Lecture 3 - Auditors Services.pptx ddadss

auditing

1. 1 LECTURE 3: AUDITOR’S SERVICES

2. Learning objectives After studying this chapter, you should be able to: Understand the general definition of assurance services. Identify the assurance and non-assurance services normally performed by auditors. Explain what an assurance engagement entails. Describe the five elements exhibited by all assurance engagements. Know the various subject matters that can be covered in an assurance engagement. 2

3. Learning objectives After studying this chapter, you should be able to: Distinguish between the different suitable criteria applicable to an assurance service Understand what distinguishes a review from a compilation Understand the place of professional judgement in audits Describe professional scepticism Give the inherent limitations of an audit Quality Control 3

4. 3.1. International Framework for Auditor Services 4

5. The International Auditing and Assurance Standards Board (IAASB) is: “ an independent standard-setting body that serves the public interest by setting high-quality international standards for auditing, quality control, review, other assurance, and related services, and by facilitating the convergence of international and national standards ” (IAASB 2019). 5 3.1. International Framework for Auditor Services

6. 6 3.1. International Framework for Auditor Services International Auditing and Assurance Standards Board (IAASB) issues: International Standards on Auditing (ISAs) as the standards to be applied by auditors in reporting on historical financial information. International Standards on Assurance Engagements (ISAEs) as the standards to be applied by practitioners in assurance engagements dealing with information other than historical financial information International Standards on Quality Control (ISQCs) as the standards to be applied for all services falling under the Standards of the IAASB, and International Standards on Related Services (ISRSs) as the standards to be applied on related services, as it considers appropriate International Standards on Review Engagements (ISREs) as the standards to be applied to the review of historical financial information.

7. Guidance and Practical Assistance Provided by Practice Statements (IAPS, IAEPs, IRSPSs): International Auditing Practice Notes (IAPNs), represented by IAPN 1000–1100, are issued to provide interpretive guidance and practical assistance to auditors in implementing ISAs for audit, review and special purpose engagements. International Assurance Engagement Practice Notes (IAEPNs), provide interpretive guidance for ISAEs, International Related Services Practice Notes (IRSPNs) will provide assistance for auditors implementing ISRSs. 7 3.1. International Framework for Auditor Services

8. 3.2. Elements of an Assurance Engagement Definition of Assurance Engagement: “Assurance engagement means an engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users (other than the responsible party) about the outcome of the evaluation or measurement of a subject matter against criteria.” 8

9. 3.2. Elements of an Assurance Engagement Types of Assurance Engagement: A reasonable assurance engagement: The objective is a reduction in assurance engagement risk to an acceptably low level => a positive form of expression of the practitioner’s conclusion. A limited assurance engagement The objective is a reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement, but where that risk is greater than for a reasonable assurance engagement => a negative form of expression of the practitioner’s conclusion. 9

10. Five Elements Exhibited by all Assurance Engagements: A three-party relationship involving a practitioner, a responsible party, and the intended users; An appropriate subject matter; Suitable criteria; Sufficient appropriate evidence; and A written assurance report 10 3.2. Elements of an Assurance Engagement

11. Three-party relationship : 11 Three people or groups of people involved: – the practitioner (accountant) – the intended users – the responsible party (the person(s) who prepared the subject matter) 3.2. Elements of an Assurance Engagement

12. Subject matter The subject matter of an assurance engagement can take many forms, such as: Financial performance or conditions for which the subject matter information may be the recognition, measurement, presentation and disclosure represented in financial statements Non-financial performance or conditions for which the subject matter information may be key indicators of efficiency and effectiveness. Physical characteristics for which the subject matter information may be a specifications document. Systems and processes for which the subject matter information may be a statement of effectiveness. Behaviour for which the subject matter information may be a statement of compliance or a statement of effectiveness. 12 3.2. Elements of an Assurance Engagement

13. Suitable Criteria Suitable criteria are the benchmarks (standards, objectives, or set of rules) used to evaluate evidence or measure the subject matter of an assurance engagement. For example, in the preparation of financial statements, the suitable criteria may be IFRS, US Generally Accepted Accounting Principles (US GAAP), or national standards. The Characteristics for Assessing Suitable Criteria: Relevance, Completeness, Reliability, Neutrality and Understandability. Criteria Established or Specifically Developed: are embodied in laws or regulations, or issued by recognized bodies of experts and are identified for the purpose of the engagement which are consistent with the engagement objectives. 13 3.2. Elements of an Assurance Engagement

14. Evidence The practitioner plans and performs an assurance engagement with an attitude of professional scepticism to obtain sufficient appropriate evidence about whether the subject matter information is free of material misstatement. Sufficiency is the measure of the quantity of evidence. Appropriateness is the measure of the quality of evidence; that is, its relevance and its reliability Materiality is relevant when the auditor determines the nature, timing and extent of evidence-gathering procedures, and when assessing whether the subject matter information is free of misstatement. Materiality is considered in the context of quantitative and qualitative factors, such as relative magnitude and the nature and extent of the effect of these factors on the evaluation of the subject matter. 14 3.2. Elements of an Assurance Engagement

15. Assurance Report The auditor provides a written report containing a conclusion that conveys the assurance obtained from the subject matter information. ISAs, ISREs and ISAEs establish basic elements for assurance reports. Also, the auditor considers other reporting responsibilities, including communicating with those charged with governance when appropriate. 15 3.2. Elements of an Assurance Engagement

16. Assurance Report (cont.) In an assertion-based engagement, the practitioner’s conclusion can be worded either: in terms of the responsible party’s assertion (for example: ‘In our opinion the responsible party’s assertion that internal control is effective, in all material respects, based on XYZ criteria, is fairly stated’); or directly in terms of the subject matter and the criteria (for example: ‘In our opinion internal control is effective, in all material respects, based on XYZ criteria’). 16 3.2. Elements of an Assurance Engagement

17. 17 3.2. Elements of an Assurance Engagement

18. 3.3. Audits of Historical Financial Information The overall objectives of an audit of financial statements is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework. The auditor also must report on the financial statements, and communicate as required by the ISAs, in accordance with the auditor’s findings. The expression of a conclusion by an auditor is designed to enhance the degree of confidence intended users can have about historical financial statements. 18

19. 3.4. Professional Judgement, Professional Scepticism and Inherent Limitations 19

20. 20 Professional Judgement Definition Professional judgement is the application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement Professional judgement is required for the critical elements of auditing including criteria, independence of mind, sufficient appropriate audit evidence, determining and communicating significant deficiencies in internal control and determination of whether an audit objective has been achieved 3.4. Professional Judgement, Professional Scepticism and Inherent Limitations

21. 21 Professional Judgement ISA 200 requires the auditor to exercise professional judgement in planning and performing an audit of financial statements, including, but not restricted to the following: Materiality and audit risk Nature, extent and timing of audit procedures Evaluating sufficient and appropriate audit evidence obtained Evaluating management judgements Drawing conclusions on the evidence obtained Determination of what other matters arising from the audit significant to the oversight of the financial reporting process 3.4. Professional Judgement, Professional Scepticism and Inherent Limitations

22. 22 Professional Scepticism Definition Professional scepticism is an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence An attitude of professional scepticism means the practitioner makes a critical assessment, with a questioning mind, of the validity of evidence obtained 3.4. Professional Judgement, Professional Scepticism and Inherent Limitations

23. 23 Professional Scepticism Requires auditor to be alert to: Audit evidence that contradicts other audit evidence obtained; Information that brings into question the reliability of documents and responses to inquiries to be used as audit evidence; Conditions that may indicate possible fraud ; and Circumstances that suggest the need for audit procedures in addition to those required by ISAs Professional scepticism should be documented to provide evidence of the auditor’s exercise of professional scepticism in accordance with the ISAs. 3.4. Professional Judgement, Professional Scepticism and Inherent Limitations

24. 3.5. Quality Control (ISQC #1 and ISA 220) 24 International Standard on Quality Control #1 (ISQC #1) applies to all firms of professional accountants in respect to audits and reviews, other assurance, and related services engagements. ISQC #1 gives the requirements designed to enable the accounting firm to meet the objective of quality control. ISA 220 deals with quality control procedures for audits of financial statements.

25. 25 A major objective of the audit firm is to establish and maintain a system of quality control to provide it with reasonable assurance that the accounting firm and its personnel comply with professional standards, legal and regulatory requirements and that reports issued are appropriate in the circumstances. Quality control include the policies and procedures as followings: Leadership responsibilities for quality within the firm. Relevant ethical requirements. Acceptance and continuance of client relationships and specific engagements. Human resources. Engagement performance. Monitoring. 3.5. Quality Control (ISQC #1 and ISA 220)

26. 26 3.5. Quality Control (ISQC #1 and ISA 220)