Chartered Accountants Audit Conference

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Chartered Accountants Audit Conference Application
of Complex Auditing Standards
Christin Schaller FCA Principal Red Square
Training and Consulting Pty Limited 02 9948 8686
charteredaccountants.com.au
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Application of complex auditing standards

• ASAs in force for financial periods commencing
  on/after 1 July 2006
• Corporations Act audits/reviews standards
  legally enforceable via ASIC
• all other audits/reviews standards enforced by
  professional bodies (eg via Institutes Quality
  Review program)

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Application of complex auditing standards

• ASAs reflect a business risk approach
• understand environment and operations
• assess risks arising
• identify assertions at risk
• design and perform procedures
• evaluate evidence obtained

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Application of complex auditing standards

• Three key standards covered today
• ASA 230 Audit Documentation
• ASA 315 Understanding the Entity and its
  Environment and Assessing the Risks of Material
  Misstatement
• ASA 330 The Auditors Procedures in Response to
  Assessed Risks

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1. ASA 230 Audit documentation

• purpose is to establish mandatory requirements
  and provide guidance on documentation
• Key mandatory requirements
• overall provide a basis for your audit report
  and evidence the audit was performed in
  accordance with ASAs

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1. ASA 230 Audit documentation

• documentation should enable an experienced
  auditor to understand the work performed
• record the identifying characteristics of
  specific items/matters being tested
• document discussions of significant matters
• document contradictory information and how this
  was addressed

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Heading Style
1. ASA 230 Audit documentation
Body copy gt Bullet style

• where factors outside your control prevent you
  from complying with a mandatory requirement, need
  to document
• - circumstances and reason
• - alternative procedures

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1. ASA 230 Audit documentation

• record who performed work and date performed, and
  who reviewed the work and the date/extent of
  review
• complete the audit file on a timely basis after
  the audit report

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1. ASA 230 Audit documentation

• once the file is completed, no documentation
  shall be deleted or discarded before the end of
  the retention period (7 years)
• any modifications to the file need to be
  documented
• need to adopt procedures for maintaining
  documentation (also a requirement of APES 320)

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2. ASA 315 Understanding the entity/risks

• purpose is to establish mandatory requirements
  and provide guidance on obtaining an
  understanding of the entity and its environment
  in assessing the risks of material misstatement
  in a financial report audit

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2. ASA 315 Understanding the entity/risks

• Deals with 5 key issues
• risk assessment procedures, including internal
  controls
• understanding the entity and its environment,
  including internal controls
• assessing the risks of material misstatement
  (RMM), including identifying significant risks
• communicating with management/those charged with
  governance
• documentation

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2. ASA 315 Understanding the entity/risks i. Risk
assessment procedures
Perform the following risk assessment procedures
to obtain an understanding of the entity, its
environment, and its controls a) inquiries of
management/staff b) analytical procedures c)
observation and inspection
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2. ASA 315 Understanding the entity/risks i. Risk
assessment procedures

• the members of the audit team should discuss the
  susceptibility of the entitys financial report
  to material misstatements.
• the discussion needs to be documented, including
  any significant decisions reached.

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2. ASA 315 Understanding the entity/risks ii. The
entity environment, including controls

• You need to obtain an understanding of
• relevant industry, regulatory, and other external
  factors including the applicable financial
  reporting framework, and
• the nature of the entity
• the entitys accounting policies and whether they
  are appropriate

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2. ASA 315 Understanding the entity/risks ii. The
entity environment, including controls

• obtain an understanding of the entitys
  objectives and strategies, and the related
  business risks that may result in material
  misstatements.

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2. ASA 315 Understanding the entity/risks ii. The
entity environment, including controls

• obtain an understanding of internal control
  relevant to the audit this comprises five
  elements
• the control environment
• the entitys risk assessment process
• the information system
• control activities
• e) monitoring of controls

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2. ASA 315 Understanding the entity/risks ii. The
entity environment, including controls
a) the control environment
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2. ASA 315 Understanding the entity/risks ii. The
entity environment, including controls
b) the entitys process for identifying and
acting on business risks relevant to financial
reporting objectives
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2. ASA 315 Understanding the entity/risks ii. The
entity environment, including controls

• c) the information system relevant to financial
  reporting, including
• the significant classes of transactions
• the procedures by which those transactions are
  initiated, recorded, processed and reported
• the related accounting records
• how the system captures significant events
• the financial reporting process

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2. ASA 315 Understanding the entity/risks ii. The
entity environment, including controls
d) control activities, sufficient to assess the
RMM at the assertion level and to design further
audit procedures responsive to assessed risks
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2. ASA 315 Understanding the entity/risks ii. The
entity environment, including controls
e) the major types of activities the entity uses
to monitor and correct controls
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2. ASA 315 Understanding the entity/risks iii. As
sessing the risk of material misstatements (RMM)

• using the information obtained thus far, identify
  and assess the RMM at the financial report level,
  and at the assertion level for classes of
  transactions, account balances and disclosures.

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2. ASA 315 Understanding the entity/risks iii. As
sessing the risk of material misstatements (RMM)

• as part of the risk assessment, determine which
  of the risks identified are risks that require
  special audit consideration (such risks are
  defined as significant risks)

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2. ASA 315 Understanding the entity/risks iii. As
sessing the risk of material misstatements (RMM)

• for significant risks, evaluate the design of the
  entitys related controls and determine whether
  they have been implemented.
• to determine implementation, it is most likely
  you will need to test controls (select sample etc)

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2. ASA 315 Understanding the entity/risks iii. As
sessing the risk of material misstatements (RMM)

• as part of the risk assessment, evaluate the
  entitys controls over those risks for which it
  is not possible or practicable to reduce the
  risks of material misstatement at the assertion
  level to an acceptably low level with audit
  evidence obtained only from substantive
  procedures.

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2. ASA 315 Understanding the entity/risks iv. Com
municating with management

• make those charged with governance/management
  aware, as soon as practicable, of material
  weaknesses in internal control.

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2. ASA 315 Understanding the entity/risks v. Docu
mentation

• Matters to be documented include
• discussions amongst the audit team
• key elements of the understanding obtained of the
  entity, including each of the internal control
  components, and the risk of material
  misstatements
• the assessed risk of material misstatement at the
  financial report and assertion level
• risk areas where substantive procedures did not
  provide sufficient evidence, and the related
  controls evaluated

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3. ASA 330 Procedures in response to risks

• purpose is to establish mandatory requirements
  and provide guidance on determining overall
  responses and designing and performing further
  audit procedures to respond to the assessed RMM
  at the financial report and assertion levels

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3. ASA 330 Procedures in response to risks

• Deals with 4 key issues
• introduction/ overall responses (to assessed
  risks)
• audit procedures responsive to risks of material
  misstatement at the assertion level
• evaluating the sufficiency and appropriateness of
  audit evidence obtained
• documentation

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3. ASA 330 Procedures in response to
risks i. Introduction/overall responses

• in order to reduce audit risk to an acceptably
  low level, determine overall responses to
  assessed risks at the financial report level
• i.e., choose your overall audit approach.

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3. ASA 330 Procedures in response to
risks ii. Audit procedures responsive to risks

• in determining the audit procedures, consider
  inherent and control risk, as this will affect
  the procedures selected.

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3. ASA 330 Procedures in response to
risks ii. Audit procedures responsive to risks

• when your assessment of risks of material
  misstatement at the assertion level includes an
  expectation that controls are operating
  effectively, you need to perform tests of control
• also need to test controls related to significant
  audit risks

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3. ASA 330 Procedures in response to
risks ii. Audit procedures responsive to risks

• when you obtain audit evidence about the
  effectiveness of controls during an interim
  period, you should determine what additional
  evidence should be obtained for the remaining
  period.

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3. ASA 330 Procedures in response to
risks ii. Audit procedures responsive to risks

• irrespective of the assessed risk of material
  misstatement, you should design and perform
  substantive procedures for each material class of
  transactions, account balance and disclosure.

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3. ASA 330 Procedures in response to
risks iii. Evaluating audit evidence

• conclude whether sufficient appropriate audit
  evidence has been obtained to reduce to an
  acceptably low level the risk of material
  misstatement in the financial report.

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3. ASA 330 Procedures in response to
risks iv. Documentation

• document the overall responses to address the
  assessed risks, the further audit procedures, the
  link of those procedures with the assessed risks
  at the assertion level, and the results of audit
  procedures.

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Heading Style
Application of complex auditing standards
Body copy gt Bullet style

• In summary remember
• standards now reflect a business risk approach
• greater emphasis on understanding the entity and
  its environment
• document what you do If its not documented
  its not done.