Introduction - ifac.org€¦ · Web viewA INTRODUCTION. The Professional Practices Board (PPB) of the Institute of Chartered Accountants of New Zealand (the Institute) has considered

SUBMISSION

TO THE

INTERNATIONAL FEDERATION OF ACCOUNTANTS

ON EXPOSURE DRAFTS

PROPOSED INTERNATIONAL STANDARDS ON AUDITING AND PROPOSED AMENDMENT TO ISA 200 “OBJECTIVE AND PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS”

UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT

THE AUDITOR’S PROCEDURES IN RESPONSE TO ASSESSED RISKS

AUDIT EVIDENCE

PREPARED BY THE

INSTITUTE OF CHARTERED ACCOUNTANTSOF NEW ZEALAND

March 2003

Submission to the IAASB on The Audit Risk Exposure Drafts Page 2

SUBMISSION TO THE IFAC INTERNATIONAL AUDITNG AND ASSURANCE STANDARDS BOARD ON THE AUDIT RISK MODEL EXPOSURE DRAFTS

A INTRODUCTION

1.1 The Professional Practices Board (PPB) of the Institute of Chartered Accountants of New Zealand (the Institute) has considered the exposure drafts “Proposed International Standards on Auditing and Proposed Amendment to ISA 200 Objective and Principles Governing an Audit of Financial Statements”, “Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement”, “The Auditor’s Procedures in Response to Assessed Risks” and “Audit Evidence”. The PPB has overall responsibility for the development of Ethical and Professional Engagement Standards (including Auditing) for the Institute.

1.2 Sections B – C of our submission raise general concerns regarding the rationale for the proposed new standards, certain definitional issues, and formatting and structural issues. Sections D – H provide detailed comments and suggested amendments in relation to each of the proposed standards.

1.3 The PPB hopes that this submission will assist IFAC in its finalisation of the aforementioned exposure drafts on Audit Risk. Any queries on the content of this submission should be directed in the first instance to:

Simon Lee, Manager – Accounting & Professional StandardsInstitute of Chartered Accountants of New ZealandPO Box 11342Wellington(tel +64 4 917 5638, fax +64 4 472 6282)or by email to: [email protected]

or to:

Vanessa Sealy-Fisher, Manager – Accounting & Professional StandardsInstitute of Chartered Accountants of New ZealandPO Box 3334AucklandNew Zealand(tel +64 9 917 5923, fax +64 9 522 0820)or by email to: [email protected]

B GENERAL COMMENTS

2.1 The PPB supports the international harmonisation of auditing standards and believes that the goal of the IAASB should be the development of a set of generic standards that apply to all assurance engagements to the maximum extent possible and to all sectors.

2.2 The auditing standards in New Zealand apply to all sectors and as far as possible to all high-level assurance engagements. In New Zealand the Auditor-General uses the


auditing standards promulgated by the Institute of Chartered Accountants of New Zealand as the basis for standards for the conduct of the audit of public sector entities.

2.3 In addition, in New Zealand, the definition of audit1 is not restricted to financial statements – it involves providing a high level of assurance regardless of the subject matter. In 1998 the PPB codified its audit standards in large part to harmonise with the ISAs issued by the then International Auditing Practices Committee. At that time a conscious effort was also made to develop standards that could be applied to all high-level assurance engagements, irrespective of the subject matter. In some cases the application of audit standards is limited to audits of financial statements, although in this case standards usually state that the principles may be applicable to all audits.

Reasons for changes from existing standards

2.4 The PPB does not support the new documents because the changes proposed appear, in substance, to be relatively minor. The PPB believes that the same end could have been achieved by amending existing standards rather than a total reorganisation of current requirements and that the issue of new standards is not justified.

2.5 When standards are changed there are significant costs in training and education and in reviewing and revising audit methodologies. Based on the background material in the Explanatory Memorandum, the PPB is not convinced that in this case the costs of the changes will exceed the benefits of the changes.

2.6 The Explanatory Memorandum, states “Recent changes in the business environment…” as justification for reviewing the ISAs and exposing the proposed changes. However, it is not clear why the current ISAs are considered to be inappropriate as a result of these changes.

2.7 The PPB recommends that an explanation of the changes and their impact on the current ISAs should be provided to enable constituents to properly understand the proposed changes.

2.8 Appendix 1 to the Explanatory Memorandum states that “…the fundamental audit risk model was not broken, but certain changes were needed.” and “Where appropriate, the recommendations of the JWG and the POB have been adopted.” However, no further detail or explanation has been provided in the Explanatory Memorandum regarding the: reasons for the changes if the fundamental audit risk model was not broken; nor recommendations made by the JWG and POB.

2.9 The PPB suggests that information regarding the reasons for the proposed changes and for adopting the recommendations of the JWG and the POB be provided to enable constituents to properly understand the proposed changes.

1 In New Zealand an audit is defined similarly to a high-level assurance engagement under the IAASB framework.“An audit is a professional engagement designed to enable an independent auditor to provide a high, but not absolute, level of assurance to users through:

• the issuance of a positive expression of an opinion that enhances the credibility of a written assertion, or set of assertions, about a matter of accountability (“attest audit”); or

• the provision of relevant and reliable information and a positive expression of opinion about a matter of accountability where the party responsible for the matter of accountability does not make a written assertion, or set of assertions (“direct reporting audit”).”


2.10 The PPB did not find the Explanatory Memorandum very useful in understanding the changes from the existing standards.

2.11 There are a number of actions the IAASB could consider in this regard that will assist its constituents when commenting on future exposure drafts. The PPB recommends for each proposed ISA that the IAASB: Clearly set out the background to the proposed revised/new standard, including

specific issues that the proposed standard is intended to address, and a summary of the main changes from existing standards;

Develop a detailed Basis for Conclusions to assist constituents understand the rationale for decisions; and

Develop a discussion paper that includes key questions on which the IAASB seeks comment.

2.12 The recommendation in paragraph 2.11 above is based on the process undertaken by the International Accounting Standards Board (IASB) when it issues for comment an exposure draft or a revised standard.

2.13 For example, ED 3 Business Combinations (issued for comment in December 2002) briefly explains a requirement of the proposed standard and then requests comment on a specific question in relation to that requirement. The reason for the requirement is then explained in the Basis for Conclusions that accompanies the exposure draft.

2.14 This process identifies the major requirements of the proposed standard and enables constituents to provide a response that focuses on the requirements of the proposed standard and, particularly, the question/s that is/are posed in relation to each requirement.

C AREAS OF CONCERN

Applicability of the standards

3.1 Although many of the New Zealand auditing standards have specific application (for example, the standard applies to all audits of financial reports), they also contain a statement to the effect that despite the scope of the standard being limited “much of the guidance in this Standard is applicable to any audit”.

3.2 The PPB notes that the following statement to this effect is included beneath the “Contents” of ISA 200 “Objective and Principles Governing an Audit of Financial Statements”, the Audit Risk Exposure Drafts that are currently on issue for comment as well as many of the ISAs (for example, ISA 240, ISA 320 and ISA 580) currently on issue.

“International Standards on Auditing (ISAs) are to be applied in the audit of financial statements. ISAs are also to be applied, adapted as necessary, to the audit of other information and to related services.”


3.3 The PPB recommends that this statement be included within all standards where such a statement is relevant.

3.4 This would emphasise that while the standard is drafted for audits of financial statements, the general principles apply to all high-level assurance engagements and would make users aware of the wider applicability of the ISAs.

Audit risk model

3.5 There is no definition or clear explanation of the proposed audit risk model.

3.6 While the exposure drafts claim to be introducing a new or refined approach to audit risk, the proposed amendments to ISA 200, paragraphs 19 through 22, continue to identify the components of audit risk as Inherent Risk, Control Risk and Detection Risk – the current situation.

3.7 The PPB recommends that the IAASB define and explain the proposed audit risk model and compare it to the current model in order that constituents may have a better understanding of the proposed changes.

Format and structuring

Black and grey lettering

3.8 Throughout the proposed standards the PPB notes that many paragraphs mix “black letter” requirements and “grey letter” commentary. The PPB does not support the inclusion of black lettered principles and procedures in the same paragraphs as grey lettered explanatory and other material.

3.9 The PPB considers that users will find the standards easier to follow if the “black letter” principles are set out in a separate paragraph supported by the explanatory and other material that explains the principles and procedures and provides examples and illustrations.

Structure of proposed ISAs

3.10 The PPB also considers that a uniform “structure” should be applied consistently throughout all IAASB auditing standards that will assist users to understand the ISAs. Examples of inappropriate structure include: The inclusion of a bold letter standard in the Introduction section of the ISAs; and Explanatory material sometimes preceding rather than following the standard.

Bold letter standard in “Introduction”

3.11 The Introduction section of these exposure drafts contains the purpose of the ISA and sometimes an overview of the ISA. The inclusion of a bold letter standard in an introduction is not appropriate. A standard contains a specific requirement therefore it should have its own heading and not be included within the Introduction.


3.12 The PPB recommends that the ISAs contain separate headings “Purpose” and “Overview of the Requirements” above the relevant paragraphs. The use of more specific headings will enable users of the ISAs to find the information they are seeking.

3.13 For example, ISA XX “Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement” contains a standard in paragraph 4, and a heading above paragraph 7, an explanatory paragraph.

3.14 The heading above paragraph 7 “Risk Assessment Procedures and Sources of Information About the Entity and its Environment, Including Its Internal Control” would be more appropriate prior to the standard in paragraph 4, “The auditor should obtain an understanding of the entity and its environment, including its internal control, that is sufficient to assess the risks of material misstatement of the financial statements whether due to fraud or error, and sufficient to design and perform further audit procedures”. This would then mean that the standard in paragraph 4 is no longer in the Introduction section of the ISA.

Explanatory material preceding a standard

3.15 Explanatory material sometimes precedes a standard, for example ISA XX “Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement”, paragraph 23 (explanatory) and paragraph 24 (standard). The explanatory and other material explains and expands on the requirements of the standard and often includes examples and illustrations.

3.16 The PPB recommends, therefore, that explanatory material and guidance should follow the standard not precede it. This will make it easier for users to identify the standard and then read the additional guidance if they consider this to be necessary.

Definitions

3.17 ISA XX “Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement” introduces new terms, for example, “risk assessment procedures”, paragraph 8, and “significant risk”, paragraph 105. These terms are not defined in this exposure draft but the term “risk assessment procedures” is explained in ISA XX “Audit Evidence”, paragraph 15(a), as the procedures performed to obtain an understanding of the entity and its environment in order to assess the risks of material misstatement at the financial statement and assertion levels.

3.18 The PPB recommends that a definition section for key terms be included in all ISAs. The definitions will clarify the meaning of the terms used in the document, thus reducing confusion regarding the meaning of the terms, and will assist users to understand the standard.

Explanatory Memorandum – Changes to Existing Requirements

3.19 Although the PPB agrees with the requirements for the auditor to obtain an understanding of the business to be included in the proposed standard, the PPB


considers that the purpose of obtaining this understanding has been restricted in the proposed standard.

3.20 ISA 310 “Knowledge of the Business”, paragraph 9, identifies the following areas in which an understanding of the entity and its environment can be used to assist the auditor: Assessing risks and identifying problems. Planning and performing the audit effectively and efficiently. Evaluating audit evidence. Providing better service to the client.

3.21 ISA XX “Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement”, paragraph 4, emphasises an understanding of the entity and its environment for the purposes of assessing the risks of material misstatement of the financial statements. This means that the purpose of gaining an understanding of the entity and its environment in order to plan and perform the audit effectively and efficiently and to provide a better service to the client is not adequately considered.

3.22 The PPB considers that the proposed standard should be cross-referenced to ISA 310 “Knowledge of the Business” in order that users of the standard are aware that obtaining an understanding of the entity and its environment is undertaken for reasons other than the assessment of the risk of material misstatement of the financial statements.


D RESPONSE TO SPECIFIC ISSUES ON WHICH COMMENT IS SOUGHT IN APPENDIX 3

GENERAL

ISAs are drafted to contain basic principles and essential procedures together with related guidance that apply to the auditor of financial statements of any entity, irrespective of its size. However, the IAASB recognises that the audit of small entities may give rise to certain special audit considerations.

Are there such special audit considerations in applying the standards and guidance contained in proposed ISA XX “Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement” and proposed ISA XX “The Auditor’s Procedures in Response to Assessed Risks”? If so, include details of such considerations.

(The IAASB will take any comments made in response to this request when taking forward its project to consider the effect of the proposed ISAs on IAPS 1005, “The Special Considerations in the Audit of Small Entities”, and to make proposals about whether to incorporate relevant guidance in the ISAs or revision of IAPS 1005.)

4.1 The PPB considers that there are no special audit considerations in applying the standards and guidance in the exposure drafts to small entities.

4.2 For this reason the PPB considers that paragraphs relating to small entities should be removed from the proposed ISAs.

ISA XX “UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT”

Paragraphs 50 through 94 deals with internal control including the requirement to obtain an understanding of the components of internal control and guidance on obtaining the understanding. Appendix 2 contains further guidance to assist the auditor in understanding the components of internal control, including their application to small entities.

Is this additional guidance helpful, or is there sufficient material in the ISA itself? In considering this question, commentators should assume that the paragraphs relating to small entities will be retained, whether in the Appendix or elsewhere.

4.3 The PPB considers that the guidance in Appendix 2 is helpful..

4.4 However, the PPB considers that there are no special audit considerations in applying the standards and guidance in the exposure draft to small entities, therefore, the guidance in Appendix 2 specifically relating to small entities should be removed for the following reasons: The requirement is for the auditor to assess the risk of material misstatement,

irrespective of the size of the entity; The inclusion of examples specific to small entities may limit the use of

professional judgement by auditors; and There is no definition of what comprises a “small” entity.


ISA XX “THE AUDITOR’S PROCEDURES IN RESPONSE TO ASSESSED RISKS”

Where the auditor plans to rely on controls that have not changed since they were last tested, paragraph 38 requires the auditor to test the operating effectiveness of such controls at least every third audit. The IAASB discussed whether it was appropriate to impose such a limit on the ability of the auditor to use audit evidence obtained in a prior audit. The alternative view is that the period for such reliance should be left to the auditor’s judgement.

Is it appropriate for the ISA to specify a time period, and if so, is every third audit an appropriate limit? If not, please indicate what time period, if any, is considered more appropriate?

4.5 The PPB does not agree that every third audit is an appropriate limit where the auditor plans to rely on controls that have not changed since they were last tested. The controls would need to be tested at least annually in order to determine whether or not they have in fact changed. Refer to paragraphs 7.7 – 7.8 of our submission.

DOCUMENTATION

Proposed ISAs XX, “Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement”, and ISA XX, “The Auditor’s Procedures in Response to Assessed Risks”, include detailed documentation requirements. The IAASB considers that documentation requirements are important as a means of ensuring that auditors comply with significant requirements of the standards. The requirements are more extensive than previously.

Do commentators agree that it is appropriate for the IAASB to establish detailed documentation requirements? Are the proposals practical? If not, what suggestions do you have for documentation that achieves the objective of improving compliance with standards?

4.6 The PPB does not agree with the inclusion of the specific topic material included on the grounds that this sort of information should be detailed in the planning memorandum. Refer to paragraphs 6.12 and 7.13 of our submission.


RESPONSES TO SPECIFIC EXPOSURE DRAFTS

E PROPOSED AMENDMENT TO ISA 200, “OBJECTIVES AND PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS”

5.1 ISA 200 contains general principles. The PPB considers that paragraphs 18 through 22 of the proposed amendment are too detailed to be included in a general standard such as ISA 200.

5.2 The PPB suggests that paragraphs 18 through 22 would be more appropriately situated in ISA XX “Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement”.

Paragraph 12

5.3 The last sentence of paragraph 12 states that “The auditor is concerned only with risks that may affect the financial statements.”

5.4 The PPB recommends that this sentence be amended to read “The auditor is concerned only with risks that may affect the audit subject matter.”

5.5 This will then align ISA 200 with the comments made at the front of ISAs regarding the applicability of the general principles to all high-level assurance engagements and not only to audits of financial statements, as discussed earlier in paragraphs 3.2 through 3.4.

Paragraph 14

5.6 The PPB supports the inclusion in ISA 200 of the bold lettering of paragraph 14, “The auditor should plan and perform the audit to reduce audit risk to an acceptably low level”.

5.7 However, the PPB recommends that the grey lettering in paragraph 14 form a separate paragraph in order that the black lettered principles and procedures are not contained in the same paragraph as the grey lettered explanatory material, as mentioned previously in paragraph 3.8.

5.8 The PPB also recommends that, for ease of use, as previously discussed in paragraph 3.12, an appropriate heading be included above the standard in paragraph 14.



F UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT

General comment

6.1 The PPB is concerned that the proposed standard has become so generic that an auditor will be unable to argue that they performed a reasonable audit because the scope of the audit obligation to assess risk and internal control is so broad.

6.2 The internal control model is now based on the COSO report, which was designed to address internal control to promote effective and efficient operations from the standpoint of within an entity. That model is not applicable to the seeking of sufficient appropriate audit evidence, which is the objective of an audit, therefore the document is not focussed on the audit objectives of internal control.

Structure of the proposed ISA

Crux of the ISA

6.3 Paragraph 95, states “The auditor should assess the risks of material misstatement at the financial statement level, and at the assertion level for classes of transactions, account balances and disclosures.” This paragraph represents the crux of the standard and in our view should be located at the front of the proposed ISA near the standard contained in paragraph 4 and prior to paragraph 8 which is headed “Risk Assessment Procedures”.

6.4 The major headings in the proposed ISA are in the following order: Introduction (paragraphs 1-6), which includes a standard relating to obtaining an

understanding sufficient to assess the risks of material misstatement in paragraph 4; Risk Assessment Procedures and Sources of Information About the Entity and Its

Environment, Including its Internal Control (paragraphs 7-25); Understanding the Entity and its Environment, Including its Internal Control

(paragraphs 26-94); Assessing the Risks of Material Misstatement (paragraphs 95-114); Communicating with Those Charged with Governance or Management (paragraphs

115-116); Documentation (paragraphs 117-119); and Effective Date (paragraph 120).

6.5 The PPB considers that the structure of the document and the requirements would be improved if all the material relating to risk assessment was located together. We recommend that paragraph 4 and the requirements of paragraphs 95-114 be located together to achieve a more logical flow.

Structure


6.6 As previously mentioned in paragraph 3.8 the PPB does not support the inclusion of black lettered principles and procedures in the same paragraphs as grey lettered explanatory and other material.

6.7 In addition, the proposed ISA is not consistent regarding the ordering of some of the paragraphs and the placement of the principles and procedures within the ISA.

6.8 For example, there is a major heading “Understanding the Entity and its Environment, Including Internal Control” prior to paragraph 26. Paragraph 26 lists five areas of understanding required by the auditor. Each area listed is then identified as a standard, together with explanatory material, in a paragraph subsequent to paragraph 26.

6.9 For ease of use, the ISA would be better structured if the standard was identified immediately beneath an appropriate heading and then followed by explanatory material. Using paragraphs 26 to 33 as an example:

Understanding the Entity and its Environment, Including Internal ControlINDUSTRY, REGULATORY AND OTHER EXTERNAL FACTORS, INCLUDING THE APPLICABLE FINANCIAL REPORTING FRAMEWORK26. The auditor should obtain an understanding of relevant industry, regulatory,

and other external factors including the applicable financial reporting framework.

Grey letter of paragraph 26 and paragraphs 27 to 31 as explanatory material.

NATURE OF THE ENTITY, INCLUDING THE ENTITY’S APPLICATION OF ACCOUNTING POLICIES32. The auditor should obtain an understanding of the nature of the entity.

Grey letter of paragraph 32 and 33 as explanatory material.

6.10 The format illustrated above would improve the structure of the proposed ISA .

Cross referencing to other standards

6.11 Throughout the exposure draft, reference is made to other ISAs (e.g. ISA 260 “Communications of Audit Matters with Those Charged with Governance” [paragraph 116], ISA 520 “Analytical Procedures” [paragraph 12], ISA 240 “The Auditor’s Responsibility to Consider Fraud and Error in an Audit of Financial Statements” [paragraph 19]).

6.12 For consistency, reference to ISA 230 “Documentation” should be made in the ED under the section dealing with “Documentation”, paragraphs 117 through 119.

SPECIFIC PARAGRAPHS

Paragraph 32 – Obtaining an understanding of the nature of the entity


6.13 The PPB considers that paragraph 32 should include the auditor obtaining an understanding of the governance of the entity as part of its nature.

6.14 The following amendment is recommended for paragraph 32:

“The nature of an entity refers to the entity’s operations, its ownership and governance, the types of investments…..”

Appendix 2 – Internal Control Components

6.15 The PPB suggests the following amendment to the wording of the third bullet point in paragraph 10 of Appendix 2:

“Measure the value of transactions in a manner that permits recording their proper monetary value in the financial statements.”



G THE AUDITOR’S PROCEDURES IN RESPONSE TO ASSESSED RISKS

7.1 The PPB notes that the proposed standard will replace aspects of the existing International Standards on Auditing (ISAs): ISA 400 Risk Assessments and Internal Control; and ISA 401 Auditing in A Computer Information Systems Environment.

7.2 Consequently the proposed standard will impact upon the current New Zealand Standards, which are consistent in all material respects with the ISAs listed above. The existing standards in New Zealand are: AS 402 Risk Assessments and Internal Control; and AS-210 Auditing in a Computer Information Systems Environment

7.3 Where possible, in New Zealand, auditing standards are designed to be applicable to all audits (assurance engagements) regardless of the subject matter. The New Zealand auditing standards listed above apply to all audits of financial report. However, the standards also note that while the scope of the standards is limited to financial report audits, much of the guidance contained is applicable to any audit. As discussed earlier in paragraphs 3.2 through 3.4, we recommend that the IAASB consider including a similar statement in the proposed standard.

Tests of Controls

7.4 We are concerned that the relationship between paragraphs 22, 38, and 40 is unclear and that there appears to be inconsistency between these paragraphs.

7.5 Paragraph 22 requires the auditor to perform tests of control to obtain sufficient appropriate audit evidence that the controls were operating effectively during the period under the audit. However, paragraph 38 allows auditors to rely on the audit control tests undertaken in previous periods where such controls have not changed, subject to testing the operating effectiveness of controls at least every third period. This is inconsistent with paragraph 22. Furthermore, unless the auditor tests controls in the period under audit, we consider that it would be very difficult for the auditor to conclude that the control has not changed and has operated effectively throughout the period.

7.6 Paragraph 40 requires that where an auditor determines that there is a significant risk and the auditor plans to rely on the operating effectiveness of controls to mitigate the risk, the auditor is required to obtain evidence about the operating effectiveness of those controls from tests of controls performed in the current period. This paragraph appears to override the requirements set out in paragraph 38. We suggest that paragraph 40 be combined with paragraph 22 or relocated to follow paragraph 22.

7.7 We also recommend that the proposed standard clarify the nature and extent of the audit work required where testing of controls is to be rotated over a number of audits.

7.8 In particular we recommend paragraph 36 be amended to:


require that where a rotational approach to audit testing is adopted, that the auditor be required to obtain and document audit evidence which supports this reliance; and

specify the minimum audit requirements for audit of controls in intervening audit periods, for example:- establish that the control systems have not changed during the current audit

period;- obtain evidence that the system is operating as designed; and- obtain audit evidence that the controls have continued to operate throughout

the audit period.

Substantive procedures

7.9 Paragraph 43 requires auditors to plan and perform substantive tests for each material class of transactions, account balance and disclosure irrespective of the assessed risk of material misstatement. Paragraph 44 requires auditors to perform substantive procedures specifically in response to risks where risks of material misstatement are assessed by the auditor to be significant.

7.10 Paragraphs 43 and 44 appear inconsistent. Paragraph 43 appears to override paragraph 44 by requiring substantive procedures for each material class of transactions, balances or disclosures, irrespective of the assessed risk of material misstatement. Furthermore when read with paragraph 44, paragraph 43 implies that substantive procedures may be performed without considering any specific risk. We consider that all substantive procedures should be designed to respond to specific risks.

7.11 We recommend that the relationship between paragraphs 43 and 44 be clarified and suggest the following to replace the black letter requirement in paragraphs 43 and paragraph 44:

The auditor should plan and perform substantive procedures for each material class of transaction. Where, in accordance with paragraph 104 of ISA XX, “Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement,” the auditor has determined that an assessed risk of material misstatement at the assertion level is a significant risk, the auditor should perform additional substantive procedures that are specifically responsive to that risk.

Documentation

7.12 ED ISA XX The Auditor’s Procedures in Response to Assessed Risks, paragraph 65, requires the auditor to document the overall responses to the risk of material misstatement.

7.13 ISA 230 Documentation sets out the general requirements regarding documentation of audit evidence and procedures. It is recommended that ED ISA XX The Auditor’s Procedures in Response to Assessed Risks include a cross-reference to ISA 230 Documentation. (ISA 230 will require amendment to reflect the changed approach to audit risk).


OTHER ISSUES

Cross references7.14 The proposed standard contains a lot of material regarding audit evidence. We

recommend that all material concerning audit evidence be included in ISA XX Audit Evidence with cross-references where appropriate to ISA XX The Auditor’s Procedures in Response to Assessed Risks.

7.15 However, if the IAASB believes that the material on audit evidence be retained within the proposed standard we recommend that the proposed standard be reviewed and that cross references to relevant ISAs be inserted where appropriate. For example: Paragraphs 8 through 14 and paragraph 58 provide guidance on audit procedures

responsive to risks of material misstatement at the assertion level. A cross-reference to ISA XX Audit Evidence may be appropriate.

Paragraphs 58 through 64 provide guidance on assessing the sufficiency and appropriateness of audit evidence. A cross-reference to ISA XX Audit Evidence may be appropriate.

Paragraphs 61 and 62 refer to fraud and error. A cross-reference to ISA 240 The Auditor’s Responsibility to Consider Fraud and Error in an Audit of Financial Statements should be included.

Consistency of requirements7.16 As noted in sections 3 and 4 above, certain paragraphs appear to be inconsistent. We

recommend that the proposed standard be reviewed to ensure consistency within the proposed standard and also to ensure consistency between the proposed standard and other ISAs.

Structure and Editing7.17 We recommend that the proposed standard be reviewed to assist readers of the

document. For example certain paragraphs contain two ideas and it would be easier for readers if the paragraphs were split in two. Paragraph 15 for example could be split into two paragraphs, the first addressing the issue of performing tests closer to the period end, and the second addressing performance of substantive procedures unannounced or at unpredictable times.

7.18 We suggest that commentary in paragraph 8 be rewritten as a list, rather than a long sentence. For example:“ In designing further audit procedures, the audit considers such matters as: the significance of risk; the likelihood that a material misstatement will occur; the characteristics of the class of transactions; ….

Nature, Timing and Extent of Audit Procedures7.19 Paragraph 5 notes that the overall responses may include emphasizing to the audit

team the need to maintain professional scepticism in evaluating audit evidence. We believe that the audit team should always maintain professional scepticism in collecting and evaluating evidence.


7.20 Paragraph 13 is under the heading “Considering the Nature, Timing and Extent of Audit Procedures”. However, paragraph 13 does not appear to relate directly to the discussion in paragraphs 10, 11 and 12. For example paragraph 13 does not include any requirements relating to the nature of the audit procedures. We recommend that guidance be expanded to include discussion on the nature of the audit procedures.

7.21 We recommend that paragraph 11 contain some discussion of the nature of audit evidence. For example guidance could include the principle that the higher the audit risk the more persuasive the audit evidence needs to be and that this may affect the nature of the audit procedures to be conducted.



H AUDIT EVIDENCE

Assertions – paragraph 7

8.1 ISA 500 “Audit Evidence”, paragraph 13, explains the management assertions of “valuation” and “measurement”.

8.2 The assertion of measurement includes both the recording of a transaction or event at the proper amount and the allocation of revenues or expenses to the proper period.

8.3 ISA XX “Audit Evidence” separates the two components of “measurement” into “accuracy” (the recording of the transaction or event) and “cutoff” (the allocation to the proper period).

8.4 The IAASB has not provided any reasons for either the separation of the two components nor the change from “measurement” to “accuracy”.

8.5 “Accuracy” is a new assertion and the definition in paragraph 7(a)(iii) is circular.

“Accuracy – amounts and other data relating to recorded transactions and events have been recorded accurately:”

8.6 The word “accuracy” implies a greater degree of precision than “measurement” and could be misleading to users of the financial statements, particularly as estimates are frequently used when determining some of the figures in financial statements.

8.7 The PPB therefore recommends that paragraph 7(a)(iii) be amended to read:

“measurement – a transaction or event is recorded at the proper amount”

which is consistent with ISA 500 “Audit Evidence”

8.8 Replacing “accuracy” as an assertion will require an amendment to paragraph 7(c)(iv), the presentation and disclosure assertion of “Accuracy and valuation”.

8.9 The PPB suggests the following amendment to paragraph 7(c)(iv):

“Accuracy and valuation – financial and other information are is disclosed fairly and at appropriate amounts”

Use of professional judgement – paragraph 14

8.10 ISA 500 “Audit Evidence”, paragraph 9, provides examples of factors that influence the auditor’s judgement when deciding what is sufficient appropriate audit evidence.

8.11 The PPB recommends that this paragraph be retained in ISA XX “Audit Evidence” as it provides useful guidance.


Evaluating the sufficiency and appropriateness of audit evidence

8.12 ISA XX “The Auditor’s Procedures in Response to Assessed Risks”, paragraphs 58 through 67, contain standards and guidance in relation to: Whether the assessments of the risks of material misstatements at the assertion level

remain appropriate, based on the audit procedures performed and the audit evidence obtained;

Whether sufficient appropriate audit evidence has been obtained to reduce to an acceptably low level the risk of material misstatement in the financial statements; and

The type of audit opinion to be expressed when the auditor is unable to obtain sufficient appropriate audit evidence for a material financial statement assertion.

8.13 The PPB considers that these paragraphs, particularly paragraph 64 relating to the expression of an opinion where sufficient appropriate audit evidence is not obtained, would be more appropriately situated in ISA XX “Audit Evidence”

8.14 ISA XX “Audit Evidence” has, as its standard “The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion.” (paragraphs 2). The logical positioning of the standard relating to the expression of the audit opinion where sufficient appropriate audit evidence is not obtained would, therefore, be the standard dealing with audit evidence.


I CONCLUSION

9.1 I trust that these comments are helpful. Please contact Simon Lee, Vanessa Sealy-Fisher or myself should you require any further comment.

Yours faithfully

Craig FisherChairman – Professional Practices Board


Documents

Introduction - ifac.org€¦ · Web viewA INTRODUCTION. The Professional Practices Board (PPB) of the Institute of Chartered Accountants of New Zealand (the Institute) has considered