Tuesday, August 11, 2015

When to perform Tests of Controls in an audit ?

The objective of the auditor while performing the audit is to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement, through DESIGNING and IMPLEMENTING appropriate responses to those risks.

TESTS of CONTROLS is an audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level.

As required by ISA 330, the auditor shall design and implement overall responses to address the assessed risks of material misstatement at the financial statement level.

Further, paragraph 6 of ISA 330 states that the auditor shall design and perform further audit procedures whose nature, timing and extent are based on and are responsive to the assessed risks of material misstatement at the assertion level.

In designing the further audit procedures to be performed, the auditor shall :

  1. Consider the reasons for the assessment given to the risk of material misstatement at the assertion level for each class of transactions, account balance, and disclosure, including :
    • The likelihood of material misstatement due to the particular characteristics of the relevant class of transactions, account balance, or disclosure (that is, the inherent risk); and
    • Whether the risk assessment takes account of relevant controls (that is, the control risk), thereby requiring the auditor to obtain audit evidence to determine whether the controls are operating effectively (that is, the auditor intends to rely on the operating effectiveness of controls in determining the nature, timing and extent of substantive procedures);
  2. Obtain more persuasive audit evidence the higher the auditor’s assessment risk.

The auditor shall design and perform TESTS of CONTROLS to obtain sufficient appropriate audit evidence as to the operating effectiveness of relevant controls IF :

  1. The auditor’s assessment of risks of material misstatement at the assertion level includes an expectation that the controls are operating effectively (that is, the auditor intends to rely on the operating effectiveness of controls in determining the nature, timing and extent of substantive procedures); OR
  2. Substantive procedures alone cannot provide sufficient appropriate audit evidence at the assertion level.

In designing and performing tests of controls, the auditor shall obtain more persuasive audit evidence the greater the reliance the auditor places on the effectiveness of a control (A higher level of assurance may be sought about the operating effectiveness of controls when the approach adopted consists primarily of tests of controls, in particular where it is not possible or practicable to obtain sufficient appropriate audit evidence only from substantive procedures) (HRD).

Considering whether EXTERNAL CONFIRMATION procedures are to be performed as Substantive Audit Procedures

Substantive procedure is an audit procedure designed to detect material misstatements at the assertion level. Substantive procedures comprise :

  1. Tests of details (of classes of transactions, account balances, and disclosures); and
  2. Substantive analytical procedures

While conducting substantive audit procedures, the auditor is required to consider whether EXTERNAL CONFIRMATION procedures are to be performed as part of substantive audit procedures.

ISA 330 paragraph A48 states that EXTERNAL CONFIRMATION procedures frequently are relevant when addressing assertions associated with account balances and their elements, but need not be restricted to these items. For example, the auditor may request external confirmation of the terms of agreements, contracts, or transactions between and entity and other parties. External confirmation procedures also may be performed to obtain audit evidence about the absence of certain conditions. For example, a request may specifically seek confirmation that no”side agreement” exists that may be relevant to an entity’s revenue cutoff assertion. Other situations where external confirmation procedures may provide relevant audit evidence in responding to assessed risks of material misstatement include :

  • Bank balances and other information relevant to banking relationships
  • Account receivable balances and terms
  • Inventories held by third parties at bonded warehouse for processing or on consignment
  • Property title deeds held by lawyers or financiers for safe custody or as security
  • Investments held for safekeeping by third parties, or purchased from stockbrokers but not delivered at the balance sheet date
  • Amounts due to lenders, including relevant terms of repayment and restrictive covenants
  • Account payable balances and terms

Although external confirmations may provide relevant audit evidence relating to certain assertions, there are some assertions for which external confirmations provide less relevant audit evidence. For example, external confirmations provide less relevant audit evidence relating to the recoverability of accounts receivable balance, than they do of their existence.

The auditor may determine that external confirmation procedures performed for one purpose provide and opportunity to obtain audit evidence about other matters. For example, confirmation requests for bank balances often include requests for information relevant to other financial statement assertions. Such considerations may influence the auditor’s decision about whether to perform external confirmation procedures.

As detailed in paragraph A51 of ISA 330, there are several factors that may assist the auditor in determining whether external confirmation procedures are to be performed as substantive audit procedures, include:

  • The confirming party’s knowledge of the subject matter – responses may be more reliable if provided by a person at the confirming party who has the requisite knowledge about the information being confirmed
  • The ability or willingness of the intended confirming party to respond – for example, the confirming party :
    • May not accept responsibility for responding to a confirmation request;
    • May consider responding too costly or time consuming;
    • May have concerns about the potential legal liability resulting from responding;
    • May account for transactions in different currencies; or
    • May operate in an environment where responding to confirmation requests is not a significant aspect of day-to-day operations

In such situations, confirming parties may not respond, may respond in a casual manner or may attempt to restrict the reliance placed on the response

  • The objectivity of the intended confirming party – if the confirming party is a related party of the entity, responses to confirmation requests may be less reliable.

Thursday, July 16, 2015

Revised of ISA addressing Disclosures in the Audit of Financial Statements

As dropped into my mail inbox by today, July 16, 2015, the IAASB has announced on July 15, 2015 the finalization of Amendments to Auditing Standards to Promote Greater Focus on Financial Statements Disclosures.

It said that the IAASB on July 15, 2015 released its revised International Standards on Auditing (ISAs), Addressing Disclosures in the Audit of Financial Statements. The revisions to the standards aim to focus auditors more explicitly on disclosures throughout the audit process and drive consistency in auditor behavior in applying the requirements of the ISAs.

As a complement to these revisions, IAASB staff has also developed a publication, Addressing Disclosures in the Audit of Financial Statements and Related Conforming Amendments, for auditors that describes financial reporting disclosure trends and their possible implications from an audit perspective and highlights how the ISAs as revised guide the auditor in addressing disclosures. This publication is intended to help the consistent, effective, and proper application of the IASs when addressing disclosures as part of an audit of financial statements, and may be particularly relevant to small and medium practices implementing the changes to the ISAs.

The IAASB firmly believes these changes to the ISAs will enhance audit quality and are capable of being applied proportionately in audits of entities of all sizes, and in all jurisdictions and sectors.

A staff-prepared Basis for Conclusions, which explains the IAASB’s rationale for its decisions, and an At a Glance document, which explains the main changes to the ISAs, are also now available.

The revisions to the standards encompass changes to 10 ISAs and conforming amendments to five other ISAs. They will be effective for audits of financial statements for periods ending on or after December 15, 2016, in line with the effective date for the new and revised Auditor Reporting Standards and ISA 720 (Revised), The Auditor's Responsibilities Relating to Other Information (HRD).

Monday, June 15, 2015

2015 Edition of Code of Ethics for Professional Accountants

The IESBA has published the 2015 IESBA Handbook which contains the entire Code of Ethics for Professional Accountants. This handbook replaces the 2014 edition of the Handbook of the Code of Ethics for Professional Accountants.

The 2015 edition of the handbook contains the following changes to the Code addressing certain non-assurance services provisions for audit clients in Section 290 :

  • The exception provisions (paragraphs 290.171 and 290.183) that permit an audit firm to provide certain bookkeeping and taxation services to public interest entity audit clients in emergency or other unusual situations have been withdrawn
  • The provision addressing management responsibility have been strengthened, with additional guidance and clarification provided regarding what constitutes management responsibility
  • The guidance regarding the concept of “routine or mechanical” services relating to the preparation of accounting records and financial statements for audit clients that are not public interest entities has been enhanced and clarified

Corresponding and conforming changes have been made to Section 291 of the Code with respect to assurance clients.

The changes will be effective on April 15, 2016, except for the changes to Section 290, which will be effective for audits of financial statements for periods commencing on or after April 15, 2016. Early adoption is permitted.

Click here to access the Code.