International Standards on Auditing: whats beyond the changes

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International Standards on Auditingwhats
beyond the changes ?

• Nikolai REMIZOV,
• Director for Special Projects,
• Auditing company FBK (PKF-Moscow)

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INTERNATIONAL STANDARDS ON AUDITING

• In 2002 the official Russian translation of the
  International Standards on Auditing (ISAs) 2001
  edition and Ethics Code of Professional
  Accountants was published and distributed in
  Russia.

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RUSSIAN STANDARDS ON AUDITING

• Russian Federal Law No. 119, dated August 7, 2001
• Government of Russia Decree No. 696, dated
  September 23, 2002
• Government of Russia Decree No. 405, dated July
  4, 2003
• Government of Russia Decree No. 532, dated
  October 7, 2004
• Government of Russia Decree No. 228, dated April
  16, 2005

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CHANGES IN ISAs

• In the old ISAs all documents were located in
  three sections
• Code of Ethics for Professional Accountants
• International Standards on Auditing
• International Audit Practice Statements
• Now there are additional sections in the book
• International Standards on Quality Control
• Framework
• Assurance engagements (other than audits or
  reviews of historical financial information)
• Related services
• Some of the former standards (ISAs 810, 910, 920
  ? 930) moved from the general ISA section to new
  sections and their numbers (codes) changed.

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CHANGES IN ISAs AUDIT RISK

• New ISAs 315 and 330 were prepared. In those ISAs
  a new concept of audit risks is described, other
  definition and classification of internal
  control system and control environment is given,
  the other ways of carrying on auditing procedures
  and collecting audit evidence is laid down.
• ISA 500 on audit evidence is prepared anew
  contents and classification of financial
  statement assertions changed, contents and
  classification of audit procedures to obtain
  audit evidence also changed.
• Even ISA 200, that is devoted to objectives and
  general principles governing the audit of
  financial statements changed. Some time ago the
  most concise ISA, it now increased nearly three
  times in volume. Now it also includes the
  definitions of materiality and audit risks.

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CHANGES IN ISAs AUDIT RISK

• ISA 300, devoted to planning, also changed
  dramatically so far as changing approach to
  auditing as it is caused changing in the process
  of planning.
• New approaches, wording, definitions caused
  numerous amendments in the long list of ISAs
  210, 230, 250, 260, 320, 402, 501, 505, 510, 520,
  530, 540, 545, 550, 550, 560, 570, 580, 610, 620,
  710 and 720.
• The following documents were withdrawn 310
  (knowledge of clients business), 400 (audit
  risks and internal control), 401 (auditing in
  computer information system environment) and the
  previous variant of ISA 500.
• It means that in the years 2005-2006 RSAs No. 1,
  3, 5, 8 and 15 will be not in compliance with
  ISAs.

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CHANGES IN ISAs QUALITY CONTROL

• ISA 220, devoted to quality control, was redone.
• Now in IFACs book there is a new International
  quality control standard No. 1 and in addition
  there is a new variant of ISA 220 is prepared.
• New wording, classification, definitions caused
  amendments to ISA 620. As a result of that all,
  RSA No. 7 will be not in compliance with ISAs
  requirement on audit quality. I is important to
  point out, that RSA No. 7 is now a basis for the
  quality control procedures of Russian auditors
  professional associations.

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CHANGES IN ISAs FRAUD AND ERROR

• So far as the main argument for the changes in
  ISAs was fighting with corporate fraud, ISA
  devoted to fraud and error were also amended.
• RSA No. 13 is based on the 2002 edition of ISA
  240. This ISA will be superseded by a new variant
  next year. Thus, RSA No. 13 on fraud and error
  will stop being in compliance with ISA 240 next
  year.
• Changes in ISA 240 caused amendments in ISAs 260,
  320 and 580.

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CHANGES IN ISAs AUDTORS REPORT

• In 2006 it is planned to introduce new variant of
  ISA 700, devoted to the preparation of the
  auditors report. It is also planned to prepare
  a separate ISA 701, that should lay down
  requirements for the modifications of the
  auditors report (it was all included into the
  same ISA 700 before).
• Those changes will cause additional ammendments
  to ISA 200 and also ISAs 210, 560 and 800.
• For Russian auditors and legal entities that
  means, that the wording of the Russian auditors
  report (which is now nearly a word-by-word
  translation of the English text) will differ
  since 2006 and RSA No. 6 will start being
  different from ISAs 700 and 701.

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CHANGES IN ISAsFAIR VALUE, ASSURANCE ENGAGEMENTS

• After the Russian translation of ISAs was
  published ISA 545 appeared, it was devoted to the
  auditing of fair value items.
• The fact, that ISAs 315 and 330 appeared, caused
  amendments to this ISA as well.
• First steps in drafting standards on assurance
  engagements that appeared in 2001 IFACs book
  edition were developed in 2005 and a group of
  documents with codes 3000 and 3400 appeared.

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CHANGES IN ISAs COMPUTERS AND IT

• In the new edition IAPSs 1001, 1002, 1003 and
  1009, that were devoted to computer accounting
  and auditing, were withdrawn.
• A new IAPS 1013 appeared, that is devoted to
  electronic commerce.
• A new IAPS 1014 appeared, that is devoted to
  reporting by auditors on compliance with
  International Financial Reporting Standards.

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CHANGES IN ISAs EXPOSURE DRAFTS

• At the moment several exposure drafts may be
  downloaded on IFACs web-site and discussed by
  specialists
• ISA 230 Audit Documentation
• ISA 320 Materiality in the Identification and
  Evaluation of Misstatements
• ISA 540 Auditing Accounting Estimates and
  Related Disclosures (other than Those Involving
  Fair Measurement and Disclosures)
• ISA 600 Using the Work of Another Auditor and
  IAPS The Audit of Group Financial Statements
• ISA Review of Interim Financial Information
  Performed by the Auditor of the Entity.

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AUDIT RISK

• A new component of the audit risk was introduced
  in the latest edition of ISAs a risk of
  material misstatement. This means a possibility
  of the fact, that before the audit started, there
  were material misstatements in the financial
  statements.
• In fact, this risk is a combination of two well
  known audit risk components inherent risk and
  control risk.

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AUDIT RISK

• ISAs requires for the risk of material
  misstatements to be considered on the following
  two levels
• The level of financial statements as a whole
• The level of financial statement assertions for
• classes of transactions,
• account balances
• disclosures.

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AUDIT RISK

• The auditor should perform the following risk
  assessment procedures to obtain an understanding
  of the entity and its environment, including its
  internal control
• Inquiries of management and others within the
  entity
• Analytical procedures
• Observation and inspection.

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AUDIT RISK

• In order to assess the risks of material
  misstatements on financial statements level and
  on the assertions level, the auditor
• Identifies risks by considering the entity and
  its environment, including relevant controls and
  by considering the classes of transactions,
  account balances, and disclosures in the
  financial statements
• Relates the identified risks to what can go wrong
  at the assertions level
• Considers the significance and likelihood of
  risks
• Determines whether any of the assessed risks are
  significant risks or risks from which substantive
  procedures alone do not provide sufficient
  appropriate audit evidence.

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AUDIT RISK

• The following audit procedures and assessments
  should be documented
• The discussion among the engagement team
  regarding the susceptibility of the entitys
  financial statements to material misstatement due
  to error or fraud, and the significant decisions
  reached
• Key elements of the understanding obtained
  regarding each of the necessary aspects of the
  entity and its environment to assess the risks of
  material misstatement of the financial
  statements the sources of information from which
  the understanding was obtained and the risk
  assessment procedures
• The identified and assessed risks of material
  misstatement at the financial statement level and
  at the assertion level
• The risks identified and related controls
  evaluated.

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INTERNAL CONTROL
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INTERNAL CONTROL

• Starting with auditing financial statements for
  the year ending December 31, 2006 it is planned
  to change ISA 700 and to make amendments to the
  wording that express the responsibility of the
  management of the entity under audit.
• The management of the entity is declared to be
  responsible for designing, implementation and
  support of the internal control system, that
  would provide true and fair presentation of
  financial statements, that should be free from
  material misstatements whether caused by fraud or
  error.
• The section of the auditors report devoted to
  the scope of auditing should be expanded by a
  clause that the audit included procedures based
  on the professional judgment of the auditor in
  order to assess the risk of material misstatement
  as a result of either fraud or error.

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INTERNAL CONTROL
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INTERNAL CONTROL

• The control environment includes the governance
  and management functions and the attitudes,
  awareness, and actions of those charged with
  governance and management concerning the entitys
  internal control and its importance in the
  entity.
• The control environment set the tone of an
  organization, influencing the control
  consciousness of its people.
• It is the foundation for effective internal
  control, providing discipline and structure.

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INTERNAL CONTROL
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AUDIT EVIDENCE

• The sources of audit evidence changed
• In old ISA 500 it was stated that Audit evidence
  will comprise source documents and accounting
  records underlying the financial statements and
  corroborating information from other sources,
• In the new ISA 500 it is stated Audit evidence,
  which is cumulative in nature, includes audit
  evidence obtained from audit procedures performed
  during the course of the audit and may include
  audit evidence obtained from other sources such
  as previous audits and firms quality control
  procedures for client acceptance and continuance.

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AUDIT EVIDENCE
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AUDIT EVIDENCE
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AUDIT EVIDENCE
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PLANNING
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PLANNING

• Planning is not a discrete phase of an audit, but
  rather a continual and iterative process that
  often begins shortly after (or in connection
  with) the completion of previous audit and
  continues until the completion of the current
  audit engagement

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PLANNING
The (overall) auditstrategy
The overall audit plan
The (detailed) audit plan
The audit program
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PLANNING

• The auditor should perform the following
  activities at the beginning of the current audit
  engagement
• Perform procedures regarding the continuance of
  the client relationship and the specific audit
  engagement
• Evaluate compliance with ethical requirements,
  including independence
• Establish an understanding of the terms of
  engagement

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PLANNING

• The auditor should document the overall audit
  strategy and the audit plan, including any
  significant changes made during the audit
  engagement
• The auditors documentation of the overall audit
  strategy records the key decisions considered
  necessary to properly plan the audit and to
  communicate significant matters to the engagement
  team
• The auditors documentation of the audit plan is
  sufficient to demonstrate the planned nature,
  timing and extent of risk assessment procedures,
  and further audit procedures for each material
  class of transaction, account balance, and
  disclosure in response to audit risk
• The auditors documentation of any significant
  changes to the originally planned overall audit
  strategy and to the detailed audit plan includes
  the reasons for the significant changes and the
  auditors response to the events, conditions, or
  results of audit procedures that resulted in such
  changes

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CONCLUSIONS

• The International Standards on Auditing underwent
  considerable changes in the year 2005 and even
  more changes are to go next year
• The purpose of the changes was a response to
  well-known corporate fraud cases
  standard-setters tried to make audit job more
  reliable without increase in price
• As a result of the changes in ISAs Russian
  Standards on Auditing now fail to comply with new
  ISAs
• It is definitely desirable to use the latest
  update of ISAs while auditing financial
  statements, prepared in compliance with IAS (or
  IFRSs)
• FBK (PKF-Moscow) successfully implements ISAs of
  2005 edition in its work

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QUESTIONS ?
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THE END

• We hope, that the presentation reached its
  objectives and was interesting and useful for
  everybody !