Ch04

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

Slide 4.1

An Auditor’s Services Principles of Auditing: An Introduction to International Standards on Auditing - Ch 4

Rick Stephan Hayes, Roger Dassen, Arnold Schilder,

Philip Wallage


Slide 4.2

What services does an independent audit firm offer their clients?


Slide 4.3

IAASB’s 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 (historical financial) and ISAEs (not based on historical f/s) 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 IAASB’s Engagement Standards.


Slide 4.4

Illustration 4.1


Slide 4.5

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 practitioner’s 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 but greater than a reasonable assurance engagement as the basis for a negative form of expression of the practitioner’s 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”.


Slide 4.6

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)


Slide 4.7

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,


Slide 4.8

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.


Slide 4.9

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.


Slide 4.10

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.


Slide 4.11

five elements that all assurance engagements exhibit

(1) a three party relationship involving a practitioner; a responsible party; and the intended users,

(2) a subject matter, (3) suitable criteria, (4) evidence (5) an assurance report.


Slide 4.12

Illustration 4.2


Slide 4.13

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 or subject matter information (assertion).

The intended users are the person or persons for whom the practitioner prepares the assurance report.


Slide 4.14

Illustration 4.3


Slide 4.15

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).

Subject Matter


Slide 4.16

Suitable CriteriaSuitable criteria are the benchmarks (standards,

objectives or set of rules) used to evaluate the subject matter.– 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– Internal control framework


Slide 4.17

Characteristics of Suitable Criteria

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


Slide 4.18

Assurance Report

The practitioner provides a written report containing a conclusion that conveys the assurance obtained about the subject matter information. – ISAs, ISREs and ISAEs

establish basic elements for assurance reports.


Slide 4.19

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.


Slide 4.20

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 auditor’s 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).


Slide 4.21

Audit Procedures for a Review

• “For the purpose of expressing negative assurance in the review report, the practitioner should obtain sufficient appropriate evidence primarily through inquiry and analytical procedures to be able to draw conclusions.” ISRE 2400

• Ordinarily, the auditor will also do limited inspection (of minutes of Board of Directors meetings, for instance)


Slide 4.22

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, whether internal or external, in paper form, electronic form, or other media, or a physical examination of an asset.


Slide 4.23

SPECIAL PURPOSE FRAMEWORK FINANCIAL STATEMENTS {Old equivalent} Not in text

1. Special purpose financial statements – Complete (not partial) financial statements prepared in accordance with a special purpose framework.

A Special purpose framework is a financial reporting framework designed to meet the financial information needs of specific users.

{(1) Other comprehensive basis of accounting,

(2) Reports on compliance with contractual agreements}


Slide 4.24

Examples of special purpose frameworks A tax basis of accounting for a set of financial

statements that accompany an entity’s tax return;

The cash receipts and disbursements basis of accounting for cash flow information that an entity may be requested to prepare for creditors;

The financial reporting provisions established by a regulator to meet that regulator’s requirements; or

The financial reporting provisions of a contract, such as a bond indenture or a loan agreement.


Slide 4.25

Special Considerations—Audits Of Single Financial Statements And Specific Elements, Accounts Or Items Of A Financial Statement – ISA 805 {Old equivalent}

Not in text

• ISA 805 deals with special considerations in the application of ISAs to an audit of a single financial statement or of a specific element, account or item of a financial statement. (1) {component financial statements} (2) {summarized financial statements}


Slide 4.26

Examples of Specific Elements, Accounts or Items of a Financial Statement

• Accounts receivable, allowance for doubtful accounts receivable, inventory, the liability for accrued benefits of a private pension plan, the recorded value of identified intangible assets, or the liability for “incurred but not reported” claims in an insurance portfolio, including related explanatory notes.

• A schedule of externally managed assets and income of a private pension plan, including related explanatory notes.

• A schedule of net tangible assets, including related explanatory notes.

• A schedule of disbursements in relation to a lease property, including related explanatory notes.

• A schedule of profit participation or employee bonuses, including related explanatory notes.


Slide 4.27

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.


Slide 4.28

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

assurance engagements are:

• Sarbanes Oxley Section 404 (PCAOB AS #5) 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.


Slide 4.29

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 and possible actions by an entity. 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 management’s 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 (“what if” scenario).


Slide 4.30

In an engagement to examine prospective financial information, the auditor should obtain sufficient appropriate evidence as to whether:

Management’s best-estimate assumptions on which the prospective financial information is based are not unreasonable;

The prospective financial information is properly prepared on the basis of the assumptions;

The prospective financial information is properly presented and all material assumptions are adequately disclosed, including a clear indication as to whether they are best-estimate assumptions or hypothetical assumptions; and

The prospective financial information is prepared on a consistent basis with historical financial statements, using appropriate accounting principles.


Slide 4.31

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.


Slide 4.32

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.


Slide 4.33

Economic Sustainability An organization’s impacts on the economic circumstances of its stakeholders and on economic systems at the local, national and global levels.

Environmental Sustainability An organization’s impacts on living and non-living natural systems, including ecosystems, land, air and water.

Social Sustainability An organization’s impacts on the social systems within which it operates. Impacts on stakeholders at the local, national,

and global levels. The organization’s intangible assets, such as its

human capital and reputation.

Sustainability Reporting “Triple Bottom Line” Assurances


Slide 4.34

The report under the GRI Guidelines has 5 sections

1. Vision and Strategy – a description of the reporting organization’s strategy with regard to sustainability, including a statement from the CEO.

2. Profile – overview of the reporting organization’s 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.


Slide 4.35

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)


Slide 4.36

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

The objective of an agreed-upon procedures engagement is for the auditor to carry out procedures of an audit nature to which the auditor and the entity and third parties have agreed and to report on factual findings.

• As the auditor simply provides a report of the factual findings of agreed-upon procedures, no assurance is expressed. Instead, users of the report assess for themselves the procedures and findings reported by the auditor and draw their own conclusions from the auditor’s work.


Slide 4.37

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.


Slide 4.38

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.


Slide 4.39

Thank You for Your Attention

Any Questions?


Slide 4.40

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 practitioner’s conclusion – The assurance report date.– The name and location of the firm or the

practitioner

Ch04

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