the a!!ro!riateness of the nature,
ti(in) and e,tent of the further audit !rocedures are reconsidered so as to o"tain sufficient
a!!ro!riate audit evidence on which to "ase the audit o!inion'
A19' 0ach individual (isstate(ent is considered to evaluate its effect on the relevant classes of
transactions, account "alances or disclosures, includin) whether the (aterialit# level for that
!articular class of transactions, account "alance or disclosure, if an#, has "een e,ceeded'
A14' If an individual (isstate(ent is ;ud)ed to "e (aterial, it is unlikel# that it can "e offset "# other
(isstate(ents' For e,a(!le, if revenue has "een (ateriall# overstated, the financial state(ents as
a whole will "e (ateriall# (isstated, even if the effect of the (isstate(ent on earnin)s is
co(!letel# offset "# an e*uivalent overstate(ent of e,!enses' It (a# "e a!!ro!riate to offset
(isstate(ents within the sa(e account "alance or class of transactions? however, the risk that
further undetected (isstate(ents (a# e,ist is considered "efore concludin) that offsettin) even
i((aterial (isstate(ents is a!!ro!riate'
11
A15' =eter(inin) whether a classification (isstate(ent is (aterial involves the evaluation of
*ualitative considerations, such as the effect of the classification (isstate(ent on de"t or other
contractual covenants, the effect on individual line ite(s or su"-totals, or the effect on ke# ratios'
here (a# "e circu(stances where the auditor concludes that a classification (isstate(ent is not
(aterial in the conte,t of the financial state(ents as a whole, even thou)h it (a# e,ceed the
(aterialit# level or levels a!!lied in evaluatin) other (isstate(ents' For e,a(!le, a
(isclassification "etween "alance sheet line ite(s (a# not "e considered (aterial in the conte,t
of the financial state(ents as a whole when the a(ount of the (isclassification is s(all in relation
to the siJe of the related "alance sheet line ite(s and the (isclassification does not affect the
inco(e state(ent or an# ke# ratios'
10
11
he identification of a nu("er of i((aterial (isstate(ents within the sa(e account "alance or class of transactions (a# re*uire
the auditor to reassess the risk of (aterial (isstate(ent for that account "alance or class of transactions'
987 ISA 450
A1B' he circu(stances related to so(e (isstate(ents (a# cause the auditor to evaluate the( as
(aterial, individuall# or when considered to)ether with other (isstate(ents accu(ulated durin)
the audit, even if the# are lower than (aterialit# for the financial state(ents as a whole'
%ircu(stances that (a# affect the evaluation include the e,tent to which the (isstate(ent.
% G Affects co(!liance with re)ulator# re*uire(ents?
% G Affects co(!liance with de"t covenants or other contractual re*uire(ents?
% G Aelates to the incorrect selection or a!!lication of an accountin) !olic# that has an
i((aterial effect on the current !eriod+s financial state(ents "ut is likel# to have a (aterial effect
on future !eriods+ financial state(ents?
% G Easks a chan)e in earnin)s or other trends, es!eciall# in the conte,t of )eneral econo(ic
and industr# conditions?
% G Affects ratios used to evaluate the entit#+s financial !osition, results of o!erations or cash
flows?
% G Affects se)(ent infor(ation !resented in the financial state(ents $for e,a(!le, the
si)nificance of the (atter to a se)(ent or other !ortion of the entit#+s "usiness that has "een
identified as !la#in) a si)nificant role in the entit#+s o!erations or !rofita"ilit#&?
% G @as the effect of increasin) (ana)e(ent co(!ensation, for e,a(!le, "# ensurin) that the
re*uire(ents for the award of "onuses or other incentives are satisfied?
% G Is si)nificant havin) re)ard to the auditor+s understandin) of known !revious
co((unications to users, for e,a(!le, in relation to forecast earnin)s?
% G Aelates to ite(s involvin) !articular !arties $for e,a(!le, whether e,ternal !arties to the
transaction are related to (e("ers of the entit#+s (ana)e(ent&?
% G Is an o(ission of infor(ation not s!ecificall# re*uired "# the a!!lica"le financial
re!ortin) fra(ework "ut which, in the ;ud)(ent of the auditor, is i(!ortant to the users+
understandin) of the financial !osition, financial !erfor(ance or cash flows of the entit#? or
% G Affects other infor(ation that will "e co((unicated in docu(ents containin) the audited
financial state(ents $for e,a(!le, infor(ation to "e included in a CEana)e(ent =iscussion and
Anal#sisD or an C7!eratin) and Financial AeviewD& that (a# reasona"l# "e e,!ected to
ISA 450 988
influence the econo(ic decisions of the users of the financial state(ents' ISA 740
14
deals
with the auditor+s consideration of other infor(ation, on which the auditor has no
o"li)ation to re!ort, in docu(ents containin) audited financial state(ents'
hese circu(stances are onl# e,a(!les? not all are likel# to "e !resent in all audits nor is the list
necessaril# co(!lete' he e,istence of an# circu(stances such as these does not necessaril# lead
to a conclusion that the (isstate(ent is (aterial'
A17' ISA 440
19
e,!lains how the i(!lications of a (isstate(ent that is, or (a# "e, the result of fraud
ou)ht to "e considered in relation to other as!ects of the audit, even if the siJe of the (isstate(ent
is not (aterial in relation to the financial state(ents'
A18' he cu(ulative effect of i((aterial uncorrected (isstate(ents related to !rior !eriods (a# have a
(aterial effect on the current !eriod+s financial state(ents' here are different acce!ta"le
a!!roaches to the auditor+s evaluation of such uncorrected (isstate(ents on the current !eriod+s
financial state(ents' Usin) the sa(e evaluation a!!roach !rovides consistenc# fro( !eriod to
!eriod'
A15' In the case of an audit of a !u"lic sector entit#, the evaluation whether a (isstate(ent is (aterial
(a# also "e affected "# the auditor+s res!onsi"ilities esta"lished "# law, re)ulation or other
authorit# to re!ort s!ecific (atters, includin), for e,a(!le, fraud'
A40' Further(ore, issues such as !u"lic interest, accounta"ilit#, !ro"it# and ensurin) effective
le)islative oversi)ht, in !articular, (a# affect the assess(ent whether an ite( is (aterial "# virtue
of its nature' his is !articularl# so for ite(s that relate to co(!liance with law, re)ulation or other
authorit#'
Co$$unication #ith 1hose Charged #ith 2o!ernance $Aef. 6ara' 14&
A41' If uncorrected (isstate(ents have "een co((unicated with !erson$s& with (ana)e(ent
res!onsi"ilities, and those !erson$s& also have )overnance res!onsi"ilities, the# need not "e
co((unicated a)ain with those sa(e !erson$s& in their )overnance role' he auditor nonetheless
has to "e satisfied that co((unication with !erson$s& with (ana)e(ent res!onsi"ilities
ade*uatel# infor(s all of those with who( the auditor would otherwise co((unicate in their
)overnance ca!acit#'
14
14
ISA 740, Che Auditor+s Aes!onsi"ilities Aelatin) to 7ther Infor(ation in =ocu(ents %ontainin) Audited Financial
State(ents'D
19
14
985 ISA 450
A44' Lhere there is a lar)e nu("er of individual i((aterial uncorrected (isstate(ents, the auditor
(a# co((unicate the nu("er and overall (onetar# effect of the uncorrected (isstate(ents,
rather than the details of each individual uncorrected (isstate(ent'
A49' ISA 4B0 re*uires the auditor to co((unicate with those char)ed with )overnance the written
re!resentations the auditor is re*uestin) $see !ara)ra!h 14 of this ISA&'
15
he auditor (a# discuss
with those char)ed with )overnance the reasons for, and the i(!lications of, a failure to correct
(isstate(ents, havin) re)ard to the siJe and nature of the (isstate(ent ;ud)ed in the surroundin)
circu(stances, and !ossi"le i(!lications in relation to future financial state(ents'
A44' 1ecause the !re!aration of the financial state(ents re*uires (ana)e(ent and, where a!!ro!riate,
those char)ed with )overnance to ad;ust the financial state(ents to correct (aterial (isstate(ents,
the auditor is re*uired to re*uest the( to !rovide a written re!resentation a"out uncorrected
(isstate(ents' In so(e circu(stances, (ana)e(ent and, where a!!ro!riate, those char)ed with
)overnance (a# not "elieve that certain uncorrected (isstate(ents are (isstate(ents' For that
reason, the# (a# want to add to their written re!resentation words such as. CLe do not a)ree that
ite(s H and H constitute (isstate(ents "ecause Udescri!tion of reasonsV'D 7"tainin) this
re!resentation does not, however, relieve the auditor of the need to for( a conclusion on the effect
of uncorrected (isstate(ents'
A45' he auditor+s docu(entation of uncorrected (isstate(ents (a# take into account.
1$a& he consideration of the a))re)ate effect of uncorrected (isstate(ents?
2$"& he evaluation of whether the (aterialit# level or levels for !articular classes of
transactions, account "alances or disclosures, if an#, have "een e,ceeded? and
3$c& he evaluation of the effect of uncorrected (isstate(ents on ke# ratios or trends, and
co(!liance with le)al, re)ulator# and contractual re*uire(ents $for e,a(!le, de"t covenants&'
ISA 4B0, !ara)ra!h 1B$c&$ii&'
ISA 450 950
INTERNATIONAL STANDARD ON AUDITING @00 AUDIT E,IDENCE
CONTENTS
6ara)ra!h
Infor(ation to 1e Used as Audit 0vidence ''''''''''''''''''''''''''''''''''''''''''''''''' A4B-A51
Selectin) Ite(s for estin) to 7"tain Audit 0vidence '''''''''''''''''''''''''''''''' A54-A5B
Inconsistenc# in, or =ou"ts over Aelia"ilit# of, Audit 0vidence '''''''''''''''' A57
International Standard on Auditin) $ISA& 500, CAudit 0videnceD should "e read in con;unction with ISA
400, C7verall 7";ectives of the Inde!endent Auditor and the %onduct of an Audit in Accordance with
951 ISA 500
1. 1' his International Standard on Auditin) $ISA& e,!lains what constitutes audit evidence in
an audit of financial state(ents, and deals with the auditor+s res!onsi"ilit# to desi)n and !erfor(
audit !rocedures to o"tain sufficient a!!ro!riate audit evidence to "e a"le to draw reasona"le
conclusions on which to "ase the auditor+s o!inion'
2. 4' his ISA is a!!lica"le to all the audit evidence o"tained durin) the course of the audit'
7ther ISAs deal with s!ecific as!ects of the audit $for e,a(!le, ISA 915
1
&, the audit evidence to
"e o"tained in relation to a !articular to!ic $for e,a(!le, ISA 570
4
&, s!ecific !rocedures to o"tain
audit evidence $for e,a(!le, ISA 540
9
&, and the evaluation of whether sufficient a!!ro!riate audit
evidence has "een o"tained $ISA 400
4
and ISA 990
5
&'
Effecti9e D!te
15, 4005'
O$1ecti9e
4' he o";ective of the auditor is to desi)n and !erfor( audit !rocedures in such a wa# as to ena"le
the auditor to o"tain sufficient a!!ro!riate audit evidence to "e a"le to draw reasona"le
conclusions on which to "ase the auditor+s o!inion'
Defi"itio"
$a& Accountin) records K he records of initial accountin) entries and su!!ortin) records, such
as checks and records of electronic fund transfers? invoices? contracts? the )eneral and
su"sidiar# led)ers,;ournal entries and other ad;ust(ents to the financial state(ents that are
not reflected in ;ournal entries? and records such as work sheets and s!readsheets
su!!ortin) cost allocations, co(!utations, reconciliations and disclosures'
1
ISA 915, CIdentif#in) and Assessin) the Aisks of Eaterial Eisstate(ent throu)h Understandin) the
0ntit# and Its 0nviron(ent'D 4
ISA 570, C<oin) %oncern'D 9
ISA 540, CAnal#tical 6rocedures'D 4
5 D
ISA 990, Che Auditor+s Aes!onses to Assessed Aisks'
ISA 500 954
1$"& A!!ro!riateness $of audit evidence& K he (easure of the *ualit# of audit evidence? that
is, its relevance and its relia"ilit# in !rovidin) su!!ort for the conclusions on which the auditor+s
o!inion is "ased'
2$c& Audit evidence K Infor(ation used "# the auditor in arrivin) at the conclusions on which
the auditor+s o!inion is "ased' Audit evidence includes "oth infor(ation contained in the
accountin) records underl#in) the financial state(ents and other infor(ation'
3$d& Eana)e(ent+s e,!ert K An individual or or)aniJation !ossessin) e,!ertise in a field other than
accountin) or auditin), whose work in that field is used "# the entit# to assist the entit# in
!re!arin) the financial state(ents'
4$e& Sufficienc# $of audit evidence& K he (easure of the *uantit# of audit evidence' he
*uantit# of the audit evidence needed is affected "# the auditor+s assess(ent of the risks of
(aterial (isstate(ent and also "# the *ualit# of such audit evidence'
Re2-i'e.e"t S-fficie"t App'op'i!te A-#it E9i#e"ce
B' he auditor shall desi)n and !erfor( audit !rocedures that are a!!ro!riate in the circu(stances for
the !ur!ose of o"tainin) sufficient a!!ro!riate audit evidence' $Aef. 6ara' A1-A45&
I"fo'.!tio" to Be Ue# ! A-#it E9i#e"ce
1. 7' Lhen desi)nin) and !erfor(in) audit !rocedures, the auditor shall consider the relevance
and relia"ilit# of the infor(ation to "e used as audit evidence' $Aef. 6ara' A4B-A99&
18' If infor(ation to "e used as audit evidence has "een !re!ared usin) the work of a
(ana)e(ent+s e,!ert, the auditor shall, to the e,tent necessar#, havin) re)ard to the
si)nificance of that e,!ert+s work for the auditor+s !ur!oses. $Aef. 6ara' A94-A9B&
2$a& 0valuate the co(!etence, ca!a"ilities and o";ectivit# of that e,!ert? $Aef. 6ara' A97-
A49&
3$"& 7"tain an understandin) of the work of that e,!ert? and $Aef. 6ara' A44-A47&
4$c& 0valuate the a!!ro!riateness of that e,!ert+s work as audit evidence for the relevant assertion'
$Aef. 6ara' A48&
2. 5' Lhen usin) infor(ation !roduced "# the entit#, the auditor shall evaluate whether the
infor(ation is sufficientl# relia"le for the auditor+s !ur!oses, includin) as necessar# in the
circu(stances.
959 ISA 500
1. $a& 7"tainin) audit evidence a"out the accurac# and co(!leteness of the infor(ation? and
2. $"& 0valuatin) whether the infor(ation is sufficientl# !recise and detailed for the auditor+s
!ur!oses' $Aef. 6ara' A51&
Se0ecti"( Ite. fo' Teti"( to O$t!i" A-#it E9i#e"ce
10' Lhen desi)nin) tests of controls and tests of details, the auditor shall deter(ine (eans of
selectin) ite(s for testin) that are effective in (eetin) the !ur!ose of the audit !rocedure' $Aef.
6ara' A54-A5B&
I"co"ite"c/ i"4 o' Do-$t o9e' Re0i!$i0it/ of4 A-#it E9i#e"ce
11' If.
1. $a& audit evidence o"tained fro( one source is inconsistent with that o"tained fro( another?
or
2. $"& the auditor has dou"ts over the relia"ilit# of infor(ation to "e used as audit evidence,
the auditor shall deter(ine what (odifications or additions to audit !rocedures are necessar# to
resolve the (atter, and shall consider the effect of the (atter, if an#, on other as!ects of the audit'
$Aef. 6ara' A57&
EEE
S-fficie"t App'op'i!te A-#it E9i#e"ce $Aef. 6ara' B&
A1' Audit evidence is necessar# to su!!ort the auditor+s o!inion and re!ort' It is cu(ulative in nature
and is !ri(aril# o"tained fro( audit !rocedures !erfor(ed durin) the course of the audit' It (a#,
however, also include infor(ation o"tained fro( other sources such as !revious audits $!rovided
the auditor has deter(ined whether chan)es have occurred since the !revious audit that (a# affect
its relevance to the current audit
B
& or a fir(+s *ualit# control !rocedures for client acce!tance and
continuance' In addition to other sources inside and outside the entit#, the entit#+s accountin)
records are an i(!ortant source of audit evidence' Also, infor(ation that (a# "e used as audit
evidence (a# have "een !re!ared usin) the work of a (ana)e(ent+s e,!ert' Audit evidence
co(!rises "oth infor(ation that su!!orts and corro"orates (ana)e(ent+s assertions, and an#
infor(ation that contradicts such assertions' In addition, in so(e cases the a"sence of infor(ation
$for e,a(!le,
ISA 500 954
(ana)e(ent+s refusal to !rovide a re*uested re!resentation& is used "# the auditor, and therefore,
also constitutes audit evidence'
A4' Eost of the auditor+s work in for(in) the auditor+s o!inion consists of o"tainin) and evaluatin)
audit evidence' Audit !rocedures to o"tain audit evidence can include ins!ection, o"servation,
confir(ation, recalculation, re!erfor(ance and anal#tical !rocedures, often in so(e co("ination,
in addition to in*uir#' Althou)h in*uir# (a# !rovide i(!ortant audit evidence, and (a# even
!roduce evidence of a (isstate(ent, in*uir# alone ordinaril# does not !rovide sufficient audit
evidence of the a"sence of a (aterial (isstate(ent at the assertion level, nor of the o!eratin)
effectiveness of controls'
A9' As e,!lained in ISA 400,
7
reasona"le assurance is o"tained when the auditor has o"tained
sufficient a!!ro!riate audit evidence to reduce audit risk $that is, the risk that the auditor e,!resses
an ina!!ro!riate o!inion when the financial state(ents are (ateriall# (isstated& to an acce!ta"l#
low level'
A4' he sufficienc# and a!!ro!riateness of audit evidence are interrelated' Sufficienc# is the (easure
of the *uantit# of audit evidence' he *uantit# of audit evidence needed is affected "# the
auditor+s assess(ent of the risks of (isstate(ent $the hi)her the assessed risks, the (ore audit
evidence is likel# to "e re*uired& and also "# the *ualit# of such audit evidence $the hi)her the
*ualit#, the less (a# "e re*uired&' 7"tainin) (ore audit evidence, however, (a# not co(!ensate
for its !oor *ualit#'
A5' A!!ro!riateness is the (easure of the *ualit# of audit evidence? that is, its relevance and its
relia"ilit# in !rovidin) su!!ort for the conclusions on which the auditor+s o!inion is "ased' he
relia"ilit# of evidence is influenced "# its source and "# its nature, and is de!endent on the
individual circu(stances under which it is o"tained'
AB' ISA 990 re*uires the auditor to conclude whether sufficient a!!ro!riate audit evidence has "een
o"tained'
8
Lhether sufficient a!!ro!riate audit evidence has "een o"tained to reduce audit risk to
an acce!ta"l# low level, and there"# ena"le the auditor to draw reasona"le conclusions on which
to "ase the auditor+s o!inion, is a (atter of !rofessional ;ud)(ent' ISA 400 contains discussion of
such (atters as the nature of audit !rocedures, the ti(eliness of financial re!ortin), and the
"alance "etween "enefit and cost, which are relevant factors when the auditor e,ercises
!rofessional ;ud)(ent re)ardin) whether sufficient a!!ro!riate audit evidence has "een o"tained'
7
ISA 400, !ara)ra!h 5' 8
ISA 990, !ara)ra!h 4B'
955 ISA 500
)ources of Audit /!idence
A7' So(e audit evidence is o"tained "# !erfor(in) audit !rocedures to test the accountin) records, for
e,a(!le, throu)h anal#sis and review, re!erfor(in) !rocedures followed in the financial re!ortin)
!rocess, and reconcilin) related t#!es and a!!lications of the sa(e infor(ation' hrou)h the
!erfor(ance of such audit !rocedures, the auditor (a# deter(ine that the accountin) records are
internall# consistent and a)ree to the financial state(ents'
A8' Eore assurance is ordinaril# o"tained fro( consistent audit evidence o"tained fro( different
sources or of a different nature than fro( ite(s of audit evidence considered individuall#' For
e,a(!le, corro"oratin) infor(ation o"tained fro( a source inde!endent of the entit# (a# increase
the assurance the auditor o"tains fro( audit evidence that is )enerated internall#, such as evidence
e,istin) within the accountin) records, (inutes of (eetin)s, or a (ana)e(ent re!resentation'
A5' Infor(ation fro( sources inde!endent of the entit# that the auditor (a# use as audit evidence (a#
include confir(ations fro( third !arties, anal#sts+ re!orts, and co(!ara"le data a"out co(!etitors
$"ench(arkin) data&'
Audit (rocedures for ,btaining Audit /!idence
A10' As re*uired "#, and e,!lained further in, ISA 915 and ISA 990, audit evidence to draw
reasona"le conclusions on which to "ase the auditor+s o!inion is o"tained "# !erfor(in).
1$a& Aisk assess(ent !rocedures? and
1$"&Further audit !rocedures, which co(!rise.
2$i& ests of controls, when re*uired "# the ISAs or when the auditor has chosen to do so? and
3$ii& Su"stantive !rocedures, includin) tests of details and su"stantive anal#tical !rocedures'
A11' he audit !rocedures descri"ed in !ara)ra!hs A14-A45 "elow (a# "e used as risk assess(ent
!rocedures, tests of controls or su"stantive !rocedures, de!endin) on the conte,t in which the#
are a!!lied "# the auditor' As e,!lained in ISA 990, audit evidence o"tained fro( !revious
audits (a#, in certain circu(stances, !rovide a!!ro!riate audit evidence where the auditor
!erfor(s audit !rocedures to esta"lish its continuin) relevance'
5
A14' he nature and ti(in) of the audit !rocedures to "e used (a# "e affected "# the fact that so(e
of the accountin) data and other infor(ation (a# "e availa"le onl# in electronic for( or onl# at
certain !oints or !eriods in ti(e'
ISA 500 95B
For e,a(!le, source docu(ents, such as !urchase orders and invoices, (a# e,ist onl# in
electronic for( when an entit# uses electronic co((erce, or (a# "e discarded after scannin)
when an entit# uses i(a)e !rocessin) s#ste(s to facilitate stora)e and reference'
A19' %ertain electronic infor(ation (a# not "e retrieva"le after a s!ecified !eriod of ti(e, for
e,a(!le, if files are chan)ed and if "acku! files do not e,ist' Accordin)l#, the auditor (a# find
it necessar# as a result of an entit#+s data retention !olicies to re*uest retention of so(e
infor(ation for the auditor+s review or to !erfor( audit !rocedures at a ti(e when the
infor(ation is availa"le'
Ins!ection
A14' Ins!ection involves e,a(inin) records or docu(ents, whether internal or e,ternal, in !a!er
for(, electronic for(, or other (edia, or a !h#sical e,a(ination of an asset' Ins!ection of
records and docu(ents !rovides audit evidence of var#in) de)rees of relia"ilit#, de!endin) on
their nature and source and, in the case of internal records and docu(ents, on the effectiveness
of the controls over their !roduction' An e,a(!le of ins!ection used as a test of controls is
ins!ection of records for evidence of authoriJation'
A15' So(e docu(ents re!resent direct audit evidence of the e,istence of an asset, for e,a(!le, a
docu(ent constitutin) a financial instru(ent such as a stock or "ond' Ins!ection of such
docu(ents (a# not necessaril# !rovide audit evidence a"out ownershi! or value' In addition,
ins!ectin) an e,ecuted contract (a# !rovide audit evidence relevant to the entit#+s a!!lication
of accountin) !olicies, such as revenue reco)nition'
A1B' Ins!ection of tan)i"le assets (a# !rovide relia"le audit evidence with res!ect to their e,istence,
"ut not necessaril# a"out the entit#+s ri)hts and o"li)ations or the valuation of the assets'
Ins!ection of individual inventor# ite(s (a# acco(!an# the o"servation of inventor# countin)'
7"servation
A17' 7"servation consists of lookin) at a !rocess or !rocedure "ein) !erfor(ed "# others, for
e,a(!le, the auditor+s o"servation of inventor# countin) "# the entit#+s !ersonnel, or of the
!erfor(ance of control activities' 7"servation !rovides audit evidence a"out the !erfor(ance of
a !rocess or !rocedure, "ut is li(ited to the !oint in ti(e at which the o"servation takes !lace,
and "# the fact that the act of "ein) o"served (a# affect how the !rocess or !rocedure is
!erfor(ed' See ISA 501 for further )uidance on o"servation of the countin) of inventor#'
10
ISA 501, CAudit 0videnceNS!ecific %onsiderations for Selected Ite(s'D
957 ISA 500
0,ternal %onfir(ation
A18' An e,ternal confir(ation re!resents audit evidence o"tained "# the auditor as a direct written
res!onse to the auditor fro( a third !art# $the confir(in) !art#&, in !a!er for(, or "# electronic
or other (ediu(' 0,ternal confir(ation !rocedures fre*uentl# are relevant when addressin)
assertions associated with certain account "alances and their ele(ents' @owever, e,ternal
confir(ations need not "e restricted to account "alances onl#' For e,a(!le, the auditor (a#
re*uest confir(ation of the ter(s of a)ree(ents or transactions an entit# has with third !arties?
the confir(ation re*uest (a# "e desi)ned to ask if an# (odifications have "een (ade to the
a)ree(ent and, if so, what the relevant details are' 0,ternal confir(ation !rocedures also are
used to o"tain audit evidence a"out the a"sence of certain conditions, for e,a(!le, the a"sence
of a Cside a)ree(entD that (a# influence revenue reco)nition' See ISA 505 for further
)uidance'
11
Aecalculation
A15' Aecalculation consists of checkin) the (athe(atical accurac# of docu(ents or records'
Aecalculation (a# "e !erfor(ed (anuall# or electronicall#'
Ae!erfor(ance
A40' Ae!erfor(ance involves the auditor+s inde!endent e,ecution of !rocedures or controls that were
ori)inall# !erfor(ed as !art of the entit#+s internal control'
Anal#tical 6rocedures
A41' Anal#tical !rocedures consist of evaluations of financial infor(ation throu)h anal#sis of
!lausi"le relationshi!s a(on) "oth financial and non-financial data' Anal#tical !rocedures also
enco(!ass such investi)ation as is necessar# of identified fluctuations or relationshi!s that are
inconsistent with other relevant infor(ation or that differ fro( e,!ected values "# a si)nificant
a(ount' See ISA 540 for further )uidance'
In*uir#
A44' In*uir# consists of seekin) infor(ation of knowled)ea"le !ersons, "oth financial and non-
financial, within the entit# or outside the entit#' In*uir# is used e,tensivel# throu)hout the audit
in addition to other audit !rocedures' In*uiries (a# ran)e fro( for(al written in*uiries to
infor(al oral in*uiries' 0valuatin) res!onses to in*uiries is an inte)ral !art of the in*uir#
!rocess'
ISA 505, C0,ternal %onfir(ations'D
ISA 500 958
A49' Aes!onses to in*uiries (a# !rovide the auditor with infor(ation not !reviousl# !ossessed or
with corro"orative audit evidence' Alternativel#, res!onses (i)ht !rovide infor(ation that
differs si)nificantl# fro( other infor(ation that the auditor has o"tained, for e,a(!le,
infor(ation re)ardin) the !ossi"ilit# of (ana)e(ent override of controls' In so(e cases,
res!onses to in*uiries !rovide a "asis for the auditor to (odif# or !erfor( additional audit
!rocedures'
A44' Althou)h corro"oration of evidence o"tained throu)h in*uir# is often of !articular i(!ortance,
in the case of in*uiries a"out (ana)e(ent intent, the infor(ation availa"le to su!!ort
(ana)e(ent+s intent (a# "e li(ited' In these cases, understandin) (ana)e(ent+s !ast histor# of
carr#in) out its stated intentions, (ana)e(ent+s stated reasons for choosin) a !articular course
of action, and (ana)e(ent+s a"ilit# to !ursue a s!ecific course of action (a# !rovide relevant
infor(ation to corro"orate the evidence o"tained throu)h in*uir#'
A45' In res!ect of so(e (atters, the auditor (a# consider it necessar# to o"tain written
re!resentations fro( (ana)e(ent and, where a!!ro!riate, those char)ed with )overnance to
confir( res!onses to oral in*uiries' See ISA 580 for further )uidance'
14
I"fo'.!tio" to Be Ue# ! A-#it E9i#e"ce
+ele!ance and +eliability $Aef. 6ara' 7&
A4B' As noted in !ara)ra!h A1, while audit evidence is !ri(aril# o"tained fro( audit !rocedures
!erfor(ed durin) the course of the audit, it (a# also include infor(ation o"tained fro( other
sources such as, for e,a(!le, !revious audits, in certain circu(stances, and a fir(+s *ualit#
control !rocedures for client acce!tance and continuance' he *ualit# of all audit evidence is
affected "# the relevance and relia"ilit# of the infor(ation u!on which it is "ased'
Aelevance
A47' Aelevance deals with the lo)ical connection with, or "earin) u!on, the !ur!ose of the audit
!rocedure and, where a!!ro!riate, the assertion under consideration' he relevance of
infor(ation to "e used as audit evidence (a# "e affected "# the direction of testin)' For
e,a(!le, if the !ur!ose of an audit !rocedure is to test for overstate(ent in the e,istence or
valuation of accounts !a#a"le, testin) the recorded accounts !a#a"le (a# "e a relevant audit
!rocedure' 7n the other hand, when testin) for understate(ent in the e,istence or valuation of
accounts !a#a"le, testin) the recorded accounts
955 ISA 500
!a#a"le would not "e relevant, "ut testin) such infor(ation as su"se*uent dis"urse(ents, un!aid
invoices, su!!liers+ state(ents, and un(atched receivin) re!orts (a# "e relevant'
A48' A )iven set of audit !rocedures (a# !rovide audit evidence that is relevant to certain assertions,
"ut not others' For e,a(!le, ins!ection of docu(ents related to the collection of receiva"les
after the !eriod end (a# !rovide audit evidence re)ardin) e,istence and valuation, "ut not
necessaril# cutoff' Si(ilarl#, o"tainin) audit evidence re)ardin) a !articular assertion, for
e,a(!le, the e,istence of inventor#, is not a su"stitute for o"tainin) audit evidence re)ardin)
another assertion, for e,a(!le, the valuation of that inventor#' 7n the other hand, audit evidence
fro( different sources or of a different nature (a# often "e relevant to the sa(e assertion'
A45' ests of controls are desi)ned to evaluate the o!eratin) effectiveness of controls in !reventin),
or detectin) and correctin), (aterial (isstate(ents at the assertion level' =esi)nin) tests of
controls to o"tain relevant audit evidence includes identif#in) conditions $characteristics or
attri"utes& that indicate !erfor(ance of a control, and deviation conditions which indicate
de!artures fro( ade*uate !erfor(ance' he !resence or a"sence of those conditions can then "e
tested "# the auditor'
A90' Su"stantive !rocedures are desi)ned to detect (aterial (isstate(ents at the assertion level' he#
co(!rise tests of details and su"stantive anal#tical !rocedures' =esi)nin) su"stantive
!rocedures includes identif#in) conditions relevant to the !ur!ose of the test that constitute a
(isstate(ent in the relevant assertion'
Aelia"ilit#
A91' he relia"ilit# of infor(ation to "e used as audit evidence, and therefore of the audit evidence
itself, is influenced "# its source and its nature, and the circu(stances under which it is o"tained,
includin) the controls over its !re!aration and (aintenance where relevant' herefore,
)eneraliJations a"out the relia"ilit# of various kinds of audit evidence are su";ect to i(!ortant
e,ce!tions' 0ven when infor(ation to "e used as audit evidence is o"tained fro( sources
e,ternal to the entit#, circu(stances (a# e,ist that could affect its relia"ilit#' For e,a(!le,
infor(ation o"tained fro( an inde!endent e,ternal source (a# not "e relia"le if the source is
not knowled)ea"le, or a (ana)e(ent+s e,!ert (a# lack o";ectivit#' Lhile reco)niJin) that
e,ce!tions (a# e,ist, the followin) )eneraliJations a"out the relia"ilit# of audit evidence (a#
"e useful.
G he relia"ilit# of audit evidence is increased when it is o"tained fro( inde!endent
sources outside the entit#'
ISA 500 400
1. G he relia"ilit# of audit evidence that is )enerated internall# is increased when the related
controls, includin) those over its !re!aration and (aintenance, i(!osed "# the entit# are effective'
2. G Audit evidence o"tained directl# "# the auditor $for e,a(!le, o"servation of the
a!!lication of a control& is (ore relia"le than audit evidence o"tained indirectl# or "# inference
$for e,a(!le, in*uir# a"out the a!!lication of a control&'
3. G Audit evidence in docu(entar# for(, whether !a!er, electronic, or other (ediu(, is
(ore relia"le than evidence o"tained orall# $for e,a(!le, a conte(!oraneousl# written record of a
(eetin) is (ore relia"le than a su"se*uent oral re!resentation of the (atters discussed&'
4. G Audit evidence !rovided "# ori)inal docu(ents is (ore relia"le than audit evidence
!rovided "# !hotoco!ies or facsi(iles, or docu(ents that have "een fil(ed, di)itiJed or otherwise
transfor(ed into electronic for(, the relia"ilit# of which (a# de!end on the controls over their
!re!aration and (aintenance'
A94' ISA 540 !rovides further )uidance re)ardin) the relia"ilit# of data used for !ur!oses of
desi)nin) anal#tical !rocedures as su"stantive !rocedures'
19
A99' ISA 440 deals with circu(stances where the auditor has reason to "elieve that a docu(ent (a#
not "e authentic, or (a# have "een (odified without that (odification havin) "een disclosed to
the auditor'
14
+eliability of Infor$ation (roduced by a <anage$ent8s /4pert $Aef. 6ara' 8&
A94' he !re!aration of an entit#+s financial state(ents (a# re*uire e,!ertise in a field other than
accountin) or auditin), such as actuarial calculations, valuations, or en)ineerin) data' he entit#
(a# e(!lo# or en)a)e e,!erts in these fields to o"tain the needed e,!ertise to !re!are the
financial state(ents' Failure to do so when such e,!ertise is necessar# increases the risks of
A95' Lhen infor(ation to "e used as audit evidence has "een !re!ared usin) the work of a
(ana)e(ent+s e,!ert, the re*uire(ent in !ara)ra!h 8 of this ISA a!!lies' For e,a(!le, an
individual or or)aniJation (a# !ossess e,!ertise in the a!!lication of (odels to esti(ate the fair
value of securities for which there is no o"serva"le (arket' If the individual or or)aniJation
a!!lies that e,!ertise in (akin) an esti(ate which the entit# uses in !re!arin) its
19
14
ISA 440, Che Auditor+s Aes!onsi"ilities Aelatin) to Fraud in an Audit of Financial State(ents,D !ara)ra!h 19'
401 ISA 500
financial state(ents, the individual or or)aniJation is a (ana)e(ent+s e,!ert and !ara)ra!h 8
a!!lies' If, on the other hand, that individual or or)aniJation (erel# !rovides !rice data
re)ardin) !rivate transactions not otherwise availa"le to the entit# which the entit# uses in its
own esti(ation (ethods, such infor(ation, if used as audit evidence, is su";ect to !ara)ra!h 7 of
this ISA, "ut is not the use of a (ana)e(ent+s e,!ert "# the entit#'
A9B' he nature, ti(in) and e,tent of audit !rocedures in relation to the re*uire(ent in !ara)ra!h 8 of
this ISA, (a# "e affected "# such (atters as.
% G he nature and co(!le,it# of the (atter to which the (ana)e(ent+s e,!ert relates'
% G he risks of (aterial (isstate(ent in the (atter'
% G he availa"ilit# of alternative sources of audit evidence'
% G he nature, sco!e and o";ectives of the (ana)e(ent+s e,!ert+s work'
% G Lhether the (ana)e(ent+s e,!ert is e(!lo#ed "# the entit#, or is a !art# en)a)ed "# it to
!rovide relevant services'
% G he e,tent to which (ana)e(ent can e,ercise control or influence over the work of the
(ana)e(ent+s e,!ert'
% G Lhether the (ana)e(ent+s e,!ert is su";ect to technical !erfor(ance standards or other
!rofessional or industr# re*uire(ents'
% G he nature and e,tent of an# controls within the entit# over the (ana)e(ent+s e,!ert+s
work'
% G he auditor+s knowled)e and e,!erience of the (ana)e(ent+s e,!ert+s field of e,!ertise'
% G he auditor+s !revious e,!erience of the work of that e,!ert'
he %o(!etence, %a!a"ilities and 7";ectivit# of a Eana)e(ent+s 0,!ert $Aef. 6ara' 8$a&&
A97' %o(!etence relates to the nature and level of e,!ertise of the (ana)e(ent+s e,!ert' %a!a"ilit#
relates the a"ilit# of the (ana)e(ent+s e,!ert to e,ercise that co(!etence in the circu(stances'
Factors that influence ca!a"ilit# (a# include, for e,a(!le, )eo)ra!hic location, and the
availa"ilit# of ti(e and resources' 7";ectivit# relates to the !ossi"le effects that "ias, conflict of
interest or the influence of others (a# have on the !rofessional or "usiness ;ud)(ent of the
(ana)e(ent+s e,!ert' he co(!etence, ca!a"ilities and o";ectivit# of a (ana)e(ent+s e,!ert,
and an# controls within the entit# over that e,!ert+s work, are i(!ortant factors in relation to the
relia"ilit# of an# infor(ation !roduced "# a (ana)e(ent+s e,!ert'
ISA 500 404
A98' Infor(ation re)ardin) the co(!etence, ca!a"ilities and o";ectivit# of a
(ana)e(ent+s e,!ert (a# co(e fro( a variet# of sources, such as.
% G 6ersonal e,!erience with !revious work of that e,!ert'
% G =iscussions with that e,!ert'
% G =iscussions with others who are fa(iliar with that e,!ert+s work'
% G Snowled)e of that e,!ert+s *ualifications, (e("ershi! of a !rofessional "od# or industr#
association, license to !ractice, or other for(s of e,ternal reco)nition'
% G 6u"lished !a!ers or "ooks written "# that e,!ert'
% G An auditor+s e,!ert, if an#, who assists the auditor in o"tainin) sufficient a!!ro!riate
audit evidence with res!ect to infor(ation !roduced "# the (ana)e(ent+s e,!ert'
A95' Eatters relevant to evaluatin) the co(!etence, ca!a"ilities and o";ectivit# of a (ana)e(ent+s
e,!ert include whether that e,!ert+s work is su";ect to technical !erfor(ance standards or other
!rofessional or industr# re*uire(ents, for e,a(!le, ethical standards and other (e("ershi!
re*uire(ents of a !rofessional "od# or industr# association, accreditation standards of a licensin)
"od#, or re*uire(ents i(!osed "# law or re)ulation'
A40' 7ther (atters that (a# "e relevant include.
% G he relevance of the (ana)e(ent+s e,!ert+s co(!etence to the (atter for which that
e,!ert+s work will "e used, includin) an# areas of s!ecialt# within that e,!ert+s field' For e,a(!le,
a !articular actuar# (a# s!ecialiJe in !ro!ert# and casualt# insurance, "ut have li(ited e,!ertise
re)ardin) !ension calculations'
% G he (ana)e(ent+s e,!ert+s co(!etence with res!ect to relevant accountin) re*uire(ents,
for e,a(!le, knowled)e of assu(!tions and (ethods, includin) (odels where a!!lica"le, that are
consistent with the a!!lica"le financial re!ortin) fra(ework'
% G Lhether une,!ected events, chan)es in conditions, or the audit evidence o"tained fro(
the results of audit !rocedures indicate that it (a# "e necessar# to reconsider the initial evaluation
of the co(!etence, ca!a"ilities and o";ectivit# of the (ana)e(ent+s e,!ert as the audit !ro)resses'
A41' A "road ran)e of circu(stances (a# threaten o";ectivit#, for e,a(!le, self-interest threats,
advocac# threats, fa(iliarit# threats, self-review threats and inti(idation threats' Safe)uards (a#
reduce such threats, and (a# "e created either "# e,ternal structures $for e,a(!le, the
(ana)e(ent+s e,!ert+s
409 ISA 500
!rofession, le)islation or re)ulation&, or "# the (ana)e(ent+s e,!ert+s work environ(ent $for
e,a(!le, *ualit# control !olicies and !rocedures&'
A44' Althou)h safe)uards cannot eli(inate all threats to a (ana)e(ent+s e,!ert+s o";ectivit#, threats
such as inti(idation threats (a# "e of less si)nificance to an e,!ert en)a)ed "# the entit# than
to an e,!ert e(!lo#ed "# the entit#, and the effectiveness of safe)uards such as *ualit# control
!olicies and !rocedures (a# "e )reater' 1ecause the threat to o";ectivit# created "# "ein) an
e(!lo#ee of the entit# will alwa#s "e !resent, an e,!ert e(!lo#ed "# the entit# cannot
ordinaril# "e re)arded as "ein) (ore likel# to "e o";ective than other e(!lo#ees of the entit#'
A49' Lhen evaluatin) the o";ectivit# of an e,!ert en)a)ed "# the entit#, it (a# "e relevant to discuss
with (ana)e(ent and that e,!ert an# interests and relationshi!s that (a# create threats to the
e,!ert+s o";ectivit#, and an# a!!lica"le safe)uards, includin) an# !rofessional re*uire(ents that
a!!l# to the e,!ert? and to evaluate whether the safe)uards are ade*uate' Interests and
relationshi!s creatin) threats (a# include.
1. G Financial interests'
2. G 1usiness and !ersonal relationshi!s'
3. G 6rovision of other services'
7"tainin) an Understandin) of the Lork of the Eana)e(ent+s 0,!ert $Aef. 6ara' 8$"&&
A44' An understandin) of the work of the (ana)e(ent+s e,!ert includes an understandin) of the
relevant field of e,!ertise' An understandin) of the relevant field of e,!ertise (a# "e o"tained in
con;unction with the auditor+s deter(ination of whether the auditor has the e,!ertise to evaluate
the work of the (ana)e(ent+s e,!ert, or whether the auditor needs an auditor+s e,!ert for this
!ur!ose'
15
A45' As!ects of the (ana)e(ent+s e,!ert+s field relevant to the auditor+s understandin) (a# include.
% G Lhether that e,!ert+s field has areas of s!ecialt# within it that are relevant to the audit'
% G Lhether an# !rofessional or other standards, and re)ulator# or le)al re*uire(ents a!!l#'
% G Lhat assu(!tions and (ethods are used "# the (ana)e(ent+s e,!ert, and whether the#
are )enerall# acce!ted within that e,!ert+s field and a!!ro!riate for financial re!ortin) !ur!oses'
ISA B40, CUsin) the Lork of an Auditor+s 0,!ert,D !ara)ra!h 7'
ISA 500 404
G he nature of internal and e,ternal data or infor(ation the auditor+s e,!ert uses'
A4B' In the case of a (ana)e(ent+s e,!ert en)a)ed "# the entit#, there will ordinaril# "e an
en)a)e(ent letter or other written for( of a)ree(ent "etween the entit# and that e,!ert'
0valuatin) that a)ree(ent when o"tainin) an understandin) of the work of the (ana)e(ent+s
e,!ert (a# assist the auditor in deter(inin) the a!!ro!riateness of the followin) for the
auditor+s !ur!oses.
% G he nature, sco!e and o";ectives of that e,!ert+s work?
% G he res!ective roles and res!onsi"ilities of (ana)e(ent and that e,!ert? and
% G he nature, ti(in) and e,tent of co((unication "etween (ana)e(ent and that e,!ert,
includin) the for( of an# re!ort to "e !rovided "# that e,!ert'
A47' In the case of a (ana)e(ent+s e,!ert e(!lo#ed "# the entit#, it is less likel# there will "e a
written a)ree(ent of this kind' In*uir# of the e,!ert and other (e("ers of (ana)e(ent (a# "e
the (ost a!!ro!riate wa# for the auditor to o"tain the necessar# understandin)'
0valuatin) the A!!ro!riateness of the Eana)e(ent+s 0,!ert+s Lork $Aef. 6ara' 8$c&&
A48' %onsiderations when evaluatin) the a!!ro!riateness of the (ana)e(ent+s e,!ert+s work as audit
evidence for the relevant assertion (a# include.
1. G he relevance and reasona"leness of that e,!ert+s findin)s or conclusions, their
consistenc# with other audit evidence, and whether the# have "een a!!ro!riatel# reflected in the
financial state(ents?
2. G If that e,!ert+s work involves use of si)nificant assu(!tions and (ethods, the relevance
and reasona"leness of those assu(!tions and (ethods? and
3. G If that e,!ert+s work involves si)nificant use of source data the relevance, co(!leteness,
and accurac# of that source data'
Infor$ation (roduced by the /ntity and "sed for the Auditor8s (urposes $Aef. 6ara' 5$a&-$"&&
A45' In order for the auditor to o"tain relia"le audit evidence, infor(ation !roduced "# the entit# that
is used for !erfor(in) audit !rocedures needs to "e sufficientl# co(!lete and accurate' For
e,a(!le, the effectiveness of auditin) revenue "# a!!l#in) standard !rices to records of sales
volu(e is affected "# the accurac# of the !rice infor(ation and the co(!leteness and accurac#
of the sales volu(e data' Si(ilarl#, if the auditor intends to test a !o!ulation $for e,a(!le,
!a#(ents& for a certain characteristic $for e,a(!le,
405 ISA 500
authoriJation&, the results of the test will "e less relia"le if the !o!ulation fro( which ite(s are
selected for testin) is not co(!lete'
A50' 7"tainin) audit evidence a"out the accurac# and co(!leteness of such infor(ation (a# "e
!erfor(ed concurrentl# with the actual audit !rocedure a!!lied to the infor(ation when
o"tainin) such audit evidence is an inte)ral !art of the audit !rocedure itself' In other situations,
the auditor (a# have o"tained audit evidence of the accurac# and co(!leteness of such
infor(ation "# testin) controls over the !re!aration and (aintenance of the infor(ation' In
so(e situations, however, the auditor (a# deter(ine that additional audit !rocedures are
needed'
A51' In so(e cases, the auditor (a# intend to use infor(ation !roduced "# the entit# for other audit
!ur!oses' For e,a(!le, the auditor (a# intend to (ake use of the entit#+s !erfor(ance (easures
for the !ur!ose of anal#tical !rocedures, or to (ake use of the entit#+s infor(ation !roduced for
(onitorin) activities, such as internal auditor+s re!orts' In such cases, the a!!ro!riateness of the
audit evidence o"tained is affected "# whether the infor(ation is sufficientl# !recise or detailed
for the auditor+s !ur!oses' For e,a(!le, !erfor(ance (easures used "# (ana)e(ent (a# not "e
!recise enou)h to detect (aterial (isstate(ents'
Se0ecti"( Ite. fo' Teti"( to O$t!i" A-#it E9i#e"ce $Aef. 6ara' 10&
A54' An effective test !rovides a!!ro!riate audit evidence to an e,tent that, taken with other audit
evidence o"tained or to "e o"tained, will "e sufficient for the auditor+s !ur!oses' In selectin)
ite(s for testin), the auditor is re*uired "# !ara)ra!h 7 to deter(ine the relevance and relia"ilit#
of infor(ation to "e used as audit evidence? the other as!ect of effectiveness $sufficienc#& is an
i(!ortant consideration in selectin) ite(s to test' he (eans availa"le to the auditor for
selectin) ite(s for testin) are.
1$a& Selectin) all ite(s $100Q e,a(ination&?
2$"& Selectin) s!ecific ite(s? and
3$c& Audit sa(!lin)'
he a!!lication of an# one or co("ination of these (eans (a# "e a!!ro!riate de!endin) on the
!articular circu(stances, for e,a(!le, the risks of (aterial (isstate(ent related to the assertion
"ein) tested, and the !racticalit# and efficienc# of the different (eans'
ISA 500 40B
)electing All Ite$s
A59' he auditor (a# decide that it will "e (ost a!!ro!riate to e,a(ine the entire !o!ulation of ite(s
that (ake u! a class of transactions or account "alance $or a stratu( within that !o!ulation&'
100Q e,a(ination is unlikel# in the case of tests of controls? however, it is (ore co((on for
tests of details' 100Q e,a(ination (a# "e a!!ro!riate when, for e,a(!le.
% G he !o!ulation constitutes a s(all nu("er of lar)e value ite(s?
% G here is a si)nificant risk and other (eans do not !rovide sufficient a!!ro!riate audit
evidence? or
% G he re!etitive nature of a calculation or other !rocess !erfor(ed auto(aticall# "# an
infor(ation s#ste( (akes a 100Q e,a(ination cost effective'
)electing )pecific Ite$s
A54' he auditor (a# decide to select s!ecific ite(s fro( a !o!ulation' In (akin) this decision,
factors that (a# "e relevant include the auditor+s understandin) of the entit#, the assessed risks
of (aterial (isstate(ent, and the characteristics of the !o!ulation "ein) tested' he ;ud)(ental
selection of s!ecific ite(s is su";ect to non-sa(!lin) risk' S!ecific ite(s selected (a# include.
% G -igh !alue or .ey ite$s' he auditor (a# decide to select s!ecific ite(s within a
!o!ulation "ecause the# are of hi)h value, or e,hi"it so(e other characteristic, for e,a(!le, ite(s
that are sus!icious, unusual, !articularl# risk-!rone or that have a histor# of error'
% G All ite$s o!er a certain a$ount' he auditor (a# decide to e,a(ine ite(s whose
recorded values e,ceed a certain a(ount so as to verif# a lar)e !ro!ortion of the total a(ount of a
class of transactions or account "alance'
% G Ite$s to obtain infor$ation' he auditor (a# e,a(ine ite(s to o"tain infor(ation a"out
(atters such as the nature of the entit# or the nature of transactions'
A55' Lhile selective e,a(ination of s!ecific ite(s fro( a class of transactions or account "alance
will often "e an efficient (eans of o"tainin) audit evidence, it does not constitute audit
sa(!lin)' he results of audit !rocedures a!!lied to ite(s selected in this wa# cannot "e
!ro;ected to the entire !o!ulation? accordin)l#, selective e,a(ination of s!ecific ite(s does not
!rovide audit evidence concernin) the re(ainder of the !o!ulation'
407 ISA 500
Audit )a$pling
A5B' Audit sa(!lin) is desi)ned to ena"le conclusions to "e drawn a"out an entire !o!ulation on the
"asis of testin) a sa(!le drawn fro( it' Audit sa(!lin) is discussed in ISA 590'
1B
I"co"ite"c/ i"4 o' Do-$t o9e' Re0i!$i0it/ of4 A-#it E9i#e"ce $Aef. 6ara' 11&
A57' 7"tainin) audit evidence fro( different sources or of a different nature (a# indicate that an
individual ite( of audit evidence is not relia"le, such as when audit evidence o"tained fro( one
source is inconsistent with that o"tained fro( another' his (a# "e the case when, for e,a(!le,
res!onses to in*uiries of (ana)e(ent, internal audit, and others are inconsistent, or when
res!onses to in*uiries of those char)ed with )overnance (ade to corro"orate the res!onses to
in*uiries of (ana)e(ent are inconsistent with the res!onse "# (ana)e(ent' ISA 490 includes a
s!ecific docu(entation re*uire(ent if the auditor identified infor(ation that is inconsistent with
the auditor+s final conclusion re)ardin) a si)nificant (atter'
17
1B
ISA 590, CAudit Sa(!lin)'D
17
ISA 490, CAudit =ocu(entation,D !ara)ra!h 11'
ISA 500 408
INTERNATIONAL STANDARD ON AUDITING @07
AUDIT E,IDENCEDS*ECIFIC CONSIDERATIONS FOR SELECTED ITE)S
CONTENTS
6ara)ra!h
Se)(ent Infor(ation '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A4B-A47
International Standard on Auditin) $ISA& 501, CAudit 0videnceNS!ecific %onsiderations for Selected
Ite(sD should "e read in con;unction with ISA 400, C7verall 7";ectives of the Inde!endent Auditor and the
405 ISA 501
1' his International Standard on Auditin) $ISA& deals with s!ecific considerations "# the auditor in
o"tainin) sufficient a!!ro!riate audit evidence in accordance with ISA 990,
1
ISA 500
4
and other
relevant ISAs, with res!ect to certain as!ects of inventor#, liti)ation and clai(s involvin) the
entit#, and se)(ent infor(ation in an audit of financial state(ents'
Effecti9e D!te
15, 4005'
O$1ecti9e
9' he o";ective of the auditor is to o"tain sufficient a!!ro!riate audit evidence re)ardin) the.
1. $a& 0,istence and condition of inventor#?
2. $"& %o(!leteness of liti)ation and clai(s involvin) the entit#? and
3. $c& 6resentation and disclosure of se)(ent infor(ation in accordance with the a!!lica"le
Re2-i'e.e"t I"9e"to'/
4' If inventor# is (aterial to the financial state(ents, the auditor shall o"tain sufficient a!!ro!riate
audit evidence re)ardin) the e,istence and condition of inventor# "#.
$a& Attendance at !h#sical inventor# countin), unless i(!ractica"le, to. $Aef. 6ara' A1-A9&
1$i& 0valuate (ana)e(ent+s instructions and !rocedures for recordin) and controllin) the results of the
entit#+s !h#sical inventor# countin)? $Aef. 6ara' A4&
2$ii& 7"serve the !erfor(ance of (ana)e(ent+s count !rocedures? $Aef. 6ara' A5&
$iii& Ins!ect the inventor#? and $Aef. 6ara' AB&
$iv& 6erfor( test counts? and $Aef. 6ara' A7-A8&
1
4
ISA 500, CAudit 0vidence'D
ISA 501 410
$"& 6erfor(in) audit !rocedures over the entit#+s final inventor# records to deter(ine whether
the# accuratel# reflect actual inventor# count results'
1. 5' If !h#sical inventor# countin) is conducted at a date other than the date of the financial
state(ents, the auditor shall, in addition to the !rocedures re*uired "# !ara)ra!h 4, !erfor( audit
!rocedures to o"tain audit evidence a"out whether chan)es in inventor# "etween the count date
and the date of the financial state(ents are !ro!erl# recorded' $Aef. 6ara' A5-A11&
2. B' If the auditor is una"le to attend !h#sical inventor# countin) due to unforeseen
circu(stances, the auditor shall (ake or o"serve so(e !h#sical counts on an alternative date, and
!erfor( audit !rocedures on intervenin) transactions'
3. 7' If attendance at !h#sical inventor# countin) is i(!ractica"le, the auditor shall !erfor(
alternative audit !rocedures to o"tain sufficient a!!ro!riate audit evidence re)ardin) the e,istence
and condition of inventor#' If it is not !ossi"le to do so, the auditor shall (odif# the o!inion in the
auditor+s re!ort in accordance with ISA 705'
9
1. 8' If inventor# under the custod# and control of a third !art# is (aterial to the financial
state(ents, the auditor shall o"tain sufficient a!!ro!riate audit evidence re)ardin) the
e,istence and condition of that inventor# "# !erfor(in) one or "oth of the followin).
2. $a& Ae*uest confir(ation fro( the third !art# as to the *uantities and condition of inventor#
held on "ehalf of the entit#' $Aef. 6ara' A15&
3. $"& 6erfor( ins!ection or other audit !rocedures a!!ro!riate in the circu(stances' $Aef. 6ara'
A1B&
Liti(!tio" !"# C0!i.
1. 5' he auditor shall desi)n and !erfor( audit !rocedures in order to identif# liti)ation and
clai(s involvin) the entit# which (a# )ive rise to a risk of (aterial (isstate(ent, includin).
2. $a& In*uir# of (ana)e(ent and, where a!!lica"le, others within the entit#, includin) in-
house le)al counsel?
3. $"& Aeviewin) (inutes of (eetin)s of those char)ed with )overnance and corres!ondence
"etween the entit# and its e,ternal le)al counsel? and
4. $c& Aeviewin) le)al e,!ense accounts' $Aef. 6ara' A40&
2. 10' If the auditor assesses a risk of (aterial (isstate(ent re)ardin) liti)ation or clai(s that
have "een identified, or when audit !rocedures !erfor(ed indicate that other (aterial liti)ation or
clai(s (a# e,ist, the auditor shall, in addition to the !rocedures re*uired "# other ISAs, seek
direct co((unication with the
411 ISA 501
entit#+s e,ternal le)al counsel' he auditor shall do so throu)h a letter of in*uir#, !re!ared "#
(ana)e(ent and sent "# the auditor, re*uestin) the entit#+s e,ternal le)al counsel to co((unicate
directl# with the auditor' If law, re)ulation or the res!ective le)al !rofessional "od# !rohi"its the
entit#+s e,ternal le)al counsel fro( co((unicatin) directl# with the auditor, the auditor shall
!erfor( alternative audit !rocedures' $Aef. 6ara' A41-A45&
11' If.
1. $a& (ana)e(ent refuses to )ive the auditor !er(ission to co((unicate or (eet with the
entit#+s e,ternal le)al counsel, or the entit#+s e,ternal le)al counsel refuses to res!ond
a!!ro!riatel# to the letter of in*uir#, or is !rohi"ited fro( res!ondin)? and
2. $"& the auditor is una"le to o"tain sufficient a!!ro!riate audit evidence "# !erfor(in)
alternative audit !rocedures,
the auditor shall (odif# the o!inion in the auditor+s re!ort in accordance with ISA 705'
Dritten +epresentations
14' he auditor shall re*uest (ana)e(ent and, where a!!ro!riate, those char)ed with )overnance to
!rovide written re!resentations that all known actual or !ossi"le liti)ation and clai(s whose
effects should "e considered when !re!arin) the financial state(ents have "een disclosed to the
auditor and accounted for and disclosed in accordance with the a!!lica"le financial re!ortin)
fra(ework'
Se(.e"t I"fo'.!tio"
19' he auditor shall o"tain sufficient a!!ro!riate audit evidence re)ardin) the !resentation and
disclosure of se)(ent infor(ation in accordance with the a!!lica"le financial re!ortin)
fra(ework "#. $Aef. 6ara' A4B&
1$a& 7"tainin) an understandin) of the (ethods used "# (ana)e(ent in deter(inin) se)(ent
infor(ation, and. $Aef. 6ara' A47&
2$i& 0valuatin) whether such (ethods are likel# to result in disclosure in accordance with the
a!!lica"le financial re!ortin) fra(ework? and
3$ii& Lhere a!!ro!riate, testin) the a!!lication of such (ethods? and
2$"& 6erfor(in) anal#tical !rocedures or other audit !rocedures a!!ro!riate in the circu(stances'
OOO
ISA 501 414
App0ic!tio" !"# Othe' E5p0!"!to'/ )!te'i!0 I"9e"to'/
Attendance at (hysical In!entory Counting $Aef. 6ara' 4$a&&
A1' Eana)e(ent ordinaril# esta"lishes !rocedures under which inventor# is !h#sicall# counted at
least once a #ear to serve as a "asis for the !re!aration of the financial state(ents and, if
a!!lica"le, to ascertain the relia"ilit# of the entit#+s !er!etual inventor# s#ste('
A4' Attendance at !h#sical inventor# countin) involves.
1. G Ins!ectin) the inventor# to ascertain its e,istence and evaluate its condition, and
!erfor(in) test counts?
2. G 7"servin) co(!liance with (ana)e(ent+s instructions and the !erfor(ance of
!rocedures for recordin) and controllin) the results of the !h#sical inventor# count? and
3. G 7"tainin) audit evidence as to the relia"ilit# of (ana)e(ent+s count !rocedures'
hese !rocedures (a# serve as test of controls or su"stantive !rocedures de!endin) on the
auditor+s risk assess(ent, !lanned a!!roach and the s!ecific !rocedures carried out'
A9' Eatters relevant in !lannin) attendance at !h#sical inventor# countin) $or in desi)nin) and
!erfor(in) audit !rocedures !ursuant to !ara)ra!hs 4-8 of this ISA& include, for e,a(!le.
1. G he risks of (aterial (isstate(ent related to inventor#'
2. G he nature of the internal control related to inventor#'
3. G Lhether ade*uate !rocedures are e,!ected to "e esta"lished and !ro!er instructions
issued for !h#sical inventor# countin)'
4. G he ti(in) of !h#sical inventor# countin)'
5. G Lhether the entit# (aintains a !er!etual inventor# s#ste('
6. G he locations at which inventor# is held, includin) the (aterialit# of the inventor# and
the risks of (aterial (isstate(ent at different locations, in decidin) at which locations attendance
is a!!ro!riate' ISA B00
4
deals with the involve(ent of other auditors and accordin)l# (a# "e
relevant if such involve(ent is with re)ards to attendance of !h#sical inventor# countin) at a
re(ote location'
ISA B00, CS!ecial %onsiderationsNAudits of <rou! Financial State(ents $Includin) the Lork of %o(!onent Auditors&'D
419 ISA 501
G Lhether the assistance of an auditor+s e,!ert is needed' ISA B40
5
deals with the use of an
auditor+s e,!ert to assist the auditor to o"tain sufficient a!!ro!riate audit evidence'
0valuate Eana)e(ent+s Instructions and 6rocedures $Aef. 6ara' 4$a&$i&&
A4' Eatters relevant in evaluatin) (ana)e(ent+s instructions and !rocedures for recordin) and
controllin) the !h#sical inventor# countin) include whether the# address, for e,a(!le.
% G he a!!lication of a!!ro!riate control activities, for e,a(!le, collection of used !h#sical
inventor# count records, accountin) for unused !h#sical inventor# count records, and count and
re-count !rocedures'
% G he accurate identification of the sta)e of co(!letion of work in !ro)ress, of slow
(ovin), o"solete or da(a)ed ite(s and of inventor# owned "# a third !art#, for e,a(!le, on
consi)n(ent'
% G he !rocedures used to esti(ate !h#sical *uantities, where a!!lica"le, such as (a# "e
needed in esti(atin) the !h#sical *uantit# of a coal !ile'
% G %ontrol over the (ove(ent of inventor# "etween areas and the shi!!in) and recei!t of
inventor# "efore and after the cutoff date'
7"serve the 6erfor(ance of Eana)e(ent+s %ount 6rocedures $Aef. 6ara' 4$a&$ii&&
A5' 7"servin) the !erfor(ance of (ana)e(ent+s count !rocedures, for e,a(!le those relatin) to
control over the (ove(ent of inventor# "efore, durin) and after the count, assists the auditor in
o"tainin) audit evidence that (ana)e(ent+s instructions and count !rocedures are ade*uatel#
desi)ned and i(!le(ented' In addition, the auditor (a# o"tain co!ies of cutoff infor(ation, such
as details of the (ove(ent of inventor#, to assist the auditor in !erfor(in) audit !rocedures over
the accountin) for such (ove(ents at a later date'
Ins!ect the Inventor# $Aef. 6ara' 4$a&$iii&&
AB' Ins!ectin) inventor# when attendin) !h#sical inventor# countin) assists the auditor in ascertainin)
the e,istence of the inventor# $thou)h not necessaril# its ownershi!&, and in identif#in), for
e,a(!le, o"solete, da(a)ed or a)in) inventor#'
6erfor( est %ounts $Aef. 6ara' 4$a&$iv&&
A7' 6erfor(in) test counts, for e,a(!le "# tracin) ite(s selected fro( (ana)e(ent+s count records to
the !h#sical inventor# and tracin) ite(s selected fro( the !h#sical inventor# to (ana)e(ent+s
count records, !rovides audit evidence a"out the co(!leteness and the accurac# of those records'
ISA B40, CUsin) the Lork of an Auditor+s 0,!ert'D
ISA 501 414
A8' In addition to recordin) the auditor+s test counts, o"tainin) co!ies of (ana)e(ent+s co(!leted
!h#sical inventor# count records assists the auditor in !erfor(in) su"se*uent audit !rocedures to
deter(ine whether the entit#+s final inventor# records accuratel# reflect actual inventor# count
results'
(hysical In!entory Counting Conducted ,ther than At the ?ate of the Financial )tate$ents $Aef.
6ara' 5&
A5' For !ractical reasons, the !h#sical inventor# countin) (a# "e conducted at a date, or dates, other
than the date of the financial state(ents' his (a# "e done irres!ective of whether (ana)e(ent
deter(ines inventor# *uantities "# an annual !h#sical inventor# countin) or (aintains a !er!etual
inventor# s#ste(' In either case, the effectiveness of the desi)n, i(!le(entation and (aintenance
of controls over chan)es in inventor# deter(ines whether the conduct of !h#sical inventor#
countin) at a date, or dates, other than the date of the financial state(ents is a!!ro!riate for audit
!ur!oses' ISA 990 esta"lishes re*uire(ents and !rovides )uidance on su"stantive !rocedures
!erfor(ed at an interi( date'
B
A10' Lhere a !er!etual inventor# s#ste( is (aintained, (ana)e(ent (a# !erfor( !h#sical counts or
other tests to ascertain the relia"ilit# of inventor# *uantit# infor(ation included in the entit#+s
!er!etual inventor# records' In so(e cases, (ana)e(ent or the auditor (a# identif# differences
"etween the !er!etual inventor# records and actual !h#sical inventor# *uantities on hand? this (a#
indicate that the controls over chan)es in inventor# are not o!eratin) effectivel#'
A11' Aelevant (atters for consideration when desi)nin) audit !rocedures to o"tain audit evidence a"out
whether chan)es in inventor# a(ounts "etween the count date, or dates, and the final inventor#
records are !ro!erl# recorded include.
1. G Lhether the !er!etual inventor# records are !ro!erl# ad;usted'
2. G Aelia"ilit# of the entit#+s !er!etual inventor# records'
3. G Aeasons for si)nificant differences "etween the infor(ation o"tained durin) the !h#sical
count and the !er!etual inventor# records'
Attendance at (hysical In!entory Counting Is I$practicable $Aef. 6ara' 7&
A14' In so(e cases, attendance at !h#sical inventor# countin) (a# "e i(!ractica"le' his (a# "e due
to factors such as the nature and location of the inventor#, for e,a(!le, where inventor# is held in
a location that (a# !ose threats to the safet# of the auditor' he (atter of )eneral inconvenience to
the auditor, however, is not sufficient to su!!ort a decision "# the auditor that attendance is
i(!ractica"le' Further, as e,!lained in ISA 400,
7
the (atter of
B
ISA 990, !ara)ra!hs 44-49' 7
415 ISA 501
difficult#, ti(e, or cost involved is not in itself a valid "asis for the auditor to o(it an audit
!rocedure for which there is no alternative or to "e satisfied with audit evidence that is less than
!ersuasive'
A19' In so(e cases where attendance is i(!ractica"le, alternative audit !rocedures, for e,a(!le
ins!ection of docu(entation of the su"se*uent sale of s!ecific inventor# ite(s ac*uired or
!urchased !rior to the !h#sical inventor# countin), (a# !rovide sufficient a!!ro!riate audit
evidence a"out the e,istence and condition of inventor#'
A14' In other cases, however, it (a# not "e !ossi"le to o"tain sufficient a!!ro!riate audit evidence
re)ardin) the e,istence and condition of inventor# "# !erfor(in) alternative audit !rocedures' In
such cases, ISA 705 re*uires the auditor to (odif# the o!inion in the auditor+s re!ort as a result of
the sco!e li(itation'
8
In!entory under the Custody and Control of a 1hird (arty
%onfir(ation $Aef. 6ara' 8$a&&
A15' ISA 505
5
esta"lishes re*uire(ents and !rovides )uidance for !erfor(in) e,ternal confir(ation
!rocedures'
7ther Audit 6rocedures $Aef. 6ara' 8$"&&
A1B' =e!endin) on the circu(stances, for e,a(!le where infor(ation is o"tained that raises dou"t
a"out the inte)rit# and o";ectivit# of the third !art#, the auditor (a# consider it a!!ro!riate to
!erfor( other audit !rocedures instead of, or in addition to, confir(ation with the third !art#'
0,a(!les of other audit !rocedures include.
% G Attendin), or arran)in) for another auditor to attend, the third !art#+s !h#sical countin)
of inventor#, if !ractica"le'
% G 7"tainin) another auditor+s re!ort, or a service auditor+s re!ort, on the ade*uac# of the
third !art#+s internal control for ensurin) that inventor# is !ro!erl# counted and ade*uatel#
safe)uarded'
% G Ins!ectin) docu(entation re)ardin) inventor# held "# third !arties, for e,a(!le,
warehouse recei!ts'
% G Ae*uestin) confir(ation fro( other !arties when inventor# has "een !led)ed as
collateral'
8
5
ISA 505, C0,ternal %onfir(ations'D
ISA 501 41B
Liti(!tio" !"# C0!i.
Co$pleteness of :itigations and Clai$s $Aef. 6ara' 5&
A17' Miti)ation and clai(s involvin) the entit# (a# have a (aterial effect on the financial state(ents
and thus (a# "e re*uired to "e disclosed or accounted for in the financial state(ents'
A18' In addition to the !rocedures identified in !ara)ra!h 5, other relevant !rocedures include, for
e,a(!le, usin) infor(ation o"tained throu)h risk assess(ent !rocedures carried out as !art of
o"tainin) an understandin) of the entit# and its environ(ent to assist the auditor to "eco(e aware
of liti)ation and clai(s involvin) the entit#'
A15' Audit evidence o"tained for !ur!oses of identif#in) liti)ation and clai(s that (a# )ive rise to a
risk of (aterial (isstate(ent also (a# !rovide audit evidence re)ardin) other relevant
considerations, such as valuation or (easure(ent, re)ardin) liti)ation and clai(s' ISA 540
10
esta"lishes re*uire(ents and !rovides )uidance relevant to the auditor+s consideration of liti)ation
and clai(s re*uirin) accountin) esti(ates or related disclosures in the financial state(ents'
Aeviewin) Me)al 0,!ense Accounts $Aef. 6ara' 5$c&&
A40' =e!endin) on the circu(stances, the auditor (a# ;ud)e it a!!ro!riate to e,a(ine related source
docu(ents, such as invoices for le)al e,!enses, as !art of the auditor+s review of le)al e,!ense
accounts'
Co$$unication #ith the /ntity8s /4ternal :egal Counsel $Aef. 6ara' 10-11&
A41' =irect co((unication with the entit#+s e,ternal le)al counsel assists the auditor in o"tainin)
sufficient a!!ro!riate audit evidence as to whether !otentiall# (aterial liti)ation and clai(s are
known and (ana)e(ent+s esti(ates of the financial i(!lications, includin) costs, are reasona"le'
A44' In so(e cases, the auditor (a# seek direct co((unication with the entit#+s e,ternal le)al counsel
throu)h a letter of )eneral in*uir#' For this !ur!ose, a letter of )eneral in*uir# re*uests the entit#+s
e,ternal le)al counsel to infor( the auditor of an# liti)ation and clai(s that the counsel is aware
of, to)ether with an assess(ent of the outco(e of the liti)ation and clai(s, and an esti(ate of the
financial i(!lications, includin) costs involved'
A49' If it is considered unlikel# that the entit#+s e,ternal le)al counsel will res!ond a!!ro!riatel# to a
letter of )eneral in*uir#, for e,a(!le if the !rofessional "od# to which the e,ternal le)al counsel
"elon)s !rohi"its res!onse to such a letter, the auditor (a# seek direct co((unication throu)h a
letter of s!ecific in*uir#' For this !ur!ose, a letter of s!ecific in*uir# includes.
417 ISA 501
1. $a& A list of liti)ation and clai(s?
2. $"& Lhere availa"le, (ana)e(ent+s assess(ent of the outco(e of each of the identified liti)ation
and clai(s and its esti(ate of the financial i(!lications, includin) costs involved? and
3. $c& A re*uest that the entit#+s e,ternal le)al counsel confir( the reasona"leness of
(ana)e(ent+s assess(ents and !rovide the auditor with further infor(ation if the list is
considered "# the entit#+s e,ternal le)al counsel to "e inco(!lete or incorrect'
A44' In certain circu(stances, the auditor also (a# ;ud)e it necessar# to (eet with the entit#+s e,ternal
le)al counsel to discuss the likel# outco(e of the liti)ation or clai(s' his (a# "e the case, for
e,a(!le, where.
% G he auditor deter(ines that the (atter is a si)nificant risk'
% G he (atter is co(!le,'
% G here is disa)ree(ent "etween (ana)e(ent and the entit#+s e,ternal le)al counsel'
7rdinaril#, such (eetin)s re*uire (ana)e(ent+s !er(ission and are held with a re!resentative of
(ana)e(ent in attendance'
A45' In accordance with ISA 700,
11
the auditor is re*uired to date the auditor+s re!ort no earlier than the
date on which the auditor has o"tained sufficient a!!ro!riate audit evidence on which to "ase the
auditor+s o!inion on the financial state(ents' Audit evidence a"out the status of liti)ation and
clai(s u! to the date of the auditor+s re!ort (a# "e o"tained "# in*uir# of (ana)e(ent, includin)
in-house le)al counsel, res!onsi"le for dealin) with the relevant (atters' In so(e instances, the
auditor (a# need to o"tain u!dated infor(ation fro( the entit#+s e,ternal le)al counsel'
Se(.e"t I"fo'.!tio" $Aef. 6ara' 19&
A4B' =e!endin) on the a!!lica"le financial re!ortin) fra(ework, the entit# (a# "e re*uired or
!er(itted to disclose se)(ent infor(ation in the financial state(ents' he auditor+s res!onsi"ilit#
re)ardin) the !resentation and disclosure of se)(ent infor(ation is in relation to the financial
state(ents taken as a whole' Accordin)l#, the auditor is not re*uired to !erfor( audit !rocedures
that would "e necessar# to e,!ress an o!inion on the se)(ent infor(ation !resented on a stand
alone "asis'
"nderstanding of the <ethods "sed by <anage$ent $Aef. 6ara' 19$a&&
A47' =e!endin) on the circu(stances, e,a(!le of (atters that (a# "e relevant when o"tainin) an
understandin) of the (ethods used "# (ana)e(ent in
ISA 700, CFor(in) an 7!inion and Ae!ortin) on Financial State(ents,D !ara)ra!h 41'
ISA 501 418
deter(inin) se)(ent infor(ation and whether such (ethods are likel# to result in disclosure in accordance
with the a!!lica"le financial re!ortin) fra(ework include.
1. G Sales, transfers and char)es "etween se)(ents, and eli(ination of inter-se)(ent
a(ounts'
2. G %o(!arisons with "ud)ets and other e,!ected results, for e,a(!le, o!eratin) !rofits as a
!ercenta)e of sales'
3. G he allocation of assets and costs a(on) se)(ents'
4. G %onsistenc# with !rior !eriods, and the ade*uac# of the disclosures with res!ect to
inconsistencies'
415 ISA 501
INTERNATIONAL STANDARD ON AUDITING @0@
EFTERNAL CONFIR)ATIONS
CONTENTS
6ara)ra!h
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1
0,ternal %onfir(ation 6rocedures to 7"tain Audit 0vidence '''''''''''''''''''' 4-9
0ffective =ate '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
O$1ecti9e ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' B
Re2-i'e.e"t
0,ternal %onfir(ation 6rocedures '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 7
Eana)e(ent+s Aefusal to Allow the Auditor to Send a %onfir(ation
Ae*uest '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 8-5
Aesults of the 0,ternal %onfir(ation 6rocedures ''''''''''''''''''''''''''''''''''''''' 10-14
Ne)ative %onfir(ations '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 15
0valuatin) the 0vidence 7"tained '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1B
0,ternal %onfir(ation 6rocedures '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1-A7 Eana)e(ent+s Aefusal to
Allow the Auditor to Send a %onfir(ation
Ae*uest '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A8-A10
Aesults of the 0,ternal %onfir(ation 6rocedures ''''''''''''''''''''''''''''''''''''''' A11-A44
Ne)ative %onfir(ations '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A49
0valuatin) the 0vidence 7"tained '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A44-A45
International Standard on Auditin) $ISA& 505, C0,ternal %onfir(ationsD should "e read in con;unction with
ISA 505 440
1' his International Standard on Auditin) $ISA& deals with the auditor+s use of e,ternal
confir(ation !rocedures to o"tain audit evidence in accordance with the re*uire(ents of ISA 990
1
and ISA 500'
4
It does not address in*uiries re)ardin) liti)ation and clai(s, which are dealt with in
ISA 501'
9
E5te'"!0 Co"fi'.!tio" *'oce#-'e to O$t!i" A-#it E9i#e"ce
4' ISA 500 indicates that the relia"ilit# of audit evidence is influenced "# its source and "# its nature,
and is de!endent on the individual circu(stances under which it is o"tained'
4
hat ISA also
includes the followin) )eneraliJations a!!lica"le to audit evidence.
5
1. G Audit evidence is (ore relia"le when it is o"tained fro( inde!endent sources outside the
entit#'
2. G Audit evidence o"tained directl# "# the auditor is (ore relia"le than audit evidence
o"tained indirectl# or "# inference'
3. G Audit evidence is (ore relia"le when it e,ists in docu(entar# for(, whether !a!er,
electronic or other (ediu('
Accordin)l#, de!endin) on the circu(stances of the audit, audit evidence in the for( of e,ternal
confir(ations received directl# "# the auditor fro( confir(in) !arties (a# "e (ore relia"le than
evidence )enerated internall# "# the entit#' his ISA is intended to assist the auditor in desi)nin)
and !erfor(in) e,ternal confir(ation !rocedures to o"tain relevant and relia"le audit evidence'
9' 7ther ISAs reco)niJe the i(!ortance of e,ternal confir(ations as audit evidence, for e,a(!le.
G ISA 990 discusses the auditor+s res!onsi"ilit# to desi)n and i(!le(ent overall res!onses to
address the assessed risks of (aterial (isstate(ent at the financial state(ent level, and to
desi)n and !erfor( further audit !rocedures whose nature, ti(in) and e,tent are "ased on,
and are res!onsive to, the assessed risks of (aterial (isstate(ent at the assertion level'
B
In
addition, ISA 990 re*uires that, irres!ective of the
1
4
ISA 500, CAudit 0vidence'D 9
ISA 501, CAudit 0videnceNS!ecific %onsiderations for Selected Ite(s'D 4
5
ISA 500, !ara)ra!h A91' B
ISA 990, !ara)ra!hs 5-B'
441 ISA 505
assessed risks of (aterial (isstate(ent, the auditor desi)ns and !erfor(s su"stantive
!rocedures for each (aterial class of transactions, account "alance, and disclosure' he
auditor is also re*uired to consider whether e,ternal confir(ation !rocedures are to "e
!erfor(ed as su"stantive audit !rocedures'
7
% G ISA 990 re*uires that the auditor o"tain (ore !ersuasive audit evidence the hi)her the
auditor+s assess(ent of risk'
8
o do this, the auditor (a# increase the *uantit# of the evidence or
o"tain evidence that is (ore relevant or relia"le, or "oth' For e,a(!le, the auditor (a# !lace (ore
e(!hasis on o"tainin) evidence directl# fro( third !arties or o"tainin) corro"oratin) evidence
fro( a nu("er of inde!endent sources' ISA 990 also indicates that e,ternal confir(ation
!rocedures (a# assist the auditor in o"tainin) audit evidence with the hi)h level of relia"ilit# that
the auditor re*uires to res!ond to si)nificant risks of (aterial (isstate(ent, whether due to fraud
or error'
5
% G ISA 440 indicates that the auditor (a# desi)n confir(ation re*uests to o"tain additional
corro"orative infor(ation as a res!onse to address the assessed risks of (aterial (isstate(ent due
to fraud at the assertion level'
10
% G ISA 500 indicates that corro"oratin) infor(ation o"tained fro( a source inde!endent of
the entit#, such as e,ternal confir(ations, (a# increase the assurance the auditor o"tains fro(
evidence e,istin) within the accountin) records or fro( re!resentations (ade "# (ana)e(ent'
11
Effecti9e D!te
15, 4005'
O$1ecti9e
5' he o";ective of the auditor, when usin) e,ternal confir(ation !rocedures, is to desi)n and
!erfor( such !rocedures to o"tain relevant and relia"le audit evidence'
7
ISA 990, !ara)ra!hs 18-15'
8
ISA 990, !ara)ra!h 7$"&' 5
ISA 990, !ara)ra!h A59' 10
State(ents,D !ara)ra!h A97' 11
ISA 505 444
Defi"itio"
1$a& 0,ternal confir(ation K Audit evidence o"tained as a direct written res!onse to the
auditor fro( a third !art# $the confir(in) !art#&, in !a!er for(, or "# electronic or other (ediu('
2$"& 6ositive confir(ation re*uest K A re*uest that the confir(in) !art# res!ond directl# to the
auditor indicatin) whether the confir(in) !art# a)rees or disa)rees with the infor(ation in the
re*uest, or !rovidin) the re*uested infor(ation'
3$c& Ne)ative confir(ation re*uest K A re*uest that the confir(in) !art# res!ond directl# to
the auditor onl# if the confir(in) !art# disa)rees with the infor(ation !rovided in the re*uest'
4$d& Non-res!onse K A failure of the confir(in) !art# to res!ond, or full# res!ond, to a !ositive
confir(ation re*uest, or a confir(ation re*uest returned undelivered'
5$e& 0,ce!tion K A res!onse that indicates a difference "etween infor(ation re*uested to "e confir(ed,
or contained in the entit#+s records, and infor(ation !rovided "# the confir(in) !art#'
Re2-i'e.e"t E5te'"!0 Co"fi'.!tio" *'oce#-'e
7' Lhen usin) e,ternal confir(ation !rocedures, the auditor shall (aintain control over e,ternal
confir(ation re*uests, includin).
1. $a& =eter(inin) the infor(ation to "e confir(ed or re*uested? $Aef. 6ara' A1&
2. $"& Selectin) the a!!ro!riate confir(in) !art#? $Aef. 6ara' A4&
3. $c& =esi)nin) the confir(ation re*uests, includin) deter(inin) that re*uests are !ro!erl#
addressed and contain return infor(ation for res!onses to "e sent directl# to the auditor? and $Aef.
6ara' A9-AB&
4. $d& Sendin) the re*uests, includin) follow-u! re*uests when a!!lica"le, to the confir(in) !art#'
$Aef. 6ara' A7&
)!"!(e.e"t> Ref-!0 to A00o& the A-#ito' to Se"# ! Co"fi'.!tio" Re2-et
8' If (ana)e(ent refuses to allow the auditor to send a confir(ation re*uest, the auditor shall.
$a& In*uire as to (ana)e(ent+s reasons for the refusal, and seek audit evidence as to their
validit# and reasona"leness? $Aef. 6ara' A8&
449 ISA 505
1$"& 0valuate the i(!lications of (ana)e(ent+s refusal on the auditor+s assess(ent of the relevant
risks of (aterial (isstate(ent, includin) the risk of fraud, and on the nature, ti(in) and e,tent of
other audit !rocedures? and $Aef. 6ara' A5&
2$c& 6erfor( alternative audit !rocedures desi)ned to o"tain relevant and relia"le audit
evidence' $Aef. 6ara' A10&
5' If the auditor concludes that (ana)e(ent+s refusal to allow the auditor to send a confir(ation
re*uest is unreasona"le, or the auditor is una"le to o"tain relevant and relia"le audit evidence fro(
alternative audit !rocedures, the auditor shall co((unicate with those char)ed with )overnance in
accordance with ISA 4B0'
14
he auditor also shall deter(ine the i(!lications for the audit and the
auditor+s o!inion in accordance with ISA 705'
19
Re-0t of the E5te'"!0 Co"fi'.!tio" *'oce#-'e
+eliability of +esponses to Confir$ation +e>uests
1. 10' If the auditor identifies factors that )ive rise to dou"ts a"out the relia"ilit# of the res!onse
to a confir(ation re*uest, the auditor shall o"tain further audit evidence to resolve those dou"ts'
2. 11' If the auditor deter(ines that a res!onse to a confir(ation re*uest is not relia"le, the
auditor shall evaluate the i(!lications on the assess(ent of the relevant risks of (aterial
(isstate(ent, includin) the risk of fraud, and on the related nature, ti(in) and e,tent of other
audit !rocedures' $Aef. 6ara' A17&
Aon3+esponses
14' In the case of each non-res!onse, the auditor shall !erfor( alternative audit !rocedures to o"tain
relevant and relia"le audit evidence' $Aef. 6ara A18-A15&
Dhen a +esponse to a (ositi!e Confir$ation +e>uest Is Aecessary to ,btain )ufficient
Appropriate Audit /!idence
19' If the auditor has deter(ined that a res!onse to a !ositive confir(ation re*uest is necessar# to
o"tain sufficient a!!ro!riate audit evidence, alternative audit !rocedures will not !rovide the audit
evidence the auditor re*uires' If the auditor does not o"tain such confir(ation, the auditor shall
deter(ine the i(!lications for the audit and the auditor+s o!inion in accordance with ISA 705'
$Aef. 6ara A40&
14
ISA 4B0, C%o((unication with hose %har)ed with <overnance,D !ara)ra!h 1B' 19
ISA 505 444
/4ceptions
14' he auditor shall investi)ate e,ce!tions to deter(ine whether or not the# are indicative of
(isstate(ents' $Aef. 6ara' A41-A44&
Ne(!ti9e Co"fi'.!tio"
15' Ne)ative confir(ations !rovide less !ersuasive audit evidence than !ositive confir(ations'
Accordin)l#, the auditor shall not use ne)ative confir(ation re*uests as the sole su"stantive audit
!rocedure to address an assessed risk of (aterial (isstate(ent at the assertion level unless all of
the followin) are !resent. $Aef. 6ara' A49&
1. $a& he auditor has assessed the risk of (aterial (isstate(ent as low and has o"tained
sufficient a!!ro!riate audit evidence re)ardin) the o!eratin) effectiveness of controls relevant to
the assertion?
2. $"& he !o!ulation of ite(s su";ect to ne)ative confir(ation !rocedures co(!rises a lar)e nu("er
of s(all, ho(o)eneous, account "alances, transactions or conditions?
3. $c& A ver# low e,ce!tion rate is e,!ected? and
4. $d& he auditor is not aware of circu(stances or conditions that would cause reci!ients of
ne)ative confir(ation re*uests to disre)ard such re*uests'
E9!0-!ti"( the E9i#e"ce O$t!i"e#
1B' he auditor shall evaluate whether the results of the e,ternal confir(ation !rocedures !rovide
relevant and relia"le audit evidence, or whether further audit evidence is necessar#' $Aef. 6ara
A44-A45&
OOO
App0ic!tio" !"# Othe' E5p0!"!to'/ )!te'i!0 E5te'"!0
Co"fi'.!tio" *'oce#-'e
?eter$ining the Infor$ation to =e Confir$ed or +e>uested $Aef. 6ara' 7$a&&
A1' 0,ternal confir(ation !rocedures fre*uentl# are !erfor(ed to confir( or re*uest infor(ation
re)ardin) account "alances and their ele(ents' he# (a# also "e used to confir( ter(s of
a)ree(ents, contracts, or transactions "etween an entit# and other !arties, or to confir( the
a"sence of certain conditions, such as a Cside a)ree(ent'D
445 ISA 505
)electing the Appropriate Confir$ing (arty $Aef. 6ara' 7$"&&
A4' Aes!onses to confir(ation re*uests !rovide (ore relevant and relia"le audit evidence when
confir(ation re*uests are sent to a confir(in) !art# the auditor "elieves is knowled)ea"le a"out
the infor(ation to "e confir(ed' For e,a(!le, a financial institution official who is
knowled)ea"le a"out the transactions or arran)e(ents for which confir(ation is re*uested (a# "e
the (ost a!!ro!riate !erson at the financial institution fro( who( to re*uest confir(ation'
?esigning Confir$ation +e>uests $Aef. 6ara' 7$c&&
A9' he desi)n of a confir(ation re*uest (a# directl# affect the confir(ation res!onse rate, and the
relia"ilit# and the nature of the audit evidence o"tained fro( res!onses'
A4' Factors to consider when desi)nin) confir(ation re*uests include.
1. G he assertions "ein) addressed'
2. G S!ecific identified risks of (aterial (isstate(ent, includin) fraud risks'
3. G he la#out and !resentation of the confir(ation re*uest'
4. G 6rior e,!erience on the audit or si(ilar en)a)e(ents'
5. G he (ethod of co((unication $for e,a(!le, in !a!er for(, or "# electronic or other
(ediu(&'
6. G Eana)e(ent+s authoriJation or encoura)e(ent to the confir(in) !arties to res!ond to the
auditor' %onfir(in) !arties (a# onl# "e willin) to res!ond to a confir(ation re*uest containin)
(ana)e(ent+s authoriJation'
7. G he a"ilit# of the intended confir(in) !art# to confir( or !rovide the re*uested
infor(ation $for e,a(!le, individual invoice a(ount versus total "alance&'
A5' A !ositive e,ternal confir(ation re*uest asks the confir(in) !art# to re!l# to the auditor in all
cases, either "# indicatin) the confir(in) !art#+s a)ree(ent with the )iven infor(ation, or "#
askin) the confir(in) !art# to !rovide infor(ation' A res!onse to a !ositive confir(ation re*uest
ordinaril# is e,!ected to !rovide relia"le audit evidence' here is a risk, however, that a
confir(in) !art# (a# re!l# to the confir(ation re*uest without verif#in) that the infor(ation is
correct' he auditor (a# reduce this risk "# usin) !ositive confir(ation re*uests that do not state
the a(ount $or other infor(ation& on the confir(ation re*uest, and ask the confir(in) !art# to fill
in the a(ount or furnish other infor(ation' 7n the other hand, use of this t#!e of C"lankD
confir(ation re*uest (a# result in lower res!onse rates "ecause additional effort is re*uired of the
confir(in) !arties'
ISA 505 44B
AB' =eter(inin) that re*uests are !ro!erl# addressed includes testin) the validit# of so(e or all of the
addresses on confir(ation re*uests "efore the# are sent out'
Follo#3"p on Confir$ation +e>uests $Aef. 6ara' 7$d&&
A7' he auditor (a# send an additional confir(ation re*uest when a re!l# to a !revious re*uest has
not "een received within a reasona"le ti(e' For e,a(!le, the auditor (a#, havin) re-verified the
accurac# of the ori)inal address, send an additional or follow-u! re*uest'
)!"!(e.e"t> Ref-!0 to A00o& the A-#ito' to Se"# ! Co"fi'.!tio" Re2-et
+easonableness of <anage$ent8s +efusal $Aef. 6ara' 8$a&&
A8' A refusal "# (ana)e(ent to allow the auditor to send a confir(ation re*uest is a li(itation on the
audit evidence the auditor (a# wish to o"tain' he auditor is therefore re*uired to in*uire as to the
reasons for the li(itation' A co((on reason advanced is the e,istence of a le)al dis!ute or
on)oin) ne)otiation with the intended confir(in) !art#, the resolution of which (a# "e affected
"# an unti(el# confir(ation re*uest' he auditor is re*uired to seek audit evidence as to the
validit# and reasona"leness of the reasons "ecause of the risk that (ana)e(ent (a# "e atte(!tin)
to den# the auditor access to audit evidence that (a# reveal fraud or error'
I$plications for the Assess$ent of +is.s of <aterial <isstate$ent $Aef. 6ara' 8$"&&
A5' he auditor (a# conclude fro( the evaluation in !ara)ra!h 8$"& that it would "e a!!ro!riate to
revise the assess(ent of the risks of (aterial (isstate(ent at the assertion level and (odif#
!lanned audit !rocedures in accordance with ISA 915'
14
For e,a(!le, if (ana)e(ent+s re*uest to
not confir( is unreasona"le, this (a# indicate a fraud risk factor that re*uires evaluation in
15
Alternati!e Audit (rocedures $Aef. 6ara' 8$c&&
A10' he alternative audit !rocedures !erfor(ed (a# "e si(ilar to those a!!ro!riate for a non-res!onse
as set out in !ara)ra!hs A18-A15 of this ISA' Such !rocedures also would take account of the
results of the auditor+s evaluation in !ara)ra!h 8$"& of this ISA'
14
!ara)ra!h 91'
15
447 ISA 505
Re-0t of the E5te'"!0 Co"fi'.!tio" *'oce#-'e
+eliability of +esponses to Confir$ation +e>uests $Aef. 6ara' 10&
A11' ISA 500 indicates that even when audit evidence is o"tained fro( sources e,ternal to the entit#,
circu(stances (a# e,ist that affect its relia"ilit#'
1B
All res!onses carr# so(e risk of interce!tion,
alteration or fraud' Such risk e,ists re)ardless of whether a res!onse is o"tained in !a!er for(, or
"# electronic or other (ediu(' Factors that (a# indicate dou"ts a"out the relia"ilit# of a res!onse
include that it.
% G Las received "# the auditor indirectl#? or
% G A!!eared not to co(e fro( the ori)inall# intended confir(in) !art#'
A14' Aes!onses received electronicall#, for e,a(!le "# facsi(ile or electronic (ail, involve risks as to
relia"ilit# "ecause !roof of ori)in and authorit# of the res!ondent (a# "e difficult to esta"lish, and
alterations (a# "e difficult to detect' A !rocess used "# the auditor and the res!ondent that creates
a secure environ(ent for res!onses received electronicall# (a# (iti)ate these risks' If the auditor
is satisfied that such a !rocess is secure and !ro!erl# controlled, the relia"ilit# of the related
res!onses is enhanced' An electronic confir(ation !rocess (i)ht incor!orate various techni*ues
for validatin) the identit# of a sender of infor(ation in electronic for(, for e,a(!le, throu)h the
use of encr#!tion, electronic di)ital si)natures, and !rocedures to verif# we" site authenticit#'
A19' If a confir(in) !art# uses a third !art# to coordinate and !rovide res!onses to confir(ation
re*uests, the auditor (a# !erfor( !rocedures to address the risks that.
1$a& he res!onse (a# not "e fro( the !ro!er source?
2$"&A res!ondent (a# not "e authoriJed to res!ond? and
3$c& he inte)rit# of the trans(ission (a# have "een co(!ro(ised'
A14' he auditor is re*uired "# ISA 500 to deter(ine whether to (odif# or add !rocedures to resolve
dou"ts over the relia"ilit# of infor(ation to "e used as audit evidence'
17
he auditor (a# choose to
verif# the source and contents of a res!onse to a confir(ation re*uest "# contactin) the
confir(in) !art#' For e,a(!le, when a confir(in) !art# res!onds "# electronic (ail, the auditor
(a# tele!hone the confir(in) !art# to deter(ine whether the confir(in) !art# did, in fact, send
the res!onse' Lhen a res!onse has "een returned to the auditor indirectl# $for e,a(!le, "ecause
the confir(in) !art# incorrectl#
1B
ISA 500, !ara)ra!h A91' 17
ISA 505 448
addressed it to the entit# rather than to the auditor&, the auditor (a# re*uest the confir(in) !art#
to res!ond in writin) directl# to the auditor'
A15' 7n its own, an oral res!onse to a confir(ation re*uest does not (eet the definition of an e,ternal
confir(ation "ecause it is not a direct written res!onse to the auditor' @owever, u!on o"tainin) an
oral res!onse to a confir(ation re*uest, the auditor (a#, de!endin) on the circu(stances, re*uest
the confir(in) !art# to res!ond in writin) directl# to the auditor' If no such res!onse is received,
in accordance with !ara)ra!h 14, the auditor seeks other audit evidence to su!!ort the infor(ation
in the oral res!onse'
A1B' A res!onse to a confir(ation re*uest (a# contain restrictive lan)ua)e re)ardin) its use' Such
restrictions do not necessaril# invalidate the relia"ilit# of the res!onse as audit evidence'
"nreliable +esponses $Aef. 6ara' 11&
A17' Lhen the auditor concludes that a res!onse is unrelia"le, the auditor (a# need to revise the
assess(ent of the risks of (aterial (isstate(ent at the assertion level and (odif# !lanned audit
!rocedures accordin)l#, in accordance with ISA 915'
18
For e,a(!le, an unrelia"le res!onse (a#
indicate a fraud risk factor that re*uires evaluation in accordance with ISA 440'
15
Aon3+esponses $Aef. 6ara' 14& A18' 0,a(!les of alternative audit !rocedures the auditor (a# !erfor(
include.
% G For accounts receiva"le "alances K e,a(inin) s!ecific su"se*uent cash recei!ts, shi!!in)
docu(entation, and sales near the !eriod-end'
% G For accounts !a#a"le "alances K e,a(inin) su"se*uent cash dis"urse(ents or
corres!ondence fro( third !arties, and other records, such as )oods received notes'
A15' he nature and e,tent of alternative audit !rocedures are affected "# the account and assertion in
*uestion' A non-res!onse to a confir(ation re*uest (a# indicate a !reviousl# unidentified risk of
(aterial (isstate(ent' In such situations, the auditor (a# need to revise the assessed risk of
(aterial (isstate(ent at the assertion level, and (odif# !lanned audit !rocedures, in accordance
with ISA 915'
40
For e,a(!le, fewer res!onses to confir(ation re*uests than antici!ated, or a
)reater nu("er of res!onses than antici!ated, (a# indicate a !reviousl# unidentified fraud risk
factor that re*uires evaluation in accordance with ISA 440'
41
18
ISA 915, !ara)ra!h 91' 15
40
ISA 915, !ara)ra!h 91' 41
445 ISA 505
Dhen a +esponse to a (ositi!e Confir$ation +e>uest Is Aecessary to ,btain )ufficient
Appropriate Audit /!idence $Aef' 6ara' 19&
A40' In certain circu(stances, the auditor (a# identif# an assessed risk of (aterial (isstate(ent at the
assertion level for which a res!onse to a !ositive confir(ation re*uest is necessar# to o"tain
sufficient a!!ro!riate audit evidence' Such circu(stances (a# include where.
1. G he infor(ation availa"le to corro"orate (ana)e(ent+s assertion$s& is onl# availa"le
outside the entit#'
2. G S!ecific fraud risk factors, such as the risk of (ana)e(ent override of controls, or the
risk of collusion which can involve e(!lo#ee$s& and/or (ana)e(ent, !revent the auditor fro(
rel#in) on evidence fro( the entit#'
/4ceptions $Aef. 6ara' 14&
A41' 0,ce!tions noted in res!onses to confir(ation re*uests (a# indicate (isstate(ents or !otential
(isstate(ents in the financial state(ents' Lhen a (isstate(ent is identified, the auditor is
re*uired "# ISA 440 to evaluate whether such (isstate(ent is indicative of fraud'
44
0,ce!tions
(a# !rovide a )uide to the *ualit# of res!onses fro( si(ilar confir(in) !arties or for si(ilar
accounts' 0,ce!tions also (a# indicate a deficienc#, or deficiencies, in the entit#+s internal control
over financial re!ortin)'
A44' So(e e,ce!tions do not re!resent (isstate(ents' For e,a(!le, the auditor (a# conclude that
differences in res!onses to confir(ation re*uests are due to ti(in), (easure(ent, or clerical errors
in the e,ternal confir(ation !rocedures'
Ne(!ti9e Co"fi'.!tio" $Aef. 6ara' 15&
A49' he failure to receive a res!onse to a ne)ative confir(ation re*uest does not e,!licitl# indicate
recei!t "# the intended confir(in) !art# of the confir(ation re*uest or verification of the accurac#
of the infor(ation contained in the re*uest' Accordin)l#, a failure of a confir(in) !art# to res!ond
to a ne)ative confir(ation re*uest !rovides si)nificantl# less !ersuasive audit evidence than does
a res!onse to a !ositive confir(ation re*uest' %onfir(in) !arties also (a# "e (ore likel# to
res!ond indicatin) their disa)ree(ent with a confir(ation re*uest when the infor(ation in the
re*uest is not in their favor, and less likel# to res!ond otherwise' For e,a(!le, holders of "ank
de!osit accounts (a# "e (ore likel# to res!ond if the# "elieve that the "alance in their account is
understated in the confir(ation re*uest, "ut (a# "e less likel# to res!ond when the# "elieve the
"alance is overstated' herefore, sendin) ne)ative confir(ation re*uests to holders of "ank de!osit
accounts (a# "e a useful !rocedure in considerin)
ISA 505 490
whether such "alances (a# "e understated, "ut is unlikel# to "e effective if the auditor is seekin)
evidence re)ardin) overstate(ent'
E9!0-!ti"( the E9i#e"ce O$t!i"e# $Aef. 6ara' 1B&
A44' Lhen evaluatin) the results of individual e,ternal confir(ation re*uests, the auditor (a#
cate)oriJe such results as follows.
A45' he auditor+s evaluation, when taken into account with other audit !rocedures the auditor (a# have
!erfor(ed, (a# assist the auditor in concludin) whether sufficient a!!ro!riate audit evidence has
"een o"tained or whether further audit evidence is necessar#, as re*uired "# ISA 990'
49
ISA 990, !ara)ra!hs 4B-47'
491 ISA 505
INTERNATIONAL STANDARD ON AUDITING @70 INITIAL AUDIT
ENGAGE)ENTSDO*ENING BALANCES
CONTENTS
6ara)ra!h
International Standard on Auditin) $ISA& 510, CInitial Audit 0n)a)e(entsD 7!enin) 1alancesD should "e
read in con;unction with ISA 400, C7verall 7";ectives of the Inde!endent Auditor and the %onduct of an
Audit in Accordance with International Standards on Auditin)'D
ISA 510 494
o!enin) "alances in an initial audit en)a)e(ent' In addition to financial state(ent a(ounts,
o!enin) "alances include (atters re*uirin) disclosure that e,isted at the "e)innin) of the !eriod,
such as contin)encies and co((it(ents' Lhen the financial state(ents include co(!arative
financial infor(ation, the re*uire(ents and )uidance in ISA 710
1
also a!!l#' ISA 900
4
includes
additional re*uire(ents and )uidance re)ardin) activities !rior to startin) an initial audit'
Effecti9e D!te
15, 4005'
O$1ecti9e
9' In conductin) an initial audit en)a)e(ent, the o";ective of the auditor with res!ect to o!enin)
"alances is to o"tain sufficient a!!ro!riate audit evidence a"out whether.
1$a&7!enin) "alances contain (isstate(ents that (ateriall# affect the current !eriod+s financial
state(ents? and
2$"& A!!ro!riate accountin) !olicies reflected in the o!enin) "alances have "een consistentl# a!!lied
in the current !eriod+s financial state(ents, or chan)es thereto are a!!ro!riatel# accounted for and
ade*uatel# !resented and disclosed in accordance with the a!!lica"le financial re!ortin)
fra(ework'
Defi"itio"
4' For the !ur!oses of the ISAs, the followin) ter(s have the (eanin)s attri"uted "elow.
$a& Initial audit en)a)e(ent K An en)a)e(ent in which either.
1$i& he financial state(ents for the !rior !eriod were not audited? or
2$ii& he financial state(ents for the !rior !eriod were audited "# a !redecessor auditor'
1
ISA 710, C%o(!arative Infor(ationD%orres!ondin) Fi)ures and %o(!arative Financial State(ents'D
4
ISA 900, C6lannin) an Audit of Financial State(ents'D
499 ISA 510
1$a&7!enin) "alances K hose account "alances that e,ist at the "e)innin) of the !eriod' 7!enin)
"alances are "ased u!on the closin) "alances of the !rior !eriod and reflect the effects of
transactions and events of !rior !eriods and accountin) !olicies a!!lied in the !rior !eriod'
7!enin) "alances also include (atters re*uirin) disclosure that e,isted at the "e)innin) of the
!eriod, such as contin)encies and co((it(ents'
2$"& 6redecessor auditor K he auditor fro( a different audit fir(, who audited the financial state(ents
of an entit# in the !rior !eriod and who has "een re!laced "# the current auditor'
Re2-i'e.e"t
A-#it *'oce#-'e
,pening =alances
1. 5' he auditor shall read the (ost recent financial state(ents, if an#, and the !redecessor
auditor+s re!ort thereon, if an#, for infor(ation relevant to o!enin) "alances, includin)
disclosures'
1. B' he auditor shall o"tain sufficient a!!ro!riate audit evidence a"out whether the o!enin)
"alances contain (isstate(ents that (ateriall# affect the current !eriod+s financial state(ents
"#. $Aef. 6ara' A1KA4&
2. $a& =eter(inin) whether the !rior !eriod+s closin) "alances have "een correctl# "rou)ht
forward to the current !eriod or, when a!!ro!riate, have "een restated?
3. $"& =eter(inin) whether the o!enin) "alances reflect the a!!lication of a!!ro!riate
accountin) !olicies? and
4. $c& 6erfor(in) one or (ore of the followin). $Aef. 6ara' A9KA7&
5. $i& Lhere the !rior #ear financial state(ents were audited, reviewin) the !redecessor
auditor+s workin) !a!ers to o"tain evidence re)ardin) the o!enin) "alances?
6. $ii& 0valuatin) whether audit !rocedures !erfor(ed in the current !eriod !rovide evidence
relevant to the o!enin) "alances? or
7. $iii& 6erfor(in) s!ecific audit !rocedures to o"tain evidence re)ardin) the o!enin) "alances'
2. 7' If the auditor o"tains audit evidence that the o!enin) "alances contain (isstate(ents that
could (ateriall# affect the current !eriod+s financial state(ents, the auditor shall !erfor( such
additional audit !rocedures as are a!!ro!riate in the circu(stances to deter(ine the effect on the
current !eriod+s financial state(ents' If the auditor concludes that such (isstate(ents e,ist in the
current !eriod+s financial state(ents, the auditor shall
ISA 510 494
co((unicate the (isstate(ents with the a!!ro!riate level of (ana)e(ent and those char)ed with
)overnance in accordance with ISA 450'
9
Consistency of Accounting (olicies
8' he auditor shall o"tain sufficient a!!ro!riate audit evidence a"out whether the accountin)
!olicies reflected in the o!enin) "alances have "een consistentl# a!!lied in the current !eriod+s
financial state(ents, and whether chan)es in the accountin) !olicies have "een a!!ro!riatel#
accounted for and ade*uatel# !resented and disclosed in accordance with the a!!lica"le financial
+ele!ant Infor$ation in the (redecessor Auditor8s +eport
5' If the !rior !eriod+s financial state(ents were audited "# a !redecessor auditor and there was a
(odification to the o!inion, the auditor shall evaluate the effect of the (atter )ivin) rise to the
(odification in assessin) the risks of (aterial (isstate(ent in the current !eriod+s financial
state(ents in accordance with ISA 915'
4
A-#it Co"c0-io" !"# Repo'ti"(
,pening =alances
1. 10' If the auditor is una"le to o"tain sufficient a!!ro!riate audit evidence re)ardin) the
o!enin) "alances, the auditor shall e,!ress a *ualified o!inion or disclai( an o!inion on the
financial state(ents, as a!!ro!riate, in accordance with ISA 705'
5
$Aef. 6ara' A8&
2. 11' If the auditor concludes that the o!enin) "alances contain a (isstate(ent that (ateriall#
affects the current !eriod+s financial state(ents, and the effect of the (isstate(ent is not
a!!ro!riatel# accounted for or not ade*uatel# !resented or disclosed, the auditor shall e,!ress a
*ualified o!inion or an adverse o!inion, as a!!ro!riate, in accordance with ISA 705'
Consistency of Accounting (olicies
14' If the auditor concludes that.
$a& the current !eriod+s accountin) !olicies are not consistentl# a!!lied in relation to o!enin)
"alances in accordance with the a!!lica"le financial re!ortin) fra(ework? or
9
ISA 450, C0valuation of Eisstate(ents Identified durin) the Audit,D !ara)ra!hs 8 and 14' 4
5
495 ISA 510
$"& a chan)e in accountin) !olicies is not a!!ro!riatel# accounted for or not ade*uatel# !resented
or disclosed in accordance with the a!!lica"le financial re!ortin) fra(ework,
the auditor shall e,!ress a *ualified o!inion or an adverse o!inion as a!!ro!riate in accordance
with ISA 705'
<odification to the ,pinion in the (redecessor Auditor8s +eport
19' If the !redecessor auditor+s o!inion re)ardin) the !rior !eriod+s financial state(ents included a
(odification to the auditor+s o!inion that re(ains relevant and (aterial to the current !eriod+s
financial state(ents, the auditor shall (odif# the auditor+s o!inion on the current !eriod+s
financial state(ents in accordance with ISA 705 and ISA 710' $Aef. 6ara' A5&
OOO
App0ic!tio" !"# Othe' E5p0!"!to'/ )!te'i!0 A-#it *'oce#-'e
Considerations )pecific to (ublic )ector /ntities $Aef. 6ara' B&
A1' In the !u"lic sector, there (a# "e le)al or re)ulator# li(itations on the infor(ation that the current
auditor can o"tain fro( a !redecessor auditor' For e,a(!le, if a !u"lic sector entit# that has
!reviousl# "een audited "# a statutoril# a!!ointed auditor $for e,a(!le, an Auditor <eneral, or
other suita"l# *ualified !erson a!!ointed on "ehalf of the Auditor <eneral& is !rivatiJed, the
a(ount of access to workin) !a!ers or other infor(ation that the statutoril# a!!ointed auditor can
!rovide a newl#-a!!ointed auditor that is in the !rivate sector (a# "e constrained "# !rivac# or
secrec# laws or re)ulations' In situations where such co((unications are constrained, audit
evidence (a# need to "e o"tained throu)h other (eans and, if sufficient a!!ro!riate audit
evidence cannot "e o"tained, consideration )iven to the effect on the auditor+s o!inion'
A4' If the statutoril# a!!ointed auditor outsources an audit of a !u"lic sector entit# to a !rivate sector
audit fir(, and the statutoril# a!!ointed auditor a!!oints an audit fir( other than the fir( that
audited the financial state(ents of the !u"lic sector entit# in the !rior !eriod, this is not usuall#
re)arded as a chan)e in auditors for the statutoril# a!!ointed auditor' =e!endin) on the nature of
the outsourcin) arran)e(ent, however, the audit en)a)e(ent (a# "e considered an initial audit
en)a)e(ent fro( the !ers!ective of the !rivate sector auditor in fulfillin) their res!onsi"ilities,
and therefore this ISA a!!lies'
ISA 510 49B
,pening =alances $Aef. 6ara' B$c&&
A9' he nature and e,tent of audit !rocedures necessar# to o"tain sufficient a!!ro!riate audit evidence
re)ardin) o!enin) "alances de!end on such (atters as.
% G he accountin) !olicies followed "# the entit#'
% G he nature of the account "alances, classes of transactions and disclosures and the risks
of (aterial (isstate(ent in the current !eriod+s financial state(ents'
% G he si)nificance of the o!enin) "alances relative to the current !eriod+s financial
state(ents'
% G Lhether the !rior !eriod+s financial state(ents were audited and, if so, whether the
!redecessor auditor+s o!inion was (odified'
A4' If the !rior !eriod+s financial state(ents were audited "# a !redecessor auditor, the auditor (a# "e
a"le to o"tain sufficient a!!ro!riate audit evidence re)ardin) the o!enin) "alances "# reviewin)
the !redecessor auditor+s workin) !a!ers' Lhether such a review !rovides sufficient a!!ro!riate
audit evidence is influenced "# the !rofessional co(!etence and inde!endence of the !redecessor
auditor'
A5' Aelevant ethical and !rofessional re*uire(ents )uide the current auditor+s co((unications with
the !redecessor auditor'
AB' For current assets and lia"ilities, so(e audit evidence a"out o!enin) "alances (a# "e o"tained as
!art of the current !eriod+s audit !rocedures' For e,a(!le, the collection $!a#(ent& of o!enin)
accounts receiva"le $accounts !a#a"le& durin) the current !eriod will !rovide so(e audit evidence
of their e,istence, ri)hts and o"li)ations, co(!leteness and valuation at the "e)innin) of the
!eriod' In the case of inventories, however, the current !eriod+s audit !rocedures on the closin)
inventor# "alance !rovide little audit evidence re)ardin) inventor# on hand at the "e)innin) of the
!eriod' herefore, additional audit !rocedures (a# "e necessar#, and one or (ore of the followin)
(a# !rovide sufficient a!!ro!riate audit evidence.
% G 7"servin) a current !h#sical inventor# count and reconcilin) it to the o!enin) inventor#
*uantities'
% G 6erfor(in) audit !rocedures on the valuation of the o!enin) inventor# ite(s'
% G 6erfor(in) audit !rocedures on )ross !rofit and cutoff'
A7' For non-current assets and lia"ilities, such as !ro!ert# !lant and e*ui!(ent, invest(ents and lon)-
ter( de"t, so(e audit evidence (a# "e o"tained "# e,a(inin) the accountin) records and other
infor(ation underl#in) the
497 ISA 510
o!enin) "alances' In certain cases, the auditor (a# "e a"le to o"tain so(e audit evidence
re)ardin) o!enin) "alances throu)h confir(ation with third !arties, for e,a(!le, for lon)-ter(
de"t and invest(ents' In other cases, the auditor (a# need to carr# out additional audit !rocedures'
,pening =alances $Aef. 6ara' 10&
A8' ISA 705 esta"lishes re*uire(ents and !rovides )uidance on circu(stances that (a# result in a
(odification to the auditor+s o!inion on the financial state(ents, the t#!e of o!inion a!!ro!riate in
the circu(stances, and the content of the auditor+s re!ort when the auditor+s o!inion is (odified'
he ina"ilit# of the auditor to o"tain sufficient a!!ro!riate audit evidence re)ardin) o!enin)
"alances (a# result in one of the followin) (odifications to the o!inion in the auditor+s re!ort.
1$a&A *ualified o!inion or a disclai(er of o!inion, as is a!!ro!riate in the circu(stances? or
2$"& Unless !rohi"ited "# law or re)ulation, an o!inion which is *ualified or disclai(ed, as
a!!ro!riate, re)ardin) the results of o!erations, and cash flows, where relevant, and un(odified
re)ardin) financial !osition'
he A!!endi, includes illustrative auditors+ re!orts'
<odification to the ,pinion in the (redecessor Auditor8s +eport $Aef. 6ara' 19&
A5' In so(e situations, a (odification to the !redecessor auditor+s o!inion (a# not "e relevant and
(aterial to the o!inion on the current !eriod+s financial state(ents' his (a# "e the case where,
for e,a(!le, there was a sco!e li(itation in the !rior !eriod, "ut the (atter )ivin) rise to the sco!e
li(itation has "een resolved in the current !eriod'
ISA 510 498
Appe"#i5
$Aef. 6ara' A8&
I00-t'!tio" of A-#ito'> Repo't &ith )o#ifie# Opi"io"
I00-t'!tio" 7G
Ci'c-.t!"ce #ec'i$e# i" p!'!('!ph A+H!I i"c0-#e the fo00o&i"(G
1. G The !-#ito' #i# "ot o$e'9e the co-"ti"( of the ph/ic!0 i"9e"to'/ !t the $e(i""i"(
of the c-''e"t pe'io# !"# &! -"!$0e to o$t!i" -fficie"t !pp'op'i!te !-#it e9i#e"ce
'e(!'#i"( the ope"i"( $!0!"ce of i"9e"to'/J
2. G The poi$0e effect of the i"!$i0it/ to o$t!i" -fficie"t !pp'op'i!te !-#it e9i#e"ce
'e(!'#i"( ope"i"( $!0!"ce of i"9e"to'/ !'e #ee.e# to $e .!te'i!0 $-t "ot pe'9!i9e to the
e"tit/> fi"!"ci!0 pe'fo'.!"ce !"# c!h f0o&J
B
3. G The fi"!"ci!0 poitio" !t /e!' e"# i f!i'0/ p'ee"te#J
4. G I" thi p!'tic-0!' 1-'i#ictio"4 0!& !"# 'e(-0!tio" p'ohi$it the !-#ito' f'o. (i9i"(
!" opi"io" &hich i 2-!0ifie# 'e(!'#i"( the fi"!"ci!0 pe'fo'.!"ce !"# c!h f0o& !"#
-".o#ifie# 'e(!'#i"( fi"!"ci!0 poitio"J
IN=060N=0N AU=I7A+S A067A
UA!!ro!riate AddresseeV
Repo't o" the Fi"!"ci!0 St!te.e"t
7
Le have audited the acco(!an#in) financial state(ents of A1% %o(!an#, which co(!rise the "alance
infor(ation'
<anage$ent8s
8
+esponsibility for the Financial )tate$ents
Eana)e(ent is res!onsi"le for the !re!aration and fair !resentation of these financial state(ents in
accordance with International Financial Ae!ortin) Standards,
5
B
If the !ossi"le effects, in the auditor+s ;ud)(ent, are considered to "e (aterial and !ervasive to the
entit#+s financial !erfor(ance and cash flows, the auditor would disclai( an o!inion on the financial
!erfor(ance and cash flows' 7
he su"-title CAe!ort on the Financial State(entsD is unnecessar# in circu(stances when the second
su"-title CAe!ort on 7ther Me)al and Ae)ulator# Ae*uire(entsD is not a!!lica"le' 8
7r other ter( that is a!!ro!riate in the conte,t of the le)al fra(ework in the !articular ;urisdiction'
5
Lhere (ana)e(ent+s res!onsi"ilit# is to !re!are financial state(ents that )ive a true and fair view, this (a# read. CEana)e(ent
is res!onsi"le for the !re!aration of financial state(ents that )ive a true and fair view in accordance with International Financial
Ae!ortin) Standards, and for such '''D
495 ISA 510 A660N=II
and for such internal control as (ana)e(ent deter(ines is necessar# to ena"le the !re!aration of financial
state(ents that are free fro( (aterial (isstate(ent, whether due to fraud or error'
Auditor8s +esponsibility
7ur res!onsi"ilit# is to e,!ress an o!inion on these financial state(ents "ased on our audit' Le conducted
our audit in accordance with International Standards on Auditin)' hose standards re*uire that we co(!l#
with ethical re*uire(ents and !lan and !erfor( the audit to o"tain reasona"le assurance a"out whether the
financial state(ents are free fro( (aterial (isstate(ent'
An audit involves !erfor(in) !rocedures to o"tain audit evidence a"out the a(ounts and disclosures in the
financial state(ents' he !rocedures selected de!end on the auditor+s ;ud)(ent, includin) the assess(ent
of the risks of (aterial (isstate(ent of the financial state(ents, whether due to fraud or error' In (akin)
those risk assess(ents, the auditor considers internal control relevant to the entit#+s !re!aration and fair
!resentation
10
of the financial state(ents in order to desi)n audit !rocedures that are a!!ro!riate in the
circu(stances, "ut not for the !ur!ose of e,!ressin) an o!inion on the effectiveness of the entit#+s internal
control'
11
An audit also includes evaluatin) the a!!ro!riateness of accountin) !olicies used and the
reasona"leness of accountin) esti(ates (ade "# (ana)e(ent, as well as evaluatin) the overall !resentation
Le "elieve that the audit evidence we have o"tained is sufficient and a!!ro!riate to !rovide a "asis for our
*ualified audit o!inion'
=asis for *ualified ,pinion
Le were a!!ointed as auditors of the co(!an# on >une 90, 40I1 and thus did not o"serve the countin) of
the !h#sical inventories at the "e)innin) of the #ear' Le were una"le to satisf# ourselves "# alternative
(eans concernin) inventor# *uantities held at =ece("er 91, 40I0' Since o!enin) inventories enter into the
deter(ination of the financial !erfor(ance and cash flows, we were una"le to deter(ine whether
ad;ust(ents (i)ht have "een necessar# in res!ect of the !rofit for
10
In the case of footnote 5, this (a# read. CIn (akin) those risk assess(ents, the auditor considers
internal control relevant to the entit#+s !re!aration of financial state(ents that )ive a true and fair
view in order to desi)n audit !rocedures that are a!!ro!riate in the circu(stances, "ut not for the
!ur!ose of e,!ressin) an o!inion on the effectiveness of the entit#+s internal control'D 11
In circu(stances when the auditor also has res!onsi"ilit# to e,!ress an o!inion on the effectiveness of internal control in
con;unction with the audit of the financial state(ents, this sentence would "e worded as follows. CIn (akin) those risk
assess(ents, the auditor considers internal control relevant to the entit#+s !re!aration and fair !resentation of the financial
state(ents in order to desi)n audit !rocedures that are a!!ro!riate in the circu(stances'D In the case of footnote 5, this (a# read.
CIn (akin) those risk assess(ents, the auditor considers internal control relevant to the entit#+s !re!aration of financial
state(ents that )ive a true and fair view in order to desi)n audit !rocedures that are a!!ro!riate in the circu(stances'D
ISA 510 A660N=II 440
the #ear re!orted in the inco(e state(ent and the net cash flows fro( o!eratin) activities re!orted in the
cash flow state(ent'
*ualified ,pinion
In our o!inion, e,ce!t for the !ossi"le effects of the (atter descri"ed in the 1asis for :ualified 7!inion
!ara)ra!h, the financial state(ents !resent fairl#, in all (aterial res!ects, $or gi!e a true and fair !ie# of&
the financial !osition of A1% %o(!an# as at =ece("er 91, 40I1, and $of& its financial !erfor(ance and its
cash flows for the #ear then ended in accordance with International Financial Ae!ortin) Standards'
,ther <atter
he financial state(ents of A1% %o(!an# for the #ear ended =ece("er 91, 40I0 were audited "# another
auditor who e,!ressed an un(odified o!inion on those state(ents on Earch 91, 40I1'
Repo't o" Othe' Le(!0 !"# Re(-0!to'/ Re2-i'e.e"t
UFor( and content of this section of the auditor+s re!ort will var# de!endin) on the
nature of the auditor+s other re!ortin) res!onsi"ilities'V
UAuditor+s si)natureV
U=ate of the auditor+s re!ortV
UAuditor+s addressV
441 ISA 510 A660N=II
I00-t'!tio" 2G
Ci'c-.t!"ce #ec'i$e# i" p!'!('!ph A+H$I i"c0-#e the fo00o&i"(G
1. G The !-#ito' #i# "ot o$e'9e the co-"ti"( of the ph/ic!0 i"9e"to'/ !t the $e(i""i"(
of the c-''e"t pe'io# !"# &! -"!$0e to o$t!i" -fficie"t !pp'op'i!te !-#it e9i#e"ce
'e(!'#i"( the ope"i"( $!0!"ce of i"9e"to'/J
2. G The poi$0e effect of the i"!$i0it/ to o$t!i" -fficie"t !pp'op'i!te !-#it e9i#e"ce
'e(!'#i"( ope"i"( $!0!"ce of i"9e"to'/ !'e #ee.e# to $e .!te'i!0 $-t "ot pe'9!i9e to the
e"tit/> fi"!"ci!0 pe'fo'.!"ce !"# c!h f0o&J
14
3. G The fi"!"ci!0 poitio" !t /e!' e"# i f!i'0/ p'ee"te#J
4. G A" opi"io" th!t i 2-!0ifie# 'e(!'#i"( the fi"!"ci!0 pe'fo'.!"ce !"# c!h f0o& !"#
-".o#ifie# 'e(!'#i"( fi"!"ci!0 poitio" i co"i#e'e# !pp'op'i!te i" the ci'c-.t!"ceJ
19
infor(ation'
<anage$ent8s
14
15
and for such internal control as
(ana)e(ent deter(ines is necessar# to ena"le the !re!aration of financial state(ents that are free fro(
(aterial (isstate(ent, whether due to fraud or error'
14
If the !ossi"le effects, in the auditor+s ;ud)(ent, are considered to "e (aterial and !ervasive to the
entit#+s financial !erfor(ance and cash flows, the auditor would disclai( the o!inion on the
financial !erfor(ance and cash flows' 19
7r other ter( that is a!!ro!riate in the conte,t of the le)al fra(ework in the !articular ;urisdiction' 15
ISA 510 A660N=II 444
!resentation
1B
control'
17
un(odified o!inion on the financial !osition and our *ualified audit o!inion on the financial !erfor(ance
and cash flows'
=asis for *ualified ,pinion on the Financial (erfor$ance and Cash Flo#s
Le were a!!ointed as auditors of the co(!an# on >une 90, 40I1 and thus did not o"serve the countin) of
the !h#sical inventories at the "e)innin) of the #ear' Le were una"le to satisf# ourselves "# alternative
(eans concernin) inventor# *uantities held at =ece("er 91, 40I0' Since o!enin) inventories enter into the
deter(ination of the financial !erfor(ance and cash flows, we were una"le to deter(ine whether
ad;ust(ents (i)ht have "een necessar# in res!ect of the !rofit for the #ear re!orted in the inco(e state(ent
and the net cash flows fro( o!eratin) activities re!orted in the cash flow state(ent'
1B
state(ents in order to desi)n audit !rocedures that are a!!ro!riate in the circu(stances'D In the case of footnote 15, this (a#
read. CIn (akin) those risk assess(ents, the auditor considers internal control relevant to the entit#+s !re!aration of financial
449 ISA 510 A660N=II
*ualified ,pinion on the Financial (erfor$ance and Cash Flo#s
!ara)ra!h, the Inco(e State(ent and %ash Flow State(ent !resent fairl#, in all (aterial res!ects $or gi!e a
true and fair !ie# of& the financial !erfor(ance and cash flows of A1% %o(!an# for the #ear ended
=ece("er 91, 40I1 in accordance with International Financial Ae!ortin) Standards'
,pinion on the financial position
In our o!inion, the "alance sheet !resents fairl#, in all (aterial res!ects $or gi!es a true and fair !ie# of& the
financial !osition of A1% %o(!an# as at =ece("er 91, 40I1 in accordance with International Financial
Ae!ortin) Standards'
,ther <atter
he financial state(ents of A1% %o(!an# for the #ear ended =ece("er 91, 40I0 were audited "# another
auditor who e,!ressed an un(odified o!inion on those state(ents on Earch 91, 40I1'
UFor( and content of this section of the auditor+s re!ort will var# de!endin)
on the nature of the auditor+s other re!ortin) res!onsi"ilities'V
UAuditor+s addressV
ISA 510 A660N=II 444
INTERNATIONAL STANDARD ON AUDITING @20 ANALYTICAL
*ROCEDURES
CONTENTS
6ara)ra!h
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 9
Defi"itio" ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
Re2-i'e.e"t
Su"stantive Anal#tical 6rocedures '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5 Anal#tical 6rocedures that
Assist Lhen For(in) an 7verall
%onclusion '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' B
Investi)atin) Aesults of Anal#tical 6rocedures '''''''''''''''''''''''''''''''''''''''''' 7
=efinition of Anal#tical 6rocedures ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1-A9 Su"stantive Anal#tical
6rocedures '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A4-A1B Anal#tical 6rocedures that Assist Lhen
For(in) an
7verall %onclusion '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A17-A15
Investi)atin) Aesults of Anal#tical 6rocedures '''''''''''''''''''''''''''''''''''''''''' A40-A41
International Standard on Auditin) $ISA& 540, CAnal#tical 6roceduresD should "e read in con;unction with
445 ISA 540
1' his International Standard on Auditin) $ISA& deals with the auditor+s use of anal#tical !rocedures
as su"stantive !rocedures $Csu"stantive anal#tical !roceduresD&' It also deals with the auditor+s
res!onsi"ilit# to !erfor( anal#tical !rocedures near the end of the audit that assist the auditor
when for(in) an overall conclusion on the financial state(ents' ISA 915
1
deals with the use of
anal#tical !rocedures as risk assess(ent !rocedures' ISA 990 includes re*uire(ents and )uidance
re)ardin) the nature, ti(in) and e,tent of audit !rocedures in res!onse to assessed risks? these
audit !rocedures (a# include su"stantive anal#tical !rocedures'
4
Effecti9e D!te
15, 4005'
O$1ecti9e
1. $a& o o"tain relevant and relia"le audit evidence when usin) su"stantive anal#tical
!rocedures? and
2. $"& o desi)n and !erfor( anal#tical !rocedures near the end of the audit that assist the auditor
when for(in) an overall conclusion as to whether the financial state(ents are consistent with the
auditor+s understandin) of the entit#'
Defi"itio"
4' For the !ur!oses of the ISAs, the ter( Canal#tical !roceduresD (eans evaluations of financial
infor(ation throu)h anal#sis of !lausi"le relationshi!s a(on) "oth financial and non-financial
data' Anal#tical !rocedures also enco(!ass such investi)ation as is necessar# of identified
fluctuations or relationshi!s that are inconsistent with other relevant infor(ation or that differ
fro( e,!ected values "# a si)nificant a(ount' $Aef. 6ara' A1-A9&
Re2-i'e.e"t S-$t!"ti9e A"!0/tic!0 *'oce#-'e
5' Lhen desi)nin) and !erfor(in) su"stantive anal#tical !rocedures, either alone or in co("ination
with tests of details, as su"stantive !rocedures in
1
0ntit# and Its 0nviron(ent,D !ara)ra!h B$"&' 4
ISA 990, Che Auditor+s Ae!onses to Assessed Aisks,D !ara)ra!hs B and 18'
ISA 540 44B
accordance with ISA 990,
9
the auditor shall. $Aef. 6ara' A4-A5&
1$a&=eter(ine the suita"ilit# of !articular su"stantive anal#tical !rocedures for )iven assertions,
takin) account of the assessed risks of (aterial (isstate(ent and tests of details, if an#, for these
assertions? $Aef. 6ara' AB-A11&
2$"& 0valuate the relia"ilit# of data fro( which the auditor+s e,!ectation of recorded a(ounts or ratios
is develo!ed, takin) account of source, co(!ara"ilit#, and nature and relevance of infor(ation
availa"le, and controls over !re!aration? $Aef. 6ara' A14-A14&
3$c&=evelo! an e,!ectation of recorded a(ounts or ratios and evaluate whether the e,!ectation is
sufficientl# !recise to identif# a (isstate(ent that, individuall# or when a))re)ated with other
(isstate(ents, (a# cause the financial state(ents to "e (ateriall# (isstated? and $Aef. 6ara' A15&
4$d& =eter(ine the a(ount of an# difference of recorded a(ounts fro( e,!ected values that is
acce!ta"le without further investi)ation as re*uired "# !ara)ra!h 7' $Aef. 6ara' A1B&
A"!0/tic!0 *'oce#-'e th!t Ait =he" Fo'.i"( !" O9e'!00 Co"c0-io"
B' he auditor shall desi)n and !erfor( anal#tical !rocedures near the end of the audit that assist the
auditor when for(in) an overall conclusion as to whether the financial state(ents are consistent
with the auditor+s understandin) of the entit#' $Aef. 6ara' A17-A15&
I"9eti(!ti"( Re-0t of A"!0/tic!0 *'oce#-'e
7' If anal#tical !rocedures !erfor(ed in accordance with this ISA identif# fluctuations or
relationshi!s that are inconsistent with other relevant infor(ation or that differ fro( e,!ected
values "# a si)nificant a(ount, the auditor shall investi)ate such differences "#.
1$a&In*uirin) of (ana)e(ent and o"tainin) a!!ro!riate audit evidence relevant to (ana)e(ent+s
res!onses? and
2$"& 6erfor(in) other audit !rocedures as necessar# in the circu(stances' $Aef. 6ara' A40-A41&
EEE
447 ISA 540
App0ic!tio" !"# Othe' E5p0!"!to'/ )!te'i!0 Defi"itio" of A"!0/tic!0
*'oce#-'e $Aef. 6ara' 4& A1' Anal#tical !rocedures include the consideration of
co(!arisons of the entit#+s financial infor(ation with, for e,a(!le.
1. G %o(!ara"le infor(ation for !rior !eriods'
2. G Antici!ated results of the entit#, such as "ud)ets or forecasts, or e,!ectations of the
auditor, such as an esti(ation of de!reciation'
3. G Si(ilar industr# infor(ation, such as a co(!arison of the entit#+s ratio of sales to
accounts receiva"le with industr# avera)es or with other entities of co(!ara"le siJe in the sa(e
industr#'
A4' Anal#tical !rocedures also include consideration of relationshi!s, for e,a(!le.
1. G A(on) ele(ents of financial infor(ation that would "e e,!ected to confor( to a
!redicta"le !attern "ased on the entit#+s e,!erience, such as )ross (ar)in !ercenta)es'
2. G 1etween financial infor(ation and relevant non-financial infor(ation, such as !a#roll
costs to nu("er of e(!lo#ees'
A9' Farious (ethods (a# "e used to !erfor( anal#tical !rocedures' hese (ethods ran)e fro(
!erfor(in) si(!le co(!arisons to !erfor(in) co(!le, anal#ses usin) advanced statistical
techni*ues' Anal#tical !rocedures (a# "e a!!lied to consolidated financial state(ents,
co(!onents and individual ele(ents of infor(ation'
S-$t!"ti9e A"!0/tic!0 *'oce#-'e $Aef. 6ara' 5&
A4' he auditor+s su"stantive !rocedures at the assertion level (a# "e tests of details, su"stantive
anal#tical !rocedures, or a co("ination of "oth' he decision a"out which audit !rocedures to
!erfor(, includin) whether to use su"stantive anal#tical !rocedures, is "ased on the auditor+s
;ud)(ent a"out the e,!ected effectiveness and efficienc# of the availa"le audit !rocedures to
reduce audit risk at the assertion level to an acce!ta"l# low level'
A5' he auditor (a# in*uire of (ana)e(ent as to the availa"ilit# and relia"ilit# of infor(ation needed
to a!!l# su"stantive anal#tical !rocedures, and the results of an# such anal#tical !rocedures
!erfor(ed "# the entit#' It (a# "e effective to use anal#tical data !re!ared "# (ana)e(ent,
!rovided the auditor is satisfied that such data is !ro!erl# !re!ared'
)uitability of (articular Analytical (rocedures for 2i!en Assertions $Aef. 6ara' 5$a&&
AB' Su"stantive anal#tical !rocedures are )enerall# (ore a!!lica"le to lar)e volu(es of transactions
that tend to "e !redicta"le over ti(e' he a!!lication
ISA 540 448
of !lanned anal#tical !rocedures is "ased on the e,!ectation that relationshi!s a(on) data e,ist
and continue in the a"sence of known conditions to the contrar#' @owever, the suita"ilit# of a
!articular anal#tical !rocedure will de!end u!on the auditor+s assess(ent of how effective it will
"e in detectin) a (isstate(ent that, individuall# or when a))re)ated with other (isstate(ents,
(a# cause the financial state(ents to "e (ateriall# (isstated'
A7' In so(e cases, even an unso!histicated !redictive (odel (a# "e effective as an anal#tical
!rocedure' For e,a(!le, where an entit# has a known nu("er of e(!lo#ees at fi,ed rates of !a#
throu)hout the !eriod, it (a# "e !ossi"le for the auditor to use this data to esti(ate the total
!a#roll costs for the !eriod with a hi)h de)ree of accurac#, there"# !rovidin) audit evidence for a
si)nificant ite( in the financial state(ents and reducin) the need to !erfor( tests of details on the
!a#roll' he use of widel# reco)niJed trade ratios $such as !rofit (ar)ins for different t#!es of
retail entities& can often "e used effectivel# in su"stantive anal#tical !rocedures to !rovide
evidence to su!!ort the reasona"leness of recorded a(ounts'
A8' =ifferent t#!es of anal#tical !rocedures !rovide different levels of assurance' Anal#tical
!rocedures involvin), for e,a(!le, the !rediction of total rental inco(e on a "uildin) divided into
a!art(ents, takin) the rental rates, the nu("er of a!art(ents and vacanc# rates into consideration,
can !rovide !ersuasive evidence and (a# eli(inate the need for further verification "# (eans of
tests of details, !rovided the ele(ents are a!!ro!riatel# verified' In contrast, calculation and
co(!arison of )ross (ar)in !ercenta)es as a (eans of confir(in) a revenue fi)ure (a# !rovide
less !ersuasive evidence, "ut (a# !rovide useful corro"oration if used in co("ination with other
audit !rocedures'
A5' he deter(ination of the suita"ilit# of !articular su"stantive anal#tical !rocedures is influenced "#
the nature of the assertion and the auditor+s assess(ent of the risk of (aterial (isstate(ent' For
e,a(!le, if controls over sales order !rocessin) are deficient, the auditor (a# !lace (ore reliance
on tests of details rather than on su"stantive anal#tical !rocedures for assertions related to
receiva"les'
A10' 6articular su"stantive anal#tical !rocedures (a# also "e considered suita"le when tests of details
are !erfor(ed on the sa(e assertion' For e,a(!le, when o"tainin) audit evidence re)ardin) the
valuation assertion for accounts receiva"le "alances, the auditor (a# a!!l# anal#tical !rocedures
to an a)in) of custo(ers+ accounts in addition to !erfor(in) tests of details on su"se*uent cash
recei!ts to deter(ine the collecta"ilit# of the receiva"les'
A11' he relationshi!s "etween individual financial state(ent ite(s traditionall# considered in the audit
of "usiness entities (a# not alwa#s "e relevant in the
445 ISA 540
audit of )overn(ents or other non-"usiness !u"lic sector entities? for e,a(!le, in (an# !u"lic
sector entities there (a# "e little direct relationshi! "etween revenue and e,!enditure' In addition,
"ecause e,!enditure on the ac*uisition of assets (a# not "e ca!italiJed, there (a# "e no
relationshi! "etween e,!enditures on, for e,a(!le, inventories and fi,ed assets and the a(ount of
those assets re!orted in the financial state(ents' Also, industr# data or statistics for co(!arative
!ur!oses (a# not "e availa"le in the !u"lic sector' @owever, other relationshi!s (a# "e relevant,
for e,a(!le, variations in the cost !er kilo(eter of road construction or the nu("er of vehicles
ac*uired co(!ared with vehicles retired'
1he +eliability of the ?ata $Aef. 6ara' 5$"&&
A14' he relia"ilit# of data is influenced "# its source and nature and is de!endent on the circu(stances
under which it is o"tained' Accordin)l#, the followin) are relevant when deter(inin) whether data
is relia"le for !ur!oses of desi)nin) su"stantive anal#tical !rocedures.
1. $a& Source of the infor(ation availa"le' For e,a(!le, infor(ation (a# "e (ore relia"le
when it is o"tained fro( inde!endent sources outside the entit#?
4
2. $"& %o(!ara"ilit# of the infor(ation availa"le' For e,a(!le, "road industr# data (a# need to "e
su!!le(ented to "e co(!ara"le to that of an entit# that !roduces and sells s!ecialiJed !roducts?
3. $c& Nature and relevance of the infor(ation availa"le' For e,a(!le, whether "ud)ets have
"een esta"lished as results to "e e,!ected rather than as )oals to "e achieved? and
4. $d& %ontrols over the !re!aration of the infor(ation that are desi)ned to ensure its co(!leteness,
accurac# and validit#' For e,a(!le, controls over the !re!aration, review and (aintenance of
"ud)ets'
A19' he auditor (a# consider testin) the o!eratin) effectiveness of controls, if an#, over the entit#+s
!re!aration of infor(ation used "# the auditor in !erfor(in) su"stantive anal#tical !rocedures in
res!onse to assessed risks' Lhen such controls are effective, the auditor )enerall# has )reater
confidence in the relia"ilit# of the infor(ation and, therefore, in the results of anal#tical
!rocedures' he o!eratin) effectiveness of controls over nonfinancial infor(ation (a# often "e
tested in con;unction with other tests of controls' For e,a(!le, in esta"lishin) controls over the
!rocessin) of sales invoices, an entit# (a# include controls over the recordin) of unit sales' In
these circu(stances, the auditor (a# test the o!eratin) effectiveness of controls over the recordin)
of unit sales in con;unction with tests of the o!eratin) effectiveness of controls over the !rocessin)
of sales invoices'
ISA 500, CAudit 0vidence,D !ara)ra!h A91'
ISA 540 450
Alternativel#, the auditor (a# consider whether the infor(ation was su";ected to audit testin)'
ISA 500 esta"lishes re*uire(ents and !rovides )uidance in deter(inin) the audit !rocedures to "e
!erfor(ed on the infor(ation to "e used for su"stantive anal#tical !rocedures'
5
A14' he (atters discussed in !ara)ra!hs A14$a&-A14$d& are relevant irres!ective of whether the
auditor !erfor(s su"stantive anal#tical !rocedures on the entit#+s !eriod end financial state(ents,
or at an interi( date and !lans to !erfor( su"stantive anal#tical !rocedures for the re(ainin)
!eriod' ISA 990 esta"lishes re*uire(ents and !rovides )uidance on su"stantive !rocedures
!erfor(ed at an interi( date'
B
/!aluation Dhether the /4pectation Is )ufficiently (recise $Aef. 6ara' 5$c&&
A15' Eatters relevant to the auditor+s evaluation of whether the e,!ectation can "e develo!ed
sufficientl# !recisel# to identif# a (isstate(ent that, when a))re)ated with other (isstate(ents,
(a# cause the financial state(ents to "e (ateriall# (isstated, include.
1. G he accurac# with which the e,!ected results of su"stantive anal#tical !rocedures can "e
!redicted' For e,a(!le, the auditor (a# e,!ect )reater consistenc# in co(!arin) )ross !rofit
(ar)ins fro( one !eriod to another than in co(!arin) discretionar# e,!enses, such as research or
advertisin)'
2. G he de)ree to which infor(ation can "e disa))re)ated' For e,a(!le, su"stantive
anal#tical !rocedures (a# "e (ore effective when a!!lied to financial infor(ation on individual
sections of an o!eration or to financial state(ents of co(!onents of a diversified entit#, than when
a!!lied to the financial state(ents of the entit# as a whole'
3. G he availa"ilit# of the infor(ation, "oth financial and non-financial' For e,a(!le, the
auditor (a# consider whether financial infor(ation, such as "ud)ets or forecasts, and non-
financial infor(ation, such as the nu("er of units !roduced or sold, is availa"le to desi)n
su"stantive anal#tical !rocedures' If the infor(ation is availa"le, the auditor (a# also consider the
relia"ilit# of the infor(ation as discussed in !ara)ra!hs A14-A19 a"ove'
A$ount of ?ifference of +ecorded A$ounts fro$ /4pected Jalues that Is Acceptable
$Aef. 6ara' 5$d&&
A1B' he auditor+s deter(ination of the a(ount of difference fro( the e,!ectation that can "e acce!ted
without further investi)ation is influenced
5
ISA 500, !ara)ra!h 10' B
ISA 990, !ara)ra!hs 44-49'
451 ISA 540
"# (aterialit#
7
and the consistenc# with the desired level of assurance, takin) account of the
!ossi"ilit# that a (isstate(ent, individuall# or when a))re)ated with other (isstate(ents, (a#
cause the financial state(ents to "e (ateriall# (isstated' ISA 990 re*uires the auditor to o"tain
(ore !ersuasive audit evidence the hi)her the auditor+s assess(ent of risk'
8
Accordin)l#, as the
assessed risk increases, the a(ount of difference considered acce!ta"le without investi)ation
decreases in order to achieve the desired level of !ersuasive evidence'
5
A"!0/tic!0 *'oce#-'e th!t Ait =he" Fo'.i"( !" O9e'!00 Co"c0-io" $Aef. 6ara' B&
A17' he conclusions drawn fro( the results of anal#tical !rocedures desi)ned and !erfor(ed in
accordance with !ara)ra!h B are intended to corro"orate conclusions for(ed durin) the audit of
individual co(!onents or ele(ents of the financial state(ents' his assists the auditor to draw
reasona"le conclusions on which to "ase the auditor+s o!inion'
A18' he results of such anal#tical !rocedures (a# identif# a !reviousl# unreco)niJed risk of (aterial
(isstate(ent' In such circu(stances, ISA 915 re*uires the auditor to revise the auditor+s
assess(ent of the risks of (aterial (isstate(ent and (odif# the further !lanned audit !rocedures
accordin)l#'
10
A15' he anal#tical !rocedures !erfor(ed in accordance with !ara)ra!h B (a# "e si(ilar to those that
would "e used as risk assess(ent !rocedures'
I"9eti(!ti"( Re-0t of A"!0/tic!0 *'oce#-'e $Aef. 6ara' 7&
A40' Audit evidence relevant to (ana)e(ent+s res!onses (a# "e o"tained "# evaluatin) those
res!onses takin) into account the auditor+s understandin) of the entit# and its environ(ent, and
with other audit evidence o"tained durin) the course of the audit'
A41' he need to !erfor( other audit !rocedures (a# arise when, for e,a(!le, (ana)e(ent is una"le
to !rovide an e,!lanation, or the e,!lanation, to)ether with the audit evidence o"tained relevant to
(ana)e(ent+s res!onse, is not considered ade*uate'
7
ISA 940, CEaterialit# in 6lannin) and 6erfor(in) an Audit,D !ara)ra!h A19'
8
ISA 990, !ara)ra!h 7$"&'
5
10
ISA 915, !ara)ra!h 91' ISA 540 454
INTERNATIONAL STANDARD ON AUDITING @30 AUDIT SA)*LING
CONTENTS
6ara)ra!h
6erfor(in) Audit 6rocedures ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A14TA1B Nature and %ause of
=eviations and Eisstate(ents ''''''''''''''''''''''''''''''''''' A17 6ro;ectin)
Eisstate(ents '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A18TA40 0valuatin) Aesults of Audit
Sa(!lin) '''''''''''''''''''''''''''''''''''''''''''''''''''''''' A41TA49 A!!endi, 1. Stratification and Falue-Lei)hted
Selection A!!endi, 4. 0,a(!les of Factors Influencin) Sa(!le SiJe for ests of
%ontrols A!!endi, 9. 0,a(!les of Factors Influencin) Sa(!le
SiJe for ests of =etails A!!endi, 4. Sa(!le Selection Eethods
459 ISA 590
International Standard on Auditin) $ISA& 590, CAudit Sa(!lin)D should "e read in con;unction with ISA
ISA 590 454
1. 1' his International Standard on Auditin) $ISA& a!!lies when the auditor has decided to
use audit sa(!lin) in !erfor(in) audit !rocedures' It deals with the auditor+s use of statistical and
non-statistical sa(!lin) when desi)nin) and selectin) the audit sa(!le, !erfor(in) tests of
controls and tests of details, and evaluatin) the results fro( the sa(!le'
2. 4' his ISA co(!le(ents ISA 500,
1
which deals with the auditor+s res!onsi"ilit# to desi)n
and !erfor( audit !rocedures to o"tain sufficient a!!ro!riate audit evidence to "e a"le to draw
reasona"le conclusions on which to "ase the auditor+s o!inion ISA 500 !rovides )uidance on the
(eans availa"le to the auditor for selectin) ite(s for testin), of which audit sa(!lin) is one
(eans'
Effecti9e D!te
15, 4005'
O$1ecti9e
4' he o";ective of the auditor, when usin) audit sa(!lin), is to !rovide a reasona"le "asis for the
auditor to draw conclusions a"out the !o!ulation fro( which the sa(!le is selected'
Defi"itio"
1$a& Audit sa(!lin) $sa(!lin)& K he a!!lication of audit !rocedures to less than 100Q of
ite(s within a !o!ulation of audit relevance such that all sa(!lin) units have a chance of selection
in order to !rovide the auditor with a reasona"le "asis on which to draw conclusions a"out the
entire !o!ulation'
2$"& 6o!ulation K he entire set of data fro( which a sa(!le is selected and a"out which the
auditor wishes to draw conclusions'
3$c& Sa(!lin) risk K he risk that the auditor+s conclusion "ased on a sa(!le (a# "e different
fro( the conclusion if the entire !o!ulation were su";ected to the sa(e audit !rocedure' Sa(!lin)
risk can lead to two t#!es of erroneous conclusions.
$i& In the case of a test of controls, that controls are (ore effective than the# actuall#
are, or in the case of a test of
ISA 500, CAudit 0vidence'D
455 ISA 590
Re2-i'e.e"t S!.p0e Dei("4 Si;e !"# Se0ectio" of Ite. fo' Teti"(
1. B' Lhen desi)nin) an audit sa(!le, the auditor shall consider the !ur!ose of the audit
!rocedure and the characteristics of the !o!ulation fro( which the sa(!le will "e drawn' $Aef.
6ara' A4-A5&
2. 7' he auditor shall deter(ine a sa(!le siJe sufficient to reduce sa(!lin) risk to an
acce!ta"l# low level' $Aef. 6ara' A10-A11&
3. 8' he auditor shall select ite(s for the sa(!le in such a wa# that each sa(!lin) unit in the
!o!ulation has a chance of selection' $Aef. 6ara' A14-A19&
*e'fo'.i"( A-#it *'oce#-'e
1. 5' he auditor shall !erfor( audit !rocedures, a!!ro!riate to the !ur!ose, on each ite(
selected'
2. 10' If the audit !rocedure is not a!!lica"le to the selected ite(, the auditor shall !erfor( the
!rocedure on a re!lace(ent ite(' $Aef. 6ara' A14&
3. 11' If the auditor is una"le to a!!l# the desi)ned audit !rocedures, or suita"le alternative
!rocedures, to a selected ite(, the auditor shall treat that ite( as a deviation fro( the !rescri"ed
control, in the case of tests of controls, or a (isstate(ent, in the case of tests of details' $Aef. 6ara'
A15-A1B&
N!t-'e !"# C!-e of De9i!tio" !"# )it!te.e"t
1. 14' he auditor shall investi)ate the nature and cause of an# deviations or (isstate(ents
identified, and evaluate their !ossi"le effect on the !ur!ose of the audit !rocedure and on other
areas of the audit' $Aef. 6ara' A17&
2. 19' In the e,tre(el# rare circu(stances when the auditor considers a (isstate(ent or
deviation discovered in a sa(!le to "e an ano(al#, the auditor shall o"tain a hi)h de)ree of
certaint# that such (isstate(ent or deviation is not re!resentative of the !o!ulation' he auditor
shall o"tain this de)ree of certaint# "# !erfor(in) additional audit !rocedures to o"tain sufficient
a!!ro!riate audit evidence that the (isstate(ent or deviation does not affect the re(ainder of the
!o!ulation'
*'o1ecti"( )it!te.e"t
14' For tests of details, the auditor shall !ro;ect (isstate(ents found in the sa(!le to the !o!ulation'
E9!0-!ti"( Re-0t of A-#it S!.p0i"(
15' he auditor shall evaluate.
$a& he results of the sa(!le? and $Aef. 6ara' A41-A44&
457 ISA 590
$"& Lhether the use of audit sa(!lin) has !rovided a reasona"le "asis for conclusions a"out
the !o!ulation that has "een tested' $Aef. 6ara' A49&
OOO
App0ic!tio" !"# Othe' E5p0!"!to'/ )!te'i!0 Defi"itio"
Aon3)a$pling +is. $Aef. 6ara' 5$d&&
A1' 0,a(!les of non-sa(!lin) risk include use of ina!!ro!riate audit !rocedures, or (isinter!retation
of audit evidence and failure to reco)niJe a (isstate(ent or deviation'
)a$pling "nit $Aef. 6ara' 5$f&&
A4' he sa(!lin) units (i)ht "e !h#sical ite(s $for e,a(!le, checks listed on de!osit sli!s, credit
entries on "ank state(ents, sales invoices or de"tors+ "alances& or (onetar# units'
1olerable <isstate$ent $Aef. 6ara' 5$i&&
A9' Lhen desi)nin) a sa(!le, the auditor deter(ines tolera"le (isstate(ent in order to address the
risk that the a))re)ate of individuall# i((aterial (isstate(ents (a# cause the financial
state(ents to "e (ateriall# (isstated and !rovide a (ar)in for !ossi"le undetected (isstate(ents'
olera"le (isstate(ent is the a!!lication of !erfor(ance (aterialit#, as defined in ISA 940,
4
to a
!articular sa(!lin) !rocedure' olera"le (isstate(ent (a# "e the sa(e a(ount or an a(ount
lower than !erfor(ance (aterialit#'
S!.p0e Dei("4 Si;e !"# Se0ectio" of Ite. fo' Teti"(
)a$ple ?esign $Aef. 6ara' B&
A4' Audit sa(!lin) ena"les the auditor to o"tain and evaluate audit evidence a"out so(e characteristic
of the ite(s selected in order to for( or assist in for(in) a conclusion concernin) the !o!ulation
fro( which the sa(!le is drawn' Audit sa(!lin) can "e a!!lied usin) either non-statistical or
statistical sa(!lin) a!!roaches'
A5' Lhen desi)nin) an audit sa(!le, the auditor+s consideration includes the s!ecific !ur!ose to "e
achieved and the co("ination of audit !rocedures that is likel# to "est achieve that !ur!ose'
%onsideration of the nature of the audit evidence sou)ht and !ossi"le deviation or (isstate(ent
conditions or other characteristics relatin) to that audit evidence will assist the auditor in definin)
what constitutes a deviation or (isstate(ent and what !o!ulation to use for
ISA 940, CEaterialit# in 6lannin) and 6erfor(in) an Audit,D !ara)ra!h 5'
ISA 590 458
sa(!lin)' In fulfillin) the re*uire(ent of !ara)ra!h 10 of ISA 500, when !erfor(in) audit
sa(!lin), the auditor !erfor(s audit !rocedures to o"tain evidence that the !o!ulation fro( which
the audit sa(!le is drawn is co(!lete'
AB' he auditor+s consideration of the !ur!ose of the audit !rocedure, as re*uired "# !ara)ra!h B,
includes a clear understandin) of what constitutes a deviation or (isstate(ent so that all, and onl#,
those conditions that are relevant to the !ur!ose of the audit !rocedure are included in the
evaluation of deviations or !ro;ection of (isstate(ents' For e,a(!le, in a test of details relatin) to
the e,istence of accounts receiva"le, such as confir(ation, !a#(ents (ade "# the custo(er "efore
the confir(ation date "ut received shortl# after that date "# the client, are not considered a
(isstate(ent' Also, a (is!ostin) "etween custo(er accounts does not affect the total accounts
receiva"le "alance' herefore, it (a# not "e a!!ro!riate to consider this a (isstate(ent in
evaluatin) the sa(!le results of this !articular audit !rocedure, even thou)h it (a# have an
i(!ortant effect on other areas of the audit, such as the assess(ent of the risk of fraud or the
ade*uac# of the allowance for dou"tful accounts'
A7' In considerin) the characteristics of a !o!ulation, for tests of controls, the auditor (akes an
assess(ent of the e,!ected rate of deviation "ased on the auditor+s understandin) of the relevant
controls or on the e,a(ination of a s(all nu("er of ite(s fro( the !o!ulation' his assess(ent is
(ade in order to desi)n an audit sa(!le and to deter(ine sa(!le siJe' For e,a(!le, if the
e,!ected rate of deviation is unacce!ta"l# hi)h, the auditor will nor(all# decide not to !erfor(
tests of controls' Si(ilarl#, for tests of details, the auditor (akes an assess(ent of the e,!ected
(isstate(ent in the !o!ulation' If the e,!ected (isstate(ent is hi)h, 100Q e,a(ination or use of
a lar)e sa(!le siJe (a# "e a!!ro!riate when !erfor(in) tests of details'
A8' In considerin) the characteristics of the !o!ulation fro( which the sa(!le will "e drawn, the
auditor (a# deter(ine that stratification or value-wei)hted selection is a!!ro!riate' A!!endi, 1
!rovides further discussion on stratification and value-wei)hted selection'
A5' he decision whether to use a statistical or non-statistical sa(!lin) a!!roach is a (atter for the
auditor+s ;ud)(ent? however, sa(!le siJe is not a valid criterion to distin)uish "etween statistical
and non-statistical a!!roaches'
)a$ple )iBe $Aef. 6ara' 7&
A10' he level of sa(!lin) risk that the auditor is willin) to acce!t affects the sa(!le siJe re*uired' he
lower the risk the auditor is willin) to acce!t, the )reater the sa(!le siJe will need to "e'
A11' he sa(!le siJe can "e deter(ined "# the a!!lication of a statisticall#-"ased for(ula or throu)h
the e,ercise of !rofessional ;ud)(ent' A!!endices 4 and 9 indicate the influences that various
factors t#!icall# have on the deter(ination of sa(!le siJe' Lhen circu(stances are si(ilar, the
effect on sa(!le siJe of
455 ISA 590
factors such as those identified in A!!endices 4 and 9 will "e si(ilar re)ardless of whether a
statistical or non-statistical a!!roach is chosen'
)election of Ite$s for 1esting $Aef. 6ara' 8&
A14' Lith statistical sa(!lin), sa(!le ite(s are selected in a wa# that each sa(!lin) unit has a known
!ro"a"ilit# of "ein) selected' Lith non-statistical sa(!lin), ;ud)(ent is used to select sa(!le
ite(s' 1ecause the !ur!ose of sa(!lin) is to !rovide a reasona"le "asis for the auditor to draw
conclusions a"out the !o!ulation fro( which the sa(!le is selected, it is i(!ortant that the auditor
selects a re!resentative sa(!le, so that "ias is avoided, "# choosin) sa(!le ite(s which have
characteristics t#!ical of the !o!ulation'
A19' he !rinci!al (ethods of selectin) sa(!les are the use of rando( selection, s#ste(atic selection
and ha!haJard selection' 0ach of these (ethods is discussed in A!!endi, 4'
*e'fo'.i"( A-#it *'oce#-'e $Aef. 6ara' 10-11&
A14' An e,a(!le of when it is necessar# to !erfor( the !rocedure on a re!lace(ent ite( is when a
voided check is selected while testin) for evidence of !a#(ent authoriJation' If the auditor is
satisfied that the check has "een !ro!erl# voided such that it does not constitute a deviation, an
a!!ro!riatel# chosen re!lace(ent is e,a(ined'
A15' An e,a(!le of when the auditor is una"le to a!!l# the desi)ned audit !rocedures to a selected
ite( is when docu(entation relatin) to that ite( has "een lost'
A1B' An e,a(!le of a suita"le alternative !rocedure (i)ht "e the e,a(ination of su"se*uent cash
recei!ts to)ether with evidence of their source and the ite(s the# are intended to settle when no
re!l# has "een received in res!onse to a !ositive confir(ation re*uest'
N!t-'e !"# C!-e of De9i!tio" !"# )it!te.e"t $Aef. 6ara' 14&
A17' In anal#Jin) the deviations and (isstate(ents identified, the auditor (a# o"serve that (an# have
a co((on feature, for e,a(!le, t#!e of transaction, location, !roduct line or !eriod of ti(e' In
such circu(stances, the auditor (a# decide to identif# all ite(s in the !o!ulation that !ossess the
co((on feature, and e,tend audit !rocedures to those ite(s' In addition, such deviations or
(isstate(ents (a# "e intentional, and (a# indicate the !ossi"ilit# of fraud'
*'o1ecti"( )it!te.e"t $Aef. 6ara' 14&
A18' he auditor is re*uired to !ro;ect (isstate(ents for the !o!ulation to o"tain a "road view of the
scale of (isstate(ent "ut this !ro;ection (a# not "e sufficient to deter(ine an a(ount to "e
recorded'
ISA 590 4B0
A15' Lhen a (isstate(ent has "een esta"lished as an ano(al#, it (a# "e e,cluded when !ro;ectin)
(isstate(ents to the !o!ulation' @owever, the effect of an# such (isstate(ent, if uncorrected, still
needs to "e considered in addition to the !ro;ection of the non-ano(alous (isstate(ents'
A40' For tests of controls, no e,!licit !ro;ection of deviations is necessar# since the sa(!le deviation
rate is also the !ro;ected deviation rate for the !o!ulation as a whole' ISA 990
9
!rovides )uidance
when deviations fro( controls u!on which the auditor intends to rel# are detected'
E9!0-!ti"( Re-0t of A-#it S!.p0i"( $Aef. 6ara' 15&
A41' For tests of controls, an une,!ectedl# hi)h sa(!le deviation rate (a# lead to an increase in the
assessed risk of (aterial (isstate(ent, unless further audit evidence su"stantiatin) the initial
assess(ent is o"tained' For tests of details, an une,!ectedl# hi)h (isstate(ent a(ount in a sa(!le
(a# cause the auditor to "elieve that a class of transactions or account "alance is (ateriall#
(isstated, in the a"sence of further audit evidence that no (aterial (isstate(ent e,ists'
A44' In the case of tests of details, the !ro;ected (isstate(ent !lus ano(alous (isstate(ent, if an#, is
the auditor+s "est esti(ate of (isstate(ent in the !o!ulation' Lhen the !ro;ected (isstate(ent
!lus ano(alous (isstate(ent, if an#, e,ceeds tolera"le (isstate(ent, the sa(!le does not !rovide
a reasona"le "asis for conclusions a"out the !o!ulation that has "een tested' he closer the
!ro;ected (isstate(ent !lus ano(alous (isstate(ent is to tolera"le (isstate(ent, the (ore likel#
that actual (isstate(ent in the !o!ulation (a# e,ceed tolera"le (isstate(ent' Also if the
!ro;ected (isstate(ent is )reater than the auditor+s e,!ectations of (isstate(ent used to
deter(ine the sa(!le siJe, the auditor (a# conclude that there is an unacce!ta"le sa(!lin) risk
that the actual (isstate(ent in the !o!ulation e,ceeds the tolera"le (isstate(ent' %onsiderin) the
results of other audit !rocedures hel!s the auditor to assess the risk that actual (isstate(ent in the
!o!ulation e,ceeds tolera"le (isstate(ent, and the risk (a# "e reduced if additional audit
evidence is o"tained'
A49' If the auditor concludes that audit sa(!lin) has not !rovided a reasona"le "asis for conclusions
a"out the !o!ulation that has "een tested, the auditor (a#.
1. G Ae*uest (ana)e(ent to investi)ate (isstate(ents that have "een identified and the
!otential for further (isstate(ents and to (ake an# necessar# ad;ust(ents? or
2. G ailor the nature, ti(in) and e,tent of those further audit !rocedures to "est achieve the
re*uired assurance' For e,a(!le, in the case of tests of controls, the auditor (i)ht e,tend the
sa(!le siJe, test an alternative control or (odif# related su"stantive !rocedures'
ISA 990, Che Auditor+s Aes!onses to Assessed Aisks,D !ara)ra!h 17'
4B1 ISA 590
Appe"#i5 7
$Aef. 6ara' A8&
St'!tific!tio" !"# ,!0-e<=ei(hte# Se0ectio"
In considerin) the characteristics of the !o!ulation fro( which the sa(!le will "e drawn, the auditor (a#
deter(ine that stratification or value-wei)hted selection is a!!ro!riate' his A!!endi, !rovides )uidance to
the auditor on the use of stratification and value-wei)hted sa(!lin) techni*ues'
St'!tific!tio"
1. 1' Audit efficienc# (a# "e i(!roved if the auditor stratifies a !o!ulation "# dividin) it into
discrete su"-!o!ulations which have an identif#in) characteristic' he o";ective of stratification is
to reduce the varia"ilit# of ite(s within each stratu( and therefore allow sa(!le siJe to "e
reduced without increasin) sa(!lin) risk'
2. 4' Lhen !erfor(in) tests of details, the !o!ulation is often stratified "# (onetar# value'
his allows )reater audit effort to "e directed to the lar)er value ite(s, as these ite(s (a# contain
the )reatest !otential (isstate(ent in ter(s of overstate(ent' Si(ilarl#, a !o!ulation (a# "e
stratified accordin) to a !articular characteristic that indicates a hi)her risk of (isstate(ent, for
e,a(!le, when testin) the allowance for dou"tful accounts in the valuation of accounts receiva"le,
"alances (a# "e stratified "# a)e'
3. 9' he results of audit !rocedures a!!lied to a sa(!le of ite(s within a stratu( can onl# "e
!ro;ected to the ite(s that (ake u! that stratu(' o draw a conclusion on the entire !o!ulation, the
auditor will need to consider the risk of (aterial (isstate(ent in relation to whatever other strata
(ake u! the entire !o!ulation' For e,a(!le, 40Q of the ite(s in a !o!ulation (a# (ake u! 50Q
of the value of an account "alance' he auditor (a# decide to e,a(ine a sa(!le of these ite(s'
he auditor evaluates the results of this sa(!le and reaches a conclusion on the 50Q of value
se!aratel# fro( the re(ainin) 10Q $on which a further sa(!le or other (eans of )atherin) audit
evidence will "e used, or which (a# "e considered i((aterial&'
4. 4' If a class of transactions or account "alance has "een divided into strata, the (isstate(ent
is !ro;ected for each stratu( se!aratel#' 6ro;ected (isstate(ents for each stratu( are then
co("ined when considerin) the !ossi"le effect of (isstate(ents on the total class of transactions
or account "alance'
,!0-e<=ei(hte# Se0ectio"
5' Lhen !erfor(in) tests of details it (a# "e efficient to identif# the sa(!lin) unit as the individual
(onetar# units that (ake u! the !o!ulation' @avin) selected s!ecific (onetar# units fro( within
the !o!ulation, for e,a(!le, the accounts
receiva"le "alance, the auditor (a# then e,a(ine the !articular ite(s, for e,a(!le, individual "alances,
that contain those (onetar# units' 7ne "enefit of this a!!roach to definin) the sa(!lin) unit is that audit
effort is directed to the lar)er value ite(s "ecause the# have a )reater chance of selection, and can result in
s(aller sa(!le siJes' his a!!roach (a# "e used in con;unction with the s#ste(atic (ethod of sa(!le
selection $descri"ed in A!!endi, 4& and is (ost efficient when selectin) ite(s usin) rando( selection'
Appe"#i5 2
$Aef. 6ara' A11&
E5!.p0e of F!cto' I"f0-e"ci"( S!.p0e Si;e fo' Tet of Co"t'o0
he followin) are factors that the auditor (a# consider when deter(inin) the sa(!le siJe for tests of
controls' hese factors, which need to "e considered to)ether, assu(e the auditor does not (odif# the
nature or ti(in) of tests of controls or otherwise (odif# the a!!roach to su"stantive !rocedures in res!onse
to assessed risks'
ISA 590 A660N=II 4B4 4B5 ISA 590 A660N=II
Appe"#i5 3
$Aef. 6ara' A11&
E5!.p0e of F!cto' I"f0-e"ci"( S!.p0e Si;e fo' Tet of Det!i0
he followin) are factors that the auditor (a# consider when deter(inin) the sa(!le siJe for tests of
details' hese factors, which need to "e considered to)ether, assu(e the auditor does not (odif# the
a!!roach to tests of controls or otherwise (odif# the nature or ti(in) of su"stantive !rocedures in res!onse
to the assessed risks'
ISA 590 A660N=II 4BB 4B7 ISA 590 A660N=II ISA 590 A660N=II 4B8
Appe"#i5 6
$Aef. 6ara' A19&
S!.p0e Se0ectio" )etho#
here are (an# (ethods of selectin) sa(!les' he !rinci!al (ethods are as follows.
INTERNATIONAL STANDARD ON AUDITING @60
AUDITING ACCOUNTING ESTI)ATES4 INCLUDING FAIR ,ALUE ACCOUNTING ESTI)ATES4 AND RELATED
DISCLOSURES
CONTENTS
6ara)ra!h
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1
Nature of Accountin) 0sti(ates ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4-4
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' B
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 7
Re2-i'e.e"t
Aisk Assess(ent 6rocedures and Aelated Activities '''''''''''''''''''''''''''''' 8-5
Identif#in) and Assessin) the Aisks of Eaterial Eisstate(ent '''''''''''''' 10-11
Aes!onses to the Assessed Aisks of Eaterial Eisstate(ent ''''''''''''''''''' 14-14
Further Su"stantive 6rocedures to Aes!ond to Si)nificant Aisks ''''''''''' 15-17
0valuatin) the Aeasona"leness of the Accountin) 0sti(ates, and
=eter(inin) Eisstate(ents ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 18
=isclosures Aelated to Accountin) 0sti(ates ''''''''''''''''''''''''''''''''''''''''' 15-40
Indicators of 6ossi"le Eana)e(ent 1ias '''''''''''''''''''''''''''''''''''''''''''''''' 41
Lritten Ae!resentations '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 44
=ocu(entation '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 49
Nature of Accountin) 0sti(ates ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1-A11
Aisk Assess(ent 6rocedures and Aelated Activities '''''''''''''''''''''''''''''' A14-A44
Identif#in) and Assessin) the Aisks of Eaterial Eisstate(ent '''''''''''''' A45-A51
Aes!onses to the Assessed Aisks of Eaterial Eisstate(ent ''''''''''''''''''' A54-A101
Further Su"stantive 6rocedures to Aes!ond to Si)nificant Aisks ''''''''''' A104-A115
ISA 540 470
International Standard on Auditin) $ISA& 540, CAuditin) Accountin) 0sti(ates, Includin) Fair Falue
Accountin) 0sti(ates, and Aelated =isclosuresD should "e read in con;unction with ISA 400, C7verall
471 ISA 540
accountin) esti(ates, includin) fair value accountin) esti(ates, and related disclosures in an audit
of financial state(ents' S!ecificall#, it e,!ands on how ISA 915
1
and ISA 990
4
and other relevant
ISAs are to "e a!!lied in relation to accountin) esti(ates' It also includes re*uire(ents and
)uidance on (isstate(ents of individual accountin) esti(ates, and indicators of !ossi"le
(ana)e(ent "ias'
N!t-'e of Acco-"ti"( Eti.!te
1. 4' So(e financial state(ent ite(s cannot "e (easured !recisel#, "ut can onl# "e esti(ated'
For !ur!oses of this ISA, such financial state(ent ite(s are referred to as accountin) esti(ates'
he nature and relia"ilit# of infor(ation availa"le to (ana)e(ent to su!!ort the (akin) of an
accountin) esti(ate varies widel#, which there"# affects the de)ree of esti(ation uncertaint#
associated with accountin) esti(ates' he de)ree of esti(ation uncertaint# affects, in turn, the
risks of (aterial (isstate(ent of accountin) esti(ates, includin) their susce!ti"ilit# to
unintentional or intentional (ana)e(ent "ias' $Aef. 6ara' A1-A11&
2. 9' he (easure(ent o";ective of accountin) esti(ates can var# de!endin) on the a!!lica"le
financial re!ortin) fra(ework and the financial ite( "ein) re!orted' he (easure(ent o";ective
for so(e accountin) esti(ates is to forecast the outco(e of one or (ore transactions, events or
conditions )ivin) rise to the need for the accountin) esti(ate' For other accountin) esti(ates,
includin) (an# fair value accountin) esti(ates, the (easure(ent o";ective is different, and is
e,!ressed in ter(s of the value of a current transaction or financial state(ent ite( "ased on
conditions !revalent at the (easure(ent date, such as esti(ated (arket !rice for a !articular t#!e
of asset or lia"ilit#' For e,a(!le, the a!!lica"le financial re!ortin) fra(ework (a# re*uire fair
value (easure(ent "ased on an assu(ed h#!othetical current transaction "etween knowled)ea"le,
willin) !arties $so(eti(es referred to as C(arket!lace !artici!antsD or e*uivalent& in an ar(+s
len)th transaction, rather than the settle(ent of a transaction at so(e !ast or future date'
9
3. 4' A difference "etween the outco(e of an accountin) esti(ate and the a(ount ori)inall#
reco)niJed or disclosed in the financial state(ents does not necessaril# re!resent a (isstate(ent
of the financial state(ents' his is !articularl# the case
1
=ifferent definitions of fair value (a# e,ist a(on) financial re!ortin) fra(eworks'
ISA 540 474
for fair value accountin) esti(ates, as an# o"served outco(e is invaria"l# affected "# events or
conditions su"se*uent to the date at which the (easure(ent is esti(ated for !ur!oses of the
Effecti9e D!te
15, 4005'
O$1ecti9e
B' he o";ective of the auditor is to o"tain sufficient a!!ro!riate audit evidence a"out whether.
1$a& accountin) esti(ates, includin) fair value accountin) esti(ates, in the financial
state(ents, whether reco)niJed or disclosed, are reasona"le? and
2$"& related disclosures in the financial state(ents are ade*uate, in the conte,t of the a!!lica"le
Defi"itio"
1$a&Accountin) esti(ate K An a!!ro,i(ation of a (onetar# a(ount in the a"sence of a !recise (eans
of (easure(ent' his ter( is used for an a(ount (easured at fair value where there is esti(ation
uncertaint#, as well as for other a(ounts that re*uire esti(ation' Lhere this ISA addresses onl#
accountin) esti(ates involvin) (easure(ent at fair value, the ter( Cfair value accountin)
esti(atesD is used'
2$"& Auditor+s !oint esti(ate or auditor+s ran)e K he a(ount, or ran)e of a(ounts, res!ectivel#,
derived fro( audit evidence for use in evaluatin) (ana)e(ent+s !oint esti(ate'
3$c& 0sti(ation uncertaint# K he susce!ti"ilit# of an accountin) esti(ate and related
disclosures to an inherent lack of !recision in its (easure(ent'
4$d& Eana)e(ent "ias K A lack of neutralit# "# (ana)e(ent in the !re!aration of infor(ation'
5$e&Eana)e(ent+s !oint esti(ate K he a(ount selected "# (ana)e(ent for reco)nition or disclosure
in the financial state(ents as an accountin) esti(ate'
479 ISA 540
$f& 7utco(e of an accountin) esti(ate K he actual (onetar# a(ount which results fro( the
resolution of the underl#in) transaction$s&, event$s& or condition$s& addressed "# the
accountin) esti(ate'
8' Lhen !erfor(in) risk assess(ent !rocedures and related activities to o"tain an understandin) of
the entit# and its environ(ent, includin) the entit#+s internal control, as re*uired "# ISA 915,
4
the
auditor shall o"tain an understandin) of the followin) in order to !rovide a "asis for the
identification and assess(ent of the risks of (aterial (isstate(ent for accountin) esti(ates. $Aef.
6ara' A14&
1$a& he re*uire(ents of the a!!lica"le financial re!ortin) fra(ework relevant to accountin)
esti(ates, includin) related disclosures' $Aef. 6ara' A19-A15&
2$"& @ow (ana)e(ent identifies those transactions, events and conditions that (a# )ive rise
to the need for accountin) esti(ates to "e reco)niJed or disclosed in the financial state(ents' In
o"tainin) this understandin), the auditor shall (ake in*uiries of (ana)e(ent a"out chan)es in
circu(stances that (a# )ive rise to new, or the need to revise e,istin), accountin) esti(ates' $Aef.
6ara' A1B-A41&
1$c&@ow (ana)e(ent (akes the accountin) esti(ates, and an understandin) of the data on which
the# are "ased, includin). $Aef. 6ara' A44-A49&
2$i& he (ethod, includin) where a!!lica"le the (odel, used in (akin) the accountin) esti(ate?
3$ii& Aelevant controls? $Aef. 6ara' A47-A48&
$iii& Lhether (ana)e(ent has used an e,!ert? $Aef. 6ara' A45-A90&
1$iv& he assu(!tions underl#in) the accountin) esti(ates? $Aef. 6ara' A91-A9B&
2$v& Lhether there has "een or ou)ht to have "een a chan)e fro( the !rior !eriod in the (ethods for
(akin) the accountin) esti(ates, and if so, wh#? and $Aef. 6ara' A97&
3$vi& Lhether and, if so, how (ana)e(ent has assessed the effect of esti(ation uncertaint#'
$Aef. 6ara' A98&
ISA 915, !ara)ra!hs 5-B and 11-14'
ISA 540 474
5' he auditor shall review the outco(e of accountin) esti(ates included in the !rior !eriod financial
state(ents, or, where a!!lica"le, their su"se*uent re-esti(ation for the !ur!ose of the current
!eriod' he nature and e,tent of the auditor+s review takes account of the nature of the accountin)
esti(ates, and whether the infor(ation o"tained fro( the review would "e relevant to identif#in)
and assessin) risks of (aterial (isstate(ent of accountin) esti(ates (ade in the current !eriod
financial state(ents' @owever, the review is not intended to call into *uestion the ;ud)(ents (ade
in the !rior !eriods that were "ased on infor(ation availa"le at the ti(e' $Aef. 6ara' A95-A44&
1. 10' In identif#in) and assessin) the risks of (aterial (isstate(ent, as re*uired "# ISA 915,
5

the auditor shall evaluate the de)ree of esti(ation uncertaint# associated with an accountin)
esti(ate' $Aef. 6ara' A45-A4B&
2. 11' he auditor shall deter(ine whether, in the auditor+s ;ud)(ent, an# of those accountin)
esti(ates that have "een identified as havin) hi)h esti(ation uncertaint# )ive rise to si)nificant
risks' $Aef. 6ara' A47-A51&
Repo"e to the Aee# Ri% of )!te'i!0 )it!te.e"t
114' 1ased on the assessed risks of (aterial (isstate(ent, the auditor shall deter(ine. $Aef.
6ara' A54&
2$a& Lhether (ana)e(ent has a!!ro!riatel# a!!lied the re*uire(ents of the a!!lica"le financial
re!ortin) fra(ework relevant to the accountin) esti(ate? and $Aef. 6ara' A59-A5B&
3$"& Lhether the (ethods for (akin) the accountin) esti(ates are a!!ro!riate and have "een
a!!lied consistentl#, and whether chan)es, if an#, in accountin) esti(ates or in the (ethod for
(akin) the( fro( the !rior !eriod are a!!ro!riate in the circu(stances' $Aef. 6ara' A57-A58&
2. 19' In res!ondin) to the assessed risks of (aterial (isstate(ent, as re*uired "# ISA 990,
B
the
auditor shall undertake one or (ore of the followin), takin) account of the nature of the
accountin) esti(ate. $Aef. 6ara' A55-AB1&
$a& =eter(ine whether events occurrin) u! to the date of the auditor+s re!ort !rovide audit
evidence re)ardin) the accountin) esti(ate' $Aef. 6ara' AB4-AB7&
5
ISA 915, !ara)ra!h 45' B
475 ISA 540
1$"& est how (ana)e(ent (ade the accountin) esti(ate and the data on which it is "ased' In
doin) so, the auditor shall evaluate whether. $Aef. 6ara' AB8-A70&
2$i& he (ethod of (easure(ent used is a!!ro!riate in the circu(stances? and $Aef. 6ara' A71-
A7B&
3$ii& he assu(!tions used "# (ana)e(ent are reasona"le in li)ht of the (easure(ent o";ectives
of the a!!lica"le financial re!ortin) fra(ework' $Aef. 6ara' A77-A89&
2$c&est the o!eratin) effectiveness of the controls over how (ana)e(ent (ade the accountin)
esti(ate, to)ether with a!!ro!riate su"stantive !rocedures' $Aef. 6ara' A84-A8B&
1$d& =evelo! a !oint esti(ate or a ran)e to evaluate (ana)e(ent+s !oint esti(ate' For this
!ur!ose. $Aef. 6ara' A87-A51&
2$i& If the auditor uses assu(!tions or (ethods that differ fro( (ana)e(ent+s, the auditor shall
o"tain an understandin) of (ana)e(ent+s assu(!tions or (ethods sufficient to esta"lish that
the auditor+s !oint esti(ate or ran)e takes into account relevant varia"les and to evaluate an#
si)nificant differences fro( (ana)e(ent+s !oint esti(ate' $Aef. 6ara' A54&
3$ii& If the auditor concludes that it is a!!ro!riate to use a ran)e, the auditor shall narrow the
ran)e, "ased on audit evidence availa"le, until all outco(es within the ran)e are considered
reasona"le' $Aef. 6ara' A59-A55&
14' In deter(inin) the (atters identified in !ara)ra!h 14 or in res!ondin) to the assessed risks of
(aterial (isstate(ent in accordance with !ara)ra!h 19, the auditor shall consider whether
s!ecialiJed skills or knowled)e in relation to one or (ore as!ects of the accountin) esti(ates are
re*uired in order to o"tain sufficient a!!ro!riate audit evidence' $Aef. 6ara' A5B-A101&
F-'the' S-$t!"ti9e *'oce#-'e to Repo"# to Si("ific!"t Ri%
/sti$ation "ncertainty
15' For accountin) esti(ates that )ive rise to si)nificant risks, in addition to other su"stantive
!rocedures !erfor(ed to (eet the re*uire(ents of ISA 990,
7
the auditor shall evaluate the
followin). $Aef. 6ara' A104&
$a& @ow (ana)e(ent has considered alternative assu(!tions or outco(es, and wh# it has
re;ected the(, or how (ana)e(ent has otherwise
ISA 540 47B
addressed esti(ation uncertaint# in (akin) the accountin) esti(ate' $Aef. 6ara' A109-
A10B&
1$"& Lhether the si)nificant assu(!tions used "# (ana)e(ent are reasona"le' $Aef. 6ara' A107-
A105&
2$c&Lhere relevant to the reasona"leness of the si)nificant assu(!tions used "# (ana)e(ent or the
a!!ro!riate a!!lication of the a!!lica"le financial re!ortin) fra(ework, (ana)e(ent+s intent to
carr# out s!ecific courses of action and its a"ilit# to do so' $Aef. 6ara' A110&
1B' If, in the auditor+s ;ud)(ent, (ana)e(ent has not ade*uatel# addressed the effects of esti(ation
uncertaint# on the accountin) esti(ates that )ive rise to si)nificant risks, the auditor shall, if
considered necessar#, develo! a ran)e with which to evaluate the reasona"leness of the accountin)
esti(ate' $Aef. 6ara' A111-A114&
+ecognition and <easure$ent Criteria
17' For accountin) esti(ates that )ive rise to si)nificant risks, the auditor shall o"tain sufficient
a!!ro!riate audit evidence a"out whether.
1$a& (ana)e(ent+s decision to reco)niJe, or to not reco)niJe, the accountin) esti(ates in the financial
state(ents? and $Aef. 6ara' A119-A114&
2$"& the selected (easure(ent "asis for the accountin) esti(ates, $Aef. 6ara' A115&
are in accordance with the re*uire(ents of the a!!lica"le financial re!ortin) fra(ework'
E9!0-!ti"( the Re!o"!$0e"e of the Acco-"ti"( Eti.!te4 !"# Dete'.i"i"( )it!te.e"t
18' he auditor shall evaluate, "ased on the audit evidence, whether the accountin) esti(ates in the
financial state(ents are either reasona"le in the conte,t of the a!!lica"le financial re!ortin)
fra(ework, or are (isstated' $Aef. 6ara' A11BA115&
Dic0o-'e Re0!te# to Acco-"ti"( Eti.!te
1. 15' he auditor shall o"tain sufficient a!!ro!riate audit evidence a"out whether the
disclosures in the financial state(ents related to accountin) esti(ates are in accordance with the
re*uire(ents of the a!!lica"le financial re!ortin) fra(ework' $Aef. 6ara' A140-A141&
2. 40' For accountin) esti(ates that )ive rise to si)nificant risks, the auditor shall also evaluate
the ade*uac# of the disclosure of their esti(ation uncertaint# in the financial state(ents in the
conte,t of the a!!lica"le financial re!ortin) fra(ework' $Aef. 6ara' A144-A149&
477 ISA 540
I"#ic!to' of *oi$0e )!"!(e.e"t Bi!
41' he auditor shall review the ;ud)(ents and decisions (ade "# (ana)e(ent in the (akin) of
accountin) esti(ates to identif# whether there are indicators of !ossi"le (ana)e(ent "ias'
Indicators of !ossi"le (ana)e(ent "ias do not the(selves constitute (isstate(ents for the
!ur!oses of drawin) conclusions on the reasona"leness of individual accountin) esti(ates' $Aef.
6ara' A144A145&
44' he auditor shall o"tain written re!resentations fro( (ana)e(ent and, where a!!ro!riate, those
char)ed with )overnance whether the# "elieve si)nificant assu(!tions used in (akin) accountin)
esti(ates are reasona"le' $Aef. 6ara' A14B-A147&
Doc-.e"t!tio"
8
1. $a& he "asis for the auditor+s conclusions a"out the reasona"leness of accountin) esti(ates
and their disclosure that )ive rise to si)nificant risks? and
2. $"& Indicators of !ossi"le (ana)e(ent "ias, if an#' $Aef. 6ara' A148&
OOO
N!t-'e of Acco-"ti"( Eti.!te $Aef. 6ara' 4&
A1' 1ecause of the uncertainties inherent in "usiness activities, so(e financial state(ent ite(s can
onl# "e esti(ated' Further, the s!ecific characteristics of an asset, lia"ilit# or co(!onent of e*uit#,
or the "asis of or (ethod of (easure(ent !rescri"ed "# the financial re!ortin) fra(ework, (a#
)ive rise to the need to esti(ate a financial state(ent ite(' So(e financial re!ortin) fra(eworks
!rescri"e s!ecific (ethods of (easure(ent and the disclosures that are re*uired to "e (ade in the
financial state(ents, while other financial re!ortin) fra(eworks are less s!ecific' he A!!endi, to
this ISA discusses fair value (easure(ents and disclosures under different financial re!ortin)
fra(eworks'
A4' So(e accountin) esti(ates involve relativel# low esti(ation uncertaint# and (a# )ive rise to
lower risks of (aterial (isstate(ents, for e,a(!le.
ISA 540 478
% G Accountin) esti(ates arisin) in entities that en)a)e in "usiness activities that are not
co(!le,'
% G Accountin) esti(ates that are fre*uentl# (ade and u!dated "ecause the# relate to routine
transactions'
% G Accountin) esti(ates derived fro( data that is readil# availa"le, such as !u"lished
interest rate data or e,chan)e-traded !rices of securities' Such data (a# "e referred to as
Co"serva"leD in the conte,t of a fair value accountin) esti(ate'
% G Fair value accountin) esti(ates where the (ethod of (easure(ent !rescri"ed "# the
a!!lica"le financial re!ortin) fra(ework is si(!le and a!!lied easil# to the asset or lia"ilit#
re*uirin) (easure(ent at fair value'
% G Fair value accountin) esti(ates where the (odel used to (easure the accountin) esti(ate
is well-known or )enerall# acce!ted, !rovided that the assu(!tions or in!uts to the (odel are
o"serva"le'
A9' For so(e accountin) esti(ates, however, there (a# "e relativel# hi)h esti(ation uncertaint#,
!articularl# where the# are "ased on si)nificant assu(!tions, for e,a(!le.
% G Accountin) esti(ates relatin) to the outco(e of liti)ation'
% G Fair value accountin) esti(ates for derivative financial instru(ents not !u"licl# traded'
% G Fair value accountin) esti(ates for which a hi)hl# s!ecialiJed entit#-develo!ed (odel is
used or for which there are assu(!tions or in!uts that cannot "e o"served in the (arket!lace'
A4' he de)ree of esti(ation uncertaint# varies "ased on the nature of the accountin) esti(ate, the
e,tent to which there is a )enerall# acce!ted (ethod or (odel used to (ake the accountin) esti(ate,
and the su";ectivit# of the assu(!tions used to (ake the accountin) esti(ate' In so(e cases,
esti(ation uncertaint# associated with an accountin) esti(ate (a# "e so )reat that the reco)nition
criteria in the a!!lica"le financial re!ortin) fra(ework are not (et and the accountin) esti(ate
cannot "e (ade'
A5' Not all financial state(ent ite(s re*uirin) (easure(ent at fair value, involve esti(ation uncertaint#'
For e,a(!le, this (a# "e the case for so(e financial state(ent ite(s where there is an active and
o!en (arket that !rovides readil# availa"le and relia"le infor(ation on the !rices at which actual
e,chan)es occur, in which case the e,istence of !u"lished !rice *uotations ordinaril# is the "est
audit evidence of fair value' @owever, esti(ation uncertaint# (a# e,ist even when the valuation
(ethod and data are well defined' For e,a(!le, valuation of securities *uoted on an active and o!en
(arket at the listed (arket
475 ISA 540
!rice (a# re*uire ad;ust(ent if the holdin) is si)nificant in relation to the (arket or is su";ect to
restrictions in (arketa"ilit#' In addition, )eneral econo(ic circu(stances !revailin) at the ti(e,
for e,a(!le, illi*uidit# in a !articular (arket, (a# i(!act esti(ation uncertaint#'
AB' Additional e,a(!les of situations where accountin) esti(ates, other than fair value accountin)
esti(ates, (a# "e re*uired include.
% G Allowance for dou"tful accounts'
% G Inventor# o"solescence'
% G Larrant# o"li)ations'
% G =e!reciation (ethod or asset useful life'
% G 6rovision a)ainst the carr#in) a(ount of an invest(ent where there is uncertaint#
re)ardin) its recovera"ilit#'
% G 7utco(e of lon) ter( contracts'
% G %osts arisin) fro( liti)ation settle(ents and ;ud)(ents'
A7' Additional e,a(!les of situations where fair value accountin) esti(ates (a# "e re*uired include.
1. G %o(!le, financial instru(ents, which are not traded in an active and o!en (arket'
2. G Share-"ased !a#(ents'
3. G 6ro!ert# or e*ui!(ent held for dis!osal'
4. G %ertain assets or lia"ilities ac*uired in a "usiness co("ination, includin) )oodwill and
intan)i"le assets'
5. G ransactions involvin) the e,chan)e of assets or lia"ilities "etween inde!endent !arties
without (onetar# consideration, for e,a(!le, a non-(onetar# e,chan)e of !lant facilities in
different lines of "usiness'
A8' 0sti(ation involves ;ud)(ents "ased on infor(ation availa"le when the financial state(ents are
!re!ared' For (an# accountin) esti(ates, these include (akin) assu(!tions a"out (atters that are
uncertain at the ti(e of esti(ation' he auditor is not res!onsi"le for !redictin) future conditions,
transactions or events that, if known at the ti(e of the audit, (i)ht have si)nificantl# affected
(ana)e(ent+s actions or the assu(!tions used "# (ana)e(ent'
<anage$ent =ias
A5' Financial re!ortin) fra(eworks often call for neutralit#, that is, freedo( fro( "ias' Accountin)
esti(ates are i(!recise, however, and can "e influenced "# (ana)e(ent ;ud)(ent' Such
;ud)(ent (a# involve unintentional or
ISA 540 480
intentional (ana)e(ent "ias $for e,a(!le, as a result of (otivation to achieve a desired result&'
he susce!ti"ilit# of an accountin) esti(ate to (ana)e(ent "ias increases with the su";ectivit#
involved in (akin) it' Unintentional (ana)e(ent "ias and the !otential for intentional
(ana)e(ent "ias are inherent in su";ective decisions that are often re*uired in (akin) an
accountin) esti(ate' For continuin) audits, indicators of !ossi"le (ana)e(ent "ias identified
durin) the audit of the !recedin) !eriods influence the !lannin) and risk identification and
assess(ent activities of the auditor in the current !eriod'
A10' Eana)e(ent "ias can "e difficult to detect at an account level' It (a# onl# "e identified when
considered in the a))re)ate of )rou!s of accountin) esti(ates or all accountin) esti(ates, or when
o"served over a nu("er of accountin) !eriods' Althou)h so(e for( of (ana)e(ent "ias is
inherent in su";ective decisions, in (akin) such ;ud)(ents there (a# "e no intention "#
(ana)e(ent to (islead the users of financial state(ents' Lhere, however, there is intention to
(islead, (ana)e(ent "ias is fraudulent in nature'
A11' 6u"lic sector entities (a# have si)nificant holdin)s of s!ecialiJed assets for which there are no
readil# availa"le and relia"le sources of infor(ation for !ur!oses of (easure(ent at fair value or
other current value "ases, or a co("ination of "oth' 7ften s!ecialiJed assets held do not )enerate
cash flows and do not have an active (arket' Eeasure(ent at fair value therefore ordinaril#
re*uires esti(ation and (a# "e co(!le,, and in so(e rare cases (a# not "e !ossi"le at all'
Ri% Ae.e"t *'oce#-'e !"# Re0!te# Acti9itie $Aef. 6ara' 8&
A14' he risk assess(ent !rocedures and related activities re*uired "# !ara)ra!h 8 of this ISA assist the
auditor in develo!in) an e,!ectation of the nature and t#!e of accountin) esti(ates that an entit#
(a# have' he auditor+s !ri(ar# consideration is whether the understandin) that has "een
o"tained is sufficient to identif# and assess the risks of (aterial (isstate(ent in relation to
accountin) esti(ates, and to !lan the nature, ti(in) and e,tent of further audit !rocedures'
,btaining an "nderstanding of the +e>uire$ents of the Applicable Financial +eporting
Fra$e#or. $Aef. 6ara' 8$a&&
A19' 7"tainin) an understandin) of the re*uire(ents of the a!!lica"le financial re!ortin) fra(ework
assists the auditor in deter(inin) whether it, for e,a(!le.
G 6rescri"es certain conditions for the reco)nition,
5
or (ethods for the (easure(ent, of
Eost financial re!ortin) fra(eworks re*uire incor!oration in the "alance sheet or inco(e state(ent of ite(s that satisf# their
criteria for reco)nition' =isclosure of accountin) !olicies or addin) notes to the financial state(ents does not rectif# a failure to
reco)niJe such ite(s, includin) accountin) esti(ates'
481 ISA 540
% G S!ecifies certain conditions that !er(it or re*uire (easure(ent at a fair value, for
e,a(!le, "# referrin) to (ana)e(ent+s intentions to carr# out certain courses of action with
res!ect to an asset or lia"ilit#'
% G S!ecifies re*uired or !er(itted disclosures'
7"tainin) this understandin) also !rovides the auditor with a "asis for discussion with
(ana)e(ent a"out how (ana)e(ent has a!!lied those re*uire(ents relevant to the accountin)
esti(ate, and the auditor+s deter(ination of whether the# have "een a!!lied a!!ro!riatel#'
A14' Financial re!ortin) fra(eworks (a# !rovide )uidance for (ana)e(ent on deter(inin) !oint
esti(ates where alternatives e,ist' So(e financial re!ortin) fra(eworks, for e,a(!le, re*uire that
the !oint esti(ate selected "e the alternative that reflects (ana)e(ent+s ;ud)(ent of the (ost
likel# outco(e'
10
7thers (a# re*uire, for e,a(!le, use of a discounted !ro"a"ilit#-wei)hted
e,!ected value' In so(e cases, (ana)e(ent (a# "e a"le to (ake a !oint esti(ate directl#' In
other cases, (ana)e(ent (a# "e a"le to (ake a relia"le !oint esti(ate onl# after considerin)
alternative assu(!tions or outco(es fro( which it is a"le to deter(ine a !oint esti(ate'
A15' Financial re!ortin) fra(eworks (a# re*uire the disclosure of infor(ation concernin) the
si)nificant assu(!tions to which the accountin) esti(ate is !articularl# sensitive' Further(ore,
where there is a hi)h de)ree of esti(ation uncertaint#, so(e financial re!ortin) fra(eworks do not
!er(it an accountin) esti(ate to "e reco)niJed in the financial state(ents, "ut certain disclosures
(a# "e re*uired in the notes to the financial state(ents'
,btaining an "nderstanding of -o# <anage$ent Identifies the Aeed for Accounting /sti$ates $Aef. 6ara'
8$"&&
A1B' he !re!aration of the financial state(ents re*uires (ana)e(ent to deter(ine whether a
transaction, event or condition )ives rise to the need to (ake an accountin) esti(ate, and that all
necessar# accountin) esti(ates have "een reco)niJed, (easured and disclosed in the financial
state(ents in accordance with the a!!lica"le financial re!ortin) fra(ework'
A17' Eana)e(ent+s identification of transactions, events and conditions that )ive rise to the need for
accountin) esti(ates is likel# to "e "ased on.
1. G Eana)e(ent+s knowled)e of the entit#+s "usiness and the industr# in which it o!erates'
2. G Eana)e(ent+s knowled)e of the i(!le(entation of "usiness strate)ies in the current
!eriod'
=ifferent financial re!ortin) fra(eworks (a# use different ter(inolo)# to descri"e !oint esti(ates deter(ined in this wa#'
ISA 540 484
G Lhere a!!lica"le, (ana)e(ent+s cu(ulative e,!erience of !re!arin) the entit#+s financial
state(ents in !rior !eriods'
In such cases, the auditor (a# o"tain an understandin) of how (ana)e(ent identifies the need for
accountin) esti(ates !ri(aril# throu)h in*uir# of (ana)e(ent' In other cases, where
(ana)e(ent+s !rocess is (ore structured, for e,a(!le, when (ana)e(ent has a for(al risk
(ana)e(ent function, the auditor (a# !erfor( risk assess(ent !rocedures directed at the (ethods
and !ractices followed "# (ana)e(ent for !eriodicall# reviewin) the circu(stances that )ive rise
to the accountin) esti(ates and re-esti(atin) the accountin) esti(ates as necessar#' he
co(!leteness of accountin) esti(ates is often an i(!ortant consideration of the auditor,
!articularl# accountin) esti(ates relatin) to lia"ilities'
A18' he auditor+s understandin) of the entit# and its environ(ent o"tained durin) the !erfor(ance of
risk assess(ent !rocedures, to)ether with other audit evidence o"tained durin) the course of the
audit, assist the auditor in identif#in) circu(stances, or chan)es in circu(stances, that (a# )ive
rise to the need for an accountin) esti(ate'
A15' In*uiries of (ana)e(ent a"out chan)es in circu(stances (a# include, for e,a(!le, in*uiries
a"out whether.
% G he entit# has en)a)ed in new t#!es of transactions that (a# )ive rise to accountin)
esti(ates'
% G er(s of transactions that )ave rise to accountin) esti(ates have chan)ed'
% G Accountin) !olicies relatin) to accountin) esti(ates have chan)ed, as a result of chan)es
to the re*uire(ents of the a!!lica"le financial re!ortin) fra(ework or otherwise'
% G Ae)ulator# or other chan)es outside the control of (ana)e(ent have occurred that (a#
re*uire (ana)e(ent to revise, or (ake new, accountin) esti(ates'
% G New conditions or events have occurred that (a# )ive rise to the need for new or revised
A40' =urin) the audit, the auditor (a# identif# transactions, events and conditions that )ive rise to the
need for accountin) esti(ates that (ana)e(ent failed to identif#' ISA 915 deals with
circu(stances where the auditor identifies risks of (aterial (isstate(ent that (ana)e(ent failed
to identif#, includin) deter(inin) whether there is a si)nificant deficienc# in internal control with
re)ard to the entit#+s risk assess(ent !rocesses'
11
ISA 915, !ara)ra!h 1B'
489 ISA 540
A41' 7"tainin) this understandin) for s(aller entities is often less co(!le, as their "usiness activities
are often li(ited and transactions are less co(!le,' Further, often a sin)le !erson, for e,a(!le the
owner-(ana)er, identifies the need to (ake an accountin) esti(ate and the auditor (a# focus
in*uiries accordin)l#'
,btaining an "nderstanding of -o# <anage$ent <a.es the Accounting /sti$ates
$Aef. 6ara' 8$c&&
A44' he !re!aration of the financial state(ents also re*uires (ana)e(ent to esta"lish financial
re!ortin) !rocesses for (akin) accountin) esti(ates, includin) ade*uate internal control' Such
!rocesses include the followin).
1. G Selectin) a!!ro!riate accountin) !olicies and !rescri"in) esti(ation !rocesses, includin)
a!!ro!riate esti(ation or valuation (ethods, includin), where a!!lica"le, (odels'
2. G =evelo!in) or identif#in) relevant data and assu(!tions that affect accountin) esti(ates'
3. G 6eriodicall# reviewin) the circu(stances that )ive rise to the accountin) esti(ates and
re-esti(atin) the accountin) esti(ates as necessar#'
A49' Eatters that the auditor (a# consider in o"tainin) an understandin) of how (ana)e(ent (akes
the accountin) esti(ates include, for e,a(!le.
1. G he t#!es of accounts or transactions to which the accountin) esti(ates relate $for
e,a(!le, whether the accountin) esti(ates arise fro( the recordin) of routine and recurrin)
transactions or whether the# arise fro( non-recurrin) or unusual transactions&'
2. G Lhether and, if so, how (ana)e(ent has used reco)niJed (easure(ent techni*ues for
(akin) !articular accountin) esti(ates'
3. G Lhether the accountin) esti(ates were (ade "ased on data availa"le at an interi( date
and, if so, whether and how (ana)e(ent has taken into account the effect of events, transactions
and chan)es in circu(stances occurrin) "etween that date and the !eriod end'
Eethod of Eeasure(ent, Includin) the Use of Eodels $Aef. 6ara' 8$c&$i&&
A44' In so(e cases, the a!!lica"le financial re!ortin) fra(ework (a# !rescri"e the (ethod of
(easure(ent for an accountin) esti(ate, for e,a(!le, a !articular (odel that is to "e used in
(easurin) a fair value esti(ate' In (an# cases, however, the a!!lica"le financial re!ortin)
fra(ework does not !rescri"e the (ethod of (easure(ent, or (a# s!ecif# alternative (ethods for
(easure(ent'
ISA 540 484
A45' Lhen the a!!lica"le financial re!ortin) fra(ework does not !rescri"e a !articular (ethod to "e
used in the circu(stances, (atters that the auditor (a# consider in o"tainin) an understandin) of
the (ethod or, where a!!lica"le the (odel, used to (ake accountin) esti(ates include, for
e,a(!le.
1. G @ow (ana)e(ent considered the nature of the asset or lia"ilit# "ein) esti(ated when
selectin) a !articular (ethod'
2. G Lhether the entit# o!erates in a !articular "usiness, industr# or environ(ent in which
there are (ethods co((onl# used to (ake the !articular t#!e of accountin) esti(ate'
A4B' here (a# "e )reater risks of (aterial (isstate(ent, for e,a(!le, in cases when (ana)e(ent has
internall# develo!ed a (odel to "e used to (ake the accountin) esti(ate or is de!artin) fro( a
(ethod co((onl# used in a !articular industr# or environ(ent'
Aelevant %ontrols $Aef. 6ara' 8$c&$ii&&
A47' Eatters that the auditor (a# consider in o"tainin) an understandin) of relevant controls include,
for e,a(!le, the e,!erience and co(!etence of those who (ake the accountin) esti(ates, and
controls related to.
% G @ow (ana)e(ent deter(ines the co(!leteness, relevance and accurac# of the data used
to develo! accountin) esti(ates'
% G he review and a!!roval of accountin) esti(ates, includin) the assu(!tions or in!uts
used in their develo!(ent, "# a!!ro!riate levels of (ana)e(ent and, where a!!ro!riate, those
% G he se)re)ation of duties "etween those co((ittin) the entit# to the underl#in)
transactions and those res!onsi"le for (akin) the accountin) esti(ates, includin) whether the
assi)n(ent of res!onsi"ilities a!!ro!riatel# takes account of the nature of the entit# and its
!roducts or services $for e,a(!le, in the case of a lar)e financial institution, relevant se)re)ation
of duties (a# include an inde!endent function res!onsi"le for esti(ation and validation of fair
value !ricin) of the entit#+s !ro!rietar# financial !roducts staffed "# individuals whose
re(uneration is not tied to such !roducts&'
A48' 7ther controls (a# "e relevant to (akin) the accountin) esti(ates de!endin) on the
circu(stances' For e,a(!le, if the entit# uses s!ecific (odels for (akin) accountin) esti(ates,
(ana)e(ent (a# !ut into !lace s!ecific !olicies and !rocedures around such (odels' Aelevant
controls (a# include, for e,a(!le, those esta"lished over.
G he desi)n and develo!(ent, or selection, of a !articular (odel for a !articular !ur!ose'
485 ISA 540
1. G he use of the (odel'
2. G he (aintenance and !eriodic validation of the inte)rit# of the (odel'
Eana)e(ent+s Use of 0,!erts $Aef. 6ara' 8$c&$iii&&
A45' Eana)e(ent (a# have, or the entit# (a# e(!lo# individuals with, the e,!erience and
co(!etence necessar# to (ake the re*uired !oint esti(ates' In so(e cases, however, (ana)e(ent
(a# need to en)a)e an e,!ert to (ake, or assist in (akin), the(' his need (a# arise "ecause of,
for e,a(!le.
% G he s!ecialiJed nature of the (atter re*uirin) esti(ation, for e,a(!le, the (easure(ent
of (ineral or h#drocar"on reserves in e,tractive industries'
% G he technical nature of the (odels re*uired to (eet the relevant re*uire(ents of the
a!!lica"le financial re!ortin) fra(ework, as (a# "e the case in certain (easure(ents at fair
value'
% G he unusual or infre*uent nature of the condition, transaction or event re*uirin) an
A90' In s(aller entities, the circu(stances re*uirin) an accountin) esti(ate often are such that the
owner-(ana)er is ca!a"le of (akin) the re*uired !oint esti(ate' In so(e cases, however, an
e,!ert will "e needed' =iscussion with the owner-(ana)er earl# in the audit !rocess a"out the
nature of an# accountin) esti(ates, the co(!leteness of the re*uired accountin) esti(ates, and the
ade*uac# of the esti(atin) !rocess (a# assist the owner-(ana)er in deter(inin) the need to use
an e,!ert'
Assu(!tions $Aef. 6ara' 8$c&$iv&&
A91' Assu(!tions are inte)ral co(!onents of accountin) esti(ates' Eatters that the auditor (a#
consider in o"tainin) an understandin) of the assu(!tions underl#in) the accountin) esti(ates
include, for e,a(!le.
% G he nature of the assu(!tions, includin) which of the assu(!tions are likel# to "e
si)nificant assu(!tions'
% G @ow (ana)e(ent assesses whether the assu(!tions are relevant and co(!lete $that is,
that all relevant varia"les have "een taken into account&'
% G Lhere a!!lica"le, how (ana)e(ent deter(ines that the assu(!tions used are internall#
consistent'
% G Lhether the assu(!tions relate to (atters within the control of (ana)e(ent $for
e,a(!le, assu(!tions a"out the (aintenance
ISA 540 48B
!ro)ra(s that (a# affect the esti(ation of an asset+s useful life&, and how the# confor( to the
entit#+s "usiness !lans and the e,ternal environ(ent, or to (atters that are outside its control
$for e,a(!le, assu(!tions a"out interest rates, (ortalit# rates, !otential ;udicial or re)ulator#
actions, or the varia"ilit# and the ti(in) of future cash flows&'
G he nature and e,tent of docu(entation, if an#, su!!ortin) the assu(!tions'
Assu(!tions (a# "e (ade or identified "# an e,!ert to assist (ana)e(ent in (akin) the accountin)
esti(ates' Such assu(!tions, when used "# (ana)e(ent, "eco(e (ana)e(ent+s assu(!tions'
A94' In so(e cases, assu(!tions (a# "e referred to as in!uts, for e,a(!le, where (ana)e(ent uses a
(odel to (ake an accountin) esti(ate, thou)h the ter( in!uts (a# also "e used to refer to the
underl#in) data to which s!ecific assu(!tions are a!!lied'
A99' Eana)e(ent (a# su!!ort assu(!tions with different t#!es of infor(ation drawn fro( internal and
e,ternal sources, the relevance and relia"ilit# of which will var#' In so(e cases, an assu(!tion (a#
"e relia"l# "ased on a!!lica"le infor(ation fro( either e,ternal sources $for e,a(!le, !u"lished
interest rate or other statistical data& or internal sources $for e,a(!le, historical infor(ation or
!revious conditions e,!erienced "# the entit#&' In other cases, an assu(!tion (a# "e (ore
su";ective, for e,a(!le, where the entit# has no e,!erience or e,ternal sources fro( which to draw'
A94' In the case of fair value accountin) esti(ates, assu(!tions reflect, or are consistent with, what
knowled)ea"le, willin) ar(+s len)th !arties $so(eti(es referred to as C(arket!lace !artici!antsD or
e*uivalent& would use in deter(inin) fair value when e,chan)in) an asset or settlin) a lia"ilit#'
S!ecific assu(!tions will also var# with the characteristics of the asset or lia"ilit# "ein) valued, the
valuation (ethod used $for e,a(!le, a (arket a!!roach, or an inco(e a!!roach& and the
re*uire(ents of the a!!lica"le financial re!ortin) fra(ework'
A95' Lith res!ect to fair value accountin) esti(ates, assu(!tions or in!uts var# in ter(s of their source
and "ases, as follows.
1$a& hose that reflect what (arket!lace !artici!ants would use in !ricin) an asset or lia"ilit#
develo!ed "ased on (arket data o"tained fro( sources inde!endent of the re!ortin) entit#
$so(eti(es referred to as Co"serva"le in!utsD or e*uivalent&'
2$"& hose that reflect the entit#+s own ;ud)(ents a"out what assu(!tions (arket!lace
!artici!ants would use in !ricin) the asset or lia"ilit#
487 ISA 540
develo!ed "ased on the "est infor(ation availa"le in the circu(stances $so(eti(es referred
to as Cuno"serva"le in!utsD or e*uivalent&'
In !ractice, however, the distinction "etween $a& and $"& is not alwa#s a!!arent' Further, it (a# "e
necessar# for (ana)e(ent to select fro( a nu("er of different assu(!tions used "# different
(arket!lace !artici!ants'
A9B' he e,tent of su";ectivit#, such as whether an assu(!tion or in!ut is o"serva"le, influences the
de)ree of esti(ation uncertaint# and there"# the auditor+s assess(ent of the risks of (aterial
(isstate(ent for a !articular accountin) esti(ate'
%han)es in Eethods for Eakin) Accountin) 0sti(ates $Aef. 6ara' 8$c&$v&&
A97' In evaluatin) how (ana)e(ent (akes the accountin) esti(ates, the auditor is re*uired to
understand whether there has "een or ou)ht to have "een a chan)e fro( the !rior !eriod in the
(ethods for (akin) the accountin) esti(ates' A s!ecific esti(ation (ethod (a# need to "e
chan)ed in res!onse to chan)es in the environ(ent or circu(stances affectin) the entit# or in the
re*uire(ents of the a!!lica"le financial re!ortin) fra(ework' If (ana)e(ent has chan)ed the
(ethod for (akin) an accountin) esti(ate, it is i(!ortant that (ana)e(ent can de(onstrate that
the new (ethod is (ore a!!ro!riate, or is itself a res!onse to such chan)es' For e,a(!le, if
(ana)e(ent chan)es the "asis of (akin) an accountin) esti(ate fro( a (ark-to-(arket a!!roach
to usin) a (odel, the auditor challen)es whether (ana)e(ent+s assu(!tions a"out the
(arket!lace are reasona"le in li)ht of econo(ic circu(stances'
0sti(ation Uncertaint# $Aef. 6ara' 8$c&$vi&&
A98' Eatters that the auditor (a# consider in o"tainin) an understandin) of whether and, if so, how
(ana)e(ent has assessed the effect of esti(ation uncertaint# include, for e,a(!le.
1. G Lhether and, if so, how (ana)e(ent has considered alternative assu(!tions or outco(es
"#, for e,a(!le, !erfor(in) a sensitivit# anal#sis to deter(ine the effect of chan)es in the
assu(!tions on an accountin) esti(ate'
2. G @ow (ana)e(ent deter(ines the accountin) esti(ate when anal#sis indicates a nu("er
of outco(e scenarios'
3. G Lhether (ana)e(ent (onitors the outco(e of accountin) esti(ates (ade in the !rior
!eriod, and whether (ana)e(ent has a!!ro!riatel# res!onded to the outco(e of that (onitorin)
!rocedure'
+e!ie#ing (rior (eriod Accounting /sti$ates $Aef. 6ara' 5&
A95' he outco(e of an accountin) esti(ate will often differ fro( the accountin) esti(ate reco)niJed
in the !rior !eriod financial state(ents' 1# !erfor(in)
ISA 540 488
risk assess(ent !rocedures to identif# and understand the reasons for such differences, the auditor
(a# o"tain.
% G Infor(ation re)ardin) the effectiveness of (ana)e(ent+s !rior !eriod esti(ation !rocess,
fro( which the auditor can ;ud)e the likel# effectiveness of (ana)e(ent+s current !rocess'
% G Audit evidence that is !ertinent to the re-esti(ation, in the current !eriod, of !rior !eriod
% G Audit evidence of (atters, such as esti(ation uncertaint#, that (a# "e re*uired to "e
disclosed in the financial state(ents'
A40' he review of !rior !eriod accountin) esti(ates (a# also assist the auditor, in the current !eriod,
in identif#in) circu(stances or conditions that increase the susce!ti"ilit# of accountin) esti(ates
to, or indicate the !resence of, !ossi"le (ana)e(ent "ias' he auditor+s !rofessional ske!ticis(
assists in identif#in) such circu(stances or conditions and in deter(inin) the nature, ti(in) and
e,tent of further audit !rocedures'
A41' A retros!ective review of (ana)e(ent ;ud)(ents and assu(!tions related to si)nificant
accountin) esti(ates is also re*uired "# ISA 440'
14
hat review is conducted as !art of the
re*uire(ent for the auditor to desi)n and !erfor( !rocedures to review accountin) esti(ates for
"iases that could re!resent a risk of (aterial (isstate(ent due to fraud, in res!onse to the risks of
(ana)e(ent override of controls' As a !ractical (atter, the auditor+s review of !rior !eriod
accountin) esti(ates as a risk assess(ent !rocedure in accordance with this ISA (a# "e carried
out in con;unction with the review re*uired "# ISA 440'
A44' he auditor (a# ;ud)e that a (ore detailed review is re*uired for those accountin) esti(ates that
were identified durin) the !rior !eriod audit as havin) hi)h esti(ation uncertaint#, or for those
accountin) esti(ates that have chan)ed si)nificantl# fro( the !rior !eriod' 7n the other hand, for
e,a(!le, for accountin) esti(ates that arise fro( the recordin) of routine and recurrin)
transactions, the auditor (a# ;ud)e that the a!!lication of anal#tical !rocedures as risk assess(ent
!rocedures is sufficient for !ur!oses of the review'
A49' For fair value accountin) esti(ates and other accountin) esti(ates "ased on current conditions at
the (easure(ent date, (ore variation (a# e,ist "etween the fair value a(ount reco)niJed in the
!rior !eriod financial state(ents and the outco(e or the a(ount re-esti(ated for the !ur!ose of
the current !eriod' his is "ecause the (easure(ent o";ective for such accountin) esti(ates deals
with !erce!tions a"out value at a !oint in ti(e, which (a# chan)e si)nificantl# and ra!idl# as the
environ(ent in which the entit# o!erates
14
ISA 440, Che Auditor+s Aes!onsi"ilities Aelatin) to Fraud in an Audit of Financial State(ents,D !ara)ra!h 94$"&$ii&'
485 ISA 540
chan)es' he auditor (a# therefore focus the review on o"tainin) infor(ation that would "e
relevant to identif#in) and assessin) risks of (aterial (isstate(ent' For e,a(!le, in so(e cases
o"tainin) an understandin) of chan)es in (arket!lace !artici!ant assu(!tions which affected the
outco(e of a !rior !eriod fair value accountin) esti(ate (a# "e unlikel# to !rovide relevant
infor(ation for audit !ur!oses' If so, then the auditor+s consideration of the outco(e of !rior
!eriod fair value accountin) esti(ates (a# "e directed (ore towards understandin) the
effectiveness of (ana)e(ent+s !rior esti(ation !rocess, that is, (ana)e(ent+s track record, fro(
which the auditor can ;ud)e the likel# effectiveness of (ana)e(ent+s current !rocess'
A44' A difference "etween the outco(e of an accountin) esti(ate and the a(ount reco)niJed in the
!rior !eriod financial state(ents does not necessaril# re!resent a (isstate(ent of the !rior !eriod
financial state(ents' @owever, it (a# do so if, for e,a(!le, the difference arises fro( infor(ation
that was availa"le to (ana)e(ent when the !rior !eriod+s financial state(ents were finaliJed, or
that could reasona"l# "e e,!ected to have "een o"tained and taken into account in the !re!aration
of those financial state(ents' Ean# financial re!ortin) fra(eworks contain )uidance on
distin)uishin) "etween chan)es in accountin) esti(ates that constitute (isstate(ents and chan)es
that do not, and the accountin) treat(ent re*uired to "e followed'
/sti$ation "ncertainty $Aef. 6ara' 10&
A45' he de)ree of esti(ation uncertaint# associated with an accountin) esti(ate (a# "e influenced "#
factors such as.
% G he e,tent to which the accountin) esti(ate de!ends on ;ud)(ent'
% G he sensitivit# of the accountin) esti(ate to chan)es in assu(!tions'
% G he e,istence of reco)niJed (easure(ent techni*ues that (a# (iti)ate the esti(ation
uncertaint# $thou)h the su";ectivit# of the assu(!tions used as in!uts (a# nevertheless )ive rise
to esti(ation uncertaint#&'
% G he len)th of the forecast !eriod, and the relevance of data drawn fro( !ast events to
forecast future events'
% G he availa"ilit# of relia"le data fro( e,ternal sources'
% G he e,tent to which the accountin) esti(ate is "ased on o"serva"le or uno"serva"le
in!uts'
he de)ree of esti(ation uncertaint# associated with an accountin) esti(ate (a# influence the
esti(ate+s susce!ti"ilit# to "ias'
A4B' Eatters that the auditor considers in assessin) the risks of (aterial (isstate(ent (a# also include.
ISA 540 450
1. G he actual or e,!ected (a)nitude of an accountin) esti(ate'
2. G he recorded a(ount of the accountin) esti(ate $that is, (ana)e(ent+s !oint esti(ate& in
relation to the a(ount e,!ected "# the auditor to "e recorded'
3. G Lhether (ana)e(ent has used an e,!ert in (akin) the accountin) esti(ate'
4. G he outco(e of the review of !rior !eriod accountin) esti(ates'
-igh /sti$ation "ncertainty and )ignificant +is.s $Aef. 6ara' 11&
A47' 0,a(!les of accountin) esti(ates that (a# have hi)h esti(ation uncertaint# include the
followin).
1. G Accountin) esti(ates that are hi)hl# de!endent u!on ;ud)(ent, for e,a(!le, ;ud)(ents
a"out the outco(e of !endin) liti)ation or the a(ount and ti(in) of future cash flows de!endent
on uncertain events (an# #ears in the future'
2. G Accountin) esti(ates that are not calculated usin) reco)niJed (easure(ent techni*ues'
3. G Accountin) esti(ates where the results of the auditor+s review of si(ilar accountin)
esti(ates (ade in the !rior !eriod financial state(ents indicate a su"stantial difference "etween
the ori)inal accountin) esti(ate and the actual outco(e'
4. G Fair value accountin) esti(ates for which a hi)hl# s!ecialiJed entit#-develo!ed (odel is
used or for which there are no o"serva"le in!uts'
A48' A see(in)l# i((aterial accountin) esti(ate (a# have the !otential to result in a (aterial
(isstate(ent due to the esti(ation uncertaint# associated with the esti(ation? that is, the siJe of
the a(ount reco)niJed or disclosed in the financial state(ents for an accountin) esti(ate (a# not
"e an indicator of its esti(ation uncertaint#'
A45' In so(e circu(stances, the esti(ation uncertaint# is so hi)h that a reasona"le accountin) esti(ate
cannot "e (ade' he a!!lica"le financial re!ortin) fra(ework (a#, therefore, !reclude
reco)nition of the ite( in the financial state(ents, or its (easure(ent at fair value' In such cases,
the si)nificant risks relate not onl# to whether an accountin) esti(ate should "e reco)niJed, or
whether it should "e (easured at fair value, "ut also to the ade*uac# of the disclosures' Lith
res!ect to such accountin) esti(ates, the a!!lica"le financial re!ortin) fra(ework (a# re*uire
disclosure of the accountin) esti(ates and the hi)h esti(ation uncertaint# associated with the(
$see !ara)ra!hs A140A149&'
451 ISA 540
A50' If the auditor deter(ines that an accountin) esti(ate )ives rise to a si)nificant risk, the auditor is
re*uired to o"tain an understandin) of the entit#+s controls, includin) control activities'
19
A51' In so(e cases, the esti(ation uncertaint# of an accountin) esti(ate (a# cast si)nificant dou"t
a"out the entit#+s a"ilit# to continue as a )oin) concern' ISA 570
14
esta"lishes re*uire(ents and
!rovides )uidance in such circu(stances'
Repo"e to the Aee# Ri% of )!te'i!0 )it!te.e"t $Aef. 6ara' 14&
A54' ISA 990 re*uires the auditor to desi)n and !erfor( audit !rocedures whose nature, ti(in) and
e,tent are res!onsive to the assessed risks of (aterial (isstate(ent in relation to accountin)
esti(ates at "oth the financial state(ent and assertion levels'
15
6ara)ra!hs A59-A115 focus on
s!ecific res!onses at the assertion level onl#'
Application of the +e>uire$ents of the Applicable Financial +eporting Fra$e#or.
$Aef. 6ara' 14$a&&
A59' Ean# financial re!ortin) fra(eworks !rescri"e certain conditions for the reco)nition of
accountin) esti(ates and s!ecif# the (ethods for (akin) the( and re*uired disclosures' Such
re*uire(ents (a# "e co(!le, and re*uire the a!!lication of ;ud)(ent' 1ased on the
understandin) o"tained in !erfor(in) risk assess(ent !rocedures, the re*uire(ents of the
a!!lica"le financial re!ortin) fra(ework that (a# "e susce!ti"le to (isa!!lication or differin)
inter!retations "eco(e the focus of the auditor+s attention'
A54' =eter(inin) whether (ana)e(ent has a!!ro!riatel# a!!lied the re*uire(ents of the a!!lica"le
financial re!ortin) fra(ework is "ased, in !art, on the auditor+s understandin) of the entit# and its
environ(ent' For e,a(!le, the (easure(ent of the fair value of so(e ite(s, such as intan)i"le
assets ac*uired in a "usiness co("ination, (a# involve s!ecial considerations that are affected "#
the nature of the entit# and its o!erations'
A55' In so(e situations, additional audit !rocedures, such as the ins!ection "# the auditor of the current
!h#sical condition of an asset, (a# "e necessar# to deter(ine whether (ana)e(ent has
a!!ro!riatel# a!!lied the re*uire(ents of the a!!lica"le financial re!ortin) fra(ework'
A5B' he a!!lication of the re*uire(ents of the a!!lica"le financial re!ortin) fra(ework re*uires
(ana)e(ent to consider chan)es in the environ(ent or circu(stances that affect the entit#' For
e,a(!le, the introduction of an active
19
14
ISA 570, C<oin) %oncern'D 15
ISA 540 454
(arket for a !articular class of asset or lia"ilit# (a# indicate that the use of discounted cash flows
to esti(ate the fair value of such asset or lia"ilit# is no lon)er a!!ro!riate'
Consistency in <ethods and =asis for Changes $Aef. 6ara' 14$"&&
A57' he auditor+s consideration of a chan)e in an accountin) esti(ate, or in the (ethod for (akin) it
fro( the !rior !eriod, is i(!ortant "ecause a chan)e that is not "ased on a chan)e in
circu(stances or new infor(ation is considered ar"itrar#' Ar"itrar# chan)es in an accountin)
esti(ate result in inconsistent financial state(ents over ti(e and (a# )ive rise to a financial
state(ent (isstate(ent or "e an indicator of !ossi"le (ana)e(ent "ias'
A58' Eana)e(ent often is a"le to de(onstrate )ood reason for a chan)e in an accountin) esti(ate or
the (ethod for (akin) an accountin) esti(ate fro( one !eriod to another "ased on a chan)e in
circu(stances' Lhat constitutes a )ood reason, and the ade*uac# of su!!ort for (ana)e(ent+s
contention that there has "een a chan)e in circu(stances that warrants a chan)e in an accountin)
esti(ate or the (ethod for (akin) an accountin) esti(ate, are (atters of ;ud)(ent'
+esponses to the Assessed +is.s of <aterial <isstate$ents $Aef. 6ara' 19&
A55' he auditor+s decision as to which res!onse, individuall# or in co("ination, in !ara)ra!h 19 to
undertake to res!ond to the risks of (aterial (isstate(ent (a# "e influenced "# such (atters as.
% G he nature of the accountin) esti(ate, includin) whether it arises fro( routine or non
routine transactions'
% G Lhether the !rocedure$s& is e,!ected to effectivel# !rovide the auditor with sufficient
a!!ro!riate audit evidence'
% G he assessed risk of (aterial (isstate(ent, includin) whether the assessed risk is a
si)nificant risk'
AB0' For e,a(!le, when evaluatin) the reasona"leness of the allowance for dou"tful accounts, an
effective !rocedure for the auditor (a# "e to review su"se*uent cash collections in co("ination
with other !rocedures' Lhere the esti(ation uncertaint# associated with an accountin) esti(ate is
hi)h, for e,a(!le, an accountin) esti(ate "ased on a !ro!rietar# (odel for which there are
uno"serva"le in!uts, it (a# "e that a co("ination of the res!onses to assessed risks in !ara)ra!h
19 is necessar# in order to o"tain sufficient a!!ro!riate audit evidence'
AB1' Additional )uidance e,!lainin) the circu(stances in which each of the res!onses (a# "e
a!!ro!riate is !rovided in !ara)ra!hs AB4-A55'
459 ISA 540
0vents 7ccurrin) U! to the =ate of the Auditor+s Ae!ort $Aef. 6ara' 19$a&&
AB4' =eter(inin) whether events occurrin) u! to the date of the auditor+s re!ort !rovide audit evidence
re)ardin) the accountin) esti(ate (a# "e an a!!ro!riate res!onse when such events are e,!ected
to.
% G 7ccur? and
% G 6rovide audit evidence that confir(s or contradicts the accountin) esti(ate'
AB9' 0vents occurrin) u! to the date of the auditor+s re!ort (a# so(eti(es !rovide sufficient
a!!ro!riate audit evidence a"out an accountin) esti(ate' For e,a(!le, sale of the co(!lete
inventor# of a su!erseded !roduct shortl# after the !eriod end (a# !rovide audit evidence relatin)
to the esti(ate of its net realiJa"le value' In such cases, there (a# "e no need to !erfor(
additional audit !rocedures on the accountin) esti(ate, !rovided that sufficient a!!ro!riate
evidence a"out the events is o"tained'
AB4' For so(e accountin) esti(ates, events occurrin) u! to the date of the auditor+s re!ort are unlikel#
to !rovide audit evidence re)ardin) the accountin) esti(ate' For e,a(!le, the conditions or events
relatin) to so(e accountin) esti(ates develo! onl# over an e,tended !eriod' Also, "ecause of the
(easure(ent o";ective of fair value accountin) esti(ates, infor(ation after the !eriod-end (a#
not reflect the events or conditions e,istin) at the "alance sheet date and therefore (a# not "e
relevant to the (easure(ent of the fair value accountin) esti(ate' 6ara)ra!h 19 identifies other
res!onses to the risks of (aterial (isstate(ent that the auditor (a# undertake'
AB5' In so(e cases, events that contradict the accountin) esti(ate (a# indicate that (ana)e(ent has
ineffective !rocesses for (akin) accountin) esti(ates, or that there is (ana)e(ent "ias in the
(akin) of accountin) esti(ates'
ABB' 0ven thou)h the auditor (a# decide not to undertake this a!!roach in res!ect of s!ecific
accountin) esti(ates, the auditor is re*uired to co(!l# with ISA 5B0'
1B
he auditor is re*uired to
!erfor( audit !rocedures desi)ned to o"tain sufficient a!!ro!riate audit evidence that all events
occurrin) "etween the date of the financial state(ents and the date of the auditor+s re!ort that
re*uire ad;ust(ent of, or disclosure in, the financial state(ents have "een identified
17
and
a!!ro!riatel# reflected in the financial state(ents'
18
1ecause the (easure(ent of (an# accountin)
esti(ates, other than fair value accountin) esti(ates, usuall# de!ends on the outco(e of future
conditions, transactions or events, the auditor+s work under ISA 5B0 is !articularl# relevant'
1B
ISA 5B0, CSu"se*uent 0vents'D
17
ISA 5B0, !ara)ra!h B' 18
ISA 540 454
AB7' Lhen there is a lon)er !eriod "etween the "alance sheet date and the date of the auditor+s re!ort,
the auditor+s review of events in this !eriod (a# "e an effective res!onse for accountin) esti(ates
other than fair value accountin) esti(ates' his (a# !articularl# "e the case in so(e s(aller
owner-(ana)ed entities, es!eciall# when (ana)e(ent does not have for(aliJed control
!rocedures over accountin) esti(ates'
estin) @ow Eana)e(ent Eade the Accountin) 0sti(ate $Aef. 6ara' 19$"&&
AB8' estin) how (ana)e(ent (ade the accountin) esti(ate and the data on which it is "ased (a# "e
an a!!ro!riate res!onse when the accountin) esti(ate is a fair value accountin) esti(ate
develo!ed on a (odel that uses o"serva"le and uno"serva"le in!uts' It (a# also "e a!!ro!riate
when, for e,a(!le.
1. G he accountin) esti(ate is derived fro( the routine !rocessin) of data "# the entit#+s
accountin) s#ste('
2. G he auditor+s review of si(ilar accountin) esti(ates (ade in the !rior !eriod financial
state(ents su))ests that (ana)e(ent+s current !eriod !rocess is likel# to "e effective'
3. G he accountin) esti(ate is "ased on a lar)e !o!ulation of ite(s of a si(ilar nature that
individuall# are not si)nificant'
AB5' estin) how (ana)e(ent (ade the accountin) esti(ate (a# involve, for e,a(!le.
1. G estin) the e,tent to which data on which the accountin) esti(ate is "ased is accurate,
co(!lete and relevant, and whether the accountin) esti(ate has "een !ro!erl# deter(ined usin)
such data and (ana)e(ent assu(!tions'
2. G %onsiderin) the source, relevance and relia"ilit# of e,ternal data or infor(ation,
includin) that received fro( e,ternal e,!erts en)a)ed "# (ana)e(ent to assist in (akin) an
3. G Aecalculatin) the accountin) esti(ate, and reviewin) infor(ation a"out an accountin)
esti(ate for internal consistenc#'
4. G %onsiderin) (ana)e(ent+s review and a!!roval !rocesses'
A70' In s(aller entities, the !rocess for (akin) accountin) esti(ates is likel# to "e less structured than
in lar)er entities' S(aller entities with active (ana)e(ent involve(ent (a# not have e,tensive
descri!tions of accountin) !rocedures, so!histicated accountin) records, or written !olicies' 0ven
if the entit# has no
455 ISA 540
for(al esta"lished !rocess, it does not (ean that (ana)e(ent is not a"le to !rovide a "asis u!on
which the auditor can test the accountin) esti(ate'
0valuatin) the (ethod of (easure(ent $Aef. 6ara' 19$"&$i&&
A71' Lhen the a!!lica"le financial re!ortin) fra(ework does not !rescri"e the (ethod of
(easure(ent, evaluatin) whether the (ethod used, includin) an# a!!lica"le (odel, is a!!ro!riate
in the circu(stances is a (atter of !rofessional ;ud)(ent'
A74' For this !ur!ose, (atters that the auditor (a# consider include, for e,a(!le, whether.
% G Eana)e(ent+s rationale for the (ethod selected is reasona"le'
% G Eana)e(ent has sufficientl# evaluated and a!!ro!riatel# a!!lied the criteria, if an#,
!rovided in the a!!lica"le financial re!ortin) fra(ework to su!!ort the selected (ethod'
% G he (ethod is a!!ro!riate in the circu(stances )iven the nature of the asset or lia"ilit#
"ein) esti(ated and the re*uire(ents of the a!!lica"le financial re!ortin) fra(ework relevant to
% G he (ethod is a!!ro!riate in relation to the "usiness, industr# and environ(ent in which
the entit# o!erates'
A79' In so(e cases, (ana)e(ent (a# have deter(ined that different (ethods result in a ran)e of
si)nificantl# different esti(ates' In such cases, o"tainin) an understandin) of how the entit# has
investi)ated the reasons for these differences (a# assist the auditor in evaluatin) the
a!!ro!riateness of the (ethod selected'
0valuatin) the use of (odels
A74' In so(e cases, !articularl# when (akin) fair value accountin) esti(ates, (ana)e(ent (a# use a
(odel' Lhether the (odel used is a!!ro!riate in the circu(stances (a# de!end on a nu("er of
factors, such as the nature of the entit# and its environ(ent, includin) the industr# in which it
o!erates, and the s!ecific asset or lia"ilit# "ein) (easured'
A75' he e,tent to which the followin) considerations are relevant de!ends on the circu(stances,
includin) whether the (odel is one that is co((erciall# availa"le for use in a !articular sector or
industr#, or a !ro!rietar# (odel' In so(e cases, an entit# (a# use an e,!ert to develo! and test a
(odel'
A7B' =e!endin) on the circu(stances, (atters that the auditor (a# also consider in testin) the (odel
include, for e,a(!le, whether.
ISA 540 45B
1. G he (odel is validated !rior to usa)e, with !eriodic reviews to ensure it is still suita"le
for its intended use' he entit#+s validation !rocess (a# include evaluation of.
1. o he (odel+s theoretical soundness and (athe(atical inte)rit#, includin) the
a!!ro!riateness of (odel !ara(eters'
2. o he consistenc# and co(!leteness of the (odel+s in!uts with (arket !ractices'
3. o he (odel+s out!ut as co(!ared to actual transactions'
2. G A!!ro!riate chan)e control !olicies and !rocedures e,ist'
3. G he (odel is !eriodicall# cali"rated and tested for validit#, !articularl# when in!uts are
su";ective'
4. G Ad;ust(ents are (ade to the out!ut of the (odel, includin) in the case of fair value
accountin) esti(ates, whether such ad;ust(ents reflect the assu(!tions (arket!lace !artici!ants
would use in si(ilar circu(stances'
5. G he (odel is ade*uatel# docu(ented, includin) the (odel+s intended a!!lications and
li(itations and its ke# !ara(eters, re*uired in!uts, and results of an# validation anal#sis
!erfor(ed'
Assu(!tions used "# (ana)e(ent $Aef. 6ara' 19$"&$ii&&
A77' he auditor+s evaluation of the assu(!tions used "# (ana)e(ent is "ased onl# on infor(ation
availa"le to the auditor at the ti(e of the audit' Audit !rocedures dealin) with (ana)e(ent
assu(!tions are !erfor(ed in the conte,t of the audit of the entit#+s financial state(ents, and not
for the !ur!ose of !rovidin) an o!inion on assu(!tions the(selves'
A78' Eatters that the auditor (a# consider in evaluatin) the reasona"leness of the assu(!tions used "#
(ana)e(ent include, for e,a(!le.
% G Lhether individual assu(!tions a!!ear reasona"le'
% G Lhether the assu(!tions are interde!endent and internall# consistent'
% G Lhether the assu(!tions a!!ear reasona"le when considered collectivel# or in
con;unction with other assu(!tions, either for that accountin) esti(ate or for other accountin)
esti(ates'
% G In the case of fair value accountin) esti(ates, whether the assu(!tions a!!ro!riatel#
reflect o"serva"le (arket!lace assu(!tions'
A75' he assu(!tions on which accountin) esti(ates are "ased (a# reflect what (ana)e(ent e,!ects
will "e the outco(e of s!ecific o";ectives and strate)ies' In such cases, the auditor (a# !erfor(
audit !rocedures to evaluate the
457 ISA 540
reasona"leness of such assu(!tions "# considerin), for e,a(!le, whether the assu(!tions are
consistent with.
% G he )eneral econo(ic environ(ent and the entit#+s econo(ic circu(stances'
% G he !lans of the entit#'
% G Assu(!tions (ade in !rior !eriods, if relevant'
% G 0,!erience of, or !revious conditions e,!erienced "#, the entit#, to the e,tent this
historical infor(ation (a# "e considered re!resentative of future conditions or events'
% G 7ther assu(!tions used "# (ana)e(ent relatin) to the financial state(ents'
A80' he reasona"leness of the assu(!tions used (a# de!end on (ana)e(ent+s intent and a"ilit# to
carr# out certain courses of action' Eana)e(ent often docu(ents !lans and intentions relevant to
s!ecific assets or lia"ilities and the financial re!ortin) fra(ework (a# re*uire it to do so'
Althou)h the e,tent of audit evidence to "e o"tained a"out (ana)e(ent+s intent and a"ilit# is a
(atter of !rofessional ;ud)(ent, the auditor+s !rocedures (a# include the followin).
% G Aeview of (ana)e(ent+s histor# of carr#in) out its stated intentions'
% G Aeview of written !lans and other docu(entation, includin), where a!!lica"le, for(all#
a!!roved "ud)ets, authoriJations or (inutes'
% G In*uir# of (ana)e(ent a"out its reasons for a !articular course of action'
% G Aeview of events occurrin) su"se*uent to the date of the financial state(ents and u! to
the date of the auditor+s re!ort'
% G 0valuation of the entit#+s a"ilit# to carr# out a !articular course of action )iven the
entit#+s econo(ic circu(stances, includin) the i(!lications of its e,istin) co((it(ents'
%ertain financial re!ortin) fra(eworks, however, (a# not !er(it (ana)e(ent+s intentions or
!lans to "e taken into account when (akin) an accountin) esti(ate' his is often the case for fair
value accountin) esti(ates "ecause their (easure(ent o";ective re*uires that assu(!tions reflect
those used "# (arket!lace !artici!ants'
A81' Eatters that the auditor (a# consider in evaluatin) the reasona"leness of assu(!tions used "#
(ana)e(ent underl#in) fair value accountin) esti(ates, in addition to those discussed a"ove
where a!!lica"le, (a# include, for e,a(!le.
G Lhere relevant, whether and, if so, how (ana)e(ent has incor!orated (arket-s!ecific
in!uts into the develo!(ent of assu(!tions'
ISA 540 458
% G Lhether the assu(!tions are consistent with o"serva"le (arket conditions, and the
characteristics of the asset or lia"ilit# "ein) (easured at fair value'
% G Lhether the sources of (arket-!artici!ant assu(!tions are relevant and relia"le, and how
(ana)e(ent has selected the assu(!tions to use when a nu("er of different (arket !artici!ant
assu(!tions e,ist'
% G Lhere a!!ro!riate, whether and, if so, how (ana)e(ent considered assu(!tions used in,
or infor(ation a"out, co(!ara"le transactions, assets or lia"ilities'
A84' Further, fair value accountin) esti(ates (a# co(!rise o"serva"le in!uts as well as uno"serva"le
in!uts' Lhere fair value accountin) esti(ates are "ased on uno"serva"le in!uts, (atters that the
auditor (a# consider include, for e,a(!le, how (ana)e(ent su!!orts the followin).
% G he identification of the characteristics of (arket!lace !artici!ants relevant to the
% G Eodifications it has (ade to its own assu(!tions to reflect its view of assu(!tions
(arket!lace !artici!ants would use'
% G Lhether it has incor!orated the "est infor(ation availa"le in the circu(stances'
% G Lhere a!!lica"le, how its assu(!tions take account of co(!ara"le transactions, assets or
lia"ilities'
If there are uno"serva"le in!uts, it is (ore likel# that the auditor+s evaluation of the assu(!tions
will need to "e co("ined with other res!onses to assessed risks in !ara)ra!h 19 in order to o"tain
sufficient a!!ro!riate audit evidence' In such cases, it (a# "e necessar# for the auditor to !erfor(
other audit !rocedures, for e,a(!le, e,a(inin) docu(entation su!!ortin) the review and a!!roval
of the accountin) esti(ate "# a!!ro!riate levels of (ana)e(ent and, where a!!ro!riate, "# those
A89' In evaluatin) the reasona"leness of the assu(!tions su!!ortin) an accountin) esti(ate, the auditor
(a# identif# one or (ore si)nificant assu(!tions' If so, it (a# indicate that the accountin)
esti(ate has hi)h esti(ation uncertaint# and (a#, therefore, )ive rise to a si)nificant risk'
Additional res!onses to si)nificant risks are descri"ed in !ara)ra!hs A104-A115'
estin) the 7!eratin) 0ffectiveness of %ontrols $Aef. 6ara' 19$c&&
A84' estin) the o!eratin) effectiveness of the controls over how (ana)e(ent (ade the accountin)
esti(ate (a# "e an a!!ro!riate res!onse when (ana)e(ent+s !rocess has "een well-desi)ned,
i(!le(ented and (aintained, for e,a(!le.
455 ISA 540
1. G %ontrols e,ist for the review and a!!roval of the accountin) esti(ates "# a!!ro!riate
levels of (ana)e(ent and, where a!!ro!riate, "# those char)ed with )overnance'
2. G he accountin) esti(ate is derived fro( the routine !rocessin) of data "# the entit#+s
accountin) s#ste('
A85' estin) the o!eratin) effectiveness of the controls is re*uired when.
1$a& he auditor+s assess(ent of risks of (aterial (isstate(ent at the assertion level includes
an e,!ectation that controls over the !rocess are o!eratin) effectivel#? or
2$"& Su"stantive !rocedures alone do not !rovide sufficient a!!ro!riate audit evidence at the assertion
level'
15
A8B' %ontrols over the !rocess to (ake an accountin) esti(ate (a# e,ist in s(aller entities, "ut the
for(alit# with which the# o!erate varies' Further, s(aller entities (a# deter(ine that certain t#!es
of controls are not necessar# "ecause of active (ana)e(ent involve(ent in the financial re!ortin)
!rocess' In the case of ver# s(all entities, however, there (a# not "e (an# controls that the
auditor can identif#' For this reason, the auditor+s res!onse to the assessed risks is likel# to "e
su"stantive in nature, with the auditor !erfor(in) one or (ore of the other res!onses in !ara)ra!h
19'
=evelo!in) a 6oint 0sti(ate or Aan)e $Aef. 6ara' 19$d&&
A87' =evelo!in) a !oint esti(ate or a ran)e to evaluate (ana)e(ent+s !oint esti(ate (a# "e an
a!!ro!riate res!onse where, for e,a(!le.
% G An accountin) esti(ate is not derived fro( the routine !rocessin) of data "# the
accountin) s#ste('
% G he auditor+s review of si(ilar accountin) esti(ates (ade in the !rior !eriod financial
state(ents su))ests that (ana)e(ent+s current !eriod !rocess is unlikel# to "e effective'
% G he entit#+s controls within and over (ana)e(ent+s !rocesses for deter(inin) accountin)
esti(ates are not well desi)ned or !ro!erl# i(!le(ented'
% G 0vents or transactions "etween the !eriod end and the date of the auditor+s re!ort
contradict (ana)e(ent+s !oint esti(ate'
ISA 540 500
G here are alternative sources of relevant data availa"le to the auditor which can "e used in
(akin) a !oint esti(ate or a ran)e'
A88' 0ven where the entit#+s controls are well desi)ned and !ro!erl# i(!le(ented, develo!in) a !oint
esti(ate or a ran)e (a# "e an effective or efficient res!onse to the assessed risks' In other
situations, the auditor (a# consider this a!!roach as !art of deter(inin) whether further
!rocedures are necessar# and, if so, their nature and e,tent'
A85' he a!!roach taken "# the auditor in develo!in) either a !oint esti(ate or a ran)e (a# var# "ased
on what is considered (ost effective in the circu(stances' For e,a(!le, the auditor (a# initiall#
develo! a !reli(inar# !oint esti(ate, and then assess its sensitivit# to chan)es in assu(!tions to
ascertain a ran)e with which to evaluate (ana)e(ent+s !oint esti(ate' Alternativel#, the auditor
(a# "e)in "# develo!in) a ran)e for !ur!oses of deter(inin), where !ossi"le, a !oint esti(ate'
A50' he a"ilit# of the auditor to (ake a !oint esti(ate, as o!!osed to a ran)e, de!ends on several
factors, includin) the (odel used, the nature and e,tent of data availa"le and the esti(ation
uncertaint# involved with the accountin) esti(ate' Further, the decision to develo! a !oint
esti(ate or ran)e (a# "e influenced "# the a!!lica"le financial re!ortin) fra(ework, which (a#
!rescri"e the !oint esti(ate that is to "e used after consideration of the alternative outco(es and
assu(!tions, or !rescri"e a s!ecific (easure(ent (ethod $for e,a(!le, the use of a discounted
!ro"a"ilit#-wei)hted e,!ected value&'
A51' he auditor (a# develo! a !oint esti(ate or a ran)e in a nu("er of wa#s, for e,a(!le, "#.
1. G Usin) a (odel, for e,a(!le, one that is co((erciall# availa"le for use in a !articular
sector or industr#, or a !ro!rietar# or auditor-develo!ed (odel'
2. G Further develo!in) (ana)e(ent+s consideration of alternative assu(!tions or outco(es,
for e,a(!le, "# introducin) a different set of assu(!tions'
3. G 0(!lo#in) or en)a)in) a !erson with s!ecialiJed e,!ertise to develo! or e,ecute the
(odel, or to !rovide relevant assu(!tions'
4. G Eakin) reference to other co(!ara"le conditions, transactions or events, or, where
relevant, (arkets for co(!ara"le assets or lia"ilities'
Understandin) Eana)e(ent+s Assu(!tions or Eethod $Aef. 6ara' 19$d&$i&&
A54' Lhen the auditor (akes a !oint esti(ate or a ran)e and uses assu(!tions or a (ethod different
fro( those used "# (ana)e(ent, !ara)ra!h 19$d&$i& re*uires the auditor to o"tain a sufficient
understandin) of the assu(!tions or (ethod used "# (ana)e(ent in (akin) the accountin)
esti(ate' his understandin)
501 ISA 540
!rovides the auditor with infor(ation that (a# "e relevant to the auditor+s develo!(ent of an
a!!ro!riate !oint esti(ate or ran)e' Further, it assists the auditor to understand and evaluate an#
si)nificant differences fro( (ana)e(ent+s !oint esti(ate' For e,a(!le, a difference (a# arise
"ecause the auditor used different, "ut e*uall# valid, assu(!tions as co(!ared with those used "#
(ana)e(ent' his (a# reveal that the accountin) esti(ate is hi)hl# sensitive to certain
assu(!tions and therefore su";ect to hi)h esti(ation uncertaint#, indicatin) that the accountin)
esti(ate (a# "e a si)nificant risk' Alternativel#, a difference (a# arise as a result of a factual error
(ade "# (ana)e(ent' =e!endin) on the circu(stances, the auditor (a# find it hel!ful in drawin)
conclusions to discuss with (ana)e(ent the "asis for the assu(!tions used and their validit#, and
the difference, if an#, in the a!!roach taken to (akin) the accountin) esti(ate'
Narrowin) a Aan)e $Aef. 6ara' 19$d&$ii&&
A59' Lhen the auditor concludes that it is a!!ro!riate to use a ran)e to evaluate the reasona"leness of
(ana)e(ent+s !oint esti(ate $the auditor+s ran)e&, !ara)ra!h 19$d&$ii& re*uires that ran)e to
enco(!ass all Creasona"le outco(esD rather than all !ossi"le outco(es' he ran)e cannot "e one
that co(!rises all !ossi"le outco(es if it is to "e useful, as such a ran)e would "e too wide to "e
effective for !ur!oses of the audit' he auditor+s ran)e is useful and effective when it is
sufficientl# narrow to ena"le the auditor to conclude whether the accountin) esti(ate is (isstated'
A54' 7rdinaril#, a ran)e that has "een narrowed to "e e*ual to or less than !erfor(ance (aterialit# is
ade*uate for the !ur!oses of evaluatin) the reasona"leness of (ana)e(ent+s !oint esti(ate'
@owever, !articularl# in certain industries, it (a# not "e !ossi"le to narrow the ran)e to "elow
such an a(ount' his does not necessaril# !reclude reco)nition of the accountin) esti(ate' It (a#
indicate, however, that the esti(ation uncertaint# associated with the accountin) esti(ate is such
that it )ives rise to a si)nificant risk' Additional res!onses to si)nificant risks are descri"ed in
!ara)ra!hs A104A115'
A55' Narrowin) the ran)e to a !osition where all outco(es within the ran)e are considered reasona"le
(a# "e achieved "#.
1. $a& 0li(inatin) fro( the ran)e those outco(es at the e,tre(ities of the ran)e ;ud)ed "# the
auditor to "e unlikel# to occur? and
2. $"& %ontinuin) to narrow the ran)e, "ased on audit evidence availa"le, until the auditor concludes
that all outco(es within the ran)e are considered reasona"le' In so(e rare cases, the auditor (a#
"e a"le to narrow the ran)e until the audit evidence indicates a !oint esti(ate'
ISA 540 504
Considering #hether )pecialiBed ).ills or Kno#ledge Are +e>uired $Aef. 6ara' 14&
A5B' In !lannin) the audit, the auditor is re*uired to ascertain the nature, ti(in) and e,tent of resources
necessar# to !erfor( the audit en)a)e(ent'
40
his (a# include, as necessar#, the involve(ent of
those with s!ecialiJed skills or knowled)e' In addition, ISA 440 re*uires the en)a)e(ent !artner
to "e satisfied that the en)a)e(ent tea(, and an# auditor+s e,ternal e,!erts who are not !art of the
en)a)e(ent tea(, collectivel# have the a!!ro!riate co(!etence and ca!a"ilities to !erfor( the
audit en)a)e(ent'
41
=urin) the course of the audit of accountin) esti(ates the auditor (a#
identif#, in li)ht of the e,!erience of the auditor and the circu(stances of the en)a)e(ent, the
need for s!ecialiJed skills or knowled)e to "e a!!lied in relation to one or (ore as!ects of the
A57' Eatters that (a# affect the auditor+s consideration of whether s!ecialiJed skills or knowled)e is
re*uired include, for e,a(!le.
% G he nature of the underl#in) asset, lia"ilit# or co(!onent of e*uit# in a !articular
"usiness or industr# $for e,a(!le, (ineral de!osits, a)ricultural assets, co(!le, financial
instru(ents&'
% G A hi)h de)ree of esti(ation uncertaint#'
% G %o(!le, calculations or s!ecialiJed (odels are involved, for e,a(!le, when esti(atin)
fair values when there is no o"serva"le (arket'
% G he co(!le,it# of the re*uire(ents of the a!!lica"le financial re!ortin) fra(ework
relevant to accountin) esti(ates, includin) whether there are areas known to "e su";ect to
differin) inter!retation or !ractice is inconsistent or develo!in)'
% G he !rocedures the auditor intends to undertake in res!ondin) to assessed risks'
A58' For the (a;orit# of accountin) esti(ates, even when there is esti(ation uncertaint#, it is unlikel#
that s!ecialiJed skills or knowled)e will "e re*uired' For e,a(!le, it is unlikel# that s!ecialiJed
skills or knowled)e would "e necessar# for an auditor to evaluate an allowance for dou"tful
accounts'
A55' @owever, the auditor (a# not !ossess the s!ecialiJed skills or knowled)e re*uired when the
(atter involved is in a field other than accountin) or auditin) and (a# need to o"tain it fro( an
auditor+s e,!ert' ISA B40
44
esta"lishes re*uire(ents and !rovides )uidance in deter(inin) the
need to
40
ISA 900, C6lannin) an Audit of Financial State(ents,D !ara)ra!h 8$e&'
41
ISA 440, C:ualit# %ontrol for an Audit of Financial State(ents,D !ara)ra!h 14' 44
ISA B40, CUsin) the Lork of an Auditor+s 0,!ert'D
509 ISA 540
e(!lo# or en)a)e an auditor+s e,!ert and the auditor+s res!onsi"ilities when usin) the work of an
auditor+s e,!ert'
A100' Further, in so(e cases, the auditor (a# conclude that it is necessar# to o"tain s!ecialiJed skills or
knowled)e related to s!ecific areas of accountin) or auditin)' Individuals with such skills or
knowled)e (a# "e e(!lo#ed "# the auditor+s fir( or en)a)ed fro( an e,ternal or)aniJation
outside of the auditor+s fir(' Lhere such individuals !erfor( audit !rocedures on the en)a)e(ent,
the# are !art of the en)a)e(ent tea( and accordin)l#, the# are su";ect to the re*uire(ents in ISA
440'
A101' =e!endin) on the auditor+s understandin) and e,!erience of workin) with the auditor+s e,!ert or
those other individuals with s!ecialiJed skills or knowled)e, the auditor (a# consider it
a!!ro!riate to discuss (atters such as the re*uire(ents of the a!!lica"le financial re!ortin)
fra(ework with the individuals involved to esta"lish that their work is relevant for audit !ur!oses'
F-'the' S-$t!"ti9e *'oce#-'e to Repo"# to Si("ific!"t Ri% $Aef. 6ara' 15&
A104' In auditin) accountin) esti(ates that )ive rise to si)nificant risks, the auditor+s further su"stantive
!rocedures are focused on the evaluation of.
1$a&@ow (ana)e(ent has assessed the effect of esti(ation uncertaint# on the accountin) esti(ate,
and the effect such uncertaint# (a# have on the a!!ro!riateness of the reco)nition of the
accountin) esti(ate in the financial state(ents? and
2$"&he ade*uac# of related disclosures'
/sti$ation "ncertainty
Eana)e(ent+s %onsideration of 0sti(ation Uncertaint# $Aef. 6ara' 15$a&&
A109' Eana)e(ent (a# evaluate alternative assu(!tions or outco(es of the accountin) esti(ates
throu)h a nu("er of (ethods, de!endin) on the circu(stances' 7ne !ossi"le (ethod used "#
(ana)e(ent is to undertake a sensitivit# anal#sis' his (i)ht involve deter(inin) how the
(onetar# a(ount of an accountin) esti(ate varies with different assu(!tions' 0ven for
accountin) esti(ates (easured at fair value there can "e variation "ecause different (arket
!artici!ants will use different assu(!tions' A sensitivit# anal#sis could lead to the develo!(ent of
a nu("er of outco(e scenarios, so(eti(es characteriJed as a ran)e of outco(es "# (ana)e(ent,
such as C!essi(isticD and Co!ti(isticD scenarios'
A104' A sensitivit# anal#sis (a# de(onstrate that an accountin) esti(ate is not sensitive to chan)es in
!articular assu(!tions' Alternativel#, it (a# de(onstrate that the accountin) esti(ate is sensitive
to one or (ore assu(!tions that then "eco(e the focus of the auditor+s attention'
ISA 540 504
A105' his is not intended to su))est that one !articular (ethod of addressin) esti(ation uncertaint#
$such as sensitivit# anal#sis& is (ore suita"le than another, or that (ana)e(ent+s consideration of
alternative assu(!tions or outco(es needs to "e conducted throu)h a detailed !rocess su!!orted
"# e,tensive docu(entation' Aather, it is whether (ana)e(ent has assessed how esti(ation
uncertaint# (a# affect the accountin) esti(ate that is i(!ortant, not the s!ecific (anner in which
it is done' Accordin)l#, where (ana)e(ent has not considered alternative assu(!tions or
outco(es, it (a# "e necessar# for the auditor to discuss with (ana)e(ent, and re*uest su!!ort
for, how it has addressed the effects of esti(ation uncertaint# on the accountin) esti(ate'
A10B' S(aller entities (a# use si(!le (eans to assess the esti(ation uncertaint#' In addition to the
auditor+s review of availa"le docu(entation, the auditor (a# o"tain other audit evidence of
(ana)e(ent consideration of alternative assu(!tions or outco(es "# in*uir# of (ana)e(ent' In
addition, (ana)e(ent (a# not have the e,!ertise to consider alternative outco(es or otherwise
address the esti(ation uncertaint# of the accountin) esti(ate' In such cases, the auditor (a#
e,!lain to (ana)e(ent the !rocess or the different (ethods availa"le for doin) so, and the
docu(entation thereof' his would not, however, chan)e the res!onsi"ilities of (ana)e(ent for
the !re!aration of the financial state(ents'
Si)nificant Assu(!tions $Aef. 6ara' 15$"&&
A107' An assu(!tion used in (akin) an accountin) esti(ate (a# "e dee(ed to "e si)nificant if a
reasona"le variation in the assu(!tion would (ateriall# affect the (easure(ent of the accountin)
esti(ate'
A108' Su!!ort for si)nificant assu(!tions derived fro( (ana)e(ent+s knowled)e (a# "e o"tained fro(
(ana)e(ent+s continuin) !rocesses of strate)ic anal#sis and risk (ana)e(ent' 0ven without
for(al esta"lished !rocesses, such as (a# "e the case in s(aller entities, the auditor (a# "e a"le
to evaluate the assu(!tions throu)h in*uiries of and discussions with (ana)e(ent, alon) with
other audit !rocedures in order to o"tain sufficient a!!ro!riate audit evidence'
A105' he auditor+s considerations in evaluatin) assu(!tions (ade "# (ana)e(ent are descri"ed in
!ara)ra!hs A77-A89'
Eana)e(ent Intent and A"ilit# $Aef. 6ara' 15$c&&
A110' he auditor+s considerations in relation to assu(!tions (ade "# (ana)e(ent and (ana)e(ent+s
intent and a"ilit# are descri"ed in !ara)ra!hs A19 and A80'
505 ISA 540
?e!elop$ent of a +ange $Aef. 6ara' 1B&
A111' In !re!arin) the financial state(ents, (ana)e(ent (a# "e satisfied that it has ade*uatel#
addressed the effects of esti(ation uncertaint# on the accountin) esti(ates that )ive rise to
si)nificant risks' In so(e circu(stances, however, the auditor (a# view the efforts of
(ana)e(ent as inade*uate' his (a# "e the case, for e,a(!le, where, in the auditor+s ;ud)(ent.
1. G Sufficient a!!ro!riate audit evidence could not "e o"tained throu)h the auditor+s
evaluation of how (ana)e(ent has addressed the effects of esti(ation uncertaint#'
2. G It is necessar# to e,!lore further the de)ree of esti(ation uncertaint# associated with an
accountin) esti(ate, for e,a(!le, where the auditor is aware of wide variation in outco(es for
si(ilar accountin) esti(ates in si(ilar circu(stances'
3. G It is unlikel# that other audit evidence can "e o"tained, for e,a(!le, throu)h the review
of events occurrin) u! to the date of the auditor+s re!ort'
4. G Indicators of (ana)e(ent "ias in the (akin) of accountin) esti(ates (a# e,ist'
A114' he auditor+s considerations in deter(inin) a ran)e for this !ur!ose are descri"ed in !ara)ra!hs
A87-A55'
+ecognition and <easure$ent Criteria
Aeco)nition of the Accountin) 0sti(ates in the Financial State(ents $Aef. 6ara' 17$a&&
A119' Lhere (ana)e(ent has reco)niJed an accountin) esti(ate in the financial state(ents, the focus
of the auditor+s evaluation is on whether the (easure(ent of the accountin) esti(ate is
sufficientl# relia"le to (eet the reco)nition criteria of the a!!lica"le financial re!ortin)
fra(ework'
A114' Lith res!ect to accountin) esti(ates that have not "een reco)niJed, the focus of the auditor+s
evaluation is on whether the reco)nition criteria of the a!!lica"le financial re!ortin) fra(ework
have in fact "een (et' 0ven where an accountin) esti(ate has not "een reco)niJed, and the
auditor concludes that this treat(ent is a!!ro!riate, there (a# "e a need for disclosure of the
circu(stances in the notes to the financial state(ents' he auditor (a# also deter(ine that there is
a need to draw the reader+s attention to a si)nificant uncertaint# "# addin) an 0(!hasis of Eatter
!ara)ra!h to the auditor+s re!ort' ISA 70B
49
esta"lishes re*uire(ents and !rovides )uidance
concernin) such !ara)ra!hs'
ISA 70B, C0(!hasis of Eatter 6ara)ra!hs and 7ther Eatter 6ara)ra!hs in the Inde!endent Auditor+s Ae!ort'D
ISA 540 50B
Eeasure(ent 1asis for the Accountin) 0sti(ates $Aef. 6ara' 17$"&&
A115' Lith res!ect to fair value accountin) esti(ates, so(e financial re!ortin) fra(eworks !resu(e that
fair value can "e (easured relia"l# as a !rere*uisite to either re*uirin) or !er(ittin) fair value
(easure(ents and disclosures' In so(e cases, this !resu(!tion (a# "e overco(e when, for
e,a(!le, there is no a!!ro!riate (ethod or "asis for (easure(ent' In such cases, the focus of the
auditor+s evaluation is on whether (ana)e(ent+s "asis for overco(in) the !resu(!tion relatin) to
the use of fair value set forth under the a!!lica"le financial re!ortin) fra(ework is a!!ro!riate'
E9!0-!ti"( the Re!o"!$0e"e of the Acco-"ti"( Eti.!te4 !"# Dete'.i"i"( )it!te.e"t $Aef.
6ara' 18&
A11B' 1ased on the audit evidence o"tained, the auditor (a# conclude that the evidence !oints to an
accountin) esti(ate that differs fro( (ana)e(ent+s !oint esti(ate' Lhere the audit evidence
su!!orts a !oint esti(ate, the difference "etween the auditor+s !oint esti(ate and (ana)e(ent+s
!oint esti(ate constitutes a (isstate(ent' Lhere the auditor has concluded that usin) the auditor+s
ran)e !rovides sufficient a!!ro!riate audit evidence, a (ana)e(ent !oint esti(ate that lies outside
the auditor+s ran)e would not "e su!!orted "# audit evidence' In such cases, the (isstate(ent is
no less than the difference "etween (ana)e(ent+s !oint esti(ate and the nearest !oint of the
auditor+s ran)e'
A117' Lhere (ana)e(ent has chan)ed an accountin) esti(ate, or the (ethod in (akin) it, fro( the
!rior !eriod "ased on a su";ective assess(ent that there has "een a chan)e in circu(stances, the
auditor (a# conclude "ased on the audit evidence that the accountin) esti(ate is (isstated as a
result of an ar"itrar# chan)e "# (ana)e(ent, or (a# re)ard it as an indicator of !ossi"le
(ana)e(ent "ias $see !ara)ra!hs A144-A145&'
A118' ISA 450
44
!rovides )uidance on distin)uishin) (isstate(ents for !ur!oses of the auditor+s
evaluation of the effect of uncorrected (isstate(ents on the financial state(ents' In relation to
accountin) esti(ates, a (isstate(ent, whether caused "# fraud or error, (a# arise as a result of.
1. G Eisstate(ents a"out which there is no dou"t $factual (isstate(ents&'
2. G =ifferences arisin) fro( (ana)e(ent+s ;ud)(ents concernin) accountin) esti(ates that
the auditor considers unreasona"le, or the selection or a!!lication of accountin) !olicies that the
auditor considers ina!!ro!riate $;ud)(ental (isstate(ents&'
3. G he auditor+s "est esti(ate of (isstate(ents in !o!ulations, involvin) the !ro;ection of
(isstate(ents identified in audit sa(!les to the entire
ISA 450, C0valuation of Eisstate(ents Identified durin) the Audit'D
507 ISA 540
!o!ulations fro( which the sa(!les were drawn $!ro;ected (isstate(ents&'
In so(e cases involvin) accountin) esti(ates, a (isstate(ent could arise as a result of a
co("ination of these circu(stances, (akin) se!arate identification difficult or i(!ossi"le'
A115' 0valuatin) the reasona"leness of accountin) esti(ates and related disclosures included in the
notes to the financial state(ents, whether re*uired "# the a!!lica"le financial re!ortin) fra(ework
or disclosed voluntaril#, involves essentiall# the sa(e t#!es of considerations a!!lied when
auditin) an accountin) esti(ate reco)niJed in the financial state(ents'
Dic0o-'e Re0!te# to Acco-"ti"( Eti.!te
?isclosures in Accordance #ith the Applicable Financial +eporting Fra$e#or.
$Aef. 6ara' 15&
A140' he !resentation of financial state(ents in accordance with the a!!lica"le financial re!ortin)
fra(ework includes ade*uate disclosure of (aterial (atters' he a!!lica"le financial re!ortin)
fra(ework (a# !er(it, or !rescri"e, disclosures related to accountin) esti(ates, and so(e entities
(a# disclose voluntaril# additional infor(ation in the notes to the financial state(ents' hese
disclosures (a# include, for e,a(!le.
% G he assu(!tions used'
% G he (ethod of esti(ation used, includin) an# a!!lica"le (odel'
% G he "asis for the selection of the (ethod of esti(ation'
% G he effect of an# chan)es to the (ethod of esti(ation fro( the !rior !eriod'
% G he sources and i(!lications of esti(ation uncertaint#'
Such disclosures are relevant to users in understandin) the accountin) esti(ates reco)niJed or
disclosed in the financial state(ents, and sufficient a!!ro!riate audit evidence needs to "e
o"tained a"out whether the disclosures are in accordance with the re*uire(ents of the a!!lica"le
A141' In so(e cases, the a!!lica"le financial re!ortin) fra(ework (a# re*uire s!ecific disclosures
re)ardin) uncertainties' For e,a(!le, so(e financial re!ortin) fra(eworks !rescri"e.
G he disclosure of ke# assu(!tions and other sources of esti(ation uncertaint# that have a
si)nificant risk of causin) a (aterial ad;ust(ent to the carr#in) a(ounts of assets and
lia"ilities' Such re*uire(ents (a# "e descri"ed usin) ter(s such as CSe# Sources of
0sti(ation Uncertaint#D or C%ritical Accountin) 0sti(ates'D
ISA 540 508
1. G he disclosure of the ran)e of !ossi"le outco(es, and the assu(!tions used in
deter(inin) the ran)e'
2. G he disclosure of infor(ation re)ardin) the si)nificance of fair value accountin)
esti(ates to the entit#+s financial !osition and !erfor(ance'
3. G :ualitative disclosures such as the e,!osures to risk and how the# arise, the entit#+s
o";ectives, !olicies and !rocedures for (ana)in) the risk and the (ethods used to (easure the risk
and an# chan)es fro( the !revious !eriod of these *ualitative conce!ts'
4. G :uantitative disclosures such as the e,tent to which the entit# is e,!osed to risk, "ased on
infor(ation !rovided internall# to the entit#+s ke# (ana)e(ent !ersonnel, includin) credit risk,
li*uidit# risk and (arket risk'
?isclosures of /sti$ation "ncertainty for Accounting /sti$ates that 2i!e +ise to )ignificant +is.s $Aef.
6ara' 40&
A144' In relation to accountin) esti(ates havin) si)nificant risk, even where the disclosures are in
accordance with the a!!lica"le financial re!ortin) fra(ework, the auditor (a# conclude that the
disclosure of esti(ation uncertaint# is inade*uate in li)ht of the circu(stances and facts involved'
he auditor+s evaluation of the ade*uac# of disclosure of esti(ation uncertaint# increases in
i(!ortance the )reater the ran)e of !ossi"le outco(es of the accountin) esti(ate is in relation to
(aterialit# $see related discussion in !ara)ra!h A54&'
A149' In so(e cases, the auditor (a# consider it a!!ro!riate to encoura)e (ana)e(ent to descri"e, in the
notes to the financial state(ents, the circu(stances relatin) to the esti(ation uncertaint#' ISA
705
45
!rovides )uidance on the i(!lications for the auditor+s o!inion when the auditor "elieves
that (ana)e(ent+s disclosure of esti(ation uncertaint# in the financial state(ents is inade*uate or
(isleadin)'
I"#ic!to' of *oi$0e )!"!(e.e"t Bi! $Aef. 6ara' 41&
A144' =urin) the audit, the auditor (a# "eco(e aware of ;ud)(ents and decisions (ade "# (ana)e(ent
which )ive rise to indicators of !ossi"le (ana)e(ent "ias' Such indicators (a# affect the
auditor+s conclusion as to whether the auditor+s risk assess(ent and related res!onses re(ain
a!!ro!riate, and the auditor (a# need to consider the i(!lications for the rest of the audit' Further,
the# (a# affect the auditor+s evaluation of whether the financial state(ents as a whole are free
fro( (aterial (isstate(ent, as discussed in ISA 700'
4B
45
4B
505 ISA 540
A145' 0,a(!les of indicators of !ossi"le (ana)e(ent "ias with res!ect to accountin) esti(ates include.
1. G %han)es in an accountin) esti(ate, or the (ethod for (akin) it, where (ana)e(ent has
(ade a su";ective assess(ent that there has "een a chan)e in circu(stances'
2. G Use of an entit#+s own assu(!tions for fair value accountin) esti(ates when the# are
inconsistent with o"serva"le (arket!lace assu(!tions'
3. G Selection or construction of si)nificant assu(!tions that #ield a !oint esti(ate favora"le
for (ana)e(ent o";ectives'
4. G Selection of a !oint esti(ate that (a# indicate a !attern of o!ti(is( or !essi(is('
A14B' ISA 580
47
discusses the use of written re!resentations' =e!endin) on the nature, (aterialit# and
e,tent of esti(ation uncertaint#, written re!resentations a"out accountin) esti(ates reco)niJed or
disclosed in the financial state(ents (a# include re!resentations.
% G A"out the a!!ro!riateness of the (easure(ent !rocesses, includin) related assu(!tions
and (odels, used "# (ana)e(ent in deter(inin) accountin) esti(ates in the conte,t of the
a!!lica"le financial re!ortin) fra(ework, and the consistenc# in a!!lication of the !rocesses'
% G hat the assu(!tions a!!ro!riatel# reflect (ana)e(ent+s intent and a"ilit# to carr# out
s!ecific courses of action on "ehalf of the entit#, where relevant to the accountin) esti(ates and
disclosures'
% G hat disclosures related to accountin) esti(ates are co(!lete and a!!ro!riate under the
% G hat no su"se*uent event re*uires ad;ust(ent to the accountin) esti(ates and disclosures
included in the financial state(ents'
A147' For those accountin) esti(ates not reco)niJed or disclosed in the financial state(ents, written
re!resentations (a# also include re!resentations a"out.
1. G he a!!ro!riateness of the "asis used "# (ana)e(ent for deter(inin) that the
reco)nition or disclosure criteria of the a!!lica"le financial re!ortin) fra(ework have not "een
(et $see !ara)ra!h A114&'
2. G he a!!ro!riateness of the "asis used "# (ana)e(ent to overco(e the !resu(!tion
relatin) to the use of fair value set forth under the entit#+s
ISA 540 510
a!!lica"le financial re!ortin) fra(ework, for those accountin) esti(ates not (easured or
disclosed at fair value $see !ara)ra!h A115&'
A148' =ocu(entation of indicators of !ossi"le (ana)e(ent "ias identified durin) the audit assists the
auditor in concludin) whether the auditor+s risk assess(ent and related res!onses re(ain
a!!ro!riate, and in evaluatin) whether the financial state(ents as a whole are free fro( (aterial
(isstate(ent' See !ara)ra!h A145 for e,a(!les of indicators of !ossi"le (ana)e(ent "ias'
511 ISA 540
Appe"#i5
$Aef. 6ara' A1&
F!i' ,!0-e )e!-'e.e"t !"# Dic0o-'e -"#e' Diffe'e"t Fi"!"ci!0 Repo'ti"(
F'!.e&o'%
he !ur!ose of this a!!endi, is onl# to !rovide a )eneral discussion of fair value (easure(ents and
disclosures under different financial re!ortin) fra(eworks, for "ack)round and conte,t'
1. 1' =ifferent financial re!ortin) fra(eworks re*uire or !er(it a variet# of fair value
(easure(ents and disclosures in financial state(ents' he# also var# in the level of )uidance that
the# !rovide on the "asis for (easurin) assets and lia"ilities or the related disclosures' So(e
financial re!ortin) fra(eworks )ive !rescri!tive )uidance, others )ive )eneral )uidance, and so(e
)ive no )uidance at all' In addition, certain industr#-s!ecific (easure(ent and disclosure !ractices
for fair values also e,ist'
2. 4' =efinitions of fair value (a# differ a(on) financial re!ortin) fra(eworks, or for
different assets, lia"ilities or disclosures within a !articular fra(ework' For e,a(!le, International
Accountin) Standard $IAS& 95
48
defines fair value as Cthe a(ount for which an asset could "e
e,chan)ed, or a lia"ilit# settled, "etween knowled)ea"le, willin) !arties in an ar(+s len)th
transaction'D he conce!t of fair value ordinaril# assu(es a current transaction, rather than
settle(ent at so(e !ast or future date' Accordin)l#, the !rocess of (easurin) fair value would "e a
search for the esti(ated !rice at which that transaction would occur' Additionall#, different
financial re!ortin) fra(eworks (a# use such ter(s as Centit#-s!ecific value,D Cvalue in use,D or
si(ilar ter(s, "ut (a# still fall within the conce!t of fair value in this ISA'
3. 9' Financial re!ortin) fra(eworks (a# treat chan)es in fair value (easure(ents that occur
over ti(e in different wa#s' For e,a(!le, a !articular financial re!ortin) fra(ework (a# re*uire
that chan)es in fair value (easure(ents of certain assets or lia"ilities "e reflected directl# in
e*uit#, while such chan)es (i)ht "e reflected in inco(e under another fra(ework' In so(e
fra(eworks, the deter(ination of whether to use fair value accountin) or how it is a!!lied is
influenced "# (ana)e(ent+s intent to carr# out certain courses of action with res!ect to the
s!ecific asset or lia"ilit#'
4. 4' =ifferent financial re!ortin) fra(eworks (a# re*uire certain s!ecific fair value
(easure(ents and disclosures in financial state(ents and !rescri"e or !er(it the( in var#in)
de)rees' he financial re!ortin) fra(eworks (a#.
IAS 95, CFinancial Instru(ents. Aeco)nition and Eeasure(ent'D
ISA 540 A660N=II 514
% G 6rescri"e (easure(ent, !resentation and disclosure re*uire(ents for certain infor(ation
included in the financial state(ents or for infor(ation disclosed in notes to financial state(ents or
!resented as su!!le(entar# infor(ation?
% G 6er(it certain (easure(ents usin) fair values at the o!tion of an entit# or onl# when
certain criteria have "een (et?
% G 6rescri"e a s!ecific (ethod for deter(inin) fair value, for e,a(!le, throu)h the use of an
inde!endent a!!raisal or s!ecified wa#s of usin) discounted cash flows?
% G 6er(it a choice of (ethod for deter(inin) fair value fro( a(on) several alternative
(ethods $the criteria for selection (a# or (a# not "e !rovided "# the financial re!ortin)
fra(ework&? or
% G 6rovide no )uidance on the fair value (easure(ents or disclosures of fair value other
than their use "ein) evident throu)h custo( or !ractice, for e,a(!le, an industr# !ractice'
1. 5' So(e financial re!ortin) fra(eworks !resu(e that fair value can "e (easured relia"l#
for assets or lia"ilities as a !rere*uisite to either re*uirin) or !er(ittin) fair value (easure(ents
or disclosures' In so(e cases, this !resu(!tion (a# "e overco(e when an asset or lia"ilit# does
not have a *uoted (arket !rice in an active (arket and for which other (ethods of reasona"l#
esti(atin) fair value are clearl# ina!!ro!riate or unworka"le' So(e financial re!ortin)
fra(eworks (a# s!ecif# a fair value hierarch# that distin)uishes in!uts for use in arrivin) at fair
values ran)in) fro( those that involve clearl# Co"serva"le in!utsD "ased on *uoted !rices and
active (arkets and those Cuno"serva"le in!utsD that involve an entit#+s own ;ud)(ents a"out
assu(!tions that (arket!lace !artici!ants would use'
2. B' So(e financial re!ortin) fra(eworks re*uire certain s!ecified ad;ust(ents or
(odifications to valuation infor(ation, or other considerations uni*ue to a !articular asset or
lia"ilit#' For e,a(!le, accountin) for invest(ent !ro!erties (a# re*uire ad;ust(ents to "e (ade to
an a!!raised (arket value, such as ad;ust(ents for esti(ated closin) costs on sale, ad;ust(ents
related to the !ro!ert#+s condition and location, and other (atters' Si(ilarl#, if the (arket for a
!articular asset is not an active (arket, !u"lished !rice *uotations (a# have to "e ad;usted or
(odified to arrive at a (ore suita"le (easure of fair value' For e,a(!le, *uoted (arket !rices
(a# not "e indicative of fair value if there is infre*uent activit# in the (arket, the (arket is not
well esta"lished, or s(all volu(es of units are traded relative to the a))re)ate nu("er of tradin)
units in e,istence' Accordin)l#, such (arket !rices (a# have to "e ad;usted or (odified'
Alternative sources of (arket infor(ation (a# "e needed to (ake such ad;ust(ents or
(odifications' Further, in so(e cases, collateral assi)ned $for e,a(!le, when collateral is assi)ned
for certain t#!es of invest(ent in
519 ISA 540 A660N=II
de"t& (a# need to "e considered in deter(inin) the fair value or !ossi"le i(!air(ent of an asset or
lia"ilit#'
7' In (ost financial re!ortin) fra(eworks, underl#in) the conce!t of fair value (easure(ents is a
!resu(!tion that the entit# is a )oin) concern without an# intention or need to li*uidate, curtail
(ateriall# the scale of its o!erations, or undertake a transaction on adverse ter(s' herefore, in
this case, fair value would not "e the a(ount that an entit# would receive or !a# in a forced
transaction, involuntar# li*uidation, or distress sale' 7n the other hand, )eneral econo(ic
conditions or econo(ic conditions s!ecific to certain industries (a# cause illi*uidit# in the
(arket!lace and re*uire fair values to "e !redicated u!on de!ressed !rices, !otentiall#
si)nificantl# de!ressed !rices' An entit#, however, (a# need to take its current econo(ic or
o!eratin) situation into account in deter(inin) the fair values of its assets and lia"ilities if
!rescri"ed or !er(itted to do so "# its financial re!ortin) fra(ework and such fra(ework (a# or
(a# not s!ecif# how that is done' For e,a(!le, (ana)e(ent+s !lan to dis!ose of an asset on an
accelerated "asis to (eet s!ecific "usiness o";ectives (a# "e relevant to the deter(ination of the
fair value of that asset'
*'e9!0e"ce of F!i' ,!0-e )e!-'e.e"t
8' Eeasure(ents and disclosures "ased on fair value are "eco(in) increasin)l# !revalent in financial
re!ortin) fra(eworks' Fair values (a# occur in, and affect the deter(ination of, financial
state(ents in a nu("er of wa#s, includin) the (easure(ent at fair value of the followin).
1. G S!ecific assets or lia"ilities, such as (arketa"le securities or lia"ilities to settle an
o"li)ation under a financial instru(ent, routinel# or !eriodicall# C(arked-to-(arket'D
2. G S!ecific co(!onents of e*uit#, for e,a(!le when accountin) for the reco)nition,
(easure(ent and !resentation of certain financial instru(ents with e*uit# features, such as a "ond
converti"le "# the holder into co((on shares of the issuer'
3. G S!ecific assets or lia"ilities ac*uired in a "usiness co("ination' For e,a(!le, the initial
deter(ination of )oodwill arisin) on the !urchase of an entit# in a "usiness co("ination usuall# is
"ased on the fair value (easure(ent of the identifia"le assets and lia"ilities ac*uired and the fair
value of the consideration )iven'
4. G S!ecific assets or lia"ilities ad;usted to fair value on a one-ti(e "asis' So(e financial
re!ortin) fra(eworks (a# re*uire the use of a fair value (easure(ent to *uantif# an ad;ust(ent
to an asset or a )rou! of assets as !art of an asset i(!air(ent deter(ination, for e,a(!le, a test of
i(!air(ent of )oodwill ac*uired in a "usiness co("ination "ased on the fair value of a defined
o!eratin) entit# or re!ortin) unit, the value of
ISA 540 A660N=II 514
which is then allocated a(on) the entit#+s or unit+s )rou! of assets and lia"ilities in order to derive
an i(!lied )oodwill for co(!arison to the recorded )oodwill'
% G A))re)ations of assets and lia"ilities' In so(e circu(stances, the (easure(ent of a class
or )rou! of assets or lia"ilities calls for an a))re)ation of fair values of so(e of the individual
assets or lia"ilities in such class or )rou!' For e,a(!le, under an entit#+s a!!lica"le financial
re!ortin) fra(ework, the (easure(ent of a diversified loan !ortfolio (i)ht "e deter(ined "ased
on the fair value of so(e cate)ories of loans co(!risin) the !ortfolio'
% G Infor(ation disclosed in notes to financial state(ents or !resented as su!!le(entar#
infor(ation, "ut not reco)niJed in the financial state(ents'
515 ISA 540 A660N=II
INTERNATIONAL STANDARD ON AUDITING @@0
RELATED *ARTIES
CONTENTS
6ara)ra!h
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1
Nature of Aelated 6art# Aelationshi!s and ransactions '''''''''''''''''''''''''''' 4
Aes!onsi"ilities of the Auditor ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 9-7
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 8
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 10
Re2-i'e.e"t
Aisk Assess(ent 6rocedures and Aelated Activities '''''''''''''''''''''''''''''''''' 11-17
Identification and Assess(ent of the Aisks of Eaterial Eisstate(ent
Associated with Aelated 6art# Aelationshi!s and ransactions ''''''''''' 18-15
Aes!onses to the Aisks of Eaterial Eisstate(ent Associated with
Aelated 6art# Aelationshi!s and ransactions ''''''''''''''''''''''''''''''''''''' 40-44
0valuation of the Accountin) for and =isclosure of Identified Aelated
6art# Aelationshi!s and ransactions '''''''''''''''''''''''''''''''''''''''''''''''''' 45
Lritten Ae!resentations '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4B
%o((unication with hose %har)ed with <overnance ''''''''''''''''''''''''''''' 47
=ocu(entation '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 48
Aes!onsi"ilities of the Auditor ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1-A9 =efinition of a Aelated
6art# '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A4-A7 Aisk Assess(ent 6rocedures and Aelated
Activities '''''''''''''''''''''''''''''''''' A8-A48 Identification and Assess(ent of the Aisks of Eaterial
Eisstate(ent
Associated with Aelated 6art# Aelationshi!s and ransactions ''''''''''' A45-A90
ISA 550 51B
Aes!onses to the Aisks of Eaterial Eisstate(ent Associated with
Aelated 6art# Aelationshi!s and ransactions ''''''''''''''''''''''''''''''''''''' A91-A45 0valuation of the
Accountin) for and =isclosure of Identified Aelated
6art# Aelationshi!s and ransactions '''''''''''''''''''''''''''''''''''''''''''''''''' A4B-A47
Lritten Ae!resentations '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A48-A45
%o((unication with hose %har)ed with <overnance ''''''''''''''''''''''''''''' A50
International Standard on Auditin) $ISA& 550, CAelated 6artiesD should "e read in con;unction with ISA
517 ISA 550
related !art# relationshi!s and transactions in an audit of financial state(ents' S!ecificall#, it
e,!ands on how ISA 915,
1
ISA 990,
4
and ISA 440
9
are to "e a!!lied in relation to risks of (aterial
(isstate(ent associated with related !art# relationshi!s and transactions'
N!t-'e of Re0!te# *!'t/ Re0!tio"hip !"# T'!"!ctio"
4' Ean# related !art# transactions are in the nor(al course of "usiness' In such circu(stances, the#
(a# carr# no hi)her risk of (aterial (isstate(ent of the financial state(ents than si(ilar
transactions with unrelated !arties' @owever, the nature of related !art# relationshi!s and
transactions (a#, in so(e circu(stances, )ive rise to hi)her risks of (aterial (isstate(ent of the
financial state(ents than transactions with unrelated !arties' For e,a(!le.
1. G Aelated !arties (a# o!erate throu)h an e,tensive and co(!le, ran)e of relationshi!s and
structures, with a corres!ondin) increase in the co(!le,it# of related !art# transactions'
2. G Infor(ation s#ste(s (a# "e ineffective at identif#in) or su((ariJin) transactions and
outstandin) "alances "etween an entit# and its related !arties'
3. G Aelated !art# transactions (a# not "e conducted under nor(al (arket ter(s and
conditions? for e,a(!le, so(e related !art# transactions (a# "e conducted with no e,chan)e of
consideration'
Repo"i$i0itie of the A-#ito'
9' 1ecause related !arties are not inde!endent of each other, (an# financial re!ortin) fra(eworks
esta"lish s!ecific accountin) and disclosure re*uire(ents for related !art# relationshi!s,
transactions and "alances to ena"le users of the financial state(ents to understand their nature and
actual or !otential effects on the financial state(ents' Lhere the a!!lica"le financial re!ortin)
fra(ework esta"lishes such re*uire(ents, the auditor has a res!onsi"ilit# to !erfor( audit
!rocedures to identif#, assess and res!ond to the risks of (aterial (isstate(ent arisin) fro( the
entit#+s failure to a!!ro!riatel# account for or disclose related !art# relationshi!s, transactions or
"alances in accordance with the re*uire(ents of the fra(ework'
1
State(ents'D
ISA 550 518
1. 4' 0ven if the a!!lica"le financial re!ortin) fra(ework esta"lishes (ini(al or no related
!art# re*uire(ents, the auditor nevertheless needs to o"tain an understandin) of the entit#+s
related !art# relationshi!s and transactions sufficient to "e a"le to conclude whether the
financial state(ents, insofar as the# are affected "# those relationshi!s and transactions. $Aef.
6ara' A1&
2. $a& Achieve fair !resentation $for fair !resentation fra(eworks&? or $Aef. 6ara' A4&
3. $"& Are not (isleadin) $for co(!liance fra(eworks&' $Aef. 6ara' A9&
2. 5' In addition, an understandin) of the entit#+s related !art# relationshi!s and transactions is
relevant to the auditor+s evaluation of whether one or (ore fraud risk factors are !resent as
re*uired "# ISA 440,
4
"ecause fraud (a# "e (ore easil# co((itted throu)h related !arties'
1. B' 7win) to the inherent li(itations of an audit, there is an unavoida"le risk that so(e
(aterial (isstate(ents of the financial state(ents (a# not "e detected, even thou)h the audit
is !ro!erl# !lanned and !erfor(ed in accordance with the ISAs'
5
In the conte,t of related
!arties, the !otential effects of inherent li(itations on the auditor+s a"ilit# to detect (aterial
(isstate(ents are )reater for such reasons as the followin).
1. G Eana)e(ent (a# "e unaware of the e,istence of all related !art# relationshi!s
and transactions, !articularl# if the a!!lica"le financial re!ortin) fra(ework does not
esta"lish related !art# re*uire(ents'
2. G Aelated !art# relationshi!s (a# !resent a )reater o!!ortunit# for collusion,
conceal(ent or (ani!ulation "# (ana)e(ent'
3. 7' 6lannin) and !erfor(in) the audit with !rofessional ske!ticis( as re*uired "# ISA 400
B

is therefore !articularl# i(!ortant in this conte,t, )iven the !otential for undisclosed related !art#
relationshi!s and transactions' he re*uire(ents in this ISA are desi)ned to assist the auditor in
identif#in) and assessin) the risks of (aterial (isstate(ent associated with related !art#
relationshi!s and transactions, and in desi)nin) audit !rocedures to res!ond to the assessed risks'
Effecti9e D!te
15, 4005'
4
ISA 440, !ara)ra!h 44' 5
International Standards on Auditin),D !ara)ra!h A54' B
515 ISA 550
O$1ecti9e
1. $a& Irres!ective of whether the a!!lica"le financial re!ortin) fra(ework esta"lishes related
!art# re*uire(ents, to o"tain an understandin) of related !art# relationshi!s and transactions
sufficient to "e a"le.
2. $i& o reco)niJe fraud risk factors, if an#, arisin) fro( related !art# relationshi!s and
transactions that are relevant to the identification and assess(ent of the risks of (aterial
(isstate(ent due to fraud? and
3. $ii& o conclude, "ased on the audit evidence o"tained, whether the financial state(ents,
insofar as the# are affected "# those relationshi!s and transactions.
4. a' Achieve fair !resentation $for fair !resentation fra(eworks&? or
5. "' Are not (isleadin) $for co(!liance fra(eworks&? and
2. $"& In addition, where the a!!lica"le financial re!ortin) fra(ework esta"lishes related !art#
re*uire(ents, to o"tain sufficient a!!ro!riate audit evidence a"out whether related !art#
relationshi!s and transactions have "een a!!ro!riatel# identified, accounted for and disclosed in
the financial state(ents in accordance with the fra(ework'
Defi"itio"
1. $a& Ar(+s len)th transaction K A transaction conducted on such ter(s and conditions as
"etween a willin) "u#er and a willin) seller who are unrelated and are actin) inde!endentl# of
each other and !ursuin) their own "est interests'
1. $"& Aelated !art# K A !art# that is either. $Aef. 6ara' A4-A7&
2. $i& A related !art# as defined in the a!!lica"le financial re!ortin) fra(ework? or
3. $ii& Lhere the a!!lica"le financial re!ortin) fra(ework esta"lishes (ini(al or no related
!art# re*uire(ents.
a' A !erson or other entit# that has control or si)nificant influence, directl# or
indirectl# throu)h one or (ore inter(ediaries, over the re!ortin) entit#?
ISA 550 540
1. "' Another entit# over which the re!ortin) entit# has control or si)nificant influence,
directl# or indirectl# throu)h one or (ore inter(ediaries? or
2. c' Another entit# that is under co((on control with the re!ortin) entit# throu)h havin).
i' %o((on controllin) ownershi!?
ii' 7wners who are close fa(il# (e("ers? or
iii' %o((on ke# (ana)e(ent'
@owever, entities that are under co((on control "# a state $that is, a national,
re)ional or local )overn(ent& are not considered related unless the# en)a)e in
si)nificant transactions or share resources to a si)nificant e,tent with one
another'
11' As !art of the risk assess(ent !rocedures and related activities that ISA 915 and ISA 440 re*uire
the auditor to !erfor( durin) the audit,
7
the auditor shall !erfor( the audit !rocedures and related
activities set out in !ara)ra!hs 14-17 to o"tain infor(ation relevant to identif#in) the risks of
(aterial (isstate(ent associated with related !art# relationshi!s and transactions' $Aef. 6ara' A8&
"nderstanding the /ntity8s +elated (arty +elationships and 1ransactions
1. 14' he en)a)e(ent tea( discussion that ISA 915 and ISA 440 re*uire
8
shall include s!ecific
consideration of the susce!ti"ilit# of the financial state(ents to (aterial (isstate(ent due to fraud
or error that could result fro( the entit#+s related !art# relationshi!s and transactions' $Aef. 6ara'
A5-A10&
119' he auditor shall in*uire of (ana)e(ent re)ardin).
2$a& he identit# of the entit#+s related !arties, includin) chan)es fro( the !rior !eriod? $Aef.
6ara' A11-A14&
3$"& he nature of the relationshi!s "etween the entit# and these related !arties? and
4$c& Lhether the entit# entered into an# transactions with these related !arties durin) the
!eriod and, if so, the t#!e and !ur!ose of the transactions'
7
ISA 915, !ara)ra!h 5? ISA 440, !ara)ra!h 1B' 8
ISA 915, !ara)ra!h 10? ISA 440, !ara)ra!h 15'
541 ISA 550
14' he auditor shall in*uire of (ana)e(ent and others within the entit#, and !erfor( other risk
assess(ent !rocedures considered a!!ro!riate, to o"tain an understandin) of the controls, if an#,
that (ana)e(ent has esta"lished to. $Aef. 6ara' A15-A40&
1. $a& Identif#, account for, and disclose related !art# relationshi!s and transactions in
accordance with the a!!lica"le financial re!ortin) fra(ework?
2. $"& AuthoriJe and a!!rove si)nificant transactions and arran)e(ents with related !arties? and
$Aef. 6ara' A41&
3. $c& AuthoriJe and a!!rove si)nificant transactions and arran)e(ents outside the nor(al
course of "usiness'
<aintaining Alertness for +elated (arty Infor$ation Dhen +e!ie#ing +ecords or ?ocu$ents
15' =urin) the audit, the auditor shall re(ain alert, when ins!ectin) records or docu(ents, for
arran)e(ents or other infor(ation that (a# indicate the e,istence of related !art# relationshi!s or
transactions that (ana)e(ent has not !reviousl# identified or disclosed to the auditor' $Aef. 6ara'
A44-A49&
In !articular, the auditor shall ins!ect the followin) for indications of the e,istence of related !art#
relationshi!s or transactions that (ana)e(ent has not !reviousl# identified or disclosed to the
auditor.
1$a&1ank and le)al confir(ations o"tained as !art of the auditor+s !rocedures?
2$"& Einutes of (eetin)s of shareholders and of those char)ed with )overnance? and
3$c&Such other records or docu(ents as the auditor considers necessar# in the circu(stances of the
entit#'
1B' If the auditor identifies si)nificant transactions outside the entit#+s nor(al course of "usiness when
!erfor(in) the audit !rocedures re*uired "# !ara)ra!h 15 or throu)h other audit !rocedures, the
auditor shall in*uire of (ana)e(ent a"out. $Aef. 6ara' A44-A45&
1$a& he nature of these transactions? and $Aef. 6ara' A4B&
2$"&Lhether related !arties could "e involved' $Aef. 6ara' A47&
)haring +elated (arty Infor$ation #ith the /ngage$ent 1ea$
17' he auditor shall share relevant infor(ation o"tained a"out the entit#+s related !arties with the
other (e("ers of the en)a)e(ent tea(' $Aef. 6ara' A48&
ISA 550 544
I#e"tific!tio" !"# Ae.e"t of the Ri% of )!te'i!0 )it!te.e"t Aoci!te# &ith Re0!te# *!'t/
Re0!tio"hip !"# T'!"!ctio"
1. 18' In (eetin) the ISA 915 re*uire(ent to identif# and assess the risks of (aterial
(isstate(ent,
5
the auditor shall identif# and assess the risks of (aterial (isstate(ent associated
with related !art# relationshi!s and transactions and deter(ine whether an# of those risks are
si)nificant risks' In (akin) this deter(ination, the auditor shall treat identified si)nificant related
!art# transactions outside the entit#+s nor(al course of "usiness as )ivin) rise to si)nificant risks'
2. 15' If the auditor identifies fraud risk factors $includin) circu(stances relatin) to the
e,istence of a related !art# with do(inant influence& when !erfor(in) the risk assess(ent
!rocedures and related activities in connection with related !arties, the auditor shall consider such
infor(ation when identif#in) and assessin) the risks of (aterial (isstate(ent due to fraud in
accordance with ISA 440' $Aef. 6ara' AB and A45-A90&
Repo"e to the Ri% of )!te'i!0 )it!te.e"t Aoci!te# &ith Re0!te# *!'t/ Re0!tio"hip !"#
T'!"!ctio"
40' As !art of the ISA 990 re*uire(ent that the auditor res!ond to assessed risks,
10
the auditor desi)ns
and !erfor(s further audit !rocedures to o"tain sufficient a!!ro!riate audit evidence a"out the
assessed risks of (aterial (isstate(ent associated with related !art# relationshi!s and
transactions' hese audit !rocedures shall include those re*uired "# !ara)ra!hs 41-44' $Aef. 6ara'
A91-A94&
Identification of (re!iously "nidentified or "ndisclosed +elated (arties or )ignificant +elated
(arty 1ransactions
1. 41' If the auditor identifies arran)e(ents or infor(ation that su))ests the e,istence of related
!art# relationshi!s or transactions that (ana)e(ent has not !reviousl# identified or disclosed to
the auditor, the auditor shall deter(ine whether the underl#in) circu(stances confir( the
e,istence of those relationshi!s or transactions'
1. 44' If the auditor identifies related !arties or si)nificant related !art# transactions that
(ana)e(ent has not !reviousl# identified or disclosed to the auditor, the auditor shall.
2. $a& 6ro(!tl# co((unicate the relevant infor(ation to the other (e("ers of the en)a)e(ent
tea(? $Aef. 6ara' A95&
3. $"& Lhere the a!!lica"le financial re!ortin) fra(ework esta"lishes related !art#
re*uire(ents.
5
ISA 915, !ara)ra!h 45' 10
549 ISA 550
1$i& Ae*uest (ana)e(ent to identif# all transactions with the newl# identified related !arties for the
auditor+s further evaluation? and
2$ii& In*uire as to wh# the entit#+s controls over related !art# relationshi!s and transactions
failed to ena"le the identification or disclosure of the related !art# relationshi!s or transactions?
1$c& 6erfor( a!!ro!riate su"stantive audit !rocedures relatin) to such newl# identified related !arties
or si)nificant related !art# transactions? $Aef. 6ara' A9B&
2$d& Aeconsider the risk that other related !arties or si)nificant related !art# transactions (a# e,ist that
(ana)e(ent has not !reviousl# identified or disclosed to the auditor, and !erfor( additional audit
!rocedures as necessar#? and
3$e& If the non-disclosure "# (ana)e(ent a!!ears intentional $and therefore indicative of a risk of
(aterial (isstate(ent due to fraud&, evaluate the i(!lications for the audit' $Aef. 6ara' A97&
Identified )ignificant +elated (arty 1ransactions outside the /ntity8s Aor$al Course of =usiness
49' For identified si)nificant related !art# transactions outside the entit#+s nor(al course of "usiness,
the auditor shall.
1$a& Ins!ect the underl#in) contracts or a)ree(ents, if an#, and evaluate whether.
2$i& he "usiness rationale $or lack thereof& of the transactions su))ests that the# (a# have "een
entered into to en)a)e in fraudulent financial re!ortin) or to conceal (isa!!ro!riation of
assets?
11
3$ii& he ter(s of the transactions are consistent with (ana)e(ent+s e,!lanations? and
4$iii& he transactions have "een a!!ro!riatel# accounted for and disclosed in accordance with
the a!!lica"le financial re!ortin) fra(ework? and
2$"& 7"tain audit evidence that the transactions have "een a!!ro!riatel# authoriJed and
a!!roved' $Aef. 6ara' A40-A41&
ISA 550 544
Assertions 1hat +elated (arty 1ransactions Dere Conducted on 1er$s />ui!alent to 1hose (re!ailing in
an Ar$8s :ength 1ransaction
44' If (ana)e(ent has (ade an assertion in the financial state(ents to the effect that a related !art#
transaction was conducted on ter(s e*uivalent to those !revailin) in an ar(+s len)th transaction,
the auditor shall o"tain sufficient a!!ro!riate audit evidence a"out the assertion' $Aef. 6ara' A44-
A45&
E9!0-!tio" of the Acco-"ti"( fo' !"# Dic0o-'e of I#e"tifie# Re0!te# *!'t/ Re0!tio"hip !"#
T'!"!ctio"
45' In for(in) an o!inion on the financial state(ents in accordance with ISA 700,
14
the auditor shall
evaluate. $Aef. 6ara' A4B&
1$a& Lhether the identified related !art# relationshi!s and transactions have "een
a!!ro!riatel# accounted for and disclosed in accordance with the a!!lica"le financial re!ortin)
fra(ework? and $Aef. 6ara' A47&
1$"&Lhether the effects of the related !art# relationshi!s and transactions.
2$i& 6revent the financial state(ents fro( achievin) fair !resentation $for fair !resentation
fra(eworks&? or
3$ii& %ause the financial state(ents to "e (isleadin) $for co(!liance fra(eworks&'
4B' Lhere the a!!lica"le financial re!ortin) fra(ework esta"lishes related !art# re*uire(ents, the
auditor shall o"tain written re!resentations fro( (ana)e(ent and, where a!!ro!riate, those
char)ed with )overnance that. $Aef. 6ara' A48-A45&
1$a& he# have disclosed to the auditor the identit# of the entit#+s related !arties and all the
related !art# relationshi!s and transactions of which the# are aware? and
2$"& he# have a!!ro!riatel# accounted for and disclosed such relationshi!s and transactions in
accordance with the re*uire(ents of the fra(ework'
Co..-"ic!tio" &ith Thoe Ch!'(e# &ith Go9e'"!"ce
47' Unless all of those char)ed with )overnance are involved in (ana)in) the entit#,
19
the auditor
shall co((unicate with those char)ed with )overnance si)nificant (atters arisin) durin) the
audit in connection with the entit#+s related !arties' $Aef. 6ara' A50&
14
ISA 700, CFor(in) an 7!inion and Ae!ortin) on Financial State(ents,D !ara)ra!hs 10-15' 19
545 ISA 550
Doc-.e"t!tio"
48' he auditor shall include in the audit docu(entation the na(es of the identified related !arties and
the nature of the related !art# relationshi!s'
14
OOO
App0ic!tio" !"# Othe' E5p0!"!to'/ )!te'i!0 Repo"i$i0itie of
the A-#ito'
Financial +eporting Fra$e#or.s 1hat /stablish <ini$al +elated (arty +e>uire$ents
$Aef. 6ara' 4&
A1' An a!!lica"le financial re!ortin) fra(ework that esta"lishes (ini(al related !art# re*uire(ents is
one that defines the (eanin) of a related !art# "ut that definition has a su"stantiall# narrower
sco!e than the definition set out in !ara)ra!h 10$"&$ii& of this ISA, so that a re*uire(ent in the
fra(ework to disclose related !art# relationshi!s and transactions would a!!l# to su"stantiall#
fewer related !art# relationshi!s and transactions'
Fair (resentation Fra$e#or.s $Aef. 6ara' 4$a&&
A4' In the conte,t of a fair !resentation fra(ework,
15
related !art# relationshi!s and transactions (a#
cause the financial state(ents to fail to achieve fair !resentation if, for e,a(!le, the econo(ic
realit# of such relationshi!s and transactions is not a!!ro!riatel# reflected in the financial
state(ents' For instance, fair !resentation (a# not "e achieved if the sale of a !ro!ert# "# the
entit# to a controllin) shareholder at a !rice a"ove or "elow fair (arket value has "een accounted
for as a transaction involvin) a !rofit or loss for the entit# when it (a# constitute a contri"ution or
return of ca!ital or the !a#(ent of a dividend'
Co$pliance Fra$e#or.s $Aef. 6ara' 4$"&&
A9' In the conte,t of a co(!liance fra(ework, whether related !art# relationshi!s and transactions
cause the financial state(ents to "e (isleadin) as discussed in ISA 700 de!ends u!on the
!articular circu(stances of the en)a)e(ent' For e,a(!le, even if non-disclosure of related !art#
transactions in the financial state(ents is in co(!liance with the fra(ework and a!!lica"le law or
re)ulation, the financial state(ents could "e (isleadin) if the entit# derives a ver# su"stantial
!ortion of its revenue fro( transactions with related !arties, and that fact is not disclosed'
@owever, it will "e e,tre(el# rare for the auditor
14
ISA 400, !ara)ra!h 19$a&, defines the (eanin) of fair !resentation and co(!liance fra(eworks'
ISA 550 54B
to consider financial state(ents that are !re!ared and !resented in accordance with a co(!liance
fra(ework to "e (isleadin) if in accordance with ISA 410
1B
the auditor deter(ined that the
fra(ework is acce!ta"le'
17
Defi"itio" of ! Re0!te# *!'t/ $Aef. 6ara' 10$"&&
A4' Ean# financial re!ortin) fra(eworks discuss the conce!ts of control and si)nificant influence'
Althou)h the# (a# discuss these conce!ts usin) different ter(s, the# )enerall# e,!lain that.
A5' he e,istence of the followin) relationshi!s (a# indicate the !resence of control or si)nificant
influence.
1. $a& =irect or indirect e*uit# holdin)s or other financial interests in the entit#'
2. $"& he entit#+s holdin)s of direct or indirect e*uit# or other financial interests in other
entities'
3. $c& 1ein) !art of those char)ed with )overnance or ke# (ana)e(ent $that is, those (e("ers
of (ana)e(ent who have the authorit# and res!onsi"ilit# for !lannin), directin) and controllin)
the activities of the entit#&'
4. $d& 1ein) a close fa(il# (e("er of an# !erson referred to in su"!ara)ra!h $c&'
5. $e& @avin) a si)nificant "usiness relationshi! with an# !erson referred to in su"!ara)ra!h $c&'
+elated (arties #ith ?o$inant Influence
AB' Aelated !arties, "# virtue of their a"ilit# to e,ert control or si)nificant influence, (a# "e in a
!osition to e,ert do(inant influence over the entit# or its (ana)e(ent' %onsideration of such
"ehavior is relevant when identif#in) and assessin) the risks of (aterial (isstate(ent due to
fraud, as further e,!lained in !ara)ra!hs A45-A90'
1B
ISA 410, CA)reein) the er(s of Audit 0n)a)e(ents,D !ara)ra!h B$a&' 17
547 ISA 550
)pecial3(urpose /ntities as +elated (arties
A7' In so(e circu(stances, a s!ecial-!ur!ose entit#
18
(a# "e a related !art# of the entit# "ecause the
entit# (a# in su"stance control it, even if the entit# owns little or none of the s!ecial-!ur!ose
entit#+s e*uit#'
+is.s of <aterial <isstate$ent Associated #ith +elated (arty +elationships and 1ransactions $Aef.
6ara' 11&
A8' he !u"lic sector auditor+s res!onsi"ilities re)ardin) related !art# relationshi!s and transactions
(a# "e affected "# the audit (andate, or "# o"li)ations on !u"lic sector entities arisin) fro( law,
re)ulation or other authorit#' %onse*uentl#, the !u"lic sector auditor+s res!onsi"ilities (a# not "e
li(ited to addressin) the risks of (aterial (isstate(ent associated with related !art# relationshi!s
and transactions, "ut (a# also include a "roader res!onsi"ilit# to address the risks of non-
co(!liance with law, re)ulation and other authorit# )overnin) !u"lic sector "odies that la# down
s!ecific re*uire(ents in the conduct of "usiness with related !arties' Further, the !u"lic sector
auditor (a# need to have re)ard to !u"lic sector financial re!ortin) re*uire(ents for related !art#
relationshi!s and transactions that (a# differ fro( those in the !rivate sector'
"nderstanding the /ntity8s +elated (arty +elationships and 1ransactions
=iscussion a(on) the 0n)a)e(ent ea( $Aef. 6ara' 14&
A5' Eatters that (a# "e addressed in the discussion a(on) the en)a)e(ent tea( include.
% G he nature and e,tent of the entit#+s relationshi!s and transactions with related !arties
$usin), for e,a(!le, the auditor+s record of identified related !arties u!dated after each audit&'
% G An e(!hasis on the i(!ortance of (aintainin) !rofessional ske!ticis( throu)hout the
audit re)ardin) the !otential for (aterial (isstate(ent associated with related !art# relationshi!s
and transactions'
% G he circu(stances or conditions of the entit# that (a# indicate the e,istence of related
!art# relationshi!s or transactions that (ana)e(ent has not identified or disclosed to the auditor
$for e,a(!le, a co(!le, or)aniJational structure, use of s!ecial-!ur!ose entities for off-"alance
sheet transactions, or an inade*uate infor(ation s#ste(&'
ISA 915, !ara)ra!hs A4B-A47, !rovides )uidance re)ardin) the nature of a s!ecial-!ur!ose entit#'
ISA 550 548
% G he records or docu(ents that (a# indicate the e,istence of related !art# relationshi!s or
transactions'
% G he i(!ortance that (ana)e(ent and those char)ed with )overnance attach to the
identification, a!!ro!riate accountin) for, and disclosure of related !art# relationshi!s and
transactions $if the a!!lica"le financial re!ortin) fra(ework esta"lishes related !art#
re*uire(ents&, and the related risk of (ana)e(ent override of relevant controls'
A10' In addition, the discussion in the conte,t of fraud (a# include s!ecific consideration of how
related !arties (a# "e involved in fraud' For e,a(!le.
% G @ow s!ecial-!ur!ose entities controlled "# (ana)e(ent (i)ht "e used to facilitate
earnin)s (ana)e(ent'
% G @ow transactions "etween the entit# and a known "usiness !artner of a ke# (e("er of
(ana)e(ent could "e arran)ed to facilitate (isa!!ro!riation of the entit#+s assets'
he Identit# of the 0ntit#+s Aelated 6arties $Aef. 6ara' 19$a&&
A11' Lhere the a!!lica"le financial re!ortin) fra(ework esta"lishes related !art# re*uire(ents,
infor(ation re)ardin) the identit# of the entit#+s related !arties is likel# to "e readil# availa"le to
(ana)e(ent "ecause the entit#+s infor(ation s#ste(s will need to record, !rocess and su((ariJe
related !art# relationshi!s and transactions to ena"le the entit# to (eet the accountin) and
disclosure re*uire(ents of the fra(ework' Eana)e(ent is therefore likel# to have a
co(!rehensive list of related !arties and chan)es fro( the !rior !eriod' For recurrin)
en)a)e(ents, (akin) the in*uiries !rovides a "asis for co(!arin) the infor(ation su!!lied "#
(ana)e(ent with the auditor+s record of related !arties noted in !revious audits'
A14' @owever, where the fra(ework does not esta"lish related !art# re*uire(ents, the entit# (a# not
have such infor(ation s#ste(s in !lace' Under such circu(stances, it is !ossi"le that (ana)e(ent
(a# not "e aware of the e,istence of all related !arties' Nevertheless, the re*uire(ent to (ake the
in*uiries s!ecified "# !ara)ra!h 19 still a!!lies "ecause (ana)e(ent (a# "e aware of !arties that
(eet the related !art# definition set out in this ISA' In such a case, however, the auditor+s in*uiries
re)ardin) the identit# of the entit#+s related !arties are likel# to for( !art of the auditor+s risk
assess(ent !rocedures and related activities !erfor(ed in accordance with ISA 915 to o"tain
infor(ation re)ardin).
1. G he entit#+s ownershi! and )overnance structures?
2. G he t#!es of invest(ents that the entit# is (akin) and !lans to (ake? and
3. G he wa# the entit# is structured and how it is financed'
545 ISA 550
In the !articular case of co((on control relationshi!s, as (ana)e(ent is (ore likel# to "e aware of
such relationshi!s if the# have econo(ic si)nificance to the entit#, the auditor+s in*uiries are likel#
to "e (ore effective if the# are focused on whether !arties with which the entit# en)a)es in
si)nificant transactions, or shares resources to a si)nificant de)ree, are related !arties'
A19' In the conte,t of a )rou! audit, ISA B00 re*uires the )rou! en)a)e(ent tea( to !rovide each
co(!onent auditor with a list of related !arties !re!ared "# )rou! (ana)e(ent and an# other
related !arties of which the )rou! en)a)e(ent tea( is aware'
15
Lhere the entit# is a co(!onent
within a )rou!, this infor(ation !rovides a useful "asis for the auditor+s in*uiries of (ana)e(ent
re)ardin) the identit# of the entit#+s related !arties'
A14' he auditor (a# also o"tain so(e infor(ation re)ardin) the identit# of the entit#+s related !arties
throu)h in*uiries of (ana)e(ent durin) the en)a)e(ent acce!tance or continuance !rocess'
he 0ntit#+s %ontrols over Aelated 6art# Aelationshi!s and ransactions $Aef. 6ara' 14&
A15' 7thers within the entit# are those considered likel# to have knowled)e of the entit#+s related !art#
relationshi!s and transactions, and the entit#+s controls over such relationshi!s and transactions'
hese (a# include, to the e,tent that the# do not for( !art of (ana)e(ent.
% G hose char)ed with )overnance?
% G 6ersonnel in a !osition to initiate, !rocess, or record transactions that are "oth si)nificant
and outside the entit#+s nor(al course of "usiness, and those who su!ervise or (onitor such
!ersonnel?
% G Internal auditors?
% G In-house le)al counsel? and
% G he chief ethics officer or e*uivalent !erson'
A1B' he audit is conducted on the !re(ise that (ana)e(ent and, where a!!ro!riate, those char)ed
with )overnance have acknowled)ed and understand that the# have res!onsi"ilit# for the
!re!aration of the financial state(ents in accordance with the a!!lica"le financial re!ortin)
fra(ework, includin) where relevant their fair !resentation, and for such internal control as
(ana)e(ent and, where a!!ro!riate, those char)ed with )overnance deter(ine is necessar# to
ena"le the !re!aration of financial state(ents that are free fro( (aterial (isstate(ent, whether
due to fraud or error'
40
Accordin)l#, where the
15
ISA B00, CS!ecial %onsiderationsNAudits of <rou! Financial State(ents $Includin) the Lork of
%o(!onent Auditors&,D !ara)ra!h 40$e&' 40
ISA 550 590
fra(ework esta"lishes related !art# re*uire(ents, the !re!aration of the financial state(ents
re*uires (ana)e(ent, with oversi)ht fro( those char)ed with )overnance, to desi)n, i(!le(ent
and (aintain ade*uate controls over related !art# relationshi!s and transactions so that these are
identified and a!!ro!riatel# accounted for and disclosed in accordance with the fra(ework' In
their oversi)ht role, those char)ed with )overnance (onitor how (ana)e(ent is dischar)in) its
res!onsi"ilit# for such controls' Ae)ardless of an# related !art# re*uire(ents the fra(ework (a#
esta"lish, those char)ed with )overnance (a#, in their oversi)ht role, o"tain infor(ation fro(
(ana)e(ent to ena"le the( to understand the nature and "usiness rationale of the entit#+s related
!art# relationshi!s and transactions'
A17' In (eetin) the ISA 915 re*uire(ent to o"tain an understandin) of the control environ(ent,
41
the
auditor (a# consider features of the control environ(ent relevant to (iti)atin) the risks of
(aterial (isstate(ent associated with related !art# relationshi!s and transactions, such as.
1. G Internal ethical codes, a!!ro!riatel# co((unicated to the entit#+s !ersonnel and
enforced, )overnin) the circu(stances in which the entit# (a# enter into s!ecific t#!es of related
!art# transactions'
2. G 6olicies and !rocedures for o!en and ti(el# disclosure of the interests that (ana)e(ent
and those char)ed with )overnance have in related !art# transactions'
3. G he assi)n(ent of res!onsi"ilities within the entit# for identif#in), recordin),
su((ariJin), and disclosin) related !art# transactions'
4. G i(el# disclosure and discussion "etween (ana)e(ent and those char)ed with
)overnance of si)nificant related !art# transactions outside the entit#+s nor(al course of "usiness,
includin) whether those char)ed with )overnance have a!!ro!riatel# challen)ed the "usiness
rationale of such transactions $for e,a(!le, "# seekin) advice fro( e,ternal !rofessional
advisors&'
5. G %lear )uidelines for the a!!roval of related !art# transactions involvin) actual or
!erceived conflicts of interest, such as a!!roval "# a su"co((ittee of those char)ed with
)overnance co(!risin) individuals inde!endent of (ana)e(ent'
6. G 6eriodic reviews "# internal auditors, where a!!lica"le'
7. G 6roactive action taken "# (ana)e(ent to resolve related !art# disclosure issues, such as
"# seekin) advice fro( the auditor or e,ternal le)al counsel'
591 ISA 550
G he e,istence of whistle-"lowin) !olicies and !rocedures, where a!!lica"le'
A18' %ontrols over related !art# relationshi!s and transactions within so(e entities (a# "e deficient or
non-e,istent for a nu("er of reasons, such as.
1. G he low i(!ortance attached "# (ana)e(ent to identif#in) and disclosin) related !art#
relationshi!s and transactions'
2. G he lack of a!!ro!riate oversi)ht "# those char)ed with )overnance'
3. G An intentional disre)ard for such controls "ecause related !art# disclosures (a# reveal
infor(ation that (ana)e(ent considers sensitive, for e,a(!le, the e,istence of transactions
involvin) fa(il# (e("ers of (ana)e(ent'
4. G An insufficient understandin) "# (ana)e(ent of the related !art# re*uire(ents of the
5. G he a"sence of disclosure re*uire(ents under the a!!lica"le financial re!ortin)
fra(ework'
Lhere such controls are ineffective or non-e,istent, the auditor (a# "e una"le to o"tain sufficient
a!!ro!riate audit evidence a"out related !art# relationshi!s and transactions' If this were the case,
the auditor would, in accordance with ISA 705,
44
consider the i(!lications for the audit, includin)
the o!inion in the auditor+s re!ort'
A15' Fraudulent financial re!ortin) often involves (ana)e(ent override of controls that otherwise (a#
a!!ear to "e o!eratin) effectivel#'
49
he risk of (ana)e(ent override of controls is hi)her if
(ana)e(ent has relationshi!s that involve control or si)nificant influence with !arties with which
the entit# does "usiness "ecause these relationshi!s (a# !resent (ana)e(ent with )reater
incentives and o!!ortunities to !er!etrate fraud' For e,a(!le, (ana)e(ent+s financial interests in
certain related !arties (a# !rovide incentives for (ana)e(ent to override controls "# $a& directin)
the entit#, a)ainst its interests, to conclude transactions for the "enefit of these !arties, or $"&
colludin) with such !arties or controllin) their actions' 0,a(!les of !ossi"le fraud include.
1. G %reatin) fictitious ter(s of transactions with related !arties desi)ned to (isre!resent the
"usiness rationale of these transactions'
2. G Fraudulentl# or)aniJin) the transfer of assets fro( or to (ana)e(ent or others at
a(ounts si)nificantl# a"ove or "elow (arket value'
3. G 0n)a)in) in co(!le, transactions with related !arties, such as s!ecial
44
ISA 705, CEodifications to the 7!inion in the Inde!endent Auditor+s Ae!ort'D 49
ISA 440, !ara)ra!hs 91 and A4'
ISA 550 594
!ur!ose entities, that are structured to (isre!resent the financial !osition or financial
!erfor(ance of the entit#'
A40' %ontrol activities in s(aller entities are likel# to "e less for(al and s(aller entities (a# have no
docu(ented !rocesses for dealin) with related !art# relationshi!s and transactions' An owner-
(ana)er (a# (iti)ate so(e of the risks arisin) fro( related !art# transactions, or !otentiall#
increase those risks, throu)h active involve(ent in all the (ain as!ects of the transactions' For
such entities, the auditor (a# o"tain an understandin) of the related !art# relationshi!s and
transactions, and an# controls that (a# e,ist over these, throu)h in*uir# of (ana)e(ent co("ined
with other !rocedures, such as o"servation of (ana)e(ent+s oversi)ht and review activities, and
ins!ection of availa"le relevant docu(entation'
AuthoriJation and a!!roval of si)nificant transactions and arran)e(ents $Aef. 6ara' 14$"&&
A41' AuthoriJation involves the )rantin) of !er(ission "# a !art# or !arties with the a!!ro!riate
authorit# $whether (ana)e(ent, those char)ed with )overnance or the entit#+s shareholders& for
the entit# to enter into s!ecific transactions in accordance with !re-deter(ined criteria, whether
;ud)(ental or not' A!!roval involves those !arties+ acce!tance of the transactions the entit# has
entered into as havin) satisfied the criteria on which authoriJation was )ranted' 0,a(!les of
controls the entit# (a# have esta"lished to authoriJe and a!!rove si)nificant transactions and
arran)e(ents with related !arties or si)nificant transactions and arran)e(ents outside the nor(al
course of "usiness include.
% G Eonitorin) controls to identif# such transactions and arran)e(ents for authoriJation and
a!!roval'
% G A!!roval of the ter(s and conditions of the transactions and arran)e(ents "#
(ana)e(ent, those char)ed with )overnance or, where a!!lica"le, shareholders'
<aintaining Alertness for +elated (arty Infor$ation Dhen +e!ie#ing +ecords or ?ocu$ents
Aecords or =ocu(ents hat the Auditor Ea# Ins!ect $Aef. 6ara' 15&
A44' =urin) the audit, the auditor (a# ins!ect records or docu(ents that (a# !rovide infor(ation
a"out related !art# relationshi!s and transactions, for e,a(!le.
1. G hird-!art# confir(ations o"tained "# the auditor $in addition to "ank and le)al
confir(ations&'
2. G 0ntit# inco(e ta, returns'
599 ISA 550
% G Infor(ation su!!lied "# the entit# to re)ulator# authorities'
% G Shareholder re)isters to identif# the entit#+s !rinci!al shareholders'
% G State(ents of conflicts of interest fro( (ana)e(ent and those char)ed with )overnance'
% G Aecords of the entit#+s invest(ents and those of its !ension !lans'
% G %ontracts and a)ree(ents with ke# (ana)e(ent or those char)ed with )overnance'
% G Si)nificant contracts and a)ree(ents not in the entit#+s ordinar# course of "usiness'
% G S!ecific invoices and corres!ondence fro( the entit#+s !rofessional advisors'
% G Mife insurance !olicies ac*uired "# the entit#'
% G Si)nificant contracts re-ne)otiated "# the entit# durin) the !eriod'
% G Internal auditors+ re!orts'
% G =ocu(ents associated with the entit#+s filin)s with a securities re)ulator $for e,a(!le,
!ros!ectuses&'
Arran)e(ents that (a# indicate the e,istence of !reviousl# unidentified or
undisclosed related !art# relationshi!s or transactions'
A49' An arran)e(ent involves a for(al or infor(al a)ree(ent "etween the entit# and one or (ore other
!arties for such !ur!oses as.
% G he esta"lish(ent of a "usiness relationshi! throu)h a!!ro!riate vehicles or structures'
% G he conduct of certain t#!es of transactions under s!ecific ter(s and conditions'
1. G he !rovision of desi)nated services or financial su!!ort'
2. 0,a(!les of arran)e(ents that (a# indicate the e,istence of related !art# relationshi!s or
transactions that (ana)e(ent has not !reviousl# identified or disclosed to the auditor include.
% G 6artici!ation in unincor!orated !artnershi!s with other !arties'
% G A)ree(ents for the !rovision of services to certain !arties under ter(s and conditions
that are outside the entit#+s nor(al course of "usiness'
% G <uarantees and )uarantor relationshi!s'
ISA 550 594
Identification of Si)nificant ransactions outside the Nor(al %ourse of 1usiness $Aef. 6ara' 1B&
A44' 7"tainin) further infor(ation on si)nificant transactions outside the entit#+s nor(al course of
"usiness ena"les the auditor to evaluate whether fraud risk factors, if an#, are !resent and, where
the a!!lica"le financial re!ortin) fra(ework esta"lishes related !art# re*uire(ents, to identif# the
risks of (aterial (isstate(ent'
A45' 0,a(!les of transactions outside the entit#+s nor(al course of "usiness (a# include.
1. G %o(!le, e*uit# transactions, such as cor!orate restructurin)s or ac*uisitions'
2. G ransactions with offshore entities in ;urisdictions with weak cor!orate laws'
3. G he leasin) of !re(ises or the renderin) of (ana)e(ent services "# the entit# to another
!art# if no consideration is e,chan)ed'
4. G Sales transactions with unusuall# lar)e discounts or returns'
5. G ransactions with circular arran)e(ents, for e,a(!le, sales with a co((it(ent to
re!urchase'
6. G ransactions under contracts whose ter(s are chan)ed "efore e,!ir#'
Understandin) the nature of si)nificant transactions outside the nor(al course of "usiness $Aef. 6ara'
1B$a&&
A4B' In*uirin) into the nature of the si)nificant transactions outside the entit#+s nor(al course of
"usiness involves o"tainin) an understandin) of the "usiness rationale of the transactions, and the
ter(s and conditions under which these have "een entered into'
In*uirin) into whether related !arties could "e involved $Aef. 6ara' 1B$"&&
A47' A related !art# could "e involved in a si)nificant transaction outside the entit#+s nor(al course of
"usiness not onl# "# directl# influencin) the transaction throu)h "ein) a !art# to the transaction,
"ut also "# indirectl# influencin) it throu)h an inter(ediar#' Such influence (a# indicate the
!resence of a fraud risk factor'
)haring +elated (arty Infor$ation #ith the /ngage$ent 1ea$ $Aef. 6ara' 17&
A48' Aelevant related !art# infor(ation that (a# "e shared a(on) the en)a)e(ent tea( (e("ers
includes, for e,a(!le.
% G he identit# of the entit#+s related !arties'
% G he nature of the related !art# relationshi!s and transactions'
595 ISA 550
G Si)nificant or co(!le, related !art# relationshi!s or transactions that (a# re*uire s!ecial
audit consideration, in !articular transactions in which (ana)e(ent or those char)ed with
)overnance are financiall# involved'
I#e"tific!tio" !"# Ae.e"t of the Ri% of )!te'i!0 )it!te.e"t Aoci!te# &ith Re0!te# *!'t/
Re0!tio"hip !"# T'!"!ctio"
Fraud +is. Factors Associated #ith a +elated (arty #ith ?o$inant Influence $Aef. 6ara' 15&
A45' =o(ination of (ana)e(ent "# a sin)le !erson or s(all )rou! of !ersons without co(!ensatin)
controls is a fraud risk factor'
44
Indicators of do(inant influence e,erted "# a related !art# include.
% G he related !art# has vetoed si)nificant "usiness decisions taken "# (ana)e(ent or those
% G Si)nificant transactions are referred to the related !art# for final a!!roval'
% G here is little or no de"ate a(on) (ana)e(ent and those char)ed with )overnance
re)ardin) "usiness !ro!osals initiated "# the related !art#'
% G ransactions involvin) the related !art# $or a close fa(il# (e("er of the related !art#&
are rarel# inde!endentl# reviewed and a!!roved'
=o(inant influence (a# also e,ist in so(e cases if the related !art# has !la#ed a leadin) role in
foundin) the entit# and continues to !la# a leadin) role in (ana)in) the entit#'
A90' In the !resence of other risk factors, the e,istence of a related !art# with do(inant influence (a#
indicate si)nificant risks of (aterial (isstate(ent due to fraud' For e,a(!le.
% G An unusuall# hi)h turnover of senior (ana)e(ent or !rofessional advisors (a# su))est
unethical or fraudulent "usiness !ractices that serve the related !art#+s !ur!oses'
% G he use of "usiness inter(ediaries for si)nificant transactions for which there a!!ears to
"e no clear "usiness ;ustification (a# su))est that the related !art# could have an interest in such
transactions throu)h control of such inter(ediaries for fraudulent !ur!oses'
% G 0vidence of the related !art#+s e,cessive !artici!ation in or !reoccu!ation with the
selection of accountin) !olicies or the deter(ination of si)nificant esti(ates (a# su))est the
!ossi"ilit# of fraudulent financial re!ortin)'
ISA 440, A!!endi, 1'
ISA 550 59B
Repo"e to the Ri% of )!te'i!0 )it!te.e"t Aoci!te# &ith Re0!te# *!'t/ Re0!tio"hip !"#
T'!"!ctio" $Aef. 6ara' 40&
A91' he nature, ti(in) and e,tent of the further audit !rocedures that the auditor (a# select to res!ond
to the assessed risks of (aterial (isstate(ent associated with related !art# relationshi!s and
transactions de!end u!on the nature of those risks and the circu(stances of the entit#'
45
A94' 0,a(!les of su"stantive audit !rocedures that the auditor (a# !erfor( when the auditor has
assessed a si)nificant risk that (ana)e(ent has not a!!ro!riatel# accounted for or disclosed
s!ecific related !art# transactions in accordance with the a!!lica"le financial re!ortin) fra(ework
$whether due to fraud or error& include.
1. G %onfir(in) or discussin) s!ecific as!ects of the transactions with inter(ediaries such as
"anks, law fir(s, )uarantors, or a)ents, where !ractica"le and not !rohi"ited "# law, re)ulation or
ethical rules'
2. G %onfir(in) the !ur!oses, s!ecific ter(s or a(ounts of the transactions with the related
!arties $this audit !rocedure (a# "e less effective where the auditor ;ud)es that the entit# is likel#
to influence the related !arties in their res!onses to the auditor&'
3. G Lhere a!!lica"le, readin) the financial state(ents or other relevant financial
infor(ation, if availa"le, of the related !arties for evidence of the accountin) of the transactions in
the related !arties+ accountin) records'
A99' If the auditor has assessed a si)nificant risk of (aterial (isstate(ent due to fraud as a result of the
!resence of a related !art# with do(inant influence, the auditor (a#, in addition to the )eneral
re*uire(ents of ISA 440, !erfor( audit !rocedures such as the followin) to o"tain an
understandin) of the "usiness relationshi!s that such a related !art# (a# have esta"lished directl#
or indirectl# with the entit# and to deter(ine the need for further a!!ro!riate su"stantive audit
!rocedures.
% G In*uiries of, and discussion with, (ana)e(ent and those char)ed with )overnance'
% G In*uiries of the related !art#'
% G Ins!ection of si)nificant contracts with the related !art#'
% G A!!ro!riate "ack)round research, such as throu)h the Internet or s!ecific e,ternal
"usiness infor(ation data"ases'
ISA 990 !rovides further )uidance on considerin) the nature, ti(in) and e,tent of further audit !rocedures' ISA 440 esta"lishes
re*uire(ents and !rovides )uidance on a!!ro!riate res!onses to assessed risks of (aterial (isstate(ent due to fraud'
597 ISA 550
G Aeview of e(!lo#ee whistle-"lowin) re!orts where these are retained'
A94' =e!endin) u!on the results of the auditor+s risk assess(ent !rocedures, the auditor (a# consider
it a!!ro!riate to o"tain audit evidence without testin) the entit#+s controls over related !art#
relationshi!s and transactions' In so(e circu(stances, however, it (a# not "e !ossi"le to o"tain
sufficient a!!ro!riate audit evidence fro( su"stantive audit !rocedures alone in relation to the
risks of (aterial (isstate(ent associated with related !art# relationshi!s and transactions' For
e,a(!le, where intra-)rou! transactions "etween the entit# and its co(!onents are nu(erous and
a si)nificant a(ount of infor(ation re)ardin) these transactions is initiated, recorded, !rocessed
or re!orted electronicall# in an inte)rated s#ste(, the auditor (a# deter(ine that it is not !ossi"le
to desi)n effective su"stantive audit !rocedures that "# the(selves would reduce the risks of
(aterial (isstate(ent associated with these transactions to an acce!ta"l# low level' In such a case,
in (eetin) the ISA 990 re*uire(ent to o"tain sufficient a!!ro!riate audit evidence as to the
o!eratin) effectiveness of relevant controls,
4B
the auditor is re*uired to test the entit#+s controls
over the co(!leteness and accurac# of the recordin) of the related !art# relationshi!s and
transactions'
Identification of (re!iously "nidentified or "ndisclosed +elated (arties or )ignificant +elated
(arty 1ransactions
%o((unicatin) Newl# Identified Aelated 6art# Infor(ation to the 0n)a)e(ent ea( $Aef. 6ara' 44$a&&
A95' %o((unicatin) !ro(!tl# an# newl# identified related !arties to the other (e("ers of the
en)a)e(ent tea( assists the( in deter(inin) whether this infor(ation affects the results of, and
conclusions drawn fro(, risk assess(ent !rocedures alread# !erfor(ed, includin) whether the
risks of (aterial (isstate(ent need to "e reassessed'
Su"stantive 6rocedures Aelatin) to Newl# Identified Aelated 6arties or Si)nificant Aelated 6art#
ransactions $Aef. 6ara' 44$c&&
A9B' 0,a(!les of su"stantive audit !rocedures that the auditor (a# !erfor( relatin) to newl# identified
related !arties or si)nificant related !art# transactions include.
G Eakin) in*uiries re)ardin) the nature of the entit#+s relationshi!s with the newl# identified
related !arties, includin) $where a!!ro!riate and not !rohi"ited "# law, re)ulation or
ethical rules& in*uirin) of !arties outside the entit# who are !resu(ed to have si)nificant
knowled)e of the entit# and its "usiness, such as le)al counsel, !rinci!al a)ents, (a;or
re!resentatives, consultants, )uarantors, or other close "usiness !artners'
ISA 990, !ara)ra!h 8$"&'
ISA 550 598
% G %onductin) an anal#sis of accountin) records for transactions with the newl# identified
related !arties' Such an anal#sis (a# "e facilitated usin) co(!uter-assisted audit techni*ues'
% G Ferif#in) the ter(s and conditions of the newl# identified related !art# transactions, and
evaluatin) whether the transactions have "een a!!ro!riatel# accounted for and disclosed in
Intentional Non-=isclosure "# Eana)e(ent $Aef. 6ara' 44$e&&
A97' he re*uire(ents and )uidance in ISA 440 re)ardin) the auditor+s res!onsi"ilities relatin) to fraud
in an audit of financial state(ents are relevant where (ana)e(ent a!!ears to have intentionall#
failed to disclose related !arties or si)nificant related !art# transactions to the auditor' he auditor
(a# also consider whether it is necessar# to re-evaluate the relia"ilit# of (ana)e(ent+s res!onses
to the auditor+s in*uiries and (ana)e(ent+s re!resentations to the auditor'
Identified )ignificant +elated (arty 1ransactions outside the /ntity8s Aor$al Course of =usiness
0valuatin) the 1usiness Aationale of Si)nificant Aelated 6art# ransactions $Aef. 6ara' 49&
A98' In evaluatin) the "usiness rationale of a si)nificant related !art# transaction outside the entit#+s
nor(al course of "usiness, the auditor (a# consider the followin).
1G Lhether the transaction.
a. o Is overl# co(!le, $for e,a(!le, it (a# involve (ulti!le related !arties within a
consolidated )rou!&'
b. o @as unusual ter(s of trade, such as unusual !rices, interest rates, )uarantees and
re!a#(ent ter(s'
c. o Macks an a!!arent lo)ical "usiness reason for its occurrence'
d. o Involves !reviousl# unidentified related !arties'
e. o Is !rocessed in an unusual (anner'
% G Lhether (ana)e(ent has discussed the nature of, and accountin) for, such a transaction
with those char)ed with )overnance'
% G Lhether (ana)e(ent is !lacin) (ore e(!hasis on a !articular accountin) treat(ent
rather than )ivin) due re)ard to the underl#in) econo(ics of the transaction'
595 ISA 550
If (ana)e(ent+s e,!lanations are (ateriall# inconsistent with the ter(s of the related !art#
transaction, the auditor is re*uired, in accordance with ISA 500,
47
to consider the relia"ilit# of
(ana)e(ent+s e,!lanations and re!resentations on other si)nificant (atters'
A95' he auditor (a# also seek to understand the "usiness rationale of such a transaction fro( the
related !art#+s !ers!ective, as this (a# hel! the auditor to "etter understand the econo(ic realit#
of the transaction and wh# it was carried out' A "usiness rationale fro( the related !art#+s
!ers!ective that a!!ears inconsistent with the nature of its "usiness (a# re!resent a fraud risk
factor'
AuthoriJation and A!!roval of Si)nificant Aelated 6art# ransactions $Aef. 6ara' 49$"&&
A40' AuthoriJation and a!!roval "# (ana)e(ent, those char)ed with )overnance, or, where a!!lica"le,
the shareholders of si)nificant related !art# transactions outside the entit#+s nor(al course of
"usiness (a# !rovide audit evidence that these have "een dul# considered at the a!!ro!riate levels
within the entit# and that their ter(s and conditions have "een a!!ro!riatel# reflected in the
financial state(ents' he e,istence of transactions of this nature that were not su";ect to such
authoriJation and a!!roval, in the a"sence of rational e,!lanations "ased on discussion with
(ana)e(ent or those char)ed with )overnance, (a# indicate risks of (aterial (isstate(ent due to
error or fraud' In these circu(stances, the auditor (a# need to "e alert for other transactions of a
si(ilar nature' AuthoriJation and a!!roval alone, however, (a# not "e sufficient in concludin)
whether risks of (aterial (isstate(ent due to fraud are a"sent "ecause authoriJation and a!!roval
(a# "e ineffective if there has "een collusion "etween the related !arties or if the entit# is su";ect
to the do(inant influence of a related !art#'
A41' A s(aller entit# (a# not have the sa(e controls !rovided "# different levels of authorit# and
a!!roval that (a# e,ist in a lar)er entit#' Accordin)l#, when auditin) a s(aller entit#, the auditor
(a# rel# to a lesser de)ree on authoriJation and a!!roval for audit evidence re)ardin) the validit#
of si)nificant related !art# transactions outside the entit#+s nor(al course of "usiness' Instead, the
auditor (a# consider !erfor(in) other audit !rocedures such as ins!ectin) relevant docu(ents,
confir(in) s!ecific as!ects of the transactions with relevant !arties, or o"servin) the owner-
(ana)er+s involve(ent with the transactions'
ISA 500, CAudit 0vidence,D !ara)ra!h 11'
ISA 550 540
Assertions 1hat +elated (arty 1ransactions Dere Conducted on 1er$s />ui!alent to 1hose (re!ailing in
an Ar$8s :ength 1ransaction $Aef. 6ara' 44&
A44' Althou)h audit evidence (a# "e readil# availa"le re)ardin) how the !rice of a related !art#
transaction co(!ares to that of a si(ilar ar(+s len)th transaction, there are ordinaril# !ractical
difficulties that li(it the auditor+s a"ilit# to o"tain audit evidence that all other as!ects of the
transaction are e*uivalent to those of the ar(+s len)th transaction' For e,a(!le, althou)h the
auditor (a# "e a"le to confir( that a related !art# transaction has "een conducted at a (arket
!rice, it (a# "e i(!ractica"le to confir( whether other ter(s and conditions of the transaction
$such as credit ter(s, contin)encies and s!ecific char)es& are e*uivalent to those that would
ordinaril# "e a)reed "etween inde!endent !arties' Accordin)l#, there (a# "e a risk that
(ana)e(ent+s assertion that a related !art# transaction was conducted on ter(s e*uivalent to
those !revailin) in an ar(+s len)th transaction (a# "e (ateriall# (isstated'
A49' he !re!aration of the financial state(ents re*uires (ana)e(ent to su"stantiate an assertion that a
related !art# transaction was conducted on ter(s e*uivalent to those !revailin) in an ar(+s len)th
transaction' Eana)e(ent+s su!!ort for the assertion (a# include.
% G %o(!arin) the ter(s of the related !art# transaction to those of an identical or si(ilar
transaction with one or (ore unrelated !arties'
% G 0n)a)in) an e,ternal e,!ert to deter(ine a (arket value and to confir( (arket ter(s and
conditions for the transaction'
% G %o(!arin) the ter(s of the transaction to known (arket ter(s for "roadl# si(ilar
transactions on an o!en (arket'
A44' 0valuatin) (ana)e(ent+s su!!ort for this assertion (a# involve one or (ore of the followin).
% G %onsiderin) the a!!ro!riateness of (ana)e(ent+s !rocess for su!!ortin) the assertion'
% G Ferif#in) the source of the internal or e,ternal data su!!ortin) the assertion, and testin)
the data to deter(ine their accurac#, co(!leteness and relevance'
% G 0valuatin) the reasona"leness of an# si)nificant assu(!tions on which the assertion is
"ased'
A45' So(e financial re!ortin) fra(eworks re*uire the disclosure of related !art# transactions not
conducted on ter(s e*uivalent to those !revailin) in ar(+s len)th transactions' In these
circu(stances, if (ana)e(ent has not disclosed a related !art# transaction in the financial
state(ents, there (a# "e an i(!licit assertion that the transaction was conducted on ter(s
e*uivalent to those !revailin) in an ar(+s len)th transaction'
541 ISA 550
E9!0-!tio" of the Acco-"ti"( fo' !"# Dic0o-'e of I#e"tifie# Re0!te# *!'t/ Re0!tio"hip !"#
T'!"!ctio"
<ateriality Considerations in /!aluating <isstate$ents $Aef. 6ara' 45&
A4B' ISA 450 re*uires the auditor to consider "oth the siJe and the nature of a (isstate(ent, and the
!articular circu(stances of its occurrence, when evaluatin) whether the (isstate(ent is (aterial'
48
he si)nificance of the transaction to the financial state(ent users (a# not de!end solel# on the
recorded a(ount of the transaction "ut also on other s!ecific relevant factors, such as the nature of
the related !art# relationshi!'
/!aluation of +elated (arty ?isclosures $Aef. 6ara' 45$a&&
A47' 0valuatin) the related !art# disclosures in the conte,t of the disclosure re*uire(ents of the
a!!lica"le financial re!ortin) fra(ework (eans considerin) whether the facts and circu(stances
of the entit#+s related !art# relationshi!s and transactions have "een a!!ro!riatel# su((ariJed and
!resented so that the disclosures are understanda"le' =isclosures of related !art# transactions (a#
not "e understanda"le if.
1. $a& he "usiness rationale and the effects of the transactions on the financial state(ents are
unclear or (isstated? or
2. $"& Se# ter(s, conditions, or other i(!ortant ele(ents of the transactions necessar# for
understandin) the( are not a!!ro!riatel# disclosed'
='itte" Rep'ee"t!tio" $Aef. 6ara' 4B&
A48' %ircu(stances in which it (a# "e a!!ro!riate to o"tain written re!resentations fro( those char)ed
with )overnance include.
% G Lhen the# have a!!roved s!ecific related !art# transactions that $a& (ateriall# affect the
financial state(ents, or $"& involve (ana)e(ent'
% G Lhen the# have (ade s!ecific oral re!resentations to the auditor on details of certain
related !art# transactions'
% G Lhen the# have financial or other interests in the related !arties or the related !art#
transactions'
A45' he auditor (a# also decide to o"tain written re!resentations re)ardin) s!ecific assertions that
(ana)e(ent (a# have (ade, such as a re!resentation that s!ecific related !art# transactions do
not involve undisclosed side a)ree(ents'
ISA 450, C0valuation of Eisstate(ents Identified durin) the Audit,D !ara)ra!h 11$a&' 6ara)ra!h A1B of ISA 450 !rovides
)uidance on the circu(stances that (a# affect the evaluation of a (isstate(ent'
ISA 550 544
Co..-"ic!tio" &ith Thoe Ch!'(e# &ith Go9e'"!"ce $Aef. 6ara' 47&
A50' %o((unicatin) si)nificant (atters arisin) durin) the audit
45
in connection with the entit#+s
related !arties hel!s the auditor to esta"lish a co((on understandin) with those char)ed with
)overnance of the nature and resolution of these (atters' 0,a(!les of si)nificant related !art#
(atters include.
% G Non-disclosure $whether intentional or not& "# (ana)e(ent to the auditor of related
!arties or si)nificant related !art# transactions, which (a# alert those char)ed with )overnance to
si)nificant related !art# relationshi!s and transactions of which the# (a# not have "een !reviousl#
aware'
% G he identification of si)nificant related !art# transactions that have not "een
a!!ro!riatel# authoriJed and a!!roved, which (a# )ive rise to sus!ected fraud'
% G =isa)ree(ent with (ana)e(ent re)ardin) the accountin) for and disclosure of
si)nificant related !art# transactions in accordance with the a!!lica"le financial re!ortin)
fra(ework'
% G Non-co(!liance with a!!lica"le law or re)ulations !rohi"itin) or restrictin) s!ecific
t#!es of related !art# transactions'
% G =ifficulties in identif#in) the !art# that ulti(atel# controls the entit#'
ISA 490, !ara)ra!h A8, !rovides further )uidance on the nature of si)nificant (atters arisin) durin) the audit'
549 ISA 550
INTERNATIONAL STANDARD ON AUDITING @A0 SUBSEQUENT E,ENTS
4005&
CONTENTS
6ara)ra!h
I"t'o#-ctio"
Sco!e of this ISA ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1
Su"se*uent 0vents ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
0ffective =ate '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 9
O$1ecti9e ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
Defi"itio"''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
Re2-i'e.e"t
0vents 7ccurrin) "etween the =ate of the Financial State(ents and the =ate of the Auditor+s
Ae!ort ''''''''''''''''''''''''''''''''''''''''''''''''''''''' B-5
Facts Lhich 1eco(e Snown to the Auditor after the =ate of the Auditor+s Ae!ort "ut "efore the =ate the
Financial State(ents are Issued '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 10-19
Facts Lhich 1eco(e Snown to the Auditor after the Financial State(ents @ave 1een
Issued ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 14-17
Sco!e of this ISA ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1
=efinitions ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A4-A5
0vents 7ccurrin) "etween the =ate of the Financial State(ents and the =ate of the Auditor+s
Ae!ort ''''''''''''''''''''''''''''''''''''''''''''''''''''''' AB-A10
Facts Lhich 1eco(e Snown to the Auditor after the =ate of the Auditor+s Ae!ort "ut "efore the =ate the
Financial State(ents are Issued '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A11-A1B
Facts Lhich 1eco(e Snown to the Auditor after the Financial State(ents @ave 1een
Issued ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A17-A18
ISA 5B0 544
International Standard on Auditin) $ISA& 5B0, CSu"se*uent 0ventsD should "e read in con;unction with ISA
545 ISA 5B0
su"se*uent events in an audit of financial state(ents' $Aef. 6ara' A1&
S-$e2-e"t E9e"t
4' Financial state(ents (a# "e affected "# certain events that occur after the date of the financial
state(ents' Ean# financial re!ortin) fra(eworks s!ecificall# refer to such events'
1
Such financial
re!ortin) fra(eworks ordinaril# identif# two t#!es of events.
1$a&hose that !rovide evidence of conditions that e,isted at the date of the financial state(ents? and
2$"& hose that !rovide evidence of conditions that arose after the date of the financial state(ents'
ISA 700 e,!lains that the date of the auditor+s re!ort infor(s the reader that the auditor has
considered the effect of events and transactions of which the auditor "eco(es aware and that
occurred u! to that date'
4
Effecti9e D!te
15, 4005'
O$1ecti9e
1. $a& o o"tain sufficient a!!ro!riate audit evidence a"out whether events occurrin) "etween the
date of the financial state(ents and the date of the auditor+s re!ort that re*uire ad;ust(ent of, or
disclosure in, the financial state(ents are a!!ro!riatel# reflected in those financial state(ents in
accordance with the a!!lica"le financial re!ortin) fra(ework? and
2. $"& o res!ond a!!ro!riatel# to facts that "eco(e known to the auditor after the date of the
auditor+s re!ort, that, had the# "een known to the auditor at that date, (a# have caused the auditor
to a(end the auditor+s re!ort'
1
For e,a(!le, International Accountin) Standard $IAS& 10, C0vents After the Ae!ortin) 6eriodD deals
with the treat(ent in financial state(ents of events, "oth favora"le and unfavora"le, that occur
"etween the date of the financial state(ents $referred to as the Cend of the re!ortin) !eriodD in the
IAS& and the date when the financial state(ents are authoriJed for issue' 4
ISA 700, CFor(in) an 7!inion and Ae!ortin) on Financial State(ents,D !ara)ra!h A98'
ISA 5B0 54B
Defi"itio"
1. $a& =ate of the financial state(ents K he date of the end of the latest !eriod covered "# the
2. $"& =ate of a!!roval of the financial state(ents K he date on which all the state(ents that
co(!rise the financial state(ents, includin) the related notes, have "een !re!ared and those with
the reco)niJed authorit# have asserted that the# have taken res!onsi"ilit# for those financial
state(ents' $Aef. 6ara' A4&
3. $c& =ate of the auditor+s re!ort K he date the auditor dates the re!ort on the financial
state(ents in accordance with ISA 700' $Aef. 6ara' A9&
4. $d& =ate the financial state(ents are issued K he date that the auditor+s re!ort and audited
financial state(ents are (ade availa"le to third !arties' $Aef. 6ara' A4-A5&
5. $e& Su"se*uent events K 0vents occurrin) "etween the date of the financial state(ents and
the date of the auditor+s re!ort, and facts that "eco(e known to the auditor after the date of the
auditor+s re!ort'
Re2-i'e.e"t
E9e"t Occ-''i"( $et&ee" the D!te of the Fi"!"ci!0 St!te.e"t !"# the D!te of the A-#ito'>
Repo't
1. B' he auditor shall !erfor( audit !rocedures desi)ned to o"tain sufficient a!!ro!riate audit
evidence that all events occurrin) "etween the date of the financial state(ents and the date of the
auditor+s re!ort that re*uire ad;ust(ent of, or disclosure in, the financial state(ents have "een
identified' he auditor is not, however, e,!ected to !erfor( additional audit !rocedures on (atters
to which !reviousl# a!!lied audit !rocedures have !rovided satisfactor# conclusions' $Aef. 6ara'
AB&
2. 7' he auditor shall !erfor( the !rocedures re*uired "# !ara)ra!h B so that the# cover the
!eriod fro( the date of the financial state(ents to the date of the auditor+s re!ort, or as near as
!ractica"le thereto' he auditor shall take into account the auditor+s risk assess(ent in deter(inin)
the nature and e,tent of such audit !rocedures, which shall include the followin). $Aef. 6ara' A7-
A8&
$a& 7"tainin) an understandin) of an# !rocedures (ana)e(ent has esta"lished to ensure that
su"se*uent events are identified'
547 ISA 5B0
1. $"& In*uirin) of (ana)e(ent and, where a!!ro!riate, those char)ed with )overnance as to whether
an# su"se*uent events have occurred which (i)ht affect the financial state(ents' $Aef. 6ara' A5&
2. $c& Aeadin) (inutes, if an#, of the (eetin)s, of the entit#+s owners, (ana)e(ent and those
char)ed with )overnance, that have "een held after the date of the financial state(ents and
in*uirin) a"out (atters discussed at an# such (eetin)s for which (inutes are not #et availa"le'
$Aef. 6ara' A10&
3. $d& Aeadin) the entit#+s latest su"se*uent interi( financial state(ents, if an#'
8' If, as a result of the !rocedures !erfor(ed as re*uired "# !ara)ra!hs B and 7, the auditor identifies
events that re*uire ad;ust(ent of, or disclosure in, the financial state(ents, the auditor shall
deter(ine whether each such event is a!!ro!riatel# reflected in those financial state(ents in
Dritten +epresentations
5' he auditor shall re*uest (ana)e(ent and, where a!!ro!riate, those char)ed with )overnance, to
!rovide a written re!resentation in accordance with ISA 580
9
that all events occurrin) su"se*uent
to the date of the financial state(ents and for which the a!!lica"le financial re!ortin) fra(ework
re*uires ad;ust(ent or disclosure have "een ad;usted or disclosed'
F!ct =hich Beco.e K"o&" to the A-#ito' !fte' the D!te of the A-#ito'> Repo't $-t $efo'e
the D!te the Fi"!"ci!0 St!te.e"t A'e I-e#
1. 10' he auditor has no o"li)ation to !erfor( an# audit !rocedures re)ardin) the financial
state(ents after the date of the auditor+s re!ort' @owever, if, after the date of the auditor+s
re!ort "ut "efore the date the financial state(ents are issued, a fact "eco(es known to the
auditor that, had it "een known to the auditor at the date of the auditor+s re!ort, (a# have
caused the auditor to a(end the auditor+s re!ort, the auditor shall. $Aef. 6ara' A11&
2. $a& =iscuss the (atter with (ana)e(ent and, where a!!ro!riate, those char)ed with
)overnance'
3. $"& =eter(ine whether the financial state(ents need a(end(ent and, if so,
4. $c& In*uire how (ana)e(ent intends to address the (atter in the financial state(ents'
2. 11' If (ana)e(ent a(ends the financial state(ents, the auditor shall.
ISA 5B0 548
1. $a& %arr# out the audit !rocedures necessar# in the circu(stances on the a(end(ent'
1. $"& Unless the circu(stances in !ara)ra!h 14 a!!l#.
2. $i& 0,tend the audit !rocedures referred to in !ara)ra!hs B and 7 to the date of the new
auditor+s re!ort? and
3. $ii& 6rovide a new auditor+s re!ort on the a(ended financial state(ents' he new auditor+s
re!ort shall not "e dated earlier than the date of a!!roval of the a(ended financial state(ents'
1. 14' Lhere law, re)ulation or the financial re!ortin) fra(ework does not !rohi"it
(ana)e(ent fro( restrictin) the a(end(ent of the financial state(ents to the effects of the
su"se*uent event or events causin) that a(end(ent and those res!onsi"le for a!!rovin) the
financial state(ents are not !rohi"ited fro( restrictin) their a!!roval to that a(end(ent, the
auditor is !er(itted to restrict the audit !rocedures on su"se*uent events re*uired in
!ara)ra!h 11$"&$i& to that a(end(ent' In such cases, the auditor shall either.
2. $a& A(end the auditor+s re!ort to include an additional date restricted to that a(end(ent that
there"# indicates that the auditor+s !rocedures on su"se*uent events are restricted solel# to the
a(end(ent of the financial state(ents descri"ed in the relevant note to the financial
state(ents? or $Aef. 6ara' A14&
3. $"& 6rovide a new or a(ended auditor+s re!ort that includes a state(ent in an 0(!hasis of
Eatter !ara)ra!h
4
or 7ther Eatter !ara)ra!h that conve#s that the auditor+s !rocedures on
su"se*uent events are restricted solel# to the a(end(ent of the financial state(ents as
descri"ed in the relevant note to the financial state(ents'
4. 19' In so(e ;urisdictions, (ana)e(ent (a# not "e re*uired "# law, re)ulation or the
financial re!ortin) fra(ework to issue a(ended financial state(ents and, accordin)l#, the
auditor need not !rovide an a(ended or new auditor+s re!ort' @owever, if (ana)e(ent does
not a(end the financial state(ents in circu(stances where the auditor "elieves the# need to
"e a(ended, then. $Aef. 6ara' A19-A14&
5. $a& If the auditor+s re!ort has not #et "een !rovided to the entit#, the auditor shall (odif# the
o!inion as re*uired "# ISA 705
5
and then !rovide the auditor+s re!ort? or
6. $"& If the auditor+s re!ort has alread# "een !rovided to the entit#, the auditor shall notif#
(ana)e(ent and, unless all of those char)ed with
4
See ISA 70B, C0(!hasis of Eatter 6ara)ra!hs and 7ther Eatter 6ara)ra!hs in the Inde!endent Auditor+s Ae!ort'D
5
545 ISA 5B0
)overnance are involved in (ana)in) the entit#, those char)ed with )overnance, not to
issue the financial state(ents to third !arties "efore the necessar# a(end(ents have "een
(ade' If the financial state(ents are nevertheless su"se*uentl# issued without the necessar#
a(end(ents, the auditor shall take a!!ro!riate action, to seek to !revent reliance on the
auditor+s re!ort' $Aef' 6ara. A15-A1B&
F!ct =hich Beco.e K"o&" to the A-#ito' !fte' the Fi"!"ci!0 St!te.e"t H!9e Bee" I-e#
1. 14' After the financial state(ents have "een issued, the auditor has no o"li)ation to !erfor(
an# audit !rocedures re)ardin) such financial state(ents' @owever, if, after the financial
state(ents have "een issued, a fact "eco(es known to the auditor that, had it "een known to
the auditor at the date of the auditor+s re!ort, (a# have caused the auditor to a(end the
auditor+s re!ort, the auditor shall.
2. $a& =iscuss the (atter with (ana)e(ent and, where a!!ro!riate, those char)ed with
)overnance?
3. $"& =eter(ine whether the financial state(ents need a(end(ent? and, if so,
4. $c& In*uire how (ana)e(ent intends to address the (atter in the financial state(ents'
5. 15' If (ana)e(ent a(ends the financial state(ents, the auditor shall. $Aef. 6ara' A17&
6. $a& %arr# out the audit !rocedures necessar# in the circu(stances on the a(end(ent'
7. $"& Aeview the ste!s taken "# (ana)e(ent to ensure that an#one in recei!t of the !reviousl#
issued financial state(ents to)ether with the auditor+s re!ort thereon is infor(ed of the
situation'
8. $c& Unless the circu(stances in !ara)ra!h 14 a!!l#.
9. $i& 0,tend the audit !rocedures referred to in !ara)ra!hs B and 7 to the date of the new
auditor+s re!ort, and date the new auditor+s re!ort no earlier than the date of a!!roval of the
a(ended financial state(ents? and
10. $ii& 6rovide a new auditor+s re!ort on the a(ended financial state(ents'
11. $d& Lhen the circu(stances in !ara)ra!h 14 a!!l#, a(end the auditor+s re!ort, or !rovide a
new auditor+s re!ort as re*uired "# !ara)ra!h 14'
2. 1B' he auditor shall include in the new or a(ended auditor+s re!ort an 0(!hasis of Eatter
!ara)ra!h or 7ther Eatter$s& !ara)ra!h referrin) to a
ISA 5B0 550
note to the financial state(ents that (ore e,tensivel# discusses the reason for the a(end(ent of
the !reviousl# issued financial state(ents and to the earlier re!ort !rovided "# the auditor'
17' If (ana)e(ent does not take the necessar# ste!s to ensure that an#one in recei!t of the !reviousl#
issued financial state(ents is infor(ed of the situation and does not a(end the financial
state(ents in circu(stances where the auditor "elieves the# need to "e a(ended, the auditor shall
notif# (ana)e(ent and, unless all of those char)ed with )overnance are involved in (ana)in) the
entit#,
B
those char)ed with )overnance, that the auditor will seek to !revent future reliance on the
auditor+s re!ort' If, des!ite such notification, (ana)e(ent or those char)ed with )overnance do
not take these necessar# ste!s, the auditor shall take a!!ro!riate action to seek to !revent reliance
on the auditor+s re!ort' $Aef. 6ara' A18&
EEE
A1' Lhen the audited financial state(ents are included in other docu(ents su"se*uent to the issuance
of the financial state(ents, the auditor (a# have additional res!onsi"ilities relatin) to su"se*uent
events that the auditor (a# need to consider, such as le)al or re)ulator# re*uire(ents involvin)
the offerin) of securities to the !u"lic in ;urisdictions in which the securities are "ein) offered' For
e,a(!le, the auditor (a# "e re*uired to !erfor( additional audit !rocedures to the date of the
final offerin) docu(ent' hese !rocedures (a# include those referred to in !ara)ra!hs B and 7
!erfor(ed u! to a date at or near the effective date of the final offerin) docu(ent, and readin) the
offerin) docu(ent to assess whether the other infor(ation in the offerin) docu(ent is consistent
with the financial infor(ation with which the auditor is associated'
7
Defi"itio"
?ate of Appro!al of the Financial )tate$ents $Aef. 6ara' 5$"&&
A4' In so(e ;urisdictions, law or re)ulation identifies the individuals or "odies $for e,a(!le,
(ana)e(ent or those char)ed with )overnance& that are res!onsi"le for concludin) that all the
state(ents that co(!rise the financial state(ents, includin) the related notes, have "een !re!ared,
and s!ecifies the necessar# a!!roval !rocess' In other ;urisdictions, the a!!roval !rocess
B
ISA 4B0, C%o((unication with hose %har)ed with <overnance,D !ara)ra!h 19' 7
See ISA 400, C7verall 7";ectives of the Inde!endent Auditor and the %onduct of an Audit in Accordance with International
551 ISA 5B0
is not !rescri"ed in law or re)ulation and the entit# follows its own !rocedures in !re!arin) and
finaliJin) its financial state(ents in view of its (ana)e(ent and )overnance structures' In so(e
;urisdictions, final a!!roval of the financial state(ents "# shareholders is re*uired' In these
;urisdictions, final a!!roval "# shareholders is not necessar# for the auditor to conclude that
sufficient a!!ro!riate audit evidence on which to "ase the auditor+s o!inion on the financial
state(ents has "een o"tained' he date of a!!roval of the financial state(ents for !ur!oses of the
ISAs is the earlier date on which those with the reco)niJed authorit# deter(ine that all the
state(ents that co(!rise the financial state(ents, includin) the related notes, have "een !re!ared
and that those with the reco)niJed authorit# have asserted that the# have taken res!onsi"ilit# for
those financial state(ents'
?ate of the Auditor8s +eport $Aef. 6ara' 5$c&&
A9' he auditor+s re!ort cannot "e dated earlier than the date on which the auditor has o"tained
sufficient a!!ro!riate audit evidence on which to "ase the o!inion on the financial state(ents
includin) evidence that all the state(ents that co(!rise the financial state(ents, includin) the
related notes, have "een !re!ared and that those with the reco)niJed authorit# have asserted that
the# have taken res!onsi"ilit# for those financial state(ents'
8
%onse*uentl#, the date of the
auditor+s re!ort cannot "e earlier than the date of a!!roval of the financial state(ents as defined in
!ara)ra!h 5$"&' A ti(e !eriod (a# ela!se due to ad(inistrative issues "etween the date of the
auditor+s re!ort as defined in !ara)ra!h 5$c& and the date the auditor+s re!ort is !rovided to the
entit#'
?ate the Financial )tate$ents Are Issued $Aef. 6ara' 5$d&&
A4' he date the financial state(ents are issued )enerall# de!ends on the re)ulator# environ(ent of
the entit#' In so(e circu(stances, the date the financial state(ents are issued (a# "e the date that
the# are filed with a re)ulator# authorit#' Since audited financial state(ents cannot "e issued
without an auditor+s re!ort, the date that the audited financial state(ents are issued (ust not onl#
"e at or later than the date of the auditor+s re!ort, "ut (ust also "e at or later than the date the
auditor+s re!ort is !rovided to the entit#'
A5' In the case of the !u"lic sector, the date the financial state(ents are issued (a# "e the date the
audited financial state(ents and the auditor+s re!ort thereon are !resented to the le)islature or
otherwise (ade !u"lic'
ISA 700, !ara)ra!h 41' In so(e cases, law or re)ulation also identifies the !oint in the financial state(ent re!ortin) !rocess at
which the audit is e,!ected to "e co(!lete'
ISA 5B0 554
E9e"t Occ-''i"( $et&ee" the D!te of the Fi"!"ci!0 St!te.e"t !"# the D!te of the A-#ito'>
Repo't $Aef. 6ara' B-5&
AB' =e!endin) on the auditor+s risk assess(ent, the audit !rocedures re*uired "# !ara)ra!h B (a#
include !rocedures, necessar# to o"tain sufficient a!!ro!riate audit evidence, involvin) the review
or testin) of accountin) records or transactions occurrin) "etween the date of the financial
state(ents and the date of the auditor+s re!ort' he audit !rocedures re*uired "# !ara)ra!hs B and
7 are in addition to !rocedures that the auditor (a# !erfor( for other !ur!oses that, nevertheless,
(a# !rovide evidence a"out su"se*uent events $for e,a(!le, to o"tain audit evidence for account
"alances as at the date of the financial state(ents, such as cut-off !rocedures or !rocedures in
relation to su"se*uent recei!ts of accounts receiva"le&'
A7' 6ara)ra!h 7 sti!ulates certain audit !rocedures in this conte,t that the auditor is re*uired to
!erfor( !ursuant to !ara)ra!h B' he su"se*uent events !rocedures that the auditor !erfor(s (a#,
however, de!end on the infor(ation that is availa"le and, in !articular, the e,tent to which the
accountin) records have "een !re!ared since the date of the financial state(ents' Lhere the
accountin) records are not u!-to-date, and accordin)l# no interi( financial state(ents $whether
for internal or e,ternal !ur!oses& have "een !re!ared, or (inutes of (eetin)s of (ana)e(ent or
those char)ed with )overnance have not "een !re!ared, relevant audit !rocedures (a# take the
for( of ins!ection of availa"le "ooks and records, includin) "ank state(ents' 6ara)ra!h A8 )ives
e,a(!les of so(e of the additional (atters that the auditor (a# consider in the course of these
in*uiries'
A8' In addition to the audit !rocedures re*uired "# !ara)ra!h 7, the auditor (a# consider it necessar#
and a!!ro!riate to.
1. G Aead the entit#+s latest availa"le "ud)ets, cash flow forecasts and other related
(ana)e(ent re!orts for !eriods after the date of the financial state(ents?
2. G In*uire, or e,tend !revious oral or written in*uiries, of the entit#+s le)al counsel
concernin) liti)ation and clai(s? or
3. G %onsider whether written re!resentations coverin) !articular su"se*uent events (a# "e
necessar# to su!!ort other audit evidence and there"# o"tain sufficient a!!ro!riate audit evidence'
In>uiry $Aef' 6ara' 7$"&&
A5' In in*uirin) of (ana)e(ent and, where a!!ro!riate, those char)ed with )overnance, as to whether
an# su"se*uent events have occurred that (i)ht affect the financial state(ents, the auditor (a#
in*uire as to the current status of ite(s that were accounted for on the "asis of !reli(inar# or
559 ISA 5B0
inconclusive data and (a# (ake s!ecific in*uiries a"out the followin) (atters.
% G Lhether new co((it(ents, "orrowin)s or )uarantees have "een entered into'
% G Lhether sales or ac*uisitions of assets have occurred or are !lanned'
% G Lhether there have "een increases in ca!ital or issuance of de"t instru(ents, such as the
issue of new shares or de"entures, or an a)ree(ent to (er)e or li*uidate has "een (ade or is
!lanned'
% G Lhether an# assets have "een a!!ro!riated "# )overn(ent or destro#ed, for e,a(!le, "#
fire or flood'
% G Lhether there have "een an# develo!(ents re)ardin) contin)encies'
% G Lhether an# unusual accountin) ad;ust(ents have "een (ade or are conte(!lated'
% G Lhether an# events have occurred or are likel# to occur that will "rin) into *uestion the
a!!ro!riateness of accountin) !olicies used in the financial state(ents, as would "e the case, for
e,a(!le, if such events call into *uestion the validit# of the )oin) concern assu(!tion'
% G Lhether an# events have occurred that are relevant to the (easure(ent of esti(ates or
!rovisions (ade in the financial state(ents'
% G Lhether an# events have occurred that are relevant to the recovera"ilit# of assets'
+eading <inutes $Aef' 6ara' 7$c&&
A10' In the !u"lic sector, the auditor (a# read the official records of relevant !roceedin)s of the
le)islature and in*uire a"out (atters addressed in !roceedin)s for which official records are not
#et availa"le'
F!ct =hich Beco.e K"o&" to the A-#ito' !fte' the D!te of the A-#ito'> Repo't $-t $efo'e
the D!te the Fi"!"ci!0 St!te.e"t A'e I-e#
<anage$ent +esponsibility to#ards Auditor $Aef. 6ara' 10&
A11' As e,!lained in ISA 410, the ter(s of the audit en)a)e(ent include the a)ree(ent of (ana)e(ent
to infor( the auditor of facts that (a# affect the financial state(ents, of which (ana)e(ent (a#
"eco(e aware durin) the !eriod fro( the date of the auditor+s re!ort to the date the financial
state(ents are issued'
5
ISA 410, CA)reein) the er(s of Audit 0n)a)e(ents,D !ara)ra!h A49'
ISA 5B0 554
?ual ?ating $Aef. 6ara' 14$a&&
A14' Lhen, in the circu(stances descri"ed in !ara)ra!h 14$a&, the auditor a(ends the auditor+s re!ort
to include an additional date restricted to that a(end(ent, the date of the auditor+s re!ort on the
financial state(ents !rior to their su"se*uent a(end(ent "# (ana)e(ent re(ains unchan)ed
"ecause this date infor(s the reader as to when the audit work on those financial state(ents was
co(!leted' @owever, an additional date is included in the auditor+s re!ort to infor( users that the
auditor+s !rocedures su"se*uent to that date were restricted to the su"se*uent a(end(ent of the
financial state(ents' he followin) is an illustration of such an additional date.
$=ate of auditor+s re!ort&, e,ce!t as to Note Y, which is as of $date of co(!letion of audit
!rocedures restricted to a(end(ent descri"ed in Note Y&'
Ao A$end$ent of Financial )tate$ents by <anage$ent $Aef. 6ara' 19&
A19' In so(e ;urisdictions, (ana)e(ent (a# not "e re*uired "# law, re)ulation or the financial
re!ortin) fra(ework to issue a(ended financial state(ents' his is often the case when issuance
of the financial state(ents for the followin) !eriod is i((inent, !rovided a!!ro!riate disclosures
are (ade in such state(ents'
A14' In the !u"lic sector, the actions taken in accordance with !ara)ra!h 19 when (ana)e(ent does not
a(end the financial state(ents (a# also include re!ortin) se!aratel# to the le)islature, or other
relevant "od# in the re!ortin) hierarch#, on the i(!lications of the su"se*uent event for the
financial state(ents and the auditor+s re!ort'
Auditor Action to )ee. to (re!ent +eliance on Auditor8s +eport $Aef. 6ara' 19$"&&
A15' he auditor (a# need to fulfill additional le)al o"li)ations even when the auditor has notified
(ana)e(ent not to issue the financial state(ents and (ana)e(ent has a)reed to this re*uest'
A1B' Lhere (ana)e(ent has issued the financial state(ents des!ite the auditor+s notification not to
issue the financial state(ents to third !arties, the auditor+s course of action to !revent reliance on
the auditor+s re!ort on the financial state(ents de!ends u!on the auditor+s le)al ri)hts and
o"li)ations' %onse*uentl#, the auditor (a# consider it a!!ro!riate to seek le)al advice'
555 ISA 5B0
F!ct =hich Beco.e K"o&" to the A-#ito' !fte' the Fi"!"ci!0 St!te.e"t H!9e Bee" I-e#
Ao A$end$ent of Financial )tate$ents by <anage$ent $Aef. 6ara' 15&
A17' In so(e ;urisdictions, entities in the !u"lic sector (a# "e !rohi"ited fro( issuin) a(ended
financial state(ents "# law or re)ulation' In such circu(stances, the a!!ro!riate course of action
for the auditor (a# "e to re!ort to the a!!ro!riate statutor# "od#'
Auditor Action to )ee. to (re!ent +eliance on Auditor8s +eport $Aef. 6ara' 17&
A18' Lhere the auditor "elieves that (ana)e(ent, or those char)ed with )overnance, have failed to
take the necessar# ste!s to !revent reliance on the auditor+s re!ort on financial state(ents
!reviousl# issued "# the entit# des!ite the auditor+s !rior notification that the auditor will take
action to seek to !revent such reliance, the auditor+s course of action de!ends u!on the auditor+s
le)al ri)hts and o"li)ations' %onse*uentl#, the auditor (a# consider it a!!ro!riate to seek le)al
advice'
ISA 5B0 55B
INTERNATIONAL STANDARD ON AUDITING @B0 GOING CONCERN
CONTENTS
6ara)ra!h
557 ISA 570
6eriod "e#ond Eana)e(ent+s Assess(ent ''''''''''''''''''''''''''''''''''''''''''''''''' A19-A14 Additional Audit
6rocedures Lhen 0vents or %onditions Are
Identified '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A15-A18 Audit %onclusions and
Ae!ortin) ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A15 Use of <oin) %oncern Assu(!tion A!!ro!riate "ut
a Eaterial
Uncertaint# 0,ists '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A40-A44
Use of <oin) %oncern Assu(!tion Ina!!ro!riate ''''''''''''''''''''''''''''''''''''''' A45-A4B
Eana)e(ent Unwillin) to Eake or 0,tend Its Assess(ent ''''''''''''''''''''''' A47
International Standard on Auditin) $ISA& 570, C<oin) %oncernD should "e read in con;unction with ISA
ISA 570 558
1' his International Standard on Auditin) $ISA& deals with the auditor+s res!onsi"ilities in the audit
of financial state(ents relatin) to (ana)e(ent+s use of the )oin) concern assu(!tion in the
!re!aration of the financial state(ents'
Goi"( Co"ce'" A-.ptio"
4' Under the )oin) concern assu(!tion, an entit# is viewed as continuin) in "usiness for the
foreseea"le future' <eneral !ur!ose financial state(ents are !re!ared on a )oin) concern "asis,
unless (ana)e(ent either intends to li*uidate the entit# or to cease o!erations, or has no realistic
alternative "ut to do so' S!ecial !ur!ose financial state(ents (a# or (a# not "e !re!ared in
accordance with a financial re!ortin) fra(ework for which the )oin) concern "asis is relevant $for
e,a(!le, the )oin) concern "asis is not relevant for so(e financial state(ents !re!ared on a ta,
"asis in !articular ;urisdictions&' Lhen the use of the )oin) concern assu(!tion is a!!ro!riate,
assets and lia"ilities are recorded on the "asis that the entit# will "e a"le to realiJe its assets and
dischar)e its lia"ilities in the nor(al course of "usiness' $Aef. 6ara' A1&
Repo"i$i0it/ fo' Ae.e"t of the E"tit/> A$i0it/ to Co"ti"-e ! ! Goi"( Co"ce'"
1. 9' So(e financial re!ortin) fra(eworks contain an e,!licit re*uire(ent for (ana)e(ent to
(ake a s!ecific assess(ent of the entit#+s a"ilit# to continue as a )oin) concern, and standards
re)ardin) (atters to "e considered and disclosures to "e (ade in connection with )oin) concern'
For e,a(!le, International Accountin) Standard $IAS& 1 re*uires (ana)e(ent to (ake an
assess(ent of an entit#+s a"ilit# to continue as a )oin) concern'
1
he detailed re*uire(ents
re)ardin) (ana)e(ent+s res!onsi"ilit# to assess the entit#+s a"ilit# to continue as a )oin) concern
and related financial state(ent disclosures (a# also "e set out in law or re)ulation'
2. 4' In other financial re!ortin) fra(eworks, there (a# "e no e,!licit re*uire(ent for
(ana)e(ent to (ake a s!ecific assess(ent of the entit#+s a"ilit# to continue as a )oin) concern'
Nevertheless, since the )oin) concern assu(!tion is a funda(ental !rinci!le in the !re!aration of
financial state(ents as discussed in !ara)ra!h 4, the !re!aration of the financial state(ents
re*uires (ana)e(ent to assess the entit#+s a"ilit# to continue as a )oin) concern even if the
financial re!ortin) fra(ework does not include an e,!licit re*uire(ent to do so'
IAS 1, C6resentation of Financial State(entsD as at 1 >anuar# 4005, !ara)ra!hs 45-4B'
555 ISA 570
5' Eana)e(ent+s assess(ent of the entit#+s a"ilit# to continue as a )oin) concern involves (akin) a
;ud)(ent, at a !articular !oint in ti(e, a"out inherentl# uncertain future outco(es of events or
conditions' he followin) factors are relevant to that ;ud)(ent.
1. G he de)ree of uncertaint# associated with the outco(e of an event or condition increases
si)nificantl# the further into the future an event or condition or the outco(e occurs' For that
reason, (ost financial re!ortin) fra(eworks that re*uire an e,!licit (ana)e(ent assess(ent
s!ecif# the !eriod for which (ana)e(ent is re*uired to take into account all availa"le infor(ation'
2. G he siJe and co(!le,it# of the entit#, the nature and condition of its "usiness and the
de)ree to which it is affected "# e,ternal factors affect the ;ud)(ent re)ardin) the outco(e of
events or conditions'
3. G An# ;ud)(ent a"out the future is "ased on infor(ation availa"le at the ti(e at which the
;ud)(ent is (ade' Su"se*uent events (a# result in outco(es that are inconsistent with ;ud)(ents
that were reasona"le at the ti(e the# were (ade'
+esponsibilities of the Auditor
1. B' he auditor+s res!onsi"ilit# is to o"tain sufficient a!!ro!riate audit evidence a"out the
a!!ro!riateness of (ana)e(ent+s use of the )oin) concern assu(!tion in the !re!aration and
!resentation of the financial state(ents and to conclude whether there is a (aterial uncertaint#
a"out the entit#+s a"ilit# to continue as a )oin) concern' his res!onsi"ilit# e,ists even if the
financial re!ortin) fra(ework used in the !re!aration of the financial state(ents does not include
an e,!licit re*uire(ent for (ana)e(ent to (ake a s!ecific assess(ent of the entit#+s a"ilit# to
continue as a )oin) concern'
2. 7' @owever, as descri"ed in ISA 400,
4
the !otential effects of inherent li(itations on the
auditor+s a"ilit# to detect (aterial (isstate(ents are )reater for future events or conditions that
(a# cause an entit# to cease to continue as a )oin) concern' he auditor cannot !redict such future
events or conditions' Accordin)l#, the a"sence of an# reference to )oin) concern uncertaint# in an
auditor+s re!ort cannot "e viewed as a )uarantee as to the entit#+s a"ilit# to continue as a )oin)
concern'
Effecti9e D!te
15, 4005'
ISA 570 5B0
O$1ecti9e
1. $a& o o"tain sufficient a!!ro!riate audit evidence re)ardin) the a!!ro!riateness of
(ana)e(ent+s use of the )oin) concern assu(!tion in the !re!aration of the financial state(ents?
2. $"& o conclude, "ased on the audit evidence o"tained, whether a (aterial uncertaint# e,ists
related to events or conditions that (a# cast si)nificant dou"t on the entit#+s a"ilit# to continue as
a )oin) concern? and
3. $c& o deter(ine the i(!lications for the auditor+s re!ort'
110' Lhen !erfor(in) risk assess(ent !rocedures as re*uired "# ISA 915,
9
the auditor shall
consider whether there are events or conditions that (a# cast si)nificant dou"t on the entit#+s
a"ilit# to continue as a )oin) concern' In so doin), the auditor shall deter(ine whether
(ana)e(ent has alread# !erfor(ed a !reli(inar# assess(ent of the entit#+s a"ilit# to
continue as a )oin) concern, and. $Aef. 6ara' A4-A5&
2$a& If such an assess(ent has "een !erfor(ed, the auditor shall discuss the assess(ent with
(ana)e(ent and deter(ine whether (ana)e(ent has identified events or conditions that,
individuall# or collectivel#, (a# cast si)nificant dou"t on the entit#+s a"ilit# to continue as a
)oin) concern and, if so, (ana)e(ent+s !lans to address the(? or
3$"& If such an assess(ent has not #et "een !erfor(ed, the auditor shall discuss with
(ana)e(ent the "asis for the intended use of the )oin) concern assu(!tion, and in*uire of
(ana)e(ent whether events or conditions e,ist that, individuall# or collectivel#, (a# cast
si)nificant dou"t on the entit#+s a"ilit# to continue as a )oin) concern'
2. 11' he auditor shall re(ain alert throu)hout the audit for audit evidence of events or
conditions that (a# cast si)nificant dou"t on the entit#+s a"ilit# to continue as a )oin) concern'
$Aef. 6ara' AB&
E9!0-!ti"( )!"!(e.e"t> Ae.e"t
14' he auditor shall evaluate (ana)e(ent+s assess(ent of the entit#+s a"ilit# to continue as a )oin)
concern' $Aef. 6ara' A7-A5? A11-A14&
!ara)ra!h 5'
5B1 ISA 570
1. 19' In evaluatin) (ana)e(ent+s assess(ent of the entit#+s a"ilit# to continue as a )oin)
concern, the auditor shall cover the sa(e !eriod as that used "# (ana)e(ent to (ake its
assess(ent as re*uired "# the a!!lica"le financial re!ortin) fra(ework, or "# law or re)ulation if
it s!ecifies a lon)er !eriod' If (ana)e(ent+s assess(ent of the entit#+s a"ilit# to continue as a
)oin) concern covers less than twelve (onths fro( the date of the financial state(ents as defined
in ISA 5B0,
4
the auditor shall re*uest (ana)e(ent to e,tend its assess(ent !eriod to at least
twelve (onths fro( that date'$Aef. 6ara' A10-A14&
2. 14' In evaluatin) (ana)e(ent+s assess(ent, the auditor shall consider whether
(ana)e(ent+s assess(ent includes all relevant infor(ation of which the auditor is aware as a
result of the audit'
*e'io# $e/o"# )!"!(e.e"t> Ae.e"t
15' he auditor shall in*uire of (ana)e(ent as to its knowled)e of events or conditions "e#ond the
!eriod of (ana)e(ent+s assess(ent that (a# cast si)nificant dou"t on the entit#+s a"ilit# to
continue as a )oin) concern' $Aef. 6ara' A19-A14&
A##itio"!0 A-#it *'oce#-'e =he" E9e"t o' Co"#itio" A'e I#e"tifie#
1B' If events or conditions have "een identified that (a# cast si)nificant dou"t on the entit#+s a"ilit#
to continue as a )oin) concern, the auditor shall o"tain sufficient a!!ro!riate audit evidence to
deter(ine whether or not a (aterial uncertaint# e,ists throu)h !erfor(in) additional audit
!rocedures, includin) consideration of (iti)atin) factors' hese !rocedures shall include. $Aef.
6ara' A15&
1$a&Lhere (ana)e(ent has not #et !erfor(ed an assess(ent of the entit#+s a"ilit# to continue as a
)oin) concern, re*uestin) (ana)e(ent to (ake its assess(ent'
2$"& 0valuatin) (ana)e(ent+s !lans for future actions in relation to its )oin) concern assess(ent,
whether the outco(e of these !lans is likel# to i(!rove the situation and whether (ana)e(ent+s
!lans are feasi"le in the circu(stances' $Aef. 6ara' A1B&
3$c&Lhere the entit# has !re!ared a cash flow forecast, and anal#sis of the forecast is a si)nificant
factor in considerin) the future outco(e of events or conditions in the evaluation of (ana)e(ent+s
!lans for future action. $Aef. 6ara' A17-A18&
$i& 0valuatin) the relia"ilit# of the underl#in) data )enerated to !re!are the forecast?
and
ISA 5B0, CSu"se*uent 0vents,D !ara)ra!h 5$a&'
ISA 570 5B4
17' 1ased on the audit evidence o"tained, the auditor shall conclude whether, in the auditor+s
;ud)(ent, a (aterial uncertaint# e,ists related to events or conditions that, individuall# or
collectivel#, (a# cast si)nificant dou"t on the entit#+s a"ilit# to continue as a )oin) concern' A
(aterial uncertaint# e,ists when the (a)nitude of its !otential i(!act and likelihood of
occurrence is such that, in the auditor+s ;ud)(ent, a!!ro!riate disclosure of the nature and
i(!lications of the uncertaint# is necessar# for. $Aef. 6ara' A15&
1$a&In the case of a fair !resentation financial re!ortin) fra(ework, the fair !resentation of the
financial state(ents, or
2$"& In the case of a co(!liance fra(ework, the financial state(ents not to "e (isleadin)'
Ue of Goi"( Co"ce'" A-.ptio" App'op'i!te $-t ! )!te'i!0 U"ce't!i"t/ E5it
118' If the auditor concludes that the use of the )oin) concern assu(!tion is a!!ro!riate in the
circu(stances "ut a (aterial uncertaint# e,ists, the auditor shall deter(ine whether the
financial state(ents.
2$a&Ade*uatel# descri"e the !rinci!al events or conditions that (a# cast si)nificant dou"t on the
entit#+s a"ilit# to continue as a )oin) concern and (ana)e(ent+s !lans to deal with these
events or conditions? and
3$"& =isclose clearl# that there is a (aterial uncertaint# related to events or conditions that (a#
cast si)nificant dou"t on the entit#+s a"ilit# to continue as a )oin) concern and, therefore, that
it (a# "e una"le to realiJe its assets and dischar)e its lia"ilities in the nor(al course of
"usiness' $Aef. 6ara' A40&
2. 15' If ade*uate disclosure is (ade in the financial state(ents, the auditor shall e,!ress an
un(odified o!inion and include an 0(!hasis of Eatter !ara)ra!h in the auditor+s re!ort to.
$a& @i)hli)ht the e,istence of a (aterial uncertaint# relatin) to the event or condition that (a#
cast si)nificant dou"t on the entit#+s a"ilit# to continue as a )oin) concern? and
5B9 ISA 570
$"& =raw attention to the note in the financial state(ents that discloses the (atters set out in
!ara)ra!h 18' $See ISA 70B'
5
& $Aef. 6ara' A41-A44&
40' If ade*uate disclosure is not (ade in the financial state(ents, the auditor shall e,!ress a *ualified
o!inion or adverse o!inion, as a!!ro!riate, in accordance with ISA 705'
B
he auditor shall state in
the auditor+s re!ort that there is a (aterial uncertaint# that (a# cast si)nificant dou"t a"out the
entit#+s a"ilit# to continue as a )oin) concern' $Aef. 6ara' A49-A44&
Ue of Goi"( Co"ce'" A-.ptio" I"!pp'op'i!te
41' If the financial state(ents have "een !re!ared on a )oin) concern "asis "ut, in the auditor+s
;ud)(ent, (ana)e(ent+s use of the )oin) concern assu(!tion in the financial state(ents is
ina!!ro!riate, the auditor shall e,!ress an adverse o!inion' $Aef. 6ara' A45-A4B&
)!"!(e.e"t U"&i00i"( to )!%e o' E5te"# It Ae.e"t
44' If (ana)e(ent is unwillin) to (ake or e,tend its assess(ent when re*uested to do so "# the
auditor, the auditor shall consider the i(!lications for the auditor+s re!ort' $Aef. 6ara' A47&
49' Unless all those char)ed with )overnance are involved in (ana)in) the entit#,
7
the auditor shall
co((unicate with those char)ed with )overnance events or conditions identified that (a# cast
si)nificant dou"t on the entit#+s a"ilit# to continue as a )oin) concern' Such co((unication with
those char)ed with )overnance shall include the followin).
1. $a& Lhether the events or conditions constitute a (aterial uncertaint#?
2. $"& Lhether the use of the )oin) concern assu(!tion is a!!ro!riate in the !re!aration and
!resentation of the financial state(ents? and
3. $c& he ade*uac# of related disclosures in the financial state(ents'
Si("ific!"t De0!/ i" the App'o9!0 of Fi"!"ci!0 St!te.e"t
44' If there is si)nificant dela# in the a!!roval of the financial state(ents "# (ana)e(ent or those
char)ed with )overnance after the date of the financial state(ents, the auditor shall in*uire as to
the reasons for the dela#' If the auditor "elieves that the dela# could "e related to events or
conditions relatin)
5
ISA 70B, C0(!hasis of Eatter 6ara)ra!hs and 7ther Eatter 6ara)ra!hs in the Inde!endent Auditor+s
Ae!ort'D B
ISA 570 5B4
to the )oin) concern assess(ent, the auditor shall !erfor( those additional audit !rocedures
necessar#, as descri"ed in !ara)ra!h 1B, as well as consider the effect on the auditor+s conclusion
re)ardin) the e,istence of a (aterial uncertaint#, as descri"ed in !ara)ra!h 17'
OOO
App0ic!tio" !"# Othe' E5p0!"!to'/ )!te'i!0 Goi"( Co"ce'"
A-.ptio" $Aef. 6ara' 4&
A1' Eana)e(ent+s use of the )oin) concern assu(!tion is also relevant to !u"lic sector entities' For
e,a(!le, International 6u"lic Sector Accountin) Standard $I6SAS& 1 addresses the issue of the
a"ilit# of !u"lic sector entities to continue as )oin) concerns'
8
<oin) concern risks (a# arise, "ut
are not li(ited to, situations where !u"lic sector entities o!erate on a for-!rofit "asis, where
)overn(ent su!!ort (a# "e reduced or withdrawn, or in the case of !rivatiJation' 0vents or
conditions that (a# cast si)nificant dou"t on an entit#+s a"ilit# to continue as a )oin) concern in
the !u"lic sector (a# include situations where the !u"lic sector entit# lacks fundin) for its
continued e,istence or when !olic# decisions are (ade that affect the services !rovided "# the
!u"lic sector entit#'
/!ents or Conditions 1hat <ay Cast ?oubt about 2oing Concern Assu$ption $Aef. 6ara' 10&
A4' he followin) are e,a(!les of events or conditions that, individuall# or collectivel#, (a# cast
si)nificant dou"t a"out the )oin) concern assu(!tion' his listin) is not all-inclusive nor does the
e,istence of one or (ore of the ite(s alwa#s si)nif# that a (aterial uncertaint# e,ists'
Financial
1. G Net lia"ilit# or net current lia"ilit# !osition'
2. G Fi,ed-ter( "orrowin)s a!!roachin) (aturit# without realistic !ros!ects of renewal or
re!a#(ent? or e,cessive reliance on short-ter( "orrowin)s to finance lon)-ter( assets'
3. G Indications of withdrawal of financial su!!ort "# creditors'
I6SAS 1, C6resentation of Financial State(entsD as at >anuar# 1, 4005, !ara)ra!hs 98-41'
5B5 ISA 570
1. G Ne)ative o!eratin) cash flows indicated "# historical or !ros!ective financial state(ents'
2. G Adverse ke# financial ratios'
3. G Su"stantial o!eratin) losses or si)nificant deterioration in the value of assets used to
)enerate cash flows'
4. G Arrears or discontinuance of dividends'
5. G Ina"ilit# to !a# creditors on due dates'
6. G Ina"ilit# to co(!l# with the ter(s of loan a)ree(ents'
7. G %han)e fro( credit to cash-on-deliver# transactions with su!!liers'
1. G Ina"ilit# to o"tain financin) for essential new !roduct develo!(ent or other essential
invest(ents'
2. 7!eratin)
8. G Eana)e(ent intentions to li*uidate the entit# or to cease o!erations'
9. G Moss of ke# (ana)e(ent without re!lace(ent'
10. G Moss of a (a;or (arket, ke# custo(er$s&, franchise, license, or !rinci!al su!!lier$s&'
11. G Ma"or difficulties'
12. G Shorta)es of i(!ortant su!!lies'
13. G 0(er)ence of a hi)hl# successful co(!etitor'
7ther
14. G Non-co(!liance with ca!ital or other statutor# re*uire(ents'
15. G 6endin) le)al or re)ulator# !roceedin)s a)ainst the entit# that (a#, if successful, result in
clai(s that the entit# is unlikel# to "e a"le to satisf#'
16. G %han)es in law or re)ulation or )overn(ent !olic# e,!ected to adversel# affect the
entit#'
17. G Uninsured or underinsured catastro!hes when the# occur'
he si)nificance of such events or conditions often can "e (iti)ated "# other factors' For e,a(!le,
the effect of an entit# "ein) una"le to (ake its nor(al de"t re!a#(ents (a# "e counter-"alanced
"# (ana)e(ent+s !lans to (aintain ade*uate cash flows "# alternative (eans, such as "#
dis!osin) of assets, reschedulin) loan re!a#(ents, or o"tainin) additional ca!ital' Si(ilarl#, the
loss of a !rinci!al su!!lier (a# "e (iti)ated "# the availa"ilit# of a suita"le alternative source of
su!!l#'
ISA 570 5BB
A9' he risk assess(ent !rocedures re*uired "# !ara)ra!h 10 hel! the auditor to deter(ine whether
(ana)e(ent+s use of the )oin) concern assu(!tion is likel# to "e an i(!ortant issue and its
i(!act on !lannin) the audit' hese !rocedures also allow for (ore ti(el# discussions with
(ana)e(ent, includin) a discussion of (ana)e(ent+s !lans and resolution of an# identified )oin)
concern issues'
A4' he siJe of an entit# (a# affect its a"ilit# to withstand adverse conditions' S(all entities (a# "e
a"le to res!ond *uickl# to e,!loit o!!ortunities, "ut (a# lack reserves to sustain o!erations'
A5' %onditions of !articular relevance to s(all entities include the risk that "anks and other lenders
(a# cease to su!!ort the entit#, as well as the !ossi"le loss of a !rinci!al su!!lier, (a;or custo(er,
ke# e(!lo#ee, or the ri)ht to o!erate under a license, franchise or other le)al a)ree(ent'
+e$aining Alert throughout the Audit for Audit /!idence about /!ents or Conditions
$Aef. 6ara' 11&
AB' ISA 915 re*uires the auditor to revise the auditor+s risk assess(ent and (odif# the further !lanned
audit !rocedures accordin)l# when additional audit evidence is o"tained durin) the course of the
audit that affects the auditor+s assess(ent of risk'
5
If events or conditions that (a# cast si)nificant
dou"t on the entit#+s a"ilit# to continue as a )oin) concern are identified after the auditor+s risk
assess(ents are (ade, in addition to !erfor(in) the !rocedures in !ara)ra!h 1B, the auditor+s
assess(ent of the risks of (aterial (isstate(ent (a# need to "e revised' he e,istence of such
events or conditions (a# also affect the nature, ti(in) and e,tent of the auditor+s further
!rocedures in res!onse to the assessed risks' ISA 990
10
esta"lishes re*uire(ents and !rovides
)uidance on this issue'
E9!0-!ti"( )!"!(e.e"t> Ae.e"t
<anage$ent8s Assess$ent and )upporting Analysis and the Auditor8s /!aluation
$Aef. 6ara' 14&
A7' Eana)e(ent+s assess(ent of the entit#+s a"ilit# to continue as a )oin) concern is a ke# !art of the
auditor+s consideration of (ana)e(ent+s use of the )oin) concern assu(!tion'
A8' It is not the auditor+s res!onsi"ilit# to rectif# the lack of anal#sis "# (ana)e(ent' In so(e
circu(stances, however, the lack of detailed anal#sis "# (ana)e(ent to su!!ort its assess(ent
(a# not !revent the auditor fro(
5
ISA 915, !ara)ra!h 91' 10
5B7 ISA 570
concludin) whether (ana)e(ent+s use of the )oin) concern assu(!tion is a!!ro!riate in the
circu(stances' For e,a(!le, when there is a histor# of !rofita"le o!erations and a read# access to
financial resources, (ana)e(ent (a# (ake its assess(ent without detailed anal#sis' In this case,
the auditor+s evaluation of the a!!ro!riateness of (ana)e(ent+s assess(ent (a# "e (ade without
!erfor(in) detailed evaluation !rocedures if the auditor+s other audit !rocedures are sufficient to
ena"le the auditor to conclude whether (ana)e(ent+s use of the )oin) concern assu(!tion in the
!re!aration of the financial state(ents is a!!ro!riate in the circu(stances'
A5' In other circu(stances, evaluatin) (ana)e(ent+s assess(ent of the entit#+s a"ilit# to continue as a
)oin) concern, as re*uired "# !ara)ra!h 14, (a# include an evaluation of the !rocess (ana)e(ent
followed to (ake its assess(ent, the assu(!tions on which the assess(ent is "ased and
(ana)e(ent+s !lans for future action and whether (ana)e(ent+s !lans are feasi"le in the
circu(stances'
1he (eriod of <anage$ent8s Assess$ent $Aef. 6ara' 19&
A10' Eost financial re!ortin) fra(eworks re*uirin) an e,!licit (ana)e(ent assess(ent s!ecif# the
!eriod for which (ana)e(ent is re*uired to take into account all availa"le infor(ation'
11
Considerations )pecific to )$aller /ntities $Aef. 6ara' 14-19&
A11' In (an# cases, the (ana)e(ent of s(aller entities (a# not have !re!ared a detailed assess(ent of
the entit#+s a"ilit# to continue as a )oin) concern, "ut instead (a# rel# on in-de!th knowled)e of
the "usiness and antici!ated future !ros!ects' Nevertheless, in accordance with the re*uire(ents
of this ISA, the auditor needs to evaluate (ana)e(ent+s assess(ent of the entit#+s a"ilit# to
continue as a )oin) concern' For s(aller entities, it (a# "e a!!ro!riate to discuss the (ediu( and
lon)-ter( financin) of the entit# with (ana)e(ent, !rovided that (ana)e(ent+s contentions can
"e corro"orated "# sufficient docu(entar# evidence and are not inconsistent with the auditor+s
understandin) of the entit#' herefore, the re*uire(ent in !ara)ra!h 19 for the auditor to re*uest
(ana)e(ent to e,tend its assess(ent (a#, for e,a(!le, "e satisfied "# discussion, in*uir# and
ins!ection of su!!ortin) docu(entation, for e,a(!le, orders received for future su!!l#, evaluated
as to their feasi"ilit# or otherwise su"stantiated'
A14' %ontinued su!!ort "# owner-(ana)ers is often i(!ortant to s(aller entities+ a"ilit# to continue as
a )oin) concern' Lhere a s(all entit# is lar)el# financed "# a loan fro( the owner-(ana)er, it
(a# "e i(!ortant that these funds are not
For e,a(!le, IAS 1 defines this as a !eriod that should "e at least, "ut is not li(ited to, twelve (onths fro( the end of the
re!ortin) !eriod'
ISA 570 5B8
withdrawn' For e,a(!le, the continuance of a s(all entit# in financial difficult# (a# "e de!endent
on the owner-(ana)er su"ordinatin) a loan to the entit# in favor of "anks or other creditors, or the
owner (ana)er su!!ortin) a loan for the entit# "# !rovidin) a )uarantee with his or her !ersonal
assets as collateral' In such circu(stances the auditor (a# o"tain a!!ro!riate docu(entar#
evidence of the su"ordination of the owner-(ana)er+s loan or of the )uarantee' Lhere an entit# is
de!endent on additional su!!ort fro( the owner-(ana)er, the auditor (a# evaluate the owner-
(ana)er+s a"ilit# to (eet the o"li)ation under the su!!ort arran)e(ent' In addition, the auditor
(a# re*uest written confir(ation of the ter(s and conditions attachin) to such su!!ort and the
owner-(ana)er+s intention or understandin)'
*e'io# $e/o"# )!"!(e.e"t> Ae.e"t $Aef. 6ara' 15&
A19' As re*uired "# !ara)ra!h 11, the auditor re(ains alert to the !ossi"ilit# that there (a# "e known
events, scheduled or otherwise, or conditions that will occur "e#ond the !eriod of assess(ent used
"# (ana)e(ent that (a# "rin) into *uestion the a!!ro!riateness of (ana)e(ent+s use of the
)oin) concern assu(!tion in !re!arin) the financial state(ents' Since the de)ree of uncertaint#
associated with the outco(e of an event or condition increases as the event or condition is further
into the future, in considerin) events or conditions further in the future, the indications of )oin)
concern issues need to "e si)nificant "efore the auditor needs to consider takin) further action' If
such events or conditions are identified, the auditor (a# need to re*uest (ana)e(ent to evaluate
the !otential si)nificance of the event or condition on its assess(ent of the entit#+s a"ilit# to
continue as a )oin) concern' In these circu(stances the !rocedures in !ara)ra!h 1B a!!l#'
A14' 7ther than in*uir# of (ana)e(ent, the auditor does not have a res!onsi"ilit# to !erfor( an# other
audit !rocedures to identif# events or conditions that (a# cast si)nificant dou"t on the entit#+s
a"ilit# to continue as a )oin) concern "e#ond the !eriod assessed "# (ana)e(ent, which, as
discussed in !ara)ra!h 19, would "e at least twelve (onths fro( the date of the financial
state(ents'
A##itio"!0 A-#it *'oce#-'e =he" E9e"t o' Co"#itio" A'e I#e"tifie# $Aef. 6ara' 1B&
A15' Audit !rocedures that are relevant to the re*uire(ent in !ara)ra!h 1B (a# include the followin).
% G Anal#Jin) and discussin) cash flow, !rofit and other relevant forecasts with (ana)e(ent'
% G Anal#Jin) and discussin) the entit#+s latest availa"le interi( financial state(ents'
% G Aeadin) the ter(s of de"entures and loan a)ree(ents and deter(inin) whether an# have
"een "reached'
5B5 ISA 570
1. G Aeadin) (inutes of the (eetin)s of shareholders, those char)ed with )overnance and
relevant co((ittees for reference to financin) difficulties'
2. G In*uirin) of the entit#+s le)al counsel re)ardin) the e,istence of liti)ation and clai(s and
the reasona"leness of (ana)e(ent+s assess(ents of their outco(e and the esti(ate of their
financial i(!lications'
3. G %onfir(in) the e,istence, le)alit# and enforcea"ilit# of arran)e(ents to !rovide or
(aintain financial su!!ort with related and third !arties and assessin) the financial a"ilit# of such
!arties to !rovide additional funds'
4. G 0valuatin) the entit#+s !lans to deal with unfilled custo(er orders'
5. G 6erfor(in) audit !rocedures re)ardin) su"se*uent events to identif# those that either
(iti)ate or otherwise affect the entit#+s a"ilit# to continue as a )oin) concern'
6. G %onfir(in) the e,istence, ter(s and ade*uac# of "orrowin) facilities'
7. G 7"tainin) and reviewin) re!orts of re)ulator# actions'
8. G =eter(inin) the ade*uac# of su!!ort for an# !lanned dis!osals of assets'
/!aluating <anage$ent8s (lans for Future Actions $Aef. 6ara' 1B$"&&
A1B' 0valuatin) (ana)e(ent+s !lans for future actions (a# include in*uiries of (ana)e(ent as to its
!lans for future action, includin), for e,a(!le, its !lans to li*uidate assets, "orrow (one# or
restructure de"t, reduce or dela# e,!enditures, or increase ca!ital'
1he (eriod of <anage$ent8s Assess$ent $Aef. 6ara' 1B$c&&
A17' In addition to the !rocedures re*uired in !ara)ra!h 1B$c&, the auditor (a# co(!are.
1. G he !ros!ective financial infor(ation for recent !rior !eriods with historical results? and
2. G he !ros!ective financial infor(ation for the current !eriod with results achieved to date'
A18' Lhere (ana)e(ent+s assu(!tions include continued su!!ort "# third !arties, whether throu)h the
su"ordination of loans, co((it(ents to (aintain or !rovide additional fundin), or )uarantees, and
such su!!ort is i(!ortant to an entit#+s a"ilit# to continue as a )oin) concern, the auditor (a#
need to consider re*uestin) written confir(ation $includin) of ter(s and conditions& fro( those
third !arties and to o"tain evidence of their a"ilit# to !rovide such su!!ort'
ISA 570 570
A-#it Co"c0-io" !"# Repo'ti"( $Aef. 6ara' 17&
A15' he !hrase C(aterial uncertaint#D is used in IAS 1 in discussin) the uncertainties related to events
or conditions which (a# cast si)nificant dou"t on the entit#+s a"ilit# to continue as a )oin)
concern that should "e disclosed in the financial state(ents' In so(e other financial re!ortin)
fra(eworks the !hrase Csi)nificant uncertaint#D is used in si(ilar circu(stances'
Ue of Goi"( Co"ce'" A-.ptio" App'op'i!te $-t ! )!te'i!0 U"ce't!i"t/ E5it
Ade>uacy of ?isclosure of <aterial "ncertainty $Aef. 6ara' 18&
A40' he deter(ination of the ade*uac# of the financial state(ent disclosure (a# involve deter(inin)
whether the infor(ation e,!licitl# draws the reader+s attention to the !ossi"ilit# that the entit#
(a# "e una"le to continue realiJin) its assets and dischar)in) its lia"ilities in the nor(al course of
"usiness'
Audit +eporting Dhen ?isclosure of <aterial "ncertainty Is Ade>uate $Aef. 6ara' 15&
A41' he followin) is an illustration of an 0(!hasis of Eatter !ara)ra!h when the auditor is satisfied
as to the ade*uac# of the note disclosure.
/$phasis of <atter
Lithout *ualif#in) our o!inion, we draw attention to Note I in the financial state(ents
which indicates that the %o(!an# incurred a net loss of WWW durin) the #ear ended
=ece("er 91, 40I1 and, as of that date, the %o(!an#+s current lia"ilities e,ceeded its
total assets "# YYY' hese conditions, alon) with other (atters as set forth in Note I,
indicate the e,istence of a (aterial uncertaint# that (a# cast si)nificant dou"t a"out the
%o(!an#+s a"ilit# to continue as a )oin) concern'
A44' In situations involvin) (ulti!le (aterial uncertainties that are si)nificant to the financial
state(ents as a whole, the auditor (a# consider it a!!ro!riate in e,tre(el# rare cases to e,!ress a
disclai(er of o!inion instead of addin) an 0(!hasis of Eatter !ara)ra!h' ISA 705 !rovides
)uidance on this issue'
Audit +eporting Dhen ?isclosure of <aterial "ncertainty Is Inade>uate $Aef. 6ara' 40&
A49' he followin) is an illustration of the relevant !ara)ra!hs when a *ualified o!inion is to "e
e,!ressed.
he %o(!an#+s financin) arran)e(ents e,!ire and a(ounts outstandin) are !a#a"le on
Earch 15, 40I1' he %o(!an# has "een una"le to re-ne)otiate or o"tain re!lace(ent
financin)' his situation indicates the e,istence of a (aterial uncertaint# that (a# cast
571 ISA 570
si)nificant dou"t on the %o(!an#+s a"ilit# to continue as a )oin) concern and therefore
the %o(!an# (a# "e una"le to realiJe its assets and dischar)e its lia"ilities in the nor(al
course of "usiness' he financial state(ents $and notes thereto& do not full# disclose this
fact'
*ualified ,pinion
In our o!inion, e,ce!t for the inco(!lete disclosure of the infor(ation referred to in the
1asis for :ualified 7!inion !ara)ra!h, the financial state(ents !resent fairl#, in all
(aterial res!ects $or C)ive a true and fair view ofD& the financial !osition of the %o(!an#
as at =ece("er 91, 40I0, and of its financial !erfor(ance and its cash flows for the #ear
then ended in accordance with H
A44' he followin) is an illustration of the relevant !ara)ra!hs when an adverse o!inion is to "e
e,!ressed.
=asis for Ad!erse ,pinion
he %o(!an#+s financin) arran)e(ents e,!ired and the a(ount outstandin) was !a#a"le
on =ece("er 91, 40I0' he %o(!an# has "een una"le to re-ne)otiate or o"tain
re!lace(ent financin) and is considerin) filin) for "ankru!tc#' hese events indicate a
(aterial uncertaint# that (a# cast si)nificant dou"t on the %o(!an#+s a"ilit# to continue
as a )oin) concern and therefore the %o(!an# (a# "e una"le to realiJe its assets and
dischar)e its lia"ilities in the nor(al course of "usiness' he financial state(ents $and
notes thereto& do not disclose this fact'
Ad!erse ,pinion
In our o!inion, "ecause of the o(ission of the infor(ation (entioned in the 1asis for
Adverse 7!inion !ara)ra!h, the financial state(ents do not !resent fairl# $or C)ive a true
and fair view ofD& the financial !osition of the %o(!an# as at =ece("er 91, 40I0, and of
its financial !erfor(ance and its cash flows for the #ear then ended in accordance with H
Ue of Goi"( Co"ce'" A-.ptio" I"!pp'op'i!te $Aef. 6ara' 41&
A45' If the financial state(ents have "een !re!ared on a )oin) concern "asis "ut, in the auditor+s
;ud)(ent, (ana)e(ent+s use of the )oin) concern assu(!tion in the financial state(ents is
ina!!ro!riate, the re*uire(ent of !ara)ra!h 41 for the auditor to e,!ress an adverse o!inion
a!!lies re)ardless of whether or not the financial state(ents include disclosure of the
ina!!ro!riateness of (ana)e(ent+s use of the )oin) concern assu(!tion'
A4B' If the entit#+s (ana)e(ent is re*uired, or elects, to !re!are financial state(ents when the use of
the )oin) concern assu(!tion is not a!!ro!riate in
ISA 570 574
the circu(stances, the financial state(ents are !re!ared on an alternative "asis $for e,a(!le,
li*uidation "asis&' he auditor (a# "e a"le to !erfor( an audit of those financial state(ents
!rovided that the auditor deter(ines that the alternative "asis is an acce!ta"le financial re!ortin)
fra(ework in the circu(stances' he auditor (a# "e a"le to e,!ress an un(odified o!inion on
those financial state(ents, !rovided there is ade*uate disclosure therein "ut (a# consider it
a!!ro!riate or necessar# to include an 0(!hasis of Eatter !ara)ra!h in the auditor+s re!ort to
draw the user+s attention to that alternative "asis and the reasons for its use'
)!"!(e.e"t U"&i00i"( to )!%e o' E5te"# It Ae.e"t $Aef. 6ara' 44&
A47' In certain circu(stances, the auditor (a# "elieve it necessar# to re*uest (ana)e(ent to (ake or
e,tend its assess(ent' If (ana)e(ent is unwillin) to do so, a *ualified o!inion or a disclai(er of
o!inion in the auditor+s re!ort (a# "e a!!ro!riate, "ecause it (a# not "e !ossi"le for the auditor
to o"tain sufficient a!!ro!riate audit evidence re)ardin) the use of the )oin) concern assu(!tion
in the !re!aration of the financial state(ents, such as audit evidence re)ardin) the e,istence of
!lans (ana)e(ent has !ut in !lace or the e,istence of other (iti)atin) factors'
579 ISA 570
INTERNATIONAL STANDARD ON AUDITING @+0
=RITTEN RE*RESENTATIONS
4005&
CONTENTS
6ara)ra!h
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1-4
Lritten Ae!resentations as Audit 0vidence '''''''''''''''''''''''''''''''''''''''''''''''' 9-4
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' B
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 7-8
Re2-i'e.e"t
Eana)e(ent fro( who( Lritten Ae!resentations Ae*uested ''''''''''''''''''' 5
Lritten Ae!resentations a"out Eana)e(ent+s Aes!onsi"ilities ''''''''''''''''' 10-14
7ther Lritten Ae!resentations '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 19
=ate of and 6eriod$s& %overed "# Lritten Ae!resentations ''''''''''''''''''''''' 14
For( of Lritten Ae!resentations '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 15
=ou"t as to the Aelia"ilit# of Lritten Ae!resentations and Ae*uested
Lritten Ae!resentations Not 6rovided '''''''''''''''''''''''''''''''''''''''''''''''' 1B-40
Lritten Ae!resentations as Audit 0vidence '''''''''''''''''''''''''''''''''''''''''''''''' A1
Eana)e(ent fro( who( Lritten Ae!resentations Ae*uested ''''''''''''''''''' A4-AB
Lritten Ae!resentations a"out Eana)e(ent+s Aes!onsi"ilities ''''''''''''''''' A7-A5
7ther Lritten Ae!resentations '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A10-A19
%o((unicatin) a hreshold A(ount ''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A14
=ate of and 6eriod$s& %overed "# Lritten Ae!resentations ''''''''''''''''''''''' A15-A18
For( of Lritten Ae!resentations '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A15-A41
ISA 580 574
=ou"t as to the Aelia"ilit# of Lritten Ae!resentations and Ae*uested Lritten Ae!resentations Not 6rovided
'''''''''''''''''''''''''''''''''''''''''''''''' A49-A47
A!!endi, 1. Mist of ISAs %ontainin) Ae*uire(ents for Lritten Ae!resentations
A!!endi, 4. Illustrative Ae!resentation Metter
International Standard on Auditin) $ISA& 580, CLritten Ae!resentationsD should "e read in con;unction
with ISA 400, C7verall 7";ectives of the Inde!endent Auditor and the %onduct of an Audit in Accordance
with International Standards on Auditin)'D
575 ISA 580
o"tain written re!resentations fro( (ana)e(ent and, where a!!ro!riate, those char)ed with
)overnance in an audit of financial state(ents'
2. 4' A!!endi, 1 lists other ISAs containin) su";ect-(atter s!ecific re*uire(ents for written
re!resentations' he s!ecific re*uire(ents for written re!resentations of other ISAs do not li(it
the a!!lication of this ISA'
='itte" Rep'ee"t!tio" ! A-#it E9i#e"ce
1. 9' Audit evidence is the infor(ation used "# the auditor in arrivin) at the conclusions on
which the auditor+s o!inion is "ased'
1
Lritten re!resentations are necessar# infor(ation that the
auditor re*uires in connection with the audit of the entit#+s financial state(ents' Accordin)l#,
si(ilar to res!onses to in*uiries, written re!resentations are audit evidence' $Aef. 6ara' A1&
2. 4' Althou)h written re!resentations !rovide necessar# audit evidence, the# do not !rovide
sufficient a!!ro!riate audit evidence on their own a"out an# of the (atters with which the# deal'
Further(ore, the fact that (ana)e(ent has !rovided relia"le written re!resentations does not
affect the nature or e,tent of other audit evidence that the auditor o"tains a"out the fulfill(ent of
(ana)e(ent+s res!onsi"ilities, or a"out s!ecific assertions'
Effecti9e D!te
15, 4005'
O$1ecti9e
B' he o";ectives of the auditor are.
1$a& o o"tain written re!resentations fro( (ana)e(ent and, where a!!ro!riate, those
char)ed with )overnance that the# "elieve that the# have fulfilled their res!onsi"ilit# for the
!re!aration of the financial state(ents and for the co(!leteness of the infor(ation !rovided to the
auditor?
2$"& o su!!ort other audit evidence relevant to the financial state(ents or s!ecific assertions
in the financial state(ents "# (eans of written re!resentations if deter(ined necessar# "# the
auditor or re*uired "# other ISAs? and
ISA 500, CAudit 0vidence,D !ara)ra!h 5$c&'
ISA 580 57B
$c& o res!ond a!!ro!riatel# to written re!resentations !rovided "# (ana)e(ent and, where
a!!ro!riate, those char)ed with )overnance, or if (ana)e(ent or, where a!!ro!riate, those
char)ed with )overnance do not !rovide the written re!resentations re*uested "# the
auditor'
Defi"itio"
1. 7' For !ur!oses of the ISAs, the followin) ter( has the (eanin) attri"uted "elow.
2. Lritten re!resentation K A written state(ent "# (ana)e(ent !rovided to the auditor to
confir( certain (atters or to su!!ort other audit evidence' Lritten re!resentations in this
conte,t do not include financial state(ents, the assertions therein, or su!!ortin) "ooks and
records'
2. 8' For !ur!oses of this ISA, references to C(ana)e(entD should "e read as C(ana)e(ent
and, where a!!ro!riate, those char)ed with )overnance'D Further(ore, in the case of a fair
!resentation fra(ework, (ana)e(ent is res!onsi"le for the !re!aration and fair !resentation of
the financial state(ents in accordance with the a!!lica"le financial re!ortin) fra(ework? or the
!re!aration of financial state(ents that gi!e a true and fair !ie# in accordance with the a!!lica"le
Re2-i'e.e"t )!"!(e.e"t f'o. &ho. ='itte" Rep'ee"t!tio" Re2-ete#
5' he auditor shall re*uest written re!resentations fro( (ana)e(ent with a!!ro!riate
res!onsi"ilities for the financial state(ents and knowled)e of the (atters concerned' $Aef. 6ara'
A4-AB&
='itte" Rep'ee"t!tio" !$o-t )!"!(e.e"t> Repo"i$i0itie
(reparation of the Financial )tate$ents
10' he auditor shall re*uest (ana)e(ent to !rovide a written re!resentation that it has fulfilled its
res!onsi"ilit# for the !re!aration of the financial state(ents in accordance with the a!!lica"le
financial re!ortin) fra(ework, includin) where relevant their fair !resentation, as set out in the
ter(s of the audit en)a)e(ent'
4
$Aef. 6ara' A7-A5, A14, A44&
Infor$ation (ro!ided and Co$pleteness of 1ransactions
11' he auditor shall re*uest (ana)e(ent to !rovide a written re!resentation that.
ISA 410, CA)reein) the er(s of Audit 0n)a)e(ents,D !ara)ra!h B$"&$i&'
577 ISA 580
1$a& It has !rovided the auditor with all relevant infor(ation and access as a)reed in the ter(s
of the audit en)a)e(ent,
9
and
2$"& All transactions have "een recorded and are reflected in the financial state(ents' $Aef.
6ara' A7-A5, A14, A44&
?escription of <anage$ent8s +esponsibilities in the Dritten +epresentations
14' Eana)e(ent+s res!onsi"ilities shall "e descri"ed in the written re!resentations re*uired "#
!ara)ra!hs 10 and 11 in the (anner in which these res!onsi"ilities are descri"ed in the ter(s of
the audit en)a)e(ent'
Othe' ='itte" Rep'ee"t!tio"
19' 7ther ISAs re*uire the auditor to re*uest written re!resentations' If, in addition to such re*uired
re!resentations, the auditor deter(ines that it is necessar# to o"tain one or (ore written
re!resentations to su!!ort other audit evidence relevant to the financial state(ents or one or (ore
s!ecific assertions in the financial state(ents, the auditor shall re*uest such other written
re!resentations' $Aef. 6ara' A10-A19, A14, A44&
D!te of !"# *e'io#HI Co9e'e# $/ ='itte" Rep'ee"t!tio"
14' he date of the written re!resentations shall "e as near as !ractica"le to, "ut not after, the date of
the auditor+s re!ort on the financial state(ents' he written re!resentations shall "e for all
financial state(ents and !eriod$s& referred to in the auditor+s re!ort' $Aef. 6ara' A15-A18&
Fo'. of ='itte" Rep'ee"t!tio"
15' he written re!resentations shall "e in the for( of a re!resentation letter addressed to the auditor'
If law or re)ulation re*uires (ana)e(ent to (ake written !u"lic state(ents a"out its
res!onsi"ilities, and the auditor deter(ines that such state(ents !rovide so(e or all of the
re!resentations re*uired "# !ara)ra!hs 10 or 11, the relevant (atters covered "# such state(ents
need not "e included in the re!resentation letter' $Aef. 6ara' A15-A41&
Do-$t ! to the Re0i!$i0it/ of ='itte" Rep'ee"t!tio" !"# Re2-ete# ='itte" Rep'ee"t!tio" Not
*'o9i#e#
?oubt as to the +eliability of Dritten +epresentations
1B' If the auditor has concerns a"out the co(!etence, inte)rit#, ethical values or dili)ence of
(ana)e(ent, or a"out its co((it(ent to or enforce(ent of these, the auditor shall deter(ine the
effect that such concerns (a# have on the relia"ilit# of re!resentations $oral or written& and audit
evidence in )eneral' $Aef. 6ara' A44-A45&
ISA 410, !ara)ra!h B$"&$iii&'
ISA 580 578
1. 17' In !articular, if written re!resentations are inconsistent with other audit evidence, the
auditor shall !erfor( audit !rocedures to atte(!t to resolve the (atter' If the (atter re(ains
unresolved, the auditor shall reconsider the assess(ent of the co(!etence, inte)rit#, ethical values
or dili)ence of (ana)e(ent, or of its co((it(ent to or enforce(ent of these, and shall deter(ine
the effect that this (a# have on the relia"ilit# of re!resentations $oral or written& and audit
evidence in )eneral' $Aef. 6ara' A49&
2. 18' If the auditor concludes that the written re!resentations are not relia"le, the auditor shall
take a!!ro!riate actions, includin) deter(inin) the !ossi"le effect on the o!inion in the auditor+s
re!ort in accordance with ISA 705,
4
havin) re)ard to the re*uire(ent in !ara)ra!h 40 of this ISA'
+e>uested Dritten +epresentations Aot (ro!ided
15' If (ana)e(ent does not !rovide one or (ore of the re*uested written re!resentations, the auditor
shall.
1$a& =iscuss the (atter with (ana)e(ent?
2$"& Aeevaluate the inte)rit# of (ana)e(ent and evaluate the effect that this (a# have on the
relia"ilit# of re!resentations $oral or written& and audit evidence in )eneral? and
3$c& ake a!!ro!riate actions, includin) deter(inin) the !ossi"le effect on the o!inion in the
auditor+s re!ort in accordance with ISA 705, havin) re)ard to the re*uire(ent in !ara)ra!h 40 of
this ISA'
Dritten +epresentations about <anage$ent8s +esponsibilities
40' he auditor shall disclai( an o!inion on the financial state(ents in accordance with ISA 705 if.
1$a& he auditor concludes that there is sufficient dou"t a"out the inte)rit# of (ana)e(ent
such that the written re!resentations re*uired "# !ara)ra!hs 10 and 11 are not relia"le? or
2$"& Eana)e(ent does not !rovide the written re!resentations re*uired "# !ara)ra!hs 10 and
11' $Aef. 6ara' A4B-A47&
EEE
App0ic!tio" !"# Othe' E5p0!"!to'/ )!te'i!0 ='itte" Rep'ee"t!tio"
! A-#it E9i#e"ce $Aef. 6ara' 9& A1' Lritten re!resentations are an i(!ortant source
of audit evidence' If (ana)e(ent (odifies or does not !rovide the re*uested written
575 ISA 580
re!resentations, it (a# alert the auditor to the !ossi"ilit# that one or (ore si)nificant issues (a#
e,ist' Further, a re*uest for written, rather than oral, re!resentations in (an# cases (a# !ro(!t
(ana)e(ent to consider such (atters (ore ri)orousl#, there"# enhancin) the *ualit# of the
re!resentations'
)!"!(e.e"t f'o. &ho. ='itte" Rep'ee"t!tio" Re2-ete# $Aef. 6ara' 5&
A4' Lritten re!resentations are re*uested fro( those res!onsi"le for the !re!aration of the financial
state(ents' hose individuals (a# var# de!endin) on the )overnance structure of the entit#, and
relevant law or re)ulation? however, (ana)e(ent $rather than those char)ed with )overnance& is
often the res!onsi"le !art#' Lritten re!resentations (a# therefore "e re*uested fro( the entit#+s
chief e,ecutive officer and chief financial officer, or other e*uivalent !ersons in entities that do not
use such titles' In so(e circu(stances, however, other !arties, such as those char)ed with
)overnance, are also res!onsi"le for the !re!aration of the financial state(ents'
A9' =ue to its res!onsi"ilit# for the !re!aration of the financial state(ents, and its res!onsi"ilities for
the conduct of the entit#+s "usiness, (ana)e(ent would "e e,!ected to have sufficient knowled)e
of the !rocess followed "# the entit# in !re!arin) and !resentin) the financial state(ents and the
assertions therein on which to "ase the written re!resentations'
A4' In so(e cases, however, (ana)e(ent (a# decide to (ake in*uiries of others who !artici!ate in
!re!arin) and !resentin) the financial state(ents and assertions therein, includin) individuals who
have s!ecialiJed knowled)e relatin) to the (atters a"out which written re!resentations are
re*uested' Such individuals (a# include.
1. G An actuar# res!onsi"le for actuariall# deter(ined accountin) (easure(ents'
2. G Staff en)ineers who (a# have res!onsi"ilit# for and s!ecialiJed knowled)e a"out
environ(ental lia"ilit# (easure(ents'
3. G Internal counsel who (a# !rovide infor(ation essential to !rovisions for le)al clai(s'
A5' In so(e cases, (ana)e(ent (a# include in the written re!resentations *ualif#in) lan)ua)e to the
effect that re!resentations are (ade to the "est of its knowled)e and "elief' It is reasona"le for the
auditor to acce!t such wordin) if the auditor is satisfied that the re!resentations are "ein) (ade "#
those with a!!ro!riate res!onsi"ilities and knowled)e of the (atters included in the
re!resentations'
AB' o reinforce the need for (ana)e(ent to (ake infor(ed re!resentations, the auditor (a# re*uest
that (ana)e(ent include in the written re!resentations confir(ation that it has (ade such
in*uiries as it considered a!!ro!riate to
ISA 580 580
!lace it in the !osition to "e a"le to (ake the re*uested written re!resentations' It is not e,!ected
that such in*uiries would usuall# re*uire a for(al internal !rocess "e#ond those alread#
esta"lished "# the entit#'
='itte" Rep'ee"t!tio" !$o-t )!"!(e.e"t> Repo"i$i0itie $Aef. 6ara' 10-11&
A7' Audit evidence o"tained durin) the audit that (ana)e(ent has fulfilled the res!onsi"ilities
referred to in !ara)ra!hs 10 and 11 is not sufficient without o"tainin) confir(ation fro(
(ana)e(ent that it "elieves that it has fulfilled those res!onsi"ilities' his is "ecause the auditor is
not a"le to ;ud)e solel# on other audit evidence whether (ana)e(ent has !re!ared and !resented
the financial state(ents and !rovided infor(ation to the auditor on the "asis of the a)reed
acknowled)e(ent and understandin) of its res!onsi"ilities' For e,a(!le, the auditor could not
conclude that (ana)e(ent has !rovided the auditor with all relevant infor(ation a)reed in the
ter(s of the audit en)a)e(ent without askin) it whether, and receivin) confir(ation that, such
infor(ation has "een !rovided'
A8' he written re!resentations re*uired "# !ara)ra!hs 10 and 11 draw on the a)reed
acknowled)e(ent and understandin) of (ana)e(ent of its res!onsi"ilities in the ter(s of the
audit en)a)e(ent "# re*uestin) confir(ation that it has fulfilled the(' he auditor (a# also ask
(ana)e(ent to reconfir( its acknowled)e(ent and understandin) of those res!onsi"ilities in
written re!resentations' his is co((on in certain ;urisdictions, "ut in an# event (a# "e
!articularl# a!!ro!riate when.
1. G hose who si)ned the ter(s of the audit en)a)e(ent on "ehalf of the entit# no lon)er
have the relevant res!onsi"ilities?
2. G he ter(s of the audit en)a)e(ent were !re!ared in a !revious #ear?
3. G here is an# indication that (ana)e(ent (isunderstands those res!onsi"ilities? or
4. G %han)es in circu(stances (ake it a!!ro!riate to do so'
%onsistent with the re*uire(ent of ISA 410,
5
such reconfir(ation of (ana)e(ent+s
acknowled)e(ent and understandin) of its res!onsi"ilities is not (ade su";ect to the "est of
(ana)e(ent+s knowled)e and "elief $as discussed in !ara)ra!h A5 of this ISA&'
A5' he (andates for audits of the financial state(ents of !u"lic sector entities (a# "e "roader than
those of other entities' As a result, the !re(ise, relatin) to (ana)e(ent+s res!onsi"ilities, on
which an audit of the financial state(ents of a !u"lic sector entit# is conducted (a# )ive rise to
additional
ISA 410, !ara)ra!h B$"&'
581 ISA 580
written re!resentations' hese (a# include written re!resentations confir(in) that transactions
and events have "een carried out in accordance with law, re)ulation or other authorit#'
Othe' ='itte" Rep'ee"t!tio" $Aef. 6ara' 19&
Additional Dritten +epresentations about the Financial )tate$ents
A10' In addition to the written re!resentation re*uired "# !ara)ra!h 10, the auditor (a# consider it
necessar# to re*uest other written re!resentations a"out the financial state(ents' Such written
re!resentations (a# su!!le(ent, "ut do not for( !art of, the written re!resentation re*uired "#
!ara)ra!h 10' he# (a# include re!resentations a"out the followin).
1. G Lhether the selection and a!!lication of accountin) !olicies are a!!ro!riate? and
1. G Lhether (atters such as the followin), where relevant under the a!!lica"le financial
re!ortin) fra(ework, have "een reco)niJed, (easured, !resented or disclosed in accordance
with that fra(ework.
1. o 6lans or intentions that (a# affect the carr#in) value or classification of assets
and lia"ilities?
2. o Mia"ilities, "oth actual and contin)ent?
3. o itle to, or control over, assets, the liens or encu("rances on assets, and assets
!led)ed as collateral? and
4. o As!ects of laws, re)ulations and contractual a)ree(ents that (a# affect the
financial state(ents, includin) nonco(!liance'
Additional Dritten +epresentations about Infor$ation (ro!ided to the Auditor
A11' In addition to the written re!resentation re*uired "# !ara)ra!h 11, the auditor (a# consider it
necessar# to re*uest (ana)e(ent to !rovide a written re!resentation that it has co((unicated to
the auditor all deficiencies in internal control of which (ana)e(ent is aware'
Dritten +epresentations about )pecific Assertions
A14' Lhen o"tainin) evidence a"out, or evaluatin), ;ud)(ents and intentions, the auditor (a# consider
one or (ore of the followin).
1. G he entit#+s !ast histor# in carr#in) out its stated intentions'
2. G he entit#+s reasons for choosin) a !articular course of action'
3. G he entit#+s a"ilit# to !ursue a s!ecific course of action'
ISA 580 584
G he e,istence or lack of an# other infor(ation that (i)ht have "een o"tained durin) the
course of the audit that (a# "e inconsistent with (ana)e(ent+s ;ud)(ent or intent'
A19' In addition, the auditor (a# consider it necessar# to re*uest (ana)e(ent to !rovide written
re!resentations a"out s!ecific assertions in the financial state(ents? in !articular, to su!!ort an
understandin) that the auditor has o"tained fro( other audit evidence of (ana)e(ent+s ;ud)(ent
or intent in relation to, or the co(!leteness of, a s!ecific assertion' For e,a(!le, if the intent of
(ana)e(ent is i(!ortant to the valuation "asis for invest(ents, it (a# not "e !ossi"le to o"tain
sufficient a!!ro!riate audit evidence without a written re!resentation fro( (ana)e(ent a"out its
intentions' Althou)h such written re!resentations !rovide necessar# audit evidence, the# do not
!rovide sufficient a!!ro!riate audit evidence on their own for that assertion'
Co..-"ic!ti"( ! Th'eho0# A.o-"t $Aef. 6ara' 10-11, 19&
A14' ISA 450 re*uires the auditor to accu(ulate (isstate(ents identified durin) the audit, other than
those that are clearl# trivial'
B
he auditor (a# deter(ine a threshold a"ove which (isstate(ents
cannot "e re)arded as clearl# trivial' In the sa(e wa#, the auditor (a# consider co((unicatin) to
(ana)e(ent a threshold for !ur!oses of the re*uested written re!resentations'
D!te of !"# *e'io#HI Co9e'e# $/ ='itte" Rep'ee"t!tio" $Aef. 6ara' 14&
A15' 1ecause written re!resentations are necessar# audit evidence, the auditor+s o!inion cannot "e
e,!ressed, and the auditor+s re!ort cannot "e dated, "efore the date of the written re!resentations'
Further(ore, "ecause the auditor is concerned with events occurrin) u! to the date of the auditor+s
re!ort that (a# re*uire ad;ust(ent to or disclosure in the financial state(ents, the written
re!resentations are dated as near as !ractica"le to, "ut not after, the date of the auditor+s re!ort on
A1B' In so(e circu(stances it (a# "e a!!ro!riate for the auditor to o"tain a written re!resentation
a"out a s!ecific assertion in the financial state(ents durin) the course of the audit' Lhere this is
the case, it (a# "e necessar# to re*uest an u!dated written re!resentation'
A17' he written re!resentations are for all !eriods referred to in the auditor+s re!ort "ecause
(ana)e(ent needs to reaffir( that the written re!resentations it !reviousl# (ade with res!ect to
the !rior !eriods re(ain a!!ro!riate' he auditor and (ana)e(ent (a# a)ree to a for( of written
re!resentation that u!dates written re!resentations relatin) to the !rior !eriods "# addressin)
whether there are an# chan)es to such written re!resentations and, if so, what the# are'
ISA 450, C0valuation of Eisstate(ents Identified durin) the Audit,D !ara)ra!h 5'
589 ISA 580
A18' Situations (a# arise where current (ana)e(ent were not !resent durin) all !eriods referred to in
the auditor+s re!ort' Such !ersons (a# assert that the# are not in a !osition to !rovide so(e or all
of the written re!resentations "ecause the# were not in !lace durin) the !eriod' his fact, however,
does not di(inish such !ersons+ res!onsi"ilities for the financial state(ents as a whole'
Accordin)l#, the re*uire(ent for the auditor to re*uest fro( the( written re!resentations that
cover the whole of the relevant !eriod$s& still a!!lies'
Fo'. of ='itte" Rep'ee"t!tio" $Aef. 6ara' 15&
A15' Lritten re!resentations are re*uired to "e included in a re!resentation letter addressed to the
auditor' In so(e ;urisdictions, however, (ana)e(ent (a# "e re*uired "# law or re)ulation to
(ake a written !u"lic state(ent a"out its res!onsi"ilities' Althou)h such state(ent is a
re!resentation to the users of the financial state(ents, or to relevant authorities, the auditor (a#
deter(ine that it is an a!!ro!riate for( of written re!resentation in res!ect of so(e or all of the
re!resentations re*uired "# !ara)ra!h 10 or 11' %onse*uentl#, the relevant (atters covered "#
such state(ent need not "e included in the re!resentation letter' Factors that (a# affect the
auditor+s deter(ination include.
% G Lhether the state(ent includes confir(ation of the fulfill(ent of the res!onsi"ilities
referred to in !ara)ra!hs 10 and 11'
% G Lhether the state(ent has "een )iven or a!!roved "# those fro( who( the auditor
re*uests the relevant written re!resentations'
% G Lhether a co!# of the state(ent is !rovided to the auditor as near as !ractica"le to, "ut
not after, the date of the auditor+s re!ort on the financial state(ents $see !ara)ra!h 14&'
A40' A for(al state(ent of co(!liance with law or re)ulation, or of a!!roval of the financial
state(ents, would not contain sufficient infor(ation for the auditor to "e satisfied that all
necessar# re!resentations have "een consciousl# (ade' he e,!ression of (ana)e(ent+s
res!onsi"ilities in law or re)ulation is also not a su"stitute for the re*uested written
re!resentations'
A41' A!!endi, 4 !rovides an illustrative e,a(!le of a re!resentation letter'
Co..-"ic!tio" &ith Thoe Ch!'(e# &ith Go9e'"!"ce $Aef. 6ara' 10-11, 19&
A44' ISA 4B0 re*uires the auditor to co((unicate with those char)ed with )overnance the written
re!resentations which the auditor has re*uested fro( (ana)e(ent'
7
ISA 4B0, C%o((unication with hose %har)ed with <overnance,D !ara)ra!h 1B$c&$ii&'
ISA 580 584
Do-$t ! to the Re0i!$i0it/ of ='itte" Rep'ee"t!tio" !"# Re2-ete# ='itte" Rep'ee"t!tio"
Not *'o9i#e#
?oubt as to the +eliability of Dritten +epresentations $Aef. 6ara' 1B-17&
A49' In the case of identified inconsistencies "etween one or (ore written re!resentations and audit
evidence o"tained fro( another source, the auditor (a# consider whether the risk assess(ent
re(ains a!!ro!riate and, if not, revise the risk assess(ent and deter(ine the nature, ti(in) and
e,tent of further audit !rocedures to res!ond to the assessed risks'
A44' %oncerns a"out the co(!etence, inte)rit#, ethical values or dili)ence of (ana)e(ent, or a"out its
co((it(ent to or enforce(ent of these, (a# cause the auditor to conclude that the risk of
(ana)e(ent (isre!resentation in the financial state(ents is such that an audit cannot "e
conducted' In such a case, the auditor (a# consider withdrawin) fro( the en)a)e(ent, where
withdrawal is !ossi"le under a!!lica"le law or re)ulation, unless those char)ed with )overnance
!ut in !lace a!!ro!riate corrective (easures' Such (easures, however, (a# not "e sufficient to
ena"le the auditor to issue an un(odified audit o!inion'
A45' ISA 490 re*uires the auditor to docu(ent si)nificant (atters arisin) durin) the audit, the
conclusions reached thereon, and si)nificant !rofessional ;ud)(ents (ade in reachin) those
conclusions'
8
he auditor (a# have identified si)nificant issues relatin) to the co(!etence,
inte)rit#, ethical values or dili)ence of (ana)e(ent, or a"out its co((it(ent to or enforce(ent of
these, "ut concluded that the written re!resentations are nevertheless relia"le' In such a case, this
si)nificant (atter is docu(ented in accordance with ISA 490'
Dritten +epresentations about <anage$ent8s +esponsibilities $Aef. 6ara' 40&
A4B' As e,!lained in !ara)ra!h A7, the auditor is not a"le to ;ud)e solel# on other audit evidence
whether (ana)e(ent has fulfilled the res!onsi"ilities referred to in !ara)ra!hs 10 and 11'
herefore, if, as descri"ed in !ara)ra!h 40$a&, the auditor concludes that the written
re!resentations a"out these (atters are unrelia"le, or if (ana)e(ent does not !rovide those
written re!resentations, the auditor is una"le to o"tain sufficient a!!ro!riate audit evidence' he
!ossi"le effects on the financial state(ents of such ina"ilit# are not confined to s!ecific ele(ents,
accounts or ite(s of the financial state(ents and are hence !ervasive' ISA 705 re*uires the auditor
to disclai( an o!inion on the financial state(ents in such circu(stances'
5
8
ISA 490, CAudit =ocu(entation,D !ara)ra!hs 8$c& and 10' 5
585 ISA 580
A47' A written re!resentation that has "een (odified fro( that re*uested "# the auditor does not
necessaril# (ean that (ana)e(ent did not !rovide the written re!resentation' @owever, the
underl#in) reason for such (odification (a# affect the o!inion in the auditor+s re!ort' For e,a(!le.
% G he written re!resentation a"out (ana)e(ent+s fulfill(ent of its res!onsi"ilit# for the
!re!aration of the financial state(ents (a# state that (ana)e(ent "elieves that, e,ce!t for
(aterial nonco(!liance with a !articular re*uire(ent of the a!!lica"le financial re!ortin)
fra(ework, the financial state(ents are !re!ared in accordance with that fra(ework' he
re*uire(ent in !ara)ra!h 40 does not a!!l# "ecause the auditor concluded that (ana)e(ent has
!rovided relia"le written re!resentations' @owever, the auditor is re*uired to consider the effect of
the non-co(!liance on the o!inion in the auditor+s re!ort in accordance with ISA 705'
% G he written re!resentation a"out the res!onsi"ilit# of (ana)e(ent to !rovide the auditor
with all relevant infor(ation a)reed in the ter(s of the audit en)a)e(ent (a# state that
(ana)e(ent "elieves that, e,ce!t for infor(ation destro#ed in a fire, it has !rovided the auditor
with such infor(ation' he re*uire(ent in !ara)ra!h 40 does not a!!l# "ecause the auditor
concluded that (ana)e(ent has !rovided relia"le written re!resentations' @owever, the auditor is
re*uired to consider the effects of the !ervasiveness of the infor(ation destro#ed in the fire on the
financial state(ents and the effect thereof on the o!inion in the auditor+s re!ort in accordance with
ISA 705'
ISA 580 58B
Appe"#i5 7
$Aef. 6ara' 4&
Lit of ISA Co"t!i"i"( Re2-i'e.e"t fo' ='itte" Rep'ee"t!tio"
"e)innin) on or after =ece("er 15, 4005 that re*uire su";ect-(atter s!ecific written re!resentations' he
list is not a su"stitute for considerin) the re*uire(ents and related a!!lication and other e,!lanator#
(aterial in ISAs'
State(entsD K !ara)ra!h 95
!ara)ra!h 1B
G ISA 450, C0valuation of Eisstate(ents Identified durin) the AuditD K !ara)ra!h 14
G ISA 501, CAudit 0videnceNS!ecific %onsiderations for Selected Ite(sD K !ara)ra!h 14
1. G ISA 540, CAuditin) Accountin) 0sti(ates, Includin) Fair Falue Accountin) 0sti(ates,
and Aelated =isclosuresD K !ara)ra!h 44
2. G ISA 550, CAelated 6artiesD K !ara)ra!h 4B
3. G ISA 5B0, CSu"se*uent 0ventsD K !ara)ra!h 5
4. G ISA 570, C<oin) %oncernD K !ara)ra!h 1B$e&
5. G ISA 710, C%o(!arative Infor(ationN%orres!ondin) Fi)ures and %o(!arative Financial
State(entsD K !ara)ra!h 5
587 ISA 580 A660N=II
Appe"#i5 2
$Aef. 6ara' A41&
I00-t'!ti9e Rep'ee"t!tio" Lette'
he followin) illustrative letter includes written re!resentations that are re*uired "# this and other ISAs in
effect for audits of financial state(ents for !eriods "e)innin) on or after =ece("er 15, 4005' It is assu(ed
in this illustration that the a!!lica"le financial re!ortin) fra(ework is International Financial Ae!ortin)
Standards? the re*uire(ent of ISA 570
10
to o"tain a written re!resentation is not relevant? and that there are
no e,ce!tions to the re*uested written re!resentations' If there were e,ce!tions, the re!resentations would
need to "e (odified to reflect the e,ce!tions'
$0ntit# Metterhead& $o Auditor& $=ate&
his re!resentation letter is !rovided in connection with #our audit of the financial state(ents of A1%
%o(!an# for the #ear ended =ece("er 91, 40II
11
for the !ur!ose of e,!ressin) an o!inion as to whether
the financial state(ents are !resented fairl#, in all (aterial res!ects, $or gi!e a true and fair !ie#& in
accordance with International Financial Ae!ortin) Standards'
Le confir( that $& to the best of our .no#ledge and belief& ha!ing $ade such in>uiries as #e considered
necessary for the purpose of appropriately infor$ing oursel!es&.
Financial )tate$ents
1. G Le have fulfilled our res!onsi"ilities, as set out in the ter(s of the audit en)a)e(ent
dated Uinsert dateV, for the !re!aration of the financial state(ents in accordance with International
Financial Ae!ortin) Standards? in !articular the financial state(ents are fairl# !resented $or )ive a
true and fair view& in accordance therewith'
2. G Si)nificant assu(!tions used "# us in (akin) accountin) esti(ates, includin) those
(easured at fair value, are reasona"le' $ISA 540&
3. G Aelated !art# relationshi!s and transactions have "een a!!ro!riatel# accounted for and
disclosed in accordance with the re*uire(ents of International Financial Ae!ortin) Standards'
$ISA 550&
10
11
Lhere the auditor re!orts on (ore than one !eriod, the auditor ad;usts the date so that the letter !ertains to all !eriods covered "#
ISA 580 A660N=II 588
% G All events su"se*uent to the date of the financial state(ents and for which International
Financial Ae!ortin) Standards re*uire ad;ust(ent or disclosure have "een ad;usted or disclosed'
$ISA 5B0&
% G he effects of uncorrected (isstate(ents are i((aterial, "oth individuall# and in the
a))re)ate, to the financial state(ents as a whole' A list of the uncorrected (isstate(ents is
attached to the re!resentation letter' $ISA 450&
% G UAn# other (atters that the auditor (a# consider a!!ro!riate $see !ara)ra!h A10 of this
ISA&'V
Infor$ation (ro!ided
G Le have !rovided #ou with.
a. o Access to all infor(ation of which we are aware that is relevant to the !re!aration of the
financial state(ents such as records, docu(entation and other (atters?
b. o Additional infor(ation that #ou have re*uested fro( us for the !ur!ose of the audit? and
c. o Unrestricted access to !ersons within the entit# fro( who( #ou deter(ined it necessar#
to o"tain audit evidence'
1. G All transactions have "een recorded in the accountin) records and are reflected in the
2. G Le have disclosed to #ou the results of our assess(ent of the risk that the financial
state(ents (a# "e (ateriall# (isstated as a result of fraud' $ISA 440&
3. G Le have disclosed to #ou all infor(ation in relation to fraud or sus!ected fraud that we
are aware of and that affects the entit# and involves.
1. o Eana)e(ent?
2. o 0(!lo#ees who have si)nificant roles in internal control? or
3. o 7thers where the fraud could have a (aterial effect on the financial state(ents' $ISA 440&
1. G Le have disclosed to #ou all infor(ation in relation to alle)ations of fraud, or sus!ected
fraud, affectin) the entit#+s financial state(ents co((unicated "# e(!lo#ees, for(er e(!lo#ees,
anal#sts, re)ulators or others' $ISA 440&
2. G Le have disclosed to #ou all known instances of non-co(!liance or sus!ected non-
co(!liance with laws and re)ulations whose effects should "e considered when !re!arin)
financial state(ents' $ISA 450&
3. G Le have disclosed to #ou the identit# of the entit#+s related !arties and all the related
!art# relationshi!s and transactions of which we are aware' $ISA 550&
585 ISA 580 A660N=II
G UAn# other (atters that the auditor (a# consider necessar# $see !ara)ra!h A11 of this ISA&'V
Eana)e(ent Eana)e(ent
ISA 580 A660N=II 550
INTERNATIONAL STANDARD ON AUDITING A00
S*ECIAL CONSIDERATIONSDAUDITS OF GROU* FINANCIAL
STATE)ENTS HINCLUDING THE =ORK OF CO)*ONENT
AUDITORSI
$0ffective for audits of )rou! financial state(ents for !eriods "e)innin) on or after
=ece("er 15, 4005&
CONTENTS
6ara)ra!h
551 ISA B00
=efinitions '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A4-A7
Aes!onsi"ilit# ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A8-A5
Acce!tance and %ontinuance '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A10-A41
7verall Audit Strate)# and Audit 6lan ''''''''''''''''''''''''''''''''''''''''''''''''''''''' A44
Understandin) the <rou!, Its %o(!onents and heir 0nviron(ents ''''''''' A49-A91
Understandin) the %o(!onent Auditor '''''''''''''''''''''''''''''''''''''''''''''''''''''' A94-A41
Eaterialit# '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A44-A4B
Aes!ondin) to Assessed Aisks '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A47-A55
%onsolidation 6rocess ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A5B
%o((unication with the %o(!onent Auditor '''''''''''''''''''''''''''''''''''''''''''' A57-AB0
0valuatin) the Sufficienc# and A!!ro!riateness of Audit 0vidence
7"tained ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' AB1-AB9 %o((unication with
<rou! Eana)e(ent and hose %har)ed with
<overnance of the <rou! ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' AB4-ABB A!!endi, 1. 0,a(!le
of a :ualified 7!inion Lhere the <rou!
0n)a)e(ent ea( Is Not A"le to 7"tain Sufficient A!!ro!riate
Audit 0vidence on Lhich to 1ase the <rou! Audit 7!inion A!!endi, 4. 0,a(!les of
Eatters a"out Lhich the <rou! 0n)a)e(ent
ea( 7"tains an Understandin) A!!endi, 9. 0,a(!les of %onditions or 0vents that Ea# Indicate
Aisks of Eaterial Eisstate(ent of the <rou! Financial State(ents A!!endi, 4.
0,a(!les of a %o(!onent Auditor+s %onfir(ations A!!endi, 5. Ae*uired and Additional
Eatters Included in the <rou!
0n)a)e(ent ea(+s Metter of Instruction
International Standard on Auditin) $ISA& B00, CS!ecial %onsiderationsNAudits of <rou! Financial
State(ents $Includin) the Lork of %o(!onent Auditors&D should "e read in con;unction with ISA 400,
C7verall 7";ectives of the Inde!endent Auditor and the %onduct of an Audit in Accordance with
ISA B00 554
1. 1' he International Standards on Auditin) $ISAs& a!!l# to )rou! audits' his ISA deals
with s!ecial considerations that a!!l# to )rou! audits, in !articular those that involve co(!onent
auditors'
2. 4' An auditor (a# find this ISA, ada!ted as necessar# in the circu(stances, useful when
that auditor involves other auditors in the audit of financial state(ents that are not )rou! financial
state(ents' For e,a(!le, an auditor (a# involve another auditor to o"serve the inventor# count or
ins!ect !h#sical fi,ed assets at a re(ote location'
3. 9' A co(!onent auditor (a# "e re*uired "# statute, re)ulation or for another reason, to
e,!ress an audit o!inion on the financial state(ents of a co(!onent' he )rou! en)a)e(ent tea(
(a# decide to use the audit evidence on which the audit o!inion on the financial state(ents of the
co(!onent is "ased to !rovide audit evidence for the )rou! audit, "ut the re*uire(ents of this ISA
nevertheless a!!l#' $Aef. 6ara' A1&
4. 4' In accordance with ISA 440,
1
the )rou! en)a)e(ent !artner is re*uired to "e satisfied
that those !erfor(in) the )rou! audit en)a)e(ent, includin) co(!onent auditors, collectivel#
have the a!!ro!riate co(!etence and ca!a"ilities' he )rou! en)a)e(ent !artner is also
res!onsi"le for the direction, su!ervision and !erfor(ance of the )rou! audit en)a)e(ent'
5. 5' he )rou! en)a)e(ent !artner a!!lies the re*uire(ents of ISA 440 re)ardless of whether
the )rou! en)a)e(ent tea( or a co(!onent auditor !erfor(s the work on the financial
infor(ation of a co(!onent' his ISA assists the )rou! en)a)e(ent !artner to (eet the
re*uire(ents of ISA 440 where co(!onent auditors !erfor( work on the financial infor(ation of
co(!onents'
6. B' Audit risk is a function of the risk of (aterial (isstate(ent of the financial state(ents
and the risk that the auditor will not detect such (isstate(ents'
4
In a )rou! audit, this includes the
risk that the co(!onent auditor (a# not detect a (isstate(ent in the financial infor(ation of the
co(!onent that could cause a (aterial (isstate(ent of the )rou! financial state(ents, and the risk
that the )rou! en)a)e(ent tea( (a# not detect this (isstate(ent' his ISA e,!lains the (atters
that the )rou! en)a)e(ent tea( considers when deter(inin) the nature, ti(in) and e,tent of its
involve(ent in the risk assess(ent !rocedures and further audit !rocedures !erfor(ed "# the
co(!onent auditors on the financial infor(ation of the co(!onents' he !ur!ose of this
involve(ent is to
1
ISA 440, C:ualit# %ontrol for an Audit of Financial State(ents,D !ara)ra!hs 14 and 15'
4
559 ISA B00
o"tain sufficient a!!ro!riate audit evidence on which to "ase the audit o!inion on the )rou!
Effecti9e D!te
7' his ISA is effective for audits of )rou! financial state(ents for !eriods "e)innin) on or after
=ece("er 15, 4005'
O$1ecti9e
1$a& o deter(ine whether to act as the auditor of the )rou! financial state(ents? and
1$"& If actin) as the auditor of the )rou! financial state(ents.
2$i& o co((unicate clearl# with co(!onent auditors a"out the sco!e and ti(in) of their work on
financial infor(ation related to co(!onents and their findin)s? and
3$ii& o o"tain sufficient a!!ro!riate audit evidence re)ardin) the financial infor(ation of the
co(!onents and the consolidation !rocess to e,!ress an o!inion on whether the )rou!
financial state(ents are !re!ared, in all (aterial res!ects, in accordance with the a!!lica"le
Defi"itio"
1. $a& %o(!onent K An entit# or "usiness activit# for which )rou! or co(!onent (ana)e(ent
!re!ares financial infor(ation that should "e included in the )rou! financial state(ents' $Aef.
6ara' A4-A4&
2. $"& %o(!onent auditor K An auditor who, at the re*uest of the )rou! en)a)e(ent tea(,
!erfor(s work on financial infor(ation related to a co(!onent for the )rou! audit' $Aef. 6ara' A7&
3. $c& %o(!onent (ana)e(ent K Eana)e(ent res!onsi"le for the !re!aration of the financial
infor(ation of a co(!onent'
4. $d& %o(!onent (aterialit# K he (aterialit# for a co(!onent deter(ined "# the )rou!
en)a)e(ent tea('
5. $e& <rou! K All the co(!onents whose financial infor(ation is included in the )rou!
financial state(ents' A )rou! alwa#s has (ore than one co(!onent'
6. $f& <rou! audit K he audit of )rou! financial state(ents'
ISA B00 554
1$)& <rou! audit o!inion K he audit o!inion on the )rou! financial state(ents'
2$h& <rou! en)a)e(ent !artner K he !artner or other !erson in the fir( who is res!onsi"le for the
)rou! audit en)a)e(ent and its !erfor(ance, and for the auditor+s re!ort on the )rou! financial
state(ents that is issued on "ehalf of the fir(' Lhere ;oint auditors conduct the )rou! audit, the
;oint en)a)e(ent !artners and their en)a)e(ent tea(s collectivel# constitute the )rou!
en)a)e(ent !artner and the )rou! en)a)e(ent tea(' his ISA does not, however, deal with the
relationshi! "etween ;oint auditors or the work that one ;oint auditor !erfor(s in relation to the
work of the other ;oint auditor'
3$i& <rou! en)a)e(ent tea( K 6artners, includin) the )rou! en)a)e(ent !artner, and staff who
esta"lish the overall )rou! audit strate)#, co((unicate with co(!onent auditors, !erfor( work on
the consolidation !rocess, and evaluate the conclusions drawn fro( the audit evidence as the "asis
for for(in) an o!inion on the )rou! financial state(ents'
4$;& <rou! financial state(ents K Financial state(ents that include the financial infor(ation of (ore
than one co(!onent' he ter( C)rou! financial state(entsD also refers to co("ined financial
state(ents a))re)atin) the financial infor(ation !re!ared "# co(!onents that have no !arent "ut
are under co((on control'
5$k& <rou! (ana)e(ent K Eana)e(ent res!onsi"le for the !re!aration of the )rou! financial
state(ents'
6$l& <rou!-wide controls K %ontrols desi)ned, i(!le(ented and (aintained "# )rou! (ana)e(ent
over )rou! financial re!ortin)'
7$(& Si)nificant co(!onent K A co(!onent identified "# the )rou! en)a)e(ent tea( $i& that is of
individual financial si)nificance to the )rou!, or $ii& that, due to its s!ecific nature or
circu(stances, is likel# to include si)nificant risks of (aterial (isstate(ent of the )rou! financial
state(ents' $Aef. 6ara' A5-AB&
10' Aeference to Cthe a!!lica"le financial re!ortin) fra(eworkD (eans the financial re!ortin)
fra(ework that a!!lies to the )rou! financial state(ents' Aeference to Cthe consolidation !rocessD
includes.
1$a& he reco)nition, (easure(ent, !resentation, and disclosure of the financial infor(ation
of the co(!onents in the )rou! financial state(ents "# wa# of consolidation, !ro!ortionate
consolidation, or the e*uit# or cost (ethods of accountin)? and
2$"& he a))re)ation in co("ined financial state(ents of the financial infor(ation of
co(!onents that have no !arent "ut are under co((on control'
555 ISA B00
Re2-i'e.e"t Repo"i$i0it/
11' he )rou! en)a)e(ent !artner is res!onsi"le for the direction, su!ervision and !erfor(ance of the
)rou! audit en)a)e(ent in co(!liance with !rofessional standards and a!!lica"le le)al and
re)ulator# re*uire(ents, and whether the auditor+s re!ort that is issued is a!!ro!riate in the
circu(stances'
9
As a result, the auditor+s re!ort on the )rou! financial state(ents shall not refer to
a co(!onent auditor, unless re*uired "# law or re)ulation to include such reference' If such
reference is re*uired "# law or re)ulation, the auditor+s re!ort shall indicate that the reference does
not di(inish the )rou! en)a)e(ent !artner+s or the )rou! en)a)e(ent !artner+s fir(+s
res!onsi"ilit# for the )rou! audit o!inion' $Aef. 6ara' A8-A5&
Accept!"ce !"# Co"ti"-!"ce
1. 14' In a!!l#in) ISA 440, the )rou! en)a)e(ent !artner shall deter(ine whether sufficient
a!!ro!riate audit evidence can reasona"l# "e e,!ected to "e o"tained in relation to the
consolidation !rocess and the financial infor(ation of the co(!onents on which to "ase the )rou!
audit o!inion' For this !ur!ose, the )rou! en)a)e(ent tea( shall o"tain an understandin) of the
)rou!, its co(!onents, and their environ(ents that is sufficient to identif# co(!onents that are
likel# to "e si)nificant co(!onents' Lhere co(!onent auditors will !erfor( work on the financial
infor(ation of such co(!onents, the )rou! en)a)e(ent !artner shall evaluate whether the )rou!
en)a)e(ent tea( will "e a"le to "e involved in the work of those co(!onent auditors to the e,tent
necessar# to o"tain sufficient a!!ro!riate audit evidence' $Aef. 6ara' A10-A14&
119' If the )rou! en)a)e(ent !artner concludes that.
2$a& it will not "e !ossi"le for the )rou! en)a)e(ent tea( to o"tain sufficient a!!ro!riate
audit evidence due to restrictions i(!osed "# )rou! (ana)e(ent? and
3$"& the !ossi"le effect of this ina"ilit# will result in a disclai(er of o!inion on the )rou!
financial state(ents&,
4
the )rou! en)a)e(ent !artner shall either.
G in the case of a new en)a)e(ent, not acce!t the en)a)e(ent, or, in the case of a continuin)
en)a)e(ent, withdraw fro( the en)a)e(ent, where withdrawal is !ossi"le under
a!!lica"le law or re)ulation? or
9
ISA 440, !ara)ra!h 15' 4
ISA 705, CEodifications to the 7!inion in the
Inde!endent Auditor+s Ae!ort'D
ISA B00 55B
G where law or re)ulation !rohi"its an auditor fro( declinin) an en)a)e(ent or where
withdrawal fro( an en)a)e(ent is not otherwise !ossi"le, havin) !erfor(ed the audit of
the )rou! financial state(ents to the e,tent !ossi"le, disclai( an o!inion on the )rou!
financial state(ents' $Aef. 6ara' A19-A15&
1er$s of /ngage$ent
14' he )rou! en)a)e(ent !artner shall a)ree on the ter(s of the )rou! audit en)a)e(ent in
5
O9e'!00 A-#it St'!te(/ !"# A-#it *0!"
1. 15' he )rou! en)a)e(ent tea( shall esta"lish an overall )rou! audit strate)# and shall
develo! a )rou! audit !lan in accordance with ISA 900'
B
2. 1B' he )rou! en)a)e(ent !artner shall review the overall )rou! audit strate)# and )rou!
audit !lan' $Aef. 6ara' A44&
U"#e't!"#i"( the G'o-p4 It Co.po"e"t !"# Thei' E"9i'o".e"t
117' he auditor is re*uired to identif# and assess the risks of (aterial (isstate(ent throu)h
o"tainin) an understandin) of the entit# and its environ(ent'
7
he )rou! en)a)e(ent tea(
shall.
2$a& 0nhance its understandin) of the )rou!, its co(!onents, and their environ(ents, includin)
)rou!-wide controls, o"tained durin) the acce!tance or continuance sta)e? and
3$"& 7"tain an understandin) of the consolidation !rocess, includin) the instructions issued "#
)rou! (ana)e(ent to co(!onents' $Aef. 6ara' A49-A45&
418' he )rou! en)a)e(ent tea( shall o"tain an understandin) that is sufficient to.
5$a& %onfir( or revise its initial identification of co(!onents that are likel# to "e si)nificant?
and
6$"& Assess the risks of (aterial (isstate(ent of the )rou! financial state(ents, whether due
to fraud or error'
8
5
ISA 410, CA)reein) the er(s of Audit 0n)a)e(ents'D B
ISA 900, C6lannin) an Audit of Financial State(ents,D !ara)ra!hs 7-14' 7
ISA 915, CIdentif#in) and Assessin) the Aisks of Eaterial Eisstate(ent throu)h Understandin)
the 0ntit# and Its 0nviron(ent'D 8
ISA 915'
557 ISA B00
U"#e't!"#i"( the Co.po"e"t A-#ito'
1. 15' If the )rou! en)a)e(ent tea( !lans to re*uest a co(!onent auditor to !erfor( work on
the financial infor(ation of a co(!onent, the )rou! en)a)e(ent tea( shall o"tain an
understandin) of the followin). $Aef. 6ara' A94-A95&
2. $a& Lhether the co(!onent auditor understands and will co(!l# with the ethical
re*uire(ents that are relevant to the )rou! audit and, in !articular, is inde!endent' $Aef. 6ara'
A97&
3. $"& he co(!onent auditor+s !rofessional co(!etence' $Aef. 6ara' A98&
4. $c& Lhether the )rou! en)a)e(ent tea( will "e a"le to "e involved in the work of the
co(!onent auditor to the e,tent necessar# to o"tain sufficient a!!ro!riate audit evidence'
5. $d& Lhether the co(!onent auditor o!erates in a re)ulator# environ(ent that activel#
oversees auditors' $Aef. 6ara' A9B&
2. 40' If a co(!onent auditor does not (eet the inde!endence re*uire(ents that are relevant to
the )rou! audit, or the )rou! en)a)e(ent tea( has serious concerns a"out the other (atters listed
in !ara)ra!h 15$a&-$c&, the )rou! en)a)e(ent tea( shall o"tain sufficient a!!ro!riate audit
evidence relatin) to the financial infor(ation of the co(!onent without re*uestin) that co(!onent
auditor to !erfor( work on the financial infor(ation of that co(!onent' $Aef. 6ara' A95A41&
)!te'i!0it/
41' he )rou! en)a)e(ent tea( shall deter(ine the followin). $Aef. 6ara' A44&
1$a& Eaterialit# for the )rou! financial state(ents as a whole when esta"lishin) the overall
)rou! audit strate)#'
2$"& If, in the s!ecific circu(stances of the )rou!, there are !articular classes of transactions, account
"alances or disclosures in the )rou! financial state(ents for which (isstate(ents of lesser
a(ounts than (aterialit# for the )rou! financial state(ents as a whole could reasona"l# "e
e,!ected to influence the econo(ic decisions of users taken on the "asis of the )rou! financial
state(ents, the (aterialit# level or levels to "e a!!lied to those !articular classes of transactions,
account "alances or disclosures'
3$c& %o(!onent (aterialit# for those co(!onents where co(!onent auditors will !erfor( an audit or
a review for !ur!oses of the )rou! audit' o reduce to an a!!ro!riatel# low level the !ro"a"ilit#
that the a))re)ate of uncorrected and undetected (isstate(ents in the )rou! financial state(ents
e,ceeds (aterialit# for the )rou! financial state(ents as a whole, co(!onent (aterialit# shall "e
lower than (aterialit# for the )rou! financial state(ents as a whole' $Aef. 6ara' A49-A44&
ISA B00 558
$d& he threshold a"ove which (isstate(ents cannot "e re)arded as clearl# trivial to the )rou!
financial state(ents' $Aef. 6ara' A45&
1. 44' Lhere co(!onent auditors will !erfor( an audit for !ur!oses of the )rou! audit, the
)rou! en)a)e(ent tea( shall evaluate the a!!ro!riateness of !erfor(ance (aterialit# deter(ined
at the co(!onent level' $Aef. 6ara' A4B&
149' If a co(!onent is su";ect to audit "# statute, re)ulation or other reason, and the )rou!
en)a)e(ent tea( decides to use that audit to !rovide audit evidence for the )rou! audit, the
)rou! en)a)e(ent tea( shall deter(ine whether.
2$a&(aterialit# for the co(!onent financial state(ents as a whole? and
3$"& !erfor(ance (aterialit# at the co(!onent level
(eet the re*uire(ents of this ISA'
Repo"#i"( to Aee# Ri%
1. 44' he auditor is re*uired to desi)n and i(!le(ent a!!ro!riate res!onses to address the
assessed risks of (aterial (isstate(ent of the financial state(ents'
5
he )rou! en)a)e(ent tea(
shall deter(ine the t#!e of work to "e !erfor(ed "# the )rou! en)a)e(ent tea(, or the
co(!onent auditors on its "ehalf, on the financial infor(ation of the co(!onents $see !ara)ra!hs
4B-45&' he )rou! en)a)e(ent tea( shall also deter(ine the nature, ti(in) and e,tent of its
involve(ent in the work of the co(!onent auditors $see !ara)ra!hs 90-91&'
2. 45' If the nature, ti(in) and e,tent of the work to "e !erfor(ed on the consolidation !rocess
or the financial infor(ation of the co(!onents are "ased on an e,!ectation that )rou!-wide
controls are o!eratin) effectivel#, or if su"stantive !rocedures alone cannot !rovide sufficient
a!!ro!riate audit evidence at the assertion level, the )rou! en)a)e(ent tea( shall test, or re*uest a
co(!onent auditor to test, the o!eratin) effectiveness of those controls'
?eter$ining the 1ype of Dor. to =e (erfor$ed on the Financial Infor$ation of Co$ponents $Aef.
6ara' A47&
Si)nificant %o(!onents
1. 4B' For a co(!onent that is si)nificant due to its individual financial si)nificance to the
)rou!, the )rou! en)a)e(ent tea(, or a co(!onent auditor on its "ehalf, shall !erfor( an audit of
the financial infor(ation of the co(!onent usin) co(!onent (aterialit#'
2. 47' For a co(!onent that is si)nificant "ecause it is likel# to include si)nificant risks of
(aterial (isstate(ent of the )rou! financial state(ents due to its
555 ISA B00
s!ecific nature or circu(stances, the )rou! en)a)e(ent tea(, or a co(!onent auditor on its
"ehalf, shall !erfor( one or (ore of the followin).
1. $a& An audit of the financial infor(ation of the co(!onent usin) co(!onent (aterialit#'
2. $"& An audit of one or (ore account "alances, classes of transactions or disclosures relatin) to the
likel# si)nificant risks of (aterial (isstate(ent of the )rou! financial state(ents' $Aef. 6ara' A48&
3. $c& S!ecified audit !rocedures relatin) to the likel# si)nificant risks of (aterial (isstate(ent
of the )rou! financial state(ents' $Aef. 6ara' A45&
%o(!onents that Are Not Si)nificant %o(!onents
1. 48' For co(!onents that are not si)nificant co(!onents, the )rou! en)a)e(ent tea( shall
!erfor( anal#tical !rocedures at )rou! level' $Aef. 6ara' A50&
145' If the )rou! en)a)e(ent tea( does not consider that sufficient a!!ro!riate audit evidence
on which to "ase the )rou! audit o!inion will "e o"tained fro(.
2$a&the work !erfor(ed on the financial infor(ation of si)nificant co(!onents?
3$"& the work !erfor(ed on )rou!-wide controls and the consolidation !rocess? and
4$c& the anal#tical !rocedures !erfor(ed at )rou! level,
the )rou! en)a)e(ent tea( shall select co(!onents that are not si)nificant co(!onents and shall
!erfor(, or re*uest a co(!onent auditor to !erfor(, one or (ore of the followin) on the financial
infor(ation of the individual co(!onents selected. $Aef. 6ara' A51-A59&
1. G An audit of the financial infor(ation of the co(!onent usin) co(!onent (aterialit#'
2. G An audit of one or (ore account "alances, classes of transactions or disclosures'
3. G A review of the financial infor(ation of the co(!onent usin) co(!onent (aterialit#'
4. G S!ecified !rocedures'
he )rou! en)a)e(ent tea( shall var# the selection of co(!onents over a !eriod of ti(e'
ISA B00 B00
In!ol!e$ent in the Dor. (erfor$ed by Co$ponent Auditors $Aef. 6ara' A54-A55& Si)nificant
%o(!onentsNAisk Assess(ent
90' If a co(!onent auditor !erfor(s an audit of the financial infor(ation of a si)nificant co(!onent,
the )rou! en)a)e(ent tea( shall "e involved in the co(!onent auditor+s risk assess(ent to
identif# si)nificant risks of (aterial (isstate(ent of the )rou! financial state(ents' he nature,
ti(in) and e,tent of this involve(ent are affected "# the )rou! en)a)e(ent tea(+s understandin)
of the co(!onent auditor, "ut at a (ini(u( shall include.
Identified Si)nificant Aisks of Eaterial Eisstate(ent of the <rou! Financial State(entsNFurther
Audit 6rocedures
91' If si)nificant risks of (aterial (isstate(ent of the )rou! financial state(ents have "een identified
in a co(!onent on which a co(!onent auditor !erfor(s the work, the )rou! en)a)e(ent tea(
shall evaluate the a!!ro!riateness of the further audit !rocedures to "e !erfor(ed to res!ond to the
identified si)nificant risks of (aterial (isstate(ent of the )rou! financial state(ents' 1ased on its
understandin) of the co(!onent auditor, the )rou! en)a)e(ent tea( shall deter(ine whether it is
necessar# to "e involved in the further audit !rocedures'
Co"o0i#!tio" *'oce
94' In accordance with !ara)ra!h 17, the )rou! en)a)e(ent tea( o"tains an understandin) of )rou!-
wide controls and the consolidation !rocess, includin) the instructions issued "# )rou!
(ana)e(ent to co(!onents' In accordance with !ara)ra!h 45, the )rou! en)a)e(ent tea(, or
co(!onent auditor at the re*uest of the )rou! en)a)e(ent tea(, tests the o!eratin) effectiveness
of )rou!-wide controls if the nature, ti(in) and e,tent of the work to "e !erfor(ed on the
consolidation !rocess are "ased on an e,!ectation that )rou!-wide controls are o!eratin)
effectivel#, or if su"stantive !rocedures alone cannot !rovide sufficient a!!ro!riate audit evidence
at the assertion level'
B01 ISA B00
1. 99' he )rou! en)a)e(ent tea( shall desi)n and !erfor( further audit !rocedures on the
consolidation !rocess to res!ond to the assessed risks of (aterial (isstate(ent of the )rou!
financial state(ents arisin) fro( the consolidation !rocess' his shall include evaluatin) whether
all co(!onents have "een included in the )rou! financial state(ents'
2. 94' he )rou! en)a)e(ent tea( shall evaluate the a!!ro!riateness, co(!leteness and
accurac# of consolidation ad;ust(ents and reclassifications, and shall evaluate whether an# fraud
risk factors or indicators of !ossi"le (ana)e(ent "ias e,ist' $Aef. 6ara' A5B&
3. 95' If the financial infor(ation of a co(!onent has not "een !re!ared in accordance with the
sa(e accountin) !olicies a!!lied to the )rou! financial state(ents, the )rou! en)a)e(ent tea(
shall evaluate whether the financial infor(ation of that co(!onent has "een a!!ro!riatel# ad;usted
for !ur!oses of !re!arin) and !resentin) the )rou! financial state(ents'
4. 9B' he )rou! en)a)e(ent tea( shall deter(ine whether the financial infor(ation identified
in the co(!onent auditor+s co((unication $see !ara)ra!h 41$c&& is the financial infor(ation that
is incor!orated in the )rou! financial state(ents'
5. 97' If the )rou! financial state(ents include the financial state(ents of a co(!onent with a
financial re!ortin) !eriod-end that differs fro( that of the )rou!, the )rou! en)a)e(ent tea( shall
evaluate whether a!!ro!riate ad;ust(ents have "een (ade to those financial state(ents in
S-$e2-e"t E9e"t
1. 98' Lhere the )rou! en)a)e(ent tea( or co(!onent auditors !erfor( audits on the financial
infor(ation of co(!onents, the )rou! en)a)e(ent tea( or the co(!onent auditors shall !erfor(
!rocedures desi)ned to identif# events at those co(!onents that occur "etween the dates of the
financial infor(ation of the co(!onents and the date of the auditor+s re!ort on the )rou! financial
state(ents, and that (a# re*uire ad;ust(ent to or disclosure in the )rou! financial state(ents'
2. 95' Lhere co(!onent auditors !erfor( work other than audits of the financial infor(ation of
co(!onents, the )rou! en)a)e(ent tea( shall re*uest the co(!onent auditors to notif# the )rou!
en)a)e(ent tea( if the# "eco(e aware of su"se*uent events that (a# re*uire an ad;ust(ent to or
disclosure in the )rou! financial state(ents'
Co..-"ic!tio" &ith the Co.po"e"t A-#ito'
40' he )rou! en)a)e(ent tea( shall co((unicate its re*uire(ents to the co(!onent auditor on a
ti(el# "asis' his co((unication shall set out the work to "e !erfor(ed, the use to "e (ade of
that work, and the for( and
ISA B00 B04
content of the co(!onent auditor+s co((unication with the )rou! en)a)e(ent tea(' It shall also
include the followin). $Aef. 6ara' A57, A58, AB0&
1. $a& A re*uest that the co(!onent auditor, knowin) the conte,t in which the )rou!
en)a)e(ent tea( will use the work of the co(!onent auditor, confir(s that the co(!onent auditor
will coo!erate with the )rou! en)a)e(ent tea(' $Aef. 6ara' A55&
2. $"& he ethical re*uire(ents that are relevant to the )rou! audit and, in !articular, the
inde!endence re*uire(ents'
3. $c& In the case of an audit or review of the financial infor(ation of the co(!onent,
co(!onent (aterialit# $and, if a!!lica"le, the (aterialit# level or levels for !articular classes of
transactions, account "alances or disclosures& and the threshold a"ove which (isstate(ents cannot
"e re)arded as clearl# trivial to the )rou! financial state(ents'
4. $d& Identified si)nificant risks of (aterial (isstate(ent of the )rou! financial state(ents, due to
fraud or error, that are relevant to the work of the co(!onent auditor' he )rou! en)a)e(ent tea(
shall re*uest the co(!onent auditor to co((unicate on a ti(el# "asis an# other identified
si)nificant risks of (aterial (isstate(ent of the )rou! financial state(ents, due to fraud or error,
in the co(!onent, and the co(!onent auditor+s res!onses to such risks'
5. $e& A list of related !arties !re!ared "# )rou! (ana)e(ent, and an# other related !arties of
which the )rou! en)a)e(ent tea( is aware' he )rou! en)a)e(ent tea( shall re*uest the
co(!onent auditor to co((unicate on a ti(el# "asis related !arties not !reviousl# identified "#
)rou! (ana)e(ent or the )rou! en)a)e(ent tea(' he )rou! en)a)e(ent tea( shall deter(ine
whether to identif# such additional related !arties to other co(!onent auditors'
41' he )rou! en)a)e(ent tea( shall re*uest the co(!onent auditor to co((unicate (atters relevant to
the )rou! en)a)e(ent tea(+s conclusion with re)ard to the )rou! audit' Such co((unication shall
include. $Aef. 6ara' AB0&
1$a&Lhether the co(!onent auditor has co(!lied with ethical re*uire(ents that are relevant to the
)rou! audit, includin) inde!endence and !rofessional co(!etence?
2$"& Lhether the co(!onent auditor has co(!lied with the )rou! en)a)e(ent tea(+s re*uire(ents?
3$c&Identification of the financial infor(ation of the co(!onent on which the co(!onent auditor is
re!ortin)?
B09 ISA B00
1. $d& Infor(ation on instances of non-co(!liance with laws or re)ulations that could )ive rise to a
(aterial (isstate(ent of the )rou! financial state(ents?
2. $e& A list of uncorrected (isstate(ents of the financial infor(ation of the co(!onent $the list
need not include (isstate(ents that are "elow the threshold for clearl# trivial (isstate(ents
co((unicated "# the )rou! en)a)e(ent tea( $see !ara)ra!h 40$c&&?
3. $f& Indicators of !ossi"le (ana)e(ent "ias?
4. $)& =escri!tion of an# identified si)nificant deficiencies in internal control at the co(!onent level?
5. $h& 7ther si)nificant (atters that the co(!onent auditor co((unicated or e,!ects to co((unicate
to those char)ed with )overnance of the co(!onent, includin) fraud or sus!ected fraud involvin)
co(!onent (ana)e(ent, e(!lo#ees who have si)nificant roles in internal control at the
co(!onent level or others where the fraud resulted in a (aterial (isstate(ent of the financial
infor(ation of the co(!onent?
6. $i& An# other (atters that (a# "e relevant to the )rou! audit, or that the co(!onent auditor
wishes to draw to the attention of the )rou! en)a)e(ent tea(, includin) e,ce!tions noted in the
written re!resentations that the co(!onent auditor re*uested fro( co(!onent (ana)e(ent? and
7. $;& he co(!onent auditor+s overall findin)s, conclusions or o!inion'
E9!0-!ti"( the S-fficie"c/ !"# App'op'i!te"e of A-#it E9i#e"ce O$t!i"e#
/!aluating the Co$ponent Auditor8s Co$$unication and Ade>uacy of their Dor.
1. 44' he )rou! en)a)e(ent tea( shall evaluate the co(!onent auditor+s co((unication $see
!ara)ra!h 41&' he )rou! en)a)e(ent tea( shall.
2. $a& =iscuss si)nificant (atters arisin) fro( that evaluation with the co(!onent auditor,
co(!onent (ana)e(ent or )rou! (ana)e(ent, as a!!ro!riate? and
3. $"& =eter(ine whether it is necessar# to review other relevant !arts of the co(!onent
auditor+s audit docu(entation' $Aef. 6ara' AB1&
2. 49' If the )rou! en)a)e(ent tea( concludes that the work of the co(!onent auditor is
insufficient, the )rou! en)a)e(ent tea( shall deter(ine what additional !rocedures are to "e
!erfor(ed, and whether the# are to "e !erfor(ed "# the co(!onent auditor or "# the )rou!
en)a)e(ent tea('
ISA B00 B04
)ufficiency and Appropriateness of Audit /!idence
1. 44' he auditor is re*uired to o"tain sufficient a!!ro!riate audit evidence to reduce audit risk
to an acce!ta"l# low level and there"# ena"le the auditor to draw reasona"le conclusions on which
to "ase the auditor+s o!inion'
10
he )rou! en)a)e(ent tea( shall evaluate whether sufficient
a!!ro!riate audit evidence has "een o"tained fro( the audit !rocedures !erfor(ed on the
consolidation !rocess and the work !erfor(ed "# the )rou! en)a)e(ent tea( and the co(!onent
auditors on the financial infor(ation of the co(!onents, on which to "ase the )rou! audit o!inion'
$Aef. 6ara' AB4&
2. 45' he )rou! en)a)e(ent !artner shall evaluate the effect on the )rou! audit o!inion of an#
uncorrected (isstate(ents $either identified "# the )rou! en)a)e(ent tea( or co((unicated "#
co(!onent auditors& and an# instances where there has "een an ina"ilit# to o"tain sufficient
a!!ro!riate audit evidence' $Aef. 6ara' AB9&
Co..-"ic!tio" &ith G'o-p )!"!(e.e"t !"# Thoe Ch!'(e# &ith Go9e'"!"ce of the G'o-p
Co$$unication #ith 2roup <anage$ent
14B' he )rou! en)a)e(ent tea( shall deter(ine which identified deficiencies in internal
control to co((unicate to those char)ed with )overnance and )rou! (ana)e(ent in
accordance with ISA 4B5'
11
In (akin) this deter(ination, the )rou! en)a)e(ent tea( shall
consider.
2$a& =eficiencies in )rou!-wide internal control that the )rou! en)a)e(ent tea( has
identified?
3$"& =eficiencies in internal control that the )rou! en)a)e(ent tea( has identified in internal
controls at co(!onents? and
4$c& =eficiencies in internal control that co(!onent auditors have "rou)ht to the attention of the
)rou! en)a)e(ent tea('
2. 47' If fraud has "een identified "# the )rou! en)a)e(ent tea( or "rou)ht to its attention "# a
co(!onent auditor $see !ara)ra!h 41$h&&, or infor(ation indicates that a fraud (a# e,ist, the
)rou! en)a)e(ent tea( shall co((unicate this on a ti(el# "asis to the a!!ro!riate level of )rou!
(ana)e(ent in order to infor( those with !ri(ar# res!onsi"ilit# for the !revention and detection
of fraud of (atters relevant to their res!onsi"ilities' $Aef' 6ara' AB4&
10
ISA 400, !ara)ra!h 17' 11
ISA 4B5, C%o((unicatin) =eficiencies in Internal %ontrol to hose %har)ed with <overnance and Eana)e(ent'D
B05 ISA B00
48' A co(!onent auditor (a# "e re*uired "# statute, re)ulation or for another reason, to e,!ress an
audit o!inion on the financial state(ents of a co(!onent' In that case, the )rou! en)a)e(ent tea(
shall re*uest )rou! (ana)e(ent to infor( co(!onent (ana)e(ent of an# (atter of which the
)rou! en)a)e(ent tea( "eco(es aware that (a# "e si)nificant to the financial state(ents of the
co(!onent, "ut of which co(!onent (ana)e(ent (a# "e unaware' If )rou! (ana)e(ent refuses
to co((unicate the (atter to co(!onent (ana)e(ent, the )rou! en)a)e(ent tea( shall discuss
the (atter with those char)ed with )overnance of the )rou!' If the (atter re(ains unresolved, the
)rou! en)a)e(ent tea(, su";ect to le)al and !rofessional confidentialit# considerations, shall
consider whether to advise the co(!onent auditor not to issue the auditor+s re!ort on the financial
state(ents of the co(!onent until the (atter is resolved' $Aef. 6ara' AB5&
Co$$unication #ith 1hose Charged #ith 2o!ernance of the 2roup
45' he )rou! en)a)e(ent tea( shall co((unicate the followin) (atters with those char)ed with
)overnance of the )rou!, in addition to those re*uired "# ISA 4B0
14
and other ISAs. $Aef. 6ara'
ABB&
1. $a& An overview of the t#!e of work to "e !erfor(ed on the financial infor(ation of the
co(!onents'
2. $"& An overview of the nature of the )rou! en)a)e(ent tea(+s !lanned involve(ent in the work to
"e !erfor(ed "# the co(!onent auditors on the financial infor(ation of si)nificant co(!onents'
3. $c& Instances where the )rou! en)a)e(ent tea(+s evaluation of the work of a co(!onent
auditor )ave rise to a concern a"out the *ualit# of that auditor+s work'
4. $d& An# li(itations on the )rou! audit, for e,a(!le, where the )rou! en)a)e(ent tea(+s access to
infor(ation (a# have "een restricted'
5. $e& Fraud or sus!ected fraud involvin) )rou! (ana)e(ent, co(!onent (ana)e(ent,
e(!lo#ees who have si)nificant roles in )rou!-wide controls or others where the fraud resulted in
a (aterial (isstate(ent of the )rou! financial state(ents'
Doc-.e"t!tio"
50' he )rou! en)a)e(ent tea( shall include in the audit docu(entation the followin) (atters.
19
$a& An anal#sis of co(!onents, indicatin) those that are si)nificant, and the t#!e of work
!erfor(ed on the financial infor(ation of the co(!onents'
14
ISA 4B0, C%o((unication with hose %har)ed with <overnance'D 19
ISA B00 B0B
1$"& he nature, ti(in) and e,tent of the )rou! en)a)e(ent tea(+s involve(ent in the work !erfor(ed
"# the co(!onent auditors on si)nificant co(!onents includin), where a!!lica"le, the )rou!
en)a)e(ent tea(+s review of relevant !arts of the co(!onent auditors+ audit docu(entation and
conclusions thereon'
2$c&Lritten co((unications "etween the )rou! en)a)e(ent tea( and the co(!onent auditors a"out
the )rou! en)a)e(ent tea(+s re*uire(ents'
OOO
Co.po"e"t S-$1ect to A-#it $/ St!t-te4 Re(-0!tio" o' Othe' Re!o" $Aef. 6ara' 9&
A1' Factors that (a# affect the )rou! en)a)e(ent tea(+s decision whether to use an audit re*uired "#
statute, re)ulation or for another reason to !rovide audit evidence for the )rou! audit include the
followin).
% G =ifferences in the financial re!ortin) fra(ework a!!lied in !re!arin) the financial
state(ents of the co(!onent and that a!!lied in !re!arin) the )rou! financial state(ents'
% G =ifferences in the auditin) and other standards a!!lied "# the co(!onent auditor and
those a!!lied in the audit of the )rou! financial state(ents'
% G Lhether the audit of the financial state(ents of the co(!onent will "e co(!leted in ti(e
to (eet the )rou! re!ortin) ti(eta"le'
Defi"itio"
Co$ponent $Aef. 6ara' 5$a&&
A4' he structure of a )rou! affects how co(!onents are identified' For e,a(!le, the )rou! financial
re!ortin) s#ste( (a# "e "ased on an or)aniJational structure that !rovides for financial
infor(ation to "e !re!ared "# a !arent and one or (ore su"sidiaries, ;oint ventures, or investees
accounted for "# the e*uit# or cost (ethods of accountin)? "# a head office and one or (ore
divisions or "ranches? or "# a co("ination of "oth' So(e )rou!s, however, (a# or)aniJe their
financial re!ortin) s#ste( "# function, !rocess, !roduct or service $or "# )rou!s of !roducts or
services&, or )eo)ra!hical locations' In these cases, the entit# or "usiness activit# for which )rou!
or co(!onent (ana)e(ent !re!ares financial infor(ation that is included in the )rou! financial
state(ents (a# "e a function, !rocess, !roduct or service $or )rou! of !roducts or services&, or
)eo)ra!hical location'
B07 ISA B00
A9' Farious levels of co(!onents (a# e,ist within the )rou! financial re!ortin) s#ste(, in which case
it (a# "e (ore a!!ro!riate to identif# co(!onents at certain levels of a))re)ation rather than
individuall#'
A4' %o(!onents a))re)ated at a certain level (a# constitute a co(!onent for !ur!oses of the )rou!
audit? however, such a co(!onent (a# also !re!are )rou! financial state(ents that incor!orate the
financial infor(ation of the co(!onents it enco(!asses $that is, a su")rou!&' his ISA (a#
therefore "e a!!lied "# different )rou! en)a)e(ent !artners and tea(s for different su")rou!s
within a lar)er )rou!'
)ignificant Co$ponent $Aef. 6ara' 5$(&&
A5' As the individual financial si)nificance of a co(!onent increases, the risks of (aterial
(isstate(ent of the )rou! financial state(ents ordinaril# increase' he )rou! en)a)e(ent tea(
(a# a!!l# a !ercenta)e to a chosen "ench(ark as an aid to identif# co(!onents that are of
individual financial si)nificance' Identif#in) a "ench(ark and deter(inin) a !ercenta)e to "e
a!!lied to it involve the e,ercise of !rofessional ;ud)(ent' =e!endin) on the nature and
circu(stances of the )rou!, a!!ro!riate "ench(arks (i)ht include )rou! assets, lia"ilities, cash
flows, !rofit or turnover' For e,a(!le, the )rou! en)a)e(ent tea( (a# consider that co(!onents
e,ceedin) 15Q of the chosen "ench(ark are si)nificant co(!onents' A hi)her or lower !ercenta)e
(a#, however, "e dee(ed a!!ro!riate in the circu(stances'
AB' he )rou! en)a)e(ent tea( (a# also identif# a co(!onent as likel# to include si)nificant risks of
(aterial (isstate(ent of the )rou! financial state(ents due to its s!ecific nature or circu(stances
$that is, risks that re*uire s!ecial audit consideration
14
&' For e,a(!le, a co(!onent could "e
res!onsi"le for forei)n e,chan)e tradin) and thus e,!ose the )rou! to a si)nificant risk of (aterial
(isstate(ent, even thou)h the co(!onent is not otherwise of individual financial si)nificance to
the )rou!'
Co$ponent Auditor $Aef. 6ara' 5$"&&
A7' A (e("er of the )rou! en)a)e(ent tea( (a# !erfor( work on the financial infor(ation of a
co(!onent for the )rou! audit at the re*uest of the )rou! en)a)e(ent tea(' Lhere this is the
case, such a (e("er of the en)a)e(ent tea( is also a co(!onent auditor'
Repo"i$i0it/ $Aef. 6ara' 11&
A8' Althou)h co(!onent auditors (a# !erfor( work on the financial infor(ation of the co(!onents
for the )rou! audit and as such are res!onsi"le for their
ISA 915, !ara)ra!hs 47-45'
ISA B00 B08
overall findin)s, conclusions or o!inions, the )rou! en)a)e(ent !artner or the )rou! en)a)e(ent
!artner+s fir( is res!onsi"le for the )rou! audit o!inion'
A5' Lhen the )rou! audit o!inion is (odified "ecause the )rou! en)a)e(ent tea( was una"le to
o"tain sufficient a!!ro!riate audit evidence in relation to the financial infor(ation of one or (ore
co(!onents, the 1asis for Eodification !ara)ra!h in the auditor+s re!ort on the )rou! financial
state(ents descri"es the reasons for that ina"ilit# without referrin) to the co(!onent auditor,
unless such a reference is necessar# for an ade*uate e,!lanation of the circu(stances'
15
Accept!"ce !"# Co"ti"-!"ce
,btaining an "nderstanding at the Acceptance or Continuance )tage $Aef. 6ara' 14&
A10' In the case of a new en)a)e(ent, the )rou! en)a)e(ent tea(+s understandin) of the )rou!, its
co(!onents, and their environ(ents (a# "e o"tained fro(.
1. G Infor(ation !rovided "# )rou! (ana)e(ent?
2. G %o((unication with )rou! (ana)e(ent? and
3. G Lhere a!!lica"le, co((unication with the !revious )rou! en)a)e(ent tea(, co(!onent
(ana)e(ent, or co(!onent auditors'
A11' he )rou! en)a)e(ent tea(+s understandin) (a# include (atters such as the followin).
% G he )rou! structure, includin) "oth the le)al and or)aniJational structure $that is, how the
)rou! financial re!ortin) s#ste( is or)aniJed&'
% G %o(!onents+ "usiness activities that are si)nificant to the )rou!, includin) the industr#
and re)ulator#, econo(ic and !olitical environ(ents in which those activities take !lace'
% G he use of service or)aniJations, includin) shared service centers'
% G A descri!tion of )rou!-wide controls'
% G he co(!le,it# of the consolidation !rocess'
% G Lhether co(!onent auditors that are not fro( the )rou! en)a)e(ent !artner+s fir( or
network will !erfor( work on the financial infor(ation of an# of the co(!onents, and )rou!
(ana)e(ent+s rationale for a!!ointin) (ore than one auditor'
% G Lhether the )rou! en)a)e(ent tea(.
Y Lill have unrestricted access to those char)ed with )overnance of the )rou!, )rou!
(ana)e(ent, those char)ed with )overnance
B05 ISA B00
of the co(!onent, co(!onent (ana)e(ent, co(!onent infor(ation, and the
co(!onent auditors $includin) relevant audit docu(entation sou)ht "# the )rou!
en)a)e(ent tea(&? and
Y Lill "e a"le to !erfor( necessar# work on the financial infor(ation of the
co(!onents'
A14' In the case of a continuin) en)a)e(ent, the )rou! en)a)e(ent tea(+s a"ilit# to o"tain sufficient
a!!ro!riate audit evidence (a# "e affected "# si)nificant chan)es, for e,a(!le.
% G %han)es in the )rou! structure $for e,a(!le, ac*uisitions, dis!osals, reor)aniJations, or
chan)es in how the )rou! financial re!ortin) s#ste( is or)aniJed&'
% G %han)es in co(!onents+ "usiness activities that are si)nificant to the )rou!'
% G %han)es in the co(!osition of those char)ed with )overnance of the )rou!, )rou!
(ana)e(ent, or ke# (ana)e(ent of si)nificant co(!onents'
% G %oncerns the )rou! en)a)e(ent tea( has with re)ard to the inte)rit# and co(!etence of
)rou! or co(!onent (ana)e(ent'
% G %han)es in )rou!-wide controls'
% G %han)es in the a!!lica"le financial re!ortin) fra(ework'
/4pectation to ,btain )ufficient Appropriate Audit /!idence $Aef. 6ara' 19&
A19' A )rou! (a# consist onl# of co(!onents not considered si)nificant co(!onents' In these
circu(stances, the )rou! en)a)e(ent !artner can reasona"l# e,!ect to o"tain sufficient
a!!ro!riate audit evidence on which to "ase the )rou! audit o!inion if the )rou! en)a)e(ent tea(
will "e a"le to.
1$a& 6erfor( the work on the financial infor(ation of so(e of these co(!onents? and
2$"& 1e involved in the work !erfor(ed "# co(!onent auditors on the financial infor(ation of other
co(!onents to the e,tent necessar# to o"tain sufficient a!!ro!riate audit evidence'
Access to Infor$ation $Aef. 6ara' 19&
A14' he )rou! en)a)e(ent tea(+s access to infor(ation (a# "e restricted "# circu(stances that
cannot "e overco(e "# )rou! (ana)e(ent, for e,a(!le, laws relatin) to confidentialit# and data
!rivac#, or denial "# the co(!onent auditor of access to relevant audit docu(entation sou)ht "#
the )rou! en)a)e(ent tea(' It (a# also "e restricted "# )rou! (ana)e(ent'
ISA B00 B10
A15' Lhere access to infor(ation is restricted "# circu(stances, the )rou! en)a)e(ent tea( (a# still "e
a"le to o"tain sufficient a!!ro!riate audit evidence? however, this is less likel# as the si)nificance of
the co(!onent increases' For e,a(!le, the )rou! en)a)e(ent tea( (a# not have access to those
char)ed with )overnance, (ana)e(ent, or the auditor $includin) relevant audit docu(entation
sou)ht "# the )rou! en)a)e(ent tea(& of a co(!onent that is accounted for "# the e*uit# (ethod of
accountin)' If the co(!onent is not a si)nificant co(!onent, and the )rou! en)a)e(ent tea( has a
co(!lete set of financial state(ents of the co(!onent, includin) the auditor+s re!ort thereon, and
has access to infor(ation ke!t "# )rou! (ana)e(ent in relation to that co(!onent, the )rou!
en)a)e(ent tea( (a# conclude that this infor(ation constitutes sufficient a!!ro!riate audit
evidence in relation to that co(!onent' If the co(!onent is a si)nificant co(!onent, however, the
)rou! en)a)e(ent tea( will not "e a"le to co(!l# with the re*uire(ents of this ISA relevant in the
circu(stances of the )rou! audit' For e,a(!le, the )rou! en)a)e(ent tea( will not "e a"le to
co(!l# with the re*uire(ent in !ara)ra!hs 90-91 to "e involved in the work of the co(!onent
auditor' he )rou! en)a)e(ent tea( will not, therefore, "e a"le to o"tain sufficient a!!ro!riate audit
evidence in relation to that co(!onent' he effect of the )rou! en)a)e(ent tea(+s ina"ilit# to o"tain
sufficient a!!ro!riate audit evidence is considered in ter(s of ISA 705'
A1B' he )rou! en)a)e(ent tea( will not "e a"le to o"tain sufficient a!!ro!riate audit evidence if )rou!
(ana)e(ent restricts the access of the )rou! en)a)e(ent tea( or a co(!onent auditor to the
infor(ation of a si)nificant co(!onent'
A17' Althou)h the )rou! en)a)e(ent tea( (a# "e a"le to o"tain sufficient a!!ro!riate audit evidence if
such restriction relates to a co(!onent considered not a si)nificant co(!onent, the reason for the
restriction (a# affect the )rou! audit o!inion' For e,a(!le, it (a# affect the relia"ilit# of )rou!
(ana)e(ent+s res!onses to the )rou! en)a)e(ent tea(+s in*uiries and )rou! (ana)e(ent+s
re!resentations to the )rou! en)a)e(ent tea('
A18' Maw or re)ulation (a# !rohi"it the )rou! en)a)e(ent !artner fro( declinin) or withdrawin) fro(
an en)a)e(ent' For e,a(!le, in so(e ;urisdictions the auditor is a!!ointed for a s!ecified !eriod of
ti(e and is !rohi"ited fro( withdrawin) "efore the end of that !eriod' Also, in the !u"lic sector, the
o!tion of declinin) or withdrawin) fro( an en)a)e(ent (a# not "e availa"le to the auditor due to
the nature of the (andate or !u"lic interest considerations' In these circu(stances, this ISA still
a!!lies to the )rou! audit, and the effect of the )rou! en)a)e(ent tea(+s ina"ilit# to o"tain
sufficient a!!ro!riate audit evidence is considered in ter(s of ISA 705'
A15' A!!endi, 1 contains an e,a(!le of an auditor+s re!ort containin) a *ualified o!inion "ased on the
)rou! en)a)e(ent tea(+s ina"ilit# to o"tain sufficient
B11 ISA B00
a!!ro!riate audit evidence in relation to a si)nificant co(!onent accounted for "# the e*uit#
(ethod of accountin), "ut where, in the )rou! en)a)e(ent tea(+s ;ud)(ent, the effect is (aterial
"ut not !ervasive'
1er$s of /ngage$ent $Aef. 6ara' 14&
A40' he ter(s of en)a)e(ent identif# the a!!lica"le financial re!ortin) fra(ework'
1B
Additional
(atters (a# "e included in the ter(s of a )rou! audit en)a)e(ent, such as the fact that.
1. G he co((unication "etween the )rou! en)a)e(ent tea( and the co(!onent auditors
should "e unrestricted to the e,tent !ossi"le under law or re)ulation?
2. G I(!ortant co((unications "etween the co(!onent auditors, those char)ed with
)overnance of the co(!onent, and co(!onent (ana)e(ent, includin) co((unications on
si)nificant deficiencies in internal control, should "e co((unicated as well to the )rou!
en)a)e(ent tea(?
3. G I(!ortant co((unications "etween re)ulator# authorities and co(!onents related to
financial re!ortin) (atters should "e co((unicated to the )rou! en)a)e(ent tea(? and
1. G o the e,tent the )rou! en)a)e(ent tea( considers necessar#, it should "e !er(itted.
1. Y Access to co(!onent infor(ation, those char)ed with )overnance of
co(!onents, co(!onent (ana)e(ent, and the co(!onent auditors $includin) relevant
audit docu(entation sou)ht "# the )rou! en)a)e(ent tea(&? and
2. Y o !erfor( work or re*uest a co(!onent auditor to !erfor( work on the
financial infor(ation of the co(!onents'
A41' Aestrictions i(!osed on.
1. G the )rou! en)a)e(ent tea(+s access to co(!onent infor(ation, those char)ed with
)overnance of co(!onents, co(!onent (ana)e(ent, or the co(!onent auditors $includin)
relevant audit docu(entation sou)ht "# the )rou! en)a)e(ent tea(&? or
2. G the work to "e !erfor(ed on the financial infor(ation of the co(!onents
after the )rou! en)a)e(ent !artner+s acce!tance of the )rou! audit en)a)e(ent, constitute an
ina"ilit# to o"tain sufficient a!!ro!riate audit
ISA B00 B14
evidence that (a# affect the )rou! audit o!inion' In e,ce!tional circu(stances it (a# even lead to
withdrawal fro( the en)a)e(ent where withdrawal is !ossi"le under a!!lica"le law or re)ulation'
O9e'!00 A-#it St'!te(/ !"# A-#it *0!" $Aef. 6ara' 1B&
A44' he )rou! en)a)e(ent !artner+s review of the overall )rou! audit strate)# and )rou! audit !lan is
an i(!ortant !art of fulfillin) the )rou! en)a)e(ent !artner+s res!onsi"ilit# for the direction of
the )rou! audit en)a)e(ent'
U"#e't!"#i"( the G'o-p4 It Co.po"e"t !"# Thei' E"9i'o".e"t
<atters about Dhich the 2roup /ngage$ent 1ea$ ,btains an "nderstanding $Aef. 6ara' 17&
A49' ISA 915 contains )uidance on (atters the auditor (a# consider when o"tainin) an understandin)
of the industr#, re)ulator#, and other e,ternal factors that affect the entit#, includin) the a!!lica"le
financial re!ortin) fra(ework? the nature of the entit#? o";ectives and strate)ies and related
"usiness risks? and (easure(ent and review of the entit#+s financial !erfor(ance'
17
A!!endi, 4 of
this ISA contains )uidance on (atters s!ecific to a )rou!, includin) the consolidation !rocess'
Instructions Issued by 2roup <anage$ent to Co$ponents $Aef. 6ara' 17&
A44' o achieve unifor(it# and co(!ara"ilit# of financial infor(ation, )rou! (ana)e(ent ordinaril#
issues instructions to co(!onents' Such instructions s!ecif# the re*uire(ents for financial
infor(ation of the co(!onents to "e included in the )rou! financial state(ents and often include
financial re!ortin) !rocedures (anuals and a re!ortin) !acka)e' A re!ortin) !acka)e ordinaril#
consists of standard for(ats for !rovidin) financial infor(ation for incor!oration in the )rou!
financial state(ents' Ae!ortin) !acka)es )enerall# do not, however, take the for( of co(!lete
financial state(ents !re!ared and !resented in accordance with the a!!lica"le financial re!ortin)
fra(ework'
A45' he instructions ordinaril# cover.
% G he accountin) !olicies to "e a!!lied?
1G Statutor# and other disclosure re*uire(ents a!!lica"le to the )rou! financial state(ents,
includin).
% Y he identification and re!ortin) of se)(ents?
% Y Aelated !art# relationshi!s and transactions?
% Y Intra-)rou! transactions and unrealiJed !rofits?
B19 ISA B00
Y Intra-)rou! account "alances? and
G A re!ortin) ti(eta"le'
A4B' he )rou! en)a)e(ent tea(+s understandin) of the instructions (a# include the followin).
1. G he clarit# and !racticalit# of the instructions for co(!letin) the re!ortin) !acka)e'
1. G Lhether the instructions.
1. Y Ade*uatel# descri"e the characteristics of the a!!lica"le financial re!ortin)
fra(ework?
2. Y 6rovide for disclosures that are sufficient to co(!l# with the re*uire(ents of the
a!!lica"le financial re!ortin) fra(ework, for e,a(!le, disclosure of related !art#
relationshi!s and transactions, and se)(ent infor(ation?
3. Y 6rovide for the identification of consolidation ad;ust(ents, for e,a(!le, intra-
)rou! transactions and unrealiJed !rofits, and intra-)rou! account "alances? and
4. Y 6rovide for the a!!roval of the financial infor(ation "# co(!onent
(ana)e(ent'
Fraud $Aef. 6ara' 17&
A47' he auditor is re*uired to identif# and assess the risks of (aterial (isstate(ent of the financial
state(ents due to fraud, and to desi)n and i(!le(ent a!!ro!riate res!onses to the assessed risks'
18
Infor(ation used to identif# the risks of (aterial (isstate(ent of the )rou! financial state(ents
due to fraud (a# include the followin).
1. G <rou! (ana)e(ent+s assess(ent of the risks that the )rou! financial state(ents (a# "e
(ateriall# (isstated as a result of fraud'
2. G <rou! (ana)e(ent+s !rocess for identif#in) and res!ondin) to the risks of fraud in the
)rou!, includin) an# s!ecific fraud risks identified "# )rou! (ana)e(ent, or account "alances,
classes of transactions, or disclosures for which a risk of fraud is likel#'
3. G Lhether there are !articular co(!onents for which a risk of fraud is likel#'
4. G @ow those char)ed with )overnance of the )rou! (onitor )rou! (ana)e(ent+s !rocesses
for identif#in) and res!ondin) to the risks of
ISA 440, Che Auditor+s Aes!onsi"ilities Aelatin) to Fraud in an Audit of Financial State(ents'D
ISA B00 B14
fraud in the )rou!, and the controls )rou! (ana)e(ent has esta"lished to (iti)ate these
risks'
G Aes!onses of those char)ed with )overnance of the )rou!, )rou! (ana)e(ent, internal
audit $and if considered a!!ro!riate, co(!onent (ana)e(ent, the co(!onent auditors, and
others& to the )rou! en)a)e(ent tea(+s in*uir# whether the# have knowled)e of an#
actual, sus!ected, or alle)ed fraud affectin) a co(!onent or the )rou!'
?iscussion a$ong 2roup /ngage$ent 1ea$ <e$bers and Co$ponent Auditors +egarding the +is.s of
<aterial <isstate$ent of the 2roup Financial )tate$ents& Including +is.s of Fraud $Aef. 6ara' 17&
A48' he ke# (e("ers of the en)a)e(ent tea( are re*uired to discuss the susce!ti"ilit# of an entit# to
(aterial (isstate(ent of the financial state(ents due to fraud or error, s!ecificall# e(!hasiJin)
the risks due to fraud' In a )rou! audit, these discussions (a# also include the co(!onent
auditors'
15
he )rou! en)a)e(ent !artner+s deter(ination of who to include in the discussions,
how and when the# occur, and their e,tent, is affected "# factors such as !rior e,!erience with the
)rou!'
A45' he discussions !rovide an o!!ortunit# to.
% G Share knowled)e of the co(!onents and their environ(ents, includin) )rou!-wide
controls'
% G 0,chan)e infor(ation a"out the "usiness risks of the co(!onents or the )rou!'
% G 0,chan)e ideas a"out how and where the )rou! financial state(ents (a# "e susce!ti"le
to (aterial (isstate(ent due to fraud or error, how )rou! (ana)e(ent and co(!onent
(ana)e(ent could !er!etrate and conceal fraudulent financial re!ortin), and how assets of the
co(!onents could "e (isa!!ro!riated'
% G Identif# !ractices followed "# )rou! or co(!onent (ana)e(ent that (a# "e "iased or
desi)ned to (ana)e earnin)s that could lead to fraudulent financial re!ortin), for e,a(!le,
revenue reco)nition !ractices that do not co(!l# with the a!!lica"le financial re!ortin)
fra(ework'
% G %onsider known e,ternal and internal factors affectin) the )rou! that (a# create an
incentive or !ressure for )rou! (ana)e(ent, co(!onent (ana)e(ent, or others to co((it fraud,
!rovide the o!!ortunit# for fraud to "e !er!etrated, or indicate a culture or environ(ent that
ena"les
ISA 440, !ara)ra!h 15? ISA 915, !ara)ra!h 10'
B15 ISA B00
)rou! (ana)e(ent, co(!onent (ana)e(ent, or others to rationaliJe co((ittin) fraud'
% G %onsider the risk that )rou! or co(!onent (ana)e(ent (a# override controls'
% G %onsider whether unifor( accountin) !olicies are used to !re!are the financial
infor(ation of the co(!onents for the )rou! financial state(ents and, where not, how differences
in accountin) !olicies are identified and ad;usted $where re*uired "# the a!!lica"le financial
re!ortin) fra(ework&'
% G =iscuss fraud that has "een identified in co(!onents, or infor(ation that indicates
e,istence of a fraud in a co(!onent'
% G Share infor(ation that (a# indicate non-co(!liance with national laws or re)ulations,
for e,a(!le, !a#(ents of "ri"es and i(!ro!er transfer !ricin) !ractices'
+is. Factors $Aef. 6ara' 18&
A90' A!!endi, 9 sets out e,a(!les of conditions or events that, individuall# or to)ether, (a# indicate
risks of (aterial (isstate(ent of the )rou! financial state(ents, includin) risks due to fraud'
+is. Assess$ent $Aef. 6ara' 18&
A91' he )rou! en)a)e(ent tea(+s assess(ent at )rou! level of the risks of (aterial (isstate(ent of
the )rou! financial state(ents is "ased on infor(ation such as the followin).
1. G Infor(ation o"tained fro( the understandin) of the )rou!, its co(!onents, and their
environ(ents, and of the consolidation !rocess, includin) audit evidence o"tained in evaluatin)
the desi)n and i(!le(entation of )rou!-wide controls and controls that are relevant to the
consolidation'
2. G Infor(ation o"tained fro( the co(!onent auditors'
U"#e't!"#i"( the Co.po"e"t A-#ito' $Aef. 6ara' 15&
A94' he )rou! en)a)e(ent tea( o"tains an understandin) of a co(!onent auditor onl# when it !lans
to re*uest the co(!onent auditor to !erfor( work on the financial infor(ation of a co(!onent for
the )rou! audit' For e,a(!le, it will not "e necessar# to o"tain an understandin) of the auditors of
those co(!onents for which the )rou! en)a)e(ent tea( !lans to !erfor( anal#tical !rocedures at
)rou! level onl#'
ISA B00 B1B
2roup /ngage$ent 1ea$8s (rocedures to ,btain an "nderstanding of the Co$ponent Auditor
and )ources of Audit /!idence $Aef. 6ara' 15&
A99' he nature, ti(in) and e,tent of the )rou! en)a)e(ent tea(+s !rocedures to o"tain an
understandin) of the co(!onent auditor are affected "# factors such as !revious e,!erience with
or knowled)e of the co(!onent auditor, and the de)ree to which the )rou! en)a)e(ent tea( and
the co(!onent auditor are su";ect to co((on !olicies and !rocedures, for e,a(!le.
1G Lhether the )rou! en)a)e(ent tea( and a co(!onent auditor share.
% Y %o((on !olicies and !rocedures for !erfor(in) the work $for e,a(!le, audit
(ethodolo)ies&?
% Y %o((on *ualit# control !olicies and !rocedures? or
% Y %o((on (onitorin) !olicies and !rocedures'
2G he consistenc# or si(ilarit# of.
% Y Maws and re)ulations or le)al s#ste(?
% Y 6rofessional oversi)ht, disci!line, and e,ternal *ualit# assurance?
% Y 0ducation and trainin)?
% Y 6rofessional or)aniJations and standards? or
% Y Man)ua)e and culture'
A94' hese factors interact and are not (utuall# e,clusive' For e,a(!le, the e,tent of the )rou!
en)a)e(ent tea(+s !rocedures to o"tain an understandin) of %o(!onent Auditor A, who
consistentl# a!!lies co((on *ualit# control and (onitorin) !olicies and !rocedures and a
co((on audit (ethodolo)# or o!erates in the sa(e ;urisdiction as the )rou! en)a)e(ent !artner,
(a# "e less than the e,tent of the )rou! en)a)e(ent tea(+s !rocedures to o"tain an understandin)
of %o(!onent Auditor 1, who is not consistentl# a!!l#in) co((on *ualit# control and
(onitorin) !olicies and !rocedures and a co((on audit (ethodolo)# or o!erates in a forei)n
;urisdiction' he nature of the !rocedures !erfor(ed in relation to %o(!onent Auditors A and 1
(a# also "e different'
A95' he )rou! en)a)e(ent tea( (a# o"tain an understandin) of the co(!onent auditor in a nu("er
of wa#s' In the first #ear of involvin) a co(!onent auditor, the )rou! en)a)e(ent tea( (a#, for
e,a(!le.
G 0valuate the results of the *ualit# control (onitorin) s#ste( where the )rou! en)a)e(ent
tea( and co(!onent auditor are fro( a fir( or
B17 ISA B00
network that o!erates under and co(!lies with co((on (onitorin) !olicies and
!rocedures?
40
% G Fisit the co(!onent auditor to discuss the (atters in !ara)ra!h 15$a&-$c&?
% G Ae*uest the co(!onent auditor to confir( the (atters referred to in !ara)ra!h 15$a&-$c&
in writin)' A!!endi, 4 contains an e,a(!le of written confir(ations "# a co(!onent auditor?
% G Ae*uest the co(!onent auditor to co(!lete *uestionnaires a"out the (atters in !ara)ra!h
15$a&-$c&?
% G =iscuss the co(!onent auditor with collea)ues in the )rou! en)a)e(ent !artner+s fir(,
or with a re!uta"le third !art# that has knowled)e of the co(!onent auditor? or
% G 7"tain confir(ations fro( the !rofessional "od# or "odies to which the co(!onent
auditor "elon)s, the authorities "# which the co(!onent auditor is licensed, or other third !arties'
In su"se*uent #ears, the understandin) of the co(!onent auditor (a# "e "ased on the )rou!
en)a)e(ent tea(+s !revious e,!erience with the co(!onent auditor' he )rou! en)a)e(ent tea(
(a# re*uest the co(!onent auditor to confir( whether an#thin) in relation to the (atters listed in
!ara)ra!h 15$a&-
$c& has chan)ed since the !revious #ear'
A9B' Lhere inde!endent oversi)ht "odies have "een esta"lished to oversee the auditin) !rofession and
(onitor the *ualit# of audits, awareness of the re)ulator# environ(ent (a# assist the )rou!
en)a)e(ent tea( in evaluatin) the inde!endence and co(!etence of the co(!onent auditor'
Infor(ation a"out the re)ulator# environ(ent (a# "e o"tained fro( the co(!onent auditor or
infor(ation !rovided "# the inde!endent oversi)ht "odies'
/thical +e>uire$ents that Are +ele!ant to the 2roup Audit $Aef. 6ara' 15$a&&
A97' Lhen !erfor(in) work on the financial infor(ation of a co(!onent for a )rou! audit, the
co(!onent auditor is su";ect to ethical re*uire(ents that are relevant to the )rou! audit' Such
re*uire(ents (a# "e different or in addition to those a!!l#in) to the co(!onent auditor when
!erfor(in) a statutor# audit in the co(!onent auditor+s ;urisdiction' he )rou! en)a)e(ent tea(
therefore o"tains an understandin) whether the co(!onent auditor understands and will co(!l#
with the ethical re*uire(ents that are relevant to the )rou! audit, sufficient to fulfill the
co(!onent auditor+s res!onsi"ilities in the )rou! audit'
As re*uired "# IS:% 1, C:ualit# %ontrol for Fir(s that 6erfor( Audits and Aeviews of Financial State(ents, and 7ther
Assurance and Aelated Services 0n)a)e(ents,D !ara)ra!h 54, or national re*uire(ents that are at least as de(andin)'
ISA B00 B18
1he Co$ponent Auditor8s (rofessional Co$petence $Aef. 6ara' 15$"&&
A98' he )rou! en)a)e(ent tea(+s understandin) of the co(!onent auditor+s !rofessional co(!etence
(a# include whether the co(!onent auditor.
1. G 6ossesses an understandin) of auditin) and other standards a!!lica"le to the )rou! audit
that is sufficient to fulfill the co(!onent auditor+s res!onsi"ilities in the )rou! audit?
2. G 6ossesses the s!ecial skills $for e,a(!le, industr# s!ecific knowled)e& necessar# to
!erfor( the work on the financial infor(ation of the !articular co(!onent? and
3. G Lhere relevant, !ossesses an understandin) of the a!!lica"le financial re!ortin)
fra(ework that is sufficient to fulfill the co(!onent auditor+s res!onsi"ilities in the )rou! audit
$instructions issued "# )rou! (ana)e(ent to co(!onents often descri"e the characteristics of the
a!!lica"le financial re!ortin) fra(ework&'
Application of the 2roup /ngage$ent 1ea$8s "nderstanding of a Co$ponent Auditor
$Aef. 6ara' 40&
A95' he )rou! en)a)e(ent tea( cannot overco(e the fact that a co(!onent auditor is not inde!endent
"# "ein) involved in the work of the co(!onent auditor or "# !erfor(in) additional risk
assess(ent or further audit !rocedures on the financial infor(ation of the co(!onent'
A40' @owever, the )rou! en)a)e(ent tea( (a# "e a"le to overco(e less than serious concerns a"out
the co(!onent auditor+s !rofessional co(!etenc# $for e,a(!le, lack of industr# s!ecific
knowled)e&, or the fact that the co(!onent auditor does not o!erate in an environ(ent that
activel# oversees auditors, "# "ein) involved in the work of the co(!onent auditor or "#
!erfor(in) additional risk assess(ent or further audit !rocedures on the financial infor(ation of
the co(!onent'
A41' Lhere law or re)ulation !rohi"its access to relevant !arts of the audit docu(entation of the
co(!onent auditor, the )rou! en)a)e(ent tea( (a# re*uest the co(!onent auditor to overco(e
this "# !re!arin) a (e(orandu( that covers the relevant infor(ation'
)!te'i!0it/ $Aef. 6ara' 41-49& A44' he auditor is
re*uired.
41
1. $a& Lhen esta"lishin) the overall audit strate)#, to deter(ine.
2. $i& Eaterialit# for the financial state(ents as a whole? and
2. $ii& If, in the s!ecific circu(stances of the entit#, there are !articular classes of transactions,
account "alances or disclosures for which (isstate(ents of lesser a(ounts than (aterialit# for the
financial state(ents as a whole could reasona"l# "e e,!ected to influence the econo(ic decisions
of users taken on the "asis of the financial state(ents, the (aterialit# level or levels to "e a!!lied
to those !articular classes of transactions, account "alances or disclosures? and
ISA 940, CEaterialit# in 6lannin) and 6erfor(in) an Audit,D !ara)ra!hs 10-11'
B15 ISA B00
$"& o deter(ine !erfor(ance (aterialit#'
In the conte,t of a )rou! audit, (aterialit# is esta"lished for "oth the )rou! financial state(ents as
a whole, and for the financial infor(ation of the co(!onents' Eaterialit# for the )rou! financial
state(ents as a whole is used when esta"lishin) the overall )rou! audit strate)#'
A49' o reduce to an a!!ro!riatel# low level the !ro"a"ilit# that the a))re)ate of uncorrected and
undetected (isstate(ents in the )rou! financial state(ents e,ceeds (aterialit# for the )rou!
financial state(ents as a whole, co(!onent (aterialit# is set lower than (aterialit# for the )rou!
financial state(ents as a whole' =ifferent co(!onent (aterialit# (a# "e esta"lished for different
co(!onents' %o(!onent (aterialit# need not "e an arith(etical !ortion of the (aterialit# for the
)rou! financial state(ents as a whole and, conse*uentl#, the a))re)ate of co(!onent (aterialit#
for the different co(!onents (a# e,ceed the (aterialit# for the )rou! financial state(ents as a
whole' %o(!onent (aterialit# is used when esta"lishin) the overall audit strate)# for a
co(!onent'
A44' %o(!onent (aterialit# is deter(ined for those co(!onents whose financial infor(ation will "e
audited or reviewed as !art of the )rou! audit in accordance with !ara)ra!hs 4B, 47$a& and 45'
%o(!onent (aterialit# is used "# the co(!onent auditor to evaluate whether uncorrected detected
(isstate(ents are (aterial, individuall# or in the a))re)ate'
A45' A threshold for (isstate(ents is deter(ined in addition to co(!onent (aterialit#' Eisstate(ents
identified in the financial infor(ation of the co(!onent that are a"ove the threshold for
(isstate(ents are co((unicated to the )rou! en)a)e(ent tea('
A4B' In the case of an audit of the financial infor(ation of a co(!onent, the co(!onent auditor $or
)rou! en)a)e(ent tea(& deter(ines !erfor(ance (aterialit# at the co(!onent level' his is
necessar# to reduce to an a!!ro!riatel# low level the !ro"a"ilit# that the a))re)ate of uncorrected
and undetected (isstate(ents in the financial infor(ation of the co(!onent e,ceeds co(!onent
(aterialit#' In !ractice, the )rou! en)a)e(ent tea( (a# set co(!onent (aterialit# at this lower
level' Lhere this is the case, the co(!onent auditor uses co(!onent (aterialit# for !ur!oses of
assessin) the
ISA B00 B40
risks of (aterial (isstate(ent of the financial infor(ation of the co(!onent and to desi)n further
audit !rocedures in res!onse to assessed risks as well as for evaluatin) whether detected
(isstate(ents are (aterial individuall# or in the a))re)ate'
Repo"#i"( to Aee# Ri%
?eter$ining the 1ype of Dor. to =e (erfor$ed on the Financial Infor$ation of Co$ponents $Aef.
6ara' 4B-47&
A47' he )rou! en)a)e(ent tea(+s deter(ination of the t#!e of work to "e !erfor(ed on the financial
infor(ation of a co(!onent and its involve(ent in the work of the co(!onent auditor is affected
"#.
he dia)ra( shows how the si)nificance of the co(!onent affects the )rou! en)a)e(ent tea(+s
deter(ination of the t#!e of work to "e !erfor(ed on the financial infor(ation of the co(!onent'
B41 ISA B00
ISA B00 B44
Si)nificant %o(!onents $Aef. 6ara' 47$"&-$c&&
A48' he )rou! en)a)e(ent tea( (a# identif# a co(!onent as a si)nificant co(!onent "ecause that
co(!onent is likel# to include si)nificant risks of (aterial (isstate(ent of the )rou! financial
state(ents due to its s!ecific nature or circu(stances' In that case, the )rou! en)a)e(ent tea(
(a# "e a"le to identif# the account "alances, classes of transactions or disclosures affected "# the
likel# si)nificant risks' Lhere this is the case, the )rou! en)a)e(ent tea( (a# decide to !erfor(,
or re*uest a co(!onent auditor to !erfor(, an audit of onl# those account "alances, classes of
transactions or disclosures' For e,a(!le, in the situation descri"ed in !ara)ra!h AB, the work on
the financial infor(ation of the co(!onent (a# "e li(ited to an audit of the account "alances,
classes of transactions and disclosures affected "# the forei)n e,chan)e tradin) of that co(!onent'
Lhere the )rou! en)a)e(ent tea( re*uests a co(!onent auditor to !erfor( an audit of one or
(ore s!ecific account "alances, classes of transactions or disclosures, the co((unication of the
)rou! en)a)e(ent tea( $see !ara)ra!h 40& takes account of the fact that (an# financial state(ent
ite(s are interrelated'
A45' he )rou! en)a)e(ent tea( (a# desi)n audit !rocedures that res!ond to a likel# si)nificant risk
of (aterial (isstate(ent of the )rou! financial state(ents' For e,a(!le, in the case of a likel#
si)nificant risk of inventor# o"solescence, the )rou! en)a)e(ent tea( (a# !erfor(, or re*uest a
co(!onent auditor to !erfor(, s!ecified audit !rocedures on the valuation of inventor# at a
co(!onent that holds a lar)e volu(e of !otentiall# o"solete inventor#, "ut that is not otherwise
si)nificant'
%o(!onents that Are Not Si)nificant %o(!onents $Aef. 6ara' 48-45&
A50' =e!endin) on the circu(stances of the en)a)e(ent, the financial infor(ation of the co(!onents
(a# "e a))re)ated at various levels for !ur!oses of the anal#tical !rocedures' he results of the
anal#tical !rocedures corro"orate the )rou! en)a)e(ent tea(+s conclusions that there are no
si)nificant risks of (aterial (isstate(ent of the a))re)ated financial infor(ation of co(!onents
that are not si)nificant co(!onents'
A51' he )rou! en)a)e(ent tea(+s decision as to how (an# co(!onents to select in accordance with
!ara)ra!h 45, which co(!onents to select, and the t#!e of work to "e !erfor(ed on the financial
infor(ation of the individual co(!onents selected (a# "e affected "# factors such as the
followin).
% G he e,tent of audit evidence e,!ected to "e o"tained on the financial infor(ation of the
si)nificant co(!onents'
% G Lhether the co(!onent has "een newl# for(ed or ac*uired'
% G Lhether si)nificant chan)es have taken !lace in the co(!onent'
B49 ISA B00
% G Lhether internal audit has !erfor(ed work at the co(!onent and an# effect of that work
on the )rou! audit'
% G Lhether the co(!onents a!!l# co((on s#ste(s and !rocesses'
% G he o!eratin) effectiveness of )rou!-wide controls'
% G A"nor(al fluctuations identified "# anal#tical !rocedures !erfor(ed at )rou! level'
% G he individual financial si)nificance of, or the risk !osed "#, the co(!onent in
co(!arison with other co(!onents within this cate)or#'
% G Lhether the co(!onent is su";ect to audit re*uired "# statute, re)ulation or for another
reason'
Includin) an ele(ent of un!redicta"ilit# in selectin) co(!onents in this cate)or# (a# increase the
likelihood of identif#in) (aterial (isstate(ent of the co(!onents+ financial infor(ation' he
selection of co(!onents is often varied on a c#clical "asis'
A54' A review of the financial infor(ation of a co(!onent (a# "e !erfor(ed in accordance with
International Standard on Aeview 0n)a)e(ents $ISA0& 4400
44
or ISA0 4410,
49
ada!ted as
necessar# in the circu(stances' he )rou! en)a)e(ent tea( (a# also s!ecif# additional
!rocedures to su!!le(ent this work'
A59' As e,!lained in !ara)ra!h A19, a )rou! (a# consist onl# of co(!onents that are not si)nificant
co(!onents' In these circu(stances, the )rou! en)a)e(ent tea( can o"tain sufficient a!!ro!riate
audit evidence on which to "ase the )rou! audit o!inion "# deter(inin) the t#!e of work to "e
!erfor(ed on the financial infor(ation of the co(!onents in accordance with !ara)ra!h 45' It is
unlikel# that the )rou! en)a)e(ent tea( will o"tain sufficient a!!ro!riate audit evidence on
which to "ase the )rou! audit o!inion if the )rou! en)a)e(ent tea(, or a co(!onent auditor, onl#
tests )rou!-wide controls and !erfor(s anal#tical !rocedures on the financial infor(ation of the
co(!onents'
In!ol!e$ent in the Dor. (erfor$ed by Co$ponent Auditors $Aef. 6ara' 90-91&
A54' Factors that (a# affect the )rou! en)a)e(ent tea(+s involve(ent in the work of the co(!onent
auditor include.
$a& he si)nificance of the co(!onent?
44
ISA0 4400, C0n)a)e(ents to Aeview Financial State(ents'D
49
ISA0 4410, CAeview of Interi( Financial Infor(ation 6erfor(ed "# the Inde!endent Auditor of the 0ntit#'D
ISA B00 B44
1. $"& he identified si)nificant risks of (aterial (isstate(ent of the )rou!
2. financial state(ents? and
2$c& he )rou! en)a)e(ent tea(+s understandin) of the co(!onent auditor'
In the case of a si)nificant co(!onent or identified si)nificant risks, the )rou! en)a)e(ent tea(
!erfor(s the !rocedures descri"ed in !ara)ra!hs 90-91' In the case of a co(!onent that is not a
si)nificant co(!onent, the nature, ti(in) and e,tent of the )rou! en)a)e(ent tea(+s involve(ent in
the work of the co(!onent auditor will var# "ased on the )rou! en)a)e(ent tea(+s understandin)
of that co(!onent auditor' he fact that the co(!onent is not a si)nificant co(!onent "eco(es
secondar#' For e,a(!le, even thou)h a co(!onent is not considered a si)nificant co(!onent, the
)rou! en)a)e(ent tea( nevertheless (a# decide to "e involved in the co(!onent auditor+s risk
assess(ent, "ecause it has less than serious concerns a"out the co(!onent auditor+s !rofessional
co(!etenc# $for e,a(!le, lack of industr# s!ecific knowled)e&, or the co(!onent auditor does not
o!erate in an environ(ent that activel# oversees auditors'
A55' For(s of involve(ent in the work of a co(!onent auditor other than those descri"ed in !ara)ra!hs
90-91 and 44 (a#, "ased on the )rou! en)a)e(ent tea(+s understandin) of the co(!onent auditor,
include one or (ore of the followin).
1$a&Eeetin) with co(!onent (ana)e(ent or the co(!onent auditors to o"tain an understandin) of the
co(!onent and its environ(ent'
2$"& Aeviewin) the co(!onent auditors+ overall audit strate)# and audit !lan'
3$c&6erfor(in) risk assess(ent !rocedures to identif# and assess the risks of (aterial (isstate(ent at
the co(!onent level' hese (a# "e !erfor(ed with the co(!onent auditors, or "# the )rou!
en)a)e(ent tea('
4$d& =esi)nin) and !erfor(in) further audit !rocedures' hese (a# "e desi)ned and !erfor(ed with
the co(!onent auditors, or "# the )rou! en)a)e(ent tea('
5$e&6artici!atin) in the closin) and other ke# (eetin)s "etween the co(!onent auditors and
co(!onent (ana)e(ent'
6$f& Aeviewin) other relevant !arts of the co(!onent auditors+ audit docu(entation'
B45 ISA B00
Co"o0i#!tio" *'oce
Consolidation Ad9ust$ents and +eclassifications $Aef. 6ara' 94&
A5B' he consolidation !rocess (a# re*uire ad;ust(ents to a(ounts re!orted in the )rou! financial
state(ents that do not !ass throu)h the usual transaction !rocessin) s#ste(s, and (a# not "e
su";ect to the sa(e internal controls to which other financial infor(ation is su";ect' he )rou!
en)a)e(ent tea(+s evaluation of the a!!ro!riateness, co(!leteness and accurac# of the
ad;ust(ents (a# include.
1. G 0valuatin) whether si)nificant ad;ust(ents a!!ro!riatel# reflect the events and
transactions underl#in) the(?
2. G =eter(inin) whether si)nificant ad;ust(ents have "een correctl# calculated, !rocessed
and authoriJed "# )rou! (ana)e(ent and, where a!!lica"le, "# co(!onent (ana)e(ent?
3. G =eter(inin) whether si)nificant ad;ust(ents are !ro!erl# su!!orted and sufficientl#
docu(ented? and
4. G %heckin) the reconciliation and eli(ination of intra-)rou! transactions and unrealiJed
!rofits, and intra-)rou! account "alances'
Co..-"ic!tio" &ith the Co.po"e"t A-#ito' $Aef. 6ara' 40-41&
A57' If effective two-wa# co((unication "etween the )rou! en)a)e(ent tea( and the co(!onent
auditors does not e,ist, there is a risk that the )rou! en)a)e(ent tea( (a# not o"tain sufficient
a!!ro!riate audit evidence on which to "ase the )rou! audit o!inion' %lear and ti(el#
co((unication of the )rou! en)a)e(ent tea(+s re*uire(ents for(s the "asis of effective two-
wa# co((unication "etween the )rou! en)a)e(ent tea( and the co(!onent auditor'
A58' he )rou! en)a)e(ent tea(+s re*uire(ents are often co((unicated in a letter of instruction'
A!!endi, 5 contains )uidance on re*uired and additional (atters that (a# "e included in such a
letter of instruction' he co(!onent auditor+s co((unication with the )rou! en)a)e(ent tea(
often takes the for( of a (e(orandu( or re!ort of work !erfor(ed' %o((unication "etween the
)rou! en)a)e(ent tea( and the co(!onent auditor, however, (a# not necessaril# "e in writin)'
For e,a(!le, the )rou! en)a)e(ent tea( (a# visit the co(!onent auditor to discuss identified
si)nificant risks or review relevant !arts of the co(!onent auditor+s audit docu(entation'
Nevertheless, the docu(entation re*uire(ents of this and other ISAs a!!l#'
A55' In coo!eratin) with the )rou! en)a)e(ent tea(, the co(!onent auditor, for e,a(!le, would
!rovide the )rou! en)a)e(ent tea( with access to relevant audit docu(entation if not !rohi"ited
"# law or re)ulation'
AB0' Lhere a (e("er of the )rou! en)a)e(ent tea( is also a co(!onent auditor, the o";ective for the
)rou! en)a)e(ent tea( to co((unicate clearl# with the
ISA B00 B4B
co(!onent auditor can often "e achieved "# (eans other than s!ecific written co((unication' For
e,a(!le.
% G Access "# the co(!onent auditor to the overall audit strate)# and audit !lan (a# "e
sufficient to co((unicate the )rou! en)a)e(ent tea(+s re*uire(ents set out in !ara)ra!h 40? and
% G A review of the co(!onent auditor+s audit docu(entation "# the )rou! en)a)e(ent tea(
(a# "e sufficient to co((unicate (atters relevant to the )rou! en)a)e(ent tea(+s conclusion set
out in !ara)ra!h 41'
E9!0-!ti"( the S-fficie"c/ !"# App'op'i!te"e of A-#it E9i#e"ce O$t!i"e#
+e!ie#ing the Co$ponent Auditor8s Audit ?ocu$entation $Aef. 6ara' 44$"&&
AB1' Lhat !arts of the audit docu(entation of the co(!onent auditor will "e relevant to the )rou! audit
(a# var# de!endin) on the circu(stances' 7ften the focus is on audit docu(entation that is
relevant to the si)nificant risks of (aterial (isstate(ent of the )rou! financial state(ents' he
e,tent of the review (a# "e affected "# the fact that the co(!onent auditor+s audit docu(entation
has "een su";ected to the co(!onent auditor+s fir(+s review !rocedures'
)ufficiency and Appropriateness of Audit /!idence $Aef. 6ara' 44-45&
AB4' If the )rou! en)a)e(ent tea( concludes that sufficient a!!ro!riate audit evidence on which to
"ase the )rou! audit o!inion has not "een o"tained, the )rou! en)a)e(ent tea( (a# re*uest the
co(!onent auditor to !erfor( additional !rocedures' If this is not feasi"le, the )rou! en)a)e(ent
tea( (a# !erfor( its own !rocedures on the financial infor(ation of the co(!onent'
AB9' he )rou! en)a)e(ent !artner+s evaluation of the a))re)ate effect of an# (isstate(ents $either
identified "# the )rou! en)a)e(ent tea( or co((unicated "# co(!onent auditors& allows the
)rou! en)a)e(ent !artner to deter(ine whether the )rou! financial state(ents as a whole are
(ateriall# (isstated'
Co..-"ic!tio" &ith G'o-p )!"!(e.e"t !"# Thoe Ch!'(e# &ith Go9e'"!"ce of the G'o-p
Co$$unication #ith 2roup <anage$ent $Aef. 6ara' 4B-48&
AB4' ISA 440 contains re*uire(ents and )uidance on co((unication of fraud to (ana)e(ent and,
where (ana)e(ent (a# "e involved in the fraud, to those char)ed with )overnance'
44
AB5' <rou! (ana)e(ent (a# need to kee! certain (aterial sensitive infor(ation confidential'
0,a(!les of (atters that (a# "e si)nificant to the financial
ISA 440, !ara)ra!hs 40-44'
B47 ISA B00
state(ents of the co(!onent of which co(!onent (ana)e(ent (a# "e unaware include the
followin).
% G 6otential liti)ation'
% G 6lans for a"andon(ent of (aterial o!eratin) assets'
% G Su"se*uent events'
% G Si)nificant le)al a)ree(ents'
Co$$unication #ith 1hose Charged #ith 2o!ernance of the 2roup $Aef. 6ara' 45&
ABB' he (atters the )rou! en)a)e(ent tea( co((unicates to those char)ed with )overnance of the
)rou! (a# include those "rou)ht to the attention of the )rou! en)a)e(ent tea( "# co(!onent
auditors that the )rou! en)a)e(ent tea( ;ud)es to "e si)nificant to the res!onsi"ilities of those
char)ed with )overnance of the )rou!' %o((unication with those char)ed with )overnance of the
)rou! takes !lace at various ti(es durin) the )rou! audit' For e,a(!le, the (atters referred to in
!ara)ra!h 45$a&-$"& (a# "e co((unicated after the )rou! en)a)e(ent tea( has deter(ined the
work to "e !erfor(ed on the financial infor(ation of the co(!onents' 7n the other hand, the
(atter referred to in !ara)ra!h 45$c& (a# "e co((unicated at the end of the audit, and the (atters
referred to in !ara)ra!h 45$d&-$e& (a# "e co((unicated when the# occur'
ISA B00 B48
Appe"#i5 7
$Aef. 6ara' A15&
E5!.p0e of ! Q-!0ifie# Opi"io" =he'e the G'o-p E"(!(e.e"t Te!. I Not A$0e to
O$t!i" S-fficie"t App'op'i!te A-#it E9i#e"ce o" =hich to B!e the G'o-p A-#it
Opi"io"
In this e,a(!le, the )rou! en)a)e(ent tea( is una"le to o"tain sufficient a!!ro!riate audit evidence
relatin) to a si)nificant co(!onent accounted for "# the e*uit# (ethod $reco)niJed at Z15 (illion in the
"alance sheet, which reflects total assets of ZB0 (illion& "ecause the )rou! en)a)e(ent tea( did not have
access to the accountin) records, (ana)e(ent, or auditor of the co(!onent'
he )rou! en)a)e(ent tea( has read the audited financial state(ents of the co(!onent as of =ece("er 91,
40I1, includin) the auditor+s re!ort thereon, and considered related financial infor(ation ke!t "# )rou!
(ana)e(ent in relation to the co(!onent'
In the )rou! en)a)e(ent !artner+s ;ud)(ent, the effect on the )rou! financial state(ents of this ina"ilit# to
o"tain sufficient a!!ro!riate audit evidence is (aterial "ut not !ervasive'
Repo't o" the Co"o0i#!te# Fi"!"ci!0 St!te.e"t
45
Le have audited the acco(!an#in) consolidated financial state(ents of A1% %o(!an# and
its su"sidiaries, which co(!rise the consolidated "alance sheet as at =ece("er 91, 40I1,
and the consolidated inco(e state(ent, state(ent of chan)es in e*uit# and cash flow
state(ent for the #ear then ended, and a su((ar# of si)nificant accountin) !olicies and
other e,!lanator# infor(ation'
<anage$ent8s
4B
+esponsibility for the Consolidated Financial
)tate$ents
Eana)e(ent is res!onsi"le for the !re!aration and fair !resentation of these consolidated
financial state(ents in accordance with International Financial Ae!ortin) Standards,
47
and
for such internal control as
45
he su"-title, CAe!ort on the %onsolidated Financial State(entsD is unnecessar# in circu(stances when
the second su"-title, CAe!ort on 7ther Me)al and Ae)ulator# Ae*uire(entsD is not a!!lica"le' 4B
47
Lhere (ana)e(ent+s res!onsi"ilit# is to !re!are consolidated financial state(ents that )ive a true and fair view, this (a# read.
CEana)e(ent is res!onsi"le for the !re!aration of consolidated financial
B45 ISA B00 A660N=II
(ana)e(ent deter(ines is necessar# to ena"le the !re!aration of consolidated financial state(ents that are
free fro( (aterial (isstate(ent, whether due to fraud or error'
7ur res!onsi"ilit# is to e,!ress an o!inion on these consolidated financial state(ents "ased on our audit'
Le conducted our audit in accordance with International Standards on Auditin)' hose standards re*uire
that we co(!l# with ethical re*uire(ents and !lan and !erfor( the audit to o"tain reasona"le assurance
a"out whether the consolidated financial state(ents are free fro( (aterial (isstate(ent'
consolidated financial state(ents' he !rocedures selected de!end on the auditor+s ;ud)(ent, includin) the
assess(ent of the risks of (aterial (isstate(ent of the consolidated financial state(ents, whether due to
fraud or error' In (akin) those risk assess(ents, the auditor considers internal control relevant to the
entit#+s !re!aration and fair !resentation
48
of the consolidated financial state(ents in order to desi)n audit
!rocedures that are a!!ro!riate in the circu(stances, "ut not for the !ur!ose of e,!ressin) an o!inion on
the effectiveness of the entit#+s internal control'
45
An audit also includes evaluatin) the a!!ro!riateness of
accountin) !olicies used and the reasona"leness of accountin) esti(ates (ade "# (ana)e(ent, as well as
evaluatin) the overall !resentation of the consolidated financial state(ents'
state(ents that )ive a true and fair view in accordance with International Financial Ae!ortin) Standards,
and for such '''D 48
internal control relevant to the entit#+s !re!aration of consolidated financial state(ents that )ive a true
and fair view in order to desi)n audit !rocedures that are a!!ro!riate in the circu(stances, "ut not for the
con;unction with the audit of the consolidated financial state(ents, this sentence would "e worded as follows. CIn (akin) those
risk assess(ents, the auditor considers internal control relevant to the entit#+s !re!aration and fair !resentation of the
consolidated financial state(ents in order to desi)n audit !rocedures that are a!!ro!riate in the circu(stances'D In the case of
footnote 47, this (a# read. CIn (akin) those risk assess(ents, the auditor considers internal control relevant to the entit#+s
!re!aration of consolidated financial state(ents that )ive a true and fair view in order to desi)n audit !rocedures that are
a!!ro!riate in the circu(stances'D
ISA B00 A660N=II B90
A1% %o(!an#+s invest(ent in IYW %o(!an#, a forei)n associate ac*uired durin) the #ear
and accounted for "# the e*uit# (ethod, is carried at Z15 (illion on the consolidated
"alance sheet as at =ece("er 91, 40I1, and A1%+s share of IYW+s net inco(e of Z1
(illion is included in the consolidated inco(e state(ent for the #ear then ended' Le were
una"le to o"tain sufficient a!!ro!riate audit evidence a"out the carr#in) a(ount of A1%+s
invest(ent in IYW as at =ece("er 91, 40I1 and A1%+s share of IYW+s net inco(e for the
#ear "ecause we were denied access to the financial infor(ation, (ana)e(ent, and the
auditors of IYW' %onse*uentl#, we were una"le to deter(ine whether an# ad;ust(ents to
these a(ounts were necessar#'
*ualified ,pinion
In our o!inion, e,ce!t for the !ossi"le effects of the (atter descri"ed in the 1asis for
:ualified 7!inion !ara)ra!h, the consolidated financial state(ents !resent fairl#, in all
(aterial res!ects, $or gi!e a true and fair !ie# of& the financial !osition of A1% %o(!an#
and its su"sidiaries as at =ece("er 91, 40I1, and $of& their financial !erfor(ance and cash
flows for the #ear then ended in accordance with International Financial Ae!ortin)
Standards'
UFor( and content of this section of the auditor+s re!ort will var# de!endin) on the nature
of the auditor+s other re!ortin) res!onsi"ilities'V
UAuditor+s addressV
If, in the )rou! en)a)e(ent !artner+s ;ud)(ent, the effect on the )rou! financial state(ents of the ina"ilit#
to o"tain sufficient a!!ro!riate audit evidence is (aterial and !ervasive, the )rou! en)a)e(ent !artner
would disclai( an o!inion in accordance with ISA 705'
Appe"#i5 2
$Aef. 6ara' A49&
E5!.p0e of )!tte' !$o-t =hich the G'o-p E"(!(e.e"t Te!. O$t!i" !"
U"#e't!"#i"(
he e,a(!les !rovided cover a "road ran)e of (atters? however, not all (atters are relevant to ever# )rou!
audit en)a)e(ent and the list of e,a(!les is not necessaril# co(!lete'
<rou!-Lide %ontrols
1' <rou!-wide controls (a# include a co("ination of the followin).
% G Ae)ular (eetin)s "etween )rou! and co(!onent (ana)e(ent to discuss "usiness
develo!(ents and to review !erfor(ance'
% G Eonitorin) of co(!onents+ o!erations and their financial results, includin) re)ular
re!ortin) routines, which ena"les )rou! (ana)e(ent to (onitor co(!onents+ !erfor(ance a)ainst
"ud)ets, and to take a!!ro!riate action'
% G <rou! (ana)e(ent+s risk assess(ent !rocess, that is, the !rocess for identif#in),
anal#Jin) and (ana)in) "usiness risks, includin) the risk of fraud, that (a# result in (aterial
(isstate(ent of the )rou! financial state(ents'
% G Eonitorin), controllin), reconcilin), and eli(inatin) intra-)rou! transactions and
unrealiJed !rofits, and intra-)rou! account "alances at )rou! level'
% G A !rocess for (onitorin) the ti(eliness and assessin) the accurac# and co(!leteness of
financial infor(ation received fro( co(!onents'
% G A central I s#ste( controlled "# the sa(e )eneral I controls for all or !art of the )rou!'
% G %ontrol activities within an I s#ste( that is co((on for all or so(e co(!onents'
% G Eonitorin) of controls, includin) activities of internal audit and self-assess(ent
!ro)ra(s'
% G %onsistent !olicies and !rocedures, includin) a )rou! financial re!ortin) !rocedures
(anual'
% G <rou!-wide !ro)ra(s, such as codes of conduct and fraud !revention !ro)ra(s'
G Arran)e(ents for assi)nin) authorit# and res!onsi"ilit# to co(!onent (ana)e(ent'
4' Internal audit (a# "e re)arded as !art of )rou!-wide controls, for e,a(!le, when the internal audit
function is centraliJed' ISA B10
90
deals with the )rou! en)a)e(ent tea(+s evaluation of the
co(!etence and o";ectivit# of the internal auditors where it !lans to use their work'
%onsolidation 6rocess
9' he )rou! en)a)e(ent tea(+s understandin) of the consolidation !rocess (a# include (atters
such as the followin).
Eatters relatin) to the a!!lica"le financial re!ortin) fra(ework.
% G he e,tent to which co(!onent (ana)e(ent has an understandin) of the a!!lica"le
% G he !rocess for identif#in) and accountin) for co(!onents in accordance with the
% G he !rocess for identif#in) re!orta"le se)(ents for se)(ent re!ortin) in accordance with
the a!!lica"le financial re!ortin) fra(ework'
% G he !rocess for identif#in) related !art# relationshi!s and related !art# transactions for
re!ortin) in accordance with the a!!lica"le financial re!ortin) fra(ework'
% G he accountin) !olicies a!!lied to the )rou! financial state(ents, chan)es fro( those of
the !revious financial #ear, and chan)es resultin) fro( new or revised standards under the
1. G he !rocedures for dealin) with co(!onents with financial #ear-ends different fro( the
)rou!+s #ear-end'
2. Eatters relatin) to the consolidation !rocess.
% G <rou! (ana)e(ent+s !rocess for o"tainin) an understandin) of the accountin) !olicies
used "# co(!onents, and, where a!!lica"le, ensurin) that unifor( accountin) !olicies are used to
!re!are the financial infor(ation of the co(!onents for the )rou! financial state(ents, and that
differences in accountin) !olicies are identified, and ad;usted where re*uired in ter(s of the
a!!lica"le financial re!ortin) fra(ework' Unifor( accountin) !olicies are the s!ecific !rinci!les,
"ases, conventions, rules, and !ractices ado!ted "# the )rou!, "ased on the a!!lica"le financial
re!ortin) fra(ework, that the
ISA B10, CUsin) the Lork of Internal Auditors,D !ara)ra!h 5'
co(!onents use to re!ort si(ilar transactions consistentl#' hese !olicies are ordinaril# descri"ed in
the financial re!ortin) !rocedures (anual and re!ortin) !acka)e issued "# )rou! (ana)e(ent'
% G <rou! (ana)e(ent+s !rocess for ensurin) co(!lete, accurate and ti(el# financial
re!ortin) "# the co(!onents for the consolidation'
% G he !rocess for translatin) the financial infor(ation of forei)n co(!onents into the
currenc# of the )rou! financial state(ents'
% G @ow I is or)aniJed for the consolidation, includin) the (anual and auto(ated sta)es of
the !rocess, and the (anual and !ro)ra((ed controls in !lace at various sta)es of the
consolidation !rocess'
1. G <rou! (ana)e(ent+s !rocess for o"tainin) infor(ation on su"se*uent events'
2. Eatters relatin) to consolidation ad;ust(ents.
% G he !rocess for recordin) consolidation ad;ust(ents, includin) the !re!aration,
authoriJation and !rocessin) of related ;ournal entries, and the e,!erience of !ersonnel res!onsi"le
for the consolidation'
% G he consolidation ad;ust(ents re*uired "# the a!!lica"le financial re!ortin) fra(ework'
% G 1usiness rationale for the events and transactions that )ave rise to the consolidation
ad;ust(ents'
% G Fre*uenc#, nature and siJe of transactions "etween co(!onents'
% G 6rocedures for (onitorin), controllin), reconcilin) and eli(inatin) intra-)rou!
transactions and unrealiJed !rofits, and intra-)rou! account "alances'
% G Ste!s taken to arrive at the fair value of ac*uired assets and lia"ilities, !rocedures for
a(ortiJin) )oodwill $where a!!lica"le&, and i(!air(ent testin) of )oodwill, in accordance with
% G Arran)e(ents with a (a;orit# owner or (inorit# interests re)ardin) losses incurred "# a
co(!onent $for e,a(!le, an o"li)ation of the (inorit# interest to (ake )ood such losses&'
Appe"#i5 3
$Aef. 6ara' A90&
E5!.p0e of Co"#itio" o' E9e"t th!t )!/ I"#ic!te Ri% of )!te'i!0
)it!te.e"t of the G'o-p Fi"!"ci!0 St!te.e"t
he e,a(!les !rovided cover a "road ran)e of conditions or events? however, not all conditions or events
are relevant to ever# )rou! audit en)a)e(ent and the list of e,a(!les is not necessaril# co(!lete'
1. G A co(!le, )rou! structure, es!eciall# where there are fre*uent ac*uisitions, dis!osals or
reor)aniJations'
2. G 6oor cor!orate )overnance structures, includin) decision-(akin) !rocesses, that are not
trans!arent'
3. G Non-e,istent or ineffective )rou!-wide controls, includin) inade*uate )rou! (ana)e(ent
infor(ation on (onitorin) of co(!onents+ o!erations and their results'
4. G %o(!onents o!eratin) in forei)n ;urisdictions that (a# "e e,!osed to factors such as
unusual )overn(ent intervention in areas such as trade and fiscal !olic#, and restrictions on
currenc# and dividend (ove(ents? and fluctuations in e,chan)e rates'
5. G 1usiness activities of co(!onents that involve hi)h risk, such as lon)-ter( contracts or
tradin) in innovative or co(!le, financial instru(ents'
6. G Uncertainties re)ardin) which co(!onents+ financial infor(ation re*uire incor!oration in
the )rou! financial state(ents in accordance with the a!!lica"le financial re!ortin) fra(ework,
for e,a(!le, whether an# s!ecial-!ur!ose entities or non-tradin) entities e,ist and re*uire
incor!oration'
7. G Unusual related !art# relationshi!s and transactions'
8. G 6rior occurrences of intra-)rou! account "alances that did not "alance or reconcile on
consolidation'
9. G he e,istence of co(!le, transactions that are accounted for in (ore than one
co(!onent'
10. G %o(!onents+ a!!lication of accountin) !olicies that differ fro( those a!!lied to the
)rou! financial state(ents'
11. G %o(!onents with different financial #ear-ends, which (a# "e utiliJed to (ani!ulate the
ti(in) of transactions'
12. G 6rior occurrences of unauthoriJed or inco(!lete consolidation ad;ust(ents'
% G A))ressive ta, !lannin) within the )rou!, or lar)e cash transactions with entities in ta,
havens'
% G Fre*uent chan)es of auditors en)a)ed to audit the financial state(ents of co(!onents'
ISA B00 A660N=II B9B
Appe"#i5 6
$Aef. 6ara' A95&
E5!.p0e of ! Co.po"e"t A-#ito'> Co"fi'.!tio"
he followin) is not intended to "e a standard letter' %onfir(ations (a# var# fro( one co(!onent auditor
to another and fro( one !eriod to the ne,t'
%onfir(ations often are o"tained "efore work on the financial infor(ation of the co(!onent co((ences'
U%o(!onent Auditor MetterheadV
U=ateV
Uo <rou! 0n)a)e(ent 6artnerV
his letter is !rovided in connection with #our audit of the )rou! financial state(ents of Una(e of !arentV
for the #ear ended UdateV for the !ur!ose of e,!ressin) an o!inion on whether the )rou! financial
state(ents !resent fairl#, in all (aterial res!ects $)ive a true and fair view of& the financial !osition of the
)rou! as of UdateV and of its financial !erfor(ance and cash flows for the #ear then ended in accordance
with Uindicate a!!lica"le financial re!ortin) fra(eworkV'
Le acknowled)e recei!t of #our instructions dated UdateV, re*uestin) us to !erfor( the s!ecified work on
the financial infor(ation of Una(e of co(!onentV for the #ear ended UdateV'
Le confir( that.
1. 1' Le will "e a"le to co(!l# with the instructions' / Le advise #ou that we will not "e a"le
to co(!l# with the followin) instructions Us!ecif# instructionsV for the followin) reasons Us!ecif#
reasonsV'
2. 4' he instructions are clear and we understand the(' / Le would a!!reciate it if #ou could
clarif# the followin) instructions Us!ecif# instructionsV'
3. 9' Le will coo!erate with #ou and !rovide #ou with access to relevant audit docu(entation'
Le acknowled)e that.
1. 1' he financial infor(ation of Una(e of co(!onentV will "e included in the )rou! financial
state(ents of Una(e of !arentV'
2. 4' You (a# consider it necessar# to "e involved in the work #ou have re*uested us to
!erfor( on the financial infor(ation of Una(e of co(!onentV for the #ear ended UdateV'
9' You intend to evaluate and, if considered a!!ro!riate, use our work for the audit of the )rou!
financial state(ents of Una(e of !arentV'
In connection with the work that we will !erfor( on the financial infor(ation of Una(e of co(!onentV, a
Udescri"e co(!onent, for e,a(!le, wholl#-owned su"sidiar#, su"sidiar#, ;oint venture, investee accounted
for "# the e*uit# or cost (ethods of accountin)V of Una(e of !arentV, we confir( the followin).
1. 1' Le have an understandin) of Uindicate relevant ethical re*uire(entsV that is sufficient to
fulfill our res!onsi"ilities in the audit of the )rou! financial state(ents, and will co(!l# therewith'
In !articular, and with res!ect to Una(e of !arentV and the other co(!onents in the )rou!, we are
inde!endent within the (eanin) of Uindicate relevant ethical re*uire(entsV and co(!l# with the
a!!lica"le re*uire(ents of Urefer to rulesV !ro(ul)ated "# Una(e of re)ulator# a)enc#V'
2. 4' Le have an understandin) of International Standards on Auditin) and Uindicate other
national standards a!!lica"le to the audit of the )rou! financial state(entsV that is sufficient to
fulfill our res!onsi"ilities in the audit of the )rou! financial state(ents and will conduct our work
on the financial infor(ation of Una(e of co(!onentV for the #ear ended UdateV in accordance with
those standards'
3. 9' Le !ossess the s!ecial skills $for e,a(!le, industr# s!ecific knowled)e& necessar# to
!erfor( the work on the financial infor(ation of the !articular co(!onent'
4. 4' Le have an understandin) of Uindicate a!!lica"le financial re!ortin) fra(ework or )rou!
financial re!ortin) !rocedures (anualV that is sufficient to fulfill our res!onsi"ilities in the audit of
the )rou! financial state(ents'
Le will infor( #ou of an# chan)es in the a"ove re!resentations durin) the course of our
work on the financial infor(ation of Una(e of co(!onentV'
U=ateV
UAuditor+s addressV
Appe"#i5 @
$Aef. 6ara' A58&
Re2-i'e# !"# A##itio"!0 )!tte' I"c0-#e# i" the G'o-p E"(!(e.e"t
Te!.> Lette' of I"t'-ctio"
Matters re"uired b this I#A to be co$$unicated to the co$ponent auditor are sho%n in italici&ed te't(
Eatters that are relevant to the !lannin) of the work of the co(!onent auditor.
1. G A re>uest for the co$ponent auditor& .no#ing the conte4t in #hich the group engage$ent
tea$ #ill use the #or. of the co$ponent auditor& to confir$ that the co$ponent auditor #ill
cooperate #ith the group engage$ent tea$'
2. G he ti(eta"le for co(!letin) the audit'
3. G =ates of !lanned visits "# )rou! (ana)e(ent and the )rou! en)a)e(ent tea(, and dates
of !lanned (eetin)s with co(!onent (ana)e(ent and the co(!onent auditor'
4. G A list of ke# contacts'
5. G 1he #or. to be perfor$ed by the co$ponent auditor& the use to be $ade of that #or., and
arran)e(ents for coordinatin) efforts at the initial sta)e of and durin) the audit, includin) the
)rou! en)a)e(ent tea(+s !lanned involve(ent in the work of the co(!onent auditor'
6. G 1he ethical re>uire$ents that are rele!ant to the group audit and& in particular& the
independence re>uire$ents
7. G In the case of an audit or re!ie# of the financial infor$ation of the co$ponent&
co$ponent $ateriality (and& if applicable& the $ateriality le!el or le!els for particular classes of
transactions& account balances or disclosures)& and the threshold abo!e #hich $isstate$ents
cannot be regarded as clearly tri!ial to the group financial state$ents
8. G A list of related parties prepared by group $anage$ent& and any other related parties
that the group engage$ent tea$ is a#are of& and a re>uest that the co$ponent auditor
co$$unicates on a ti$ely basis to the group engage$ent tea$ related parties not pre!iously
identified by group $anage$ent or the group engage$ent tea$
9. G Lork to "e !erfor(ed on intra-)rou! transactions and unrealiJed !rofits and intra-)rou!
account "alances'
10. G <uidance on other statutor# re!ortin) res!onsi"ilities, for e,a(!le, re!ortin) on )rou!
(ana)e(ent+s assertion on the effectiveness of internal control'
1G Lhere ti(e la) "etween co(!letion of the work on the financial infor(ation of the
co(!onents and the )rou! en)a)e(ent tea(+s conclusion on the )rou! financial state(ents is
likel#, s!ecific instructions for a su"se*uent events review'
2Eatters that are relevant to the conduct of the work of the co(!onent auditor.
% G he findin)s of the )rou! en)a)e(ent tea(+s tests of control activities of a !rocessin)
s#ste( that is co((on for all or so(e co(!onents, and tests of controls to "e !erfor(ed "# the
co(!onent auditor'
% G Identified significant ris.s of $aterial $isstate$ent of the group financial state$ents& due
to fraud or error& that are rele!ant to the #or. of the co$ponent auditor& and a re>uest that the
co$ponent auditor co$$unicates on a ti$ely basis any other significant ris.s of $aterial
$isstate$ent of the group financial state$ents& due to fraud or error& identified in the co$ponent
and the co$ponent auditor8s response to such ris.s
% G he findin)s of internal audit, "ased on work !erfor(ed on controls at or relevant to
co(!onents'
% G A re*uest for ti(el# co((unication of audit evidence o"tained fro( !erfor(in) work on
the financial infor(ation of the co(!onents that contradicts the audit evidence on which the )rou!
en)a)e(ent tea( ori)inall# "ased the risk assess(ent !erfor(ed at )rou! level'
% G A re*uest for a written re!resentation on co(!onent (ana)e(ent+s co(!liance with the
a!!lica"le financial re!ortin) fra(ework, or a state(ent that differences "etween the accountin)
!olicies a!!lied to the financial infor(ation of the co(!onent and those a!!lied to the )rou!
financial state(ents have "een disclosed'
1G Eatters to "e docu(ented "# the co(!onent auditor'
27ther infor(ation
3G A re*uest that the followin) "e re!orted to the )rou! en)a)e(ent tea( on a ti(el# "asis.
a. o Si)nificant accountin), financial re!ortin) and auditin) (atters, includin)
accountin) esti(ates and related ;ud)(ents'
b. o Eatters relatin) to the )oin) concern status of the co(!onent'
c. o Eatters relatin) to liti)ation and clai(s'
d. o Si)nificant deficiencies in internal control that the co(!onent auditor has
identified durin) the !erfor(ance of the work on the financial infor(ation of the
co(!onent, and infor(ation that indicates the e,istence of fraud'
% G A re*uest that the )rou! en)a)e(ent tea( "e notified of an# si)nificant or unusual events
as earl# as !ossi"le'
G A re>uest that the $atters listed in paragraph C6 be co$$unicated to the group engage$ent tea$
#hen the #or. on the financial infor$ation of the co$ponent is co$pleted
INTERNATIONAL STANDARD ON AUDITING A70 USING THE =ORK OF
INTERNAL AUDITORS
CONTENTS
6ara)ra!h
I"t'o#-ctio"
Sco!e of this ISA ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1T4 Aelationshi! "etween the
Internal Audit Function and the 0,ternal
Auditor '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 9T4 0ffective
=ate '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5 O$1ecti9e
''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' B Defi"itio"
''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 7 Re2-i'e.e"t =eter(inin) Lhether and
to Lhat 0,tent to Use the Lork of the Internal
Auditors ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 8T10
Usin) S!ecific Lork of the Internal Auditors ''''''''''''''''''''''''''''''''''''''''''''''' 11T14
=ocu(entation ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 19
Sco!e of this ISA ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1TA4 7";ectives of the
Internal Audit Function '''''''''''''''''''''''''''''''''''''''''''''''''''''' A9 =eter(inin) Lhether and to Lhat 0,tent to
Use the Lork of the Internal
Auditors '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A4TA5
Usin) S!ecific Lork of the Internal Auditors ''''''''''''''''''''''''''''''''''''''''''''''' AB
International Standard on Auditin) $ISA& B10, CUsin) the Lork of Internal AuditorsD should "e read in
con;unction with ISA 400, C7verall 7";ectives of the Inde!endent Auditor and the %onduct of an Audit in
ISA B10 B44
1. 1' his International Standard on Auditin) $ISA& deals with the e,ternal auditor+s
res!onsi"ilities relatin) to the work of internal auditors when the e,ternal auditor has deter(ined,
in accordance with ISA 915,
1
that the internal audit function is likel# to "e relevant to the audit'
$Aef. 6ara' A1-A4&
2. 4' his ISA does not deal with instances when individual internal auditors !rovide direct
assistance to the e,ternal auditor in carr#in) out audit !rocedures'
Re0!tio"hip $et&ee" the I"te'"!0 A-#it F-"ctio" !"# the E5te'"!0 A-#ito'
1. 9' he o";ectives of the internal audit function are deter(ined "# (ana)e(ent and, where
a!!lica"le, those char)ed with )overnance' Lhile the o";ectives of the internal audit function and
the e,ternal auditor are different, so(e of the wa#s in which the internal audit function and the
e,ternal auditor achieve their res!ective o";ectives (a# "e si(ilar' $Aef. 6ara' A9&
2. 4' Irres!ective of the de)ree of autono(# and o";ectivit# of the internal audit function, such
function is not inde!endent of the entit# as is re*uired of the e,ternal auditor when e,!ressin) an
o!inion on financial state(ents' he e,ternal auditor has sole res!onsi"ilit# for the audit o!inion
e,!ressed, and that res!onsi"ilit# is not reduced "# the e,ternal auditor+s use of the work of the
internal auditors'
Effecti9e D!te
15, 4005'
O$1ecti9e
B' he o";ectives of the e,ternal auditor, where the entit# has an internal audit function that the
e,ternal auditor has deter(ined is likel# to "e relevant to the audit, are.
1. $a& o deter(ine whether, and to what e,tent, to use s!ecific work of the internal auditors?
and
2. $"& If usin) the s!ecific work of the internal auditors, to deter(ine whether that work is ade*uate
for the !ur!oses of the audit'
ISA 915, CIdentif#in) and Assessin) the Aisks of Eaterial Eisstate(ent throu)h Understandin) the 0ntit# and Its
0nviron(ent,D !ara)ra!h 49'
B49 ISA B10
Defi"itio"
1$a&Internal audit function K An a!!raisal activit# esta"lished or !rovided as a service to the entit#' Its
functions include, a(on)st other thin)s, e,a(inin), evaluatin) and (onitorin) the ade*uac# and
effectiveness of internal control'
2$"& Internal auditors K hose individuals who !erfor( the activities of the internal audit function'
Internal auditors (a# "elon) to an internal audit de!art(ent or e*uivalent function'
Re2-i'e.e"t
Dete'.i"i"( =hethe' !"# to =h!t E5te"t to Ue the =o'% of the I"te'"!0 A-#ito'
18' he e,ternal auditor shall deter(ine.
2$a& Lhether the work of the internal auditors is likel# to "e ade*uate for !ur!oses of the
audit? and
3$"& If so, the !lanned effect of the work of the internal auditors on the nature, ti(in) or
e,tent of the e,ternal auditor+s !rocedures'
45' In deter(inin) whether the work of the internal auditors is likel# to "e ade*uate for !ur!oses
of the audit, the e,ternal auditor shall evaluate.
5$a& he o";ectivit# of the internal audit function?
6$"& he technical co(!etence of the internal auditors?
7$c& Lhether the work of the internal auditors is likel# to "e carried out with due !rofessional
care? and
8$d& Lhether there is likel# to "e effective co((unication "etween the internal auditors and
the e,ternal auditor' $Aef. 6ara' A4&
910' In deter(inin) the !lanned effect of the work of the internal auditors on the nature,
ti(in) or e,tent of the e,ternal auditor+s !rocedures, the e,ternal auditor shall consider.
10$a& he nature and sco!e of s!ecific work !erfor(ed, or to "e !erfor(ed, "# the internal
auditors?
11$"& he assessed risks of (aterial (isstate(ent at the assertion level for !articular classes of
transactions, account "alances, and disclosures?and
12$c& he de)ree of su";ectivit# involved in the evaluation of the audit evidence )athered "# the
internal auditors in su!!ort of the relevant assertions' $Aef. 6ara' A5&
ISA B10 B44
Ui"( Specific =o'% of the I"te'"!0 A-#ito'
1. 11' In order for the e,ternal auditor to use s!ecific work of the internal auditors, the e,ternal
auditor shall evaluate and !erfor( audit !rocedures on that work to deter(ine its ade*uac# for the
e,ternal auditor+s !ur!oses' $Aef. 6ara' AB&
1. 14' o deter(ine the ade*uac# of s!ecific work !erfor(ed "# the internal auditors for the
e,ternal auditor+s !ur!oses, the e,ternal auditor shall evaluate whether.
2. $a& he work was !erfor(ed "# internal auditors havin) ade*uate technical trainin) and
!roficienc#?
3. $"& he work was !ro!erl# su!ervised, reviewed and docu(ented?
4. $c& Ade*uate audit evidence has "een o"tained to ena"le the internal auditors to draw
reasona"le conclusions?
5. $d& %onclusions reached are a!!ro!riate in the circu(stances and an# re!orts !re!ared "# the
internal auditors are consistent with the results of the work !erfor(ed? and
6. $e& An# e,ce!tions or unusual (atters disclosed "# the internal auditors are !ro!erl# resolved'
Doc-.e"t!tio"
19' If the e,ternal auditor uses s!ecific work of the internal auditors, the e,ternal auditor shall include
in the audit docu(entation the conclusions reached re)ardin) the evaluation of the ade*uac# of
the work of the internal auditors, and the audit !rocedures !erfor(ed "# the e,ternal auditor on
that work, in accordance with !ara)ra!h 11'
4
OOO
A1' As descri"ed in ISA 915,
9
the entit#+s internal audit function is likel# to "e relevant to the audit if
the nature of the internal audit function+s res!onsi"ilities and activities are related to the entit#+s
financial re!ortin), and the auditor e,!ects to use the work of the internal auditors to (odif# the
nature or ti(in), or reduce the e,tent, of audit !rocedures to "e !erfor(ed'
A4' %arr#in) out !rocedures in accordance with this ISA (a# cause the e,ternal auditor to re-evaluate
the e,ternal auditor+s assess(ent of the risks of (aterial (isstate(ent' %onse*uentl#, this (a#
affect the e,ternal auditor+s
4
9
B45 ISA B10
deter(ination of the relevance of the internal audit function to the audit' Si(ilarl#, the e,ternal
auditor (a# decide not to otherwise use the work of the internal auditors to affect the nature,
ti(in) or e,tent of the e,ternal auditor+s !rocedures' In such circu(stances, the e,ternal auditor+s
further a!!lication of this ISA (a# not "e necessar#'
O$1ecti9e of the I"te'"!0 A-#it F-"ctio" $Aef. 6ara' 9&
A9' he o";ectives of internal audit functions var# widel# and de!end on the siJe and structure of the
entit# and the re*uire(ents of (ana)e(ent and, where a!!lica"le, those char)ed with )overnance'
he activities of the internal audit function (a# include one or (ore of the followin).
% G Eonitorin) of internal control' he internal audit function (a# "e assi)ned s!ecific
res!onsi"ilit# for reviewin) controls, (onitorin) their o!eration and reco((endin) i(!rove(ents
thereto'
% G 0,a(ination of financial and o!eratin) infor(ation' he internal audit function (a# "e
assi)ned to review the (eans used to identif#, (easure, classif# and re!ort financial and o!eratin)
infor(ation, and to (ake s!ecific in*uir# into individual ite(s, includin) detailed testin) of
transactions, "alances and !rocedures'
% G Aeview of o!eratin) activities' he internal audit function (a# "e assi)ned to review the
econo(#, efficienc# and effectiveness of o!eratin) activities, includin) non-financial activities of
an entit#'
% G Aeview of co(!liance with laws and re)ulations' he internal audit function (a# "e
assi)ned to review co(!liance with laws, re)ulations and other e,ternal re*uire(ents, and with
(ana)e(ent !olicies and directives and other internal re*uire(ents'
% G Aisk (ana)e(ent' he internal audit function (a# assist the or)aniJation "# identif#in)
and evaluatin) si)nificant e,!osures to risk and contri"utin) to the i(!rove(ent of risk
(ana)e(ent and control s#ste(s'
% G <overnance' he internal audit function (a# assess the )overnance !rocess in its
acco(!lish(ent of o";ectives on ethics and values, !erfor(ance (ana)e(ent and accounta"ilit#,
co((unicatin) risk and control infor(ation to a!!ro!riate areas of the or)aniJation and
effectiveness of co((unication a(on) those char)ed with )overnance, e,ternal and internal
auditors, and (ana)e(ent'
ISA B10 B4B
Dete'.i"i"( =hethe' !"# to =h!t E5te"t to Ue the =o'% of the I"te'"!0 A-#ito'
Dhether the Dor. of the Internal Auditors Is :i.ely to =e Ade>uate for (urposes of the Audit $Aef. 6ara' 5&
A4' Factors that (a# affect the e,ternal auditor+s deter(ination of whether the work of the internal
auditors is likel# to "e ade*uate for the !ur!oses of the audit include.
7";ectivit#
% G he status of the internal audit function within the entit# and the effect such status has on
the a"ilit# of the internal auditors to "e o";ective'
% G Lhether the internal audit function re!orts to those char)ed with )overnance or an officer
with a!!ro!riate authorit#, and whether the internal auditors have direct access to those char)ed
with )overnance'
% G Lhether the internal auditors are free of an# conflictin) res!onsi"ilities'
% G Lhether those char)ed with )overnance oversee e(!lo#(ent decisions related to the
internal audit function'
% G Lhether there are an# constraints or restrictions !laced on the internal audit function "#
(ana)e(ent or those char)ed with )overnance'
1G Lhether, and to what e,tent, (ana)e(ent acts on the reco((endations of the internal audit
function, and how such action is evidenced'
2echnical co(!etence
% G Lhether the internal auditors are (e("ers of relevant !rofessional "odies'
% G Lhether the internal auditors have ade*uate technical trainin) and !roficienc# as internal
auditors'
1G Lhether there are esta"lished !olicies for hirin) and trainin) internal auditors'
2=ue !rofessional care
% G Lhether activities of the internal audit function are !ro!erl# !lanned, su!ervised,
reviewed and docu(ented'
% G he e,istence and ade*uac# of audit (anuals or other si(ilar docu(ents, work !ro)ra(s
and internal audit docu(entation'
B47 ISA B10
%o((unication
%o((unication "etween the e,ternal auditor and the internal auditors (a# "e (ost effective when
the internal auditors are free to co((unicate o!enl# with the e,ternal auditors, and.
% G Eeetin)s are held at a!!ro!riate intervals throu)hout the !eriod?
% G he e,ternal auditor is advised of and has access to relevant internal audit re!orts and is
infor(ed of an# si)nificant (atters that co(e to the attention of the internal auditors when such
(atters (a# affect the work of the e,ternal auditor? and
% G he e,ternal auditor infor(s the internal auditors of an# si)nificant (atters that (a#
affect the internal audit function'
(lanned /ffect of the Dor. of the Internal Auditors on the Aature& 1i$ing or /4tent of the /4ternal
Auditor8s (rocedures $Aef. 6ara' 10&
A5' Lhere the work of the internal auditors is to "e a factor in deter(inin) the nature, ti(in) or e,tent
of the e,ternal auditor+s !rocedures, it (a# "e useful to a)ree in advance the followin) (atters
with the internal auditors.
1. G he ti(in) of such work?
2. G he e,tent of audit covera)e?
3. G Eaterialit# for the financial state(ents as a whole $and, if a!!lica"le, (aterialit# level or
levels for !articular classes of transactions, account "alances or disclosures&, and !erfor(ance
(aterialit#?
4. G 6ro!osed (ethods of ite( selection?
5. G =ocu(entation of the work !erfor(ed? and
6. G Aeview and re!ortin) !rocedures'
Ui"( Specific =o'% of the I"te'"!0 A-#ito' $Aef. 6ara' 11&
AB' he nature, ti(in) and e,tent of the audit !rocedures !erfor(ed on s!ecific work of the internal
auditors will de!end on the e,ternal auditor+s assess(ent of the risk of (aterial (isstate(ent, the
evaluation of the internal audit function, and the evaluation of the s!ecific work of the internal
auditors' Such audit !rocedures (a# include.
1. G 0,a(ination of ite(s alread# e,a(ined "# the internal auditors?
2. G 0,a(ination of other si(ilar ite(s? and
3. G 7"servation of !rocedures !erfor(ed "# the internal auditors'
ISA B10 B48
INTERNATIONAL STANDARD ON AUDITING A20 USING THE =ORK OF AN
AUDITOR>S EF*ERT
CONTENTS
6ara)ra!h
Aeference to the Auditor+s 0,!ert in the Auditor+s Ae!ort ''''''''''''''''''''''''' A41-A44 A!!endi,.
%onsiderations for A)ree(ent "etween the Auditor and an
Auditor+s 0,ternal 0,!ert
International Standard on Auditin) $ISA& B40, CUsin) the Lork of an Auditor+s 0,!ertD should "e read in
ISA B40 B50
1. 1' his International Standard on Auditin) $ISA& deals with the auditor+s res!onsi"ilities
relatin) to the work of an individual or or)aniJation in a field of e,!ertise other than accountin) or
auditin), when that work is used to assist the auditor in o"tainin) sufficient a!!ro!riate audit
evidence'
14' his ISA does not deal with.
2$a& Situations where the en)a)e(ent tea( includes a (e("er, or consults an individual or
or)aniJation, with e,!ertise in a s!ecialiJed area of accountin) or auditin), which are dealt
with in ISA 440?
1
or
3$"& he auditor+s use of the work of an individual or or)aniJation !ossessin) e,!ertise in a field
other than accountin) or auditin), whose work in that field is used "# the entit# to assist the
entit# in !re!arin) the financial state(ents $a (ana)e(ent+s e,!ert&, which is dealt with in
ISA 500'
4
The A-#ito'> Repo"i$i0it/ fo' the A-#it Opi"io"
9' he auditor has sole res!onsi"ilit# for the audit o!inion e,!ressed, and that res!onsi"ilit# is not
reduced "# the auditor+s use of the work of an auditor+s e,!ert' Nonetheless, if the auditor usin)
the work of an auditor+s e,!ert, havin) followed this ISA, concludes that the work of that e,!ert is
ade*uate for the auditor+s !ur!oses, the auditor (a# acce!t that e,!ert+s findin)s or conclusions in
the e,!ert+s field as a!!ro!riate audit evidence'
Effecti9e D!te
15, 4005'
O$1ecti9e
1. $a& o deter(ine whether to use the work of an auditor+s e,!ert? and
2. $"& If usin) the work of an auditor+s e,!ert, to deter(ine whether that work is ade*uate for the
auditor+s !ur!oses'
1
ISA 440, C:ualit# %ontrol for an Audit of Financial State(ents,D !ara)ra!hs A10, A40-A44' 4
ISA 500, CAudit 0vidence,D !ara)ra!hs A94-A48'
B51 ISA B40
Defi"itio"
1$a& Auditor+s e,!ert K An individual or or)aniJation !ossessin) e,!ertise in a field other than
accountin) or auditin), whose work in that field is used "# the auditor to assist the auditor in
o"tainin) sufficient a!!ro!riate audit evidence' An auditor+s e,!ert (a# "e either an auditor+s
internal e,!ert $who is a !artner
9
or staff, includin) te(!orar# staff, of the auditor+s fir( or a
network fir(&, or an auditor+s e,ternal e,!ert' $Aef. 6ara' A1-A9&
2$"& 0,!ertise K Skills, knowled)e and e,!erience in a !articular field'
3$c&Eana)e(ent+s e,!ert K An individual or or)aniJation !ossessin) e,!ertise in a field other than
accountin) or auditin), whose work in that field is used "# the entit# to assist the entit# in
!re!arin) the financial state(ents'
Re2-i'e.e"t Dete'.i"i"( the Nee# fo' !" A-#ito'> E5pe't
7' If e,!ertise in a field other than accountin) or auditin) is necessar# to o"tain sufficient a!!ro!riate
audit evidence, the auditor shall deter(ine whether to use the work of an auditor+s e,!ert' $Aef.
6ara' A4-A5&
N!t-'e4 Ti.i"( !"# E5te"t of A-#it *'oce#-'e
8' he nature, ti(in) and e,tent of the auditor+s !rocedures with res!ect to the re*uire(ents in
!ara)ra!hs 5-19 of this ISA will var# de!endin) on the circu(stances' In deter(inin) the nature,
ti(in) and e,tent of those !rocedures, the auditor shall consider (atters includin). $Aef. 6ara'
A10&
1. $a& he nature of the (atter to which that e,!ert+s work relates?
2. $"& he risks of (aterial (isstate(ent in the (atter to which that e,!ert+s work relates?
3. $c& he si)nificance of that e,!ert+s work in the conte,t of the audit?
4. $d& he auditor+s knowled)e of and e,!erience with !revious work !erfor(ed "# that e,!ert? and
5. $e& Lhether that e,!ert is su";ect to the auditor+s fir(+s *ualit# control !olicies and
!rocedures' $Aef. 6ara' A11-A19&
C6artnerD and Cfir(D should "e read as referrin) to their !u"lic sector e*uivalents where relevant'
ISA B40 B54
The Co.pete"ce4 C!p!$i0itie !"# O$1ecti9it/ of the A-#ito'> E5pe't
5' he auditor shall evaluate whether the auditor+s e,!ert has the necessar# co(!etence, ca!a"ilities
and o";ectivit# for the auditor+s !ur!oses' In the case of an auditor+s e,ternal e,!ert, the
evaluation of o";ectivit# shall include in*uir# re)ardin) interests and relationshi!s that (a# create
a threat to that e,!ert+s o";ectivit#' $Aef. 6ara' A14-A40&
O$t!i"i"( !" U"#e't!"#i"( of the Fie0# of E5pe'tie of the A-#ito'> E5pe't
10' he auditor shall o"tain a sufficient understandin) of the field of e,!ertise of the auditor+s e,!ert
to ena"le the auditor to. $Aef. 6ara' A41-A44&
1$a& =eter(ine the nature, sco!e and o";ectives of that e,!ert+s work for the auditor+s
!ur!oses? and
2$"& 0valuate the ade*uac# of that work for the auditor+s !ur!oses'
A('ee.e"t &ith the A-#ito'> E5pe't
11' he auditor shall a)ree, in writin) when a!!ro!riate, on the followin) (atters with the auditor+s
e,!ert. $Aef. 6ara' A49-A4B&
1. $a& he nature, sco!e and o";ectives of that e,!ert+s work? $Aef. 6ara' A47&
2. $"& he res!ective roles and res!onsi"ilities of the auditor and that e,!ert? $Aef. 6ara' A48-
A45&
3. $c& he nature, ti(in) and e,tent of co((unication "etween the auditor and that e,!ert,
includin) the for( of an# re!ort to "e !rovided "# that e,!ert? and $Aef. 6ara' A90&
4. $d& he need for the auditor+s e,!ert to o"serve confidentialit# re*uire(ents' $Aef. 6ara'
A91&
E9!0-!ti"( the A#e2-!c/ of the A-#ito'> E5pe't> =o'%
14' he auditor shall evaluate the ade*uac# of the auditor+s e,!ert+s work for the auditor+s !ur!oses,
includin). $Aef. 6ara' A94&
1. $a& he relevance and reasona"leness of that e,!ert+s findin)s or conclusions, and their
consistenc# with other audit evidence? $Aef. 6ara' A99-A94&
2. $"& If that e,!ert+s work involves use of si)nificant assu(!tions and (ethods, the relevance and
reasona"leness of those assu(!tions and (ethods in the circu(stances? and $Aef. 6ara' A95-A97&
3. $c& If that e,!ert+s work involves the use of source data that is si)nificant to that e,!ert+s work, the
relevance, co(!leteness, and accurac# of that source data' $Aef. 6ara' A98-A95&
B59 ISA B40
19' If the auditor deter(ines that the work of the auditor+s e,!ert is not ade*uate for the auditor+s
!ur!oses, the auditor shall. $Aef. 6ara' A40&
1$a&A)ree with that e,!ert on the nature and e,tent of further work to "e !erfor(ed "# that e,!ert? or
2$"&6erfor( additional audit !rocedures a!!ro!riate to the circu(stances'
Refe'e"ce to the A-#ito'> E5pe't i" the A-#ito'> Repo't
1. 14' he auditor shall not refer to the work of an auditor+s e,!ert in an auditor+s re!ort
containin) an un(odified o!inion unless re*uired "# law or re)ulation to do so' If such reference
is re*uired "# law or re)ulation, the auditor shall indicate in the auditor+s re!ort that the reference
does not reduce the auditor+s res!onsi"ilit# for the auditor+s o!inion' $Aef. 6ara' A41&
2. 15' If the auditor (akes reference to the work of an auditor+s e,!ert in the auditor+s re!ort
"ecause such reference is relevant to an understandin) of a (odification to the auditor+s o!inion,
the auditor shall indicate in the auditor+s re!ort that such reference does not reduce the auditor+s
res!onsi"ilit# for that o!inion' $Aef. 6ara' A44&
OOO
App0ic!tio" !"# Othe' E5p0!"!to'/ )!te'i!0 Defi"itio" of !"
A-#ito'> E5pe't $Aef. 6ara' B$a&& A1' 0,!ertise in a field other than accountin)
or auditin) (a# include e,!ertise in relation to such (atters as.
% G he valuation of co(!le, financial instru(ents, land and "uildin)s, !lant and (achiner#,
;ewelr#, works of art, anti*ues, intan)i"le assets, assets ac*uired and lia"ilities assu(ed in
"usiness co("inations and assets that (a# have "een i(!aired'
% G he actuarial calculation of lia"ilities associated with insurance contracts or e(!lo#ee
"enefit !lans'
% G he esti(ation of oil and )as reserves'
% G he valuation of environ(ental lia"ilities, and site clean-u! costs'
% G he inter!retation of contracts, laws and re)ulations'
% G he anal#sis of co(!le, or unusual ta, co(!liance issues'
A4' In (an# cases, distin)uishin) "etween e,!ertise in accountin) or auditin), and e,!ertise in
another field, will "e strai)htforward, even where this involves a s!ecialiJed area of accountin) or
auditin)' For e,a(!le, an individual with e,!ertise in a!!l#in) (ethods of accountin) for deferred
inco(e ta, can often
ISA B40 B54
"e easil# distin)uished fro( an e,!ert in ta,ation law' he for(er is not an e,!ert for the !ur!oses
of this ISA as this constitutes accountin) e,!ertise? the latter is an e,!ert for the !ur!oses of this
ISA as this constitutes le)al e,!ertise' Si(ilar distinctions (a# also "e a"le to "e (ade in other
areas, for e,a(!le, "etween e,!ertise in (ethods of accountin) for financial instru(ents, and
e,!ertise in co(!le, (odelin) for the !ur!ose of valuin) financial instru(ents' In so(e cases,
however, !articularl# those involvin) an e(er)in) area of accountin) or auditin) e,!ertise,
distin)uishin) "etween s!ecialiJed areas of accountin) or auditin), and e,!ertise in another field,
will "e a (atter of !rofessional ;ud)(ent' A!!lica"le !rofessional rules and standards re)ardin)
education and co(!etenc# re*uire(ents for accountants and auditors (a# assist the auditor in
e,ercisin) that ;ud)(ent'
4
A9' It is necessar# to a!!l# ;ud)(ent when considerin) how the re*uire(ents of this ISA are affected
"# the fact that an auditor+s e,!ert (a# "e either an individual or an or)aniJation' For e,a(!le,
when evaluatin) the co(!etence, ca!a"ilities and o";ectivit# of an auditor+s e,!ert, it (a# "e that
the e,!ert is an or)aniJation the auditor has !reviousl# used, "ut the auditor has no !rior
e,!erience of the individual e,!ert assi)ned "# the or)aniJation for the !articular en)a)e(ent?or it
(a# "e the reverse, that is, the auditor (a# "e fa(iliar with the work of an individual e,!ert "ut
not with the or)aniJation that e,!ert has ;oined' In either case, "oth the !ersonal attri"utes of the
individual and the (ana)erial attri"utes of the or)aniJation $such as s#ste(s of *ualit# control the
or)aniJation i(!le(ents& (a# "e relevant to the auditor+s evaluation'
Dete'.i"i"( the Nee# fo' !" A-#ito'> E5pe't $Aef. 6ara' 7&
A4' An auditor+s e,!ert (a# "e needed to assist the auditor in one or (ore of the followin).
1. G 7"tainin) an understandin) of the entit# and its environ(ent, includin) its internal
control'
2. G Identif#in) and assessin) the risks of (aterial (isstate(ent'
3. G =eter(inin) and i(!le(entin) overall res!onses to assessed risks at the financial
state(ent level'
4. G =esi)nin) and !erfor(in) further audit !rocedures to res!ond to assessed risks at the
assertion level, co(!risin) tests of controls or su"stantive !rocedures'
5. G 0valuatin) the sufficienc# and a!!ro!riateness of audit evidence o"tained in for(in) an
o!inion on the financial state(ents'
For e,a(!le, International 0ducation Standard 8, C%o(!etence Ae*uire(ents for Audit 6rofessionalsD (a# "e of assistance'
B55 ISA B40
A5' he risks of (aterial (isstate(ent (a# increase when e,!ertise in a field other than accountin) is
needed for (ana)e(ent to !re!are the financial state(ents, for e,a(!le, "ecause this (a#
indicate so(e co(!le,it#, or "ecause (ana)e(ent (a# not !ossess knowled)e of the field of
e,!ertise' If in !re!arin) the financial state(ents (ana)e(ent does not !ossess the necessar#
e,!ertise, a (ana)e(ent+s e,!ert (a# "e used in addressin) those risks' Aelevant controls,
includin) controls that relate to the work of a (ana)e(ent+s e,!ert, if an#, (a# also reduce the
risks of (aterial (isstate(ent'
AB' If the !re!aration of the financial state(ents involves the use of e,!ertise in a field other than
accountin), the auditor, who is skilled in accountin) and auditin), (a# not !ossess the necessar#
e,!ertise to audit those financial state(ents' he en)a)e(ent !artner is re*uired to "e satisfied
that the en)a)e(ent tea(, and an# auditor+s e,!erts who are not !art of the en)a)e(ent tea(,
collectivel# have the a!!ro!riate co(!etence and ca!a"ilities to !erfor( the audit en)a)e(ent'
5
Further, the auditor is re*uired to ascertain the nature, ti(in) and e,tent of resources necessar# to
!erfor( the en)a)e(ent'
B
he auditor+s deter(ination of whether to use the work of an auditor+s
e,!ert, and if so when and to what e,tent, assists the auditor in (eetin) these re*uire(ents' As the
audit !ro)resses, or as circu(stances chan)e, the auditor (a# need to revise earlier decisions
a"out usin) the work of an auditor+s e,!ert'
A7' An auditor who is not an e,!ert in a relevant field other than accountin) or auditin) (a#
nevertheless "e a"le to o"tain a sufficient understandin) of that field to !erfor( the audit without
an auditor+s e,!ert' his understandin) (a# "e o"tained throu)h, for e,a(!le.
1. G 0,!erience in auditin) entities that re*uire such e,!ertise in the !re!aration of their
2. G 0ducation or !rofessional develo!(ent in the !articular field' his (a# include for(al
courses, or discussion with individuals !ossessin) e,!ertise in the relevant field for the !ur!ose of
enhancin) the auditor+s own ca!acit# to deal with (atters in that field' Such discussion differs
fro( consultation with an auditor+s e,!ert re)ardin) a s!ecific set of circu(stances encountered
on the en)a)e(ent where that e,!ert is )iven all the relevant facts that will ena"le the e,!ert to
!rovide infor(ed advice a"out the !articular (atter'
7
3. G =iscussion with auditors who have !erfor(ed si(ilar en)a)e(ents'
5
B
ISA 900, C6lannin) an Audit of Financial State(ents,D !ara)ra!h 8$e&' 7
ISA B40 B5B
A8' In other cases, however, the auditor (a# deter(ine that it is necessar#, or (a# choose, to use an
auditor+s e,!ert to assist in o"tainin) sufficient a!!ro!riate audit evidence' %onsiderations when
decidin) whether to use an auditor+s e,!ert (a# include.
% G Lhether (ana)e(ent has used a (ana)e(ent+s e,!ert in !re!arin) the financial
state(ents $see !ara)ra!h A5&'
% G he nature and si)nificance of the (atter, includin) its co(!le,it#'
% G he risks of (aterial (isstate(ent in the (atter'
% G he e,!ected nature of !rocedures to res!ond to identified risks, includin). the auditor+s
knowled)e of and e,!erience with the work of e,!erts in relation to such (atters? and the
availa"ilit# of alternative sources of audit evidence'
A5' Lhen (ana)e(ent has used a (ana)e(ent+s e,!ert in !re!arin) the financial state(ents, the
auditor+s decision on whether to use an auditor+s e,!ert (a# also "e influenced "# such factors as.
1. G he nature, sco!e and o";ectives of the (ana)e(ent+s e,!ert+s work'
2. G Lhether the (ana)e(ent+s e,!ert is e(!lo#ed "# the entit#, or is a !art# en)a)ed "# it to
!rovide relevant services'
3. G he e,tent to which (ana)e(ent can e,ercise control or influence over the work of the
(ana)e(ent+s e,!ert'
4. G he (ana)e(ent+s e,!ert+s co(!etence and ca!a"ilities'
5. G Lhether the (ana)e(ent+s e,!ert is su";ect to technical !erfor(ance standards or other
!rofessional or industr# re*uire(ents
6. G An# controls within the entit# over the (ana)e(ent+s e,!ert+s work'
ISA 500
8
includes re*uire(ents and )uidance re)ardin) the effect of the co(!etence, ca!a"ilities
and o";ectivit# of (ana)e(ent+s e,!erts on the relia"ilit# of audit evidence'
N!t-'e4 Ti.i"( !"# E5te"t of A-#it *'oce#-'e $Aef. 6ara' 8&
A10' he nature, ti(in) and e,tent of audit !rocedures with res!ect to the re*uire(ents in !ara)ra!hs
5-19 of this ISA will var# de!endin) on the circu(stances' For e,a(!le, the followin) factors
(a# su))est the need for different or (ore e,tensive !rocedures than would otherwise "e the case.
G he work of the auditor+s e,!ert relates to a si)nificant (atter that involves su";ective and
co(!le, ;ud)(ents'
B57 ISA B40
% G he auditor has not !reviousl# used the work of the auditor+s e,!ert, and has no !rior
knowled)e of that e,!ert+s co(!etence, ca!a"ilities and o";ectivit#'
% G he auditor+s e,!ert is !erfor(in) !rocedures that are inte)ral to the audit, rather than
"ein) consulted to !rovide advice on an individual (atter'
% G he e,!ert is an auditor+s e,ternal e,!ert and is not, therefore, su";ect to the fir(+s
*ualit# control !olicies and !rocedures'
1he Auditor8s Fir$8s *uality Control (olicies and (rocedures $Aef. 6ara' 8$e&&
A11' An auditor+s internal e,!ert (a# "e a !artner or staff, includin) te(!orar# staff, of the auditor+s
fir(, and therefore su";ect to the *ualit# control !olicies and !rocedures of that fir( in accordance
with IS:% 1
5
or national re*uire(ents that are at least as de(andin)'
10
Alternativel#, an auditor+s
internal e,!ert (a# "e a !artner or staff, includin) te(!orar# staff, of a network fir(, which (a#
share co((on *ualit# control !olicies and !rocedures with the auditor+s fir('
A14' An auditor+s e,ternal e,!ert is not a (e("er of the en)a)e(ent tea( and is not su";ect to *ualit#
control !olicies and !rocedures in accordance with IS:% 1'
11
In so(e ;urisdictions, however, law
or re)ulation (a# re*uire that an auditor+s e,ternal e,!ert "e treated as a (e("er of the
en)a)e(ent tea(, and (a# therefore "e su";ect to relevant ethical re*uire(ents, includin) those
!ertainin) to inde!endence, and other !rofessional re*uire(ents, as deter(ined "# that law or
re)ulation'
A19' 0n)a)e(ent tea(s are entitled to rel# on the fir(+s s#ste( of *ualit# control, unless infor(ation
!rovided "# the fir( or other !arties su))ests otherwise'
14
he e,tent of that reliance will var#
with the circu(stances, and (a# affect the nature, ti(in) and e,tent of the auditor+s !rocedures
with res!ect to such (atters as.
1. G %o(!etence and ca!a"ilities, throu)h recruit(ent and trainin) !ro)ra(s'
2. G 7";ectivit#' Auditor+s internal e,!erts are su";ect to relevant ethical re*uire(ents,
includin) those !ertainin) to inde!endence'
3. G he auditor+s evaluation of the ade*uac# of the auditor+s e,!ert+s work'
5
Services 0n)a)e(ents,D !ara)ra!h 14$f&'
10
ISA 440, !ara)ra!h 4' 11
IS:% 1, !ara)ra!h 14$f&' 14
ISA B40 B58
For e,a(!le, the fir(+s trainin) !ro)ra(s (a# !rovide auditor+s internal e,!erts with an
a!!ro!riate understandin) of the interrelationshi! of their e,!ertise with the audit !rocess'
Aeliance on such trainin) and other fir( !rocesses, such as !rotocols for sco!in) the work
of auditor+s internal e,!erts, (a# affect the nature, ti(in) and e,tent of the auditor+s
!rocedures to evaluate the ade*uac# of the auditor+s e,!ert+s work'
1. G Adherence to re)ulator# and le)al re*uire(ents, throu)h (onitorin) !rocesses'
2. G A)ree(ent with the auditor+s e,!ert'
Such reliance does not reduce the auditor+s res!onsi"ilit# to (eet the re*uire(ents of this ISA'
The Co.pete"ce4 C!p!$i0itie !"# O$1ecti9it/ of the A-#ito'> E5pe't $Aef. 6ara' 5&
A14' he co(!etence, ca!a"ilities and o";ectivit# of an auditor+s e,!ert are factors that si)nificantl#
affect whether the work of the auditor+s e,!ert will "e ade*uate for the auditor+s !ur!oses'
%o(!etence relates to the nature and level of e,!ertise of the auditor+s e,!ert' %a!a"ilit# relates to
the a"ilit# of the auditor+s e,!ert to e,ercise that co(!etence in the circu(stances of the
en)a)e(ent' Factors that influence ca!a"ilit# (a# include, for e,a(!le, )eo)ra!hic location, and
the availa"ilit# of ti(e and resources' 7";ectivit# relates to the !ossi"le effects that "ias, conflict
of interest, or the influence of others (a# have on the !rofessional or "usiness ;ud)(ent of the
auditor+s e,!ert'
A15' Infor(ation re)ardin) the co(!etence, ca!a"ilities and o";ectivit# of an auditor+s e,!ert (a#
co(e fro( a variet# of sources, such as.
% G 6ersonal e,!erience with !revious work of that e,!ert'
% G =iscussions with that e,!ert'
% G =iscussions with other auditors or others who are fa(iliar with that e,!ert+s work'
% G Snowled)e of that e,!ert+s *ualifications, (e("ershi! of a !rofessional "od# or industr#
association, license to !ractice, or other for(s of e,ternal reco)nition'
% G 6u"lished !a!ers or "ooks written "# that e,!ert'
% G he auditor+s fir(+s *ualit# control !olicies and !rocedures $see !ara)ra!hs A11-A19&'
A1B' Eatters relevant to evaluatin) the co(!etence, ca!a"ilities and o";ectivit# of the auditor+s e,!ert
include whether that e,!ert+s work is su";ect to technical !erfor(ance standards or other
!rofessional or industr# re*uire(ents, for e,a(!le, ethical standards and other (e("ershi!
re*uire(ents of a
B55 ISA B40
!rofessional "od# or industr# association, accreditation standards of a licensin) "od#, or
re*uire(ents i(!osed "# law or re)ulation'
A17' 7ther (atters that (a# "e relevant include.
1. G he relevance of the auditor+s e,!ert+s co(!etence to the (atter for which that e,!ert+s
work will "e used, includin) an# areas of s!ecialt# within that e,!ert+s field' For e,a(!le, a
!articular actuar# (a# s!ecialiJe in !ro!ert# and casualt# insurance, "ut have li(ited e,!ertise
re)ardin) !ension calculations'
2. G he auditor+s e,!ert+s co(!etence with res!ect to relevant accountin) and auditin)
re*uire(ents, for e,a(!le, knowled)e of assu(!tions and (ethods, includin) (odels where
a!!lica"le, that are consistent with the a!!lica"le financial re!ortin) fra(ework'
3. G Lhether une,!ected events, chan)es in conditions, or the audit evidence o"tained fro(
the results of audit !rocedures indicate that it (a# "e necessar# to reconsider the initial evaluation
of the co(!etence, ca!a"ilities and o";ectivit# of the auditor+s e,!ert as the audit !ro)resses'
A18' A "road ran)e of circu(stances (a# threaten o";ectivit#, for e,a(!le, self-interest threats,
advocac# threats, fa(iliarit# threats, self-review threats, and inti(idation threats' Safe)uards (a#
eli(inate or reduce such threats, and (a# "e created "# e,ternal structures $for e,a(!le, the
auditor+s e,!ert+s !rofession, le)islation or re)ulation&, or "# the auditor+s e,!ert+s work
environ(ent $for e,a(!le, *ualit# control !olicies and !rocedures&' here (a# also "e safe)uards
s!ecific to the audit en)a)e(ent'
A15' he evaluation of the si)nificance of threats to o";ectivit# and of whether there is a need for
safe)uards (a# de!end u!on the role of the auditor+s e,!ert and the si)nificance of the e,!ert+s
work in the conte,t of the audit' here (a# "e so(e circu(stances in which safe)uards cannot
reduce threats to an acce!ta"le level, for e,a(!le, if a !ro!osed auditor+s e,!ert is an individual
who has !la#ed a si)nificant role in !re!arin) the infor(ation that is "ein) audited, that is, if the
auditor+s e,!ert is a (ana)e(ent+s e,!ert'
A40' Lhen evaluatin) the o";ectivit# of an auditor+s e,ternal e,!ert, it (a# "e relevant to.
1$a& In*uire of the entit# a"out an# known interests or relationshi!s that the entit# has with the
auditor+s e,ternal e,!ert that (a# affect that e,!ert+s o";ectivit#'
2$"& =iscuss with that e,!ert an# a!!lica"le safe)uards, includin) an# !rofessional
re*uire(ents that a!!l# to that e,!ert? and evaluate whether the safe)uards are ade*uate to reduce
threats to an acce!ta"le level' Interests and relationshi!s that it (a# "e relevant to discuss with the
auditor+s e,!ert include.
ISA B40 BB0
1. G Financial interests'
2. G 1usiness and !ersonal relationshi!s'
3. G 6rovision of other services "# the e,!ert, includin) "# the or)aniJation in the case of an
e,ternal e,!ert that is an or)aniJation'
In so(e cases, it (a# also "e a!!ro!riate for the auditor to o"tain a written re!resentation
fro( the auditor+s e,ternal e,!ert a"out an# interests or relationshi!s with the entit# of
which that e,!ert is aware'
O$t!i"i"( !" U"#e't!"#i"( of the Fie0# of E5pe'tie of the A-#ito'> E5pe't
$Aef. 6ara' 10&
A41' he auditor (a# o"tain an understandin) of the auditor+s e,!ert+s field of e,!ertise throu)h the
(eans descri"ed in !ara)ra!h A7, or throu)h discussion with that e,!ert'
A44' As!ects of the auditor+s e,!ert+s field relevant to the auditor+s understandin) (a# include.
1. G Lhether that e,!ert+s field has areas of s!ecialt# within it that are relevant to the audit
$see !ara)ra!h A17&'
2. G Lhether an# !rofessional or other standards, and re)ulator# or le)al re*uire(ents a!!l#'
3. G Lhat assu(!tions and (ethods, includin) (odels where a!!lica"le, are used "# the
auditor+s e,!ert, and whether the# are )enerall# acce!ted within that e,!ert+s field and a!!ro!riate
for financial re!ortin) !ur!oses'
4. G he nature of internal and e,ternal data or infor(ation the auditor+s e,!ert uses'
A('ee.e"t &ith the A-#ito'> E5pe't $Aef. 6ara' 11&
A49' he nature, sco!e and o";ectives of the auditor+s e,!ert+s work (a# var# considera"l# with the
circu(stances, as (a# the res!ective roles and res!onsi"ilities of the auditor and the auditor+s
e,!ert, and the nature, ti(in) and e,tent of co((unication "etween the auditor and the auditor+s
e,!ert' It is therefore re*uired that these (atters are a)reed "etween the auditor and the auditor+s
e,!ert re)ardless of whether the e,!ert is an auditor+s e,ternal e,!ert or an auditor+s internal
e,!ert'
A44' he (atters noted in !ara)ra!h 8 (a# affect the level of detail and for(alit# of the a)ree(ent
"etween the auditor and the auditor+s e,!ert, includin) whether it is a!!ro!riate that the a)ree(ent
"e in writin)' For e,a(!le, the followin)
BB1 ISA B40
factors (a# su))est the need for (ore a detailed a)ree(ent than would otherwise "e the case, or
for the a)ree(ent to "e set out in writin).
% G he auditor+s e,!ert will have access to sensitive or confidential entit# infor(ation'
% G he res!ective roles or res!onsi"ilities of the auditor and the auditor+s e,!ert are different
fro( those nor(all# e,!ected'
% G Eulti-;urisdictional le)al or re)ulator# re*uire(ents a!!l#'
% G he (atter to which the auditor+s e,!ert+s work relates is hi)hl# co(!le,'
% G he auditor has not !reviousl# used work !erfor(ed "# that e,!ert'
% G he )reater the e,tent of the auditor+s e,!ert+s work, and its si)nificance in the conte,t of
the audit'
A45' he a)ree(ent "etween the auditor and an auditor+s e,ternal e,!ert is often in the for( of an
en)a)e(ent letter' he A!!endi, lists (atters that the auditor (a# consider for inclusion in such
an en)a)e(ent letter, or in an# other for( of a)ree(ent with an auditor+s e,ternal e,!ert'
A4B' Lhen there is no written a)ree(ent "etween the auditor and the auditor+s e,!ert, evidence of the
a)ree(ent (a# "e included in, for e,a(!le.
1. G 6lannin) (e(oranda, or related workin) !a!ers such as the audit !ro)ra('
2. G he !olicies and !rocedures of the auditor+s fir(' In the case of an auditor+s internal
e,!ert, the esta"lished !olicies and !rocedures to which that e,!ert is su";ect (a# include
!articular !olicies and !rocedures in relation to that e,!ert+s work' he e,tent of docu(entation in
the auditor+s workin) !a!ers de!ends on the nature of such !olicies and !rocedures' For e,a(!le,
no docu(entation (a# "e re*uired in the auditor+s workin) !a!ers if the auditor+s fir( has
detailed !rotocols coverin) the circu(stances in which the work of such an e,!ert is used'
Aature& )cope and ,b9ecti!es of Dor. $Aef. 6ara' 11$a&&
A47' It (a# often "e relevant when a)reein) on the nature, sco!e and o";ectives of the auditor+s
e,!ert+s work to include discussion of an# relevant technical !erfor(ance standards or other
!rofessional or industr# re*uire(ents that the e,!ert will follow'
+especti!e +oles and +esponsibilities $Aef. 6ara' 11$"&&
A48' A)ree(ent on the res!ective roles and res!onsi"ilities of the auditor and the auditor+s e,!ert (a#
include.
ISA B40 BB4
% G Lhether the auditor or the auditor+s e,!ert will !erfor( detailed testin) of source data'
% G %onsent for the auditor to discuss the auditor+s e,!ert+s findin)s or conclusions with the
entit# and others, and to include details of that e,!ert+s findin)s or conclusions in the "asis for a
(odified o!inion in the auditor+s re!ort, if necessar# $see !ara)ra!h A44&'
% G An# a)ree(ent to infor( the auditor+s e,!ert of the auditor+s conclusions concernin) that
e,!ert+s work'
Lorkin) 6a!ers
A45' A)ree(ent on the res!ective roles and res!onsi"ilities of the auditor and the auditor+s e,!ert (a#
also include a)ree(ent a"out access to, and retention of, each other+s workin) !a!ers' Lhen the
auditor+s e,!ert is a (e("er of the en)a)e(ent tea(, that e,!ert+s workin) !a!ers for( !art of
the audit docu(entation' Su";ect to an# a)ree(ent to the contrar#, auditor+s e,ternal e,!erts+
workin) !a!ers are their own and do not for( !art of the audit docu(entation'
Co$$unication $Aef. 6ara' 11$c&&
A90' 0ffective two-wa# co((unication facilitates the !ro!er inte)ration of the nature, ti(in) and
e,tent of the auditor+s e,!ert+s !rocedures with other work on the audit, and a!!ro!riate
(odification of the auditor+s e,!ert+s o";ectives durin) the course of the audit' For e,a(!le, when
the work of the auditor+s e,!ert relates to the auditor+s conclusions re)ardin) a si)nificant risk,
"oth a for(al written re!ort at the conclusion of that e,!ert+s work, and oral re!orts as the work
!ro)resses, (a# "e a!!ro!riate' Identification of s!ecific !artners or staff who will liaise with the
auditor+s e,!ert, and !rocedures for co((unication "etween that e,!ert and the entit#, assists
ti(el# and effective co((unication, !articularl# on lar)er en)a)e(ents'
Confidentiality $Aef. 6ara' 11$d&&
A91' It is necessar# for the confidentialit# !rovisions of relevant ethical re*uire(ents that a!!l# to the
auditor also to a!!l# to the auditor+s e,!ert' Additional re*uire(ents (a# "e i(!osed "# law or
re)ulation' he entit# (a# also have re*uested that s!ecific confidentialit# !rovisions "e a)reed
with auditor+s e,ternal e,!erts'
E9!0-!ti"( the A#e2-!c/ of the A-#ito'> E5pe't> =o'% $Aef. 6ara' 14&
A94' he auditor+s evaluation of the auditor+s e,!ert+s co(!etence, ca!a"ilities and o";ectivit#, the
auditor+s fa(iliarit# with the auditor+s e,!ert+s field of e,!ertise, and the nature of the work
!erfor(ed "# the auditor+s e,!ert affect
BB9 ISA B40
the nature, ti(in) and e,tent of audit !rocedures to evaluate the ade*uac# of that e,!ert+s work for
the auditor+s !ur!oses'
1he Findings and Conclusions of the Auditor8s /4pert $Aef. 6ara' 14$a&&
A99' S!ecific !rocedures to evaluate the ade*uac# of the auditor+s e,!ert+s work for the auditor+s
!ur!oses (a# include.
% G In*uiries of the auditor+s e,!ert'
% G Aeviewin) the auditor+s e,!ert+s workin) !a!ers and re!orts'
1G %orro"orative !rocedures, such as.
a. o 7"servin) the auditor+s e,!ert+s work?
b. o 0,a(inin) !u"lished data, such as statistical re!orts fro( re!uta"le,
authoritative sources?
c. o %onfir(in) relevant (atters with third !arties?
d. o 6erfor(in) detailed anal#tical !rocedures? and
e. o Ae!erfor(in) calculations'
% G =iscussion with another e,!ert with relevant e,!ertise when, for e,a(!le, the findin)s or
conclusions of the auditor+s e,!ert are not consistent with other audit evidence'
% G =iscussin) the auditor+s e,!ert+s re!ort with (ana)e(ent'
A94' Aelevant factors when evaluatin) the relevance and reasona"leness of the findin)s or conclusions
of the auditor+s e,!ert, whether in a re!ort or other for(, (a# include whether the# are.
1. G 6resented in a (anner that is consistent with an# standards of the auditor+s e,!ert+s
!rofession or industr#?
2. G %learl# e,!ressed, includin) reference to the o";ectives a)reed with the auditor, the sco!e
of the work !erfor(ed and standards a!!lied?
3. G 1ased on an a!!ro!riate !eriod and take into account su"se*uent events, where relevant?
4. G Su";ect to an# reservation, li(itation or restriction on use, and if so, whether this has
i(!lications for the auditor? and
5. G 1ased on a!!ro!riate consideration of errors or deviations encountered "# the auditor+s
e,!ert'
ISA B40 BB4
Assu$ptions& <ethods and )ource ?ata
Assu(!tions and Eethods $Aef. 6ara' 14$"&&
A95' Lhen the auditor+s e,!ert+s work is to evaluate underl#in) assu(!tions and (ethods, includin)
(odels where a!!lica"le, used "# (ana)e(ent in develo!in) an accountin) esti(ate, the auditor+s
!rocedures are likel# to "e !ri(aril# directed to evaluatin) whether the auditor+s e,!ert has
ade*uatel# reviewed those assu(!tions and (ethods' Lhen the auditor+s e,!ert+s work is to
develo! an auditor+s !oint esti(ate or an auditor+s ran)e for co(!arison with (ana)e(ent+s !oint
esti(ate, the auditor+s !rocedures (a# "e !ri(aril# directed to evaluatin) the assu(!tions and
(ethods, includin) (odels where a!!ro!riate, used "# the auditor+s e,!ert'
A9B' ISA 540
19
discusses the assu(!tions and (ethods used "# (ana)e(ent in (akin) accountin)
esti(ates, includin) the use in so(e cases of hi)hl# s!ecialiJed, entit#-develo!ed (odels'
Althou)h that discussion is written in the conte,t of the auditor o"tainin) sufficient a!!ro!riate
audit evidence re)ardin) (ana)e(ent+s assu(!tions and (ethods, it (a# also assist the auditor
when evaluatin) an auditor+s e,!ert+s assu(!tions and (ethods'
A97' Lhen an auditor+s e,!ert+s work involves the use of si)nificant assu(!tions and (ethods, factors
relevant to the auditor+s evaluation of those assu(!tions and (ethods include whether the# are.
1. G <enerall# acce!ted within the auditor+s e,!ert+s field?
2. G %onsistent with the re*uire(ents of the a!!lica"le financial re!ortin) fra(ework?
3. G =e!endent on the use of s!ecialiJed (odels? and
4. G %onsistent with those of (ana)e(ent, and if not, the reason for, and effects of, the
differences'
Source =ata Used "# the Auditor+s 0,!ert $Aef. 6ara' 14$c&&
A98' Lhen an auditor+s e,!ert+s work involves the use of source data that is si)nificant to that e,!ert+s
work, !rocedures such as the followin) (a# "e used to test that data.
% G Ferif#in) the ori)in of the data, includin) o"tainin) an understandin) of, and where
a!!lica"le testin), the internal controls over the data and, where relevant, its trans(ission to the
e,!ert'
% G Aeviewin) the data for co(!leteness and internal consistenc#'
ISA 540, CAuditin) Accountin) 0sti(ates, Includin) Fair Falue Accountin) 0sti(ates, and Aelated =isclosures,D !ara)ra!hs 8,
19 and 15'
BB5 ISA B40
A95' In (an# cases, the auditor (a# test source data' @owever, in other cases, when the nature of the
source data used "# an auditor+s e,!ert is hi)hl# technical in relation to the e,!ert+s field, that
e,!ert (a# test the source data' If the auditor+s e,!ert has tested the source data, in*uir# of that
e,!ert "# the auditor, or su!ervision or review of that e,!ert+s tests (a# "e an a!!ro!riate wa# for
the auditor to evaluate that data+s relevance, co(!leteness, and accurac#'
Inade>uate Dor. $Aef. 6ara' 19&
A40' If the auditor concludes that the work of the auditor+s e,!ert is not ade*uate for the auditor+s
!ur!oses and the auditor cannot resolve the (atter throu)h the additional audit !rocedures
re*uired "# !ara)ra!h 19, which (a# involve further work "ein) !erfor(ed "# "oth the e,!ert
and the auditor, or include e(!lo#in) or en)a)in) another e,!ert, it (a# "e necessar# to e,!ress a
(odified o!inion in the auditor+s re!ort in accordance with ISA 705 "ecause the auditor has not
o"tained sufficient a!!ro!riate audit evidence'
14
Refe'e"ce to the A-#ito'> E5pe't i" the A-#ito'> Repo't $Aef. 6ara' 14-15&
A41' In so(e cases, law or re)ulation (a# re*uire a reference to the work of an auditor+s e,!ert, for
e,a(!le, for the !ur!oses of trans!arenc# in the !u"lic sector'
A44' It (a# "e a!!ro!riate in so(e circu(stances to refer to the auditor+s e,!ert in an auditor+s re!ort
containin) a (odified o!inion, to e,!lain the nature of the (odification' In such circu(stances,
the auditor (a# need the !er(ission of the auditor+s e,!ert "efore (akin) such a reference'
ISA 705, CEodifications to the 7!inion in the Inde!endent Auditor+s Ae!ort,D !ara)ra!h B$"&'
ISA B40 BBB
Appe"#i5
$Aef. 6ara' A45&
Co"i#e'!tio" fo' A('ee.e"t $et&ee" the A-#ito' !"# !" A-#ito'>
E5te'"!0 E5pe't
his A!!endi, lists (atters that the auditor (a# consider for inclusion in an# a)ree(ent with an auditor+s
e,ternal e,!ert' he followin) list is illustrative and is not e,haustive? it is intended onl# to "e a )uide that
(a# "e used in con;unction with the considerations outlined in this ISA' Lhether to include !articular
(atters in the a)ree(ent de!ends on the circu(stances of the en)a)e(ent' he list (a# also "e of
assistance in considerin) the (atters to "e included in an a)ree(ent with an auditor+s internal e,!ert'
N!t-'e4 Scope !"# O$1ecti9e of the A-#ito'> E5te'"!0 E5pe't> =o'%
% G he nature and sco!e of the !rocedures to "e !erfor(ed "# the auditor+s e,ternal e,!ert'
% G he o";ectives of the auditor+s e,ternal e,!ert+s work in the conte,t of (aterialit# and
risk considerations concernin) the (atter to which the auditor+s e,ternal e,!ert+s work relates,
and, when relevant, the a!!lica"le financial re!ortin) fra(ework'
% G An# relevant technical !erfor(ance standards or other !rofessional or industr#
re*uire(ents the auditor+s e,ternal e,!ert will follow'
% G he assu(!tions and (ethods, includin) (odels where a!!lica"le, the auditor+s e,ternal
e,!ert will use, and their authorit#'
% G he effective date of, or when a!!lica"le the testin) !eriod for, the su";ect (atter of the
auditor+s e,ternal e,!ert+s work, and re*uire(ents re)ardin) su"se*uent events'
The Repecti9e Ro0e !"# Repo"i$i0itie of the A-#ito' !"# the A-#ito'> E5te'"!0 E5pe't
1. G Aelevant auditin) and accountin) standards, and relevant re)ulator# or le)al
re*uire(ents'
2. G he auditor+s e,ternal e,!ert+s consent to the auditor+s intended use of that e,!ert+s
re!ort, includin) an# reference to it, or disclosure of it, to others, for e,a(!le reference to it in the
"asis for a (odified o!inion in the auditor+s re!ort, if necessar#, or disclosure of it to (ana)e(ent
or an audit co((ittee'
3. G he nature and e,tent of the auditor+s review of the auditor+s e,ternal e,!ert+s work'
4. G Lhether the auditor or the auditor+s e,ternal e,!ert will test source data'
BB7 ISA B40 A660N=II
1. G he auditor+s e,ternal e,!ert+s access to the entit#+s records, files, !ersonnel and to
e,!erts en)a)ed "# the entit#'
2. G 6rocedures for co((unication "etween the auditor+s e,ternal e,!ert and the entit#'
3. G he auditor+s and the auditor+s e,ternal e,!ert+s access to each other+s workin) !a!ers'
4. G 7wnershi! and control of workin) !a!ers durin) and after the en)a)e(ent, includin) an#
file retention re*uire(ents'
5. G he auditor+s e,ternal e,!ert+s res!onsi"ilit# to !erfor( work with due skill and care'
6. G he auditor+s e,ternal e,!ert+s co(!etence and ca!a"ilit# to !erfor( the work'
7. G he e,!ectation that the auditor+s e,ternal e,!ert will use all knowled)e that e,!ert has
that is relevant to the audit or, if not, will infor( the auditor'
8. G An# restriction on the auditor+s e,ternal e,!ert+s association with the auditor+s re!ort'
9. G An# a)ree(ent to infor( the auditor+s e,ternal e,!ert of the auditor+s conclusions
concernin) that e,!ert+s work'
Co..-"ic!tio" !"# Repo'ti"(
1. G Eethods and fre*uenc# of co((unications, includin).
1. o @ow the auditor+s e,ternal e,!ert+s findin)s or conclusions will "e re!orted $for
e,a(!le, written re!ort, oral re!ort, on)oin) in!ut to the en)a)e(ent tea(&'
2. o Identification of s!ecific !ersons within the en)a)e(ent tea( who will liaise
with the auditor+s e,ternal e,!ert'
2. G Lhen the auditor+s e,ternal e,!ert will co(!lete the work and re!ort findin)s or
conclusions to the auditor'
3. G he auditor+s e,ternal e,!ert+s res!onsi"ilit# to co((unicate !ro(!tl# an# !otential
dela# in co(!letin) the work, and an# !otential reservation or li(itation on that e,!ert+s findin)s
or conclusions'
4. G he auditor+s e,ternal e,!ert+s res!onsi"ilit# to co((unicate !ro(!tl# instances in
which the entit# restricts that e,!ert+s access to records, files, !ersonnel or e,!erts en)a)ed "# the
entit#'
5. G he auditor+s e,ternal e,!ert+s res!onsi"ilit# to co((unicate to the auditor all
infor(ation that e,!ert "elieves (a# "e relevant to the audit, includin) an# chan)es in
circu(stances !reviousl# co((unicated'
6. G he auditor+s e,ternal e,!ert+s res!onsi"ilit# to co((unicate circu(stances that
ISA B40 A660N=II BB8
(a# create threats to that e,!ert+s o";ectivit#, and an# relevant safe)uards that (a# eli(inate or
reduce such threats to an acce!ta"le level'
Co"fi#e"ti!0it/
G he need for the auditor+s e,!ert to o"serve confidentialit# re*uire(ents, includin).
1. o he confidentialit# !rovisions of relevant ethical re*uire(ents that a!!l# to the auditor'
2. o Additional re*uire(ents that (a# "e i(!osed "# law or re)ulation, if an#'
3. o S!ecific confidentialit# !rovisions re*uested "# the entit#, if an#'
BB5 ISA B40 A660N=II
INTERNATIONAL STANDARD ON AUDITING B00
FOR)ING AN O*INION AND RE*ORTING ON FINANCIAL STATE)ENTS
CONTENTS
6ara)ra!h
For( of 7!inion ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A11-A14 Auditor+s
Ae!ort ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A19-A44 Su!!le(entar# Infor(ation
6resented with the Financial State(ents '''''''' A45-A51 A!!endi,. Illustrations of Auditors+ Ae!orts on
Financial State(ents
International Standard on Auditin) $ISA& 700, CFor(in) an 7!inion and Ae!ortin) on Financial
State(ents,D should "e read in con;unction with ISA 400, C7verall 7";ectives of the Inde!endent Auditor
and the %onduct of an Audit in Accordance with International Standards on Auditin)'D
ISA 700 B70
I"t'o#-ctio"
Scope of thi ISA
for( an o!inion on the financial state(ents' It also deals with the for( and content of the auditor+s
re!ort issued as a result of an audit of financial state(ents'
2. 4' ISA 705
1
and ISA 70B
4
deal with how the for( and content of the auditor+s re!ort are
affected when the auditor e,!resses a (odified o!inion or includes an 0(!hasis of Eatter
!ara)ra!h or an 7ther Eatter !ara)ra!h in the auditor+s re!ort'
3. 9' his ISA is written in the conte,t of a co(!lete set of )eneral !ur!ose financial
state(ents' ISA 800
9
deals with s!ecial considerations when financial state(ents are !re!ared in
accordance with a s!ecial !ur!ose fra(ework' ISA 805
4
deals with s!ecial considerations relevant
to an audit of a sin)le financial state(ent or of a s!ecific ele(ent, account or ite( of a financial
state(ent'
4. 4' his ISA !ro(otes consistenc# in the auditor+s re!ort' %onsistenc# in the auditor+s re!ort,
when the audit has "een conducted in accordance with ISAs, !ro(otes credi"ilit# in the )lo"al
(arket!lace "# (akin) (ore readil# identifia"le those audits that have "een conducted in
accordance with )lo"all# reco)niJed standards' It also hel!s to !ro(ote the user+s understandin)
and to identif# unusual circu(stances when the# occur'
Effecti9e D!te
15, 4005'
O$1ecti9e
B' he o";ectives of the auditor are.
1$a& o for( an o!inion on the financial state(ents "ased on an evaluation of the conclusions drawn
fro( the audit evidence o"tained? and
2$"& o e,!ress clearl# that o!inion throu)h a written re!ort that also descri"es the "asis for
that o!inion'
1
ISA 70B, C0(!hasis of Eatter 6ara)ra!hs and 7ther Eatter 6ara)ra!hs in the
Inde!endent Auditor+s Ae!ort'D 9
ISA 800, CS!ecial %onsiderationsNAudits of Financial State(ents 6re!ared in Accordance with
S!ecial 6ur!ose Fra(eworks'D 4
ISA 805, CS!ecial %onsiderationsNAudits of Sin)le Financial State(ents and S!ecific 0le(ents, Accounts or Ite(s of a
Financial State(ent'D
B71 ISA 700
F7AEIN< AN 76INI7N AN= A067AIN< 7N FINAN%IAM SA0E0NS
Defi"itio"
1$a&<eneral !ur!ose financial state(ents K Financial state(ents !re!ared in accordance with a )eneral
!ur!ose fra(ework'
2$"& <eneral !ur!ose fra(ework K A financial re!ortin) fra(ework desi)ned to (eet the co((on
financial infor(ation needs of a wide ran)e of users' he financial re!ortin) fra(ework (a# "e a
fair !resentation fra(ework or a co(!liance fra(ework'
he ter( Cfair !resentation fra(eworkD is used to refer to a financial re!ortin) fra(ework
that re*uires co(!liance with the re*uire(ents of the fra(ework and.
1$i& Acknowled)es e,!licitl# or i(!licitl# that, to achieve fair !resentation of the financial state(ents,
it (a# "e necessar# for (ana)e(ent to !rovide disclosures "e#ond those s!ecificall# re*uired "#
the fra(ework? or
2$ii& Acknowled)es e,!licitl# that it (a# "e necessar# for (ana)e(ent to de!art fro( a
re*uire(ent of the fra(ework to achieve fair !resentation of the financial state(ents' Such
de!artures are e,!ected to "e necessar# onl# in e,tre(el# rare circu(stances'
he ter( Cco(!liance fra(eworkD is used to refer to a financial re!ortin) fra(ework that
re*uires co(!liance with the re*uire(ents of the fra(ework, "ut does not contain the
acknowled)e(ents in $i& or $ii& a"ove'
5
$c& Un(odified o!inion K he o!inion e,!ressed "# the auditor when the auditor concludes
that the financial state(ents are !re!ared, in all (aterial res!ects, in accordance with the
B
8' Aeference to Cfinancial state(entsD in this ISA (eans Ca co(!lete set of )eneral !ur!ose financial
state(ents, includin) the related notes'D he related notes ordinaril# co(!rise a su((ar# of
si)nificant accountin) !olicies and other e,!lanator# infor(ation' he re*uire(ents of the
a!!lica"le financial re!ortin) fra(ework deter(ine the for( and content of the financial
state(ents, and what constitutes a co(!lete set of financial state(ents'
5
ISA 400, C7verall 7";ectives of the Inde!endent Auditor and the %onduct of an Audit in Accordance
with International Standards on Auditin),D !ara)ra!h 19$a&' B
6ara)ra!hs 95-9B deal with the !hrases used to e,!ress this o!inion in the case of a fair !resentation fra(ework and a
ISA 700 B74
5' Aeference to CInternational Financial Ae!ortin) StandardsD in this ISA (eans the International
Financial Ae!ortin) Standards issued "# the International Accountin) Standards 1oard, and
reference to CInternational 6u"lic Sector Accountin) StandardsD (eans the International 6u"lic
Sector Accountin) Standards issued "# the International 6u"lic Sector Accountin) Standards
1oard'
Re2-i'e.e"t Fo'.i"( !" Opi"io" o" the Fi"!"ci!0 St!te.e"t
1. 10' he auditor shall for( an o!inion on whether the financial state(ents are !re!ared, in all
(aterial res!ects, in accordance with the a!!lica"le financial re!ortin) fra(ework'
7 8
1. 11' In order to for( that o!inion, the auditor shall conclude as to whether the auditor has
o"tained reasona"le assurance a"out whether the financial state(ents as a whole are free fro(
(aterial (isstate(ent, whether due to fraud or error' hat conclusion shall take into account.
2. $a& he auditor+s conclusion, in accordance with ISA 990, whether sufficient a!!ro!riate
audit evidence has "een o"tained?
5
3. $"& he auditor+s conclusion, in accordance with ISA 450, whether uncorrected (isstate(ents
are (aterial, individuall# or in a))re)ate?
10
and
4. $c& he evaluations re*uired "# !ara)ra!hs 14-15'
2. 14' he auditor shall evaluate whether the financial state(ents are !re!ared, in all (aterial
res!ects, in accordance with the re*uire(ents of the a!!lica"le financial re!ortin) fra(ework'
his evaluation shall include consideration of the *ualitative as!ects of the entit#+s accountin)
!ractices, includin) indicators of !ossi"le "ias in (ana)e(ent+s ;ud)(ents' $Aef. 6ara' A1-A9&
1. 19' In !articular, the auditor shall evaluate whether, in view of the re*uire(ents of the
a!!lica"le financial re!ortin) fra(ework.
2. $a& he financial state(ents ade*uatel# disclose the si)nificant accountin) !olicies selected
and a!!lied?
3. $"& he accountin) !olicies selected and a!!lied are consistent with the a!!lica"le financial
re!ortin) fra(ework and are a!!ro!riate?
7
ISA 400, !ara)ra!h 11' 8
6ara)ra!hs 95-9B deal with the !hrases used to e,!ress this o!inion in the case of a fair !resentation fra(ework and a
5
ISA 990, Che Auditor+s Aes!onses to Assessed Aisks,D !ara)ra!h 4B' 10
ISA 450, C0valuation of Eisstate(ents Identified durin) the Audit,D !ara)ra!h 11'
B79 ISA 700
1. $c& he accountin) esti(ates (ade "# (ana)e(ent are reasona"le?
2. $d& he infor(ation !resented in the financial state(ents is relevant, relia"le, co(!ara"le
and understanda"le?
3. $e& he financial state(ents !rovide ade*uate disclosures to ena"le the intended users to
understand the effect of (aterial transactions and events on the infor(ation conve#ed in the
financial state(ents? and $Aef. 6ara' A4&
4. $f& he ter(inolo)# used in the financial state(ents, includin) the title of each financial
state(ent, is a!!ro!riate'
114' Lhen the financial state(ents are !re!ared in accordance with a fair !resentation
fra(ework, the evaluation re*uired "# !ara)ra!hs 14-19 shall also include whether the
financial state(ents achieve fair !resentation' he auditor+s evaluation as to whether the
financial state(ents achieve fair !resentation shall include consideration of.
2$a& he overall !resentation, structure and content of the financial state(ents? and
3$"& Lhether the financial state(ents, includin) the related notes, re!resent the underl#in)
transactions and events in a (anner that achieves fair !resentation'
2. 15' he auditor shall evaluate whether the financial state(ents ade*uatel# refer to or descri"e
the a!!lica"le financial re!ortin) fra(ework' $Aef. 6ara' A5A10&
Fo'. of Opi"io"
1. 1B' he auditor shall e,!ress an un(odified o!inion when the auditor concludes that the
financial state(ents are !re!ared, in all (aterial res!ects, in accordance with the a!!lica"le
117' If the auditor.
2$a&concludes that, "ased on the audit evidence o"tained, the financial state(ents as a whole are
not free fro( (aterial (isstate(ent? or
3$"& is una"le to o"tain sufficient a!!ro!riate audit evidence to conclude that the financial
state(ents as a whole are free fro( (aterial (isstate(ent,
the auditor shall (odif# the o!inion in the auditor+s re!ort in accordance with ISA 705'
18' If financial state(ents !re!ared in accordance with the re*uire(ents of a fair !resentation
fra(ework do not achieve fair !resentation, the auditor shall discuss the (atter with (ana)e(ent
and, de!endin) on the
ISA 700 B74
re*uire(ents of the a!!lica"le financial re!ortin) fra(ework and how the (atter is resolved, shall
deter(ine whether it is necessar# to (odif# the o!inion in the auditor+s re!ort in accordance with
ISA 705' $Aef. 6ara' A11&
15' Lhen the financial state(ents are !re!ared in accordance with a co(!liance fra(ework, the
auditor is not re*uired to evaluate whether the financial state(ents achieve fair !resentation'
@owever, if in e,tre(el# rare circu(stances the auditor concludes that such financial state(ents
are (isleadin), the auditor shall discuss the (atter with (ana)e(ent and, de!endin) on how it is
resolved, shall deter(ine whether, and how, to co((unicate it in the auditor+s re!ort' $Aef. 6ara'
A14&
A-#ito'> Repo't
40' he auditor+s re!ort shall "e in writin)' $Aef. 6ara' A19-A14&
Auditor8s +eport for Audits Conducted in Accordance #ith International )tandards on Auditing
itle
41' he auditor+s re!ort shall have a title that clearl# indicates that it is the re!ort of an inde!endent
auditor' $Aef. 6ara' A15&
Addressee
44' he auditor+s re!ort shall "e addressed as re*uired "# the circu(stances of the en)a)e(ent' $Aef.
6ara' A1B&
Introductor# 6ara)ra!h
49' he introductor# !ara)ra!h in the auditor+s re!ort shall. $Aef. 6ara' A17A15&
1$a& Identif# the entit# whose financial state(ents have "een audited?
2$"& State that the financial state(ents have "een audited?
3$c& Identif# the title of each state(ent that co(!rises the financial state(ents?
4$d& Aefer to the su((ar# of si)nificant accountin) !olicies and other e,!lanator#
infor(ation? and
5$e&S!ecif# the date or !eriod covered "# each financial state(ent co(!risin) the financial
state(ents'
Eana)e(ent+s Aes!onsi"ilit# for the Financial State(ents
44' his section of the auditor+s re!ort descri"es the res!onsi"ilities of those in the or)aniJation that
are res!onsi"le for the !re!aration of the financial state(ents' he auditor+s re!ort need not refer
s!ecificall# to
B75 ISA 700
C(ana)e(ent,D "ut shall use the ter( that is a!!ro!riate in the conte,t of the le)al fra(ework in
the !articular ;urisdiction' In so(e ;urisdictions, the a!!ro!riate reference (a# "e to those char)ed
with )overnance'
1. 45' he auditor+s re!ort shall include a section with the headin) CEana)e(ent+s Uor other
a!!ro!riate ter(V Aes!onsi"ilit# for the Financial State(ents'D
2. 4B' he auditor+s re!ort shall descri"e (ana)e(ent+s res!onsi"ilit# for the !re!aration of the
financial state(ents' he descri!tion shall include an e,!lanation that (ana)e(ent is res!onsi"le
for the !re!aration of the financial state(ents in accordance with the a!!lica"le financial re!ortin)
fra(ework, and for such internal control as it deter(ines is necessar# to ena"le the !re!aration of
financial state(ents that are free fro( (aterial (isstate(ent, whether due to fraud or error' $Aef.
6ara' A40-A49&
3. 47' Lhere the financial state(ents are !re!ared in accordance with a fair !resentation
fra(ework, the e,!lanation of (ana)e(ent+s res!onsi"ilit# for the financial state(ents in the
auditor+s re!ort shall refer to Cthe !re!aration and fair !resentation of these financial state(entsD
or Cthe !re!aration of financial state(ents that )ive a true and fair view,D as a!!ro!riate in the
circu(stances'
Auditor+s Aes!onsi"ilit#
1. 48' he auditor+s re!ort shall include a section with the headin) CAuditor+s Aes!onsi"ilit#'D
2. 45' he auditor+s re!ort shall state that the res!onsi"ilit# of the auditor is to e,!ress an
o!inion on the financial state(ents "ased on the audit' $Aef. 6ara' A44&
3. 90' he auditor+s re!ort shall state that the audit was conducted in accordance with
International Standards on Auditin)' he auditor+s re!ort shall also e,!lain that those standards
re*uire that the auditor co(!l# with ethical re*uire(ents and that the auditor !lan and !erfor( the
audit to o"tain reasona"le assurance a"out whether the financial state(ents are free fro( (aterial
(isstate(ent' $Aef. 6ara' A45-A4B&
1. 91' he auditor+s re!ort shall descri"e an audit "# statin) that.
2. $a& An audit involves !erfor(in) !rocedures to o"tain audit evidence a"out the a(ounts and
disclosures in the financial state(ents?
3. $"& he !rocedures selected de!end on the auditor+s ;ud)(ent, includin) the assess(ent of the
risks of (aterial (isstate(ent of the financial state(ents, whether due to fraud or error' In
(akin) those risk assess(ents, the auditor considers internal control relevant to the entit#+s
!re!aration of the financial state(ents in order to desi)n audit !rocedures that are a!!ro!riate
in the circu(stances, "ut not for the !ur!ose of e,!ressin) an o!inion on the effectiveness of
the
ISA 700 B7B
entit#+s internal control' In circu(stances when the auditor also has a res!onsi"ilit# to
e,!ress an o!inion on the effectiveness of internal control in con;unction with the audit of
the financial state(ents, the auditor shall o(it the !hrase that the auditor+s consideration of
internal control is not for the !ur!ose of e,!ressin) an o!inion on the effectiveness of
internal control? and
$c& An audit also includes evaluatin) the a!!ro!riateness of the accountin) !olicies used and
the reasona"leness of accountin) esti(ates (ade "# (ana)e(ent, as well as the overall
1. 94' Lhere the financial state(ents are !re!ared in accordance with a fair !resentation
fra(ework, the descri!tion of the audit in the auditor+s re!ort shall refer to Cthe entit#+s
!re!aration and fair !resentation of the financial state(entsD or Cthe entit#+s !re!aration of
financial state(ents that )ive a true and fair view,D as a!!ro!riate in the circu(stances'
2. 99' he auditor+s re!ort shall state whether the auditor "elieves that the audit evidence the
auditor has o"tained is sufficient and a!!ro!riate to !rovide a "asis for the auditor+s o!inion'
Auditor+s 7!inion
1. 94' he auditor+s re!ort shall include a section with the headin) C7!inion'D
1. 95' Lhen e,!ressin) an un(odified o!inion on financial state(ents !re!ared in accordance
with a fair !resentation fra(ework, the auditor+s o!inion shall, unless otherwise re*uired "#
law or re)ulation, use one of the followin) !hrases, which are re)arded as "ein) e*uivalent.
2. $a& he financial state(ents !resent fairl#, in all (aterial res!ects, H in accordance with Uthe
a!!lica"le financial re!ortin) fra(eworkV? or
3. $"& he financial state(ents )ive a true and fair view of H in accordance with Uthe a!!lica"le
financial re!ortin) fra(eworkV' $Aef. 6ara' A47-A99&
2. 9B' Lhen e,!ressin) an un(odified o!inion on financial state(ents !re!ared in accordance
with a co(!liance fra(ework, the auditor+s o!inion shall "e that the financial state(ents are
!re!ared, in all (aterial res!ects, in accordance with Uthe a!!lica"le financial re!ortin)
fra(eworkV' $Aef. 6ara' A47, A45-A99&
3. 97' If the reference to the a!!lica"le financial re!ortin) fra(ework in the auditor+s o!inion is
not to International Financial Ae!ortin) Standards issued "# the International Accountin)
Standards 1oard or International 6u"lic Sector Accountin) Standards issued "# the International
6u"lic Sector Accountin) Standards 1oard, the auditor+s o!inion shall identif# the ;urisdiction of
ori)in of the fra(ework'
B77 ISA 700
7ther Ae!ortin) Aes!onsi"ilities
1. 98' If the auditor addresses other re!ortin) res!onsi"ilities in the auditor+s re!ort on the
financial state(ents that are in addition to the auditor+s res!onsi"ilit# under the ISAs to re!ort on
the financial state(ents, these other re!ortin) res!onsi"ilities shall "e addressed in a se!arate
section in the auditor+s re!ort that shall "e su"-titled CAe!ort on 7ther Me)al and Ae)ulator#
Ae*uire(ents,D or otherwise as a!!ro!riate to the content of the section' $Aef. 6ara' A94-A95&
2. 95' If the auditor+s re!ort contains a se!arate section on other re!ortin) res!onsi"ilities, the
headin)s, state(ents and e,!lanations referred to in !ara)ra!hs 49-97 shall "e under the su"-title
CAe!ort on the Financial State(ents'D he CAe!ort on 7ther Me)al and Ae)ulator# Ae*uire(entsD
shall follow the CAe!ort on the Financial State(ents'D $Aef. 6ara' A9B&
Si)nature of the Auditor
40' he auditor+s re!ort shall "e si)ned' $Aef. 6ara' A97&
=ate of the Auditor+s Ae!ort
41' he auditor+s re!ort shall "e dated no earlier than the date on which the auditor has o"tained
sufficient a!!ro!riate audit evidence on which to "ase the auditor+s o!inion on the financial
state(ents, includin) evidence that. $Aef. 6ara' A98-A41&
1$a& All the state(ents that co(!rise the financial state(ents, includin) the related notes,
have "een !re!ared? and
2$"& hose with the reco)niJed authorit# have asserted that the# have taken res!onsi"ilit# for
Auditor+s Address
44' he auditor+s re!ort shall na(e the location in the ;urisdiction where the auditor !ractices'
Auditor8s +eport (rescribed by :a# or +egulation
49' If the auditor is re*uired "# law or re)ulation of a s!ecific ;urisdiction to use a s!ecific la#out or
wordin) of the auditor+s re!ort, the auditor+s re!ort shall refer to International Standards on
Auditin) onl# if the auditor+s re!ort includes, at a (ini(u(, each of the followin) ele(ents. $Aef.
6ara' A44&
1. $a& A title?
2. $"& An addressee, as re*uired "# the circu(stances of the en)a)e(ent?
3. $c& An introductor# !ara)ra!h that identifies the financial state(ents audited?
ISA 700 B78
1$d& A descri!tion of the res!onsi"ilit# of (ana)e(ent $or other a!!ro!riate ter(, see
!ara)ra!h 44& for the !re!aration of the financial state(ents?
1$e& A descri!tion of the auditor+s res!onsi"ilit# to e,!ress an o!inion on the financial
state(ents and the sco!e of the audit, that includes.
% G A reference to International Standards on Auditin) and the law or re)ulation?
and
% G A descri!tion of an audit in accordance with those standards?
2$f& An o!inion !ara)ra!h containin) an e,!ression of o!inion on the financial state(ents and a
reference to the a!!lica"le financial re!ortin) fra(ework used to !re!are the financial state(ents
$includin) identif#in) the ;urisdiction of ori)in of the financial re!ortin) fra(ework that is not
International Financial Ae!ortin) Standards or International 6u"lic Sector Accountin) Standards,
see !ara)ra!h 97&?
3$)& he auditor+s si)nature?
4$h& he date of the auditor+s re!ort? and
5$i& he auditor+s address'
Auditor8s +eport for Audits Conducted in Accordance #ith =oth Auditing )tandards of a )pecific
Gurisdiction and International )tandards on Auditing
44' An auditor (a# "e re*uired to conduct an audit in accordance with the auditin) standards of a
s!ecific ;urisdiction $the Cnational auditin) standardsD&, "ut (a# additionall# have co(!lied with
the ISAs in the conduct of the audit' If this is the case, the auditor+s re!ort (a# refer to
International Standards on Auditin) in addition to the national auditin) standards, "ut the auditor
shall do so onl# if. $Aef. 6ara' A49-A44&
1$a& here is no conflict "etween the re*uire(ents in the national auditin) standards and those
in ISAs that would lead the auditor $i& to for( a different o!inion, or $ii& not to include an
0(!hasis of Eatter !ara)ra!h that, in the !articular circu(stances, is re*uired "# ISAs? and
2$"& he auditor+s re!ort includes, at a (ini(u(, each of the ele(ents set out in !ara)ra!h 49$a&$i&
when the auditor uses the la#out or wordin) s!ecified "# the national auditin) standards'
Aeference to law or re)ulation in !ara)ra!h 49$e& shall "e read as reference to the national
auditin) standards' he auditor+s re!ort shall there"# identif# such national auditin) standards'
B75 ISA 700
45' Lhen the auditor+s re!ort refers to "oth the national auditin) standards and International
Standards on Auditin), the auditor+s re!ort shall identif# the ;urisdiction of ori)in of the national
auditin) standards'
S-pp0e.e"t!'/ I"fo'.!tio" *'ee"te# &ith the Fi"!"ci!0 St!te.e"t $Aef. 6ara' A45-A51&
1. 4B' If su!!le(entar# infor(ation that is not re*uired "# the a!!lica"le financial re!ortin)
fra(ework is !resented with the audited financial state(ents, the auditor shall evaluate whether
such su!!le(entar# infor(ation is clearl# differentiated fro( the audited financial state(ents' If
such su!!le(entar# infor(ation is not clearl# differentiated fro( the audited financial state(ents,
the auditor shall ask (ana)e(ent to chan)e how the unaudited su!!le(entar# infor(ation is
!resented' If (ana)e(ent refuses to do so, the auditor shall e,!lain in the auditor+s re!ort that
such su!!le(entar# infor(ation has not "een audited'
2. 47' Su!!le(entar# infor(ation that is not re*uired "# the a!!lica"le financial re!ortin)
fra(ework "ut is nevertheless an inte)ral !art of the financial state(ents "ecause it cannot "e
clearl# differentiated fro( the audited financial state(ents due to its nature and how it is !resented
shall "e covered "# the auditor+s o!inion'
OOO
Q-!0it!ti9e Apect of the E"tit/> Acco-"ti"( *'!ctice $Aef. 6ara' 14&
A1' Eana)e(ent (akes a nu("er of ;ud)(ents a"out the a(ounts and disclosures in the financial
state(ents'
A4' ISA 4B0 contains a discussion of the *ualitative as!ects of accountin) !ractices'
11
In considerin)
the *ualitative as!ects of the entit#+s accountin) !ractices, the auditor (a# "eco(e aware of
!ossi"le "ias in (ana)e(ent+s ;ud)(ents' he auditor (a# conclude that the cu(ulative effect of
a lack of neutralit#, to)ether with the effect of uncorrected (isstate(ents, causes the financial
state(ents as a whole to "e (ateriall# (isstated' Indicators of a lack of neutralit# that (a# affect
the auditor+s evaluation of whether the financial state(ents as a whole are (ateriall# (isstated
G he selective correction of (isstate(ents "rou)ht to (ana)e(ent+s attention durin) the
audit $for e,a(!le, correctin) (isstate(ents with the effect of increasin) re!orted
earnin)s, "ut not correctin) (isstate(ents that have the effect of decreasin) re!orted
earnin)s&'
ISA 4B0, C%o((unication with hose %har)ed with <overnance,D A!!endi, 4'
ISA 700 B80
G 6ossi"le (ana)e(ent "ias in the (akin) of accountin) esti(ates'
A9' ISA 540 addresses !ossi"le (ana)e(ent "ias in (akin) accountin) esti(ates'
14
Indicators of
!ossi"le (ana)e(ent "ias do not constitute (isstate(ents for !ur!oses of drawin) conclusions on
the reasona"leness of individual accountin) esti(ates' he# (a#, however, affect the auditor+s
evaluation of whether the financial state(ents as a whole are free fro( (aterial (isstate(ent'
Dic0o-'e of the Effect of )!te'i!0 T'!"!ctio" !"# E9e"t o" the I"fo'.!tio" Co"9e/e# i" the
Fi"!"ci!0 St!te.e"t $Aef. 6ara' 19$e&&
A4' It is co((on for financial state(ents !re!ared in accordance with a )eneral !ur!ose fra(ework to
!resent an entit#+s financial !osition, financial !erfor(ance and cash flows' In such circu(stances,
the auditor evaluates whether the financial state(ents !rovide ade*uate disclosures to ena"le the
intended users to understand the effect of (aterial transactions and events on the entit#+s financial
!osition, financial !erfor(ance and cash flows'
Dec'iptio" of the App0ic!$0e Fi"!"ci!0 Repo'ti"( F'!.e&o'% $Aef. 6ara' 15&
A5' As e,!lained in ISA 400, the !re!aration of the financial state(ents "# (ana)e(ent and, where
a!!ro!riate, those char)ed with )overnance re*uires the inclusion of an ade*uate descri!tion of
the a!!lica"le financial re!ortin) fra(ework in the financial state(ents'
19
hat descri!tion is
i(!ortant "ecause it advises users of the financial state(ents of the fra(ework on which the
financial state(ents are "ased'
AB' A descri!tion that the financial state(ents are !re!ared in accordance with a !articular a!!lica"le
financial re!ortin) fra(ework is a!!ro!riate onl# if the financial state(ents co(!l# with all the
re*uire(ents of that fra(ework that are effective durin) the !eriod covered "# the financial
state(ents'
A7' A descri!tion of the a!!lica"le financial re!ortin) fra(ework that contains i(!recise *ualif#in) or
li(itin) lan)ua)e $for e,a(!le, Cthe financial state(ents are in su"stantial co(!liance with
International Financial Ae!ortin) StandardsD& is not an ade*uate descri!tion of that fra(ework as
it (a# (islead users of the financial state(ents'
+eference to <ore than ,ne Financial +eporting Fra$e#or.
A8' In so(e cases, the financial state(ents (a# re!resent that the# are !re!ared in accordance with
two financial re!ortin) fra(eworks $for e,a(!le, the national fra(ework and International
Financial Ae!ortin) Standards&' his
14
ISA 540, CAuditin) Accountin) 0sti(ates, Includin) Fair Falue Accountin) 0sti(ates, and Aelated =isclosures,D !ara)ra!h 41'
19
B81 ISA 700
(a# "e "ecause (ana)e(ent is re*uired, or has chosen, to !re!are the financial state(ents in
accordance with "oth fra(eworks, in which case "oth are a!!lica"le financial re!ortin)
fra(eworks' Such descri!tion is a!!ro!riate onl# if the financial state(ents co(!l# with each of
the fra(eworks individuall#' o "e re)arded as "ein) !re!ared in accordance with "oth
fra(eworks, the financial state(ents need to co(!l# with "oth fra(eworks si(ultaneousl# and
without an# need for reconcilin) state(ents' In !ractice, si(ultaneous co(!liance is unlikel#
unless the ;urisdiction has ado!ted the other fra(ework $for e,a(!le, International Financial
Ae!ortin) Standards& as its own national fra(ework, or has eli(inated all "arriers to co(!liance
with it'
A5' Financial state(ents that are !re!ared in accordance with one financial re!ortin) fra(ework and
that contain a note or su!!le(entar# state(ent reconcilin) the results to those that would "e
shown under another fra(ework, are not !re!ared in accordance with that other fra(ework' his
is "ecause the financial state(ents do not include all the infor(ation in the (anner re*uired "#
that other fra(ework'
A10' he financial state(ents (a#, however, "e !re!ared in accordance with one a!!lica"le financial
re!ortin) fra(ework and, in addition, descri"e in the notes to the financial state(ents the e,tent to
which the financial state(ents co(!l# with another fra(ework $for e,a(!le, financial state(ents
!re!ared in accordance with the national fra(ework that also descri"e the e,tent to which the#
co(!l# with International Financial Ae!ortin) Standards&' Such descri!tion is su!!le(entar#
financial infor(ation and, as discussed in !ara)ra!h 47, is considered an inte)ral !art of the
financial state(ents and, accordin)l#, is covered "# the auditor+s o!inion'
Fo'. of Opi"io" $Aef. 6ara' 18-15&
A11' here (a# "e cases where the financial state(ents, althou)h !re!ared in accordance with the
re*uire(ents of a fair !resentation fra(ework, do not achieve fair !resentation' Lhere this is the
case, it (a# "e !ossi"le for (ana)e(ent to include additional disclosures in the financial
state(ents "e#ond those s!ecificall# re*uired "# the fra(ework or, in e,tre(el# rare
circu(stances, to de!art fro( a re*uire(ent in the fra(ework in order to achieve fair !resentation
A14' It will "e e,tre(el# rare for the auditor to consider financial state(ents that are !re!ared in
accordance with a co(!liance fra(ework to "e (isleadin) if, in accordance with ISA 410, the
auditor deter(ined that the fra(ework is acce!ta"le'
14
ISA 410, CA)reein) the er(s of Audit 0n)a)e(ents,D !ara)ra!h B$a&'
ISA 700 B84
A-#ito'> Repo't $Aef. 6ara' 40&
A19' A written re!ort enco(!asses re!orts issued in hard co!# for(at and those usin) an electronic
(ediu('
A14' he A!!endi, contains illustrations of auditors+ re!orts on financial state(ents, incor!oratin) the
ele(ents set forth in !ara)ra!hs 41-44'
Auditor8s +eport for Audits Conducted in Accordance #ith International )tandards on Auditing
itle $Aef. 6ara' 41&
A15' A title indicatin) the re!ort is the re!ort of an inde!endent auditor, for e,a(!le, CInde!endent
Auditor+s Ae!ort,D affir(s that the auditor has (et all of the relevant ethical re*uire(ents
re)ardin) inde!endence and, therefore, distin)uishes the inde!endent auditor+s re!ort fro( re!orts
issued "# others'
Addressee $Aef. 6ara' 44&
A1B' Maw or re)ulation often s!ecifies to who( the auditor+s re!ort is to "e addressed in that !articular
;urisdiction' he auditor+s re!ort is nor(all# addressed to those for who( the re!ort is !re!ared,
often either to the shareholders or to those char)ed with )overnance of the entit# whose financial
state(ents are "ein) audited'
Introductor# 6ara)ra!h $Aef. 6ara' 49&
A17' he introductor# !ara)ra!h states, for e,a(!le, that the auditor has audited the acco(!an#in)
financial state(ents of the entit#, which co(!rise Ustate the title of each financial state(ent
co(!risin) the co(!lete set of financial state(ents re*uired "# the a!!lica"le financial re!ortin)
fra(ework, s!ecif#in) the date or !eriod covered "# each financial state(entV and the su((ar# of
si)nificant accountin) !olicies and other e,!lanator# infor(ation'
A18' Lhen the auditor is aware that the audited financial state(ents will "e included in a docu(ent that
contains other infor(ation, such as an annual re!ort, the auditor (a# consider, if the for( of
!resentation allows, identif#in) the !a)e nu("ers on which the audited financial state(ents are
!resented' his hel!s users to identif# the financial state(ents to which the auditor+s re!ort relates'
A15' he auditor+s o!inion covers the co(!lete set of financial state(ents as defined "# the a!!lica"le
financial re!ortin) fra(ework' For e,a(!le, in the case of (an# )eneral !ur!ose fra(eworks, the
financial state(ents include. a "alance sheet, an inco(e state(ent, a state(ent of chan)es in
e*uit#, a cash flow state(ent, and a su((ar# of si)nificant accountin) !olicies and other
e,!lanator# infor(ation' In so(e ;urisdictions additional infor(ation (i)ht also "e considered to
"e an inte)ral !art of the financial state(ents'
B89 ISA 700
Eana)e(ent+s Aes!onsi"ilit# for the Financial State(ents $Aef. 6ara' 4B&
A40' ISA 400 e,!lains the !re(ise, relatin) to the res!onsi"ilities of (ana)e(ent and, where
a!!ro!riate, those char)ed with )overnance, on which an audit in accordance with ISAs is
conducted'
15
Eana)e(ent and, where a!!ro!riate, those char)ed with )overnance acce!t
res!onsi"ilit# for the !re!aration of the financial state(ents in accordance with the a!!lica"le
financial re!ortin) fra(ework, includin) where relevant their fair !resentation' Eana)e(ent also
acce!ts res!onsi"ilit# for such internal control as it deter(ines is necessar# to ena"le the
!re!aration of financial state(ents that are free fro( (aterial (isstate(ent, whether due to fraud
or error' he descri!tion of (ana)e(ent+s res!onsi"ilities in the auditor+s re!ort includes
reference to "oth res!onsi"ilities as it hel!s to e,!lain to users the !re(ise on which an audit is
conducted'
A41' here (a# "e circu(stances when it is a!!ro!riate for the auditor to add to the descri!tion of
(ana)e(ent+s res!onsi"ilit# in !ara)ra!h 4B to reflect additional res!onsi"ilities that are relevant
to the !re!aration of the financial state(ents in the conte,t of the !articular ;urisdiction or the
nature of the entit#'
A44' 6ara)ra!h 4B is consistent with the for( in which the res!onsi"ilities are a)reed in the
en)a)e(ent letter or other suita"le for( of written a)ree(ent, as re*uired "# ISA 410'
1B
ISA 410
!rovides so(e fle,i"ilit# "# e,!lainin) that, if law or re)ulation !rescri"es the res!onsi"ilities of
(ana)e(ent and, where a!!ro!riate, those char)ed with )overnance in relation to financial
re!ortin), the auditor (a# deter(ine that the law or re)ulation includes res!onsi"ilities that, in the
auditor+s ;ud)(ent, are e*uivalent in effect to those set out in ISA 410' For such res!onsi"ilities
that are e*uivalent, the auditor (a# use the wordin) of the law or re)ulation to descri"e the( in
the en)a)e(ent letter or other suita"le for( of written a)ree(ent' In such cases, this wordin) (a#
also "e used in the auditor+s re!ort to descri"e (ana)e(ent+s res!onsi"ilities as re*uired "#
!ara)ra!h 4B' In other circu(stances, includin) where the auditor decides not to use the wordin)
of law or re)ulation as incor!orated in the en)a)e(ent letter, the wordin) of !ara)ra!h 4B is used'
A49' In so(e ;urisdictions, law or re)ulation !rescri"in) (ana)e(ent+s res!onsi"ilities (a#
s!ecificall# refer to a res!onsi"ilit# for the ade*uac# of accountin) "ooks and records, or
accountin) s#ste(' As "ooks, records and s#ste(s are an inte)ral !art of internal control $as
defined in ISA 915
17
&, the descri!tions in ISA 410 and in !ara)ra!h 4B do not (ake s!ecific
reference to the('
15
ISA 400, !ara)ra!h 19$;&' 1B
ISA 410, !ara)ra!h B$"&$i&-$ii&'
17
!ara)ra!h 4$c&'
ISA 700 B84
Auditor+s Aes!onsi"ilit# $Aef. 6ara' 45-90&
A44' he auditor+s re!ort states that the auditor+s res!onsi"ilit# is to e,!ress an o!inion on the financial
state(ents "ased on the audit in order to contrast it to (ana)e(ent+s res!onsi"ilit# for the
!re!aration of the financial state(ents'
A45' he reference to the standards used conve#s to the users of the auditor+s re!ort that the audit has
"een conducted in accordance with esta"lished standards'
A4B' In accordance with ISA 400, the auditor does not re!resent co(!liance with ISAs in the auditor+s
re!ort unless the auditor has co(!lied with the re*uire(ents of ISA 400 and all other ISAs
relevant to the audit'
18
Auditor+s 7!inion $Aef. 6ara' 95-97&
Lordin) of the auditor+s o!inion !rescri"ed "# law or re)ulation
A47' ISA 410 e,!lains that, in so(e cases, law or re)ulation of the relevant ;urisdiction !rescri"es the
wordin) of the auditor+s re!ort $which in !articular includes the auditor+s o!inion& in ter(s that
are si)nificantl# different fro( the re*uire(ents of ISAs' In these circu(stances, ISA 410 re*uires
the auditor to evaluate.
1$a&Lhether users (i)ht (isunderstand the assurance o"tained fro( the audit of the financial
state(ents and, if so,
2$"& Lhether additional e,!lanation in the auditor+s re!ort can (iti)ate !ossi"le (isunderstandin)'
If the auditor concludes that additional e,!lanation in the auditor+s re!ort cannot (iti)ate !ossi"le
(isunderstandin), ISA 410 re*uires the auditor not to acce!t the audit en)a)e(ent, unless
re*uired "# law or re)ulation to do so' In accordance with ISA 410, an audit conducted in
accordance with such law or re)ulation does not co(!l# with ISAs' Accordin)l#, the auditor does
not include an# reference in the auditor+s re!ort to the audit havin) "een conducted in accordance
with International Standards on Auditin)'
15
C6resent fairl#, in all (aterial res!ectsD or C)ive a true and fair viewD
A48' Lhether the !hrase C!resent fairl#, in all (aterial res!ects,D or the !hrase C)ive a true and fair
viewD is used in an# !articular ;urisdiction is deter(ined "# the law or re)ulation )overnin) the
audit of financial state(ents in that ;urisdiction, or "# )enerall# acce!ted !ractice in that
;urisdiction' Lhere law or re)ulation re*uires the use of different wordin), this does not affect the
re*uire(ent in !ara)ra!h 14 of this ISA for the auditor to evaluate the fair !resentation of
financial state(ents !re!ared in accordance with a fair !resentation fra(ework'
18
ISA 400, !ara)ra!h 40' 15
B85 ISA 700
=escri!tion of infor(ation that the financial state(ents !resent
A45' In the case of financial state(ents !re!ared in accordance with a fair !resentation fra(ework, the
auditor+s o!inion states that the financial state(ents !resent fairl#, in all (aterial res!ects, or )ive
a true and fair view of the infor(ation that the financial state(ents are desi)ned to !resent, for
e,a(!le, in the case of (an# )eneral !ur!ose fra(eworks, the financial !osition of the entit# as at
the end of the !eriod and the entit#+s financial !erfor(ance and cash flows for the !eriod then
ended'
=escri!tion of the a!!lica"le financial re!ortin) fra(ework and how it (a# affect the auditor+s o!inion
A90' he identification of the a!!lica"le financial re!ortin) fra(ework in the auditor+s o!inion is
intended to advise users of the auditor+s re!ort of the conte,t in which the auditor+s o!inion is
e,!ressed? it is not intended to li(it the evaluation re*uired in !ara)ra!h 14' he a!!lica"le
financial re!ortin) fra(ework is identified in such ter(s as.
CH in accordance with International Financial Ae!ortin) StandardsD or
CH in accordance with accountin) !rinci!les )enerall# acce!ted in >urisdiction I HD
A91' Lhen the a!!lica"le financial re!ortin) fra(ework enco(!asses financial re!ortin) standards and
le)al or re)ulator# re*uire(ents, the fra(ework is identified in such ter(s as CH in accordance
with International Financial Ae!ortin) Standards and the re*uire(ents of >urisdiction I
%or!orations Act'D ISA 410 deals with circu(stances where there are conflicts "etween the
financial re!ortin) standards and the le)islative or re)ulator# re*uire(ents'
40
A94' As indicated in !ara)ra!h A8, the financial state(ents (a# "e !re!ared in accordance with two
financial re!ortin) fra(eworks, which are therefore "oth a!!lica"le financial re!ortin)
fra(eworks' Accordin)l#, each fra(ework is considered se!aratel# when for(in) the auditor+s
o!inion on the financial state(ents, and the auditor+s o!inion in accordance with !ara)ra!hs 95-9B
refers to "oth fra(eworks as follows.
$a& If the financial state(ents co(!l# with each of the fra(eworks individuall#, two o!inions are
e,!ressed. that is, that the financial state(ents are !re!ared in accordance with one of the
a!!lica"le financial re!ortin) fra(eworks $for e,a(!le, the national fra(ework& and an
o!inion that the financial state(ents are !re!ared in accordance with the other a!!lica"le
financial re!ortin) fra(ework $for e,a(!le, International Financial Ae!ortin) Standards&'
hese o!inions (a# "e e,!ressed se!aratel# or in a sin)le sentence $for e,a(!le, the
financial
ISA 700 B8B
state(ents are !resented fairl#, in all (aterial res!ects, in accordance with accountin)
!rinci!les )enerall# acce!ted in >urisdiction I and with International Financial Ae!ortin)
Standards&'
$"& If the financial state(ents co(!l# with one of the fra(eworks "ut fail to co(!l# with the
other fra(ework, an un(odified o!inion can "e )iven that the financial state(ents are
!re!ared in accordance with the one fra(ework $for e,a(!le, the national fra(ework& "ut
a (odified o!inion )iven with re)ard to the other fra(ework $for e,a(!le, International
Financial Ae!ortin) Standards& in accordance with ISA 705'
A99' As indicated in !ara)ra!h A10, the financial state(ents (a# re!resent co(!liance with the
a!!lica"le financial re!ortin) fra(ework and, in addition, disclose the e,tent of co(!liance with
another financial re!ortin) fra(ework' As e,!lained in !ara)ra!h A4B, such su!!le(entar#
infor(ation is covered "# the auditor+s o!inion as it cannot "e clearl# differentiated fro( the
1. $a& If the disclosure as to the co(!liance with the other fra(ework is (isleadin), a (odified
o!inion is e,!ressed in accordance with ISA 705'
2. $"& If the disclosure is not (isleadin), "ut the auditor ;ud)es it to "e of such i(!ortance that
it is funda(ental to the users+ understandin) of the financial state(ents, an 0(!hasis of Eatter
!ara)ra!h is added in accordance with ISA 70B, drawin) attention to the disclosure'
7ther Ae!ortin) Aes!onsi"ilities $Aef. 6ara' 98-95&
A94' In so(e ;urisdictions, the auditor (a# have additional res!onsi"ilities to re!ort on other (atters
that are su!!le(entar# to the auditor+s res!onsi"ilit# under the ISAs to re!ort on the financial
state(ents' For e,a(!le, the auditor (a# "e asked to re!ort certain (atters if the# co(e to the
auditor+s attention durin) the course of the audit of the financial state(ents' Alternativel#, the
auditor (a# "e asked to !erfor( and re!ort on additional s!ecified !rocedures, or to e,!ress an
o!inion on s!ecific (atters, such as the ade*uac# of accountin) "ooks and records' Auditin)
standards in the s!ecific ;urisdiction often !rovide )uidance on the auditor+s res!onsi"ilities with
res!ect to s!ecific additional re!ortin) res!onsi"ilities in that ;urisdiction'
A95' In so(e cases, the relevant law or re)ulation (a# re*uire or !er(it the auditor to re!ort on these
other res!onsi"ilities within the auditor+s re!ort on the financial state(ents' In other cases, the
auditor (a# "e re*uired or !er(itted to re!ort on the( in a se!arate re!ort'
A9B' hese other re!ortin) res!onsi"ilities are addressed in a se!arate section of the auditor+s re!ort in
order to clearl# distin)uish the( fro( the auditor+s res!onsi"ilit# under the ISAs to re!ort on the
financial state(ents' Lhere
B87 ISA 700
relevant, this section (a# contain su"-headin)$s& that descri"e$s& the content of the other re!ortin)
res!onsi"ilit# !ara)ra!h$s&'
Si)nature of the Auditor $Aef. 6ara' 40&
A97' he auditor+s si)nature is either in the na(e of the audit fir(, the !ersonal na(e of the auditor or
"oth, as a!!ro!riate for the !articular ;urisdiction' In addition to the auditor+s si)nature, in certain
;urisdictions, the auditor (a# "e re*uired to declare in the auditor+s re!ort the auditor+s
!rofessional accountanc# desi)nation or the fact that the auditor or fir(, as a!!ro!riate, has "een
reco)niJed "# the a!!ro!riate licensin) authorit# in that ;urisdiction'
=ate of the Auditor+s Ae!ort $Aef. 6ara' 41&
A98' he date of the auditor+s re!ort infor(s the user of the auditor+s re!ort that the auditor has
considered the effect of events and transactions of which the auditor "eca(e aware and that
occurred u! to that date' he auditor+s res!onsi"ilit# for events and transactions after the date of
the auditor+s re!ort is addressed in ISA 5B0'
41
A95' Since the auditor+s o!inion is !rovided on the financial state(ents and the financial state(ents are
the res!onsi"ilit# of (ana)e(ent, the auditor is not in a !osition to conclude that sufficient
a!!ro!riate audit evidence has "een o"tained until evidence is o"tained that all the state(ents that
co(!rise the financial state(ents, includin) the related notes, have "een !re!ared and
(ana)e(ent has acce!ted res!onsi"ilit# for the('
A40' In so(e ;urisdictions, the law or re)ulation identifies the individuals or "odies $for e,a(!le, the
directors& that are res!onsi"le for concludin) that all the state(ents that co(!rise the financial
state(ents, includin) the related notes, have "een !re!ared, and s!ecifies the necessar# a!!roval
!rocess' In such cases, evidence is o"tained of that a!!roval "efore datin) the re!ort on the
financial state(ents' In other ;urisdictions, however, the a!!roval !rocess is not !rescri"ed in law
or re)ulation' In such cases, the !rocedures the entit# follows in !re!arin) and finaliJin) its
financial state(ents in view of its (ana)e(ent and )overnance structures are considered in order
to identif# the individuals or "od# with the authorit# to conclude that all the state(ents that
co(!rise the financial state(ents, includin) the related notes, have "een !re!ared' In so(e cases,
law or re)ulation identifies the !oint in the financial state(ent re!ortin) !rocess at which the audit
is e,!ected to "e co(!lete'
A41' In so(e ;urisdictions, final a!!roval of the financial state(ents "# shareholders is re*uired "efore
the financial state(ents are issued !u"licl#' In these ;urisdictions, final a!!roval "# shareholders is
not necessar# for the auditor to conclude that sufficient a!!ro!riate audit evidence has "een
o"tained' he date
ISA 5B0, CSu"se*uent 0vents,D !ara)ra!hs 10-17'
ISA 700 B88
of a!!roval of the financial state(ents for !ur!oses of ISAs is the earlier date on which those with
the reco)niJed authorit# deter(ine that all the state(ents that co(!rise the financial state(ents,
includin) the related notes, have "een !re!ared and that those with the reco)niJed authorit# have
asserted that the# have taken res!onsi"ilit# for the('
Auditor8s +eport (rescribed by :a# or +egulation $Aef. 6ara' 49&
A44' ISA 400 e,!lains that the auditor (a# "e re*uired to co(!l# with le)al or re)ulator# re*uire(ents
in addition to ISAs'
44
Lhere this is the case, the auditor (a# "e o"li)ed to use a la#out or wordin)
in the auditor+s re!ort that differs fro( that descri"ed in this ISA' As e,!lained in !ara)ra!h 4,
consistenc# in the auditor+s re!ort, when the audit has "een conducted in accordance with ISAs,
!ro(otes credi"ilit# in the )lo"al (arket!lace "# (akin) (ore readil# identifia"le those audits
that have "een conducted in accordance with )lo"all# reco)niJed standards' Lhen the differences
"etween the le)al or re)ulator# re*uire(ents and ISAs relate onl# to the la#out and wordin) of the
auditor+s re!ort and, at a (ini(u(, each of the ele(ents identified in !ara)ra!h 49$a&$i& are
included in the auditor+s re!ort, the auditor+s re!ort (a# refer to International Standards on
Auditin)' Accordin)l#, in such circu(stances the auditor is considered to have co(!lied with the
re*uire(ents of ISAs, even when the la#out and wordin) used in the auditor+s re!ort are s!ecified
"# le)al or re)ulator# re!ortin) re*uire(ents' Lhere s!ecific re*uire(ents in a !articular
;urisdiction do not conflict with ISAs, ado!tion of the la#out and wordin) used in this ISA assists
users of the auditor+s re!ort (ore readil# to reco)niJe the auditor+s re!ort as a re!ort on an audit
conducted in accordance with ISAs' $ISA 410 deals with circu(stances where law or re)ulation
!rescri"es the la#out or wordin) of the auditor+s re!ort in ter(s that are si)nificantl# different
fro( the re*uire(ents of ISAs'&
Auditor8s +eport for Audits Conducted in Accordance #ith =oth Auditing )tandards of a )pecific
Gurisdiction and International )tandards on Auditing $Aef. 6ara' 44&
A49' he auditor (a# refer in the auditor+s re!ort to the audit havin) "een conducted in accordance
with "oth International Standards on Auditin) as well as the national auditin) standards when, in
addition to co(!l#in) with the relevant national auditin) standards, the auditor co(!lies with
each of the ISAs relevant to the audit'
49
A44' A reference to "oth International Standards on Auditin) and the national auditin) standards is not
a!!ro!riate if there is a conflict "etween the re*uire(ents in ISAs and those in the national
auditin) standards that would lead the auditor to for( a different o!inion or not to include an
0(!hasis of
44
ISA 400, !ara)ra!h A55' 49
B85 ISA 700
Eatter !ara)ra!h that, in the !articular circu(stances, is re*uired "# ISAs' For e,a(!le, so(e
national auditin) standards !rohi"it the auditor fro( includin) an 0(!hasis of Eatter !ara)ra!h to
hi)hli)ht a )oin) concern !ro"le(, whereas ISA 570 re*uires the auditor to add an 0(!hasis of
Eatter !ara)ra!h in such circu(stances'
44
In such a case, the auditor+s re!ort refers onl# to the
auditin) standards $either International Standards on Auditin) or the national auditin) standards&
in accordance with which the auditor+s re!ort has "een !re!ared'
S-pp0e.e"t!'/ I"fo'.!tio" *'ee"te# &ith the Fi"!"ci!0 St!te.e"t $Aef. 6ara' 4B-47&
A45' In so(e circu(stances, the entit# (a# "e re*uired "# law, re)ulation or standards, or (a#
voluntaril# choose, to !resent to)ether with the financial state(ents su!!le(entar# infor(ation
that is not re*uired "# the a!!lica"le financial re!ortin) fra(ework' For e,a(!le, su!!le(entar#
infor(ation (i)ht "e !resented to enhance a user+s understandin) of the a!!lica"le financial
re!ortin) fra(ework or to !rovide further e,!lanation of s!ecific financial state(ent ite(s' Such
infor(ation is nor(all# !resented in either su!!le(entar# schedules or as additional notes'
A4B' he auditor+s o!inion covers su!!le(entar# infor(ation that cannot "e clearl# differentiated fro(
the financial state(ents "ecause of its nature and how it is !resented' For e,a(!le, this would "e
the case when the notes to the financial state(ents include an e,!lanation of the e,tent to which
the financial state(ents co(!l# with another financial re!ortin) fra(ework' he auditor+s o!inion
would also cover notes or su!!le(entar# schedules that are cross-referenced fro( the financial
state(ents'
A47' Su!!le(entar# infor(ation that is covered "# the auditor+s o!inion does not need to "e
s!ecificall# referred to in the introductor# !ara)ra!h of the auditor+s re!ort when the reference to
the notes in the descri!tion of the state(ents that co(!rise the financial state(ents in the
introductor# !ara)ra!h is sufficient'
A48' Maw or re)ulation (a# not re*uire that the su!!le(entar# infor(ation "e audited, and
(ana)e(ent (a# decide not to ask the auditor to include the su!!le(entar# infor(ation within
the sco!e of the audit of the financial state(ents'
A45' he auditor+s evaluation whether unaudited su!!le(entar# infor(ation is !resented in a (anner
that could "e construed as "ein) covered "# the auditor+s o!inion includes, for e,a(!le, where
that infor(ation is !resented in relation to the financial state(ents and an# audited su!!le(entar#
infor(ation, and whether it is clearl# la"eled as Cunaudited'D
ISA 570, C<oin) %oncern,D !ara)ra!h 15'
ISA 700 B50
A50' Eana)e(ent could chan)e the !resentation of unaudited su!!le(entar# infor(ation that could "e
construed as "ein) covered "# the auditor+s o!inion, for e,a(!le, "#.
% G Ae(ovin) an# cross references fro( the financial state(ents to unaudited su!!le(entar#
schedules or unaudited notes so that the de(arcation "etween the audited and unaudited
infor(ation is sufficientl# clear'
% G 6lacin) the unaudited su!!le(entar# infor(ation outside of the financial state(ents or, if
that is not !ossi"le in the circu(stances, at a (ini(u( !lace the unaudited notes to)ether at the
end of the re*uired notes to the financial state(ents and clearl# la"el the( as unaudited'
Unaudited notes that are inter(in)led with the audited notes can "e (isinter!reted as "ein)
audited'
A51' he fact that su!!le(entar# infor(ation is unaudited does not relieve the auditor of the
res!onsi"ilit# to read that infor(ation to identif# (aterial inconsistencies with the audited financial
state(ents' he auditor+s res!onsi"ilities with res!ect to unaudited su!!le(entar# infor(ation are
consistent with those descri"ed in ISA 740'
45
State(ents'D
B51 ISA 700
Appe"#i5
$Aef. 6ara' A14&
I00-t'!tio" of A-#ito'> Repo't o" Fi"!"ci!0 St!te.e"t
1. G Illustration 1. An auditor+s re!ort on financial state(ents !re!ared in accordance with a
fair !resentation fra(ework desi)ned to (eet the co((on financial infor(ation needs of a wide
ran)e of users $for e,a(!le, International Financial Ae!ortin) Standards&'
2. G Illustration 4. An auditor+s re!ort on financial state(ents !re!ared in accordance with a
co(!liance fra(ework desi)ned to (eet the co((on financial infor(ation needs of a wide ran)e
of users'
3. G Illustration 9. An auditor+s re!ort on consolidated financial state(ents !re!ared in
accordance with a fair !resentation fra(ework desi)ned to (eet the co((on financial infor(ation
needs of a wide ran)e of users $for e,a(!le, International Financial Ae!ortin) Standards&'
ISA 700 A660N=II B54
I00-t'!tio" 7G
Ci'c-.t!"ce i"c0-#e the fo00o&i"(G
% G A-#it of ! co.p0ete et of fi"!"ci!0 t!te.e"tJ
% G The fi"!"ci!0 t!te.e"t !'e p'ep!'e# fo' ! (e"e'!0 p-'poe $/ .!"!(e.e"t of the
e"tit/ i" !cco'#!"ce &ith I"te'"!tio"!0 Fi"!"ci!0 Repo'ti"( St!"#!'#J
% G The te'. of the !-#it e"(!(e.e"t 'ef0ect #ec'iptio" of .!"!(e.e"t>
'epo"i$i0it/ fo' the fi"!"ci!0 t!te.e"t i" ISA 270J
% G I" !##itio" to the !-#it of the fi"!"ci!0 t!te.e"t4 the !-#ito' h! othe' 'epo'ti"(
'epo"i$i0itie 'e2-i'e# -"#e' 0oc!0 0!&J
IN=060N=0N AU=I7A+S A067A UA!!ro!riate
AddresseeV
4B
infor(ation'
<anage$ent8s
47
48
4B
Ae!ortin) Standards, and for such HD
B59 ISA 700 A660N=II
!resentation
45
control'
90
audit o!inion'
,pinion
In our o!inion, the financial state(ents !resent fairl#, in all (aterial res!ects, $or gi!e a true and fair !ie#
of& the financial !osition of A1% %o(!an# as at =ece("er 91, 40I1, and $of& its financial !erfor(ance
and its cash flows for the #ear then ended in accordance with International Financial Ae!ortin) Standards'
UAuditor+s addressV
45
I00-t'!tio" 2G
1. G A-#it of ! co.p0ete et of fi"!"ci!0 t!te.e"t 'e2-i'e# $/ 0!& o' 'e(-0!tio"J
2. G The fi"!"ci!0 t!te.e"t !'e p'ep!'e# fo' ! (e"e'!0 p-'poe $/ .!"!(e.e"t of the
e"tit/ i" !cco'#!"ce &ith the Fi"!"ci!0 Repo'ti"( F'!.e&o'% HFYC L!&I of ?-'i#ictio" F
Hth!t i4 ! fi"!"ci!0 'epo'ti"( f'!.e&o'%4 e"co.p!i"( 0!& o' 'e(-0!tio"4 #ei("e# to .eet
the co..o" fi"!"ci!0 i"fo'.!tio" "ee# of ! &i#e '!"(e of -e'4 $-t &hich i "ot ! f!i'
p'ee"t!tio" f'!.e&o'%IJ
3. G The te'. of the !-#it e"(!(e.e"t 'ef0ect the #ec'iptio" of .!"!(e.e"t>
infor(ation'
)!"!(e.e"t>
91
Repo"i$i0it/ fo' the Fi"!"ci!0 St!te.e"t
Eana)e(ent is res!onsi"le for the !re!aration of these financial state(ents in accordance with IYW Maw
of >urisdiction I, and for such internal control as (ana)e(ent deter(ines is necessar# to ena"le the
!re!aration of financial state(ents that are free fro( (aterial (isstate(ent, whether due to fraud or error'
A-#ito'> Repo"i$i0it/
those risk assess(ents, the auditor considers internal control relevant to the entit#+s !re!aration
of the financial state(ents in order to desi)n audit !rocedures that are a!!ro!riate in the circu(stances, "ut
not for the !ur!ose of e,!ressin) an o!inion on the effectiveness of the entit#+s internal control'
94
An audit
also includes evaluatin) the a!!ro!riateness of accountin) !olicies used and the reasona"leness of
accountin) esti(ates (ade "# (ana)e(ent, as well as evaluatin) the !resentation of the financial
state(ents'
audit o!inion'
Opi"io"
In our o!inion, the financial state(ents of A1% %o(!an# for the #ear ended =ece("er 91, 40I1 are
!re!ared, in all (aterial res!ects, in accordance with IYW Maw of >urisdiction I'
UAuditor+s addressV
assess(ents, the auditor considers internal control relevant to the entit#+s !re!aration of the financial state(ents in order to
desi)n audit !rocedures that are a!!ro!riate in the circu(stances'D
ISA 700 A660N=II B5B
I00-t'!tio" 3G
% G A-#it of co"o0i#!te# fi"!"ci!0 t!te.e"t p'ep!'e# fo' ! (e"e'!0 p-'poe $/
.!"!(e.e"t of the p!'e"t i" !cco'#!"ce &ith I"te'"!tio"!0 Fi"!"ci!0 Repo'ti"( St!"#!'#J
% G The te'. of the ('o-p !-#it e"(!(e.e"t 'ef0ect the #ec'iptio" of .!"!(e.e"t>
% G I" !##itio" to the !-#it of the ('o-p fi"!"ci!0 t!te.e"t4 the !-#ito' h! othe'
'epo'ti"( 'epo"i$i0itie 'e2-i'e# -"#e' 0oc!0 0!&J
99
Le have audited the acco(!an#in) consolidated financial state(ents of A1% %o(!an# and its
su"sidiaries, which co(!rise the consolidated "alance sheet as at =ece("er 91, 40I1, and the consolidated
inco(e state(ent, state(ent of chan)es in e*uit# and cash flow state(ent for the #ear then ended, and a
su((ar# of si)nificant accountin) !olicies and other e,!lanator# infor(ation'
<anage$ent8s
94
+esponsibility for the Consolidated Financial )tate$ents
Eana)e(ent is res!onsi"le for the !re!aration and fair !resentation of these consolidated financial
state(ents in accordance with International Financial Ae!ortin) Standards,
95
and for such internal control
as (ana)e(ent deter(ines is necessar# to ena"le the !re!aration of consolidated financial state(ents that
are free fro( (aterial (isstate(ent, whether due to fraud or error'
99
he su"-title CAe!ort on the %onsolidated Financial State(entsD is unnecessar# in circu(stances
when the second su"-title CAe!ort on 7ther Me)al and Ae)ulator# Ae*uire(entsD is not a!!lica"le' 94
is res!onsi"le for the !re!aration of consolidated financial state(ents that )ive a true and fair view in accordance with
International Financial Ae!ortin) Standards, and for such HD
9B
97
audit o!inion'
,pinion
In our o!inion, the consolidated financial state(ents !resent fairl#, in all (aterial res!ects, $or gi!e a true
and fair !ie# of& the financial !osition of A1% %o(!an# and its su"sidiaries as at =ece("er 91, 40I1, and
$of& their financial !erfor(ance and cash flows for the #ear then ended in accordance with International
Financial Ae!ortin) Standards'
UAuditor+s addressV
9B
internal control relevant to the entit#+s !re!aration of consolidated financial state(ents that )ive a
true and fair view in order to desi)n audit !rocedures that are a!!ro!riate in the circu(stances, "ut
not for the !ur!ose of e,!ressin) an o!inion on the effectiveness of the entit#+s internal control'D 97
INTERNATIONAL STANDARD ON AUDITING B0@
)ODIFICATIONS TO THE O*INION IN THE INDE*ENDENT AUDITOR>S
RE*ORT
CONTENTS
6ara)ra!hs
Auditor @as Acce!ted the 0n)a)e(ent '''''''''''''''''''''''''''''''''''''''''''''''''' A19TA15
7ther %onsiderations Aelatin) to an Adverse 7!inion or =isclai(er of
7!inion '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1B
For( and %ontent of the Auditor+s Ae!ort Lhen the 7!inion is
Eodified '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A17TA44
B55 ISA 705
A!!endi,. Illustrations of Auditors+ Ae!orts with Eodifications to the 7!inion
International Standard on Auditin) $ISA& 705 CEodifications to the 7!inion in the Inde!endent Auditor+s
Ae!ortD should "e read in con;unction with ISA 400 C7verall 7";ectives of the Inde!endent Auditor and
the %onduct of an Audit in Accordance with International Standards on Auditin)'D
ISA 705 700
1' his International Standard on Auditin) $ISA& deals with the auditor+s res!onsi"ilit# to issue an
a!!ro!riate re!ort in circu(stances when, in for(in) an o!inion in accordance with ISA 700,
1
the
auditor concludes that a (odification to the auditor+s o!inion on the financial state(ents is
necessar#'
T/pe of )o#ifie# Opi"io"
4' his ISA esta"lishes three t#!es of (odified o!inions, na(el#, a *ualified o!inion, an adverse
o!inion, and a disclai(er of o!inion' he decision re)ardin) which t#!e of (odified o!inion is
a!!ro!riate de!ends u!on.
1. $a& he nature of the (atter )ivin) rise to the (odification, that is, whether the financial
state(ents are (ateriall# (isstated or, in the case of an ina"ilit# to o"tain sufficient a!!ro!riate
audit evidence, (a# "e (ateriall# (isstated? and
2. $"& he auditor+s ;ud)(ent a"out the !ervasiveness of the effects or !ossi"le effects of the
(atter on the financial state(ents' $Aef. 6ara' A1&
Effecti9e D!te
15, 4005'
O$1ecti9e
4' he o";ective of the auditor is to e,!ress clearl# an a!!ro!riatel# (odified o!inion on the
financial state(ents that is necessar# when.
1$a&he auditor concludes, "ased on the audit evidence o"tained, that the financial state(ents as a
whole are not free fro( (aterial (isstate(ent? or
2$"& he auditor is una"le to o"tain sufficient a!!ro!riate audit evidence to conclude that the
financial state(ents as a whole are free fro( (aterial (isstate(ent'
Defi"itio"
$a& 6ervasive K A ter( used, in the conte,t of (isstate(ents, to descri"e the effects on the
financial state(ents of (isstate(ents or the
701 ISA 705
!ossi"le effects on the financial state(ents of (isstate(ents, if an#, that are undetected due
to an ina"ilit# to o"tain sufficient a!!ro!riate audit evidence' 6ervasive effects on the
financial state(ents are those that, in the auditor+s ;ud)(ent.
1$i& Are not confined to s!ecific ele(ents, accounts or ite(s of the financial state(ents?
2$ii& If so confined, re!resent or could re!resent a su"stantial !ro!ortion of the financial
state(ents? or
$iii& In relation to disclosures, are funda(ental to users+ understandin) of the financial
state(ents'
$"& Eodified o!inion K A *ualified o!inion, an adverse o!inion or a disclai(er of o!inion'
Re2-i'e.e"t Ci'c-.t!"ce =he" ! )o#ific!tio" to the A-#ito'> Opi"io" I Re2-i'e#
B' he auditor shall (odif# the o!inion in the auditor+s re!ort when.
1$a& he auditor concludes that, "ased on the audit evidence o"tained, the financial state(ents
as a whole are not free fro( (aterial (isstate(ent? or $Aef. 6ara' A4-A7&
2$"& he auditor is una"le to o"tain sufficient a!!ro!riate audit evidence to conclude that the
financial state(ents as a whole are free fro( (aterial (isstate(ent' $Aef. 6ara' A8-A14&
Dete'.i"i"( the T/pe of )o#ific!tio" to the A-#ito'> Opi"io"
*ualified ,pinion
7' he auditor shall e,!ress a *ualified o!inion when.
1. $a& he auditor, havin) o"tained sufficient a!!ro!riate audit evidence, concludes that
(isstate(ents, individuall# or in the a))re)ate, are (aterial, "ut not !ervasive, to the financial
state(ents? or
2. $"& he auditor is una"le to o"tain sufficient a!!ro!riate audit evidence on which to "ase the
o!inion, "ut the auditor concludes that the !ossi"le effects on the financial state(ents of
undetected (isstate(ents, if an#, could "e (aterial "ut not !ervasive'
Ad!erse ,pinion
8' he auditor shall e,!ress an adverse o!inion when the auditor, havin) o"tained sufficient
a!!ro!riate audit evidence, concludes that (isstate(ents, individuall# or in the a))re)ate, are "oth
(aterial and !ervasive to the financial state(ents'
ISA 705 704
?isclai$er of ,pinion
1. 5' he auditor shall disclai( an o!inion when the auditor is una"le to o"tain sufficient
a!!ro!riate audit evidence on which to "ase the o!inion, and the auditor concludes that the
!ossi"le effects on the financial state(ents of undetected (isstate(ents, if an#, could "e "oth
(aterial and !ervasive'
2. 10' he auditor shall disclai( an o!inion when, in e,tre(el# rare circu(stances involvin)
(ulti!le uncertainties, the auditor concludes that, notwithstandin) havin) o"tained sufficient
a!!ro!riate audit evidence re)ardin) each of the individual uncertainties, it is not !ossi"le to for(
an o!inion on the financial state(ents due to the !otential interaction of the uncertainties and their
!ossi"le cu(ulative effect on the financial state(ents'
Conse>uence of an Inability to ,btain )ufficient Appropriate Audit /!idence ?ue to a <anage$ent3
I$posed :i$itation after the Auditor -as Accepted the /ngage$ent
1. 11' If, after acce!tin) the en)a)e(ent, the auditor "eco(es aware that (ana)e(ent has
i(!osed a li(itation on the sco!e of the audit that the auditor considers likel# to result in the need
to e,!ress a *ualified o!inion or to disclai( an o!inion on the financial state(ents, the auditor
shall re*uest that (ana)e(ent re(ove the li(itation'
2. 14' If (ana)e(ent refuses to re(ove the li(itation referred to in !ara)ra!h 11, the auditor
shall co((unicate the (atter to those char)ed with )overnance, unless all of those char)ed with
)overnance are involved in (ana)in) the entit#,
4
and deter(ine whether it is !ossi"le to !erfor(
alternative !rocedures to o"tain sufficient a!!ro!riate audit evidence'
119' If the auditor is una"le to o"tain sufficient a!!ro!riate audit evidence, the auditor shall
deter(ine the i(!lications as follows.
2$a& If the auditor concludes that the !ossi"le effects on the financial state(ents of undetected
(isstate(ents, if an#, could "e (aterial "ut not !ervasive, the auditor shall *ualif# the
o!inion? or
3$"& If the auditor concludes that the !ossi"le effects on the financial state(ents of undetected
(isstate(ents, if an#, could "e "oth (aterial and !ervasive so that a *ualification of the
o!inion would "e inade*uate to co((unicate the )ravit# of the situation, the auditor shall.
4$i& Lithdraw fro( the audit, where !ractica"le and !ossi"le under a!!lica"le law or re)ulation?
or $Aef. 6ara' A19-A14&
5$ii& If withdrawal fro( the audit "efore issuin) the auditor+s re!ort is not !ractica"le or !ossi"le,
disclai( an o!inion on the financial state(ents'
709 ISA 705
14' If the auditor withdraws as conte(!lated "# !ara)ra!h 19$"&$i&, "efore withdrawin), the auditor
shall co((unicate to those char)ed with )overnance an# (atters re)ardin) (isstate(ents
identified durin) the audit that would have )iven rise to a (odification of the o!inion' $Aef. 6ara'
A15&
,ther Considerations +elating to an Ad!erse ,pinion or ?isclai$er of ,pinion
15' Lhen the auditor considers it necessar# to e,!ress an adverse o!inion or disclai( an o!inion on
the financial state(ents as a whole, the auditor+s re!ort shall not also include an un(odified
o!inion with res!ect to the sa(e financial re!ortin) fra(ework on a sin)le financial state(ent or
one or (ore s!ecific ele(ents, accounts or ite(s of a financial state(ent' o include such an
un(odified o!inion in the sa(e re!ort
9
in these circu(stances would contradict the auditor+s
adverse o!inion or disclai(er of o!inion on the financial state(ents as a whole' $Aef. 6ara' A1B&
Fo'. !"# Co"te"t of the A-#ito'> Repo't =he" the Opi"io" I )o#ifie#
=asis for <odification (aragraph
1. 1B' Lhen the auditor (odifies the o!inion on the financial state(ents, the auditor shall, in
addition to the s!ecific ele(ents re*uired "# ISA 700, include a !ara)ra!h in the auditor+s re!ort
that !rovides a descri!tion of the (atter )ivin) rise to the (odification' he auditor shall !lace
this !ara)ra!h i((ediatel# "efore the o!inion !ara)ra!h in the auditor+s re!ort and use the
headin) C1asis for :ualified 7!inion,D C1asis for Adverse 7!inion,D or C1asis for =isclai(er of
7!inion,D as a!!ro!riate' $Aef. 6ara' A17&
2. 17' If there is a (aterial (isstate(ent of the financial state(ents that relates to s!ecific
a(ounts in the financial state(ents $includin) *uantitative disclosures&, the auditor shall include
in the "asis for (odification !ara)ra!h a descri!tion and *uantification of the financial effects of
the (isstate(ent, unless i(!ractica"le' If it is not !ractica"le to *uantif# the financial effects, the
auditor shall so state in the "asis for (odification !ara)ra!h' $Aef. 6ara' A18&
3. 18' If there is a (aterial (isstate(ent of the financial state(ents that relates to narrative
disclosures, the auditor shall include in the "asis for (odification !ara)ra!h an e,!lanation of how
the disclosures are (isstated'
4. 15' If there is a (aterial (isstate(ent of the financial state(ents that relates to the non-
disclosure of infor(ation re*uired to "e disclosed, the auditor shall.
$a& =iscuss the non-disclosure with those char)ed with )overnance?
ISA 805, CS!ecial %onsiderationsNAudits of Sin)le Financial State(ents and S!ecific 0le(ents, Accounts or Ite(s of a
Financial State(ent,D deals with circu(stances where the auditor is en)a)ed to e,!ress a se!arate o!inion on one or (ore
s!ecific ele(ents, accounts or ite(s of a financial state(ent'
ISA 705 704
1. $"& =escri"e in the "asis for (odification !ara)ra!h the nature of the o(itted infor(ation? and
2. $c& Unless !rohi"ited "# law or re)ulation, include the o(itted disclosures, !rovided it is
!ractica"le to do so and the auditor has o"tained sufficient a!!ro!riate audit evidence a"out the
o(itted infor(ation' $Aef. 6ara' A15&
1. 40' If the (odification results fro( an ina"ilit# to o"tain sufficient a!!ro!riate audit
evidence, the auditor shall include in the "asis for (odification !ara)ra!h the reasons for that
ina"ilit#'
2. 41' 0ven if the auditor has e,!ressed an adverse o!inion or disclai(ed an o!inion on the
financial state(ents, the auditor shall descri"e in the "asis for (odification !ara)ra!h the reasons
for an# other (atters of which the auditor is aware that would have re*uired a (odification to the
o!inion, and the effects thereof' $Aef. 6ara' A40&
,pinion (aragraph
1. 44' Lhen the auditor (odifies the audit o!inion, the auditor shall use the headin) C:ualified
7!inion,D CAdverse 7!inion,D or C=isclai(er of 7!inion,D as a!!ro!riate, for the o!inion
!ara)ra!h' $Aef. 6ara' A41, A49-A44&
1. 49' Lhen the auditor e,!resses a *ualified o!inion due to a (aterial (isstate(ent in the
financial state(ents, the auditor shall state in the o!inion !ara)ra!h that, in the auditor+s
o!inion, e,ce!t for the effects of the (atter$s& descri"ed in the 1asis for :ualified 7!inion
!ara)ra!h.
2. $a& he financial state(ents !resent fairl#, in all (aterial res!ects $or )ive a true and fair
view& in accordance with the a!!lica"le financial re!ortin) fra(ework when re!ortin) in
accordance with a fair !resentation fra(ework? or
3. $"& he financial state(ents have "een !re!ared, in all (aterial res!ects, in accordance with
the a!!lica"le financial re!ortin) fra(ework when re!ortin) in accordance with a co(!liance
fra(ework'
Lhen the (odification arises fro( an ina"ilit# to o"tain sufficient a!!ro!riate audit evidence, the
auditor shall use the corres!ondin) !hrase Ce,ce!t for the !ossi"le effects of the (atter$s& '''D for
the (odified o!inion' $Aef. 6ara' A44&
44' Lhen the auditor e,!resses an adverse o!inion, the auditor shall state in the o!inion !ara)ra!h
that, in the auditor+s o!inion, "ecause of the si)nificance of the (atter$s& descri"ed in the 1asis for
Adverse 7!inion !ara)ra!h.
$a& he financial state(ents do not !resent fairl# $or )ive a true and fair view& in accordance
with the a!!lica"le financial re!ortin) fra(ework when re!ortin) in accordance with a fair
!resentation fra(ework? or
705 ISA 705
$"& he financial state(ents have not "een !re!ared, in all (aterial res!ects, in accordance
with the a!!lica"le financial re!ortin) fra(ework when re!ortin) in accordance with a
co(!liance fra(ework'
45' Lhen the auditor disclai(s an o!inion due to an ina"ilit# to o"tain sufficient a!!ro!riate audit
evidence, the auditor shall state in the o!inion !ara)ra!h that.
1. $a& 1ecause of the si)nificance of the (atter$s& descri"ed in the 1asis for =isclai(er of
7!inion !ara)ra!h, the auditor has not "een a"le to o"tain sufficient a!!ro!riate audit evidence to
!rovide a "asis for an audit o!inion? and, accordin)l#,
2. $"& he auditor does not e,!ress an o!inion on the financial state(ents'
?escription of Auditor8s +esponsibility Dhen the Auditor /4presses a *ualified or Ad!erse ,pinion
4B' Lhen the auditor e,!resses a *ualified or adverse o!inion, the auditor shall a(end the descri!tion
of the auditor+s res!onsi"ilit# to state that the auditor "elieves that the audit evidence the auditor
has o"tained is sufficient and a!!ro!riate to !rovide a "asis for the auditor+s (odified audit
o!inion'
?escription of Auditor8s +esponsibility Dhen the Auditor ?isclai$s an ,pinion
47' Lhen the auditor disclai(s an o!inion due to an ina"ilit# to o"tain sufficient a!!ro!riate audit
evidence, the auditor shall a(end the introductor# !ara)ra!h of the auditor+s re!ort to state that
the auditor was en)a)ed to audit the financial state(ents' he auditor shall also a(end the
descri!tion of the auditor+s res!onsi"ilit# and the descri!tion of the sco!e of the audit to state onl#
the followin). C7ur res!onsi"ilit# is to e,!ress an o!inion on the financial state(ents "ased on
conductin) the audit in accordance with International Standards on Auditin)' 1ecause of the
(atter$s& descri"ed in the 1asis for =isclai(er of 7!inion !ara)ra!h, however, we were not a"le
to o"tain sufficient a!!ro!riate audit evidence to !rovide a "asis for an audit o!inion'D
48' Lhen the auditor e,!ects to (odif# the o!inion in the auditor+s re!ort, the auditor shall
co((unicate with those char)ed with )overnance the circu(stances that led to the e,!ected
(odification and the !ro!osed wordin) of the (odification' $Aef. 6ara' A45&
OOO
ISA 705 70B
T/pe of )o#ifie# Opi"io" $Aef. 6ara' 4&
A1' he ta"le "elow illustrates how the auditor+s ;ud)(ent a"out the nature of the (atter )ivin) rise to
the (odification, and the !ervasiveness of its effects or !ossi"le effects on the financial
state(ents, affects the t#!e of o!inion to "e e,!ressed'
N!t-'e of )!te'i!0 )it!te.e"t $Aef. 6ara' B$a&&
A4' ISA 700 re*uires the auditor, in order to for( an o!inion on the financial state(ents, to conclude
as to whether reasona"le assurance has "een o"tained a"out whether the financial state(ents as a
whole are free fro( (aterial (isstate(ent'
4
his conclusion takes into account the auditor+s
evaluation of uncorrected (isstate(ents, if an#, on the financial state(ents in accordance with
ISA 450'
5
A9' ISA 450 defines a (isstate(ent as a difference "etween the a(ount, classification, !resentation, or
disclosure of a re!orted financial state(ent ite( and the a(ount, classification, !resentation, or
disclosure that is re*uired for the ite( to "e in accordance with the a!!lica"le financial re!ortin)
fra(ework' Accordin)l#, a (aterial (isstate(ent of the financial state(ents (a# arise in relation
to.
1$a& he a!!ro!riateness of the selected accountin) !olicies?
2$"& he a!!lication of the selected accountin) !olicies? or
3$c&he a!!ro!riateness or ade*uac# of disclosures in the financial state(ents'
4
ISA 700, !ara)ra!h 11' 5
ISA 450, C0valuation of Eisstate(ents Identified
durin) the Audit,D !ara)ra!h 4$a&'
707 ISA 705
Appropriateness of the )elected Accounting (olicies
A4' In relation to the a!!ro!riateness of the accountin) !olicies (ana)e(ent has selected, (aterial
(isstate(ents of the financial state(ents (a# arise when.
1. $a& he selected accountin) !olicies are not consistent with the a!!lica"le financial re!ortin)
fra(ework? or
2. $"& he financial state(ents, includin) the related notes, do not re!resent the underl#in)
transactions and events in a (anner that achieves fair !resentation'
A5' Financial re!ortin) fra(eworks often contain re*uire(ents for the accountin) for, and disclosure
of, chan)es in accountin) !olicies' Lhere the entit# has chan)ed its selection of si)nificant
accountin) !olicies, a (aterial (isstate(ent of the financial state(ents (a# arise when the entit#
has not co(!lied with these re*uire(ents'
Application of the )elected Accounting (olicies
AB' In relation to the a!!lication of the selected accountin) !olicies, (aterial (isstate(ents of the
financial state(ents (a# arise.
1$a&Lhen (ana)e(ent has not a!!lied the selected accountin) !olicies consistentl# with the financial
re!ortin) fra(ework, includin) when (ana)e(ent has not a!!lied the selected accountin)
!olicies consistentl# "etween !eriods or to si(ilar transactions and events $consistenc# in
a!!lication&? or
2$"& =ue to the (ethod of a!!lication of the selected accountin) !olicies $such as an unintentional
error in a!!lication&'
Appropriateness or Ade>uacy of ?isclosures in the Financial )tate$ents
A7' In relation to the a!!ro!riateness or ade*uac# of disclosures in the financial state(ents, (aterial
(isstate(ents of the financial state(ents (a# arise when.
1. $a& he financial state(ents do not include all of the disclosures re*uired "# the a!!lica"le
financial re!ortin) fra(ework?
2. $"& he disclosures in the financial state(ents are not !resented in accordance with the
a!!lica"le financial re!ortin) fra(ework? or
3. $c& he financial state(ents do not !rovide the disclosures necessar# to achieve fair
!resentation'
ISA 705 708
N!t-'e of !" I"!$i0it/ to O$t!i" S-fficie"t App'op'i!te A-#it E9i#e"ce $Aef. 6ara' B$"&&
A8' he auditor+s ina"ilit# to o"tain sufficient a!!ro!riate audit evidence $also referred to as a
li(itation on the sco!e of the audit& (a# arise fro(.
1. $a& %ircu(stances "e#ond the control of the entit#?
2. $"& %ircu(stances relatin) to the nature or ti(in) of the auditor+s work? or
3. $c& Mi(itations i(!osed "# (ana)e(ent'
A5' An ina"ilit# to !erfor( a s!ecific !rocedure does not constitute a li(itation on the sco!e of the
audit if the auditor is a"le to o"tain sufficient a!!ro!riate audit evidence "# !erfor(in) alternative
!rocedures' If this is not !ossi"le, the re*uire(ents of !ara)ra!hs 7$"& and 10 a!!l# as
a!!ro!riate' Mi(itations i(!osed "# (ana)e(ent (a# have other i(!lications for the audit, such
as for the auditor+s assess(ent of fraud risks and consideration of en)a)e(ent continuance'
A10' 0,a(!les of circu(stances "e#ond the control of the entit# include when.
1. G he entit#+s accountin) records have "een destro#ed'
2. G he accountin) records of a si)nificant co(!onent have "een seiJed indefinitel# "#
)overn(ental authorities'
A11' 0,a(!les of circu(stances relatin) to the nature or ti(in) of the auditor+s work include when.
% G he entit# is re*uired to use the e*uit# (ethod of accountin) for an associated entit#, and
the auditor is una"le to o"tain sufficient a!!ro!riate audit evidence a"out the latter+s financial
infor(ation to evaluate whether the e*uit# (ethod has "een a!!ro!riatel# a!!lied'
% G he ti(in) of the auditor+s a!!oint(ent is such that the auditor is una"le to o"serve the
countin) of the !h#sical inventories'
% G he auditor deter(ines that !erfor(in) su"stantive !rocedures alone is not sufficient, "ut
the entit#+s controls are not effective'
A14' 0,a(!les of an ina"ilit# to o"tain sufficient a!!ro!riate audit evidence arisin) fro( a li(itation
on the sco!e of the audit i(!osed "# (ana)e(ent include when.
1. G Eana)e(ent !revents the auditor fro( o"servin) the countin) of the !h#sical inventor#'
2. G Eana)e(ent !revents the auditor fro( re*uestin) e,ternal confir(ation of s!ecific
account "alances'
705 ISA 705
Co"e2-e"ce of !" I"!$i0it/ to O$t!i" S-fficie"t App'op'i!te A-#it E9i#e"ce D-e to !
)!"!(e.e"t<I.poe# Li.it!tio" !fte' the A-#ito' H! Accepte# the E"(!(e.e"t $Aef. 6ara'
19$"&-14&
A19' he !racticalit# of withdrawin) fro( the audit (a# de!end on the sta)e of co(!letion of the
en)a)e(ent at the ti(e that (ana)e(ent i(!oses the sco!e li(itation' If the auditor has
su"stantiall# co(!leted the audit, the auditor (a# decide to co(!lete the audit to the e,tent
!ossi"le, disclai( an o!inion and e,!lain the sco!e li(itation in the 1asis for =isclai(er of
7!inion !ara)ra!h !rior to withdrawin)'
A14' In certain circu(stances, withdrawal fro( the audit (a# not "e !ossi"le if the auditor is re*uired
"# law or re)ulation to continue the audit en)a)e(ent' his (a# "e the case for an auditor that is
a!!ointed to audit the financial state(ents of !u"lic sector entities' It (a# also "e the case in
;urisdictions where the auditor is a!!ointed to audit the financial state(ents coverin) a s!ecific
!eriod, or a!!ointed for a s!ecific !eriod and is !rohi"ited fro( withdrawin) "efore the
co(!letion of the audit of those financial state(ents or "efore the end of that !eriod, res!ectivel#'
he auditor (a# also consider it necessar# to include an 7ther Eatter !ara)ra!h in the auditor+s
re!ort'
B
A15' Lhen the auditor concludes that withdrawal fro( the audit is necessar# "ecause of a sco!e
li(itation, there (a# "e a !rofessional, le)al or re)ulator# re*uire(ent for the auditor to
co((unicate (atters relatin) to the withdrawal fro( the en)a)e(ent to re)ulators or the entit#+s
owners'
Othe' Co"i#e'!tio" Re0!ti"( to !" A#9e'e Opi"io" o' Dic0!i.e' of Opi"io"
$Aef. 6ara' 15&
A1B' he followin) are e,a(!les of re!ortin) circu(stances that would not contradict the auditor+s
adverse o!inion or disclai(er of o!inion.
1. G he e,!ression of an un(odified o!inion on financial state(ents !re!ared under a )iven
financial re!ortin) fra(ework and, within the sa(e re!ort, the e,!ression of an adverse o!inion
on the sa(e financial state(ents under a different financial re!ortin) fra(ework'
7
2. G he e,!ression of a disclai(er of o!inion re)ardin) the results of o!erations, and cash
flows, where relevant, and an un(odified o!inion re)ardin) the financial !osition $see ISA 510
8
&'
In this case, the auditor has not e,!ressed a disclai(er of o!inion on the financial state(ents as a
whole'
B
ISA 70B, C0(!hasis of Eatter 6ara)ra!hs and 7ther Eatter 6ara)ra!hs in the Inde!endent Auditor+s Ae!ort,D !ara)ra!h A5'
7
See !ara)ra!h A94 of ISA 700 for a descri!tion of this circu(stance' 8
ISA 510, CInitial Audit 0n)a)e(ents[7!enin) 1alances,D !ara)ra!h 10'
ISA 705 710
Fo'. !"# Co"te"t of the A-#ito'> Repo't =he" the Opi"io" I )o#ifie#
=asis for <odification (aragraph $Aef. 6ara' 1B-17, 15, 41&
A17' %onsistenc# in the auditor+s re!ort hel!s to !ro(ote users+ understandin) and to identif# unusual
circu(stances when the# occur' Accordin)l#, althou)h unifor(it# in the wordin) of a (odified
o!inion and in the descri!tion of the "asis for the (odification (a# not "e !ossi"le, consistenc# in
"oth the for( and content of the auditor+s re!ort is desira"le'
A18' An e,a(!le of the financial effects of (aterial (isstate(ents that the auditor (a# descri"e in the
"asis for (odification !ara)ra!h in the auditor+s re!ort is the *uantification of the effects on
inco(e ta,, inco(e "efore ta,es, net inco(e and e*uit# if inventor# is overstated'
A15' =isclosin) the o(itted infor(ation in the "asis for (odification !ara)ra!h would not "e
!ractica"le if.
1$a&he disclosures have not "een !re!ared "# (ana)e(ent or the disclosures are otherwise not
readil# availa"le to the auditor? or
2$"& In the auditor+s ;ud)(ent, the disclosures would "e undul# volu(inous in relation to the
auditor+s re!ort'
A40' An adverse o!inion or a disclai(er of o!inion relatin) to a s!ecific (atter descri"ed in the "asis
for *ualification !ara)ra!h does not ;ustif# the o(ission of a descri!tion of other identified
(atters that would have otherwise re*uired a (odification of the auditor+s o!inion' In such cases,
the disclosure of such other (atters of which the auditor is aware (a# "e relevant to users of the
,pinion (aragraph $Aef. 6ara' 44-49&
A41' Inclusion of this !ara)ra!h headin) (akes it clear to the user that the auditor+s o!inion is (odified
and indicates the t#!e of (odification'
A44' Lhen the auditor e,!resses a *ualified o!inion, it would not "e a!!ro!riate to use !hrases such as
Cwith the fore)oin) e,!lanationD or Csu";ect toD in the o!inion !ara)ra!h as these are not
sufficientl# clear or forceful'
Illustrative Auditors+ Ae!orts
A49' Illustrations 1 and 4 in the A!!endi, contain auditors+ re!orts with *ualified and adverse o!inions,
res!ectivel#, as the financial state(ents are (ateriall# (isstated'
A44' Illustration 9 in the A!!endi, contains an auditor+s re!ort with a *ualified o!inion as the auditor is
una"le to o"tain sufficient a!!ro!riate audit evidence' Illustration 4 contains a disclai(er of
o!inion due to an ina"ilit# to o"tain sufficient a!!ro!riate audit evidence a"out a sin)le ele(ent of
the
711 ISA 705
financial state(ents' Illustration 5 contains a disclai(er of o!inion due to an ina"ilit# to o"tain
sufficient a!!ro!riate audit evidence a"out (ulti!le ele(ents of the financial state(ents' In each
of the latter two cases, the !ossi"le effects on the financial state(ents of the ina"ilit# are "oth
(aterial and !ervasive'
Co..-"ic!tio" &ith Thoe Ch!'(e# &ith Go9e'"!"ce $Aef. 6ara' 48&
A45' %o((unicatin) with those char)ed with )overnance the circu(stances that lead to an e,!ected
(odification to the auditor+s o!inion and the !ro!osed wordin) of the (odification ena"les.
1$a&he auditor to )ive notice to those char)ed with )overnance of the intended (odification$s& and
the reasons $or circu(stances& for the (odification$s&?
2$"& he auditor to seek the concurrence of those char)ed with )overnance re)ardin) the facts of the
(atter$s& )ivin) rise to the e,!ected (odification$s&, or to confir( (atters of disa)ree(ent with
(ana)e(ent as such? and
3$c&hose char)ed with )overnance to have an o!!ortunit#, where a!!ro!riate, to !rovide the auditor
with further infor(ation and e,!lanations in res!ect of the (atter$s& )ivin) rise to the e,!ected
(odification$s&'
ISA 705 714
Appe"#i5
$Aef. 6ara' A49-44&
I00-t'!tio" of A-#ito'> Repo't &ith )o#ific!tio" to the Opi"io"
% G Illustration 1. An auditor+s re!ort containin) a *ualified o!inion due to a (aterial
(isstate(ent of the financial state(ents'
% G Illustration 4. An auditor+s re!ort containin) an adverse o!inion due to a (aterial
(isstate(ent of the financial state(ents'
% G Illustration 9. An auditor+s re!ort containin) a *ualified o!inion due to the auditor+s
ina"ilit# to o"tain sufficient a!!ro!riate audit evidence'
% G Illustration 4. An auditor+s re!ort containin) a disclai(er of o!inion due to the auditor+s
ina"ilit# to o"tain sufficient a!!ro!riate audit evidence a"out a sin)le ele(ent of the financial
state(ents'
% G Illustration 5. An auditor+s re!ort containin) a disclai(er of o!inion due to the auditor+s
ina"ilit# to o"tain sufficient a!!ro!riate audit evidence a"out (ulti!le ele(ents of the financial
state(ents'
719 ISA 705 A660N=II
I00-t'!tio" 7G
% G A-#it of ! co.p0ete et of (e"e'!0 p-'poe fi"!"ci!0 t!te.e"t p'ep!'e# $/
.!"!(e.e"t of the e"tit/ i" !cco'#!"ce &ith I"te'"!tio"!0 Fi"!"ci!0 Repo'ti"( St!"#!'#J
% G The te'. of the !-#it e"(!(e.e"t 'ef0ect the #ec'iptio" of .!"!(e.e"t>
5
% G I"9e"to'ie !'e .it!te#J The .it!te.e"t i #ee.e# to $e .!te'i!0 $-t "ot
pe'9!i9e to the fi"!"ci!0 t!te.e"tJ
AddresseeV
10
infor(ation'
<anage$ent8s
11
14
with ethical re*uire(ents and !lan
5
ISA 410, CA)reein) the er(s of Audit 0n)a)e(ents'D 10
ISA 705 A660N=II 714
and !erfor( the audit to o"tain reasona"le assurance a"out whether the financial state(ents are free fro(
!resentation
19
control'
14
he co(!an#+s inventories are carried in the "alance sheet at ,,,' Eana)e(ent has not stated the
inventories at the lower of cost and net realiJa"le value "ut has stated the( solel# at cost, which constitutes
a de!arture fro( International Financial Ae!ortin) Standards' he co(!an#+s records indicate that had
(ana)e(ent stated the inventories at the lower of cost and net realiJa"le value, an a(ount of ,,, would
have "een re*uired to write the inventories down to their net realiJa"le value' Accordin)l#, cost of sales
would have "een increased "# ,,,, and inco(e ta,, net inco(e and shareholders+ e*uit# would have "een
reduced "# ,,,, ,,, and ,,,, res!ectivel#'
*ualified ,pinion
In our o!inion, e,ce!t for the effects of the (atter descri"ed in the 1asis for :ualified 7!inion !ara)ra!h,
the financial state(ents !resent fairl#, in all (aterial res!ects, $or gi!e a true and fair !ie# of& the financial
!osition of A1% %o(!an# as at =ece("er 91, 40I1, and $of& its financial !erfor(ance and its cash flows
for the #ear then ended in accordance with International Financial Ae!ortin) Standards'
19
715 ISA 705 A660N=II
UAuditor+s addressV
I00-t'!tio" 2G
% G A-#it of co"o0i#!te# (e"e'!0 p-'poe fi"!"ci!0 t!te.e"t p'ep!'e# $/
.!"!(e.e"t of the p!'e"t i" !cco'#!"ce &ith I"te'"!tio"!0 Fi"!"ci!0 Repo'ti"( St!"#!'#J
% G The fi"!"ci!0 t!te.e"t !'e .!te'i!00/ .it!te# #-e to the "o"<co"o0i#!tio" of !
-$i#i!'/J The .!te'i!0 .it!te.e"t i #ee.e# to $e pe'9!i9e to the fi"!"ci!0 t!te.e"tJ
The effect of the .it!te.e"t o" the fi"!"ci!0 t!te.e"t h!9e "ot $ee" #ete'.i"e#
$ec!-e it &! "ot p'!ctic!$0e to #o oJ
% G I" !##itio" to the !-#it of the co"o0i#!te# fi"!"ci!0 t!te.e"t4 the !-#ito' h!
othe' 'epo'ti"( 'epo"i$i0itie 'e2-i'e# -"#e' 0oc!0 0!&J
AddresseeV
15
Le have audited the acco(!an#in) consolidated financial state(ents of A1% %o(!an# and its
su"sidiaries, which co(!rise the consolidated "alance sheet as at =ece("er 91, 40I1, and the consolidated
inco(e state(ent, state(ent of chan)es in e*uit# and cash flow state(ent for the #ear then ended, and a
su((ar# of si)nificant accountin) !olicies and other e,!lanator# infor(ation'
<anage$ent8s
1B
+esponsibility for the Consolidated Financial )tate$ents
Eana)e(ent is res!onsi"le for the !re!aration and fair !resentation of these consolidated financial
state(ents in accordance with International Financial Ae!ortin) Standards,
17
and for such internal control
as (ana)e(ent deter(ines is necessar# to ena"le the !re!aration of consolidated financial state(ents that
are free fro( (aterial (isstate(ent, whether due to fraud or error'
15
he su"-title CAe!ort on the %onsolidated Financial State(entsD is unnecessar# in circu(stances
when the second su"-title CAe!ort on 7ther Me)al and Ae)ulator# Ae*uire(entsD is not a!!lica"le' 1B
Lhere (ana)e(ent+s res!onsi"ilit# is to !re!are consolidated financial state(ents that )ive a true and fair view, this (a# read.
CEana)e(ent is res!onsi"le for the !re!aration of consolidated financial state(ents that )ive a true and fair view in accordance
with International Financial Ae!ortin) Standards, and for such '''D
717 ISA 705 A660N=II
18
15
adverse audit o!inion'
=asis for Ad!erse ,pinion
As e,!lained in Note I, the co(!an# has not consolidated the financial state(ents of su"sidiar# IYW
%o(!an# it ac*uired durin) 40I1 "ecause it has not #et "een a"le to ascertain the fair values of certain of
the su"sidiar#+s (aterial assets and lia"ilities at the ac*uisition date' his invest(ent is therefore accounted
for on a cost "asis' Under International Financial Ae!ortin) Standards, the su"sidiar# should have "een
consolidated "ecause it is controlled "# the co(!an#' @ad IYW "een consolidated, (an# ele(ents in the
acco(!an#in) financial state(ents would have "een (ateriall# affected' he effects on the consolidated
financial state(ents of the failure to consolidate have not "een deter(ined'
18
internal control relevant to the entit#+s !re!aration of consolidated financial state(ents that )ive a
true and fair view in order to desi)n audit !rocedures that are a!!ro!riate in the circu(stances, "ut
not for the !ur!ose of e,!ressin) an o!inion on the effectiveness of the entit#+s internal control'D 15
ISA 705 A660N=II 718
Ad!erse ,pinion
In our o!inion, "ecause of the si)nificance of the (atter discussed in the 1asis for Adverse 7!inion
!ara)ra!h, the consolidated financial state(ents do not !resent fairl# $or do not gi!e a true and fair !ie# of&
the financial !osition of A1% %o(!an# and its su"sidiaries as at =ece("er 91, 40I1, and $of& their
financial !erfor(ance and their cash flows for the #ear then ended in accordance with International
Financial Ae!ortin) Standards'
UAuditor+s addressV
715 ISA 705 A660N=II
I00-t'!tio" 3G
% G The !-#ito' &! -"!$0e to o$t!i" -fficie"t !pp'op'i!te !-#it e9i#e"ce 'e(!'#i"( !"
i"9et.e"t i" ! fo'ei(" !ffi0i!teJ The poi$0e effect of the i"!$i0it/ to o$t!i" -fficie"t
!pp'op'i!te !-#it e9i#e"ce !'e #ee.e# to $e .!te'i!0 $-t "ot pe'9!i9e to the fi"!"ci!0
t!te.e"tJ
AddresseeV
40
infor(ation'
<anage$ent8s
41
44
our audit in accordance with International Standards on
40
ISA 705 A660N=II 740
Auditin)' hose standards re*uire that we co(!l# with ethical re*uire(ents and !lan and !erfor( the audit
to o"tain reasona"le assurance a"out whether the financial state(ents are free fro( (aterial (isstate(ent'
!resentation
49
control'
44
A1% %o(!an#+s invest(ent in IYW %o(!an#, a forei)n associate ac*uired durin) the #ear and accounted
for "# the e*uit# (ethod, is carried at ,,, on the "alance sheet as at =ece("er 91, 40I1, and A1%+s share
of IYW+s net inco(e of ,,, is included in A1%+s inco(e for the #ear then ended' Le were una"le to
o"tain sufficient a!!ro!riate audit evidence a"out the carr#in) a(ount of A1%+s invest(ent in IYW as at
=ece("er 91, 40I1 and A1%+s share of IYW+s net inco(e for the #ear "ecause we were denied access to
the financial infor(ation, (ana)e(ent, and the auditors of IYW' %onse*uentl#, we were una"le to
deter(ine whether an# ad;ust(ents to these a(ounts were necessar#'
*ualified ,pinion
!ara)ra!h, the financial state(ents !resent fairl#, in all (aterial
49
741 ISA 705 A660N=II
res!ects, $or gi!e a true and fair !ie# of& the financial !osition of A1% %o(!an# as at =ece("er 91, 40I1,
and $of& its financial !erfor(ance and its cash flows for the #ear then ended in accordance with
International Financial Ae!ortin) Standards'
UAuditor+s addressV
ISA 705 A660N=II 744
I00-t'!tio" 6G
1. G A-#it of ! co.p0ete et of (e"e'!0 p-'poe fi"!"ci!0 t!te.e"t p'ep!'e# $/
3. G The !-#ito' &! -"!$0e to o$t!i" -fficie"t !pp'op'i!te !-#it e9i#e"ce !$o-t !
i"(0e e0e.e"t of the fi"!"ci!0 t!te.e"tJ Th!t i4 the !-#ito' &! !0o -"!$0e to o$t!i"
!-#it e9i#e"ce !$o-t the fi"!"ci!0 i"fo'.!tio" of ! 1oi"t 9e"t-'e i"9et.e"t th!t 'ep'ee"t
o9e' 90K of the co.p!"/> "et !etJ The poi$0e effect of thi i"!$i0it/ to o$t!i" -fficie"t
!pp'op'i!te !-#it e9i#e"ce !'e #ee.e# to $e $oth .!te'i!0 !"# pe'9!i9e to the fi"!"ci!0
t!te.e"tJ
4. G I" !##itio" to the !-#it of the fi"!"ci!0 t!te.e"t4 the !-#ito' h! othe' 'epo'ti"(
AddresseeV
45
Le were en)a)ed to audit the acco(!an#in) financial state(ents of A1% %o(!an#, which co(!rise the
"alance sheet as at =ece("er 91, 40I1, and the inco(e state(ent, state(ent of chan)es in e*uit# and cash
flow state(ent for the #ear then ended, and a su((ar# of si)nificant accountin) !olicies and other
e,!lanator# infor(ation'
<anage$ent8s
4B
47
45
su"-title CAe!ort on 7ther Me)al and Ae)ulator# Ae*uire(entsD is not a!!lica"le' 4B
749 ISA 705 A660N=II
7ur res!onsi"ilit# is to e,!ress an o!inion on these financial state(ents "ased on conductin) the audit in
accordance with International Standards on Auditin)' 1ecause of the (atter descri"ed in the 1asis for
=isclai(er of 7!inion !ara)ra!h, however, we were not a"le to o"tain sufficient a!!ro!riate audit evidence
to !rovide a "asis for an audit o!inion'
=asis for ?isclai$er of ,pinion
he co(!an#+s invest(ent in its ;oint venture IYW $%ountr# I& %o(!an# is carried at ,,, on the
co(!an#+s "alance sheet, which re!resents over 50Q of the co(!an#+s net assets as at =ece("er 91, 40I1'
Le were not allowed access to the (ana)e(ent and the auditors of IYW, includin) IYW+s auditors+ audit
docu(entation' As a result, we were una"le to deter(ine whether an# ad;ust(ents were necessar# in
res!ect of the co(!an#+s !ro!ortional share of IYW+s assets that it controls ;ointl#, its !ro!ortional share of
IYW+s lia"ilities for which it is ;ointl# res!onsi"le, its !ro!ortional share of IYW+s inco(e and e,!enses
for the #ear, and the ele(ents (akin) u! the state(ent of chan)es in e*uit# and cash flow state(ent'
1ecause of the si)nificance of the (atter descri"ed in the 1asis for =isclai(er of 7!inion !ara)ra!h, we
have not "een a"le to o"tain sufficient a!!ro!riate audit evidence to !rovide a "asis for an audit o!inion'
Accordin)l#, we do not e,!ress an o!inion on the financial state(ents'
UAuditor+s addressV
ISA 705 A660N=II 744
I00-t'!tio" @G
1. G A-#it of ! co.p0ete et of (e"e'!0 p-'poe fi"!"ci!0 t!te.e"t p'ep!'e# $/
3. G The !-#ito' &! -"!$0e to o$t!i" -fficie"t !pp'op'i!te !-#it e9i#e"ce !$o-t
.-0tip0e e0e.e"t of the fi"!"ci!0 t!te.e"tJ Th!t i4 the !-#ito' &! -"!$0e to o$t!i" !-#it
e9i#e"ce !$o-t the e"tit/> i"9e"to'ie !"# !cco-"t 'ecei9!$0eJ The poi$0e effect of thi
i"!$i0it/ to o$t!i" -fficie"t !pp'op'i!te !-#it e9i#e"ce !'e #ee.e# to $e $oth .!te'i!0 !"#
pe'9!i9e to the fi"!"ci!0 t!te.e"tJ
4. G I" !##itio" to the !-#it of the fi"!"ci!0 t!te.e"t4 the !-#ito' h! othe' 'epo'ti"(
AddresseeV
48
Le were en)a)ed to audit the acco(!an#in) financial state(ents of A1% %o(!an#, which co(!rise the
"alance sheet as at =ece("er 91, 40I1, and the inco(e state(ent, state(ent of chan)es in e*uit# and cash
flow state(ent for the #ear then ended, and a su((ar# of si)nificant accountin) !olicies and other
<anage$ent8s
45
90
48
745 ISA 705 A660N=II
7ur res!onsi"ilit# is to e,!ress an o!inion on these financial state(ents "ased on conductin) the audit in
accordance with International Standards on Auditin)' 1ecause of the (atters descri"ed in the 1asis for
=isclai(er of 7!inion !ara)ra!h, however, we were not a"le to o"tain sufficient a!!ro!riate audit evidence
to !rovide a "asis for an audit o!inion'
=asis for ?isclai$er of ,pinion
Le were not a!!ointed as auditors of the co(!an# until after =ece("er 91, 40I1 and thus did not o"serve
the countin) of !h#sical inventories at the "e)innin) and end of the #ear' Le were una"le to satisf#
ourselves "# alternative (eans concernin) the inventor# *uantities held at =ece("er 91, 40I0 and 40I1
which are stated in the "alance sheet at ,,, and ,,,, res!ectivel#' In addition, the introduction of a new
co(!uteriJed accounts receiva"le s#ste( in Se!te("er 40I1 resulted in nu(erous errors in accounts
receiva"le' As of the date of our audit re!ort, (ana)e(ent was still in the !rocess of rectif#in) the s#ste(
deficiencies and correctin) the errors' Le were una"le to confir( or verif# "# alternative (eans accounts
receiva"le included in the "alance sheet at a total a(ount of ,,, as at =ece("er 91, 40I1' As a result of
these (atters, we were una"le to deter(ine whether an# ad;ust(ents (i)ht have "een found necessar# in
res!ect of recorded or unrecorded inventories and accounts receiva"le, and the ele(ents (akin) u! the
inco(e state(ent, state(ent of chan)es in e*uit# and cash flow state(ent'
1ecause of the si)nificance of the (atters descri"ed in the 1asis for =isclai(er of 7!inion !ara)ra!h, we
have not "een a"le to o"tain sufficient a!!ro!riate audit evidence to !rovide a "asis for an audit o!inion'
Accordin)l#, we do not e,!ress an o!inion on the financial state(ents'
UAuditor+s addressV
INTERNATIONAL STANDARD ON AUDITING B0A
E)*HASIS OF )ATTER *ARAGRA*HS AND OTHER )ATTER
*ARAGRA*HS IN THE INDE*ENDENT AUDITOR>S RE*ORT
CONTENTS
6ara)ra!h
7ther Eatter 6ara)ra!hs in the Auditor+s Ae!ort ''''''''''''''''''''''''''''''''''''''''' A5TA11 %o((unication with
hose %har)ed with <overnance ''''''''''''''''''''''''''''''' A14 A!!endi, 1. Mist of ISAs %ontainin)
Ae*uire(ents for 0(!hasis of
Eatter 6ara)ra!hs A!!endi, 4. Mist of ISAs %ontainin) Ae*uire(ents for
7ther Eatter 6ara)ra!hs A!!endi, 9. Illustration of an Auditor+s Ae!ort that
Includes an 0(!hasis of Eatter 6ara)ra!h
International Standard on Auditin) $ISA& 70B, C0(!hasis of Eatter 6ara)ra!hs and 7ther Eatter
6ara)ra!hs in the Inde!endent Auditor+s Ae!ortD should "e read in con;unction with ISA 400, C7verall
747 ISA 70B
11' his International Standard on Auditin) $ISA& deals with additional co((unication in the
auditor+s re!ort when the auditor considers it necessar# to.
2$a& =raw users+ attention to a (atter or (atters !resented or disclosed in the financial
state(ents that are of such i(!ortance that the# are funda(ental to users+ understandin) of
the financial state(ents? or
3$"& =raw users+ attention to an# (atter or (atters other than those !resented or disclosed in
the financial state(ents that are relevant to users+ understandin) of the audit, the auditor+s
res!onsi"ilities or the auditor+s re!ort'
2. 4' A!!endices 1 and 4 identif# ISAs that contain s!ecific re*uire(ents for the auditor to
include 0(!hasis of Eatter !ara)ra!hs or 7ther Eatter !ara)ra!hs in the auditor+s re!ort' In those
circu(stances, the re*uire(ents in this ISA re)ardin) the for( and !lace(ent of such !ara)ra!hs
a!!l#'
Effecti9e D!te
15, 4005'
O$1ecti9e
4' he o";ective of the auditor, havin) for(ed an o!inion on the financial state(ents, is to draw
users+ attention, when in the auditor+s ;ud)(ent it is necessar# to do so, "# wa# of clear additional
co((unication in the auditor+s re!ort, to.
1$a&A (atter, althou)h a!!ro!riatel# !resented or disclosed in the financial state(ents, that is of such
i(!ortance that it is funda(ental to users+ understandin) of the financial state(ents? or
2$"& As a!!ro!riate, an# other (atter that is relevant to users+ understandin) of the audit, the auditor+s
res!onsi"ilities or the auditor+s re!ort'
Defi"itio"
5' For the !ur!oses of the ISAs, the followin) ter(s have the (eanin)s attri"uted "elow.
$a& 0(!hasis of Eatter !ara)ra!h K A !ara)ra!h included in the auditor+s re!ort that refers to a
(atter a!!ro!riatel# !resented or disclosed in the financial state(ents that, in the auditor+s
;ud)(ent,
ISA 70B 748
is of such i(!ortance that it is funda(ental to users+ understandin) of the financial
state(ents'
$"& 7ther Eatter !ara)ra!h K A !ara)ra!h included in the auditor+s re!ort that refers to a (atter
other than those !resented or disclosed in the financial state(ents that, in the auditor+s
;ud)(ent, is relevant to users+ understandin) of the audit, the auditor+s res!onsi"ilities or
Re2-i'e.e"t E.ph!i of )!tte' *!'!('!ph i" the A-#ito'> Repo't
1. B' If the auditor considers it necessar# to draw users+ attention to a (atter !resented or
disclosed in the financial state(ents that, in the auditor+s ;ud)(ent, is of such i(!ortance that it is
funda(ental to users+ understandin) of the financial state(ents, the auditor shall include an
0(!hasis of Eatter !ara)ra!h in the auditor+s re!ort !rovided the auditor has o"tained sufficient
a!!ro!riate audit evidence that the (atter is not (ateriall# (isstated in the financial state(ents'
Such a !ara)ra!h shall refer onl# to infor(ation !resented or disclosed in the financial state(ents'
$Aef. 6ara' A1-A4&
1. 7' Lhen the auditor includes an 0(!hasis of Eatter !ara)ra!h in the auditor+s re!ort, the
auditor shall.
2. $a& Include it i((ediatel# after the 7!inion !ara)ra!h in the auditor+s re!ort?
3. $"& Use the headin) C0(!hasis of Eatter,D or other a!!ro!riate headin)?
4. $c& Include in the !ara)ra!h a clear reference to the (atter "ein) e(!hasiJed and to where
relevant disclosures that full# descri"e the (atter can "e found in the financial state(ents? and
5. $d& Indicate that the auditor+s o!inion is not (odified in res!ect of the (atter e(!hasiJed'
$Aef. 6ara' A9-A4&
Othe' )!tte' *!'!('!ph i" the A-#ito'> Repo't
8' If the auditor considers it necessar# to co((unicate a (atter other than those that are !resented or
disclosed in the financial state(ents that, in the auditor+s ;ud)(ent, is relevant to users+
understandin) of the audit, the auditor+s res!onsi"ilities or the auditor+s re!ort and this is not
!rohi"ited "# law or re)ulation, the auditor shall do so in a !ara)ra!h in the auditor+s re!ort, with
the headin) C7ther Eatter,D or other a!!ro!riate headin)' he auditor shall include this !ara)ra!h
i((ediatel# after the 7!inion !ara)ra!h and an# 0(!hasis of Eatter !ara)ra!h, or elsewhere in
the auditor+s re!ort
745 ISA 70B
if the content of the 7ther Eatter !ara)ra!h is relevant to the 7ther Ae!ortin) Aes!onsi"ilities
section' $Aef. 6ara' A5-A11&
5' If the auditor e,!ects to include an 0(!hasis of Eatter or an 7ther Eatter !ara)ra!h in the
auditor+s re!ort, the auditor shall co((unicate with those char)ed with )overnance re)ardin) this
e,!ectation and the !ro!osed wordin) of this !ara)ra!h' $Aef. 6ara' A14&
OOO
App0ic!tio" !"# Othe' E5p0!"!to'/ )!te'i!0 E.ph!i of )!tte'
*!'!('!ph i" the A-#ito'> Repo't
Circu$stances in Dhich an /$phasis of <atter (aragraph <ay =e Aecessary $Aef. 6ara' B&
A1' 0,a(!les of circu(stances where the auditor (a# consider it necessar# to include an 0(!hasis of
Eatter !ara)ra!h are.
1. G An uncertaint# relatin) to the future outco(e of e,ce!tional liti)ation or re)ulator#
action'
2. G 0arl# a!!lication $where !er(itted& of a new accountin) standard $for e,a(!le, a new
International Financial Ae!ortin) Standard& that has a !ervasive effect on the financial state(ents
in advance of its effective date'
3. G A (a;or catastro!he that has had, or continues to have, a si)nificant effect on the entit#+s
financial !osition'
A4' A wides!read use of 0(!hasis of Eatter !ara)ra!hs di(inishes the effectiveness of the auditor+s
co((unication of such (atters' Additionall#, to include (ore infor(ation in an 0(!hasis of
Eatter !ara)ra!h than is !resented or disclosed in the financial state(ents (a# i(!l# that the
(atter has not "een a!!ro!riatel# !resented or disclosed? accordin)l#, !ara)ra!h B li(its the use of
an 0(!hasis of Eatter !ara)ra!h to (atters !resented or disclosed in the financial state(ents'
Including an /$phasis of <atter (aragraph in the Auditor8s +eport $Aef. 6ara' 7&
A9' he inclusion of an 0(!hasis of Eatter !ara)ra!h in the auditor+s re!ort does not affect the
auditor+s o!inion' An 0(!hasis of Eatter !ara)ra!h is not a su"stitute for either.
ISA 70B 790
1. $a& he auditor e,!ressin) a *ualified o!inion or an adverse o!inion, or disclai(in) an
o!inion, when re*uired "# the circu(stances of a s!ecific audit en)a)e(ent $see ISA 705
1
&? or
2. $"& =isclosures in the financial state(ents that the a!!lica"le financial re!ortin) fra(ework
re*uires (ana)e(ent to (ake'
A4' he illustrative re!ort in A!!endi, 9 includes an 0(!hasis of Eatter !ara)ra!h in an auditor+s
re!ort that contains a *ualified o!inion'
Othe' )!tte' *!'!('!ph i" the A-#ito'> Repo't $Aef. 6ara' 8&
Circu$stances in Dhich an ,ther <atter (aragraph <ay =e Aecessary
Aelevant to Users+ Understandin) of the Audit
A5' In the rare circu(stance where the auditor is una"le to withdraw fro( an en)a)e(ent even thou)h
the !ossi"le effect of an ina"ilit# to o"tain sufficient a!!ro!riate audit evidence due to a li(itation
on the sco!e of the audit i(!osed "# (ana)e(ent is !ervasive,
4
the auditor (a# consider it
necessar# to include an 7ther Eatter !ara)ra!h in the auditor+s re!ort to e,!lain wh# it is not
!ossi"le for the auditor to withdraw fro( the en)a)e(ent'
Aelevant to Users+ Understandin) of the Auditor+s Aes!onsi"ilities or the Auditor+s Ae!ort
AB' Maw, re)ulation or )enerall# acce!ted !ractice in a ;urisdiction (a# re*uire or !er(it the auditor
to ela"orate on (atters that !rovide further e,!lanation of the auditor+s res!onsi"ilities in the audit
of the financial state(ents or of the auditor+s re!ort thereon' Lhere relevant, one or (ore su"-
headin)s (a# "e used that descri"e the content of the 7ther Eatter !ara)ra!h'
A7' An 7ther Eatter !ara)ra!h does not deal with circu(stances where the auditor has other re!ortin)
res!onsi"ilities that are in addition to the auditor+s res!onsi"ilit# under the ISAs to re!ort on the
financial state(ents $see C7ther Ae!ortin) Aes!onsi"ilitiesD section in ISA 700
9
&, or where the
auditor has "een asked to !erfor( and re!ort on additional s!ecified !rocedures, or to e,!ress an
o!inion on s!ecific (atters'
Ae!ortin) on (ore than one set of financial state(ents
A8' An entit# (a# !re!are one set of financial state(ents in accordance with a )eneral !ur!ose
fra(ework $for e,a(!le, the national fra(ework& and another set of financial state(ents in
accordance with another )eneral
1
4
See !ara)ra!h 19$"&$ii& of ISA 705 for a discussion of this circu(stance' 9
ISA 700, CFor(in) an 7!inion and Ae!ortin) on Financial State(ents,D !ara)ra!hs 98-95'
791 ISA 70B
!ur!ose fra(ework $for e,a(!le, International Financial Ae!ortin) Standards&, and en)a)e the
auditor to re!ort on "oth sets of financial state(ents' If the auditor has deter(ined that the
fra(eworks are acce!ta"le in the res!ective circu(stances, the auditor (a# include an 7ther
Eatter !ara)ra!h in the auditor+s re!ort, referrin) to the fact that another set of financial
state(ents has "een !re!ared "# the sa(e entit# in accordance with another )eneral !ur!ose
fra(ework and that the auditor has issued a re!ort on those financial state(ents'
Aestriction on distri"ution or use of the auditor+s re!ort
A5' Financial state(ents !re!ared for a s!ecific !ur!ose (a# "e !re!ared in accordance with a )eneral
!ur!ose fra(ework "ecause the intended users have deter(ined that such )eneral !ur!ose
financial state(ents (eet their financial infor(ation needs' Since the auditor+s re!ort is intended
for s!ecific users, the auditor (a# consider it necessar# in the circu(stances to include an 7ther
Eatter !ara)ra!h, statin) that the auditor+s re!ort is intended solel# for the intended users, and
should not "e distri"uted to or used "# other !arties'
Including an ,ther <atter (aragraph in the Auditor8s +eport
A10' he content of an 7ther Eatter !ara)ra!h reflects clearl# that such other (atter is not re*uired to
"e !resented and disclosed in the financial state(ents' An 7ther Eatter !ara)ra!h does not include
infor(ation that the auditor is !rohi"ited fro( !rovidin) "# law, re)ulation or other !rofessional
standards, for e,a(!le, ethical standards relatin) to confidentialit# of infor(ation' An 7ther
Eatter !ara)ra!h also does not include infor(ation that is re*uired to "e !rovided "#
(ana)e(ent'
A11' he !lace(ent of an 7ther Eatter !ara)ra!h de!ends on the nature of the infor(ation to "e
co((unicated' Lhen an 7ther Eatter !ara)ra!h is included to draw users+ attention to a (atter
relevant to their understandin) of the audit of the financial state(ents, the !ara)ra!h is included
i((ediatel# after the 7!inion !ara)ra!h and an# 0(!hasis of Eatter !ara)ra!h' Lhen an 7ther
Eatter !ara)ra!h is included to draw users+ attention to a (atter relatin) to 7ther Ae!ortin)
Aes!onsi"ilities addressed in the auditor+s re!ort, the !ara)ra!h (a# "e included in the section
su"titled CAe!ort on 7ther Me)al and Ae)ulator# Ae*uire(ents'D Alternativel#, when relevant to
all the auditor+s res!onsi"ilities or users+ understandin) of the auditor+s re!ort, the 7ther Eatter
!ara)ra!h (a# "e included as a se!arate section followin) the Ae!ort on the Financial State(ents
and the Ae!ort on 7ther Me)al and Ae)ulator# Ae*uire(ents'
ISA 70B 794
Co..-"ic!tio" &ith Thoe Ch!'(e# &ith Go9e'"!"ce $Aef' 6ara' 5&
A14' Such co((unication ena"les those char)ed with )overnance to "e (ade aware of the nature of
an# s!ecific (atters that the auditor intends to hi)hli)ht in the auditor+s re!ort, and !rovides the(
with an o!!ortunit# to o"tain further clarification fro( the auditor where necessar#' Lhere the
inclusion of an 7ther Eatter !ara)ra!h on a !articular (atter in the auditor+s re!ort recurs on each
successive en)a)e(ent, the auditor (a# deter(ine that it is unnecessar# to re!eat the
co((unication on each en)a)e(ent'
799 ISA 70B
Appe"#i5 7
$Aef. 6ara' 4&
Lit of ISA Co"t!i"i"( Re2-i'e.e"t fo' E.ph!i of )!tte' *!'!('!ph
"e)innin) on or after =ece("er 15, 4005, that re*uire the auditor to include an 0(!hasis of Eatter
!ara)ra!h in the auditor+s re!ort in certain circu(stances' he list is not a su"stitute for considerin) the
re*uire(ents and related a!!lication and other e,!lanator# (aterial in ISAs'
1. G ISA 410, CA)reein) the er(s of Audit 0n)a)e(entsD K !ara)ra!h 15$"&
2. G ISA 5B0, CSu"se*uent 0ventsD K !ara)ra!hs 14$"& and 1B
3. G ISA 570, C<oin) %oncernD K !ara)ra!h 15
4. G ISA 800, CS!ecial %onsiderationsNAudits of Financial State(ents 6re!ared in
Accordance with S!ecial 6ur!ose Fra(eworksD K !ara)ra!h 14
ISA 70B A660N=II 794
Appe"#i5 2
$Aef. 6ara' 4&
Lit of ISA Co"t!i"i"( Re2-i'e.e"t fo' Othe' )!tte' *!'!('!ph
"e)innin) on or after =ece("er 15, 4005, that re*uire the auditor to include an 7ther Eatter !ara)ra!h in
the auditor+s re!ort in certain circu(stances' he list is not a su"stitute for considerin) the re*uire(ents
and related a!!lication and other e,!lanator# (aterial in ISAs'
1. G ISA 5B0, CSu"se*uent 0ventsD K !ara)ra!hs 14$"& and 1B
2. G ISA 710, C%o(!arative Infor(ationN%orres!ondin) Fi)ures and %o(!arative Financial
State(entsD K !ara)ra!hs 19-14, 1B-17 and 15
3. G ISA 740, Che Auditor+s Aes!onsi"ilities Aelatin) to 7ther Infor(ation in =ocu(ents
%ontainin) Audited Financial State(entsD K !ara)ra!h 10$a&
795 ISA 70B A660N=II
Appe"#i5 3
$Aef. 6ara' A4&
I00-t'!tio" of !" A-#ito'> Repo't th!t I"c0-#e !" E.ph!i of )!tte'
*!'!('!ph
4
% G The'e i -"ce't!i"t/ 'e0!ti"( to ! pe"#i"( e5ceptio"!0 0iti(!tio" .!tte'J
% G A #ep!'t-'e f'o. the !pp0ic!$0e fi"!"ci!0 'epo'ti"( f'!.e&o'% 'e-0te# i" !
2-!0ifie# opi"io"J
AddresseeV
5
infor(ation'
<anage$ent8s
B
7
and for such internal control as (ana)e(ent
deter(ines is necessar# to ena"le the
4
ISA 410, CA)reein) the er(s of Audit 0n)a)e(ents'D 5
he su"title CAe!ort on the Financial State(entsD is unnecessar# in circu(stances when the second
su"title CAe!ort on 7ther Me)al and Ae)ulator# Ae*uire(entsD is not a!!lica"le' B
ISA 70B A660N=II 79B
!re!aration of financial state(ents that are free fro( (aterial (isstate(ent, whether due to fraud or error'
!resentation
8
control'
5
Le "elieve that the audit evidence that we have o"tained is sufficient and a!!ro!riate to !rovide a "asis for
our *ualified audit o!inion'
he co(!an#+s short-ter( (arketa"le securities are carried in the "alance sheet at
,,,' Eana)e(ent has not (arked these securities to (arket "ut has instead stated the( at cost, which
constitutes a de!arture fro( International Financial Ae!ortin) Standards' he co(!an#+s records indicate
that had (ana)e(ent (arked the (arketa"le securities to (arket, the co(!an# would have reco)niJed an
unrealiJed loss of ,,, in the inco(e state(ent for the #ear' he carr#in) a(ount of the securities in the
"alance sheet would have "een reduced "# the sa(e a(ount at
8
view in order to desi)n audit !rocedures that are a!!ro!riate in the circu(stances, "ut nor for the
state(ents in order to desi)n audit !rocedures that are a!!ro!riate in the circu(stances'D In the case of footnote 7, this (a# read.
CIn (akin) those risk assess(ents, the auditor considers internal control relevant to the entit#+s !re!aration of financial
797 ISA 70B A660N=II
=ece("er 91, 40I1, and inco(e ta,, net inco(e and shareholders+ e*uit# would have "een reduced "#
,,,, ,,, and ,,,, res!ectivel#'
*ualified ,pinion
the financial state(ents !resent fairl#, in all (aterial res!ects $or gi!e a true and fair !ie# of& the financial
!osition of A1% %o(!an# as at =ece("er 91, 40I1, and $of& its financial !erfor(ance and its cash flows
for the #ear then ended in accordance with International Financial Ae!ortin) Standards'
/$phasis of <atter
Le draw attention to Note I to the financial state(ents which descri"es the uncertaint#
10
related to the
outco(e of the lawsuit filed a)ainst the co(!an# "# IYW %o(!an#' 7ur o!inion is not *ualified in res!ect
of this (atter'
UAuditor+s addressV
In hi)hli)htin) the uncertaint#, the auditor uses the sa(e ter(inolo)# that is used in the note to the financial state(ents'
ISA 70B A660N=II 798
CO)*ARATI,E INFOR)ATIOND CORRES*ONDING FIGURES AND
CO)*ARATI,E FINANCIAL STATE)ENTS
CONTENTS
International Standard on Auditin) $ISA& 710, C%o(!arative Infor(ationN %orres!ondin) Fi)ures and
%o(!arative Financial State(entsD should "e read in con;unction with ISA 400, C7verall 7";ectives of the
Inde!endent Auditor and the %onduct of an Audit in Accordance with International Standards on Auditin)'D
795 ISA 710
co(!arative infor(ation in an audit of financial state(ents' Lhen the financial state(ents of the
!rior !eriod have "een audited "# a !redecessor auditor or were not audited, the re*uire(ents and
)uidance in ISA 510
1
re)ardin) o!enin) "alances also a!!l#'
The N!t-'e of Co.p!'!ti9e I"fo'.!tio"
1. 4' he nature of the co(!arative infor(ation that is !resented in an entit#+s financial
state(ents de!ends on the re*uire(ents of the a!!lica"le financial re!ortin) fra(ework' here are
two different "road a!!roaches to the auditor+s re!ortin) res!onsi"ilities in res!ect of such
co(!arative infor(ation. corres!ondin) fi)ures and co(!arative financial state(ents' he
a!!roach to "e ado!ted is often s!ecified "# law or re)ulation "ut (a# also "e s!ecified in the
ter(s of en)a)e(ent'
1. 9' he essential audit re!ortin) differences "etween the a!!roaches are.
2. $a& For corres!ondin) fi)ures, the auditor+s o!inion on the financial state(ents refers to the
current !eriod onl#? whereas
3. $"& For co(!arative financial state(ents, the auditor+s o!inion refers to each !eriod for which
financial state(ents are !resented'
his ISA addresses se!aratel# the auditor+s re!ortin) re*uire(ents for each a!!roach'
Effecti9e D!te
15, 4005'
O$1ecti9e
1$a&o o"tain sufficient a!!ro!riate audit evidence a"out whether the co(!arative infor(ation
included in the financial state(ents has "een !resented, in all (aterial res!ects, in accordance with
the re*uire(ents for co(!arative infor(ation in the a!!lica"le financial re!ortin) fra(ework? and
2$"&o re!ort in accordance with the auditor+s re!ortin) res!onsi"ilities'
ISA 510, CInitial Audit 0n)a)e(entsN7!enin) 1alances'D
ISA 710 740
Defi"itio"
1$a&%o(!arative infor(ation K he a(ounts and disclosures included in the financial state(ents in
res!ect of one or (ore !rior !eriods in accordance with the a!!lica"le financial re!ortin)
fra(ework'
2$"& %orres!ondin) fi)ures K %o(!arative infor(ation where a(ounts and other disclosures for the
!rior !eriod are included as an inte)ral !art of the current !eriod financial state(ents, and are
intended to "e read onl# in relation to the a(ounts and other disclosures relatin) to the current
!eriod $referred to as Ccurrent !eriod fi)uresD&' he level of detail !resented in the corres!ondin)
a(ounts and disclosures is dictated !ri(aril# "# its relevance to the current !eriod fi)ures'
3$c& %o(!arative financial state(ents K %o(!arative infor(ation where a(ounts and other
disclosures for the !rior !eriod are included for co(!arison with the financial state(ents of the
current !eriod "ut, if audited, are referred to in the auditor+s o!inion' he level of infor(ation
included in those co(!arative financial state(ents is co(!ara"le with that of the financial
state(ents of the current !eriod'
For !ur!oses of this ISA, references to C!rior !eriodD should "e read as C!rior !eriodsD when the
co(!arative infor(ation includes a(ounts and disclosures for (ore than one !eriod'
Re2-i'e.e"t A-#it *'oce#-'e
1. 7' he auditor shall deter(ine whether the financial state(ents include the co(!arative
infor(ation re*uired "# the a!!lica"le financial re!ortin) fra(ework and whether such
infor(ation is a!!ro!riatel# classified' For this !ur!ose, the auditor shall evaluate whether.
2. $a& he co(!arative infor(ation a)rees with the a(ounts and other disclosures !resented in
the !rior !eriod or, when a!!ro!riate, have "een restated? and
3. $"& he accountin) !olicies reflected in the co(!arative infor(ation are consistent with those
a!!lied in the current !eriod or, if there have "een chan)es in accountin) !olicies, whether
those chan)es have "een !ro!erl# accounted for and ade*uatel# !resented and disclosed'
2. 8' If the auditor "eco(es aware of a !ossi"le (aterial (isstate(ent in the co(!arative
infor(ation while !erfor(in) the current !eriod audit, the auditor shall !erfor( such additional
audit !rocedures as are necessar# in
741 ISA 710
the circu(stances to o"tain sufficient a!!ro!riate audit evidence to deter(ine whether a (aterial
(isstate(ent e,ists' If the auditor had audited the !rior !eriod+s financial state(ents, the auditor
shall also follow the relevant re*uire(ents of ISA 5B0'
4
If the !rior !eriod financial state(ents are
a(ended, the auditor shall deter(ine that the co(!arative infor(ation a)rees with the a(ended
5' As re*uired "# ISA 580,
9
the auditor shall re*uest written re!resentations for all !eriods referred
to in the auditor+s o!inion' he auditor shall also o"tain a s!ecific written re!resentation re)ardin)
an# restate(ent (ade to correct a (aterial (isstate(ent in !rior !eriod financial state(ents that
affect the co(!arative infor(ation' $Aef. 6ara' A1&
A-#it Repo'ti"(
Corresponding Figures
1. 10' Lhen corres!ondin) fi)ures are !resented, the auditor+s o!inion shall not refer to the
corres!ondin) fi)ures e,ce!t in the circu(stances descri"ed in !ara)ra!hs 11, 14, and 14' $Aef.
6ara' A4&
1. 11' If the auditor+s re!ort on the !rior !eriod, as !reviousl# issued, included a *ualified
o!inion, a disclai(er of o!inion, or an adverse o!inion and the (atter which )ave rise to the
(odification is unresolved, the auditor shall (odif# the auditor+s o!inion on the current
!eriod+s financial state(ents' In the 1asis for Eodification !ara)ra!h in the auditor+s re!ort,
the auditor shall either.
2. $a& Aefer to "oth the current !eriod+s fi)ures and the corres!ondin) fi)ures in the descri!tion
of the (atter )ivin) rise to the (odification when the effects or !ossi"le effects of the (atter
on the current !eriod+s fi)ures are (aterial? or
3. $"& In other cases, e,!lain that the audit o!inion has "een (odified "ecause of the effects or
!ossi"le effects of the unresolved (atter on the co(!ara"ilit# of the current !eriod+s fi)ures
and the corres!ondin) fi)ures' $Aef. 6ara' A9-A5&
2. 14' If the auditor o"tains audit evidence that a (aterial (isstate(ent e,ists in the !rior !eriod
financial state(ents on which an un(odified o!inion has "een !reviousl# issued, and the
corres!ondin) fi)ures have not "een !ro!erl# restated or a!!ro!riate disclosures have not "een
(ade, the auditor shall e,!ress a *ualified o!inion or an adverse o!inion in the auditor+s re!ort on
the current !eriod financial state(ents, (odified with res!ect to the corres!ondin) fi)ures
included therein' $Aef. 6ara' AB&
4
ISA 5B0, CSu"se*uent 0vents,D !ara)ra!hs 14-17' 9
ISA 580, CLritten Ae!resentations,D !ara)ra!h 14'
ISA 710 744
6rior 6eriod Financial State(ents Audited "# a 6redecessor Auditor
19' If the financial state(ents of the !rior !eriod were audited "# a !redecessor auditor and the auditor
is not !rohi"ited "# law or re)ulation fro( referrin) to the !redecessor auditor+s re!ort on the
corres!ondin) fi)ures and decides to do so, the auditor shall state in an 7ther Eatter !ara)ra!h in
the auditor+s re!ort.
1$a&hat the financial state(ents of the !rior !eriod were audited "# the !redecessor auditor?
2$"& he t#!e of o!inion e,!ressed "# the !redecessor auditor and, if the o!inion was (odified, the
reasons therefore? and
3$c&he date of that re!ort' $Aef. 6ara' A7&
6rior 6eriod Financial State(ents Not Audited
14' If the !rior !eriod financial state(ents were not audited, the auditor shall state in an 7ther Eatter
!ara)ra!h in the auditor+s re!ort that the corres!ondin) fi)ures are unaudited' Such a state(ent
does not, however, relieve the auditor of the re*uire(ent to o"tain sufficient a!!ro!riate audit
evidence that the o!enin) "alances do not contain (isstate(ents that (ateriall# affect the current
!eriod+s financial state(ents'
4
Co$parati!e Financial )tate$ents
1. 15' Lhen co(!arative financial state(ents are !resented, the auditor+s o!inion shall refer to
each !eriod for which financial state(ents are !resented and on which an audit o!inion is
e,!ressed' $Aef. 6ara' A8-A5&
2. 1B' Lhen re!ortin) on !rior !eriod financial state(ents in connection with the current
!eriod+s audit, if the auditor+s o!inion on such !rior !eriod financial state(ents differs fro( the
o!inion the auditor !reviousl# e,!ressed, the auditor shall disclose the su"stantive reasons for the
different o!inion in an 7ther Eatter !ara)ra!h in accordance with ISA 70B'
5
$Aef. 6ara' A10&
6rior 6eriod Financial State(ents Audited "# a 6redecessor Auditor
17' If the financial state(ents of the !rior !eriod were audited "# a !redecessor auditor, in addition to
e,!ressin) an o!inion on the current !eriod+s financial state(ents, the auditor shall state in an
7ther Eatter !ara)ra!h.
$a& that the financial state(ents of the !rior !eriod were audited "# a !redecessor auditor?
4
5
749 ISA 710
1$"& the t#!e of o!inion e,!ressed "# the !redecessor auditor and, if the o!inion was (odified, the
reasons therefore? and
2$c&the date of that re!ort,
unless the !redecessor auditor+s re!ort on the !rior !eriod+s financial state(ents is reissued with
18' If the auditor concludes that a (aterial (isstate(ent e,ists that affects the !rior !eriod financial
state(ents on which the !redecessor auditor had !reviousl# re!orted without (odification, the
auditor shall co((unicate the (isstate(ent with the a!!ro!riate level of (ana)e(ent and, unless
all of those char)ed with )overnance are involved in (ana)in) the entit#,
B
those char)ed with
)overnance and re*uest that the !redecessor auditor "e infor(ed' If the !rior !eriod financial
state(ents are a(ended, and the !redecessor auditor a)rees to issue a new auditor+s re!ort on the
a(ended financial state(ents of the !rior !eriod, the auditor shall re!ort onl# on the current
!eriod' $Aef. 6ara' A11&
6rior 6eriod Financial State(ents Not Audited
15' If the !rior !eriod financial state(ents were not audited, the auditor shall state in an 7ther Eatter
!ara)ra!h that the co(!arative financial state(ents are unaudited' Such a state(ent does not,
however, relieve the auditor of the re*uire(ent to o"tain sufficient a!!ro!riate audit evidence that
the o!enin) "alances do not contain (isstate(ents that (ateriall# affect the current !eriod+s
7
OOO
App0ic!tio" !"# Othe' E5p0!"!to'/ )!te'i!0 A-#it *'oce#-'e
Dritten +epresentations $Aef. 6ara' 5&
A1' In the case of co(!arative financial state(ents, the written re!resentations are re*uested for all
!eriods referred to in the auditor+s o!inion "ecause (ana)e(ent needs to reaffir( that the written
re!resentations it !reviousl# (ade with res!ect to the !rior !eriod re(ain a!!ro!riate' In the case
of corres!ondin) fi)ures, the written re!resentations are re*uested for the financial state(ents of
the current !eriod onl# "ecause the auditor+s o!inion is on those financial state(ents, which
include the corres!ondin) fi)ures' @owever, the auditor re*uests a s!ecific written re!resentation
re)ardin)
B
ISA 4B0, C%o((unication with hose %har)ed with <overnance,D !ara)ra!h 19' 7
ISA 710 744
an# restate(ent (ade to correct a (aterial (isstate(ent in the !rior !eriod financial state(ents
that affect the co(!arative infor(ation'
A-#it Repo'ti"(
Corresponding Figures
No Aeference in Auditor+s 7!inion $Aef. 6ara' 10&
A4' he auditor+s o!inion does not refer to the corres!ondin) fi)ures "ecause the auditor+s o!inion is
on the current !eriod financial state(ents as a whole, includin) the corres!ondin) fi)ures'
Eodification in Auditor+s Ae!ort on the 6rior 6eriod Unresolved $Aef. 6ara' 11&
A9' Lhen the auditor+s re!ort on the !rior !eriod, as !reviousl# issued, included a *ualified o!inion, a
disclai(er of o!inion, or an adverse o!inion and the (atter which )ave rise to the (odified
o!inion is resolved and !ro!erl# accounted for or disclosed in the financial state(ents in
accordance with the a!!lica"le financial re!ortin) fra(ework, the auditor+s o!inion on the current
!eriod need not refer to the !revious (odification'
A4' Lhen the auditor+s o!inion on the !rior !eriod, as !reviousl# e,!ressed, was (odified, the
unresolved (atter that )ave rise to the (odification (a# not "e relevant to the current !eriod
fi)ures' Nevertheless, a *ualified o!inion, a disclai(er of o!inion, or an adverse o!inion $as
a!!lica"le& (a# "e re*uired on the current !eriod+s financial state(ents "ecause of the effects or
!ossi"le effects of the unresolved (atter on the co(!ara"ilit# of the current and corres!ondin)
fi)ures'
A5' Illustrative e,a(!les of the auditor+s re!ort if the auditor+s re!ort on the !rior !eriod included a
(odified o!inion and the (atter )ivin) rise to the (odification is unresolved are contained in
Illustrations 1 and 4 of the A!!endi,'
Eisstate(ent in 6rior 6eriod Financial State(ents $Aef. 6ara' 14&
AB' Lhen the !rior !eriod financial state(ents that are (isstated have not "een a(ended and an
auditor+s re!ort has not "een reissued, "ut the corres!ondin) fi)ures have "een !ro!erl# restated or
a!!ro!riate disclosures have "een (ade in the current !eriod financial state(ents, the auditor+s
re!ort (a# include an 0(!hasis of Eatter !ara)ra!h descri"in) the circu(stances and referrin)
to, where relevant, disclosures that full# descri"e the (atter that can "e found in the financial
state(ents $see ISA 70B&'
6rior 6eriod Financial State(ents Audited "# a 6redecessor Auditor $Aef. 6ara' 19&
A7' An illustrative e,a(!le of the auditor+s re!ort if the !rior !eriod financial state(ents were audited
"# a !redecessor auditor and the auditor is not
745 ISA 710
!rohi"ited "# law or re)ulation fro( referrin) to the !redecessor auditor+s re!ort on the
corres!ondin) fi)ures is contained in Illustration 9 of the A!!endi,'
Co$parati!e Financial )tate$ents
Aeference in Auditor+s 7!inion $Aef. 6ara' 15&
A8' 1ecause the auditor+s re!ort on co(!arative financial state(ents a!!lies to the financial
state(ents for each of the !eriods !resented, the auditor (a# e,!ress a *ualified o!inion or an
adverse o!inion, disclai( an o!inion, or include an 0(!hasis of Eatter !ara)ra!h with res!ect to
one or (ore !eriods, while e,!ressin) a different auditor+s o!inion on the financial state(ents of
the other !eriod'
A5' An illustrative e,a(!le of the auditor+s re!ort if the auditor is re*uired to re!ort on "oth the
current and the !rior !eriod financial state(ents in connection with the current #ear+s audit and the
!rior !eriod included a (odified o!inion and the (atter )ivin) rise to the (odification is
unresolved, is contained in Illustration 4 of the A!!endi,'
7!inion on 6rior 6eriod Financial State(ents =ifferent fro( 6revious 7!inion $Aef. 6ara' 1B&
A10' Lhen re!ortin) on the !rior !eriod financial state(ents in connection with the current !eriod+s
audit, the o!inion e,!ressed on the !rior !eriod financial state(ents (a# "e different fro( the
o!inion !reviousl# e,!ressed if the auditor "eco(es aware of circu(stances or events that
(ateriall# affect the financial state(ents of a !rior !eriod durin) the course of the audit of the
current !eriod' In so(e ;urisdictions, the auditor (a# have additional re!ortin) res!onsi"ilities
desi)ned to !revent future reliance on the auditor+s !reviousl# issued re!ort on the !rior !eriod
6rior 6eriod Financial State(ents Audited "# a 6redecessor Auditor $Aef. 6ara' 18&
A11' he !redecessor auditor (a# "e una"le or unwillin) to reissue the auditor+s re!ort on the !rior
!eriod financial state(ents' An 7ther Eatter !ara)ra!h of the auditor+s re!ort (a# indicate that
the !redecessor auditor re!orted on the financial state(ents of the !rior !eriod "efore a(end(ent'
In addition, if the auditor is en)a)ed to audit and o"tains sufficient a!!ro!riate audit evidence to
"e satisfied as to the a!!ro!riateness of the a(end(ent, the auditor+s re!ort (a# also include the
followin) !ara)ra!h.
As !art of our audit of the 40I4 financial state(ents, we also audited the ad;ust(ents
descri"ed in Note I that were a!!lied to a(end the 40I1 financial state(ents' In our
o!inion, such ad;ust(ents are a!!ro!riate and have "een !ro!erl# a!!lied' Le were not
en)a)ed to audit, review, or a!!l# an# !rocedures to the 40I1 financial state(ents of the
co(!an# other than with res!ect to
ISA 710 74B
the ad;ust(ents and, accordin)l#, we do not e,!ress an o!inion or an# other for( of assurance on the 40I1
financial state(ents taken as a whole'
747 ISA 710
Appe"#i5
I00-t'!tio" of A-#ito'> Repo't I00-t'!tio" 7 \ Co''epo"#i"( Fi(-'e $Aef. 6ara' A5&
Repo't i00-t'!ti9e of the ci'c-.t!"ce #ec'i$e# i" p!'!('!ph 77H!I4 ! fo00o&G
% G The !-#ito'> 'epo't o" the p'io' pe'io#4 ! p'e9io-0/ i-e#4 i"c0-#e# ! 2-!0ifie#
opi"io"J
% G The .!tte' (i9i"( 'ie to the .o#ific!tio" i -"'eo09e#J
% G The effect o' poi$0e effect of the .!tte' o" the c-''e"t pe'io#> fi(-'e !'e
.!te'i!0 !"# 'e2-i'e ! .o#ific!tio" to the !-#ito'> opi"io" 'e(!'#i"( the c-''e"t pe'io#
fi(-'eJ
AddresseeV
8
infor(ation'
<anage$ent8s
5
10
our audit in accordance with International Standards on
8
ISA 710 A660N=II 748
Auditin)' hose standards re*uire that we co(!l# with ethical re*uire(ents and !lan and !erfor( the audit
to o"tain reasona"le assurance a"out whether the financial state(ents are free fro( (aterial (isstate(ent'
!resentation
11
control'
14
As discussed in Note I to the financial state(ents, no de!reciation has "een !rovided in the financial
state(ents, which constitutes a de!arture fro( International Financial Ae!ortin) Standards' his is the
result of a decision taken "# (ana)e(ent at the start of the !recedin) financial #ear and caused us to
*ualif# our audit o!inion on the financial state(ents relatin) to that #ear' 1ased on the strai)ht-line (ethod
of de!reciation and annual rates of 5Q for the "uildin) and 40Q for the e*ui!(ent, the loss for the #ear
should "e increased "# ,,, in 40I1 and ,,, in 40I0, !ro!ert#, !lant and e*ui!(ent should "e reduced "#
accu(ulated de!reciation of ,,, in 40I1 and ,,, in 40I0, and the accu(ulated loss should "e increased
"# ,,, in 40I1 and ,,, in 40I0'
*ualified ,pinion
the financial state(ents !resent fairl#, in all (aterial
11
745 ISA 710 A660N=II
res!ects, $or gi!e a true and fair !ie# of& the financial !osition of A1% %o(!an# as at =ece("er 91, 40I1,
and $of& its financial !erfor(ance and its cash flows for the #ear then ended in accordance with
International Financial Ae!ortin) Standards'
UAuditor+s addressV
ISA 710 A660N=II 750
I00-t'!tio" 2 \ Co''epo"#i"( Fi(-'e $Aef. 6ara' A5&
Repo't i00-t'!ti9e of the ci'c-.t!"ce #ec'i$e# i" p!'!('!ph 77H$I4 ! fo00o&G
opi"io"J
i..!te'i!0 $-t 'e2-i'e ! .o#ific!tio" to the !-#ito'> opi"io" $ec!-e of the effect o'
poi$0e effect of the -"'eo09e# .!tte' o" the co.p!'!$i0it/ of the c-''e"t pe'io#> fi(-'e
!"# the co''epo"#i"( fi(-'eJ
AddresseeV
19
infor(ation'
<anage$ent8s
14
15
19
751 ISA 710 A660N=II
!resentation
1B
control'
17
1ecause we were a!!ointed auditors of A1% %o(!an# durin) 40I0, we were not a"le to o"serve the
countin) of the !h#sical inventories at the "e)innin) of that !eriod or satisf# ourselves concernin) those
inventor# *uantities "# alternative (eans' Since o!enin) inventories affect the deter(ination of the results
of o!erations, we were una"le to deter(ine whether ad;ust(ents to the results of o!erations and o!enin)
retained earnin)s (i)ht "e necessar# for 40I0' 7ur audit o!inion on the financial state(ents for the !eriod
ended =ece("er 91, 40I0 was (odified accordin)l#' 7ur o!inion on the current !eriod+s financial
state(ents is also (odified "ecause of the !ossi"le effect of this (atter on the co(!ara"ilit# of the current
!eriod+s fi)ures and the corres!ondin) fi)ures'
*ualified ,pinion
In our o!inion, e,ce!t for the !ossi"le effects on the corres!ondin) fi)ures of the (atter descri"ed in the
1asis for :ualified 7!inion !ara)ra!h, the financial state(ents !resent fairl#, in all (aterial res!ects, $or
gi!e a true and fair !ie# of& the financial !osition of A1% %o(!an# as at =ece("er 91, 40I1, and $of& its
financial !erfor(ance and its cash flows for the #ear then ended in accordance with International Financial
1B
ISA 710 A660N=II 754
UAuditor+s addressV
759 ISA 710 A660N=II
I00-t'!tio" 3 \ Co''epo"#i"( Fi(-'e $Aef. 6ara' A7&
Repo't i00-t'!ti9e of the ci'c-.t!"ce #ec'i$e# i" p!'!('!ph 734 ! fo00o&G
1. G The p'io' pe'io#> fi"!"ci!0 t!te.e"t &e'e !-#ite# $/ ! p'e#eceo' !-#ito'J
2. G The !-#ito' i "ot p'ohi$ite# $/ 0!& o' 'e(-0!tio" f'o. 'efe''i"( to the p'e#eceo'
!-#ito'> 'epo't o" the co''epo"#i"( fi(-'e !"# #eci#e to #o oJ
AddresseeV
18
infor(ation'
<anage$ent8s
15
40
those risk
18
ISA 710 A660N=II 754
assess(ents, the auditor considers internal control relevant to the entit#+s !re!aration and fair !resentation
41
of the financial state(ents in order to desi)n audit !rocedures that are a!!ro!riate in the circu(stances, "ut
not for the !ur!ose of e,!ressin) an o!inion on the effectiveness of the entit#+s internal control'
44
An audit
also includes evaluatin) the a!!ro!riateness of accountin) !olicies used and the reasona"leness of
accountin) esti(ates (ade "# (ana)e(ent, as well as evaluatin) the overall !resentation of the financial
state(ents'
audit o!inion'
,pinion
and its cash flows for the #ear then ended in accordance with International Financial Ae!ortin) Standards'
,ther <atter
he financial state(ents of A1% %o(!an# for the #ear ended =ece("er 91, 40I0, were audited "#
another auditor who e,!ressed an un(odified o!inion on those state(ents on Earch 91, 40I1'
UAuditor+s addressV
41
755 ISA 710 A660N=II
I00-t'!tio" 6 \]]] Co.p!'!ti9e Fi"!"ci!0 St!te.e"t $Aef. 6ara' A5&
Repo't i00-t'!ti9e of the ci'c-.t!"ce #ec'i$e# i" p!'!('!ph 7@4 ! fo00o&G
% G A-#ito' i 'e2-i'e# to 'epo't o" $oth the c-''e"t pe'io# fi"!"ci!0 t!te.e"t !"#
the p'io' pe'io# fi"!"ci!0 t!te.e"t i" co""ectio" &ith the c-''e"t /e!'> !-#itJ
opi"io"J
.!te'i!0 to $oth the c-''e"t pe'io# fi"!"ci!0 t!te.e"t !"# p'io' pe'io# fi"!"ci!0
t!te.e"t !"# 'e2-i'e ! .o#ific!tio" to the !-#ito'> opi"io"J
49
sheets as at =ece("er 91, 40I1 and 40I0, and the inco(e state(ents, state(ents of chan)es in e*uit# and
cash flow state(ents for the #ears then ended, and a su((ar# of si)nificant accountin) !olicies and other
<anage$ent8s
44
45
7ur res!onsi"ilit# is to e,!ress an o!inion on these financial state(ents "ased on our audits' Le conducted
our audits in accordance with International Standards on Auditin)' hose standards re*uire that we co(!l#
with ethical re*uire(ents and !lan
49
and !erfor( the audit to o"tain reasona"le assurance a"out whether the financial state(ents are free fro(
!resentation
4B
control'
47
Le "elieve that the audit evidence we have o"tained in our audits is sufficient and a!!ro!riate to !rovide a
"asis for our *ualified audit o!inion'
As discussed in Note I to the financial state(ents, no de!reciation has "een !rovided in the financial
state(ents, which constitutes a de!arture fro( International Financial Ae!ortin) Standards' 1ased on the
strai)ht-line (ethod of de!reciation and annual rates of 5Q for the "uildin) and 40Q for the e*ui!(ent, the
loss for the #ear should "e increased "# ,,, in 40I1 and ,,, in 40I0, !ro!ert#, !lant and e*ui!(ent
should "e reduced "# accu(ulated de!reciation of ,,, in 40I1 and ,,, in 40I0, and the accu(ulated loss
should "e increased "# ,,, in 40I1 and ,,, in 40I0'
*ualified ,pinion
the financial state(ents !resent fairl#, in all (aterial res!ects, $or gi!e a true and fair !ie# of& the financial
!osition of A1% %o(!an# as at =ece("er 91, 40I1 and 40I0 and $of& its financial !erfor(ance and its
cash flows for the #ears then ended in accordance with International Financial Ae!ortin) Standards'
4B
757 ISA 710 A660N=II
UFor( and content of this section of the auditor+s re!ort will var# de!endin)
on the nature of the auditor+s other re!ortin) res!onsi"ilities'V
UAuditor+s addressV
ISA 710 A660N=II 758
THE AUDITOR>S RES*ONSIBILITIES RELATING TO OTHER
INFOR)ATION IN DOCU)ENTS CONTAINING AUDITED FINANCIAL
STATE)ENTS
$0ffective for audits of financial state(ents for !eriods "e)innin) on or after
=ece("er 15, 4005&
CONTENTS
6ara)ra!h
Eaterial Eisstate(ents of Fact ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A10-A11
International Standard on Auditin) $ISA& 740, Che Auditor+s Aes!onsi"ilities Aelatin) to 7ther
Infor(ation in =ocu(ents %ontainin) Audited Financial State(entsD should "e read in con;unction with
755 ISA 740
1. 1' his International Standard on Auditin) $ISA& deals with the auditor+s res!onsi"ilities
relatin) to other infor(ation in docu(ents containin) audited financial state(ents and the
auditor+s re!ort thereon' In the a"sence of an# se!arate re*uire(ent in the !articular circu(stances
of the en)a)e(ent, the auditor+s o!inion does not cover other infor(ation and the auditor has no
s!ecific res!onsi"ilit# for deter(inin) whether or not other infor(ation is !ro!erl# stated'
@owever, the auditor reads the other infor(ation "ecause the credi"ilit# of the audited financial
state(ents (a# "e under(ined "# (aterial inconsistencies "etween the audited financial
state(ents and other infor(ation' $Aef. 6ara' A1&
2. 4' In this ISA Cdocu(ents containin) audited financial state(entsD refers to annual re!orts
$or si(ilar docu(ents&, that are issued to owners $or si(ilar stakeholders&, containin) audited
financial state(ents and the auditor+s re!ort thereon' his ISA (a# also "e a!!lied, ada!ted as
necessar# in the circu(stances, to other docu(ents containin) audited financial state(ents, such
as those used in securities offerin)s'
1
$Aef. 6ara' A4&
Effecti9e D!te
15, 4005'
O$1ecti9e
4' he o";ective of the auditor is to res!ond a!!ro!riatel# when docu(ents containin) audited
financial state(ents and the auditor+s re!ort thereon include other infor(ation that could
under(ine the credi"ilit# of those financial state(ents and the auditor+s re!ort'
Defi"itio"
5' For !ur!oses of the ISAs the followin) ter(s have the (eanin)s attri"uted "elow.
1. $a& 7ther infor(ation K Financial and non-financial infor(ation $other than the financial
state(ents and the auditor+s re!ort thereon& which is included, either "# law, re)ulation or custo(,
in a docu(ent containin) audited financial state(ents and the auditor+s re!ort thereon' $Aef. 6ara'
A9-A4&
2. $"& Inconsistenc# K 7ther infor(ation that contradicts infor(ation contained in the audited
financial state(ents' A (aterial inconsistenc#
See ISA 400, C7verall 7";ectives of the Inde!endent Auditor and the %onduct of an Audit in Accordance with International
ISA 740 7B0
(a# raise dou"t a"out the audit conclusions drawn fro( audit evidence !reviousl# o"tained
and, !ossi"l#, a"out the "asis for the auditor+s o!inion on the financial state(ents'
$c& Eisstate(ent of fact K 7ther infor(ation that is unrelated to (atters a!!earin) in the
audited financial state(ents that is incorrectl# stated or !resented' A (aterial (isstate(ent
of fact (a# under(ine the credi"ilit# of the docu(ent containin) audited financial
state(ents'
Re2-i'e.e"t Re!#i"( Othe' I"fo'.!tio"
1. B' he auditor shall read the other infor(ation to identif# (aterial inconsistencies, if an#,
with the audited financial state(ents'
2. 7' he auditor shall (ake a!!ro!riate arran)e(ents with (ana)e(ent or those char)ed with
)overnance to o"tain the other infor(ation !rior to the date of the auditor+s re!ort' If it is not
!ossi"le to o"tain all the other infor(ation !rior to the date of the auditor+s re!ort, the auditor shall
read such other infor(ation as soon as !ractica"le' $Aef. 6ara' A5&
)!te'i!0 I"co"ite"cie
8' If, on readin) the other infor(ation, the auditor identifies a (aterial inconsistenc#, the auditor
shall deter(ine whether the audited financial state(ents or the other infor(ation needs to "e
revised'
<aterial Inconsistencies Identified in ,ther Infor$ation ,btained (rior to the ?ate of the Auditor8s
+eport
1. 5' If revision of the audited financial state(ents is necessar# and (ana)e(ent refuses to
(ake the revision, the auditor shall (odif# the o!inion in the auditor+s re!ort in accordance with
ISA 705'
4
2. 10' If revision of the other infor(ation is necessar# and (ana)e(ent refuses to (ake the
revision, the auditor shall co((unicate this (atter to those char)ed with )overnance, unless all of
those char)ed with )overnance are involved in (ana)in) the entit#?
9
and
$a& Include in the auditor+s re!ort an 7ther Eatter$s& !ara)ra!h descri"in) the (aterial
inconsistenc# in accordance with ISA 70B?
4
or
4
4
7B1 ISA 740
1$"&Lithhold the auditor+s re!ort? or
2$c&Lithdraw fro( the en)a)e(ents, where withdrawal is !ossi"le under a!!lica"le law or re)ulation'
$Aef. 6ara' AB-A7&
<aterial Inconsistencies Identified in ,ther Infor$ation ,btained )ubse>uent to the ?ate of the Auditor8s
+eport
1. 11' If revision of the audited financial state(ents is necessar#, the auditor shall follow the
relevant re*uire(ents in ISA 5B0'
5
2. 14' If revision of the other infor(ation is necessar# and (ana)e(ent a)rees to (ake the
revision, the auditor shall carr# out the !rocedures necessar# under the circu(stances' $Aef. 6ara'
A8&
3. 19' If revision of the other infor(ation is necessar#, "ut (ana)e(ent refuses to (ake the
revision, the auditor shall notif# those char)ed with )overnance, unless all of those char)ed with
)overnance are involved in (ana)in) the entit#, of the auditor+s concern re)ardin) the other
infor(ation and take an# further a!!ro!riate action' $Aef. 6ara' A5&
)!te'i!0 )it!te.e"t of F!ct
1. 14' If, on readin) the other infor(ation for the !ur!ose of identif#in) (aterial
inconsistencies, the auditor "eco(es aware of an a!!arent (aterial (isstate(ent of fact, the
auditor shall discuss the (atter with (ana)e(ent' $Aef. 6ara' A10&
2. 15' If, followin) such discussions, the auditor still considers that there is an a!!arent (aterial
(isstate(ent of fact, the auditor shall re*uest (ana)e(ent to consult with a *ualified third !art#,
such as the entit#+s le)al counsel, and the auditor shall consider the advice received'
3. 1B' If the auditor concludes that there is a (aterial (isstate(ent of fact in the other
infor(ation which (ana)e(ent refuses to correct, the auditor shall notif# those char)ed with
)overnance, unless all of those char)ed with )overnance are involved in (ana)in) the entit#, of
the auditor+s concern re)ardin) the other infor(ation and take an# further a!!ro!riate action' $Aef.
6ara' A11&
OOO
ISA 5B0, CSu"se*uent 0vents,D !ara)ra!hs 10-17'
ISA 740 7B4
App0ic!tio" !"# Othe' E5p0!"!to'/ )!te'i!0 Scope of thi ISA
Additional +esponsibilities& through )tatutory or ,ther +egulatory +e>uire$ents& in +elation to ,ther
Infor$ation $Aef. 6ara' 1&
A1' he auditor (a# have additional res!onsi"ilities, throu)h statutor# or other re)ulator#
re*uire(ents, in relation to other infor(ation that are "e#ond the sco!e of this ISA' For e,a(!le,
so(e ;urisdictions (a# re*uire the auditor to a!!l# s!ecific !rocedures to certain of the other
infor(ation such as re*uired su!!le(entar# data or to e,!ress an o!inion on the relia"ilit# of
!erfor(ance indicators descri"ed in the other infor(ation' Lhere there are such o"li)ations, the
auditor+s additional res!onsi"ilities are deter(ined "# the nature of the en)a)e(ent and "# law,
re)ulation and !rofessional standards' If such other infor(ation is o(itted or contains deficiencies,
the auditor (a# "e re*uired "# law or re)ulation to refer to the (atter in the auditor+s re!ort'
?ocu$ents Containing Audited Financial )tate$ents $Aef. 6ara' 4&
A4' Unless re*uired "# law or re)ulation, s(aller entities are less likel# to issue docu(ents containin)
audited financial state(ents' @owever, an e,a(!le of such a docu(ent would "e where a le)al
re*uire(ent e,ists for an acco(!an#in) re!ort "# those char)ed with )overnance' 0,a(!les of
other infor(ation that (a# "e included in a docu(ent containin) the audited financial state(ents
of a s(aller entit# are a detailed inco(e state(ent and a (ana)e(ent re!ort'
Defi"itio" of Othe' I"fo'.!tio" $Aef. 6ara' 5$a&& A9' 7ther infor(ation (a# co(!rise, for e,a(!le.
1. G A re!ort "# (ana)e(ent or those char)ed with )overnance on o!erations'
2. G Financial su((aries or hi)hli)hts'
3. G 0(!lo#(ent data'
4. G 6lanned ca!ital e,!enditures'
5. G Financial ratios'
6. G Na(es of officers and directors'
1. G Selected *uarterl# data' A4' For !ur!oses of the ISAs, other infor(ation does not enco(!ass, for
e,a(!le.
2. G A !ress release or a trans(ittal (e(orandu(, such as a coverin) letter, acco(!an#in)
the docu(ent containin) audited financial state(ents and the auditor+s re!ort thereon'
3. G Infor(ation contained in anal#st "riefin)s'
4. G Infor(ation contained on the entit#+s we"site'
7B9 ISA 740
Re!#i"( Othe' I"fo'.!tio" $Aef. 6ara' 7&
A5' 7"tainin) the other infor(ation !rior to the date of the auditor+s re!ort ena"les the auditor to
resolve !ossi"le (aterial inconsistencies and a!!arent (aterial (isstate(ents of fact with
(ana)e(ent on a ti(el# "asis' An a)ree(ent with (ana)e(ent as to when the other infor(ation
will "e availa"le (a# "e hel!ful'
)!te'i!0 I"co"ite"cie
<aterial Inconsistencies Identified in ,ther Infor$ation ,btained (rior to the ?ate of the Auditor8s
+eport $Aef. 6ara' 10&
AB' Lhen (ana)e(ent refuses to revise the other infor(ation, the auditor (a# "ase an# decision on
what further action to take on advice fro( the auditor+s le)al counsel'
A7' In the !u"lic sector, withdrawal fro( the en)a)e(ent or withholdin) the auditor+s re!ort (a# not
"e o!tions' In such cases, the auditor (a# issue a re!ort to the a!!ro!riate statutor# "od# )ivin)
details of the inconsistenc#'
<aterial Inconsistencies Identified in ,ther Infor$ation ,btained )ubse>uent to the ?ate of the Auditor8s
+eport $Aef. 6ara' 14-19&
A8' Lhen (ana)e(ent a)rees to revise the other infor(ation, the auditor+s !rocedures (a# include
reviewin) the ste!s taken "# (ana)e(ent to ensure that individuals in recei!t of the !reviousl#
issued financial state(ents, the auditor+s re!ort thereon, and the other infor(ation are infor(ed of
the revision'
A5' Lhen (ana)e(ent refuses to (ake the revision of such other infor(ation that the auditor
concludes is necessar#, a!!ro!riate further actions "# the auditor (a# include o"tainin) advice
fro( the auditor+s le)al counsel'
)!te'i!0 )it!te.e"t of F!ct $Aef. 6ara' 14-1B&
A10' Lhen discussin) an a!!arent (aterial (isstate(ent of fact with (ana)e(ent, the auditor (a# not
"e a"le to evaluate the validit# of so(e disclosures included within the other infor(ation and
(ana)e(ent+s res!onses to the auditor+s in*uiries, and (a# conclude that valid differences of
;ud)(ent or o!inion e,ist'
ISA 740 7B4
A11' Lhen the auditor concludes that there is a (aterial (isstate(ent of fact that (ana)e(ent refuses to
correct, a!!ro!riate further actions "# the auditor (a# include o"tainin) advice fro( the auditor+s
le)al counsel'
7B5 ISA 740
INTERNATIONAL STANDARD ON AUDITING +00
S*ECIAL CONSIDERATIONSDAUDITS OF FINANCIAL STATE)ENTS
*RE*ARED IN ACCORDANCE =ITH S*ECIAL *UR*OSE FRA)E=ORKS
CONTENTS
6ara)ra!h
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1-9
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' B-7
Re2-i'e.e"t
%onsiderations Lhen Acce!tin) the 0n)a)e(ent '''''''''''''''''''''''''''''''''''''' 8
%onsiderations Lhen 6lannin) and 6erfor(in) the Audit ''''''''''''''''''''''''' 5-10
For(in) an 7!inion and Ae!ortin) %onsiderations ''''''''''''''''''''''''''''''''''' 11-14
=efinition of S!ecial 6ur!ose Fra(ework '''''''''''''''''''''''''''''''''''''''''''''''''' A1-A4
%onsiderations Lhen Acce!tin) the 0n)a)e(ent '''''''''''''''''''''''''''''''''''''' A5-A8
%onsiderations Lhen 6lannin) and 6erfor(in) the Audit ''''''''''''''''''''''''' A5-A14
For(in) an 7!inion and Ae!ortin) %onsiderations ''''''''''''''''''''''''''''''''''' A19-A15
A!!endi,. Illustrations of Auditors+ Ae!orts on S!ecial 6ur!ose
Financial State(ents
International Standard on Auditin) $ISA& 800, CS!ecial %onsiderationsNAudits of Financial State(ents
6re!ared in Accordance with S!ecial 6ur!ose Fra(eworksD should "e read in con;unction with ISA 400,
C7verall 7";ectives of the Inde!endent Auditor and the %onduct of an Audit in Accordance with
ISA 800 7BB
1. 1' he International Standards on Auditin) $ISAs& in the 100-700 series a!!l# to an audit of
financial state(ents' his ISA deals with s!ecial considerations in the a!!lication of those ISAs to
an audit of financial state(ents !re!ared in accordance with a s!ecial !ur!ose fra(ework'
2. 4' his ISA is written in the conte,t of a co(!lete set of financial state(ents !re!ared in
accordance with a s!ecial !ur!ose fra(ework' ISA 805
1
deals with s!ecial considerations relevant
to an audit of a sin)le financial state(ent or of a s!ecific ele(ent, account or ite( of a financial
state(ent'
3. 9' his ISA does not override the re*uire(ents of the other ISAs? nor does it !ur!ort to deal
with all s!ecial considerations that (a# "e relevant in the circu(stances of the en)a)e(ent'
Effecti9e D!te
15, 4005'
O$1ecti9e
5' he o";ective of the auditor, when a!!l#in) ISAs in an audit of financial state(ents !re!ared in
accordance with a s!ecial !ur!ose fra(ework, is to address a!!ro!riatel# the s!ecial
considerations that are relevant to.
1$a& he acce!tance of the en)a)e(ent?
2$"& he !lannin) and !erfor(ance of that en)a)e(ent? and
3$c&For(in) an o!inion and re!ortin) on the financial state(ents'
Defi"itio"
1$a& S!ecial !ur!ose financial state(ents K Financial state(ents !re!ared in accordance with
a s!ecial !ur!ose fra(ework' $Aef. 6ara' A4&
2$"& S!ecial !ur!ose fra(ework K A financial re!ortin) fra(ework desi)ned to (eet the
financial infor(ation needs of s!ecific users' he financial re!ortin) fra(ework (a# "e a fair
!resentation fra(ework or a co(!liance fra(ework'
4
$Aef. 6ara' A1-A4&
1
ISA 805, CS!ecial %onsiderationsNAudits of Sin)le Financial State(ents and S!ecific 0le(ents,
Accounts or Ite(s of a Financial State(ent'D 4
Standards on Auditin),D !ara)ra!h 19$a&'
7B7 ISA 800
7' Aeference to Cfinancial state(entsD in this ISA (eans Ca co(!lete set of s!ecial !ur!ose financial
state(ents, includin) the related notes'D he related notes ordinaril# co(!rise a su((ar# of
si)nificant accountin) !olicies and other e,!lanator# infor(ation' he re*uire(ents of the
a!!lica"le financial re!ortin) fra(ework deter(ine the for( and content of the financial
state(ents, and what constitutes a co(!lete set of financial state(ents'
Re2-i'e.e"t Co"i#e'!tio" =he" Accepti"( the E"(!(e.e"t
Acceptability of the Financial +eporting Fra$e#or.
8' ISA 410 re*uires the auditor to deter(ine the acce!ta"ilit# of the financial re!ortin) fra(ework
a!!lied in the !re!aration of the financial state(ents'
9
In an audit of s!ecial !ur!ose financial
state(ents, the auditor shall o"tain an understandin) of. $Aef. 6ara' A5-A8&
1$a&he !ur!ose for which the financial state(ents are !re!ared?
2$"&he intended users? and
3$c&he ste!s taken "# (ana)e(ent to deter(ine that the a!!lica"le financial re!ortin) fra(ework is
acce!ta"le in the circu(stances'
Co"i#e'!tio" =he" *0!""i"( !"# *e'fo'.i"( the A-#it
1. 5' ISA 400 re*uires the auditor to co(!l# with all ISAs relevant to the audit'
4
In !lannin)
and !erfor(in) an audit of s!ecial !ur!ose financial state(ents, the auditor shall deter(ine
whether a!!lication of the ISAs re*uires s!ecial consideration in the circu(stances of the
en)a)e(ent' $Aef. 6ara' A5-A14&
2. 10' ISA 915 re*uires the auditor to o"tain an understandin) of the entit#+s selection and
a!!lication of accountin) !olicies'
5
In the case of financial state(ents !re!ared in accordance with
the !rovisions of a contract, the auditor shall o"tain an understandin) of an# si)nificant
inter!retations of the contract that (ana)e(ent (ade in the !re!aration of those financial
state(ents' An inter!retation is si)nificant when ado!tion of another reasona"le inter!retation
would have !roduced a (aterial difference in the infor(ation !resented in the financial
state(ents'
9
ISA 410, CA)reein) the er(s of Audit 0n)a)e(ents,D !ara)ra!h B$a&' 4
ISA 400, !ara)ra!h 18' 5
!ara)ra!h 11$c&'
ISA 800 7B8
Fo'.i"( !" Opi"io" !"# Repo'ti"( Co"i#e'!tio"
11' Lhen for(in) an o!inion and re!ortin) on s!ecial !ur!ose financial state(ents, the auditor shall
a!!l# the re*uire(ents in ISA 700'
B
$Aef. 6ara' A19&
?escription of the Applicable Financial +eporting Fra$e#or.
1. 14' ISA 700 re*uires the auditor to evaluate whether the financial state(ents ade*uatel# refer
to or descri"e the a!!lica"le financial re!ortin) fra(ework'
7
In the case of financial state(ents
!re!ared in accordance with the !rovisions of a contract, the auditor shall evaluate whether the
financial state(ents ade*uatel# descri"e an# si)nificant inter!retations of the contract on which
the financial state(ents are "ased'
119' ISA 700 deals with the for( and content of the auditor+s re!ort' In the case of an
auditor+s re!ort on s!ecial !ur!ose financial state(ents.
2$a&he auditor+s re!ort shall also descri"e the !ur!ose for which the financial state(ents are
!re!ared and, if necessar#, the intended users, or refer to a note in the s!ecial !ur!ose
financial state(ents that contains that infor(ation? and
3$"& If (ana)e(ent has a choice of financial re!ortin) fra(eworks in the !re!aration of such
financial state(ents, the e,!lanation of (ana)e(ent+s
8
res!onsi"ilit# for the financial
state(ents shall also (ake reference to its res!onsi"ilit# for deter(inin) that the a!!lica"le
financial re!ortin) fra(ework is acce!ta"le in the circu(stances'
Alerting +eaders that the Financial )tate$ents Are (repared in Accordance #ith a )pecial (urpose
Fra$e#or.
14' he auditor+s re!ort on s!ecial !ur!ose financial state(ents shall include an 0(!hasis of Eatter
!ara)ra!h alertin) users of the auditor+s re!ort that the financial state(ents are !re!ared in
accordance with a s!ecial !ur!ose fra(ework and that, as a result, the financial state(ents (a#
not "e suita"le for another !ur!ose' he auditor shall include this !ara)ra!h under an a!!ro!riate
headin)' $Aef. 6ara' A14-A15&
OOO
B
ISA 700, CFor(in) an 7!inion and Ae!ortin) on Financial State(ents'D 7
8
7B5 ISA 800
Defi"itio" of Speci!0 *-'poe F'!.e&o'% $Aef. 6ara' B& A1' 0,a(!les of
s!ecial !ur!ose fra(eworks are.
% G A ta, "asis of accountin) for a set of financial state(ents that acco(!an# an entit#+s ta,
return?
% G he cash recei!ts and dis"urse(ents "asis of accountin) for cash flow infor(ation that
an entit# (a# "e re*uested to !re!are for creditors?
% G he financial re!ortin) !rovisions esta"lished "# a re)ulator to (eet the re*uire(ents of
that re)ulator? or
% G he financial re!ortin) !rovisions of a contract, such as a "ond indenture, a loan
a)ree(ent, or a !ro;ect )rant'
A4' here (a# "e circu(stances where a s!ecial !ur!ose fra(ework is "ased on a financial re!ortin)
fra(ework esta"lished "# an authoriJed or reco)niJed standards settin) or)aniJation or "# law or
re)ulation, "ut does not co(!l# with all the re*uire(ents of that fra(ework' An e,a(!le is a
contract that re*uires financial state(ents to "e !re!ared in accordance with (ost, "ut not all, of
the Financial Ae!ortin) Standards of >urisdiction I' Lhen this is acce!ta"le in the circu(stances
of the en)a)e(ent, it is ina!!ro!riate for the descri!tion of the a!!lica"le financial re!ortin)
fra(ework in the s!ecial !ur!ose financial state(ents to i(!l# full co(!liance with the financial
re!ortin) fra(ework esta"lished "# the authoriJed or reco)niJed standards settin) or)aniJation or
"# law or re)ulation' In the a"ove e,a(!le of the contract, the descri!tion of the a!!lica"le
financial re!ortin) fra(ework (a# refer to the financial re!ortin) !rovisions of the contract,
rather than (ake an# reference to the Financial Ae!ortin) Standards of >urisdiction I'
A9' In the circu(stances descri"ed in !ara)ra!h A4, the s!ecial !ur!ose fra(ework (a# not "e a fair
!resentation fra(ework even if the financial re!ortin) fra(ework on which it is "ased is a fair
!resentation fra(ework' his is "ecause the s!ecial !ur!ose fra(ework (a# not co(!l# with all
the re*uire(ents of the financial re!ortin) fra(ework esta"lished "# the authoriJed or reco)niJed
standards settin) or)aniJation or "# law or re)ulation that are necessar# to achieve fair
A4' Financial state(ents !re!ared in accordance with a s!ecial !ur!ose fra(ework (a# "e the onl#
financial state(ents an entit# !re!ares' In such circu(stances, those financial state(ents (a# "e
used "# users other than those for who( the financial re!ortin) fra(ework is desi)ned' =es!ite
the "road distri"ution of the financial state(ents in those circu(stances, the financial state(ents
are still considered to "e s!ecial !ur!ose financial
ISA 800 770
state(ents for !ur!oses of the ISAs' he re*uire(ents in !ara)ra!hs 19-14 are desi)ned to avoid
(isunderstandin)s a"out the !ur!ose for which the financial state(ents are !re!ared'
Co"i#e'!tio" =he" Accepti"( the E"(!(e.e"t
Acceptability of the Financial +eporting Fra$e#or. $Aef. 6ara' 8&
A5' In the case of s!ecial !ur!ose financial state(ents, the financial infor(ation needs of the intended
users are a ke# factor in deter(inin) the acce!ta"ilit# of the financial re!ortin) fra(ework a!!lied
in the !re!aration of the financial state(ents'
AB' he a!!lica"le financial re!ortin) fra(ework (a# enco(!ass the financial re!ortin) standards
esta"lished "# an or)aniJation that is authoriJed or reco)niJed to !ro(ul)ate standards for s!ecial
!ur!ose financial state(ents' In that case, those standards will "e !resu(ed acce!ta"le for that
!ur!ose if the or)aniJation follows an esta"lished and trans!arent !rocess involvin) deli"eration
and consideration of the views of relevant stakeholders' In so(e ;urisdictions, law or re)ulation
(a# !rescri"e the financial re!ortin) fra(ework to "e used "# (ana)e(ent in the !re!aration of
s!ecial !ur!ose financial state(ents for a certain t#!e of entit#' For e,a(!le, a re)ulator (a#
esta"lish financial re!ortin) !rovisions to (eet the re*uire(ents of that re)ulator' In the a"sence
of indications to the contrar#, such a financial re!ortin) fra(ework is !resu(ed acce!ta"le for
s!ecial !ur!ose financial state(ents !re!ared "# such entit#'
A7' Lhere the financial re!ortin) standards referred to in !ara)ra!h AB are su!!le(ented "#
le)islative or re)ulator# re*uire(ents, ISA 410 re*uires the auditor to deter(ine whether an#
conflicts "etween the financial re!ortin) standards and the additional re*uire(ents e,ist, and
!rescri"es actions to "e taken "# the auditor if such conflicts e,ist'
5
A8' he a!!lica"le financial re!ortin) fra(ework (a# enco(!ass the financial re!ortin) !rovisions of
a contract, or sources other than those descri"ed in !ara)ra!hs AB and A7' In that case, the
acce!ta"ilit# of the financial re!ortin) fra(ework in the circu(stances of the en)a)e(ent is
deter(ined "# considerin) whether the fra(ework e,hi"its attri"utes nor(all# e,hi"ited "#
acce!ta"le financial re!ortin) fra(eworks as descri"ed in A!!endi, 4 of ISA 410' In the case of a
s!ecial !ur!ose fra(ework, the relative i(!ortance to a !articular en)a)e(ent of each of the
attri"utes nor(all# e,hi"ited "# acce!ta"le financial re!ortin) fra(eworks is a (atter of
!rofessional ;ud)(ent' For e,a(!le, for !ur!oses of esta"lishin) the value of net assets of an
entit# at the date of its sale, the vendor and the !urchaser (a# have a)reed that ver# !rudent
esti(ates of allowances for uncollecti"le accounts receiva"le
771 ISA 800
are a!!ro!riate for their needs, even thou)h such financial infor(ation is not neutral when
co(!ared with financial infor(ation !re!ared in accordance with a )eneral !ur!ose fra(ework'
Co"i#e'!tio" =he" *0!""i"( !"# *e'fo'.i"( the A-#it $Aef. 6ara' 5&
A5' ISA 400 re*uires the auditor to co(!l# with $a& relevant ethical re*uire(ents, includin) those
!ertainin) to inde!endence, relatin) to financial state(ent audit en)a)e(ents, and $"& all ISAs
relevant to the audit' It also re*uires the auditor to co(!l# with each re*uire(ent of an ISA unless,
in the circu(stances of the audit, the entire ISA is not relevant or the re*uire(ent is not relevant
"ecause it is conditional and the condition does not e,ist' In e,ce!tional circu(stances, the auditor
(a# ;ud)e it necessar# to de!art fro( a relevant re*uire(ent in an ISA "# !erfor(in) alternative
audit !rocedures to achieve the ai( of that re*uire(ent'
10
A10' A!!lication of so(e of the re*uire(ents of the ISAs in an audit of s!ecial !ur!ose financial
state(ents (a# re*uire s!ecial consideration "# the auditor' For e,a(!le, in ISA 940, ;ud)(ents
a"out (atters that are (aterial to users of the financial state(ents are "ased on a consideration of
the co((on financial infor(ation needs of users as a )rou!'
11
In the case of an audit of s!ecial
!ur!ose financial state(ents, however, those ;ud)(ents are "ased on a consideration of the
financial infor(ation needs of the intended users'
A11' In the case of s!ecial !ur!ose financial state(ents, such as those !re!ared in accordance with the
re*uire(ents of a contract, (ana)e(ent (a# a)ree with the intended users on a threshold "elow
which (isstate(ents identified durin) the audit will not "e corrected or otherwise ad;usted' he
e,istence of such a threshold does not relieve the auditor fro( the re*uire(ent to deter(ine
(aterialit# in accordance with ISA 940 for !ur!oses of !lannin) and !erfor(in) the audit of the
s!ecial !ur!ose financial state(ents'
A14' %o((unication with those char)ed with )overnance in accordance with ISAs is "ased on the
relationshi! "etween those char)ed with )overnance and the financial state(ents su";ect to audit,
in !articular, whether those char)ed with )overnance are res!onsi"le for overseein) the
!re!aration of those financial state(ents' In the case of s!ecial !ur!ose financial state(ents, those
char)ed with )overnance (a# not have such a res!onsi"ilit#? for e,a(!le, when the financial
infor(ation is !re!ared solel# for (ana)e(ent+s use' In such cases, the re*uire(ents of ISA 4B0
14
(a# not "e relevant to the audit of the s!ecial !ur!ose financial state(ents, e,ce!t when the
auditor is also res!onsi"le for the audit of the entit#+s )eneral !ur!ose financial state(ents or, for
e,a(!le, has a)reed with those char)ed with )overnance of the entit# to co((unicate
10
ISA 400, !ara)ra!hs 14, 18 and 44-49' 11
ISA 940, CEaterialit# in 6lannin) and 6erfor(in) an Audit,D
!ara)ra!h 4'
14
ISA 4B0, C%o((unication with hose %har)ed with <overnance'D
ISA 800 774
to the( relevant (atters identified durin) the audit of the s!ecial !ur!ose financial state(ents'
Fo'.i"( !" Opi"io" !"# Repo'ti"( Co"i#e'!tio" $Aef. 6ara' 11&
A19' he A!!endi, to this ISA contains illustrations of auditors+ re!orts on s!ecial !ur!ose financial
state(ents'
Alerting +eaders that the Financial )tate$ents Are (repared in Accordance #ith a )pecial (urpose
Fra$e#or. $Aef. 6ara' 14&
A14' he s!ecial !ur!ose financial state(ents (a# "e used for !ur!oses other than those for which the#
were intended' For e,a(!le, a re)ulator (a# re*uire certain entities to !lace the s!ecial !ur!ose
financial state(ents on !u"lic record' o avoid (isunderstandin)s, the auditor alerts users of the
auditor+s re!ort that the financial state(ents are !re!ared in accordance with a s!ecial !ur!ose
fra(ework and, therefore, (a# not "e suita"le for another !ur!ose'
+estriction on ?istribution or "se $Aef. 6ara' 14&
A15' In addition to the alert re*uired "# !ara)ra!h 14, the auditor (a# consider it a!!ro!riate to
indicate that the auditor+s re!ort is intended solel# for the s!ecific users' =e!endin) on the law or
re)ulation of the !articular ;urisdiction, this (a# "e achieved "# restrictin) the distri"ution or use
of the auditor+s re!ort' In these circu(stances, the !ara)ra!h referred to in !ara)ra!h 14 (a# "e
e,!anded to include these other (atters, and the headin) (odified accordin)l#'
779 ISA 800
Appe"#i5
$Aef. 6ara' A19&
I00-t'!tio" of A-#ito'> Repo't o" Speci!0 *-'poe Fi"!"ci!0 St!te.e"t
1. G Illustration 1. An auditor+s re!ort on a co(!lete set of financial state(ents !re!ared in
accordance with the financial re!ortin) !rovisions of a contract $for !ur!oses of this illustration, a
co(!liance fra(ework&'
accordance with the ta, "asis of accountin) in >urisdiction I $for !ur!oses of this illustration, a
co(!liance fra(ework&'
accordance with the financial re!ortin) !rovisions esta"lished "# a re)ulator $for !ur!oses of this
illustration, a fair !resentation fra(ework&'
ISA 800 A660N=II 774
I00-t'!tio" 7G
% G The fi"!"ci!0 t!te.e"t h!9e $ee" p'ep!'e# $/ .!"!(e.e"t of the e"tit/ i"
!cco'#!"ce &ith the fi"!"ci!0 'epo'ti"( p'o9iio" of ! co"t'!ct Hth!t i4 ! peci!0 p-'poe
f'!.e&o'%I to co.p0/ &ith the p'o9iio" of th!t co"t'!ctJ )!"!(e.e"t #oe "ot h!9e !
choice of fi"!"ci!0 'epo'ti"( f'!.e&o'%J
% G The !pp0ic!$0e fi"!"ci!0 'epo'ti"( f'!.e&o'% i ! co.p0i!"ce f'!.e&o'%J
% G Dit'i$-tio" !"# -e of the !-#ito'> 'epo't !'e 'et'icte#J
infor(ation' he financial state(ents have "een !re!ared "# (ana)e(ent of A1% %o(!an# "ased on the
financial re!ortin) !rovisions of Section W of the contract dated >anuar# 1, 40I1 "etween A1% %o(!an#
and =0F %o(!an# $Cthe contractD&'
)!"!(e.e"t>
19
Eana)e(ent is res!onsi"le for the !re!aration of these financial state(ents in accordance with the
financial re!ortin) !rovisions of Section W of the contract, and for such internal control as (ana)e(ent
deter(ines is necessar# to ena"le the !re!aration of financial state(ents that are free fro( (aterial
(isstate(ent, whether due to fraud or error'
775 ISA 800 A660N=II
those risk assess(ents, the auditor considers internal control relevant to the entit#+s !re!aration of the
financial state(ents in order to desi)n audit !rocedures that are a!!ro!riate in the circu(stances, "ut not
for the !ur!ose of e,!ressin) an o!inion on the effectiveness of the entit#+s internal control' An audit also
includes evaluatin) the a!!ro!riateness of accountin) !olicies used and the reasona"leness of accountin)
esti(ates (ade "# (ana)e(ent, as well as evaluatin) the overall !resentation of the financial state(ents'
audit o!inion'
Opi"io"
In our o!inion, the financial state(ents of A1% %o(!an# for the #ear ended =ece("er 91, 40I1 are
!re!ared, in all (aterial res!ects, in accordance with the financial re!ortin) !rovisions of Section W of the
contract'
B!i of Acco-"ti"( !"# Ret'ictio" o" Dit'i$-tio" !"# Ue
Lithout (odif#in) our o!inion, we draw attention to Note I to the financial state(ents, which descri"es
the "asis of accountin)' he financial state(ents are !re!ared to assist A1% %o(!an# to co(!l# with the
financial re!ortin) !rovisions of the contract referred to a"ove' As a result, the financial state(ents (a# not
"e suita"le for another !ur!ose' 7ur re!ort is intended solel# for A1% %o(!an# and =0F %o(!an# and
should not "e distri"uted to or used "# !arties other than A1% %o(!an# or =0F %o(!an#'
UAuditor+s addressV
I00-t'!tio" 2G
% G The fi"!"ci!0 t!te.e"t h!9e $ee" p'ep!'e# $/ .!"!(e.e"t of ! p!'t"e'hip i"
!cco'#!"ce &ith the t!5 $!i of !cco-"ti"( i" ?-'i#ictio" F Hth!t i4 ! peci!0 p-'poe
f'!.e&o'%I to !it the p!'t"e' i" p'ep!'i"( thei' i"#i9i#-!0 i"co.e t!5 'et-'"J
)!"!(e.e"t #oe "ot h!9e ! choice of fi"!"ci!0 'epo'ti"( f'!.e&o'%J
% G The !pp0ic!$0e fi"!"ci!0 'epo'ti"( f'!.e&o'% i ! co.p0i!"ce f'!.e&o'%J
% G Dit'i$-tio" of the !-#ito'> 'epo't i 'et'icte#J
Le have audited the acco(!an#in) financial state(ents of A1% 6artnershi!, which co(!rise the "alance
sheet as at =ece("er 91, 40I1 and the inco(e state(ent for the #ear then ended, and a su((ar# of
si)nificant accountin) !olicies and other e,!lanator# infor(ation' he financial state(ents have "een
!re!ared "# (ana)e(ent usin) the ta, "asis of accountin) in >urisdiction I'
)!"!(e.e"t>
14
Eana)e(ent is res!onsi"le for the !re!aration of these financial state(ents in accordance with the ta,
"asis of accountin) in >urisdiction I, and for such internal control as (ana)e(ent deter(ines is necessar#
to ena"le the !re!aration of financial state(ents that are free fro( (aterial (isstate(ent, whether due to
fraud or error'
of the risks of (aterial (isstate(ent of
777 ISA 800 A660N=II
the financial state(ents, whether due to fraud or error' In (akin) those risk assess(ents, the auditor
considers internal control relevant to the !artnershi!+s !re!aration of the financial state(ents in order to
desi)n audit !rocedures that are a!!ro!riate in the circu(stances, "ut not for the !ur!ose of e,!ressin) an
o!inion on the effectiveness of the !artnershi!+s internal control' An audit also includes evaluatin) the
a!!ro!riateness of accountin) !olicies used and the reasona"leness of accountin) esti(ates (ade "#
(ana)e(ent, as well as evaluatin) the overall !resentation of the financial state(ents'
audit o!inion'
Opi"io"
In our o!inion, the financial state(ents of A1% 6artnershi! for the #ear ended =ece("er 91, 40I1 are
!re!ared, in all (aterial res!ects, in accordance with Udescri"e the a!!lica"le inco(e ta, lawV of
>urisdiction I'
B!i of Acco-"ti"( !"# Ret'ictio" o" Dit'i$-tio"
the "asis of accountin)' he financial state(ents are !re!ared to assist the !artners of A1% 6artnershi! in
!re!arin) their individual inco(e ta, returns' As a result, the financial state(ents (a# not "e suita"le for
another !ur!ose' 7ur re!ort is intended solel# for A1% 6artnershi! and its !artners and should not "e
distri"uted to !arties other than A1% 6artnershi! or its !artners'
UAuditor+s addressV
ISA 800 A660N=II 778
I00-t'!tio" 3G
1. G The fi"!"ci!0 t!te.e"t h!9e $ee" p'ep!'e# $/ .!"!(e.e"t of the e"tit/ i"
!cco'#!"ce &ith the fi"!"ci!0 'epo'ti"( p'o9iio" et!$0ihe# $/ ! 'e(-0!to' Hth!t i4 !
peci!0 p-'poe f'!.e&o'%I to .eet the 'e2-i'e.e"t of th!t 'e(-0!to'J )!"!(e.e"t #oe
"ot h!9e ! choice of fi"!"ci!0 'epo'ti"( f'!.e&o'%J
2. G The !pp0ic!$0e fi"!"ci!0 'epo'ti"( f'!.e&o'% i ! f!i' p'ee"t!tio" f'!.e&o'%J
4. G Dit'i$-tio" o' -e of the !-#ito'> 'epo't i "ot 'et'icte#J
5. G The Othe' )!tte' p!'!('!ph 'efe' to the f!ct th!t the !-#ito' h! !0o i-e# !"
!-#ito'> 'epo't o" fi"!"ci!0 t!te.e"t p'ep!'e# $/ ABC Co.p!"/ fo' the !.e pe'io# i"
!cco'#!"ce &ith ! (e"e'!0 p-'poe f'!.e&o'%J
infor(ation' he financial state(ents have "een !re!ared "# (ana)e(ent "ased on the financial re!ortin)
!rovisions of Section Y of Ae)ulation W'
)!"!(e.e"t>
15
accordance with the financial re!ortin) !rovisions of Section Y of Ae)ulation W,
1B
and for such internal
control as (ana)e(ent deter(ines is necessar# to ena"le the !re!aration of financial state(ents that are
free fro( (aterial (isstate(ent, whether due to fraud or error'
15
1B
is res!onsi"le for the !re!aration of financial state(ents that )ive a true and fair view in accordance with the financial re!ortin)
!rovisions of section Y of Ae)ulation W, and for such HD
775 ISA 800 A660N=II
!resentation
17
control'
18
audit o!inion'
Opi"io"
and its cash flows for the #ear then ended in accordance with the financial re!ortin) !rovisions of Section
Y of Ae)ulation W'
B!i of Acco-"ti"(
the "asis of accountin)' he financial state(ents are !re!ared to assist A1% %o(!an# to (eet the
re*uire(ents of Ae)ulator =0F' As a result, the financial state(ents (a# not "e suita"le for another
!ur!ose'
17
In the case of footnote 1B, this (a# read. CIn (akin) those risk assess(ents, the auditor considers
state(ents in order to desi)n audit !rocedures that are a!!ro!riate in the circu(stances'D In the case of footnote 1B, this (a#
ISA 800 A660N=II 780
Othe' )!tte'
A1% %o(!an# has !re!ared a se!arate set of financial state(ents for the #ear ended =ece("er 91, 40I1
in accordance with International Financial Ae!ortin) Standards on which we issued a se!arate auditor+s
re!ort to the shareholders of A1% %o(!an# dated Earch 91, 40I4'
UAuditor+s addressV
781 ISA 800 A660N=II
INTERNATIONAL STANDARD ON AUDITING +0@
S*ECIAL CONSIDERATIONSDAUDITS OF SINGLE FINANCIAL
STATE)ENTS AND S*ECIFIC ELE)ENTS4 ACCOUNTS OR ITE)S OF A
FINANCIAL STATE)ENT
$0ffective for audits for !eriods "e)innin) on or after =ece("er 15, 4005&
CONTENTS
6ara)ra!h
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1-9
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' B
Re2-i'e.e"t
%onsiderations Lhen Acce!tin) the 0n)a)e(ent '''''''''''''''''''''''''''''''''''''' 7-5
%onsiderations Lhen 6lannin) and 6erfor(in) the Audit ''''''''''''''''''''''''' 10
For(in) an 7!inion and Ae!ortin) %onsiderations ''''''''''''''''''''''''''''''''''' 11-17
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1-A4
%onsiderations Lhen Acce!tin) the 0n)a)e(ent '''''''''''''''''''''''''''''''''''''' A5-A5
%onsiderations Lhen 6lannin) and 6erfor(in) the Audit ''''''''''''''''''''''''' A10-A14
For(in) an 7!inion and Ae!ortin) %onsiderations ''''''''''''''''''''''''''''''''''' A15-A18
A!!endi, 1. 0,a(!les of S!ecific 0le(ents, Accounts or Ite(s of a
Financial State(ent A!!endi, 4. Illustrations of Auditors+ Ae!orts on a Sin)le Financial
State(ent and on a S!ecific 0le(ent of a Financial State(ent
International Standard on Auditin) $ISA& 805, CS!ecial %onsiderationsNAudits of Sin)le Financial
State(ents and S!ecific 0le(ents, Accounts or Ite(s of a Financial State(entD should "e read in
ISA 805 784
1. 1' he International Standards on Auditin) $ISAs& in the 100-700 series a!!l# to an audit of
financial state(ents and are to "e ada!ted as necessar# in the circu(stances when a!!lied to
audits of other historical financial infor(ation' his ISA deals with s!ecial considerations in the
a!!lication of those ISAs to an audit of a sin)le financial state(ent or of a s!ecific ele(ent,
account or ite( of a financial state(ent' he sin)le financial state(ent or the s!ecific ele(ent,
account or ite( of a financial state(ent (a# "e !re!ared in accordance with a )eneral or s!ecial
!ur!ose fra(ework' If !re!ared in accordance with a s!ecial !ur!ose fra(ework, ISA 800
1
also
a!!lies to the audit' $Aef. 6ara' A1-A4&
2. 4' his ISA does not a!!l# to the re!ort of a co(!onent auditor, issued as a result of work
!erfor(ed on the financial infor(ation of a co(!onent at the re*uest of a )rou! en)a)e(ent tea(
for !ur!oses of an audit of )rou! financial state(ents $see ISA B00
4
&'
3. 9' his ISA does not override the re*uire(ents of the other ISAs? nor does it !ur!ort to deal
with all s!ecial considerations that (a# "e relevant in the circu(stances of the en)a)e(ent'
Effecti9e D!te
4' his ISA is effective for audits of sin)le financial state(ents or of s!ecific ele(ents, accounts or
ite(s for !eriods "e)innin) on or after =ece("er 15, 4005' In the case of audits of sin)le financial
state(ents or of s!ecific ele(ents, accounts or ite(s of a financial state(ent !re!ared as at a
s!ecific date, this ISA is effective for audits of such infor(ation !re!ared as at a date on or after
=ece("er 14, 4010'
O$1ecti9e
5' he o";ective of the auditor, when a!!l#in) ISAs in an audit of a sin)le financial state(ent or of a
s!ecific ele(ent, account or ite( of a financial state(ent, is to address a!!ro!riatel# the s!ecial
considerations that are relevant to.
1. $a& he acce!tance of the en)a)e(ent?
2. $"& he !lannin) and !erfor(ance of that en)a)e(ent? and
3. $c& For(in) an o!inion and re!ortin) on the sin)le financial state(ent or on the s!ecific
ele(ent, account or ite( of a financial state(ent'
1
ISA 800, CS!ecial %onsiderationsNAudits of Financial State(ents 6re!ared in Accordance with
S!ecial 6ur!ose Fra(eworks'D 4
ISA B00, CS!ecial %onsiderationsNAudits of <rou! Financial State(ents $Includin) the Lork of %o(!onent Auditors&'D
789 ISA 805
Defi"itio"
B' For !ur!oses of this ISA, reference to.
1. $a& C0le(ent of a financial state(entD or Cele(entD (eans an Cele(ent, account or ite( of a
financial state(ent?D
2. $"& CInternational Financial Ae!ortin) StandardsD (eans the International Financial
Ae!ortin) Standards issued "# the International Accountin) Standards 1oard? and
3. $c& A sin)le financial state(ent or to a s!ecific ele(ent of a financial state(ent includes the
related notes' he related notes ordinaril# co(!rise a su((ar# of si)nificant accountin) !olicies
and other e,!lanator# infor(ation relevant to the financial state(ent or to the ele(ent'
Re2-i'e.e"t Co"i#e'!tio" =he" Accepti"( the E"(!(e.e"t
Application of I)As
7' ISA 400 re*uires the auditor to co(!l# with all ISAs relevant to the audit'
9
In the case of an audit
of a sin)le financial state(ent or of a s!ecific ele(ent of a financial state(ent, this re*uire(ent
a!!lies irres!ective of whether the auditor is also en)a)ed to audit the entit#+s co(!lete set of
financial state(ents' If the auditor is not also en)a)ed to audit the entit#+s co(!lete set of
financial state(ents, the auditor shall deter(ine whether the audit of a sin)le financial state(ent
or of a s!ecific ele(ent of those financial state(ents in accordance with ISAs is !ractica"le' $Aef.
6ara' A5-AB&
Acceptability of the Financial +eporting Fra$e#or.
8' ISA 410 re*uires the auditor to deter(ine the acce!ta"ilit# of the financial re!ortin) fra(ework
a!!lied in the !re!aration of the financial state(ents'
4
In the case of an audit of a sin)le financial
state(ent or of a s!ecific ele(ent of a financial state(ent, this shall include whether a!!lication
of the financial re!ortin) fra(ework will result in a !resentation that !rovides ade*uate
disclosures to ena"le the intended users to understand the infor(ation conve#ed in the financial
state(ent or the ele(ent, and the effect of (aterial transactions and events on the infor(ation
conve#ed in the financial state(ent or the ele(ent' $Aef. 6ara' A7&
9
4
ISA 410, CA)reein) the er(s of Audit 0n)a)e(ents,D !ara)ra!h B$a&'
ISA 805 784
For$ of ,pinion
5' ISA 410 re*uires that the a)reed ter(s of the audit en)a)e(ent include the e,!ected for( of an#
re!orts to "e issued "# the auditor'
5
In the case of an audit of a sin)le financial state(ent or of a
s!ecific ele(ent of a financial state(ent, the auditor shall consider whether the e,!ected for( of
o!inion is a!!ro!riate in the circu(stances' $Aef. 6ara' A8-A5&
Co"i#e'!tio" =he" *0!""i"( !"# *e'fo'.i"( the A-#it
10' ISA 400 states that ISAs are written in the conte,t of an audit of financial state(ents? the# are to
"e ada!ted as necessar# in the circu(stances when a!!lied to audits of other historical financial
infor(ation'
B 7
In !lannin) and !erfor(in) the audit of a sin)le financial state(ent or of a s!ecific
ele(ent of a financial state(ent, the auditor shall ada!t all ISAs relevant to the audit as necessar#
in the circu(stances of the en)a)e(ent' $Aef. 6ara' A10-A14&
Fo'.i"( !" Opi"io" !"# Repo'ti"( Co"i#e'!tio"
11' Lhen for(in) an o!inion and re!ortin) on a sin)le financial state(ent or on a s!ecific ele(ent of
a financial state(ent, the auditor shall a!!l# the re*uire(ents in ISA 700,
8
ada!ted as necessar# in
the circu(stances of the en)a)e(ent' $Aef. 6ara' A15-A1B&
+eporting on the /ntity8s Co$plete )et of Financial )tate$ents and on a )ingle Financial )tate$ent
or on a )pecific /le$ent of 1hose Financial )tate$ents
1. 14' If the auditor undertakes an en)a)e(ent to re!ort on a sin)le financial state(ent or on a
s!ecific ele(ent of a financial state(ent in con;unction with an en)a)e(ent to audit the entit#+s
co(!lete set of financial state(ents, the auditor shall e,!ress a se!arate o!inion for each
en)a)e(ent'
2. 19' An audited sin)le financial state(ent or an audited s!ecific ele(ent of a financial
state(ent (a# "e !u"lished to)ether with the entit#+s audited co(!lete set of financial state(ents'
If the auditor concludes that the !resentation of the sin)le financial state(ent or of the s!ecific
ele(ent of a financial state(ent does not differentiate it sufficientl# fro( the co(!lete set of
financial state(ents, the auditor shall ask (ana)e(ent to rectif# the situation' Su";ect to
!ara)ra!hs 15 and 1B, the auditor shall also differentiate the o!inion on the sin)le financial
state(ent or on the s!ecific ele(ent of a financial state(ent fro( the o!inion on the co(!lete set
of financial
5
B
7
ISA 400, !ara)ra!h 19$f&, e,!lains that the ter( Cfinancial state(entsD ordinaril# refers to a
co(!lete set of financial state(ents as deter(ined "# the re*uire(ents of the a!!lica"le financial
re!ortin) fra(ework' 8
785 ISA 805
state(ents' he auditor shall not issue the auditor+s re!ort containin) the o!inion on the sin)le
financial state(ent or on the s!ecific ele(ent of a financial state(ent until satisfied with the
differentiation'
Eodified 7!inion, 0(!hasis of Eatter 6ara)ra!h or 7ther Eatter 6ara)ra!h in the Auditor+s Ae!ort on
the 0ntit#+s %o(!lete Set of Financial State(ents
1. 14' If the o!inion in the auditor+s re!ort on an entit#+s co(!lete set of financial state(ents is
(odified, or that re!ort includes an 0(!hasis of Eatter !ara)ra!h or an 7ther Eatter !ara)ra!h,
the auditor shall deter(ine the effect that this (a# have on the auditor+s re!ort on a sin)le
financial state(ent or on a s!ecific ele(ent of those financial state(ents' Lhen dee(ed
a!!ro!riate, the auditor shall (odif# the o!inion on the sin)le financial state(ent or on the
s!ecific ele(ent of a financial state(ent, or include an 0(!hasis of Eatter !ara)ra!h or an 7ther
Eatter !ara)ra!h in the auditor+s re!ort, accordin)l#' $Aef. 6ara' A17&
2. 15' If the auditor concludes that it is necessar# to e,!ress an adverse o!inion or disclai( an
o!inion on the entit#+s co(!lete set of financial state(ents as a whole, ISA 705 does not !er(it
the auditor to include in the sa(e auditor+s re!ort an un(odified o!inion on a sin)le financial
state(ent that for(s !art of those financial state(ents or on a s!ecific ele(ent that for(s !art of
5
his is "ecause such an un(odified o!inion would contradict the
adverse o!inion or disclai(er of o!inion on the entit#+s co(!lete set of financial state(ents as a
whole' $Aef. 6ara' A18&
11B' If the auditor concludes that it is necessar# to e,!ress an adverse o!inion or disclai( an
o!inion on the entit#+s co(!lete set of financial state(ents as a whole "ut, in the conte,t of a
se!arate audit of a s!ecific ele(ent that is included in those financial state(ents, the auditor
nevertheless considers it a!!ro!riate to e,!ress an un(odified o!inion on that ele(ent, the
auditor shall onl# do so if.
2$a& he auditor is not !rohi"ited "# law or re)ulation fro( doin) so?
3$"& hat o!inion is e,!ressed in an auditor+s re!ort that is not !u"lished to)ether with the
auditor+s re!ort containin) the adverse o!inion or disclai(er of o!inion? and
4$c& he s!ecific ele(ent does not constitute a (a;or !ortion of the entit#+s co(!lete set of
3. 17' he auditor shall not e,!ress an un(odified o!inion on a sin)le financial state(ent of a
co(!lete set of financial state(ents if the auditor has e,!ressed an adverse o!inion or disclai(ed
an o!inion on the co(!lete set of financial state(ents as a whole' his is the case even if the
auditor+s
ISA 705, CEodifications to the 7!inion in the Inde!endent Auditor+s Ae!ort,D !ara)ra!h 15'
ISA 805 78B
re!ort on the sin)le financial state(ent is not !u"lished to)ether with the auditor+s re!ort
containin) the adverse o!inion or disclai(er of o!inion' his is "ecause a sin)le financial
state(ent is dee(ed to constitute a (a;or !ortion of those financial state(ents'
OOO
A1' ISA 400 defines the ter( Chistorical financial infor(ationD as infor(ation e,!ressed in financial
ter(s in relation to a !articular entit#, derived !ri(aril# fro( that entit#+s accountin) s#ste(,
a"out econo(ic events occurrin) in !ast ti(e !eriods or a"out econo(ic conditions or
circu(stances at !oints in ti(e in the !ast'
10
A4' ISA 400 defines the ter( Cfinancial state(entsD as a structured re!resentation of historical
financial infor(ation, includin) related notes, intended to co((unicate an entit#+s econo(ic
resources or o"li)ations at a !oint in ti(e or the chan)es therein for a !eriod of ti(e in accordance
with a financial re!ortin) fra(ework' he ter( ordinaril# refers to a co(!lete set of financial
state(ents as deter(ined "# the re*uire(ents of the a!!lica"le financial re!ortin) fra(ework'
11
A9' ISAs are written in the conte,t of an audit of financial state(ents?
14
the# are to "e ada!ted as
necessar# in the circu(stances when a!!lied to an audit of other historical financial infor(ation,
such as a sin)le financial state(ent or a s!ecific ele(ent of a financial state(ent' his ISA assists
in this re)ard' $A!!endi, 1 lists e,a(!les of such other historical financial infor(ation'&
A4' A reasona"le assurance en)a)e(ent other than an audit of historical financial infor(ation is
!erfor(ed in accordance with International Standard on Assurance 0n)a)e(ents $ISA0& 9000'
19
Co"i#e'!tio" =he" Accepti"( the E"(!(e.e"t
Application of I)As $Aef. 6ara' 7&
A5' ISA 400 re*uires the auditor to co(!l# with $a& relevant ethical re*uire(ents, includin) those
!ertainin) to inde!endence, relatin) to financial state(ent audit en)a)e(ents, and $"& all ISAs
relevant to the audit' It also re*uires the auditor to co(!l# with each re*uire(ent of an ISA
10
ISA 400, !ara)ra!h 19$)&'
11
14
19
ISA0 9000, CAssurance 0n)a)e(ents 7ther than Audits or Aeviews of @istorical Financial Infor(ation'D
787 ISA 805
unless, in the circu(stances of the audit, the entire ISA is not relevant or the re*uire(ent is not
relevant "ecause it is conditional and the condition does not e,ist' In e,ce!tional circu(stances,
the auditor (a# ;ud)e it necessar# to de!art fro( a relevant re*uire(ent in an ISA "# !erfor(in)
alternative audit !rocedures to achieve the ai( of that re*uire(ent'
14
AB' %o(!liance with the re*uire(ents of ISAs relevant to the audit of a sin)le financial state(ent or of a
s!ecific ele(ent of a financial state(ent (a# not "e !ractica"le when the auditor is not also
en)a)ed to audit the entit#+s co(!lete set of financial state(ents' In such cases, the auditor often
does not have the sa(e understandin) of the entit# and its environ(ent, includin) its internal
control, as an auditor who also audits the entit#+s co(!lete set of financial state(ents' he auditor
also does not have the audit evidence a"out the )eneral *ualit# of the accountin) records or other
accountin) infor(ation that would "e ac*uired in an audit of the entit#+s co(!lete set of financial
state(ents' Accordin)l#, the auditor (a# need further evidence to corro"orate audit evidence
ac*uired fro( the accountin) records' In the case of an audit of a s!ecific ele(ent of a financial
state(ent, certain ISAs re*uire audit work that (a# "e dis!ro!ortionate to the ele(ent "ein)
audited' For e,a(!le, althou)h the re*uire(ents of ISA 570
15
are likel# to "e relevant in the
circu(stances of an audit of a schedule of accounts receiva"le, co(!l#in) with those re*uire(ents
(a# not "e !ractica"le "ecause of the audit effort re*uired' If the auditor concludes that an audit of
a sin)le financial state(ent or of a s!ecific ele(ent of a financial state(ent in accordance with
ISAs (a# not "e !ractica"le, the auditor (a# discuss with (ana)e(ent whether another t#!e of
en)a)e(ent (i)ht "e (ore !ractica"le'
Acceptability of the Financial +eporting Fra$e#or. $Aef. 6ara' 8& A7' A sin)le financial
state(ent or a s!ecific ele(ent of a financial state(ent (a# "e !re!ared in accordance with an
a!!lica"le financial re!ortin) fra(ework that is "ased on a financial re!ortin) fra(ework
esta"lished "# an authoriJed or reco)niJed standards settin) or)aniJation for the !re!aration of
a co(!lete set of financial state(ents $for e,a(!le, International Financial Ae!ortin)
Standards&' If this is the case, deter(ination of the acce!ta"ilit# of the a!!lica"le fra(ework
(a# involve considerin) whether that fra(ework includes all the re*uire(ents of the
fra(ework on which it is "ased that are relevant to the !resentation of a sin)le financial
state(ent or of a s!ecific ele(ent of a financial state(ent that !rovides ade*uate disclosures'
14
ISA 400, !ara)ra!hs 14, 18 and 44-49'
15
ISA 805 788
For$ of ,pinion $Aef. 6ara' 5&
A8' he for( of o!inion to "e e,!ressed "# the auditor de!ends on the a!!lica"le financial re!ortin)
fra(ework and an# a!!lica"le laws or re)ulations'
1B
In accordance with ISA 700.
17
1. $a& Lhen e,!ressin) an un(odified o!inion on a co(!lete set of financial state(ents
!re!ared in accordance with a fair !resentation fra(ework, the auditor+s o!inion, unless otherwise
re*uired "# law or re)ulation, uses one of the followin) !hrases. $i& the financial state(ents
!resent fairl#, in all (aterial res!ects, in accordance with Uthe a!!lica"le financial re!ortin)
fra(eworkV? or $ii& the financial state(ents )ive a true and fair view in accordance with Uthe
a!!lica"le financial re!ortin) fra(eworkV? and
2. $"& Lhen e,!ressin) an un(odified o!inion on a co(!lete set of financial state(ents !re!ared in
accordance with a co(!liance fra(ework, the auditor+s o!inion states that the financial state(ents
are !re!ared, in all (aterial res!ects, in accordance with Uthe a!!lica"le financial re!ortin)
fra(eworkV'
A5' In the case of a sin)le financial state(ent or of a s!ecific ele(ent of a financial state(ent, the
a!!lica"le financial re!ortin) fra(ework (a# not e,!licitl# address the !resentation of the
financial state(ent or of the ele(ent' his (a# "e the case when the a!!lica"le financial re!ortin)
fra(ework is "ased on a financial re!ortin) fra(ework esta"lished "# an authoriJed or reco)niJed
standards settin) or)aniJation for the !re!aration of a co(!lete set of financial state(ents $for
e,a(!le, International Financial Ae!ortin) Standards&' he auditor therefore considers whether
the e,!ected for( of o!inion is a!!ro!riate in the li)ht of the a!!lica"le financial re!ortin)
fra(ework' Factors that (a# affect the auditor+s consideration as to whether to use the !hrases
C!resents fairl#, in all (aterial res!ects,D or C)ives a true and fair viewD in the auditor+s o!inion
include.
% G Lhether the a!!lica"le financial re!ortin) fra(ework is e,!licitl# or i(!licitl# restricted
to the !re!aration of a co(!lete set of financial state(ents'
% G Lhether the sin)le financial state(ent or the s!ecific ele(ent of a financial state(ent
will.
o %o(!l# full# with each of those re*uire(ents of the fra(ework relevant to the
!articular financial state(ent or the !articular ele(ent, and the !resentation of the
financial state(ent or the ele(ent include the related notes'
1B
17
ISA 700, !ara)ra!hs 95-9B'
785 ISA 805
o If necessar# to achieve fair !resentation, !rovide disclosures "e#ond those
s!ecificall# re*uired "# the fra(ework or, in e,ce!tional circu(stances, de!art fro(
a re*uire(ent of the fra(ework'
he auditor+s decision as to the e,!ected for( of o!inion is a (atter of !rofessional ;ud)(ent' It
(a# "e affected "# whether use of the !hrases C!resents fairl#, in all (aterial res!ects,D or C)ives a
true and fair viewD in the auditor+s o!inion on a sin)le financial state(ent or on a s!ecific ele(ent
of a financial state(ent !re!ared in accordance with a fair !resentation fra(ework is )enerall#
acce!ted in the !articular ;urisdiction'
Co"i#e'!tio" =he" *0!""i"( !"# *e'fo'.i"( the A-#it $Aef. 6ara' 10&
A10' he relevance of each of the ISAs re*uires careful consideration' 0ven when onl# a s!ecific
ele(ent of a financial state(ent is the su";ect of the audit, ISAs such as ISA 440,
18
ISA 550
15
and
ISA 570 are, in !rinci!le, relevant' his is "ecause the ele(ent could "e (isstated as a result of
fraud, the effect of related !art# transactions, or the incorrect a!!lication of the )oin) concern
assu(!tion under the a!!lica"le financial re!ortin) fra(ework'
A11' Further(ore, ISAs are written in the conte,t of an audit of financial state(ents? the# are to "e
ada!ted as necessar# in the circu(stances when a!!lied to the audit of a sin)le financial state(ent
or of a s!ecific ele(ent of a financial state(ent'
40
For e,a(!le, written re!resentations fro(
(ana)e(ent a"out the co(!lete set of financial state(ents would "e re!laced "# written
re!resentations a"out the !resentation of the financial state(ent or the ele(ent in accordance with
A14' Lhen auditin) a sin)le financial state(ent or a s!ecific ele(ent of a financial state(ent in
con;unction with the audit of the entit#+s co(!lete set of financial state(ents, the auditor (a# "e
a"le to use audit evidence o"tained as !art of the audit of the entit#+s co(!lete set of financial
state(ents in the audit of the financial state(ent or the ele(ent' ISAs, however, re*uire the
auditor to !lan and !erfor( the audit of the financial state(ent or ele(ent to o"tain sufficient
a!!ro!riate audit evidence on which to "ase the o!inion on the financial state(ent or on the
ele(ent'
A19' he individual financial state(ents that co(!rise a co(!lete set of financial state(ents, and (an#
of the ele(ents of those financial state(ents, includin) their related notes, are interrelated'
Accordin)l#, when auditin) a sin)le financial state(ent or a s!ecific ele(ent of a financial
state(ent, the auditor (a# not "e a"le to consider the financial state(ent or the ele(ent in
18
ISA 440, Che Auditor+s Aes!onsi"ilities Aelatin) to Fraud in an Audit of Financial State(ents'D
15
40
ISA 805 750
isolation' %onse*uentl#, the auditor (a# need to !erfor( !rocedures in relation to the interrelated
ite(s to (eet the o";ective of the audit'
A14' Further(ore, the (aterialit# deter(ined for a sin)le financial state(ent or for a s!ecific ele(ent
of a financial state(ent (a# "e lower than the (aterialit# deter(ined for the entit#+s co(!lete set
of financial state(ents? this will affect the nature, ti(in) and e,tent of the audit !rocedures and
the evaluation of uncorrected (isstate(ents'
Fo'.i"( !" Opi"io" !"# Repo'ti"( Co"i#e'!tio" $Aef. 6ara' 11&
A15' ISA 700 re*uires the auditor, in for(in) an o!inion, to evaluate whether the financial state(ents
!rovide ade*uate disclosures to ena"le the intended users to understand the effect of (aterial
transactions and events on the infor(ation conve#ed in the financial state(ents'
41
In the case of a
sin)le financial state(ent or of a s!ecific ele(ent of a financial state(ent, it is i(!ortant that the
financial state(ent or the ele(ent, includin) the related notes, in view of the re*uire(ents of the
a!!lica"le financial re!ortin) fra(ework, !rovides ade*uate disclosures to ena"le the intended
users to understand the infor(ation conve#ed in the financial state(ent or the ele(ent, and the
effect of (aterial transactions and events on the infor(ation conve#ed in the financial state(ent or
the ele(ent'
A1B' A!!endi, 4 of this ISA contains illustrations of auditors+ re!orts on a sin)le financial state(ent
and on a s!ecific ele(ent of a financial state(ent'
<odified ,pinion& /$phasis of <atter (aragraph or ,ther <atter (aragraph in the Auditor8s +eport on
the /ntity8s Co$plete )et of Financial )tate$ents $Aef. 6ara' 14-15&
A17' 0ven when the (odified o!inion on the entit#+s co(!lete set of financial state(ents, 0(!hasis of
Eatter !ara)ra!h or 7ther Eatter !ara)ra!h does not relate to the audited financial state(ent or
the audited ele(ent, the auditor (a# still dee( it a!!ro!riate to refer to the (odification in an
7ther Eatter !ara)ra!h in an auditor+s re!ort on the financial state(ent or on the ele(ent "ecause
the auditor ;ud)es it to "e relevant to the users+ understandin) of the audited financial state(ent or
the audited ele(ent or the related auditor+s re!ort $see ISA 70B&'
44
A18' In the auditor+s re!ort on an entit#+s co(!lete set of financial state(ents, the e,!ression of a
disclai(er of o!inion re)ardin) the results of o!erations and cash flows, where relevant, and an
un(odified o!inion re)ardin) the financial !osition is !er(itted since the disclai(er of o!inion is
"ein) issued in res!ect of the results of o!erations and cash flows onl# and not in res!ect of the
financial state(ents as a whole'
49
41
44
ISA 70B, C0(!hasis of Eatter 6ara)ra!hs and 7ther Eatter 6ara)ra!hs in the Inde!endent Auditor+s Ae!ort,D !ara)ra!h B'
49
ISA 510, CInitial Audit 0n)a)e(entsN7!enin) 1alances,D !ara)ra!h A8, and ISA 705, !ara)ra!h A1B'
751 ISA 805
Appe"#i5 7
$Aef. 6ara' A9&
E5!.p0e of Specific E0e.e"t4 Acco-"t o' Ite. of ! Fi"!"ci!0 St!te.e"t
1. G Accounts receiva"le, allowance for dou"tful accounts receiva"le, inventor#, the lia"ilit#
for accrued "enefits of a !rivate !ension !lan, the recorded value of identified intan)i"le assets, or
the lia"ilit# for Cincurred "ut not re!ortedD clai(s in an insurance !ortfolio, includin) related
notes'
2. G A schedule of e,ternall# (ana)ed assets and inco(e of a !rivate !ension !lan, includin)
related notes'
3. G A schedule of net tan)i"le assets, includin) related notes'
4. G A schedule of dis"urse(ents in relation to a lease !ro!ert#, includin) e,!lanator# notes'
5. G A schedule of !rofit !artici!ation or e(!lo#ee "onuses, includin) e,!lanator# notes'
ISA 805 A660N=II 754
Appe"#i5 2
$Aef. 6ara' A1B&
I00-t'!tio" of A-#ito'> Repo't o" ! Si"(0e Fi"!"ci!0 St!te.e"t !"# o" ! Specific
E0e.e"t of ! Fi"!"ci!0 St!te.e"t
% G Illustration 1. An auditor+s re!ort on a sin)le financial state(ent !re!ared in accordance
with a )eneral !ur!ose fra(ework $for !ur!oses of this illustration, a fair !resentation fra(ework&'
% G Illustration 4. An auditor+s re!ort on a sin)le financial state(ent !re!ared in accordance
with a s!ecial !ur!ose fra(ework $for !ur!oses of this illustration, a fair !resentation fra(ework&'
% G Illustration 9. An auditor+s re!ort on a s!ecific ele(ent, account or ite( of a financial
state(ent !re!ared in accordance with a s!ecial !ur!ose fra(ework $for !ur!oses of this
illustration, a co(!liance fra(ework&'
759 ISA 805 A660N=II
I00-t'!tio" 7G
1. G A-#it of ! $!0!"ce heet Hth!t i4 ! i"(0e fi"!"ci!0 t!te.e"tIJ
2. G The $!0!"ce heet h! $ee" p'ep!'e# $/ .!"!(e.e"t of the e"tit/ i" !cco'#!"ce
&ith the 'e2-i'e.e"t of the Fi"!"ci!0 Repo'ti"( F'!.e&o'% i" ?-'i#ictio" F 'e0e9!"t to
p'ep!'i"( ! $!0!"ce heetJ
3. G The !pp0ic!$0e fi"!"ci!0 'epo'ti"( f'!.e&o'% i ! f!i' p'ee"t!tio" f'!.e&o'%
#ei("e# to .eet the co..o" fi"!"ci!0 i"fo'.!tio" "ee# of ! &i#e '!"(e of -e'J
5. G The !-#ito' h! #ete'.i"e# th!t it i !pp'op'i!te to -e the ph'!e 8p'ee"t f!i'0/4
i" !00 .!te'i!0 'epect4: i" the !-#ito'> opi"io"J
Le have audited the acco(!an#in) "alance sheet of A1% %o(!an# as at =ece("er 91, 40I1 and a
su((ar# of si)nificant accountin) !olicies and other e,!lanator# infor(ation $to)ether Cthe financial
state(entD&'
)!"!(e.e"t>
44
Eana)e(ent is res!onsi"le for the !re!aration and fair !resentation of this financial state(ent in
accordance with those re*uire(ents of the Financial Ae!ortin) Fra(ework in >urisdiction I relevant to
!re!arin) such a financial state(ent, and for such internal control as (ana)e(ent deter(ines is necessar#
to ena"le the !re!aration of the financial state(ent that is free fro( (aterial (isstate(ent, whether due to
fraud or error'
7ur res!onsi"ilit# is to e,!ress an o!inion on the financial state(ent "ased on our audit' Le conducted our
audit in accordance with International Standards on Auditin)' hose standards re*uire that we co(!l# with
ethical re*uire(ents and !lan and !erfor( the audit to o"tain reasona"le assurance a"out whether the
financial state(ent is free fro( (aterial (isstate(ent'
financial state(ent' he !rocedures selected de!end on the
ISA 805 A660N=II 754
auditor+s ;ud)(ent, includin) the assess(ent of the risks of (aterial (isstate(ent of the financial
state(ent, whether due to fraud or error' In (akin) those risk assess(ents, the auditor considers internal
control relevant to the entit#+s !re!aration and fair !resentation of the financial state(ent in order to desi)n
audit !rocedures that are a!!ro!riate in the circu(stances, "ut not for the !ur!ose of e,!ressin) an o!inion
on the effectiveness of the entit#+s internal control'
45
An audit also includes evaluatin) the a!!ro!riateness
of accountin) !olicies used and the reasona"leness of accountin) esti(ates, if an#, (ade "# (ana)e(ent,
as well as evaluatin) the overall !resentation of the financial state(ent'
audit o!inion'
Opi"io"
In our o!inion, the financial state(ent !resents fairl#, in all (aterial res!ects, the financial !osition of A1%
%o(!an# as at =ece("er 91, 40I1 in accordance with those re*uire(ents of the Financial Ae!ortin)
Fra(ework in >urisdiction I relevant to !re!arin) such a financial state(ent'
UAuditor+s addressV
con;unction with the audit of the financial state(ent, this sentence would "e worded as follows. CIn (akin) those risk
state(ent in order to desi)n audit !rocedures that are a!!ro!riate in the circu(stances'D
755 ISA 805 A660N=II
I00-t'!tio" 2G
1. G A-#it of ! t!te.e"t of c!h 'eceipt !"# #i$-'e.e"t Hth!t i4 ! i"(0e fi"!"ci!0
t!te.e"tIJ
2. G The fi"!"ci!0 t!te.e"t h! $ee" p'ep!'e# $/ .!"!(e.e"t of the e"tit/ i"
!cco'#!"ce &ith the c!h 'eceipt !"# #i$-'e.e"t $!i of !cco-"ti"( to 'epo"# to !
'e2-et fo' c!h f0o& i"fo'.!tio" 'ecei9e# f'o. ! c'e#ito'J )!"!(e.e"t h! ! choice of
fi"!"ci!0 'epo'ti"( f'!.e&o'%J
3. G The !pp0ic!$0e fi"!"ci!0 'epo'ti"( f'!.e&o'% i ! f!i' p'ee"t!tio" f'!.e&o'%
#ei("e# to .eet the fi"!"ci!0 i"fo'.!tio" "ee# of pecific
4B
-e'J
1. G The !-#ito' h! #ete'.i"e# th!t it i !pp'op'i!te to -e the ph'!e 8p'ee"t f!i'0/4
i" !00 .!te'i!0 'epect4: i" the !-#ito'> opi"io"J
2. G Dit'i$-tio" o' -e of the !-#ito'> 'epo't i "ot 'et'icte#J
Le have audited the acco(!an#in) state(ent of cash recei!ts and dis"urse(ents of A1% %o(!an# for the
#ear ended =ece("er 91, 40I1 and a su((ar# of si)nificant accountin) !olicies and other e,!lanator#
infor(ation $to)ether Cthe financial state(entD&' he financial state(ent has "een !re!ared "# (ana)e(ent
usin) the cash recei!ts and dis"urse(ents "asis of accountin) descri"ed in Note I'
)!"!(e.e"t>
47
Eana)e(ent is res!onsi"le for the !re!aration and fair !resentation of this financial state(ent in
accordance with the cash recei!ts and dis"urse(ents "asis of accountin) descri"ed in Note I? this includes
deter(inin) that the cash recei!ts and dis"urse(ents "asis of accountin) is an acce!ta"le "asis for the
!re!aration of the financial state(ent in the circu(stances, and for such internal control as (ana)e(ent
deter(ines is necessar# to ena"le the !re!aration of the financial state(ent that is free fro( (aterial
(isstate(ent, whether due to fraud or error'
4B
ISA 800 contains re*uire(ents and )uidance on the for( and content of financial state(ents !re!ared in accordance with a
s!ecial !ur!ose fra(ework'
47
7ur res!onsi"ilit# is to e,!ress an o!inion on the financial state(ent "ased on our audit' Le conducted our
audit in accordance with International Standards on Auditin)' hose standards re*uire that we co(!l# with
ethical re*uire(ents and !lan and !erfor( the audit to o"tain reasona"le assurance a"out whether the
financial state(ent is free fro( (aterial (isstate(ent'
financial state(ent' he !rocedures selected de!end on the auditor+s ;ud)(ent, includin) the assess(ent of
the risks of (aterial (isstate(ent of the financial state(ent, whether due to fraud or error' In (akin) those
risk assess(ents, the auditor considers internal control relevant to the entit#+s !re!aration and fair
!resentation of the financial state(ent in order to desi)n audit !rocedures that are a!!ro!riate in the
control' An audit also includes evaluatin) the a!!ro!riateness of accountin) !olicies used and the
reasona"leness of accountin) esti(ates, if an#, (ade "# (ana)e(ent, as well as evaluatin) the overall
!resentation of the financial state(ent'
audit o!inion'
Opi"io"
In our o!inion, the financial state(ent !resents fairl#, in all (aterial res!ects, the cash recei!ts and
dis"urse(ents of A1% %o(!an# for the #ear ended =ece("er 91, 40I1 in accordance with the cash
recei!ts and dis"urse(ents "asis of accountin) descri"ed in Note I'
B!i of Acco-"ti"(
Lithout (odif#in) our o!inion, we draw attention to Note I to the financial state(ent, which descri"es the
"asis of accountin)' he financial state(ent is !re!ared to !rovide infor(ation to IYW %reditor' As a
result, the state(ent (a# not "e suita"le for another !ur!ose'
UAuditor+s addressV
757 ISA 805 A660N=II
I00-t'!tio" 3G
1. G A-#it of the 0i!$i0it/ fo' 8i"c-''e# $-t "ot 'epo'te#: c0!i. i" !" i"-'!"ce
po'tfo0io Hth!t i4 e0e.e"t4 !cco-"t o' ite. of ! fi"!"ci!0 t!te.e"tIJ
2. G The fi"!"ci!0 i"fo'.!tio" h! $ee" p'ep!'e# $/ .!"!(e.e"t of the e"tit/ i"
!cco'#!"ce &ith the fi"!"ci!0 'epo'ti"( p'o9iio" et!$0ihe# $/ ! 'e(-0!to' to .eet the
'e2-i'e.e"t of th!t 'e(-0!to'J )!"!(e.e"t #oe "ot h!9e ! choice of fi"!"ci!0 'epo'ti"(
f'!.e&o'%J
3. G The !pp0ic!$0e fi"!"ci!0 'epo'ti"( f'!.e&o'% i ! co.p0i!"ce f'!.e&o'% #ei("e#
to .eet the fi"!"ci!0 i"fo'.!tio" "ee# of pecific -e'J
48
5. G Dit'i$-tio" of the !-#ito'> 'epo't i 'et'icte#J
Le have audited the acco(!an#in) schedule of the lia"ilit# for Cincurred "ut not re!ortedD clai(s of A1%
Insurance %o(!an# as at =ece("er 91, 40I1 $Cthe scheduleD&' he schedule has "een !re!ared "#
(ana)e(ent "ased on Udescri"e the financial re!ortin) !rovisions esta"lished "# the re)ulatorV'
)!"!(e.e"t>
45
Repo"i$i0it/ fo' the Sche#-0e
Eana)e(ent is res!onsi"le for the !re!aration of the schedule in accordance with Udescri"e the financial
re!ortin) !rovisions esta"lished "# the re)ulatorV, and for such internal control as (ana)e(ent deter(ines
is necessar# to ena"le the !re!aration of the schedule that is free fro( (aterial (isstate(ent, whether due
to fraud or error'
7ur res!onsi"ilit# is to e,!ress an o!inion on the schedule "ased on our audit' Le conducted our audit in
accordance with International Standards on Auditin)' hose standards re*uire that we co(!l# with ethical
re*uire(ents and !lan and !erfor( the audit to o"tain reasona"le assurance a"out whether the schedule is
free fro( (aterial (isstate(ent'
48
ISA 800 contains re*uire(ents and )uidance on the for( and content of financial state(ents !re!ared in accordance with a
s!ecial !ur!ose fra(ework'
45
ISA 805 A660N=II 758
schedule' he !rocedures selected de!end on the auditor+s ;ud)(ent, includin) the assess(ent of the risks
of (aterial (isstate(ent of the schedule, whether due to fraud or error' In (akin) those risk assess(ents,
the auditor considers internal control relevant to the entit#+s !re!aration of the schedule in order to desi)n
audit !rocedures that are a!!ro!riate in the circu(stances, "ut not for the !ur!ose of e,!ressin) an o!inion
on the effectiveness of the entit#+s internal control' An audit also includes evaluatin) the a!!ro!riateness of
evaluatin) the overall !resentation of the schedule'
audit o!inion'
Opi"io"
In our o!inion, the financial infor(ation in the schedule of the lia"ilit# for Cincurred "ut not re!ortedD
clai(s of A1% Insurance %o(!an# as at =ece("er 91, 40I1 is !re!ared, in all (aterial res!ects, in
accordance with Udescri"e the financial re!ortin) !rovisions esta"lished "# the re)ulatorV'
B!i of Acco-"ti"( !"# Ret'ictio" o" Dit'i$-tio"
Lithout (odif#in) our o!inion, we draw attention to Note I to the schedule, which descri"es the "asis of
accountin)' he schedule is !re!ared to assist A1% Insurance %o(!an# to (eet the re*uire(ents of
Ae)ulator =0F' As a result, the schedule (a# not "e suita"le for another !ur!ose' 7ur re!ort is intended
solel# for A1% Insurance %o(!an# and Ae)ulator =0F and should not "e distri"uted to !arties other than
A1% Insurance %o(!an# or Ae)ulator =0F'
UAuditor+s addressV
755 ISA 805 A660N=II
INTERNATIONAL STANDARD ON AUDITING +70
ENGAGE)ENTS TO RE*ORT ON SU))ARY FINANCIAL STATE)ENTS
$0ffective for en)a)e(ents for !eriods "e)innin) on or after =ece("er 15, 4005&
CONTENTS
6ara)ra!h
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 9
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
Re2-i'e.e"t
0n)a)e(ent Acce!tance ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5-7
Nature of 6rocedures ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 8
For( of 7!inion ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5-11
i(in) of Lork and 0vents Su"se*uent to the =ate of the Auditor+s
Ae!ort on the Audited Financial State(ents '''''''''''''''''''''''''''''''''''''''' 14-19
Auditor+s Ae!ort on Su((ar# Financial State(ents '''''''''''''''''''''''''''''''''' 14-15
Aestriction on =istri"ution or Use or Alertin) Aeaders to the 1asis of
Accountin) ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 40
%o(!aratives '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 41-44
Unaudited Su!!le(entar# Infor(ation 6resented with Su((ar#
Financial State(ents '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 49
7ther Infor(ation in =ocu(ents %ontainin) Su((ar# Financial
State(ents '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 44
Auditor Association '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 45-4B
0n)a)e(ent Acce!tance ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1-A7
0valuatin) the Availa"ilit# of the Audited Financial State(ents ''''''''''''''' A8
For( of 7!inion ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A5
ISA 810 800
$a& UnauthoriJed access to on-line ter(inal devices, !ro)ra(s and data?
$"& 0ntr# of unauthoriJed transactions?
$c& UnauthoriJed chan)es to data files?
$d& he use of co(!uter !ro)ra(s "# unauthoriJed !ersonnel? and
$e& he use of co(!uter !ro)ra(s that have not "een authoriJed'
$a& Acknowled)es e,!licitl# or i(!licitl# that, to achieve fair !resentation of the
financial state(ents, it (a# "e necessar# for (ana)e(ent to !rovide
disclosures
"e#ond those s!ecificall# re*uired "# the fra(ework? or
$"&
Acknowled)es e,!licitl# that it (a# "e necessar# for (ana)e(ent to de!art
fro(
a re*uire(ent of the fra(ework to achieve fair !resentation of the financial
state(ents' Such de!artures are e,!ected to "e necessar# onl# in e,tre(el# rare
circu(stances'
$a& Aelevance. relevant criteria contri"ute to conclusions that assist decision-
(akin) "# the intended users'
$"& %o(!leteness. criteria are sufficientl# co(!lete when relevant factors that
could affect the conclusions in the conte,t of the en)a)e(ent
circu(stances
are not o(itted' %o(!lete criteria include, where relevant, "ench(arks for
!resentation and disclosure'
$c& Aelia"ilit#. relia"le criteria allow reasona"l# consistent evaluation or
(easure(ent of the su";ect (atter includin), where relevant, !resentation
and
disclosure, when used in si(ilar circu(stances "# si(ilarl# *ualified
!ractitioners'
$d&
Neutralit#. neutral criteria contri"ute to conclusions that are free fro(
"ias'
$e&
Understanda"ilit#. understanda"le criteria contri"ute to conclusions that
are
clear, co(!rehensive, and not su";ect to si)nificantl# different
inter!retations'
$a& Initiatives to !revent, a"ate, or re(ed# da(a)e to the environ(ent, or to deal
with conservation of renewa"le and non-renewa"le resources $such initiatives
(a# "e re*uired "# environ(ental laws and re)ulations or "# contract, or the#
(a# "e undertaken voluntaril#&?
$"& %onse*uences of violatin) environ(ental laws and re)ulations?
$c& %onse*uences of environ(ental da(a)e done to others or to natural resources?
and
$d& %onse*uences of vicarious lia"ilit# i(!osed "# law $for e,a(!le, lia"ilit# for
da(a)es caused "# !revious owners&'
$a& Audit !rocesses?
$"& ISAs and a!!lica"le le)al and re)ulator# re*uire(ents?
$c& he "usiness environ(ent in which the entit# o!erates? and
$d& Auditin) and financial re!ortin) issues relevant to the entit#+s industr#'
$a& Acknowled)es e,!licitl# or i(!licitl# that, to achieve fair !resentation of the
financial state(ents, it (a# "e necessar# for (ana)e(ent to !rovide
disclosures
"e#ond those s!ecificall# re*uired "# the fra(ework? or
$"&
Acknowled)es e,!licitl# that it (a# "e necessar# for (ana)e(ent to de!art
fro( a
re*uire(ent of the fra(ework to achieve fair !resentation of the financial
state(ents'
Such de!artures are e,!ected to "e necessar# onl# in e,tre(el# rare
circu(stances'
$a& hat is ai(ed at coo!eration, and
$"& hat is clearl# ai(ed at !rofit or cost-sharin) or shares co((on ownershi!,
control or (ana)e(ent, co((on *ualit# control !olicies and !rocedures,
co((on "usiness strate)#, the use of a co((on "rand na(e, or a si)nificant
!art
of !rofessional resources'
$a& Are not confined to s!ecific ele(ents, accounts or ite(s of the financial
state(ents?
$"& If so confined, re!resent or could re!resent a su"stantial !ro!ortion of the
financial state(ents? or
$c&
In relation to disclosures, are funda(ental to users+ understandin) of the
financial
state(ents'
$a& In the case of a test of controls, that controls are (ore effective than the#
actuall#
are, or in the case of a test of details, that a (aterial (isstate(ent does not
e,ist
when in fact it does' he auditor is !ri(aril# concerned with this t#!e of
erroneous
conclusion "ecause it affects audit effectiveness and is (ore likel# to lead to an
ina!!ro!riate audit o!inion'
$"&
In the case of a test of controls, that controls are less effective than the#
actuall#
are, or in the case of a test of details, that a (aterial (isstate(ent e,ists when
in
fact it does not' his t#!e of erroneous conclusion affects audit efficienc# as it
would usuall# lead to additional work to esta"lish that initial conclusions were
incorrect'
INTERNATIONAL STANDARDS ON QUALITY CONTROL HISQCI
International Standard on :ualit# %ontrol $IS:%& 1, :ualit# %ontrols for
Fir(s that 6erfor( Audits and Aeviews of Financial State(ents,
and 7ther Assurance and Aelated Services 0n)a)e(ents '''''''''''''''''''''''''''''' 41
AUDITS OF HISTORICAL FINANCIAL INFOR)ATION
200<299 GENERAL *RINCI*LES AND RES*ONSIBILITIES
ISA 400, 7verall 7";ectives of the Inde!endent Auditor and the %onduct
of an Audit in Accordance with International Standards on Auditin) '''''''''''' 77
I"t'o#-ctio"
Sco!e of this IS:% ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1-9
Authorit# of this IS:% '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4-5
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 10
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 11
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 14
Re2-i'e.e"t
A!!l#in), and %o(!l#in) with, Aelevant
Ae*uire(ents '''''''''''''''''''''''''''
19-15
0le(ents of a S#ste( of :ualit#
%ontrol '''''''''''''''''''''''''''''''''''''''''''''''''''
1B-17
Meadershi! Aes!onsi"ilities for :ualit# within the Fir( '''''''''''''''''''''''''''' 18-15
Aelevant 0thical
Ae*uire(ents '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''
40-45
Acce!tance and %ontinuance of %lient Aelationshi!s and S!ecific
0n)a)e(ents '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4B-48
@u(an Aesources ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 45-91
0n)a)e(ent 6erfor(ance ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 94-47
Eonitorin) '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 48-5B
=ocu(entation of the S#ste( of :ualit# %ontrol ''''''''''''''''''''''''''''''''''''''' 57-55
A!!l#in), and %o(!l#in) with, Aelevant
Ae*uire(ents ''''''''''''''''''''''''''''
A1
0le(ents of a S#ste( of :ualit#
%ontrol ''''''''''''''''''''''''''''''''''''''''''''''''''''
A4-A9
Meadershi! Aes!onsi"ilities for :ualit# within the Fir( '''''''''''''''''''''''''''' A4-AB
Aelevant 0thical
Ae*uire(ents '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''
A7-A17
Acce!tance and %ontinuance of %lient Aelationshi!s and S!ecific
0n)a)e(ents '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A18-A49
41 IS:% 1
$a& Inte)rit#?
$"& 7";ectivit#?
IS:% 1 58
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1T4
An Audit of Financial State(ents ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 9T5
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 10
O9e'!00 O$1ecti9e of the A-#ito' '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 11T14
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 19
Re2-i'e.e"t
0thical Ae*uire(ents Aelatin) to an Audit of Financial State(ents '''''''''' 14
6rofessional Ske!ticis( '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 15
6rofessional >ud)(ent '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1B
Sufficient A!!ro!riate Audit 0vidence and Audit Aisk '''''''''''''''''''''''''''''' 17
%onduct of an Audit in Accordance with ISAs ''''''''''''''''''''''''''''''''''''''''''' 18T44
An Audit of Financial State(ents ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1TA19
$f& Financial state(ents K A structured re!resentation of historical
financial
infor(ation, includin) related notes, intended to co((unicate an
entit#+s
econo(ic resources or o"li)ations at a !oint in ti(e or the chan)es
therein for a !eriod of ti(e in accordance with a financial re!ortin)
fra(ework' he related notes ordinaril# co(!rise a su((ar# of
si)nificant accountin) !olicies and other e,!lanator# infor(ation' he
ter( Cfinancial state(entsD ordinaril# refers to a co(!lete set of
financial
state(ents as deter(ined "# the re*uire(ents of the a!!lica"le
financial
re!ortin) fra(ework, "ut can also refer to a sin)le financial state(ent'
$)&
@istorical financial infor(ation K Infor(ation e,!ressed in financial
ter(s
in relation to a !articular entit#, derived !ri(aril# fro( that entit#+s
accountin) s#ste(, a"out econo(ic events occurrin) in !ast ti(e
!eriods or
a"out econo(ic conditions or circu(stances at !oints in ti(e in the
!ast'
$h&
Eana)e(ent K he !erson$s& with e,ecutive res!onsi"ilit# for the
conduct
of the entit#+s o!erations' For so(e entities in
so(e
;urisdictions
,
(ana)e(ent includes so(e or all of those char)ed with )overnance,
for
e,a(!le, e,ecutive (e("ers of a )overnance "oard, or an owner-
(ana)er'
$i& Eisstate(ent K A difference "etween the a(ount, classification,
!resentation, or disclosure of a re!orted financial state(ent ite( and
the
a(ount, classification, !resentation, or disclosure that is re*uired for
the
ite( to "e in accordance with the a!!lica"le financial re!ortin)
fra(ework' Eisstate(ents can arise fro( error or fraud'
Lhere the auditor e,!resses an o!inion on whether the financial
state(ents are !resented fairl#, in all (aterial res!ects, or )ive a true
and fair view, (isstate(ents also include those ad;ust(ents of
a(ounts,
classifications, !resentation, or disclosures that, in the auditor+s
;ud)(ent, are necessar# for the financial state(ents to "e !resented
fairl#, in all (aterial res!ects, or to )ive a true and fair view'
$;& 6re(ise, relatin) to the res!onsi"ilities of (ana)e(ent and, where
a!!ro!riate, those char)ed with )overnance, on which an audit is
conducted K hat (ana)e(ent and, where a!!ro!riate, those char)ed
with )overnance have acknowled)ed and understand that the# have
the
followin) res!onsi"ilities that are funda(ental to the conduct of an
audit
in accordance with ISAs' hat is, res!onsi"ilit#.
$i& For the !re!aration of the financial state(ents in accordance
with the a!!lica"le financial re!ortin) fra(ework, includin)
where relevant their fair !resentation?
$ii&
For such internal control as (ana)e(ent and, where
a!!ro!riate,
those char)ed with )overnance deter(ine is necessar# to ena"le
the !re!aration of financial state(ents that are free fro( (aterial
(isstate(ent, whether due to fraud or error? and
ISA 400 84
$a& For the !re!aration of the financial state(ents in accordance with the
a!!lica"le financial re!ortin) fra(ework, includin) where relevant
their
fair !resentation?
$"& For such internal control as (ana)e(ent and, where a!!ro!riate,
those
char)ed with )overnance deter(ine is necessar# to ena"le the
!re!aration of financial state(ents that
are
free fro( (aterial
(isstate(ent, whether due to fraud or error? and
$c& o !rovide the auditor with.
$i& Access to all infor(ation of which (ana)e(ent and, where
a!!ro!riate, those char)ed with )overnance are aware that is
relevant to the !re!aration of the financial state(ents such as
records, docu(entation and other (atters?
$ii& Additional infor(ation that the auditor (a# re*uest fro(
(ana)e(ent and, where a!!ro!riate, those char)ed with
)overnance for the !ur!ose of the audit? and
ISA 400 8B
6ara)ra!h
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 9
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4-5
Re2-i'e.e"t
6reconditions for an Audit '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' B-8
A)ree(ent on Audit 0n)a)e(ent er(s '''''''''''''''''''''''''''''''''''''''''''''''''' 5-14
Aecurrin) Audits ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 19
Acce!tance of a %han)e in the er(s of the Audit 0n)a)e(ent ''''''''''''' 14-17
Additional %onsiderations in 0n)a)e(ent Acce!tance '''''''''''''''''''''''''''' 18-41
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1
6reconditions for an Audit '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A4-A40
A)ree(ent on Audit 0n)a)e(ent er(s '''''''''''''''''''''''''''''''''''''''''''''''''' A41-A47
Aecurrin) Audits ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A48
Acce!tance of a %han)e in the er(s of the Audit 0n)a)e(ent ''''''''''''' A45-A99
Additional %onsiderations in 0n)a)e(ent Acce!tance '''''''''''''''''''''''''''' A94-A97
A!!endi, 1. 0,a(!le of an Audit 0n)a)e(ent Metter
A!!endi, 4. =eter(inin) the Acce!ta"ilit# of <eneral 6ur!ose
Fra(eworks
$a& For the !re!aration and fair !resentation of the financial state(ents in
accordance with International Financial Ae!ortin) Standards?49
$"&
For such internal control as U(ana)e(entV deter(ines is necessar# to ena"le
the
!re!aration of financial state(ents that are free fro( (aterial (isstate(ent,
whether due to fraud or error? and
$c& o !rovide us with.
$i&
Access to all infor(ation of which U(ana)e(entV is aware that is
relevant
to the !re!aration of the financial state(ents such as records,
docu(entation and other (atters?
$ii& Additional infor(ation that we (a# re*uest fro( U(ana)e(entV for the
!ur!ose of the audit? and
$iii&
Unrestricted access to !ersons within the entit# fro( who( we
deter(ine
it necessar# to o"tain audit evidence'
7' For !ur!oses of the ISAs, the followin) ter(s have the (eanin)s attri"uted
"elow.
$a& 0n)a)e(ent !artner4 K he !artner or other !erson in the fir( who is
res!onsi"le for the audit en)a)e(ent and its !erfor(ance, and for the
auditor+s re!ort that is issued on "ehalf of the fir(, and who, where
re*uired, has the a!!ro!riate authorit# fro( a !rofessional, le)al or
re)ulator# "od#'
$"& 0n)a)e(ent *ualit# control review K A !rocess desi)ned to !rovide
an o";ective evaluation, on or "efore the date of the auditor+s re!ort,
of the si)nificant ;ud)(ents the en)a)e(ent tea( (ade and the
conclusions it reached in for(ulatin) the auditor+s re!ort' he
en)a)e(ent *ualit# control review !rocess is onl# for audits of
financial
state(ents
of listed entities and those other audit
en)a)e(ents, if an#, for which the fir( has deter(ined an
en)a)e(ent *ualit# control review is re*uired'
$c& 0n)a)e(ent *ualit# control reviewer K A !artner, other !erson in the
fir(, suita"l# *ualified e,ternal !erson, or a tea( (ade u! of such
individuals, none of who( is !art of the en)a)e(ent tea(, with
sufficient and a!!ro!riate e,!erience and authorit# to o";ectivel#
evaluate the si)nificant ;ud)(ents the en)a)e(ent tea( (ade and
the conclusions it reached in for(ulatin) the auditor+s re!ort'
$d& 0n)a)e(ent tea( K All !artners and staff !erfor(in) the
en)a)e(ent, and an# individuals en)a)ed "# the fir( or a network
fir( who !erfor( audit !rocedures on the en)a)e(ent' his e,cludes an
auditor+s e,ternal e,!ert en)a)ed "# the fir( or a network fir(' 9
$e& Fir( K A sole !ractitioner, !artnershi! or cor!oration or other entit#
of !rofessional accountants'
$f& Ins!ection K In relation to co(!leted audit en)a)e(ents, !rocedures
desi)ned to !rovide evidence of co(!liance "# en)a)e(ent tea(s
with the fir(+s *ualit# control !olicies and !rocedures'
$)& Misted entit# K An entit# whose shares, stock or de"t are *uoted or
listed on a reco)niJed stock e,chan)e, or are (arketed under the
re)ulations of a reco)niJed stock e,chan)e or other e*uivalent "od#'
4
C0n)a)e(ent !artner,D C!artner,D and Cfir(D should "e read as referrin) to their !u"lic sector
e*uivalents where relevant'
9
ISA B40, CUsin) the Lork of an Auditor+s 0,!ert,D !ara)ra!h B$a&, defines the ter( Cauditor+s
e,!ert'D
199 ISA 440
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1
Nature and 6ur!oses of Audit =ocu(entation ''''''''''''''''''''''''''''''''''''''''''' 4-9
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' B
Re2-i'e.e"t
i(el# 6re!aration of Audit =ocu(entation '''''''''''''''''''''''''''''''''''''''''''''' 7
=ocu(entation of the Audit 6rocedures 6erfor(ed and Audit
0vidence 7"tained ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 8-19
Asse("l# of the Final Audit File '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 14-1B
i(el# 6re!aration of Audit =ocu(entation '''''''''''''''''''''''''''''''''''''''''''''' A1
=ocu(entation of the Audit 6rocedures 6erfor(ed and Audit
0vidence 7"tained ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A4-A40
Asse("l# of the Final Audit
File ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''
A41-A44
A!!endi,. S!ecific Audit =ocu(entation Ae*uire(ents in 7ther ISAs
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1
%haracteristics of Fraud '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4-9
Aes!onsi"ilit# for the 6revention and =etection of Fraud '''''''''''''''''''''''''' 4-8
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 10
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 11
Re2-i'e.e"t
6rofessional Ske!ticis( '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 14-14
=iscussion a(on) the 0n)a)e(ent ea( '''''''''''''''''''''''''''''''''''''''''''''''''' 15
Aisk Assess(ent 6rocedures and Aelated Activities '''''''''''''''''''''''''''''''''' 1B-44
Identification and Assess(ent of the Aisks of Eaterial
Eisstate(ent =ue to Fraud '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 45-47
Aes!onses to the Assessed Aisks of Eaterial Eisstate(ent
=ue to Fraud '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 48-99
0valuation of Audit 0vidence ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 94-97
Auditor Una"le to %ontinue the 0n)a)e(ent ''''''''''''''''''''''''''''''''''''''''''''' 98
Lritten Ae!resentations '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 95
%o((unications to Eana)e(ent and with hose %har)ed
with <overnance '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 40-44
%o((unications to Ae)ulator# and 0nforce(ent Authorities ''''''''''''''''''' 49
=ocu(entation '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 44-47
I"t'o#-ctio"
Sco!e of this ISA ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1-9
0ffective =ate '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' B
Re2-i'e.e"t '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 7-11
=eter(ination of Lhether =eficiencies in Internal %ontrol @ave 1een
Identified '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1-A4
Si)nificant =eficiencies in Internal %ontrol ''''''''''''''''''''''''''''''''''''''''''''''' A5-A11
17
ISA 900, C6lannin) an Audit of Financial State(ents,D !ara)ra!hs 7 and 5'
18
919 ISA 915
shall.
$a& =eter(ine whether sufficient a!!ro!riate audit evidence concernin)
the relevant financial state(ent assertions is availa"le fro( records
held at the user entit#? and, if not,
$"& 6erfor( further audit !rocedures to o"tain sufficient a!!ro!riate
audit evidence or use another auditor to !erfor( those !rocedures
at the service or)aniJation on the user auditor+s "ehalf' $Aef. 6ara'
A44-A48&
6ara)ra!h
I"t'o#-ctio"
Sco!e of this ISA ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1
0ffective =ate '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
O$1ecti9e''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 9
Defi"itio"''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
Re2-i'e.e"t
Accu(ulation of Identified Eisstate(ents '''''''''''''''''''''''''''''''''''''''''''''''' 5
%onsideration of Identified Eisstate(ents as the Audit 6ro)resses '''''''''' BT7
%o((unication and %orrection of
Eisstate(ents '''''''''''''''''''''''''''''''''''''
8T5
0valuatin) the 0ffect of Uncorrected
Eisstate(ents '''''''''''''''''''''''''''''''''
10T19
Lritten Ae!resentation '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 14
=ocu(entation ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 15
=efinition of Eisstate(ent '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1
Accu(ulation of Identified Eisstate(ents '''''''''''''''''''''''''''''''''''''''''''''''' A4TA9
%onsideration of Identified Eisstate(ents as the Audit 6ro)resses '''''''''' A4TAB
%o((unication and %orrection of
Eisstate(ents '''''''''''''''''''''''''''''''''''''
A7TA10
0valuatin) the 0ffect of Uncorrected
Eisstate(ents '''''''''''''''''''''''''''''''''
A11TA49
Lritten Ae!resentation '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A44
=ocu(entation ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A45
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1-4
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 9
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
Re2-i'e.e"t
Sufficient A!!ro!riate Audit 0vidence ''''''''''''''''''''''''''''''''''''''''''''''''''''''' B
Infor(ation to 1e Used as Audit 0vidence ''''''''''''''''''''''''''''''''''''''''''''''''' 7-5
Selectin) Ite(s for estin) to 7"tain Audit 0vidence '''''''''''''''''''''''''''''''' 10
Inconsistenc# in, or =ou"ts over Aelia"ilit# of, Audit 0vidence '''''''''''''''' 11
Sufficient A!!ro!riate Audit 0vidence ''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1-A45
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 9
Re2-i'e.e"t
Inventor# ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''
'
4-8
Miti)ation and %lai(s ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5-14
Se)(ent Infor(ation '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 19
Inventor# '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1-A1B
'
Miti)ation and %lai(s ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A17-A45
$a& A res!onse "# the a!!ro!riate confir(in) !art# indicatin) a)ree(ent
with the infor(ation !rovided in the confir(ation re*uest, or
!rovidin)
re*uested infor(ation without e,ce!tion?
$"& A res!onse dee(ed unrelia"le?
$c& A non-res!onse? or
$d& A res!onse indicatin) an e,ce!tion'
I"t'o#-ctio"
Sco!e of this ISA ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1
0ffective =ate '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
O$1ecti9e ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 9
Defi"itio" ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
Re2-i'e.e"t
Audit 6rocedures '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5-5
Audit %onclusions and Ae!ortin) '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 10-19
Audit 6rocedures '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1-A7
Audit %onclusions and Ae!ortin) '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A8-A5
A!!endi,. Illustrations of Auditors+ Ae!orts with Eodified 7!inions
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1T4
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 9
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
Re2-i'e.e"t
Sa(!le =esi)n, SiJe and Selection of Ite(s for estin) '''''''''''''''''''''''''''' BT8
6erfor(in) Audit 6rocedures ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5T11
Nature and %ause of =eviations and
Eisstate(ents '''''''''''''''''''''''''''''''''''
14T19
6ro;ectin) Eisstate(ents '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 14
0valuatin) Aesults of Audit Sa(!lin) '''''''''''''''''''''''''''''''''''''''''''''''''''''''' 15
=efinitions '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1TA9
Sa(!le =esi)n, SiJe and Selection of Ite(s for estin) '''''''''''''''''''''''''''' A4TA19
details, that a (aterial (isstate(ent does not e,ist when in
fact it does' he auditor is !ri(aril# concerned with this t#!e
of erroneous conclusion "ecause it affects audit effectiveness
and is (ore likel# to lead to an ina!!ro!riate audit o!inion'
$ii& In the case of a test of controls, that controls are less effective
than the# actuall# are, or in the case of a test of details, that a
(aterial (isstate(ent e,ists when in fact it does not' his
t#!e of erroneous conclusion affects audit efficienc# as it
would usuall# lead to additional work to esta"lish that initial
conclusions were incorrect'
$d& Non-sa(!lin) risk K he risk that the auditor reaches an erroneous
conclusion for an# reason not related to sa(!lin) risk' $Aef. 6ara A1&
$e& Ano(al# K A (isstate(ent or deviation that is de(onstra"l# not
re!resentative of (isstate(ents or deviations in a !o!ulation'
$f& Sa(!lin) unit K he individual ite(s constitutin) a !o!ulation' $Aef.
6ara A4&
$)& Statistical sa(!lin) K An a!!roach to sa(!lin) that has the followin)
characteristics.
$i& Aando( selection of the sa(!le ite(s? and
$ii& he use of !ro"a"ilit# theor# to evaluate sa(!le results,
includin) (easure(ent of sa(!lin) risk'
A sa(!lin) a!!roach that does not have characteristics $i& and $ii& is
considered non-statistical sa(!lin)'
$h& Stratification K he !rocess of dividin) a !o!ulation into su"
!o!ulations, each of which is a )rou! of sa(!lin) units which have
si(ilar characteristics $often (onetar# value&'
$i& olera"le (isstate(ent K A (onetar# a(ount set "# the auditor in
res!ect of which the auditor seeks to o"tain an a!!ro!riate level of
assurance that the (onetar# a(ount set "# the auditor is not e,ceeded
"# the actual (isstate(ent in the !o!ulation' $Aef. 6ara A9&
$;& olera"le rate of deviation K A rate of deviation fro( !rescri"ed
internal control !rocedures set "# the auditor in res!ect of which the
auditor seeks to o"tain an a!!ro!riate level of assurance that the rate
of deviation set "# the auditor is not e,ceeded "# the actual rate of
deviation in the !o!ulation'
ISA 590 45B
FACTOR
EFFECT ON
SA)*LE SICE
1' An increase in the e,tent
to which the auditor+s risk
assess(ent takes into
account relevant controls
Increase he (ore assurance the auditor
intends to o"tain fro( the o!eratin)
effectiveness of controls, the lower
the auditor+s assess(ent of the risk
of (aterial (isstate(ent will "e,
and the lar)er the sa(!le siJe will
need to "e' Lhen the auditor+s
assess(ent of the risk of (aterial
(isstate(ent at the assertion level
includes an e,!ectation of the
o!eratin) effectiveness of controls,
the auditor is re*uired to !erfor(
tests of controls' 7ther thin)s "ein)
e*ual, the )reater the reliance the
auditor !laces on the o!eratin)
effectiveness of controls in the risk
assess(ent, the )reater is the e,tent
of the auditor+s tests of controls
$and therefore, the sa(!le siJe is
increased&'
4' An increase in the
tolera"le rate of deviation
=ecrease
he lower the tolera"le rate of
deviation, the lar)er the sa(!le siJe
needs to "e'
e,!ected rate of deviation of
the
Increase
he hi)her the e,!ected rate of
deviation, the lar)er the sa(!le siJe
needs to "e so that the
FACTOR
EFFECT ON
SA)*LE SICE
!o!ulation to "e tested auditor is in a !osition to (ake a
reasona"le esti(ate of the actual
rate of deviation' Factors relevant
to the auditor+s consideration of the
e,!ected rate of deviation include
the auditor+s understandin) of the
"usiness $in !articular, risk
assess(ent !rocedures undertaken
to o"tain an understandin) of
internal control&, chan)es in
!ersonnel or in internal control, the
results of audit !rocedures a!!lied
in !rior !eriods and the results of
other audit !rocedures' @i)h
e,!ected control deviation rates
ordinaril# warrant little, if an#,
reduction of the assessed risk of
auditor+s desired level of
assurance that the tolera"le
rate of deviation is not
e,ceeded "# the actual rate
of deviation in the
!o!ulation
Increase he )reater the level of assurance
that the auditor desires that the
results of the sa(!le are in fact
indicative of the actual incidence of
deviation in the !o!ulation, the
lar)er the sa(!le siJe needs to "e'
5' An increase in the nu("er
of sa(!lin) units in the
!o!ulation
Ne)li)i"le effect For lar)e !o!ulations, the actual
siJe of the !o!ulation has little, if
an#, effect on sa(!le siJe' For
s(all !o!ulations however, audit
sa(!lin) (a# not "e as efficient as
alternative (eans of o"tainin)
sufficient a!!ro!riate audit
evidence'
EFFECT ON
SA)*LE
FACTOR SICE
1' An increase in the auditor+s
assess(ent of
Increase
he hi)her the auditor+s
assess(ent of the risk of
the risk of (aterial
(isstate(ent
(aterial (isstate(ent, the lar)er
the sa(!le siJe needs to "e' he
auditor+s assess(ent of the risk
of (aterial (isstate(ent is
affected "# inherent risk and
control risk' For e,a(!le, if the
auditor does not !erfor( tests of
controls, the auditor+s risk
assess(ent cannot "e reduced
for the effective o!eration of
internal controls with res!ect to
the !articular assertion' herefore,
in order to reduce
audit risk to an acce!ta"l# low
level, the auditor needs a low
detection risk and will rel# (ore
on su"stantive !rocedures' he
(ore audit evidence that is
o"tained fro( tests of details
$that is, the lower the detection
risk&, the lar)er the sa(!le siJe
will need to "e'
4' An increase in the use of
other su"stantive !rocedures
directed at the sa(e assertion
=ecrease
he (ore the auditor is rel#in) on
other su"stantive !rocedures $tests
of details or su"stantive anal#tical
!rocedures& to reduce
FACTOR
EFFECT ON
SA)*LE SICE
to an acce!ta"le level the
detection risk re)ardin) a
!articular !o!ulation, the less
assurance the auditor will re*uire
fro( sa(!lin) and, therefore, the
s(aller the sa(!le siJe can "e'
9' An increase in the auditor+s
desired level of assurance that
tolera"le (isstate(ent is not
e,ceeded "# actual
(isstate(ent in the
!o!ulation
Increase he )reater the level of assurance
that the auditor re*uires that the
results of the sa(!le are in fact
indicative of the actual a(ount of
(isstate(ent in the !o!ulation,
the lar)er the sa(!le siJe needs to
"e'
4' An increase in tolera"le
(isstate(ent
=ecrease
he lower the tolera"le
(isstate(ent, the lar)er the
sa(!le siJe needs to "e'
5' An increase in the a(ount
of (isstate(ent the auditor
e,!ects to find in the
!o!ulation
Increase he )reater the a(ount of
(isstate(ent the auditor e,!ects
to find in the !o!ulation, the
lar)er the sa(!le siJe needs to "e
in order to (ake a reasona"le
esti(ate of the actual a(ount of
(isstate(ent in the !o!ulation'
Factors relevant to the auditor+s
consideration of the e,!ected
(isstate(ent a(ount include the
e,tent to which ite( values are
deter(ined su";ectivel#, the
results of risk assess(ent
!rocedures, the results of tests of
control, the results of audit
!rocedures a!!lied in !rior
!eriods, and the results of other
su"stantive !rocedures'
EFFECT ON
SA)*LE
FACTOR SICE
B' Stratification of the
!o!ulation when a!!ro!riate
=ecrease Lhen there is a wide ran)e
$varia"ilit#& in the (onetar# siJe
of ite(s in the !o!ulation, it (a#
"e useful to stratif# the
!o!ulation' Lhen a !o!ulation
can "e a!!ro!riatel# stratified, the
a))re)ate of the sa(!le siJes
fro( the strata )enerall# will "e
less than the sa(!le siJe that
would have "een re*uired to
attain a )iven level of sa(!lin)
risk, had one sa(!le "een drawn
fro( the whole
!o!ulation'
7' he nu("er of sa(!lin)
units in the !o!ulation
Ne)li)i"le effect
For lar)e !o!ulations, the actual
siJe of the !o!ulation has little, if
an#, effect on sa(!le siJe' hus,
for s(all !o!ulations, audit
sa(!lin) is often not as efficient
as alternative (eans of
o"tainin) sufficient a!!ro!riate
audit evidence' $@owever, when
usin) (onetar# unit sa(!lin), an
increase in the (onetar# value of
the !o!ulation increases sa(!le
siJe, unless this is offset "# a
!ro!ortional increase in
(aterialit# for the financial
state(ents as a whole Uand, if
a!!lica"le, (aterialit# level or
levels for !articular classes of
transactions, account "alances
or disclosuresV'&
$a& Aando( selection $a!!lied throu)h rando( nu("er )enerators, for e,a(!le,
rando( nu("er ta"les&'
$"& S#ste(atic selection, in which the nu("er of sa(!lin) units in the !o!ulation
is divided "# the sa(!le siJe to )ive a sa(!lin) interval, for e,a(!le 50, and
havin) deter(ined a startin) !oint within the first 50, each 50th sa(!lin) unit
thereafter is selected' Althou)h the startin) !oint (a# "e deter(ined
ha!haJardl#, the sa(!le is (ore likel# to "e trul# rando( if it is deter(ined
"# use of a co(!uteriJed rando( nu("er )enerator or rando( nu("er ta"les'
Lhen usin) s#ste(atic selection, the auditor would need to deter(ine that
sa(!lin) units within the !o!ulation are not structured in such a wa# that the
sa(!lin) interval corres!onds with a !articular !attern in the !o!ulation'
$c& Eonetar# Unit Sa(!lin) is a t#!e of value-wei)hted selection $as descri"ed in
A!!endi, 1& in which sa(!le siJe, selection and evaluation results in
a
conclusion in (onetar# a(ounts'
$d& @a!haJard selection, in which the auditor selects the sa(!le without
followin) a structured techni*ue' Althou)h no structured techni*ue is used,
the auditor would nonetheless avoid an# conscious "ias or !redicta"ilit# $for
e,a(!le, avoidin) difficult to locate ite(s, or alwa#s choosin) or avoidin) the
first or last entries on a !a)e& and thus atte(!t to ensure that all ite(s in the
!o!ulation have a chance of selection' @a!haJard selection is not a!!ro!riate
when usin) statistical sa(!lin)'
$e& 1lock selection involves selection of a "lock$s& of conti)uous ite(s fro(
within the !o!ulation' 1lock selection cannot ordinaril# "e used in audit
sa(!lin) "ecause (ost !o!ulations
are
structured such that ite(s in
a
se*uence can "e e,!ected to have si(ilar characteristics to each other, "ut
different characteristics fro( ite(s elsewhere in the !o!ulation' Althou)h in
so(e circu(stances it (a# "e an a!!ro!riate audit !rocedure to e,a(ine a
"lock of ite(s, it would rarel# "e an a!!ro!riate sa(!le selection techni*ue
when the auditor intends to draw valid inferences a"out the entire !o!ulation
"ased on the sa(!le'
A%%7UNIN< 0SIEA0S, AN= A0MA0= =IS%M7SUA0S
0valuatin) the Aeasona"leness of the Accountin) 0sti(ates, and
=eter(inin) Eisstate(ents ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A11B-A115
=isclosures Aelated to Accountin) 0sti(ates '''''''''''''''''''''''''''''''''''''''' A140-A149
Indicators of 6ossi"le Eana)e(ent
1ias ''''''''''''''''''''''''''''''''''''''''''''''''
A144-A145
Lritten Ae!resentations '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A14B-A147
=ocu(entation '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''
'
A148
A!!endi,. Fair Falue Eeasure(ents and =isclosures under =ifferent
Financial Ae!ortin) Fra(eworks
$a& %ontrol is the !ower to )overn the financial and o!eratin) !olicies of
an
entit# so as to o"tain "enefits fro( its activities? and
$"&
Si)nificant influence $which (a# "e )ained "# share ownershi!,
statute
or a)ree(ent& is the !ower to !artici!ate in the financial and o!eratin)
!olic# decisions of an entit#, "ut is not control over those !olicies'
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1
<oin) %oncern Assu(!tion '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
Aes!onsi"ilit# for Assess(ent of the 0ntit#+s A"ilit# to %ontinue
as a <oin) %oncern '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 9-7
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 8
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
Re2-i'e.e"t
Aisk Assess(ent 6rocedures and Aelated Activities ''''''''''''''''''''''''''''''''''' 10-11
0valuatin) Eana)e(ent+s Assess(ent ''''''''''''''''''''''''''''''''''''''''''''''''''''''' 14-14
6eriod "e#ond Eana)e(ent+s Assess(ent ''''''''''''''''''''''''''''''''''''''''''''''''' 15
Additional Audit 6rocedures Lhen 0vents or %onditions Are
Identified '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1B
Audit %onclusions and Ae!ortin) ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 17
Use of <oin) %oncern Assu(!tion A!!ro!riate "ut a Eaterial
Uncertaint# 0,ists '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 18-40
Use of <oin) %oncern Assu(!tion Ina!!ro!riate '''''''''''''''''''''''''''''''''''''' 41
Eana)e(ent Unwillin) to Eake or 0,tend Its Assess(ent ''''''''''''''''''''''' 44
Si)nificant =ela# in the A!!roval of Financial State(ents '''''''''''''''''''''''' 44
<oin) %oncern Assu(!tion '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1
Aisk Assess(ent 6rocedures and Aelated Activities ''''''''''''''''''''''''''''''''''' A4-AB
0valuatin) Eana)e(ent+s Assess(ent ''''''''''''''''''''''''''''''''''''''''''''''''''''''' A7-A14
$ii& =eter(inin) whether there is ade*uate su!!ort for the
assu(!tions underl#in) the forecast'
$d& %onsiderin) whether an# additional facts or infor(ation have "eco(e
availa"le since the date on which (ana)e(ent (ade its assess(ent'
$e& Ae*uestin) written re!resentations fro( (ana)e(ent and, where
a!!ro!riate, those char)ed with )overnance, re)ardin) their !lans for
future action and the feasi"ilit# of these !lans'
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1-B
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 7
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 8
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5-10
Re2-i'e.e"t
Aes!onsi"ilit# ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 11
Acce!tance and %ontinuance '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 14-14
7verall Audit Strate)# and Audit 6lan ''''''''''''''''''''''''''''''''''''''''''''''''''''''' 15-1B
Understandin) the <rou!, Its %o(!onents and heir 0nviron(ents ''''''''' 17-18
Understandin) the %o(!onent Auditor '''''''''''''''''''''''''''''''''''''''''''''''''''''' 15-40
Eaterialit# '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 41-49
Aes!ondin) to Assessed Aisks '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 44-91
%onsolidation 6rocess ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 94-97
Su"se*uent 0vents '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 98-95
%o((unication with the %o(!onent Auditor '''''''''''''''''''''''''''''''''''''''''''' 40-41
0valuatin) the Sufficienc# and A!!ro!riateness of Audit 0vidence
7"tained '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 44-45
%o((unication with <rou! Eana)e(ent and hose %har)ed with
<overnance of the <rou! ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4B-45
=ocu(entation '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 50
%o(!onents Su";ect to Audit "# Statute, Ae)ulation or 7ther Aeason''''''' A1
$a& =iscussin) with the co(!onent auditor or co(!onent (ana)e(ent
those of the co(!onent+s "usiness activities that are si)nificant to the
)rou!?
$"& =iscussin) with the co(!onent auditor the susce!ti"ilit# of the
co(!onent to (aterial (isstate(ent of the financial infor(ation due
to
fraud or error? and
$c& Aeviewin) the co(!onent auditor+s docu(entation of identified
si)nificant risks of (aterial (isstate(ent of the )rou! financial
state(ents' Such docu(entation (a# take the for( of a (e(orandu(
that reflects the co(!onent auditor+s conclusion with re)ard to the
identified si)nificant risks'
$a& he si)nificance of the co(!onent?
$"& he identified si)nificant risks of (aterial (isstate(ent of the )rou!
financial state(ents?
$c& he )rou! en)a)e(ent tea(+s evaluation of the desi)n of )rou!-wide
controls and deter(ination whether the# have "een i(!le(ented? and
$d&
he )rou! en)a)e(ent tea(+s understandin) of the co(!onent
auditor'
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1-4
he Auditor+s Aes!onsi"ilit# for the Audit 7!inion ''''''''''''''''''''''''''''''''''' 9
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' B
Re2-i'e.e"t
=eter(inin) the Need for an Auditor+s 0,!ert ''''''''''''''''''''''''''''''''''''''''''' 7
Nature, i(in) and 0,tent of Audit 6rocedures ''''''''''''''''''''''''''''''''''''''''' 8
he %o(!etence, %a!a"ilities and 7";ectivit# of the Auditor+s 0,!ert ''''' 5
7"tainin) an Understandin) of the Field of 0,!ertise of the Auditor+s
0,!ert '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 10
A)ree(ent with the Auditor+s 0,!ert ''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 11
0valuatin) the Ade*uac# of the Auditor+s 0,!ert+s Lork '''''''''''''''''''''''''' 14-19
Aeference to the Auditor+s 0,!ert in the Auditor+s
Ae!ort '''''''''''''''''''''''''
14-15
=efinition of an Auditor+s 0,!ert ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1-A9
=eter(inin) the Need for an Auditor+s 0,!ert ''''''''''''''''''''''''''''''''''''''''''' A4-A5
Nature, i(in) and 0,tent of Audit 6rocedures ''''''''''''''''''''''''''''''''''''''''' A10-A19
he %o(!etence, %a!a"ilities and 7";ectivit# of the Auditor+s 0,!ert ''''' A14-A40
7"tainin) an Understandin) of the Field of 0,!ertise of the Auditor+s
0,!ert '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A41-A44
A)ree(ent with the Auditor+s 0,!ert ''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A49-A91
0valuatin) the Ade*uac# of the Auditor+s 0,!ert+s Lork '''''''''''''''''''''''''' A94-A40
B45 ISA B40
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1-4
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' B
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 7-5
Re2-i'e.e"t
For(in) an 7!inion on the Financial State(ents ''''''''''''''''''''''''''''''''''''''' 10-15
For( of 7!inion ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1B-15
Auditor+s Ae!ort ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 40-45
Su!!le(entar# Infor(ation 6resented with the Financial State(ents '''''''' 4B-47
:ualitative As!ects of the 0ntit#+s Accountin) 6ractices ''''''''''''''''''''''''''' A1-A9
=isclosure of the 0ffect of Eaterial ransactions and 0vents on the
Infor(ation %onve#ed in the Financial State(ents ''''''''''''''''''''''''''' A4
=escri!tion of the A!!lica"le Financial Ae!ortin) Fra(ework ''''''''''''''''' A5-A10
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1
#!es of Eodified 7!inions ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 9
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
Re2-i'e.e"t
%ircu(stances Lhen a Eodification to the Auditor+s 7!inion is
Ae*uired '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' B
=eter(inin) the #!e of Eodification to the Auditor+s 7!inion ''''''''''''''' 7T15
For( and %ontent of the Auditor+s Ae!ort Lhen the 7!inion is
Eodified '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1BT47
#!es of Eodified 7!inions ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1
Nature of Eaterial
Eisstate(ents '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''
A4TA7
Nature of an Ina"ilit# to 7"tain Sufficient A!!ro!riate Audit
0vidence '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A8TA14
%onse*uence of an Ina"ilit# to 7"tain Sufficient A!!ro!riate Audit
0vidence =ue to a Eana)e(ent-I(!osed Mi(itation after the
Aature of <atter 2i!ing +ise
to the <odification
Auditor8s Gudg$ent about the (er!asi!eness of the
/ffects or (ossible /ffects on the Financial )tate$ents
<aterial but Aot (er!asi!e
<aterial and (er!asi!e
Financial state(ents are
(ateriall# (isstated
:ualified o!inion Adverse o!inion
Ina"ilit# to o"tain sufficient
a!!ro!riate audit evidence
:ualified o!inion =isclai(er of o!inion
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1T4
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 9
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
Re2-i'e.e"t
0(!hasis of Eatter 6ara)ra!hs in the Auditor+s
Ae!ort '''''''''''''''''''''''''''''''
BT7
7ther Eatter 6ara)ra!hs in the Auditor+s Ae!ort ''''''''''''''''''''''''''''''''''''''''' 8
%o((unication with hose %har)ed with <overnance ''''''''''''''''''''''''''''''' 5
0(!hasis of Eatter 6ara)ra!hs in the Auditor+s
Ae!ort '''''''''''''''''''''''''''''''
A1TA4
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1
he Nature of %o(!arative Infor(ation '''''''''''''''''''''''''''''''''''''''''''''''''''''' 4-9
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' B
Re2-i'e.e"t
Audit 6rocedures '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 7-5
Audit Ae!ortin) '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 10-15
Audit 6rocedures '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1
Audit Ae!ortin) '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A4-A11
A!!endi,. Illustrations of Auditors+ Ae!orts
I"t'o#-ctio"
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1-4
0ffective =ate ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 9
O$1ecti9e '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 4
Defi"itio" '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 5
Re2-i'e.e"t
Aeadin) 7ther Infor(ation ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' B-7
Eaterial Inconsistencies ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 8-19
Eaterial Eisstate(ents of Fact ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 14-1B
Sco!e of this ISA '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1-A4
=efinition of 7ther Infor(ation '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A9-A4
Aeadin) 7ther Infor(ation ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A5
Eaterial Inconsistencies ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' AB-A5
i(in) of Lork and 0vents Su"se*uent to the =ate of the Auditor+s
Ae!ort on the Audited Financial State(ents ''''''''''''''''''''''''''''''''''''''' A10
Auditor+s Ae!ort on Su((ar# Financial
State(ents ''''''''''''''''''''''''''''''''''
A11-A15
%o(!aratives '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A1B-A17
Unaudited Su!!le(entar# Infor(ation 6resented with Su((ar#
Financial State(ents '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A18
7ther Infor(ation in =ocu(ents %ontainin) Su((ar# Financial
State(ents '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A15
Auditor Association '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' A40
A!!endi,. Illustrations of Ae!orts on Su((ar# Financial State(ents
International Standard on Auditin) $ISA& 810, C0n)a)e(ents to Ae!ort on Su((ar#
Financial State(entsD should "e read in con;unction with ISA 400, C7verall 7";ectives
of the Inde!endent Auditor and the %onduct of an Audit in Accordance with International
801 ISA 810
an en)a)e(ent to re!ort on su((ar# financial state(ents derived fro( financial state(ents
audited in accordance with ISAs "# that sa(e auditor'
Effecti9e D!te
4' his ISA is effective for en)a)e(ents for !eriods "e)innin) on or after =ece("er 15, 4005'
O$1ecti9e
1. $a& o deter(ine whether it is a!!ro!riate to acce!t the en)a)e(ent to re!ort on su((ar#
1. $"& If en)a)ed to re!ort on su((ar# financial state(ents.
2. $i& o for( an o!inion on the su((ar# financial state(ents "ased on an evaluation of the
conclusions drawn fro( the evidence o"tained? and
3. $ii& o e,!ress clearl# that o!inion throu)h a written re!ort that also descri"es the "asis for
that o!inion'
Defi"itio"
4' For !ur!oses of this ISA, the followin) ter(s have the (eanin)s attri"uted "elow.
1$a&A!!lied criteria K he criteria a!!lied "# (ana)e(ent in the !re!aration of the su((ar# financial
state(ents'
2$"& Audited financial state(ents K Financial state(ents
1
audited "# the auditor in accordance with
ISAs, and fro( which the su((ar# financial state(ents are derived'
3$c&Su((ar# financial state(ents K @istorical financial infor(ation that is derived fro( financial
state(ents "ut that contains less detail than the financial state(ents, while still !rovidin) a
structured re!resentation consistent with that !rovided "# the financial state(ents of the entit#+s
econo(ic resources or o"li)ations at a !oint in ti(e or the chan)es therein for a !eriod of ti(e'
4

=ifferent
1
Standards on Auditin),D !ara)ra!h 19$f&, defines the ter( Cfinancial state(ents'D
4
ISA 810 804
;urisdictions (a# use different ter(inolo)# to descri"e such historical financial
infor(ation'
Re2-i'e.e"t E"(!(e.e"t Accept!"ce
1. 5' he auditor shall acce!t an en)a)e(ent to re!ort on su((ar# financial state(ents in
accordance with this ISA onl# when the auditor has "een en)a)ed to conduct an audit in
accordance with ISAs of the financial state(ents fro( which the su((ar# financial state(ents are
derived' $Aef. 6ara' A1&
1B' 1efore acce!tin) an en)a)e(ent to re!ort on su((ar# financial state(ents, the auditor shall.
$Aef. 6ara' A4&
2$a&=eter(ine whether the a!!lied criteria are acce!ta"le? $Aef. 6ara' A9-A7&
3$"& 7"tain the a)ree(ent of (ana)e(ent that it acknowled)es and understands its res!onsi"ilit#.
4$i& For the !re!aration of the su((ar# financial state(ents in accordance with the a!!lied
criteria?
5$ii& o (ake the audited financial state(ents availa"le to the intended users of the su((ar#
financial state(ents without undue difficult# $or, if law or re)ulation !rovides that the audited
financial state(ents need not "e (ade availa"le to the intended users of the su((ar#
financial state(ents and esta"lishes the criteria for the !re!aration of the su((ar# financial
state(ents, to descri"e that law or re)ulation in the su((ar# financial state(ents&? and
6$iii& o include the auditor+s re!ort on the su((ar# financial state(ents in an# docu(ent that
contains the su((ar# financial state(ents and that indicates that the auditor has re!orted on
the('
7$c&A)ree with (ana)e(ent the for( of o!inion to "e e,!ressed on the su((ar# financial
state(ents $see !ara)ra!hs 5-11&'
2. 7' If the auditor concludes that the a!!lied criteria are unacce!ta"le or is una"le to o"tain
the a)ree(ent of (ana)e(ent set out in !ara)ra!h B$"&, the auditor shall not acce!t the
en)a)e(ent to re!ort on the su((ar# financial state(ents, unless re*uired "# law or re)ulation to
do so' An en)a)e(ent conducted in accordance with such law or re)ulation does not co(!l# with
this ISA' Accordin)l#, the auditor+s re!ort on the su((ar# financial state(ents shall not indicate
that the en)a)e(ent was conducted in accordance with this ISA' he auditor shall include
a!!ro!riate reference to
809 ISA 810
this fact in the ter(s of the en)a)e(ent' he auditor shall also deter(ine the effect that this (a#
have on the en)a)e(ent to audit the financial state(ents fro( which the su((ar# financial
state(ents are derived'
N!t-'e of *'oce#-'e
8' he auditor shall !erfor( the followin) !rocedures, and an# other !rocedures that the auditor (a#
consider necessar#, as the "asis for the auditor+s o!inion on the su((ar# financial state(ents.
1. $a& 0valuate whether the su((ar# financial state(ents ade*uatel# disclose their su((ariJed
nature and identif# the audited financial state(ents'
1. $"& Lhen su((ar# financial state(ents are not acco(!anied "# the audited financial
state(ents, evaluate whether the# descri"e clearl#.
2. $i& Fro( who( or where the audited financial state(ents are availa"le? or
3. $ii& he law or re)ulation that s!ecifies that the audited financial state(ents need not "e (ade
availa"le to the intended users of the su((ar# financial state(ents and esta"lishes the criteria
for the !re!aration of the su((ar# financial state(ents'
2. $c& 0valuate whether the su((ar# financial state(ents ade*uatel# disclose the a!!lied
criteria'
3. $d& %o(!are the su((ar# financial state(ents with the related infor(ation in the audited
financial state(ents to deter(ine whether the su((ar# financial state(ents a)ree with or can "e
recalculated fro( the related infor(ation in the audited financial state(ents'
4. $e& 0valuate whether the su((ar# financial state(ents are !re!ared in accordance with the
a!!lied criteria'
5. $f& 0valuate, in view of the !ur!ose of the su((ar# financial state(ents, whether the su((ar#
financial state(ents contain the infor(ation necessar#, and are at an a!!ro!riate level of
a))re)ation, so as not to "e (isleadin) in the circu(stances'
6. $)& 0valuate whether the audited financial state(ents are availa"le to the intended users of the
su((ar# financial state(ents without undue difficult#, unless law or re)ulation !rovides that the#
need not "e (ade availa"le and esta"lishes the criteria for the !re!aration of the su((ar#
financial state(ents' $Aef. 6ara' A8&
Fo'. of Opi"io"
5' Lhen the auditor has concluded that an un(odified o!inion on the su((ar# financial state(ents
is a!!ro!riate, the auditor+s o!inion shall,
ISA 810 804
unless otherwise re*uired "# law or re)ulation, use one of the followin) !hrases. $Aef. 6ara' A5&
1. $a& he su((ar# financial state(ents are consistent, in all (aterial res!ects, with the audited
financial state(ents, in accordance with Uthe a!!lied criteriaV? or
2. $"& he su((ar# financial state(ents are a fair su((ar# of the audited financial state(ents,
in accordance with Uthe a!!lied criteriaV'
110' If law or re)ulation !rescri"es the wordin) of the o!inion on su((ar# financial
state(ents in ter(s that are different fro( those descri"ed in !ara)ra!h 5, the auditor shall.
2$a& A!!l# the !rocedures descri"ed in !ara)ra!h 8 and an# further !rocedures necessar# to
ena"le the auditor to e,!ress the !rescri"ed o!inion? and
3$"& 0valuate whether users of the su((ar# financial state(ents (i)ht (isunderstand the
auditor+s o!inion on the su((ar# financial state(ents and, if so, whether additional
e,!lanation in the auditor+s re!ort on the su((ar# financial state(ents can (iti)ate !ossi"le
(isunderstandin)'
2. 11' If, in the case of !ara)ra!h 10$"&, the auditor concludes that additional e,!lanation in the
auditor+s re!ort on the su((ar# financial state(ents cannot (iti)ate !ossi"le (isunderstandin),
the auditor shall not acce!t the en)a)e(ent, unless re*uired "# law or re)ulation to do so' An
en)a)e(ent conducted in accordance with such law or re)ulation does not co(!l# with this ISA'
Accordin)l#, the auditor+s re!ort on the su((ar# financial state(ents shall not indicate that the
en)a)e(ent was conducted in accordance with this ISA'
Ti.i"( of =o'% !"# E9e"t S-$e2-e"t to the D!te of the A-#ito'> Repo't o" the A-#ite#
Fi"!"ci!0 St!te.e"t
1. 14' he auditor+s re!ort on the su((ar# financial state(ents (a# "e dated later than the date
of the auditor+s re!ort on the audited financial state(ents' In such cases, the auditor+s re!ort on the
su((ar# financial state(ents shall state that the su((ar# financial state(ents and audited
financial state(ents do not reflect the effects of events that occurred su"se*uent to the date of the
auditor+s re!ort on the audited financial state(ents that (a# re*uire ad;ust(ent of, or disclosure
in, the audited financial state(ents' $Aef. 6ara' A10&
2. 19' he auditor (a# "eco(e aware of facts that e,isted at the date of the auditor+s re!ort on
the audited financial state(ents, "ut of which the auditor !reviousl# was unaware' In such cases,
the auditor shall not issue the auditor+s re!ort on the su((ar# financial state(ents until the
auditor+s
805 ISA 810
consideration of such facts in relation to the audited financial state(ents in accordance with ISA
5B0
9
has "een co(!leted'
A-#ito'> Repo't o" S-..!'/ Fi"!"ci!0 St!te.e"t
/le$ents of the Auditor8s +eport
14' he auditor+s re!ort on su((ar# financial state(ents shall include the followin) ele(ents.
4
$Aef.
6ara' A15&
1$a&A title clearl# indicatin) it as the re!ort of an inde!endent auditor' $Aef. 6ara' A11&
2$"&An addressee' $Aef. 6ara' A14&
1$c&An introductor# !ara)ra!h that.
2$i& Identifies the su((ar# financial state(ents on which the auditor is re!ortin), includin) the
title of each state(ent included in the su((ar# financial state(ents? $Aef. 6ara' A19&
3$ii& Identifies the audited financial state(ents?
4$iii& Aefers to the auditor+s re!ort on the audited financial state(ents, the date of that re!ort,
and, su";ect to !ara)ra!hs 17-18, the fact that an un(odified o!inion is e,!ressed on the
audited financial state(ents?
5$iv& If the date of the auditor+s re!ort on the su((ar# financial state(ents is later than the
date of the auditor+s re!ort on the audited financial state(ents, states that the su((ar#
financial state(ents and the audited financial state(ents do not reflect the effects of events
that occurred su"se*uent to the date of the auditor+s re!ort on the audited financial state(ents?
and
6$v&A state(ent indicatin) that the su((ar# financial state(ents do not contain all the disclosures
re*uired "# the financial re!ortin) fra(ework a!!lied in the !re!aration of the audited
financial state(ents, and that readin) the su((ar# financial state(ents is not a su"stitute for
readin) the audited financial state(ents'
3$d& A descri!tion of (ana)e(ent+s
5
res!onsi"ilit# for the su((ar# financial state(ents, e,!lainin)
that (ana)e(ent
B
is res!onsi"le for
9
ISA 5B0, CSu"se*uent 0vents'D
4
6ara)ra!hs 17-18, which deal with circu(stances where the auditor+s re!ort on the audited financial state(ents has "een
(odified, re*uire additional ele(ents to those listed in this !ara)ra!h' 5
B
ISA 810 80B
the !re!aration of the su((ar# financial state(ents in accordance with the a!!lied criteria'
1$e&A state(ent that the auditor is res!onsi"le for e,!ressin) an o!inion on the su((ar# financial
state(ents "ased on the !rocedures re*uired "# this ISA'
2$f& A !ara)ra!h clearl# e,!ressin) an o!inion $see !ara)ra!hs 5-11&'
3$)&he auditor+s si)nature'
4$h&he date of the auditor+s re!ort' $Aef. 6ara' A14&
5$i& he auditor+s address'
1. 15' If the addressee of the su((ar# financial state(ents is not the sa(e as the addressee of
the auditor+s re!ort on the audited financial state(ents, the auditor shall evaluate the
a!!ro!riateness of usin) a different addressee' $Aef. 6ara' A14&
11B' he auditor shall date the auditor+s re!ort on the su((ar# financial state(ents no earlier
than. $Aef. 6ara' A14&
2$a&he date on which the auditor has o"tained sufficient a!!ro!riate evidence on which to "ase
the o!inion, includin) evidence that the su((ar# financial state(ents have "een !re!ared and
those with the reco)niJed authorit# have asserted that the# have taken res!onsi"ilit# for the(?
and
3$"& he date of the auditor+s re!ort on the audited financial state(ents'
<odifications to the ,pinion& /$phasis of <atter (aragraph or ,ther <atter (aragraph in the
Auditor8s +eport on the Audited Financial )tate$ents $Aef. 6ara' A15&
17' Lhen the auditor+s re!ort on the audited financial state(ents contains a *ualified o!inion, an
0(!hasis of Eatter !ara)ra!h, or an 7ther Eatter !ara)ra!h, "ut the auditor is satisfied that the
su((ar# financial state(ents are consistent, in all (aterial res!ects, with or are a fair su((ar# of
the audited financial state(ents, in accordance with the a!!lied criteria, the auditor+s re!ort on the
su((ar# financial state(ents shall, in addition to the ele(ents in !ara)ra!h 14.
1$a&State that the auditor+s re!ort on the audited financial state(ents contains a *ualified o!inion, an
0(!hasis of Eatter !ara)ra!h, or an 7ther Eatter !ara)ra!h? and
2$"&=escri"e.
$i& he "asis for the *ualified o!inion on the audited financial state(ents, and that
*ualified o!inion? or the 0(!hasis of
807 ISA 810
Eatter or the 7ther Eatter !ara)ra!h in the auditor+s re!ort on the audited financial
state(ents? and
$ii& he effect thereof on the su((ar# financial state(ents, if an#'
18' Lhen the auditor+s re!ort on the audited financial state(ents contains an adverse o!inion or a
disclai(er of o!inion, the auditor+s re!ort on the su((ar# financial state(ents shall, in addition to
the ele(ents in !ara)ra!h 14.
1. $a& State that the auditor+s re!ort on the audited financial state(ents contains an adverse
o!inion or disclai(er of o!inion?
2. $"& =escri"e the "asis for that adverse o!inion or disclai(er of o!inion? and
3. $c& State that, as a result of the adverse o!inion or disclai(er of o!inion, it is ina!!ro!riate to
e,!ress an o!inion on the su((ar# financial state(ents'
<odified ,pinion on the )u$$ary Financial )tate$ents
15' If the su((ar# financial state(ents are not consistent, in all (aterial res!ects, with or are not a
fair su((ar# of the audited financial state(ents, in accordance with the a!!lied criteria, and
(ana)e(ent does not a)ree to (ake the necessar# chan)es, the auditor shall e,!ress an adverse
o!inion on the su((ar# financial state(ents' $Aef. 6ara' A15&
Ret'ictio" o" Dit'i$-tio" o' Ue o' A0e'ti"( Re!#e' to the B!i of Acco-"ti"(
40' Lhen distri"ution or use of the auditor+s re!ort on the audited financial state(ents is restricted, or
the auditor+s re!ort on the audited financial state(ents alerts readers that the audited financial
state(ents are !re!ared in accordance with a s!ecial !ur!ose fra(ework, the auditor shall include
a si(ilar restriction or alert in the auditor+s re!ort on the su((ar# financial state(ents'
Co.p!'!ti9e
1. 41' If the audited financial state(ents contain co(!aratives, "ut the su((ar# financial
state(ents do not, the auditor shall deter(ine whether such o(ission is reasona"le in the
circu(stances of the en)a)e(ent' he auditor shall deter(ine the effect of an unreasona"le
o(ission on the auditor+s re!ort on the su((ar# financial state(ents' $Aef. 6ara' A1B&
2. 44' If the su((ar# financial state(ents contain co(!aratives that were re!orted on "#
another auditor, the auditor+s re!ort on the su((ar# financial state(ents shall also contain the
(atters that ISA 710& re*uires the auditor to include in the auditor+s re!ort on the audited financial
state(ents'
7
$Aef. 6ara' A17&
ISA 710, C%o(!arative Infor(ationN%orres!ondin) Fi)ures and %o(!arative Financial State(ents'D
ISA 810 808
U"!-#ite# S-pp0e.e"t!'/ I"fo'.!tio" *'ee"te# &ith S-..!'/ Fi"!"ci!0 St!te.e"t
49' he auditor shall evaluate whether an# unaudited su!!le(entar# infor(ation !resented with the
su((ar# financial state(ents is clearl# differentiated fro( the su((ar# financial state(ents' If
the auditor concludes that the entit#+s !resentation of the unaudited su!!le(entar# infor(ation is
not clearl# differentiated fro( the su((ar# financial state(ents, the auditor shall ask
(ana)e(ent to chan)e the !resentation of the unaudited su!!le(entar# infor(ation' If
(ana)e(ent refuses to do so, the auditor shall e,!lain in the auditor+s re!ort on the su((ar#
financial state(ents that such infor(ation is not covered "# that re!ort' $Aef. 6ara' A18&
Othe' I"fo'.!tio" i" Doc-.e"t Co"t!i"i"( S-..!'/ Fi"!"ci!0 St!te.e"t
44' he auditor shall read other infor(ation included in a docu(ent containin) the su((ar# financial
state(ents and related auditor+s re!ort to identif# (aterial inconsistencies, if an#, with the
su((ar# financial state(ents' If, on readin) the other infor(ation, the auditor identifies a
(aterial inconsistenc#, the auditor shall deter(ine whether the su((ar# financial state(ents or
the other infor(ation needs to "e revised' If, on readin) the other infor(ation, the auditor
"eco(es aware of an a!!arent (aterial (isstate(ent of fact, the auditor shall discuss the (atter
with (ana)e(ent' $Aef. 6ara' A15&
A-#ito' Aoci!tio"
1. 45' If the auditor "eco(es aware that the entit# !lans to state that the auditor has re!orted on
su((ar# financial state(ents in a docu(ent containin) the su((ar# financial state(ents, "ut
does not !lan to include the related auditor+s re!ort, the auditor shall re*uest (ana)e(ent to
include the auditor+s re!ort in the docu(ent' If (ana)e(ent does not do so, the auditor shall
deter(ine and carr# out other a!!ro!riate actions desi)ned to !revent (ana)e(ent fro(
ina!!ro!riatel# associatin) the auditor with the su((ar# financial state(ents in that docu(ent'
$Aef. 6ara' A40&
14B' he auditor (a# "e en)a)ed to re!ort on the financial state(ents of an entit#, while not
en)a)ed to re!ort on the su((ar# financial state(ents' If, in this case, the auditor "eco(es
aware that the entit# !lans to (ake a state(ent in a docu(ent that refers to the auditor and the
fact that su((ar# financial state(ents are derived fro( the financial state(ents audited "#
the auditor, the auditor shall "e satisfied that.
2$a&he reference to the auditor is (ade in the conte,t of the auditor+s re!ort on the audited
3$"& he state(ent does not )ive the i(!ression that the auditor has re!orted on the su((ar#
805 ISA 810
If $a& or $"& are not (et, the auditor shall re*uest (ana)e(ent to chan)e the state(ent to (eet
the(, or not to refer to the auditor in the docu(ent' Alternativel#, the entit# (a# en)a)e the
auditor to re!ort on the su((ar# financial state(ents and include the related auditor+s re!ort in
the docu(ent' If (ana)e(ent does not chan)e the state(ent, delete the reference to the auditor, or
include an auditor+s re!ort on the su((ar# financial state(ents in the docu(ent containin) the
su((ar# financial state(ents, the auditor shall advise (ana)e(ent that the auditor disa)rees with
the reference to the auditor, and the auditor shall deter(ine and carr# out other a!!ro!riate actions
desi)ned to !revent (ana)e(ent fro( ina!!ro!riatel# referrin) to the auditor' $Aef. 6ara' A40&
OOO
E"(!(e.e"t Accept!"ce $Aef. 6ara' 5-B&
A1' he audit of the financial state(ents fro( which the su((ar# financial state(ents are derived
!rovides the auditor with the necessar# knowled)e to dischar)e the auditor+s res!onsi"ilities in
relation to the su((ar# financial state(ents in accordance with this ISA' A!!lication of this ISA
will not !rovide sufficient a!!ro!riate evidence on which to "ase the o!inion on the su((ar#
financial state(ents if the auditor has not also audited the financial state(ents fro( which the
su((ar# financial state(ents are derived'
A4' Eana)e(ent+s a)ree(ent with the (atters descri"ed in !ara)ra!h B (a# "e evidenced "# its
written acce!tance of the ter(s of the en)a)e(ent'
Criteria $Aef. 6ara' B$a&&
A9' he !re!aration of su((ar# financial state(ents re*uires (ana)e(ent to deter(ine the
infor(ation that needs to "e reflected in the su((ar# financial state(ents so that the# are
consistent, in all (aterial res!ects, with or re!resent a fair su((ar# of the audited financial
state(ents' 1ecause su((ar# financial state(ents "# their nature contain a))re)ated infor(ation
and li(ited disclosure, there is an increased risk that the# (a# not contain the infor(ation
necessar# so as not to "e (isleadin) in the circu(stances' his risk increases when esta"lished
criteria for the !re!aration of su((ar# financial state(ents do not e,ist'
A4' Factors that (a# affect the auditor+s deter(ination of the acce!ta"ilit# of the a!!lied criteria
include.
% G he nature of the entit#?
% G he !ur!ose of the su((ar# financial state(ents?
ISA 810 810
% G he infor(ation needs of the intended users of the su((ar# financial state(ents? and
% G Lhether the a!!lied criteria will result in su((ar# financial state(ents that are not
(isleadin) in the circu(stances'
A5' he criteria for the !re!aration of su((ar# financial state(ents (a# "e esta"lished "# an
authoriJed or reco)niJed standards settin) or)aniJation or "# law or re)ulation' Si(ilar to the case
of financial state(ents, as e,!lained in ISA 410,
8
in (an# such cases, the auditor (a# !resu(e
that such criteria are acce!ta"le'
AB' Lhere esta"lished criteria for the !re!aration of su((ar# financial state(ents do not e,ist,
criteria (a# "e develo!ed "# (ana)e(ent, for e,a(!le, "ased on !ractice in a !articular industr#'
%riteria that are acce!ta"le in the circu(stances will result in su((ar# financial state(ents that.
1$a&Ade*uatel# disclose their su((ariJed nature and identif# the audited financial state(ents?
2$"& %learl# descri"e fro( who( or where the audited financial state(ents are availa"le or, if law or
re)ulation !rovides that the audited financial state(ents need not "e (ade availa"le to the
intended users of the su((ar# financial state(ents and esta"lishes the criteria for the !re!aration
of the su((ar# financial state(ents, that law or re)ulation?
3$c&Ade*uatel# disclose the a!!lied criteria?
4$d& A)ree with or can "e recalculated fro( the related infor(ation in the audited financial state(ents?
and
5$e&In view of the !ur!ose of the su((ar# financial state(ents, contain the infor(ation necessar#,
and are at an a!!ro!riate level of a))re)ation, so as not to "e (isleadin) in the circu(stances'
A7' Ade*uate disclosure of the su((ariJed nature of the su((ar# financial state(ents and the
identit# of the audited financial state(ents, as referred to in !ara)ra!h AB$a&, (a#, for e,a(!le, "e
!rovided "# a title such as CSu((ar# Financial State(ents 6re!ared fro( the Audited Financial
State(ents for the Year 0nded =ece("er 91, 40I1'D
E9!0-!ti"( the A9!i0!$i0it/ of the A-#ite# Fi"!"ci!0 St!te.e"t $Aef. 6ara' 8$)&&
A8' he auditor+s evaluation whether the audited financial state(ents are availa"le to the intended
users of the su((ar# financial state(ents without undue difficult# is affected "# factors such as
whether.
ISA 410, CA)reein) the er(s of Audit 0n)a)e(ents,D !ara)ra!hs A9 and A8-A5'
811 ISA 810
1. G he su((ar# financial state(ents descri"e clearl# fro( who( or where the audited
financial state(ents are availa"le?
2. G he audited financial state(ents are on !u"lic record? or
3. G Eana)e(ent has esta"lished a !rocess "# which the intended users of the su((ar#
financial state(ents can o"tain read# access to the audited financial state(ents'
Fo'. of Opi"io" $Aef. 6ara' 5&
A5' A conclusion, "ased on an evaluation of the evidence o"tained "# !erfor(in) the !rocedures in
!ara)ra!h 8, that an un(odified o!inion on the su((ar# financial state(ents is a!!ro!riate
ena"les the auditor to e,!ress an o!inion containin) one of the !hrases in !ara)ra!h 5' he
auditor+s decision as to which of the !hrases to use (a# "e affected "# )enerall# acce!ted !ractice
in the !articular ;urisdiction'
Ti.i"( of =o'% !"# E9e"t S-$e2-e"t to the D!te of the A-#ito'> Repo't o" the A-#ite#
Fi"!"ci!0 St!te.e"t $Aef. 6ara' 14&
A10' he !rocedures descri"ed in !ara)ra!h 8 are often !erfor(ed durin) or i((ediatel# after the audit
of the financial state(ents' Lhen the auditor re!orts on the su((ar# financial state(ents after the
co(!letion of the audit of the financial state(ents, the auditor is not re*uired to o"tain additional
audit evidence on the audited financial state(ents, or re!ort on the effects of events that occurred
su"se*uent to the date of the auditor+s re!ort on the audited financial state(ents since the
su((ar# financial state(ents are derived fro( the audited financial state(ents and do not u!date
the('
A-#ito'> Repo't o" S-..!'/ Fi"!"ci!0 St!te.e"t
/le$ents of the Auditor8s +eport
itle $Aef. 6ara' 14$a&&
A11' A title indicatin) the re!ort is the re!ort of an inde!endent auditor, for e,a(!le, CAe!ort of the
Inde!endent Auditor,D affir(s that the auditor has (et all of the relevant ethical re*uire(ents
re)ardin) inde!endence' his distin)uishes the re!ort of the inde!endent auditor fro( re!orts
issued "# others'
Addressee $Aef. 6ara' 14$"&, 15&
A14' Factors that (a# affect the auditor+s evaluation of the a!!ro!riateness of the addressee of the
su((ar# financial state(ents include the ter(s of the en)a)e(ent, the nature of the entit#, and
the !ur!ose of the su((ar# financial state(ents'
ISA 810 814
Introductor# 6ara)ra!h $Aef. 6ara' 14$c&$i&&
A19' Lhen the auditor is aware that the su((ar# financial state(ents will "e included in a docu(ent
that contains other infor(ation, the auditor (a# consider, if the for( of !resentation allows,
identif#in) the !a)e nu("ers on which the su((ar# financial state(ents are !resented' his hel!s
readers to identif# the su((ar# financial state(ents to which the auditor+s re!ort relates'
=ate of the Auditor+s Ae!ort $Aef. 6ara' 14$h&, 1B&
A14' he !erson or !ersons with reco)niJed authorit# to conclude that the su((ar# financial
state(ents have "een !re!ared and take res!onsi"ilit# for the( de!end on the ter(s of the
en)a)e(ent, the nature of the entit#, and the !ur!ose of the su((ar# financial state(ents'
Illustrations $Aef. 6ara'14' 17-18, 15&
A15' he A!!endi, to this ISA contains illustrations of auditors+ re!orts on su((ar# financial
state(ents that.
1. $a& %ontain un(odified o!inions?
2. $"& Are derived fro( audited financial state(ents on which the auditor issued (odified o!inions?
and
3. $c& %ontain a (odified o!inion'
Co.p!'!ti9e $Aef. 6ara' 41-44&
A1B' If the audited financial state(ents contain co(!aratives, there is a !resu(!tion that the su((ar#
financial state(ents also would contain co(!aratives' %o(!aratives in the audited financial
state(ents (a# "e re)arded as corres!ondin) fi)ures or as co(!arative financial infor(ation' ISA
710 descri"es how this difference affects the auditor+s re!ort on the financial state(ents,
includin), in !articular, reference to other auditors who audited the financial state(ents for the
!rior !eriod'
A17' %ircu(stances that (a# affect the auditor+s deter(ination whether an o(ission of co(!aratives is
reasona"le include the nature and o";ective of the su((ar# financial state(ents, the a!!lied
criteria, and the infor(ation needs of the intended users of the su((ar# financial state(ents'
U"!-#ite# S-pp0e.e"t!'/ I"fo'.!tio" *'ee"te# &ith S-..!'/ Fi"!"ci!0 St!te.e"t $Aef.
6ara' 49&
A18' ISA 700
5
contains re*uire(ents and )uidance to "e a!!lied when unaudited su!!le(entar#
infor(ation is !resented with audited financial state(ents that,
ISA 700, CFor(in) an 7!inion and Ae!ortin) on Financial State(ents,D !ara)ra!hs 4B-47'
819 ISA 810
ada!ted as necessar# in the circu(stances, (a# "e hel!ful in a!!l#in) the re*uire(ent in
!ara)ra!h 49'
Othe' I"fo'.!tio" i" Doc-.e"t Co"t!i"i"( S-..!'/ Fi"!"ci!0 St!te.e"t
$Aef. 6ara' 44&
A15' ISA 740
10
contains re*uire(ents and )uidance relatin) to readin) other infor(ation included in a
docu(ent containin) the audited financial state(ents and related auditor+s re!ort, and res!ondin)
to (aterial inconsistencies and (aterial (isstate(ents of fact' Ada!ted as necessar# in the
circu(stances, the# (a# "e hel!ful in a!!l#in) the re*uire(ent in !ara)ra!h 44'
A-#ito' Aoci!tio" $Aef. 6ara' 45-4B&
A40' 7ther a!!ro!riate actions the auditor (a# take when (ana)e(ent does not take the re*uested
action (a# include infor(in) the intended users and other known third-!art# users of the
ina!!ro!riate reference to the auditor' he auditor+s course of action de!ends on the auditor+s le)al
ri)hts and o"li)ations' %onse*uentl#, the auditor (a# consider it a!!ro!riate to seek le)al advice'
State(ents'D
ISA 810 814
Appe"#i5
$Aef. 6ara' A15&
I00-t'!tio" of Repo't o" S-..!'/ Fi"!"ci!0 St!te.e"t
% G Illustration 1. An auditor+s re!ort on su((ar# financial state(ents !re!ared in
accordance with esta"lished criteria' An un(odified o!inion is e,!ressed on the audited financial
state(ents' he auditor+s re!ort on the su((ar# financial state(ents is dated later than the date of
the auditor+s re!ort on the financial state(ents fro( which su((ar# financial state(ents are
derived'
accordance with criteria develo!ed "# (ana)e(ent and ade*uatel# disclosed in the su((ar#
financial state(ents' he auditor has deter(ined that the a!!lied criteria are acce!ta"le in the
circu(stances' An un(odified o!inion is e,!ressed on the audited financial state(ents'
circu(stances' A *ualified o!inion is e,!ressed on the audited financial state(ents'
circu(stances' An adverse o!inion is e,!ressed on the audited financial state(ents'
accordance with esta"lished criteria' An un(odified o!inion is e,!ressed on the audited financial
state(ents' he auditor concludes that it is not !ossi"le to e,!ress an un(odified o!inion on the
su((ar# financial state(ents'
815 ISA 810 A660N=II
I00-t'!tio" 7G
% G A" -".o#ifie# opi"io" i e5p'ee# o" the !-#ite# fi"!"ci!0 t!te.e"tJ
% G Et!$0ihe# c'ite'i! fo' the p'ep!'!tio" of -..!'/ fi"!"ci!0 t!te.e"t e5itJ
% G The !-#ito'> 'epo't o" the -..!'/ fi"!"ci!0 t!te.e"t i #!te# 0!te' th!" the
#!te of the !-#ito'> 'epo't o" the fi"!"ci!0 t!te.e"t f'o. &hich the -..!'/ fi"!"ci!0
t!te.e"t !'e #e'i9e#J
A067A 7F @0 IN=060N=0N AU=I7A 7N @0 SUEEAAY FINAN%IAM
SA0E0NS
he acco(!an#in) su((ar# financial state(ents, which co(!rise the su((ar# "alance sheet as at
=ece("er 91, 40I1, the su((ar# inco(e state(ent, su((ar# state(ent of chan)es in e*uit# and
su((ar# cash flow state(ent for the #ear then ended, and related notes, are derived fro( the audited
financial state(ents of A1% %o(!an# for the #ear ended =ece("er 91, 40I1' Le e,!ressed an
un(odified audit o!inion on those financial state(ents in our re!ort dated Fe"ruar# 15, 40I4' hose
financial state(ents, and the su((ar# financial state(ents, do not reflect the effects of events that occurred
su"se*uent to the date of our re!ort on those financial state(ents'
he su((ar# financial state(ents do not contain all the disclosures re*uired "# Udescri"e financial
re!ortin) fra(ework a!!lied in the !re!aration of the audited financial state(ents of A1% %o(!an#V'
Aeadin) the su((ar# financial state(ents, therefore, is not a su"stitute for readin) the audited financial
state(ents of A1% %o(!an#'
)!"!(e.e"t>
11
Repo"i$i0it/ fo' the S-..!'/ Fi"!"ci!0 St!te.e"t
Eana)e(ent is res!onsi"le for the !re!aration of a su((ar# of the audited financial state(ents in
accordance with Udescri"e esta"lished criteriaV'
7ur res!onsi"ilit# is to e,!ress an o!inion on the su((ar# financial state(ents "ased on our !rocedures,
which were conducted in accordance with International Standard on Auditin) $ISA& 810, C0n)a)e(ents to
Ae!ort on Su((ar# Financial State(ents'D
Opi"io"
In our o!inion, the su((ar# financial state(ents derived fro( the audited financial state(ents of A1%
%o(!an# for the #ear ended =ece("er 91, 40I1 are consistent,
11
in all (aterial res!ects, with $or a fair su$$ary of& those financial state(ents, in
UAuditor+s addressV
817 ISA 810 A660N=II
I00-t'!tio" 2G
% G A" -".o#ifie# opi"io" i e5p'ee# o" the !-#ite# fi"!"ci!0 t!te.e"tJ
% G C'ite'i! !'e #e9e0ope# $/ .!"!(e.e"t !"# !#e2-!te0/ #ic0oe# i" Note
FJ The !-#ito' h! #ete'.i"e# th!t the c'ite'i! !'e !ccept!$0e i" the ci'c-.t!"ceJ
SA0E0NS
un(odified audit o!inion on those financial state(ents in our re!ort dated Fe"ruar# 15, 40I4'
14
)!"!(e.e"t>
19
Eana)e(ent is res!onsi"le for the !re!aration of a su((ar# of the audited financial state(ents on the
"asis descri"ed in Note I'
Opi"io"
14
Lhen the auditor+s re!ort on the su((ar# financial state(ents is dated later than the date of the
auditor+s re!ort on the audited financial state(ents fro( which it is derived, the followin) sentence
is added to this !ara)ra!h. Chose financial state(ents, and the su((ar# financial state(ents, do
not reflect the effects of events that occurred su"se*uent to the date of our re!ort on those financial
state(ents'D 19
ISA 810 A660N=II 818
in all (aterial res!ects, with $or a fair su$$ary of& those financial state(ents, on the
UAuditor+s addressV
815 ISA 810 A660N=II
I00-t'!tio" 3G
1. G A 2-!0ifie# opi"io" i e5p'ee# o" the !-#ite# fi"!"ci!0 t!te.e"tJ
2. G C'ite'i! !'e #e9e0ope# $/ .!"!(e.e"t !"# !#e2-!te0/ #ic0oe# i" Note
SA0E0NS
financial state(ents of A1% %o(!an# for the #ear ended =ece("er 91, 40I1'
14
Le e,!ressed a *ualified
audit o!inion on those financial state(ents in our re!ort dated Fe"ruar# 15, 40I4 $see "elow&'
)!"!(e.e"t>
15
Opi"io"
14
state(ents'D 15
ISA 810 A660N=II 840
in all (aterial res!ects, with $or a fair su$$ary of& those financial state(ents, on the "asis descri"ed in
Note I' @owever, the su((ar# financial state(ents are (isstated to the e*uivalent e,tent as the audited
he (isstate(ent of the audited financial state(ents is descri"ed in our *ualified audit o!inion in our
re!ort dated Fe"ruar# 15, 40I4' 7ur *ualified audit o!inion is "ased on the fact that the co(!an#+s
inventories are carried in the "alance sheet in those financial state(ents at ,,,' Eana)e(ent has not stated
the inventories at the lower of cost and net realiJa"le value "ut has stated the( solel# at cost, which
constitutes a de!arture fro( International Financial Ae!ortin) Standards' he co(!an#+s records indicate
that had (ana)e(ent stated the inventories at the lower of cost and net realiJa"le value, an a(ount of ,,,
would have "een re*uired to write the inventories down to their net realiJa"le value' Accordin)l#, cost of
sales would have "een increased "# ,,,, and inco(e ta,, net inco(e and shareholders+ e*uit# would have
"een reduced "# ,,,, ,,, and ,,,, res!ectivel#' 7ur *ualified audit o!inion states that, e,ce!t for the
effects of the descri"ed (atter, those financial state(ents !resent fairl#, in all (aterial res!ects, $or gi!e a
true and fair !ie# of& the financial !osition of A1% %o(!an# as at =ece("er 91, 40I1, and $of& its
financial !erfor(ance and its cash flows for the #ear then ended in accordance with International Financial
UAuditor+s addressV
841 ISA 810 A660N=II
I00-t'!tio" 6G
1. G A" !#9e'e opi"io" i e5p'ee# o" the !-#ite# fi"!"ci!0 t!te.e"tJ
2. G C'ite'i! !'e #e9e0ope# $/ .!"!(e.e"t !"# !#e2-!te0/ #ic0oe# i" Note
SA0E0NS
1B
)!"!(e.e"t>
17
De"i!0 of Opi"io"
In our re!ort dated Fe"ruar# 15, 40I4, we e,!ressed an adverse audit o!inion on the financial state(ents
of A1% %o(!an# for the #ear ended =ece("er 91, 40I1' he "asis for our adverse audit o!inion was
Udescri"e "asis for adverse audit o!inionV' 7ur adverse audit o!inion stated that Udescri"e adverse audit
o!inionV'
1B
state(ents'D 17
ISA 810 A660N=II 844
1ecause of the si)nificance of the (atter discussed a"ove, it is ina!!ro!riate to e,!ress an o!inion on the
su((ar# financial state(ents of A1% %o(!an# for the #ear ended =ece("er 91, 40I1'
UAuditor+s addressV
849 ISA 810 A660N=II
I00-t'!tio" @G
1. G A" -".o#ifie# opi"io" i e5p'ee# o" the !-#ite# fi"!"ci!0 t!te.e"tJ
2. G Et!$0ihe# c'ite'i! fo' the p'ep!'!tio" of -..!'/ fi"!"ci!0 t!te.e"t e5itJ
3. G The !-#ito' co"c0-#e th!t it i "ot poi$0e to e5p'e !" -".o#ifie# opi"io" o" the
-..!'/ fi"!"ci!0 t!te.e"tJ
SA0E0NS
un(odified audit o!inion on those financial state(ents in our re!ort dated Fe"ruar# 15, 40I4'
18
)!"!(e.e"t>
15
Repo"i$i0it/ fo' the S-..!'/ A-#ite# Fi"!"ci!0 St!te.e"t
Eana)e(ent is res!onsi"le for the !re!aration of a su((ar# of the audited financial state(ents in
B!i fo' A#9e'e Opi"io"
U=escri"e (atter that caused the su((ar# financial state(ents not to "e consistent,
18
state(ents'D 15
ISA 810 A660N=II 844
in all (aterial res!ects, with $or a fair su$$ary of& the audited financial state(ents, in accordance with the
a!!lied criteria'V
A#9e'e Opi"io"
In our o!inion, "ecause of the si)nificance of the (atter discussed in the 1asis for Adverse 7!inion
!ara)ra!h, the su((ar# financial state(ents referred to a"ove are not consistent with $or a fair su$$ary
of& the audited financial state(ents of A1% %o(!an# for the #ear ended =ece("er 91, 40I1, in
UAuditor+s addressV
845 ISA 810 A660N=II

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