Acfn 723: Advanced Auditing

Addis Ababa University

College of Business and Economics
Department of Accounting & Finance

• Module Title: Advanced Auditing

• Module Code: ACFN 723
• Credit Value: 2 Cr hours [4.5 ECTS]
• Instructor: Dr. P. Laxmikantham

ACFN 723: Advanced Auditing/PLK - 2019

Chapter 1

An Introduction to Auditing

ACFN 723: Advanced Auditing/PLK - 2019

Introduction

- An Overview on:

•The demand for auditing and assurance

•The International Federation of Accountants’ role
•International Financial Reporting Standards [IFRS] of 2017
•International Financial Reporting Standards [IFRS] for Small and Medium
Enterprises [SMEs] of 2017
•International Standards on Auditing [ISA] of the IAASB of 2018
•ISA in the audit of small and medium sized entities [SMEs] – Core concepts

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Introduction

•Financial Reporting Proclamation 847/2014 and Regulation 332/2014

•International Quality Control, Auditing, Review, Pronouncements of 2015

•Code of Ethics for Professional Accountants of the IFAC of 2018

•Ethiopian Code of Ethics for Professional Accountants issued by the Office of

Federal Auditor General of FGE

•Code of Conduct or Code of Professional Ethics issued by EPAAA

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Introduction

•Standards of the Public Company Accounting Oversight Board [PCAOB]

•Proclamation and Publications of the Federal Ethics and Anti-Corruption

Commission of Ethiopia

•Commercial Code of Ethiopia Art 368 – 381 & 538

•External audit reports of share companies, particularly banks & insurance in

Ethiopia

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The Study of Auditing
The study of auditing is different from other
accounting courses that you have taken because …

OTHER COURSES AUDITING

Rules, Analytical and

techniques and logical skills
computations to
prepare and Much more
analyse financial conceptual in
information nature

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The Demand for Auditing and
Assurance

The development of the corporate form

of business and the expanding world
economy over the last 200 years have
given rise to an explosion in the
demand for assurance provided by
auditors.

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Summary of Management Assertions by
Category (1 of 4)

Assertions about classes of transactions and events,

and related disclosures, for the period under audit:
Occurrence - Transactions and events that have been
recorded or disclosed have occurred, and such transactions
and events pertain to the entity.
Completeness - All transactions and events that should have
been recorded have been recorded, and all related disclosures
that should have been included in the financial statements
have been included.
Authorization – All transactions and events have been
properly authorized.
Accuracy - Amounts and other data relating to recorded
transactions and events have been recorded appropriately,
and related disclosures have been appropriately measured and
described.
ACFN 723: Advanced Auditing/PLK - 2019
Summary of Management Assertions by
Category (2 of 4)

Assertions about classes of transactions and

events, and related disclosures, for the period
under audit:

Cutoff: Transactions and events have been recorded in

the correct accounting period.
Classification: Transactions and events have been
recorded in the proper accounts.
Presentation: Transactions and events are
appropriately aggregated or disaggregated and clearly
described, and related disclosures are relevant and
understandable in the context of the requirements of the
applicable financial reporting framework.

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Summary of Management Assertions by
Category (3 of 4)

Assertions about account balances, and related

disclosures, at the period end:
Existence - assets, liabilities, and equity interests exist.
Rights and obligations - the entity holds or controls the
rights to assets, and liabilities are the obligations of the entity.
Completeness - All assets, liabilities, and equity interests that
should have been recorded have been recorded, and all related
disclosures that should have been included in the financial
statements have been included.
Valuation and allocation - assets, liabilities, and equity
interests are included in the financial statements at appropriate
amounts and any resulting valuation or allocation adjustments
are appropriately recorded.

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Summary of Management Assertions by
Category (4 of 4)

Assertions about account balances, and related

disclosures, at the period end:
Accuracy, valuation and allocation: Assets, liabilities, and
equity interests have been included in the financial statements
at appropriate amounts, and any resulting valuation or
allocation adjustments have been appropriately recorded, and
related disclosures have been appropriately measured and
described.
Classification: Assets, liabilities, and equity interests have
been recorded in the proper accounts.
Presentation: Assets, liabilities, and equity interests are
appropriately aggregated or disaggregated and clearly
described, and related disclosures are relevant and
understandable in the context of the requirements of the
applicable financial reporting framework.
ACFN 723: Advanced Auditing/PLK - 2019
Relationships among
Auditing, Attest, and Assurance Services

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Auditing, Attest, and Assurance Services Defined
(1 of 2)

Audit Services
• A systematic process of objectively obtaining and
evaluating evidence regarding assertions about
economic actions and events to ascertain the degree
of correspondence between those assertions and
established criteria and communicating the results to
interested users.
Attest Services
• Attest services occur when a practitioner is engaged to
issue ... a report on subject matter, or an assertion
about subject matter, that is the responsibility of
another party.

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Auditing, Attest, and Assurance Services Defined
(2 of 2)

Assurance Services
• Independent professional services
that improve the quality of
information, or its context, for
decision makers.

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Overview of the Financial Statement Audit
Process

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Issue the Audit Report

The auditor’s report is the main product

or output of the audit.
The audit report with an unmodified
(‘clean’) opinion is the most common
type of report issued.

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Issue the Audit Report
The Auditor’s Standard Report with an Unmodified Opinion

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Issue the Audit Report

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Issue the Audit Report
The title line of the audit report includes the word
‘Independent’, and usually, the report is
addressed to the stockholders of the company.
The audit report includes an introductory
paragraph, a management’s responsibility
paragraph, an auditor’s responsibility
paragraph, and an auditor’s opinion paragraph.
The audit report is signed and dated.

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Issue the Audit Report

The auditor may issue a modified opinion.

Suppose an auditee’s financial statements
contain a misstatement that the auditor
considers material and the client refuses to
correct the misstatement. The auditor will
likely qualify the opinion, explaining that the
financial statements are fairly stated except for
the misstatement identified by the auditor.

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Issue the Audit Report

The auditor may issue an adverse opinion.

Suppose a client’s financial statements contain a
material misstatement and the auditor
considers the significance of the effect on the
financial statements of the material
misstatement pervasive. Given such a
situation, the auditor will issue an adverse
opinion, indicating that the financial
statements are not fairly stated and should not
be relied upon.
ACFN 723: Advanced Auditing/PLK - 2019
Acfn 723: Advanced Auditing

Addis Ababa University

College of Business and Economics
Department of Accounting & Finance

• Module Title: Advanced Auditing

• Module Code: ACFN 723
• Credit Value: 2 Cr hours [4.5 ECTS]
• Instructor: Dr. P. Laxmikantham

ACFN 723: Advanced Auditing/PLK - 2019

Chapter 2
International Standards on Auditing (ISAs)
and
ISAs in the Audit of SMEs

ACFN 723: Advanced Auditing/PLK - 2019

Organizations That Affect the Public Accounting
Profession

• The Office of the Federal Auditor General of

Ethiopia (OFAG)
• The Accounting and Auditing Board of Ethiopia
(AABE)
• EPAAA
• International Auditing and Assurance Standards
Board (IAASB)
• Public Company Accounting Oversight Board
(PCAOB)
• International Accounting Standards Board (IASB)
• …

ACFN 723: Advanced Auditing/PLK - 2019

The Office of the Federal Auditor General of
Ethiopia (OFAG)

• Objectives:
– strengthen the audit system required for a reliable information
necessary for the proper management and administration of the plans
and budget of the federal government;
– ascertain that all money and property of the federal government are
collected, preserved and used properly, in accordance with the laws
and regulations of the federal government and report the same to the
House:
– undertake a financial performance, environmental protection, control
audit, special audit and other audits of the offices and organizations of
the federal government;
– make efforts, in cooperation with concerned organs, to develop and
strengthen accounting and audit profession;
– give professional assistance and advice to Regional and Federal Civil
servants and organizations engaged in accounting and audit
professions;
– draw up a standard of auditing by which accounts of the offices and
organizations of the federal government shall be examined and follow
up the implementation of the same. (Source: [Link])
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The Accounting and Auditing Board of Ethiopia
(AABE)

AABE has clear and realistic statutory objectives which are stated in
Section 5 of the Regulation as to:

– Promote high quality reporting of financial and related information by

reporting entities;
– Promote the highest professional standards among auditors and
accountants;
– Promote the quality of accounting and auditing services;
– Ensure the accountancy profession is used in the public interest;
– Protect the professional independence of accountants and auditors.

• (Source: [Link])

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International Auditing and Assurance Standards
Board (IAASB)

The International Auditing and Assurance Standards Board

• is an independent standard-setting body that serves
the public interest by setting:
• high-quality international standards for auditing,
• assurance, and other related areas, and
• by facilitating their adoption and implementation.

In doing so, the IAASB enhances the quality and

consistency of practice throughout the world and
strengthens public confidence in the global auditing
and assurance profession.

(Source: [Link])

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International standards on auditing

• International standards on auditing

• Overview on all 36 International Standards on Auditing (ISAs) in
general and the following in particular for their application to
Ethiopian context in line with Financial Reporting Proclamation #
847/2014:
– Overall Objectives of the Independent Auditor and the Conduct
of an Audit in Accordance with International Standards on
Auditing (ISA 200)

– The auditor’s responsibilities relating to fraud in an audit of

financial statements (ISA 240)

ACFN 723: Advanced Auditing/PLK - 2019

International standards on auditing

– Planning an Audit of Financial Statements (ISA 300)

– Audit Evidence (ISA 500)

– Forming an opinion and reporting on financial

statements (ISA 700)

– Modification to the opinion in the independent

auditor’s report (ISA 705)

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ISA in the Audit of Small and Medium
Sized entities (SMEs) - Core Concepts

• Ethics, ISAs and Quality Control

• Risk based audit – overview
• Internal control – purpose & components
• Financial Statement Assertions
• Audit Documentation
• Forming an opinion of Financial Statements

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Financial Reporting Proclamation
847/2014
1. To establish a:
– Sound,
– Transparent, and
– Understandable
Financial reporting system applicable to entities in both:
– Private and
– public sectors

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Financial Reporting Proclamation
847/2014
2. To having a uniform financial reporting
law: enhances transparency and
accountability …
3. To support various building blocks of the
economy and to reduce the risk of
financial crisis, corporate failure …
4. To ensure that the financial information
meets internationally recognized
reporting standards.

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Financial Reporting Proclamation
847/2014
• Art 2 (8)
– … financial statements include
• Balance sheet,
• Profit and loss account,
• Statement of change in equity,
• Cash flow statement, and
• Explanatory notes .

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Financial Reporting Proclamation
847/2014
• Art 2 (17):
– “Public interest entity” means a reporting entity that is of
• significant public relevance as the Board may decide from
time to time because of the nature of its business,
• its size or
• its number of employees, and includes,
• in particular, a company whose securities are admitted to
trading on a regulated capital market,
• banks,
• insurance companies and any other financial institutions and
• public enterprises.

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Financial Reporting Proclamation
847/2014
• Art 2 (20):
– “Small or medium enterprise”
• means an enterprise which is a reporting entity and
• does not fall under the definition given to a public
interest entity under sub-article (17) of this article
and
• other than charities and societies.

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Financial Reporting Proclamation
847/2014
• Art 5 Applicable Financial Reporting Standards:
1 The financial reporting standards to be used when
preparing financial statements shall be:
(a) International financial reporting standards, or
(b) International financial reporting standards for small
and medium enterprises,
(c) International public sector accounting standards
applicable to charities and societies
…

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Financial Reporting Proclamation
847/2014
• Art 12 Applicable Auditing Standards
– The auditing standards to be used by auditors in
Ethiopia shall be:
• the International Standards for Auditing
• issued by the International Federation of Accountants or
IAASB or
• its successor as
– adopted,
– adapted or
– amended by the Board
–…

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Financial Reporting Proclamation
847/2014
• Art 13: Consultation:
– The Board shall engage in consultation with key
stakeholders before
• adopting,
• adapting or
• amending
financial reporting and auditing standards.

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IAASB Standards

• International Standards on Auditing (ISAs)

• International Standards on Review
Engagements (ISREs)
• International Standards on Assurance
Engagements (ISAEs)
• International Standards on Related Services
(ISRSs)
• International Standards on Quality Control
(ISQCs)

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Auditing Standards
Auditing standards serve as
guidelines for and measures of
the quality of the auditor’s
performance.

IAASB issues ISAs are

International considered to
Standards on Auditing be minimum
(ISAs). standards of
performance for
auditors.
IFAC members
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General Principles and
Responsibilities
• ISA 200 Overall Objectives of the Independent Auditor and
the Conduct of an Audit in Accordance with International
Standards on Auditing
• ISA 210 Agreeing the Terms of Audit Engagements
• ISA 220 Quality Control for an Audit of Financial Statements
• ISA 230 Audit Documentation
• ISA 240 The Auditor’s Responsibilities Relating to Fraud in an
Audit of Financial Statements
• ISA 250 (Revised) Consideration of Laws and Regulations in
an Audit of Financial Statements
• ISA 260 (Revised) Communication with Those Charged with
Governance
• ISA 265 Communicating Deficiencies in Internal Control to
Those Charged with Governance and Management
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Risk Assessment and
Response to Assessed Risks
• ISA 300 Planning an Audit of Financial Statements
• ISA 315 (Revised) Identifying and Assessing the Risks of
Material Misstatement through Understanding the Entity
and Its Environment
• ISA 320 Materiality in Planning and Performing an Audit
• ISA 330 The Auditor’s Responses to Assessed Risks
• ISA 402 Audit Considerations Relating to an Entity Using a
Service Organization
• ISA 450 Evaluation of Misstatements Identified during the
Audit

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Audit Evidence
• ISA 500 Audit Evidence
• ISA 501 Audit Evidence – Specific Considerations for
Selected Items
• ISA 505 External Confirmations
• ISA 510 Initial Engagements – Opening Balances
• ISA 520 Analytical Procedures
• ISA 530 Audit Sampling
• ISA 540 Auditing Accounting Estimates, Including Fair Value
Accounting Estimates, and Related Disclosures
• ISA 550 Related Parties
• ISA 560 Subsequent Events
• ISA 570 (Revised) Going Concern
• ISA 580 Written Representations
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Using Work of Others

• ISA 600 Special Considerations – Audits of Group Financial

Statements (Including the Work of Component Auditors)
• ISA 610 (Revised) Using the Work of Internal Auditors
• ISA 620 Using the Work of an Auditor’s Expert

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Audit Conclusions and
Reporting
• ISA 700 (Revised) Forming an Opinion and Reporting on
Financial Statements
• ISA 705 (Revised) Modifications to the Opinion in the
Independent Auditor’s Report
• ISA 706 (Revised) Emphasis of Matter Paragraphs and
Other Matter Paragraphs in the Independent Auditor’s
Report
• ISA 710 Comparative Information – Corresponding Figures
and Comparative Financial Statements
• ISA 720 (Revised) The Auditor’s Responsibilities Relating to
Other Information in Documents Containing Audited
Financial Statements

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Specialized Areas

• ISA 800 (Revised) Special Considerations – Audits of

Financial Statements Prepared in Accordance with Special
Purpose Frameworks
• ISA 805 (Revised) Special Considerations – Audits of Single
Financial Statements and Specific Elements, Accounts or
Items of a Financial Statement
• ISA 810 (Revised) Engagements to Report on Summary
Financial Statements

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Sections in ISAs

• Introductory material
• Objectives
• Definitions
• Requirements
• Application and other
explanatory material

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A Series of Scandals

Enron WorldCom
Waste
Management

Sunbeam

Qwest

The Fund of
Funds
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Overall Objectives of the Auditor

INTERNATIONAL STANDARD ON AUDITING 200

• This International Standard on Auditing (ISA) deals

with the independent auditor’s overall
responsibilities when conducting an audit of
financial statements in accordance with ISAs.

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Overall Objectives of the Auditor

In conducting an audit of financial statements, the overall

objectives of the auditor are:

(a) To obtain reasonable assurance about whether the financial statements

as a whole are free from material misstatement, whether due to fraud or
error, thereby enabling the auditor to express an opinion on whether the
financial statements are prepared, in all material respects, in accordance
with an applicable financial reporting framework; and

(b) To report on the financial statements, and communicate as required by

the ISAs, in accordance with the auditor’s findings.

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Overall Objectives of the Auditor

• In all cases when reasonable assurance cannot be obtained and

• a qualified opinion in the auditor’s report is insufficient in the
circumstances for purposes of reporting to the intended users of
the financial statements,

• the ISAs require that the auditor disclaim an opinion or withdraw

(or resign) from the engagement,

• where withdrawal is possible under applicable law or regulation

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Auditor’s Responsibilities

INTERNATIONAL STANDARD ON AUDITING 240

THE AUDITOR’S RESPONSIBILITIES

RELATING TO FRAUD IN
AN AUDIT OF FINANCIAL STATEMENTS

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Auditor’s Responsibilities

• This International Standard on Auditing (ISA) 240

deals with the auditor’s responsibilities relating to
fraud in an audit of financial statements.

• Specifically, it expands on how ISA 315 (Revised)

and ISA 330 are to be applied in relation to risks of
material misstatement due to fraud.

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Auditor’s Responsibilities

The auditor has a responsibility to plan and

perform the audit to obtain reasonable
assurance about whether the financial
statements are free of material
misstatement, whether caused by error or
fraud.
Because of the nature of audit evidence and
the characteristics of fraud, the auditor is able
to obtain reasonable, but not absolute,
assurance that material misstatements are
detected.
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Characteristics of Fraud

• Misstatements in the financial statements can

arise from either fraud or error.
– The distinguishing factor between fraud and error is:
• whether the underlying action that results
• in the misstatement of the financial statements is
• intentional or
• unintentional.

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Characteristics of Fraud

• Although fraud is a broad legal concept, for the purposes

of the ISAs, the auditor is concerned with fraud that
causes a material misstatement in the financial
statements.
• Two types of intentional misstatements are relevant to
the auditor:
– misstatements resulting from fraudulent financial reporting and
– Misstatements resulting from misappropriation of assets.

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Characteristics of Fraud

Define fraud and distinguish between the two main

categories of fraud:

• In the context of financial statement auditing, fraud is defined as an

intentional misstatement of the financial statements.

• The two main categories of fraud are:

– fraudulent financial reporting and
– misappropriation of assets.
Fraudulent financial reporting is an intentional misstatement or omission of
amounts or disclosures with the intent to deceive users of the financial
statements.
Misappropriation of assets involves theft of an entity's assets
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Conditions for fraud

1. Incentives/pressures — Management or other employees have

incentives or pressures to commit fraud.
2. Opportunities — Circumstances provide opportunities for
management or employees to commit fraud.
3. Attitudes/Rationalization —
1. An attitude, character, or
2. set of ethical values exists that allows management or employees to
intentionally commit a dishonest act, or
3. they are in an environment that imposes sufficient pressure that causes
them to rationalize committing a dishonest act

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Responsibility for the Prevention and
Detection of Fraud

• The primary responsibility for the prevention and detection of fraud

rests with both those charged with governance of the entity and
management.
• It is important that management, with the oversight of those
charged with governance, place a strong emphasis on fraud
prevention,
• which may reduce opportunities for fraud to take place, and fraud
deterrence,
• which could persuade individuals not to commit fraud because of
the likelihood of detection and punishment

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Responsibility for the Prevention and
Detection of Fraud

• An auditor conducting an audit in accordance with

ISAs is responsible for obtaining:
– reasonable assurance that
– the financial statements taken
– as a whole are free from material misstatement,
whether caused by fraud or error.

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Responsibility for the Prevention and
Detection of Fraud

• The objectives of the auditor are:

(a) To identify and assess the risks of material misstatement of the
financial statements due to fraud;
(b) To obtain sufficient appropriate audit evidence regarding the
assessed risks of material misstatement due to fraud, through
designing and implementing appropriate responses; and
(c) To respond appropriately to fraud or suspected fraud
identified during the audit.

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PLANNING AN AUDIT OF FINANCIAL STATEMENTS

INTERNATIONAL STANDARD ON AUDITING 300

• This International Standard on Auditing (ISA) deals with the

auditor’s responsibility
• To plan an audit of financial statements.

• Objective
The objective of the auditor is to plan the audit so that it will be
performed in an effective manner.

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Benefits from planning

There are three primary benefits from planning

audits:
1. it helps the auditor obtain sufficient appropriate
evidence for the circumstances,
2. It helps keep audit costs reasonable, and
3. It helps avoid misunderstandings with the client.

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Audit Planning

The eight major steps in planning audits are:

1. Accept client and perform initial planning
2. Understand the client’s business and industry
3. Perform preliminary analytical procedures
4. Set preliminary judgment of materiality and performance
materiality
5. Identify significant risks due to fraud or error
6. Assess inherent risk
7. Understand internal control and assess control risk
8. Finalize overall audit strategy and audit plan

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The Phases of Audit Planning
The Phases of Audit Planning

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Planning the Audit
When preparing the audit plan, the auditor should be guided
by the results of the client acceptance/continuance process,
procedures performed to gain the understanding of the entity,
and preliminary engagement activities.
Additional steps:
•Assess business risks.
•Establish materiality.
•Consider multi-locations.
•Assess the need for experts.
•Consider non-compliances with laws and regulations.
•Identify related parties.
•Consider additional value-added services.
•Document the overall audit strategy and audit plan.
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LO# 7

Assess Business Risks

To understand To identify financial

the entity’s statement accounts
business and likely to contain
transactions misstatements

By understanding the entity’s business and identifying where

misstatements are likely to occur, the auditor can allocate
more resources to investigate more risky accounts.

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Establish Materiality

Establish overall
materiality
(more on this later!)

Establish Establish
performance performance
materiality for materiality for
accounts disclosures

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Consider Multi-Locations or
Business Units
Consolidated
Financial
Statements

Moderate Low
High Risk Risk Risk

The auditor correlates the amount of audit attention devoted to the location or
business unit with the level of risk present.
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Tests of Controls

Inquiry Inspection

Observation

Walk-
Reperformance
Through

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Materiality

Misstatements, including omissions, are considered to

be material if they, individually or in the aggregate,
could reasonably be expected to influence the
economic decisions of users taken on the basis of the
financial statements.

Materiality is not an absolute and

it is not a black or white issue!
The determination of materiality
requires professional judgement.

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Steps in Applying Materiality
on an Audit
Step 1:
Determine Overall Materiality

Step 2:
Determine Performance Materiality

Step 3:
Evaluate Audit Findings

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Step 1: Determine Overall
Materiality
The quantitative amounts
The quantitative benchmark may be adjusted lower for
for materiality may be a qualitative factors such as:
percentage of: • Material misstatements in prior
• Profit before tax. years.
• Total assets. • High risk of fraud.
• Total revenues. • Potential loan covenant
violations.
• Net assets.
• Small amounts may cause the
• Three year average profit. entity to miss forecasted
earnings.
• Volatile business environment.

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Step 2: Determine
Performance Materiality
Performance materiality is the amount or amounts set by the auditor
at less than overall materiality to reduce to an appropriately low level
the probability that the aggregate of uncorrected and undetected
misstatements exceeds materiality for the financial statements as a
whole.
• The purpose of setting performance materiality is to establish a
scope for the audit procedures for the individual account balance or
disclosure.
• In practice auditors commonly set performance materiality for each
account at between 50 and 75 per cent of overall materiality. The
firms provide guidance in determining the appropriate percentage to
use within the range.
• There are a number of reasons why total combined performance
materiality greater than overall materiality makes sense from an
audit planning perspective.
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Step 3: Evaluate Audit
Findings
When the audit evidence is gathered, the auditor:
Aggregates misstatements from each account or class of
transactions.
Considers the effect of misstatements not adjusted in the prior period..
Examines the cause of the misstatements and determines the impact
of the material misstatements on the assessment of fraud and control
risk.
The auditor compares the aggregate misstatement to overall
materiality.
Performance materiality can be used for determining the fair
presentation of the individual accounts.
If the aggregated misstatements are greater than overall materiality,
or if misstatements for individual accounts are in excess of
performance materiality, the auditor would require the entity to adjust
the financial statements or the auditor would have to issue a qualified
or adverse opinion. ACFN 723: Advanced Auditing/PLK - 2019
Audit Evidence

INTERNATIONAL STANDARD ON AUDITING 500

• This International Standard on Auditing (ISA) explains what

constitutes audit evidence in an audit of financial statements, and
• deals with the auditor’s responsibility
• to design and
• perform audit procedures
• to obtain sufficient appropriate audit evidence
• to be able to draw reasonable conclusions on which
• to base the auditor’s opinion.

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Audit Evidence

Objective
The objective of the auditor is to design and perform
audit procedures in such a way as
to enable the auditor to obtain sufficient appropriate
audit evidence
to be able to draw reasonable conclusions on which to
base the auditor’s opinion

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Audit Evidence

All the information, from

whatever source, used
by the auditor in arriving at
the conclusions on which the
audit opinion is based.

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The Concepts of Audit
Evidence

Nature of audit evidence

Sufficiency and appropriateness

of audit evidence

Evaluation of audit evidence

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Nature of Audit Evidence

Records of General Spreadsheets

initial entries and and subsidiary supporting cost
supporting records ledgers allocations

Minutes
from meetings Benchmarking
Invoices
Analyst’s
Worksheets Contracts reports

Adjustments Other
Information
to financial computations,
obtained from
statements reconciliations and
audit procedures
disclosures
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Sufficiency of
Audit Evidence

Sufficiency is a measure of
the quantity of audit evidence.

Greater risk of Higher quality

misstatement requires audit evidence results
a higher quantity in a lower quantity
of audit evidence. of audit evidence.

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Appropriateness of
Audit Evidence
Relevance
Appropriateness is a measure
Reliability of the quality of audit evidence.

Independent source outside the entity

Effectiveness of internal control

Auditor’s direct personal knowledge

Documentary evidence

Original documents
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Evaluation of Audit Evidence

Proper evaluation of evidence

requires an understanding of the:
Types of evidence available.

Relative reliability of available evidence.

An auditor should be thorough in searching

for evidence and be unbiased in its evaluation.

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Reliability of Types
of Evidence
General Guidelines for the Reliability Hierarchy by
Evidence Type

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Audit Documentation

Audit documentation (working papers) has three functions:

1 To provide support for the audit report.
2 To aid in the planning, performance and supervision of
the audit.
3 To provide basis for quality reviews; to provide evidence
supporting the auditor’s significant conclusions.

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Content of Audit
Documentation
Audit documentation provides the principal support for the
representations in the auditor’s report and should:

Demonstrate how the audit complied with auditing

and related professional practice standards.

Support the basis for the auditor’s conclusions

concerning each material financial statement
assertion.

Demonstrate that the underlying accounting

records agreed or reconciled with the financial
statements.
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Content of Audit
Documentation
Audit documentation should:
Include a audit plan detailing auditing
procedures necessary to accomplish audit objectives.

Enable an experienced auditor to understand:

Significant matters arising

The nature, timing The results of during the audit, the conclusions
and extent of the reached thereon, and significant
audit procedures audit procedures professional judgments made in
performed performed reaching those conclusions
ACFN 723: Advanced Auditing/PLK - 2019
Content of Audit
Documentation
Most public accounting firms maintain
audit documentation in two types of files:

Permanent files Current files

Corporate charter Important contracts

Chart of accounts Internal control documentation
Organization chart Terms of stock and bond issues
Prior years’ analytical procedures
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Content of Audit
Documentation
Most public accounting firms maintain
audit documentation in two types of files:

Permanent files Current files

Audit report Adjusting journal entries

Audit strategy and plan Reclassification journal entries
Working trial balance Current financial statements
Minutes of meetings Working papers supporting accounts
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Format of Audit
Documentation
Entity name
Heading Title of the working paper
Entity’s year-end date

Notations that provide a trail

Indexing and
from financial statements to
cross-referencing
audit documents.

Notations made next to

Tick marks work paper items indicating
auditor/reviewer actions.
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Audit Documentation

Audit documentation should be organized so

that audit team members and others can find
evidence supporting financial statement accounts.

All audit documentation is the property of the

auditor, including documents prepared
by the entity at the auditor’s request.

ISQC1 requires audit documentation to be retained

ordinarily for minimum five years from
the date of the auditor’s report.

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FORMING AN OPINION AND
REPORTING ON FINANCIAL STATEMENTS

INTERNATIONAL STANDARD ON AUDITING 700

• This International Standard on Auditing (ISA) deals with the

auditor’s responsibility to form an opinion on the financial
statements.
• It also deals with the form and content of the auditor’s report
issued as a result of an audit of financial statements

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FORMING AN OPINION AND
REPORTING ON FINANCIAL STATEMENTS

• ISA 705 and ISA 706 deal with how the form and
content of the auditor’s report are affected when
the auditor expresses a

– modified opinion or
– includes an Emphasis of Matter paragraph or an
– Other Matter paragraph in the auditor’s report.

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FORMING AN OPINION AND
REPORTING ON FINANCIAL STATEMENTS

Objectives
The objectives of the auditor are:
(a) To form an opinion on the financial statements
based on an evaluation of the conclusions
drawn from the audit evidence obtained; and

(b) To express clearly that opinion through a

written report that also describes the basis for
that opinion.
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Standard Audit Report with an
Unmodified Opinion
An audit report with an unmodified opinion is issued when
the auditor concludes that the financial statements are
prepared, in all material respects, in accordance with the
applicable financial reporting framework.

Nine Elements
1. Report title
2. Addressee
3. Introductory paragraph
4. Management’s responsibility
5. Auditor’s responsibility
6. Auditor’s opinion
7. Auditor’s signature
8. Date of audit report
9. Auditor’s address
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Standard Audit Report with an
Unmodified Opinion
The Auditor’s Standard Report with an Unmodified Opinion

(continued)
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Standard Audit Report with
an Unmodified Opinion

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MODIFICATIONS TO THE OPINION IN THE
INDEPENDENT AUDITOR’S REPORT

INTERNATIONAL STANDARD ON AUDITING 705

• This International Standard on Auditing (ISA) deals with the

auditor’s responsibility to issue an appropriate report in
circumstances when,
• in forming an opinion in accordance with ISA 700, the auditor
concludes that a modification to the auditor’s opinion on the
financial statements is necessary.

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MODIFICATIONS TO THE OPINION IN THE
INDEPENDENT AUDITOR’S REPORT

Types of Modified Opinions

This ISA establishes three types of modified opinions, namely,
– a qualified opinion,
– an adverse opinion, and
– a disclaimer of opinion.

The decision regarding which type of modified opinion is appropriate depends

upon:
(a) The nature of the matter giving rise to the modification, that is,
whether the financial statements are materially misstated or, in the
case of an inability to obtain sufficient appropriate audit evidence,
may be materially misstated; and
(b) The auditor’s judgment about the pervasiveness of the effects or possible
effects of the matter on the financial statements.
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MODIFICATIONS TO THE OPINION IN THE
INDEPENDENT AUDITOR’S REPORT

Objective
The objective of the auditor is to express clearly an appropriately
modified opinion on the financial statements that is necessary
when:
(a) The auditor concludes, based on the audit evidence obtained,
that the financial statements as a whole are not free from material
misstatement;
or
(b) The auditor is unable to obtain sufficient appropriate audit
evidence to conclude that the financial statements as a whole are
free from material misstatement.

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Conditions of Modification

Results from the auditor’s

Scope
inability to obtain sufficient
Limitation
appropriate evidence

Departure from Results when financial

Applicable statements are prepared or
Financial Reporting presented in a manner that
Framework conflicts with the applicable
financial reporting framework

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Types of Audit Reports with
Modified Opinion

Qualified
‘except for’

Disclaimer

Adverse

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An Overview of Audit Opinions

An Overview of Audit Opinions

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ISA in the Audit of SMEs-Core Concepts

• The third edition of the IFAC,

Small and Medium Practices (SMP) Committee’s
Guide to Using International Standards on
Auditing in the Audits of Small- and Medium-Sized Entities

• Address:
Email: paulthompson@[Link]
Small and Medium Practices Committee
International Federation of Accountants
545 Fifth Avenue,
NY 10017, USA

ACFN 723: Advanced Auditing/PLK - 2019

ISA in the Audit of SMEs-Core Concepts

Reference:
• The IFAC Guide to Quality Control for Small- and Medium-Sized
Practices provides a detailed description of the quality control
standards and guidance on how to implement a system of quality
control for small- and medium-sized practices (SMPs).
• ISQC1: International Standard on Quality Control
• ISA 200, 220

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Ethics, ISAs, and Quality Control
References:
• ISQC1: International Standard on Quality Control
• IESBA code of ethics for professional accountants
• ISA 200, 220

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Ethics, ISAs, and Quality Control

Overview
• Performing quality work begins with strong leadership within the firm and
engagement partners committed to the highest ethical standards.
• This focuses on developing the system of quality control within a firm.
• The provision of quality audits and related services is vital to:
• Safeguarding the public interest;
• Maintaining client satisfaction;
• Delivering value for money;
• Ensuring compliance with professional standards; and
• Establishing and maintaining a professional reputation.

ACFN 723: Advanced Auditing/PLK - 2019

Ethics, ISAs, and Quality Control

• The IFAC Guide to Quality Control for Small- and

Medium-Sized Practices provides a detailed
description of the quality control standards and
guidance on how to implement a system of quality
control for small- and medium-sized practices
(SMPs)

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The Risk-Based Audit — Overview
Its content:
• Auditor objectives,
• basic elements, and
• approach to performing a risk-based audit.

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ISA Objective(s) ISA 200

• In conducting an audit of financial statements, the overall

objectives of the auditor are:
(a) To obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement,
whether due to fraud or error, thereby enabling the auditor to
express an opinion on whether the financial statements are
prepared, in all material respects, in accordance with an applicable
financial reporting framework; and
(b) To report on the financial statements, and communicate as
required by the ISAs, in accordance with the auditor’s findings.

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Audit Risk

Audit Risk
• Audit risk is the risk of expressing an inappropriate
audit opinion on financial statements that are
materially misstated.
• The objective of the audit is to reduce this audit
risk to an acceptably low level.

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Audit Risk

• To reduce audit risk to an acceptably low level, the auditor is

required to:
• Assess the risks of material misstatement; and
• Limit detection risk.
This may be achieved by performing procedures that respond to the
assessed risks of material misstatement,
both at the financial statement level and
at the assertion level for classes of transactions, account balance,
and disclosures.

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Internal Control — Purpose and Components
Overview
• Internal control is designed, implemented, and maintained by those
charged with governance and management of other personnel to
address identified business and fraud risks that threaten the
achievement of stated objectives, such as the reliability of financial
reporting.
• The first step in evaluating control design is to identify the risks that
require mitigation by control.
• The second step is then to identify what controls are in place to
address those risks

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Internal Control — Purpose and Components

Internal control objectives can be broadly grouped

into four categories:
• Strategic, high-level goals that support the
mission of the entity;
• Financial reporting (internal control over
financial reporting);
• Operations (operational controls); and
• Compliance with laws and regulations.
ACFN 723: Advanced Auditing/PLK - 2019
Internal Control — Purpose and Components

Internal Control Components

The term “internal control” as used in ISA 315 is broader than just
control activities such as segregation of duties, authorizations and
account reconciliations, etc. Internal control encompasses five key
components:
• The control environment;
• The entity’s risk assessment process;
• The information system, including the related business processes,
relevant to financial reporting and communication;
• Control activities relevant to the audit; and
• Monitoring of internal control.

ACFN 723: Advanced Auditing/PLK - 2019

Financial Statement Assertions

• Assertions
Representations by management,
explicit or otherwise,
that are embodied in the financial statements,
as used by the auditor
to consider the different types of
potential misstatements that may occur.

ACFN 723: Advanced Auditing/PLK - 2019

Financial Statement Assertions

Examples of management’s assertions include:

• All the assets in the financial statements exist;
• All sales transactions have been recorded in the appropriate
period;
• Inventories are stated at appropriate values;
• Payables represent proper obligations of the entity;
• All recorded transactions occurred in the period under review;
and
• All amounts are properly presented and disclosed in the financial
statements.

ACFN 723: Advanced Auditing/PLK - 2019

Audit Documentation

The various requirements associated with the

documentation of
• audit planning,
• audit evidence obtained, and
• its ultimate storage
• ISQC 1, ISA 220, 230, 240, 300, 315, 330

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Audit Documentation

• The objective of the auditor is to prepare

documentation that provides:
(a) A sufficient and appropriate record of the basis
for the auditor’s report; and
(b) Evidence that the audit was planned and
performed in accordance with ISAs and applicable
legal and regulatory requirements.

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Audit Documentation

Overview
• Audit file documentation (whether maintained on paper or
electronically) plays a critical role in:
• Assisting the engagement team in planning and performing the
audit;
• Providing evidence to demonstrate that the planned audit
procedures were in fact performed;
• Assisting engagement reviewers in carrying out their
responsibilities in accordance with professional standards;
• Recording the judgments involved in forming the audit opinion;
• Recording matters of continuing significance for future audits of
the entity.

ACFN 723: Advanced Auditing/PLK - 2019

Audit Documentation

Audit documentation for smaller entities will generally be less

extensive than for larger entities. This particularly applies where:
• The engagement partner performs all the audit work.
Documentation would not include matters related to team
discussions, allocation of responsibilities, or supervision; and
• Some matters are so straightforward that they can be more
conveniently addressed in a single document with cross-references
to supporting working papers. This could include one or more of
the areas such as the understanding of the entity and its internal
control, the overall audit strategy and audit plan, materiality,
assessed risks, significant matters noted, and the conclusions
reached.

ACFN 723: Advanced Auditing/PLK - 2019

Forming an Opinion on Financial Statements

• ISA 700
• Requirements and considerations related to: •
Forming an opinion on the financial statements;
and • Preparing an appropriately worded auditor’s
report.

ACFN 723: Advanced Auditing/PLK - 2019

Forming an Opinion on Financial Statements

Overview
• The final step in the audit process is to evaluate the audit evidence obtained,
consider the impact of any misstatements identified, form an audit opinion, and
prepare an appropriately worded audit report.

• Financial statements prepared in accordance with one or both of the two types
of general purpose framework designed to meet the common financial-
information needs of a wide range of users;
• Forming an opinion on a complete set of general purpose financial statements.
This is based on an evaluation of the conclusions drawn from the audit evidence
obtained; and
• Expressing clearly that opinion through a written report that also describes the
basis for that opinion.

ACFN 723: Advanced Auditing/PLK - 2019

Forming an Opinion on Financial Statements

The auditor’s report communicates the following

information to the reader:
• Responsibilities of management;
• Responsibilities of the auditor and a description of the
audit;
• The audit was conducted in accordance with
International Standards on Auditing;
• The financial reporting framework used; and
• The auditor’s opinion on the financial statements.

ACFN 723: Advanced Auditing/PLK - 2019

Forming an Opinion on Financial Statements

The form of the auditor’s report will be affected by the financial

reporting framework used, any additional requirements required by
law or regulation, and the inclusion of any supplementary
information.
The auditor’s report is entitled the “Independent Auditor’s Report,”
and headings are required for each paragraph as follows:
• Report on the Financial Statements;
• Management’s Responsibility for the Financial Statements;
• Auditor’s Responsibility; and
• Opinion.

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Forming an Opinion on Financial Statements

Other headings for paragraphs that may be used

where applicable are:
• Emphasis of Matter; and
• Report on Other Legal and Regulatory
Requirements

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