An Auditor

1
An Auditors Services Principles of Auditing An
Introduction to International Standards on
Auditing - Ch 4

• Rick Stephan Hayes,
• Roger Dassen, Arnold Schilder,
• Philip Wallage

2
IAASBs Engagement Standards

• Some engagement standards are based on
  International Framework for Assurance
  Engagements (assurance engagements), and others
  result from the Related Services Framework
  (related services engagements).
• Three sets of standards (ISAs, ISREs and ISAEs)
  share the assurance engagement framework and one
  standard set (ISRS) is based on the related
  services framework.
• ISAs, ISREs, ISAEs and ISRSs are collectively
  referred to as the IAASBs Engagement Standards.

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Illustration 4.1
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Reasonable and Limited Assurance Engagements (not
in text)

• Reasonable assurance engagement and limited
  assurance engagement distinguish between the two
  types of assurance engagement
• The objective of a reasonable assurance
  engagement is a reduction in assurance engagement
  risk to an acceptably low level as the basis for
  a positive form of expression of the
  practitioners conclusion. E.g, presents fairly
  in all material respects
• The objective of a limited assurance engagement
  is a reduction in assurance engagement risk to a
  level that is acceptable in the circumstances, as
  the basis for a negative form of expression of
  the practitioners conclusion. E.g., nothing has
  come to our attention that causes us to believe
  that financial statements do not conform, in all
  material respects, with IFRS.

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Besides the International Framework for Assurance
Engagements, ISAs, ISREs and ISAEs,
practitioners who perform assurance engagements
are governed by (not in text)

• The IFAC Code of Ethics for Professional
  Accountants
• International Standards on Quality Control (ISQCs)

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Assurance Engagements for Audits and Reviews for
Historical Financial Information (ISAs / ISREs)

• Historical Financial Standards are divided into
  those governed by International Standards on
  Auditing (ISAs) and International Standards on
  Review Engagements (ISREs)
• Audit standards are described in ISA 200-799.
  Special Purpose Engagement and other examinations
  of historical financial information is ISA 800
  899 (except reporting which is ISA 701).
• Review standards are ISREs 2000 2699

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Assurance Engagements on Subject Matters Other
than Historical Financial Information (ISAEs)

• The ISAE standards are divided into two parts
• (1) ISAEs 3000 3399 which are topics that
  apply to all assurance engagements
• (2) ISAEs 3400 3699 which are subject specific
  standards, for example standards relating to
  examination of prospective financial information,

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Not all engagements performed by practitioners
are assurance engagements

• Frequently performed engagements that are not
  covered by the Assurance Framework are
• Engagements covered by International Standards
  for Related Services (ISRS), such as agreed-upon
  procedures and compilations.
• The preparation of tax returns where no
  conclusion conveying assurance is expressed.
• Consulting (or advisory) engagements, such as
  management and tax consulting.

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Related Services Framework (ISRSs)

• Standards under this framework, International
  Standards on Related Services (ISRSs), are
  applied currently to two audit services
• Agreed-upon procedures (ISRS 4400) Agreed-upon
  procedures are assurance based on audit
  procedures in a very limited agreed upon area
  with a proscribed set of users.
• Compilations (ISRS 4410 ). Compilations offer no
  assurance whatsoever.

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Assurance Engagements Defined

• Assurance engagement means an engagement in which
  a practitioner (professional accountant or
  auditor), expresses a conclusion (in report form)
  that is designed to enhance the degree of
  confidence users have about the evaluation of a
  subject matter against identified criteria.

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five elements that all assurance engagements
exhibit

• a three party relationship involving a
  practitioner a responsible party and the
  intended users,
• a subject matter,
• suitable criteria,
• evidence
• an assurance
• report.

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Illustration 4.2
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Three Party Relationship

• The practitioner (e.g., auditor, accountant,
  expert) gathers evidence to provide a conclusion
  to the intended users about whether a subject
  matter (e.g., financial statements) conforms, in
  all material respects, with identified criteria.
• The responsible party (usually management or the
  board of directors) is one who is responsible for
  the subject matter and is not the intended user.
  
• The intended users are generally the addressee of
  the assurance report.

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Illustration 4.3
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Subject Matter

• The assurance engagement evaluates whether the
  subject matter conforms to suitable criteria that
  will meet the needs of an intended user.
• A subject matter of an assurance is the topic
  about which the assurance is conducted.
• Subject matter could be information such as
  financial statements, statistical information,
  non-financial performance indicators, capacity of
  a facility, etc.
• The subject matter could also be systems and
  processes (e.g., internal controls, IT systems)
  or behavior (e.g., corporate governance,
  compliance with regulation, human resource
  practices).

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Suitable Criteria

• Suitable criteria are the benchmarks (standards,
  objectives or set of rules) used to evaluate
  evidence or measure the subject matter of an
  assurance engagement.
• International Financial Reporting Standards
• U.S. Generally Accepted Accounting Principles
• national standards
• Global Reporting Initiative
• PCAOB internal control report criteria
• Applicable law, regulation or contract
• An agreed level of performance

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Characteristics of Suitable Criteria

• (a) Relevance
• (b) Completeness
• (c) Reliability
• (d) Neutrality
• (e) Understandability

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Assurance Report

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

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Assurance Report Basic Elements

• A title
• An addressee
• A description of the subject matter.
• A statement restricting the use of the assurance
  report
• identification the responsible party
• Statement - performed in accordance with ISAEs.
• A summary of the work undertaken
• Identification of the criteria
• The practitioners conclusion
• The assurance report date.
• The name and location of the firm or the
  practitioner

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Engagements to Review Financial Statements (ISRE
2400)

• Where reviews of financial statements differ most
  from a financial statement audit is in the
  limited procedures performed (limited in inquiry
  of management and analytical procedures) and the
  review report. Reviews are limited assurance
  engagements.

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ISRE 2400 Objective of Review (not in text)

• The objective of a review of financial statements
  is to enable an auditor to state whether, on the
  basis of procedures which do not provide all the
  evidence that would be required in an audit,
  anything has come to the auditors attention that
  causes the auditor to believe that the financial
  statements are not prepared, in all material
  respects, in accordance with the applicable
  financial reporting framework (negative
  assurance).

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

• The objective of a review of interim financial
  information differs significantly from that of an
  audit in accordance with ISAs. A review of
  interim financial information does not provide a
  basis for expressing an opinion.
• A review may bring significant matters affecting
  the interim financial information to the
  auditors attention, but it does not provide all
  of the evidence that would be required in an
  audit.

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Review Limited Audit Procedures

• Inquiry consists of seeking information of
  knowledgeable persons inside or outside the
  entity.
• Analytical procedures consist of the analysis of
  significant ratios and trends including the
  resulting investigation of fluctuations and
  relationships that are inconsistent with other
  relevant information or deviate from predictable
  amounts.
• Inspection consists of examining records,
  documents, or tangible assets, is carried out on
  a limited basis.

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Review Review of Financial Statements Conclusion

• The review report should contain a clear written
  expression of negative assurance. The auditor
  should assess whether anything has come to the
  auditors attention based on the review that
  causes the auditor to believe the financial
  statements do not give a true and fair view (or
  are not presented fairly, in all material
  respects,) in accordance with the identified
  financial reporting framework.

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SPECIAL PURPOSE ENGAGEMENTSNew terms from ISA
701 replace the old ISA 800 terms Not in text

• The auditor refers to ISA 701 when expressing an
  opinion on
• A complete set of financial statements prepared
  in accordance with a financial reporting
  framework designed for a general purpose, but not
  designed to achieve fair presentation
• (b) A complete set of financial statements
  prepared in accordance with a financial reporting
  framework designed for a special purpose (1)
  Other comprehensive basis of accounting and (2)
  Reports on compliance with contractual
  agreements such as
• That used by an entity to prepare its income tax
  return.
• The cash receipts and disbursements basis of
  accounting.
• The financial reporting provisions of a
  government regulatory agency
• (c) A single financial statement, or statements,
  that would otherwise be part of a complete set of
  financial statements and
• (d) One or more specific elements, accounts or
  items of a financial statement component
  financial statements.

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

• For example, for a balance sheet prepared to
  establish the value of net assets of an entity at
  the date of its sale, the seller and the
  purchaser may have agreed that estimates of
  allowances for uncollectible accounts receivable
  are to be made. This may result in preparing
  financial information that is not neutral (as
  required in paragraph 36(d) of the ISA 200
  Framework), but it may nevertheless be acceptable
  in the circumstances.

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A financial reporting framework designed for a
special purpose Other Comprehensive Basis of
Accounting (OCBA) and Reports on compliance with
contractual agreements

• That used by an entity to prepare its income tax
  return.
• The cash receipts and disbursements basis of
  accounting.
• The financial reporting provisions of a
  government regulatory agency.
• The financial reporting provisions of a contract

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? One or more specific elements, accounts or
items of a financial statement Reports on a
Component of Financial Statements ?

• The auditor may be requested to express an
  opinion on one or more components of financial
  statements, for example, accounts receivable,
  inventory, an employees bonus calculation or a
  provision for income taxes.
• This type of engagement does not result in a
  report on the financial statements taken as a
  whole and, accordingly, the auditor would express
  an opinion only as to whether that specific
  component audited is prepared in accordance with
  the accounting standards.

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Summarized Financial Statements

• ISA 701 does not discuss reports expressing an
  opinion on summary historical financial
  information which has been derived from
  historical financial information. Standards and
  guidance for auditors reports on summary audited
  financial statements are contained in proposed
  ISA 800, The Independent Auditors Report on
  Summary Audited Financial Statements.

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? Reports on Summarized Financial Statements ?

• Some financial statement users may only be
  interested in the highlights of a companys
  financial position.
• The auditor expresses an opinion whether the
  summary financial statements are an appropriate
  summary of the financial statements from which
  they have been derived in accordance with the
  applied criteria.
• The report must caution the reader that
  summarized financial statements should be read in
  conjunction with the companys most recent
  audited financial statements.

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Assurance Engagements on Other than Historical
Financial Information

• Subject specific standards fall into four subject
  matter groups
• Prospective financial statements
• Subject mater related to non-financial
  information
• Subject matter related to systems and processes
  (e.g., corporate governance, environmental
  systems, and internal control (SOx SEC 404)
• Subject matter about behavior.

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Examples of existing standards that may be
considered in systems and processes,
non-financial information or behavior assurance
engagements are

• Sarbanes Oxley Section 404 internal control audit
  standard
• Global Reporting Initiative (GRI) Sustainability
  Reporting Guidelines.
• SA8000 standards for social accountability
  towards employees,
• International Labour Organization (ILO)
  conventions for social accountability towards
  employees,
• World Business Council for Sustainable
  Development (WBCSD) social and eco-efficiency
  indicators,
• European Union Eco-management and Audit scheme
  (EMAS) standard for environmental management
  systems, and
• ISO14001 standard for environmental management
  systems.

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The Examination of Prospective Financial
Information (ISAE 3400)

• Prospective financial information means
  financial information based on assumptions about
  events that may occur in the future. Prospective
  financial information can be in the form of a
  forecast, a projection or a combination of both.
• A forecast is prospective financial information
  prepared on the basis of managements assumptions
  as to future events (best-estimate assumptions).
• A projection means prospective financial
  information prepared on the basis of hypothetical
  assumptions about future events and management
  actions which may or may not take place, such as
  a possible merger of two companies.

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Internal Control Reporting and SOX 404 reporting

• A company must issue an internal control report
  containing these statements
• Management's responsibility for establishing and
  maintaining adequate internal control
• The framework used by management to evaluate the
  effectiveness of internal control over financial
  reporting
• Management's assessment of the effectiveness of
  the company's internal control over financial
  reporting
• The report is reviewed by an external auditor.

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Auditor Standards for Internal Control Reports

• Section 103 of the Sarbanes-Oxley require that
  public accounting firms describe in the audit
  report the scope of its testing of the company's
  internal control structure and procedures
  performed in its internal control evaluation
  under SOx Section 404(b).
• In the audit report, the registered public
  accounting firm also must describe, at a minimum,
  material weaknesses in company internal controls
  and any material noncompliance found.

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PCAOB Auditing Standard No. 4, Reporting on
Whether a Previously Reported Material Weakness
Continues to Exist (not in text)

• Establishes requirements that apply when an
  auditor is engaged to report on whether a
  previously reported material weakness in internal
  control over financial reporting continues to
  exist
• Such an engagement is voluntary in nature at the
  election of management, and may be performed as
  of any reasonable date selected by management.

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Sustainability Reporting Triple Bottom Line
Assurances

• Economic Sustainability An organizations impacts
  on the economic circumstances of its stakeholders
  and on economic systems at the local, national
  and global levels.
• Environmental Sustainability An organizations
  impacts on living and non-living natural
  systems, including ecosystems, land, air and
  water.
• Social Sustainability An organizations impacts
  on the social systems within which it operates.
• Impacts on stakeholders at the local, national,
  and global levels.
• The organizations intangible assets, such as its
  human capital and reputation.

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The report under the GRI Guidelines has 5 sections

1. Vision and Strategy a description of the
   reporting organizations strategy with regard to
   sustainability, including a statement from the
   CEO.
2. Profile overview of the reporting
   organizations structure and operations and of
   the scope of the report.
3. Governance Structure and Management Systems
   description of organizational structure,
   policies, and management systems, including
   stakeholder engagement efforts.
4. GRI Content Index a table supplied by the
   reporting organization identifying where the
   information listed.
5. Performance Indicators measures of the impact
   or effect of the reporting organization divided
   into integrated, economic, environmental, and
   social performance indicators.

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Related Services International Standards on
Related Services (ISRS)

• Engagements covered by International Standards
  for Related Services, including
• Agreed-upon procedures.(ISRS 4400)
• Compilation of financial or other information.
  (ISRS 4410)

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Engagements to Perform Agreed-Upon Procedures
Regarding Financial Information (ISRS 4400)

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

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Matters to be agreed between auditor and
management include the

• nature of the engagement including the fact that
  no assurance will be expressed on the procedures
  performed
• identification of the financial information to
  which the agreed-upon procedures will be applied
• nature, timing, and extent of the specific
  procedures to be applied.

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Audit Procedures Agreed

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

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Engagements to Compile Financial Information
(ISRS 4410)

• The objective of a compilation engagement is for
  the accountant to use accounting expertise, as
  opposed to auditing expertise, to collect,
  classify and summarize financial information.
  This ordinarily entails reducing detailed data to
  a manageable and understandable form without a
  requirement to test the assertions underlying
  that information.

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The accountant is not ordinarily required to

• Make any inquiries of management to assess the
  reliability and completeness of the information
  provided
• Assess internal controls
• Verify any matters or
• Verify any explanations.

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Thank You for Your Attention

• Any Questions?