Week 2 Course Study CAS 210
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Transcript of Week 2 Course Study CAS 210
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CAS 210 Agreeing to Terms of the Audit Engagement (Acceptance and Continuance)
Objective
3. The obecti!e of the auditor is to accept or continue an audit engagement on"# $hen it has
been agreed that%
(a) The preconditions for an audit are present& and
(b) There is a common understanding bet$een the auditor and management and' $here
appropriate' those charged $ith go!ernance of the terms of the audit engagement.
Preconditions for an Audit
. n order to estab"ish $hether the preconditions for an audit are present' the auditor sha""%
(a) *etermine $hether the financia" reporting frame$or+ app"ied in the preparation of the
financia" statements is acceptab"e& and
(b) ,btain the agreement of management that it ac+no$"edges and understands its
responsibi"it#%
(i) To prepare their financia" statements in accordance $ith the app"icab"e financia" reporting
frame$or+ to ensure fair presentation
(ii) To ha!e interna" contro"s in p"ace $hich management determines to be appropriate for
preparing the financia" statements free from materia" misstatement' $hether due to fraud or
error& and
(iii) To gi!e the auditor%
a. Access to a"" information that is re"e!ant to the preparation of the financia" statements such
as records' documentation etc&
b. Additiona" information that the auditor ma# re-uest from management for the purpose of
the audit& and
c. nrestricted access to persons $ithin the entit# from $hom the auditor determines it
necessar# to obtain audit e!idence
Limitation on Scope Prior to Audit Engagement Acceptance
/. f management imposes a "imitation on the scope of the auditors $or+ for a proposed audit
engagement such that the auditor be"ie!es the "imitation $i"" resu"t in a disc"aimer of an opinion
on the financia" statements' the auditor sha"" not accept the audit engagement' un"ess re-uired
b# "a$ or regu"ation to do so.
Other FactorsAffecting Audit Engagement Acceptance
. f the preconditions for an audit are not present' the auditor sha"" discuss the matter $ith
management.
n"ess re-uired b# "a$ or regu"ation to do so' the auditor sha"" not accept the proposed audit
engagement%
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(a) f the auditor has determined that the financia" reporting frame$or+ app"ied in the
preparation of the financia" statements is unacceptab"e' ecept as pro!ided in paragraph 1& or
(b) f the agreement referred to in paragraph(b) has not been obtained.
1. The auditor sha"" accept the audit engagement on"# if the fo""o$ing conditions are
present%
(a) 4anagement agrees to pro!ide additiona" disc"osures in the financia" statements re-uired
to a!oid the financia" statements being mis"eading& and
(b) The auditor can do the fo""o$ing%
(i) ncorporate an Emphasis of 4atter paragraph' dra$ing users attention to the additiona"
disc"osures and
(ii) The auditor $i"" not use such phrases as5 present fair"#' in a"" materia" respects'6 or 6gi!e a
true and fair !ie$6 as an opinion for the presentation of the financia" statements un"ess re-uired
b# "a$ or regu"ation.
Agreement on Audit Engagement Terms
10. The agreed terms of the audit engagement sha"" be recorded in an audit engagement
"etter or other suitab"e form of $ritten agreement and sha"" inc"ude
(a) The obecti!e and scope of the audit of the financia" statements&
(b) The responsibi"ities of the auditor&
(c) The responsibi"ities of management&
(d) dentification of the app"icab"e financia" reporting frame$or+ for the preparation of the
financia" statements&
Recurring Audits
13. The auditor does not ha!e to send a ne$ audit engagement "etter or other $ritten
agreement each period. 7o$e!er' the fo""o$ing factors ma# ma+e it appropriate to re!ise the
terms of the audit engagement or to remind the entit# of eisting terms%
8 An# indication that the entit# misunderstands the obecti!e and scope of the audit.
8 An# re!ised or specia" terms of the audit engagement.
8 A recent change of senior management.
8 A significant change in o$nership. i.e. shareho"ders
8 A significant change in nature orsi9e of the entit#s business.
8 A change in the financia" reporting frame$or+ adopted in the preparation of the financia"
statements.
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8 A change in other reporting re-uirements.
Acceptance of a Change in the Terms of the Audit Engagement
1:. The auditor sha"" not agree to a change in the terms of the audit engagement $here there
is no reasonab"e ustification for doing so.
A30. A change in circumstances that affects the entit#s re-uirements or a misunderstanding
concerning the nature of the ser!ice origina""# re-uestedma# be considered a reasonab"e basis
for re-uesting a change in the audit engagement.
A31. n contrast' a change ma# not be considered reasonab"e if it appears that the change
re"ates to information that is incorrect' incomp"ete or other$ise unsatisfactor#. An eamp"e might
be $here the auditor is unab"e to obtain sufficient appropriate audit e!idence regarding
recei!ab"es and the entit# as+s for the audit engagement to be changed to a re!ie$
engagement to a!oid a -ua"ified opinion or a disc"aimer of opinion.
1;. f the auditor is re-uested to change the audit engagement to an engagement that
con!e#s a "o$er "e!e" of assurance' the auditor sha"" determine $hether there is reasonab"e
ustification for doing so.
A32. An auditor $ho $as engaged to perform an audit in accordance $ith CASs ma# need to
assess' in addition to the matters referred to in paragraphs an# "ega" or contractua" imp"ications
of the change.
A33. f there is reasonab"e ustification to change the audit engagement to a re!ie$ or a
re"ated ser!ice' the audit $or+ performed to the date of change ma# be re"e!ant to the changed
engagement& ho$e!er' the $or+ re-uired to be performed and the report to be issued $ou"d be
appropriate to the re!ised engagement. n order to a!oid confusing the reader' the report on the
re"ated ser!ice $ou"d not inc"ude reference to%
(a) The origina" audit engagement&
(b) An# procedures that ma# ha!e been performed in the origina" audit engagement' ecept
$here the audit engagement is changed to an engagement to underta+e agreed
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3. The obecti!e of the auditor is to e!a"uate%
(a) The effect of identified misstatements on the audit& and
(b) The effect of uncorrected misstatements on the financia" statements.
$efinitions
:. >or purposes of the CASs' the fo""o$ing terms ha!e the meanings attributed be"o$%
(a) 4isstatement A difference bet$een the amount' c"assification' presentation' or
disc"osure of a reported financia" statement item and the amount' c"assification' presentation' or
disc"osure that is re-uired for the item to be in accordance $ith the app"icab"e financia" reporting
frame$or+. 4isstatements can arise from error or fraud.
(b) ncorrected misstatements 4isstatements that the auditor has accumu"ated during the
audit and that ha!e not been corrected.
Re%uirements
Accumu!ation of #dentified "isstatements
;. The auditor sha"" accumu"ate misstatements identified during the audit' other than those
that are c"ear"# tri!ia". (?ef% @ara.A2
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(b) The aggregate of misstatements accumu"ated during the audit approaches materia"it#
determined in accordance $ith CAS 320. (?ef% @ara.A;)
A;. There ma# be a greater ris+ that possib"e undetected misstatements' $hen ta+en $ith the
aggregate of misstatements accumu"ated during the audit' cou"d eceed materia"it#. ndetected
misstatements cou"d eist because of the presence of samp"ing ris+ and non
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(a) The si9e of the misstatements in re"ation to a particu"ar c"ass of transactions'
account ba"ances or disc"osures and the financia" statements as a $ho"e' and
the particu"ar circumstances of their occurrence& and (?ef% @ara.A13
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(b) ,pening ba"ances Those account ba"ances that eist at the beginning of the
period. ,pening ba"ances a"so inc"ude matters re-uiring disc"osure that eisted
at the beginning of the period' such as contingencies and commitments.
(c) @redecessor auditor The auditor from a different audit firm' $ho audited the
financia" statements of an entit# in the prior period and $ho has been rep"acedb# the current auditor.
Re%uirements
Audit Procedures
Opening Balances
;. The auditor has to read the most recent financia" statements' if an#' and the predecessor
auditors report if an#' for information re"e!ant to opening ba"ances' inc"uding
disc"osures.
. The auditor has to obtain sufficient appropriate audit e!idence to see $hether the opening
ba"ances contain misstatements that materia""# affect the current periods financia"
statements% (?ef% @ara.A1
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10. f the auditor cou"d not find enough e!idence for the opening ba"ances' the auditor must
epress a -ua"ified opinion or disc"aim an opinion on the financia" statements
11. f the auditor conc"udes that the opening ba"ances contain a misstatement that materia""#
affects the current periods financia" statements' and the effect of the misstatement is
not appropriate"# accounted for or not ade-uate"# presented or disc"osed' the auditorsha"" epress a -ua"ified opinion or an ad!erse opinion.
Consistency of Accounting Policies
12. f the auditor conc"udes that%
(a) the current periods accounting po"icies are not consistent"# app"ied in re"ation to
opening ba"ances in accordance $ith the app"icab"e financia" reporting
frame$or+& or
(b) a change in accounting po"icies is not appropriate"# accounted for or not
ade-uate"# presented or disc"osed in accordance $ith the app"icab"e financia"
reporting frame$or+'
the auditor sha"" epress a -ua"ified opinion or an ad!erse opinion
CAS 5+0 ( Samp!ing
Objective
:. The obecti!e of audit samp"ing is to pro!ide a reasonab"e basis so that the auditor can
dra$ conc"usions about the popu"ation from $hich the samp"e is se"ected.
$efinitions
(a) Audit samp"ing (samp"ing) The app"ication of audit procedures to "ess than 100 of
items $ithin a popu"ation such that a"" samp"ing units ha!e a chance of se"ection in order
to pro!ide the auditor $ith a reasonab"e basis on $hich to dra$ conc"usions about the
entire popu"ation.
,c) Samp"ing ris+ The ris+ that the auditors conc"usion based on a samp"e ma# be different
from the conc"usion if the entire popu"ation $ere subected to the same audit procedure.
Samp"ing ris+ can "ead to t$o t#pes of erroneous conc"usions%
,i- #n the case of a test of contro!s. that contro!s are more effective than the/ actua!!/
are. or in the case of a test of detai!s. that a materia! misstatement does not eist
1hen in fact it does* The auditor is primari!/ concerned 1ith this t/pe of
erroneous conc!usion because it affects audit effectiveness and is more !i2e!/ to
!ead to an inappropriate audit opinion*
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,ii- #n the case of a test of contro!s. that contro!s are !ess effective than the/ actua!!/
are. or in the case of a test of detai!s. that a materia! misstatement eists 1hen in
fact it does not* This t/pe of erroneous conc!usion affects audit efficienc/ as it
1ou!d usua!!/ !ead to additiona! 1or2 to estab!ish that initia! conc!usions 1ere
incorrect*
,d- 3onsamp!ing ris2 ( The ris2 that the auditor reaches an erroneous conc!usion for
an/ reason not re!ated to samp!ing ris2* ,Ref Para* A'-
,g- Statistica! samp!ing ( An approach to samp!ing that has the fo!!o1ing
characteristics
,i- Random se!ection of the samp!e items and
,ii- The use of probabi!it/ theor/ to eva!uate samp!e resu!ts. inc!uding measurement of
samp!ing ris2*
A samp!ing approach that does not have characteristics ,i- and ,ii- is considered non
statistica! samp!ing*
,h- Stratification ( The process of dividing a popu!ation into subpopu!ations. each of
1hich is a group of samp!ing units 1hich have simi!ar characteristics ,often
monetar# !a"ue).
(i) To"erab"e misstatement A monetar# amount set b# the auditor in respect of $hich the
auditor see+s to obtain an appropriate "e!e" of assurance that the monetar# amount set
b# the auditor is not eceeded b# the actua" misstatement in the popu"ation. (?ef%
@ara.A3)To"erab"e misstatement is the app"ication of performance materia"it#' as defined
inCAS 320' 6to a particu"ar samp"ing procedure. To"erab"e misstatement ma# be the same
amount or an amount "o$er than performance materia"it#.
() To"erab"e rate of de!iation A rate of de!iation from prescribed interna" contro" procedures
set b# the auditor in respect of $hich the auditor see+sto obtain an appropriate "e!e"of assurance that the rate of de!iation set b# the auditor is not eceeded b# the actua"
rate of de!iation in the popu"ation.
Re%uirements for $esigning Audit Samp!e
. =hen designing an audit samp"e' the auditor sha"" consider the purpose of the audit
procedure and the characteristics of the popu"ation from $hich the samp"e $i"" be
dra$n.
/. The auditor sha"" determine a samp"e si9e sufficient to reduce samp"ing ris+ to an
acceptab"# "o$ "e!e".
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. The auditor sha"" se"ect items for the samp"e in such a $a# that each samp"ing unit in the
popu"ation has a chance of se"ection.
Performing Audit Procedures ,observation. inspection. reca!cu!ation. reperformance.
ana!/tics. vouching. tracing-*
. The auditor sha"" perform audit procedures' appropriate to the purpose' on each samp"e
item se"ected.
10. f the audit procedure is not app"icab"e to the se"ected item' the auditor sha"" perform the
procedure on a rep"acement item.
11. f the auditor is unab"e to app"# the designed audit procedures' or suitab"e a"ternati!e
procedures' to a se"ected item' the auditor sha"" treat that item as a de!iation from the
prescribed contro"' in the case of tests of contro"s' or a misstatement' in the case of tests of
detai"s.
7hen /ou find $eviations and "isstatements
12. The auditor sha"" in!estigate the nature and cause of an# de!iations or misstatements and
e!a"uate their possib"e effect on the purpose of the audit procedure and on other areas of the
audit.
13. =hen the auditor considers a misstatement or de!iation disco!ered in a samp"e to be an
anoma"#' the auditor sha"" obtain a high degree of certaint# that such misstatement or de!iation
is not representati!e of the popu"ation. The auditor sha"" obtain this degree of certaint# b#
performing additiona" audit procedures to obtain sufficient appropriate audit e!idence that the
misstatement or de!iation does not affect the remainder of the popu"ation.
Projecting "isstatements
1:. >or tests of detai"s' the auditor sha"" proect misstatements found in the samp"e to the
popu"ation.
Eva!uating Resu!ts of Audit Samp!ing
1;. The auditor sha"" e!a"uate%
(a) The resu"ts of the samp"e& and (?ef% @ara.A21
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8 Tai"or the nature' timing and etent of those further audit procedures to best achie!ethe re-uired assurance. >or eamp"e' in the case of tests of contro"s' the auditormight etend the samp"e si9e' test an a"ternati!e contro" or modif# re"atedsubstanti!e procedures.
CAS 550 Re!ated Parties
$efinitions
10. >or purposes of the CASs' the fo""o$ing terms ha!e the meanings attributed be"o$%
(b) ?e"ated part# A part# that is either% (?ef% @ara.A:
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13. The auditor sha"" inter!ie$ management regarding%
(a) =ho the re"ated parties are and an# changes from the prior period
(b) The nature of the re"ationships bet$een the entit# and these re"ated parties& and
(c) =hether the entit# entered into an# transactions $ith these re"ated parties during
the period and' if so' the t#pe and purpose of the transactions.
1:. The auditor sha"" inter!ie$ management and others $ithin the entit#' to obtain an
understanding of the contro"s' if an#' that management has estab"ished to% (?ef%
@ara.A1;
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A2:. ,btaining further information on significant transactions outside the entit#s norma"course of business a""o$s the auditor to e!a"uate $hether fraud ris+ factors' if an#' arepresent
A2;. Eamp"es of transactions outside the entit#s norma" course of business ma# inc"ude%
8 Comp"e e-uit# transactions' such as corporate restructurings or ac-uisitions.
8 Transactions $ith offshore entities in urisdictions $ith $ea+ corporate "a$s.8 The "easing of premises or the rendering of management ser!ices b# the entit# to
another part# if no consideration is echanged.
8 Sa"es transactions $ith unusua""# "arge discounts or returns.
8 Transactions $ith circu"ar arrangements' for eamp"e' sa"es $ith a commitment torepurchase.
8 Transactions under contracts $hose terms are changed before epir#.
8inding and Ana!/9ing the Ris2s of "ateria! "isstatement Associated 1ith Re!ated Part/
Re!ationships and Transactions
1. The auditor has to assess the ris+s of materia" misstatement associated $ith re"atedpart# re"ationships and transactions and determine $hether an# of those ris+s are
significant ris+s. To determine this' the auditor must treat the identified significant re"ated
part# transactions outside the entit#s norma" course of business as gi!ing rise to
significant ris+s.
Responding to the Ris2s of "ateria! "isstatement Associated 1ith Re!ated Part/
Re!ationships and Transactions
20. These audit procedures sha"" inc"ude those re-uired b# paragraphs 21
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(c) @erform appropriate substanti!e audit procedures to ne$"# identified re"ated
parties or significant re"ated part# transactions& (?ef% @ara.A3)
(d) ?econsider the ris+ that others ma# eist and perform additiona" audit procedures
as necessar#
(e) f the non
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2. >inancia" statements ma# be affected b# certain e!ents that occur after the date of the
financia" statements. >inancia" reporting frame$or+s ordinari"# identif# t$o t#pes of
e!ents%
(a) Those that pro!ide e!idence of conditions that eisted at the date of the financia"
statements& and
(b) Those that pro!ide e!idence of conditions that arose after the date of the financia"
statements.
Objectives
:. The obecti!es of the auditor are%
(a) To obtain sufficient appropriate audit e!idence $hether the e!ents occurring
bet$een the date of the financia" statements and the date of the auditors report
are appropriate"# disc"osed in the financia" statements in accordance $ith the
app"icab"e financia" reporting frame$or+& and
(b) To respond appropriate"# to facts that become +no$n to the auditor after the date
of the auditors report' that' had the# been +no$n to the auditor at that date' ma#
ha!e caused the auditor to amend the auditors report.
Re%uirements
Procedures for Events Occurring bet1een the $ate of the 8inancia! Statements and the
$ate of the Auditor;s Report
. The auditor sha"" perform audit procedures designed to obtain sufficient appropriate audit
e!idence that a"" e!ents occurring bet$een the date of the financia" statements and the
date of the auditors report that re-uire adustment of' or disc"osure in' the financia"
statements ha!e been identified.
The auditor is not' ho$e!er' epected to perform additiona" audit procedures on matters
to $hich pre!ious"# app"ied audit procedures ha!e pro!ided satisfactor# conc"usions.
/. =hen performing the audit procedures the auditor sha"" ta+e into account the auditors
ris+ assessment in determining the nature and etent of such audit procedures' $hich
sha"" inc"ude the fo""o$ing% (?ef% @ara.A/
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(c) ?e!ie$ing the reading minutes' if an#' of the meetings of the entit#s o$ners'
management and those charged $ith go!ernance that ha!e been he"d after the
date of the financia" statements.
(d) ?eading the entit#s "atest subse-uent interim financia" statements' if an#.
. f the procedures performed abo!e he"p the auditor identif# e!ents that re-uire adustment
of' or disc"osure in' the financia" statements' the auditor sha"" determine $hether each
such e!ent is appropriate"# ref"ected in those financia" statements in accordance $ith
the app"icab"e financia" reporting frame$or+.
The auditor ma# in-uire as to the current status of items that $ere accounted for on the basisof pre"iminar# or inconc"usi!e data and ma# ma+e specific in-uiries about the fo""o$ingmatters%
8 =hether ne$ commitments' borro$ings or guarantees ha!e been entered into.
8 =hether sa"es or ac-uisitions of assets ha!e occurred or are p"anned.
8 =hether there ha!e been increases in capita" or issuance of debt instruments' suchas the issue of ne$ shares or debentures' or an agreement to merge or "i-uidatehas been made or is p"anned.
8 =hether an# assets ha!e been appropriated b# go!ernment or destro#ed' foreamp"e' b# fire or f"ood.
8 =hether there ha!e been an# de!e"opments regarding contingencies.
8 =hether an# unusua" accounting adustments ha!e been made or arecontemp"ated.
8 =hether an# e!ents ha!e occurred or are "i+e"# to occur that $i"" bring into -uestionthe appropriateness of accounting po"icies used in the financia" statements' as$ou"d be the case' for eamp"e' if such e!ents ca"" into -uestion the !a"idit# of
the going concern assumption.8 =hether an# e!ents ha!e occurred that are re"e!ant to the measurement of
estimates or pro!isions made in the financia" statements.
8 =hether an# e!ents ha!e occurred that are re"e!ant to the reco!erabi"it# of assets.
!ritten Representations
. The auditor sha"" re-uest management and' $here appropriate' those charged $ith
go!ernance to pro!ide a $ritten representation that a"" e!ents occurring subse-uent to
the date of the financia" statements and for $hich the app"icab"e financia" reportingframe$or+ re-uires adustment or disc"osure ha!e been adusted or disc"osed.
8acts 7hich )ecome
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auditors report but before the date the financia" statements are issued' a fact becomes
+no$n to the auditor that if it $as +no$n to the auditor at the date of the auditors report'
ma# ha!e caused the auditor to amend the auditors report' the auditor sha""% (?ef%
@ara.A11)
(a) *iscuss the matter $ith management
(b) *etermine $hether the financia" statements need amendment& and' if so'
(c) n-uire ho$ management intends to address the matter in the financia"
statements.
11. f management amends the financia" statements' the auditor sha""%
(a) Carr# out the audit procedures necessar# in the circumstances on the
amendment.
(b) n"ess the circumstances in paragraph 12app"#%
(i) Etend the same audit procedures referred to in paragraphs and / to the
date of the ne$ auditors report& and
(ii) @ro!ide a ne$ auditors report on the amended financia" statements.
8acts 7hich )ecome
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(b) ?e!ie$ the steps ta+en b# management to ensure that an#one in receipt of the
pre!ious"# issued financia" statements together $ith the auditors report is
informed of the situation.
(c) n"ess the circumstances in paragraph12app"#%
(i) Etend the audit procedures referred to in paragraphs and / to the date
of the ne$ auditors report' and date the ne$ auditors report no ear"ier
than the date of appro!a" of the amended financia" statements& and
(ii) @ro!ide a ne$ auditors report on the amended financia" statements.
1. The auditor sha"" inc"ude in the ne$ or amended auditors report an Emphasis of 4atter
paragraph or ,ther 4atter paragraph referring to a note to the financia" statements that
more etensi!e"# discusses the reason for the amendment of the pre!ious"# issued
financia" statements and to the ear"ier report pro!ided b# the auditor.
1/. f management does not ta+e the necessar# steps to ensure that an#one in receipt of the
pre!ious"# issued financia" statements is informed of the situation and does not amend
the financia" statements in circumstances $here the auditor be"ie!es the# need to be
amended' the auditor sha"" notif# management and' un"ess a"" of those charged $ith
go!ernance are in!o"!ed in managing the entit#' :those charged $ith go!ernance' that
the auditor $i"" see+ to pre!ent future re"iance on the auditors report. f' despite such
notification' management or those charged $ith go!ernance do not ta+e these
necessar# steps' the auditor sha"" ta+e appropriate action to see+ to pre!ent re"iance on
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