International Auditing and Assurance Standards Board

The Clarified ISAs, Audit Documentation, and SME Audit Considerations

ISA Implementation Support Module
Prepared by IAASB Staff October 2009

Overview
Understanding an ISA Audit The Clarified ISAs
Elements of the Clarified ISAs, SME audit considerations, and additional aspects of ISA 200

Audit documentation
Objective, SME audit considerations, and additional aspects of ISA 230
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Understanding an ISA Audit

ISA 200, Overall Objectives of the Auditor, and Conduct of 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
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Understanding an ISA Audit

ISA 200, Overall Objectives of the Auditor, and Conduct of an ISA Audit
Requirements addressing auditors general responsibilities Concepts relevant to an audit

Scope, authority, and structure of ISAs

Clarified ISAs

Elements
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 5

Elements of Clarified ISAs

Introduction
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
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Elements of Clarified ISAs

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

Elements of Clarified ISAs

Objectives
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
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Elements of Clarified ISAs

Objectives
If an objective in a relevant ISA cannot be achieved, evaluate whether this prevents achievement of auditors 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

Elements of Clarified ISAs

Requirements
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 10

Elements of Clarified ISAs

Application & Other Explanatory Material

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
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Clarified ISAs

Considerations Specific to SME Audits

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
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SME Audit Considerations

Considerations Specific to SME Audits

New guidance in application material of the ISAs providing considerations specific to audits of smaller entities
Typical qualitative characteristics of SMEs described in ISA 200

Guidance developed primarily with unlisted entities in mind; some considerations, however, may be helpful in audits of smaller listed entities Considerations do not limit responsibility to comply with ISA requirements 13

SME Audit Considerations

Proportionality of Application of ISAs

ISAs designed to be able to be applied proportionately with size/complexity of an entity
Proportionality modification of requirements

Not every audit to be performed the same way

Audit approaches may vary with circumstances (simpler/more complex)

Professional judgment needed regarding audit procedures to meet the ISA requirements and gather audit evidence

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SME Audit Considerations

Proportionality of Application of ISAs

Demonstrated in requirements, e.g.,
ISA 260.13, where management = those charged with governance ISA 315.17, absence of formal risk assessment process ISA 540.13, choice of responses to assessed risks

Demonstrated in application material, e.g., guidance on aspects of the audit which vary with size, complexity, and nature of an entity 15

SME Audit Considerations

Application in an SME Context

Basic obligation in the ISAs is to comply with all ISAs relevant to the audit

However, not all ISAs may be relevant in an SME audit, e.g.,

ISA 402, if SME does not use a service organization ISA 600, if SME audit is not a group audit ISA 610, if SME has no internal audit function
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SME Audit Considerations

Application in an SME Context

Even if an ISA is relevant, not all its requirements may be relevant
Conditional requirements need not be applied if conditions do not exist

Examples
Engagement team discussion (ISA 315.10) Determining whether material uncertainty exists in context of going concern (ISA 570.16)
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Clarified ISAs

Additional Features of ISA 200

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

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Additional Features of ISA 200

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

Professional Judgment
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
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Audit Documentation

ISA 230, Audit Documentation

Objective
Sufficient appropriate record of the basis for auditors 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. 21

Audit Documentation

Benchmark
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
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SME Audit Considerations

Proportionate Documentation in an SME Context

Appropriate documentation need not be burdensome

Application designed to be proportionate, efficient, and effective

For SMEs, likely simple in form and relatively brief ISAs explicitly encourage exercise of professional judgment in determining form and extent of documentation that make most sense
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SME Audit Considerations

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 24 230, 300, 315, etc.)

Audit Documentation

Additional features of ISA 230

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

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Audit Documentation

Additional features of ISA 230

Requirements addressing matters arising after date of auditors 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
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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.
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International Federation of Accountants

Copyright October 2009 by the International Federation of Accountants (IFAC). All rights reserved. Permission is granted to make copies of this work provided that such copies are for use in academic classrooms or for personal use and are not sold or disseminated and provided that each copy bears the following credit line: Copyright October 2009 by the International Federation of Accountants (IFAC). All rights reserved. Used with permission of IFAC. Contact permissions@ifac.org for permission to reproduce, store, or transmit this work. Otherwise, written permission from IFAC is required to reproduce, store, or transmit, or to make other similar uses of, this work, except as permitted by law. Contact permissions@ifac.org. ISBN: 978-1-60815-042-7 www.ifac.org