International Auditing and Assurance Standards Board The Clarified ISAs, Audit Documentation, and SME Audit Considerations ISA Implementation Support Module Prepared by IAASB Staff (edited) October 2009

Understanding an ISA Audit The Clarified ISAs –Elements of the Clarified ISAs, SME audit considerations, and additional aspects of ISA 200 Audit documentation –Objective and selected aspects of ISA 230 Overview 2

Understanding an ISA Audit Starting point in understanding an ISA audit; umbrella standard to all ISAs Purpose, nature, and scope of an ISA audit Overall objectives of auditor –To obtain reasonable assurance, and –To report in accordance with auditor findings   Failure to achieve carries reporting or withdrawal implications ISA 200, Overall Objectives of the Auditor, and Conduct of an ISA Audit 3

Understanding an ISA Audit Requirements addressing auditor’s general responsibilities Concepts relevant to an audit Scope, authority, and structure of ISAs ISA 200, Overall Objectives of the Auditor, and Conduct of an ISA Audit 4

Clarified ISAs Four distinct sections –Introduction; Objectives; Requirements; and Application & Other Explanatory Material –Definitions section as well, in most cases Together all sections comprise the Standard Required to have understanding of entire text to understand objective stated in an ISA and to apply requirements properly Elements 5

Elements of Clarified ISAs Scope of ISA –E.g., relationship to other ISAs, any specific limitations of the applicability of the ISA, etc. Essential contextual information –E.g., context in which the ISA is set, respective responsibilities of auditor and others, etc. Effective date –Early application permitted unless otherwise stated Introduction 6

Elements of Clarified ISAs Underpin ISA’s principles-based approach Set out aim of auditor and what needs to be accomplished Provide linkage between ISA requirements and auditor’s overall objectives Proper application of requirements expected to provide a sufficient basis for achievement of objectives; however, ISA requirements cannot anticipate all circumstances Objectives 7

Elements of Clarified ISAs To be used in planning and performing the audit to –Determine need for additional audit procedures –Evaluate whether sufficient appropriate evidence has been obtained To be understood in context of the overall objectives of the auditor and having regard to interrelationships amongst ISAs Objectives 8

Elements of Clarified ISAs If an objective in a relevant ISA cannot be achieved, evaluate whether this prevents achievement of auditor’s overall objectives –Represents a significant matter requiring documentation Circumstances that may give rise to failure, e.g., –Unable to comply with a requirement(s) –Not practicable or possible to carry out additional procedures auditor judges necessary Objectives 9

Elements of Clarified ISAs Designed to enable achievement of objectives Compliance with ISAs claimed only when auditor has complied with all relevant ISAs In exceptional circumstance, departure from a relevant requirement permitted –Where the requirement is for specific procedure and that procedure would be ineffective –Perform alternative audit procedures to achieve aim of the requirement Requirements 10

Elements of Clarified ISAs Integral part of the standard providing –Background information on matters addressed –Further explanation of a requirement, e.g., what it means or is intended to cover –Guidance for carrying out requirements, e.g., examples of procedures Does not impose a requirement, but is relevant to proper application of the requirements Application & Other Explanatory Material 11

Clarified ISAs Structure of Clarified ISAs heavily influenced by need to ensure applicability of ISAs to audits of entities of all sizes, in particular SMEs –Separate section for requirements to help readability and clarification of conditional requirements –Requirements capable of being applied proportionately –Additional guidance specific to SME audits (eliminating the need for IAPS 1005) Considerations Specific to SME Audits 12

Clarified ISAs Concepts relevant to an ISA audit –Amplification of existing guidance, e.g., on sufficiency and appropriateness of audit evidence, inherent limitations of an audit, etc. –No change to definition of reasonable assurance and underlying audit risk model Professional judgment Professional skepticism Additional Features of ISA

Additional Features of ISA 200 Essential to proper conduct of an audit New definition and requirement –Better articulates IAASB’s expectations regarding exercise of professional judgment in an audit –Helps stress auditor’s professional responsibility for the exercise of judgment in a sound, consistent, and justifiable manner Professional Judgment 14

Additional Features of ISA 200 New guidance –Addresses how judgment may be evaluated –Reminds auditor of need to consult on difficult or contentious matters and for significant judgments to be evidenced –Makes clear that judgment is not to be used as the justification for decisions that are not supported by the facts and circumstances or sufficient appropriate audit evidence Professional Judgment 15

Audit Documentation Objective –Sufficient appropriate record of the basis for auditor’s report –Evidence that audit planned and performed in accordance with ISAs Benefits, e.g., –Facilitates supervision and review, evaluation of evidence obtained and conclusions reached, internal and external inspections, etc. ISA 230, Audit Documentation 16

Audit Documentation Sufficient to enable an experienced auditor, having no previous connection with the audit, to understand –Nature, timing, and extent of the audit procedures –Results of audit procedures, and the audit evidence obtained –Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions Benchmark 17

Audit Documentation Focus is on meaningful documentation –“… it is neither necessary nor practicable for the auditor to document every matter considered, or professional judgment made, in an audit. …” –“it is unnecessary for the auditor to document separately … compliance with matters for which compliance is demonstrated by documents included within the audit file….” (ISA 230.A7) Many illustrations of how documentation can be done in efficient and effective manner (see ISAs 230, 300, 315, etc.) 18

Audit Documentation Documentation of items/matters tested, who performed the audit work, reviewer, and dates Documentation of discussions of significant matters with management, those charged with governance, and others Documentation of departure from a relevant requirement –How alternative procedures achieve aim of the requirement and reasons for departure Additional features of ISA

Audit Documentation Requirements addressing matters arising after date of auditor’s report and assembly of final audit file –Assembly of final audit file expected <= 60 days of audit report date Clarifies relationship between ISA 230 and documentation requirements in other ISAs Additional features of ISA

Note This set of support slides does not amend or override the ISAs, the texts of which alone are authoritative. Reading the slides is not a substitute for reading the ISAs. The slides are not meant to be exhaustive and reference to the ISAs themselves should always be made. In conducting an audit in accordance with ISAs, the auditor is required to comply with all the ISAs that are relevant to the engagement. 21

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