Outlines:

This standard discusses:

1. Overall objective of auditor.
2. Key requirements for performing an audit i.e. Professional Judgment,
CFAP 06: Advanced Audit & Related Services Professional Skepticism, Compliance with Code of Ethics, Compliance with ISAs.
ISA 200: Oveall Objectives of Auditor Premium Content
3.Various terms frequently used in ISA e.g. Applicable Financial Reporting (For Winter 2021)
Secret Sheet for Quick Revision Framework, Reasonable Assurance, Material Misstatement, Audit Risk,
(For students of Muhammad Asif, FCA) Sufficient appropriate evidence.

KEY REQUIREMENTS FOR PERFORMING

OVERALL OBJECTIVES OF AUDITOR AN AUDIT

There are 03 Parties involved in an audit Professional Judgment Professional Skepticism Compliance with ISAs Compliance with Code of Ethics

Auditor Management (e.g. CFO, CEO) Stakeholders (Existing Shareholders, Application of knowledge and Being alert to conditions which Structure of ISAs: A CA shall comply with requirements of
& TCWG (e.g. Directors) Prospective investors, A holding company, experience to reach an appropriate indicate possible misstatements. Introductory Material, Objectives, Definition. Code of Ethics in every engagement.
Lenders, Donors, Tax Authorities.) course of action. (e.g. procedures (See list of conditions below) Requirements. However, Independence is required only
Overall Objectives of Auditor: when guidance is not available in ISas) Application and Other Explanatory Material (including for assurance engagements.
To obtain reasonable assurance, and report on F/S. Responsibilities of Management: Appendices).
To communicate certain matters to internal/external Preparation of F/S. Expectation Gap: I.e Code of ethics sabai engagement maa apply hunxa but independance ko
parties when required by ISA/local laws. Internal controls. 1. Auditor prepares financial statements. requiremnet har engagemnet maa apply hudaina.
(Opinions on internal control, future viability, efficiency/ To provide information to auditor. 2. Auditor checks 100% transactions. Auditor has to comply with all ISAs and their all Independance not necessary for non assurance engagemnetn
effectiveness of management are NOT auditor’s objectives.) 3. Auditor provides absolute assurance. requirements, except when requirement is not relevant services
4. Auditor is responsible to detect fraud. or not practicable.
5. EOM, OM, Going Concern Uncertainty are Circumstances doesnot exist
modified opinions. for which std made Circumstances exist but impracticable to apply
When Requirement is not relevant: When Requirement is not
1. ISA 610 not relevant if no internal audit function. practicable/not effective:
2. ISA 705 not relevant if auditor expresses unmodified opinion. Auditor shall perform
3. ISA 265 not relevant, if no significance deficiency in internal control. alternative procedures
4. Requirements relating to segment information ISA 501 not relevant performed to obtain
Audit Risk (AR) if no segments. evidence/assurance.
(risk of misstatement after audit)
Eg. NAS 501 Inventory Verification on Lockdown.

Risk of Material Misstatement (RMM) Detection Risk (DR)

(risk of misstatement prior to audit) (risk that auditor does not detect misstatement) Levels of Assurance Evidence

Auditor's Audit procedure does not detect

At F/S Level At Assertion Level Limited Assurance. Reasonable Assurance: Absolute Assurance: Characteristics: Sources:
(which affects many assertions/areas) (which affects specific assertion) Moderate level of assurance expressed in High, but not absolute, level of Not provided, due to Inherent Limitations. Sufficient (measure of Quantity) 1. Previous audits. Acceptance & Condition Phase ko
negative form. assurance expressed in positive form. 1. Nature of financial statements (estimates, Appropriate (measure of Quality) 2. A & C Procedures evidence may be used later.
“Nothing has come to our attention that “Financial statements give true and judgments and uncertainties are involved) 3. During the audit (inside or outside the entity)
causes us to believe that financial fair view in accordance with the 2. Nature of audit procedures (Not complete 4. Using Others (e.g. Predecessor Auditor,
Inherent Risk (IR) Control Risk (CR)
statements do not give true and fair view”. framework”. information, No legal powers, Fraud) Component Auditor, Internal Auditor, Service
(risk due to nature of transactions) (risk due to weaknesses in internal control)
3. Time and Cost limitation Auditor, Expert, Quality Control Reviewer) Service Aduitr
4. Other difficult matters/assertions (Related
Parties, NOCLAR, Going Concern) Chllenging to identify
to auditor cause mgmt
intention is to hide.
Framework
Application of Professional Skepticism in Case Studies:
Read the following events/conditions carefully, and think misstatement which may occur in each case in financial statements. This list is very important to solve case studies in exam.
General Purpose Framework Special Purpose Framework Fair Presentation Framework Compliance Framework
Sales: Unusual increase in sales, Unusual decrease in sales, Income is received (or expense is paid) in advance
To meet needs of wide range of users e.g. To meet needs of specific users e.g. Allows additional disclosure or Does not allow additional
Inventory: Decrease in sales/demand (due to change in fashion/technology or launch of new products), Long-standing inventory/increase in inventory turnover ratio, Defective goods
1. IFRS 1. Regulatory Basis Regulator Foe Example NRB, Used NRB departure from AFRF to achieve fair disclosure or departure. in inventory, Cost of production increases, or Sale price decreases, If product is malfunctioning, New products are launched by company or competitor, Contract of specialized inventory
2. IFRS for SMEs 2. Tax Basis Tax Authority presentation. is cancelled or customer goes bankrupt, Defective goods returned by customers. Inventory is held at various locations, or Inventory is held with third party.
3. National Framework e.g. US GAAP 3. Cash Basis Bank Fixed Assets: Major fixed assets purchased during the year, Significant capital expenditures incurred during the year, Revaluation Policy, Change in life, Decrease in sales/demand of
4. XYZ Law of Jurisdiction X As per NRB for stock exchange 4. Contractual Basis Donors Opinion: inventory, Faults in production process (e.g. increase in scrap/wastage of inventory during production), Destroyed or Unused or Under-utilized Fixed Assets, Closure of a factory
Opinion: “financial statements are prepared, in all material Debtors: Increase in Debtors (or turnover ratio), Dispute with debtors, FCY receivables/payables.
“financial statements give true and fair view in respects, in accordance with the framework”.
Creditors: Decrease in creditors (or turnover ratio)
Implication on Report: Implications on Report: accordance with the framework”, or If framework is misleading/unacceptable,
If AFRF is other than IFRS, jurisdiction shall also be
special purpose
EOM (to explain basis of accounting) “financial statements are presented fairly, in all engagement is not accepted. Provisions: Provision for Warranty (Company provides warranty to its customers, Increase in warranty period/complains, Malfunctioning of products, Not in alignment with sales),
mentioned in opinion. OM (if distribution of report is restricted) material respects, in accordance with the Provision for Restructuring (closure of a factory), Provision for Onerous contracts (Loss making non-cancellable contracts), Provision for Legal Cases (unfair dismissal of staff, serious
Eg. This Financial Statement has been prepaared as per NFRS, Nepal
framework”. (Both phrases are equivalent) accident damaging environment or injuring people, malfunctioning of product)
Intangible Assets: Goodwill (Business purchased during the year), Development Cost (Product developed/launched during the year).
Going Concern Uncertainty: Loss during the year, Bankruptcy of major customer. Adverse key financial ratios (e.g. Current ratio, Quick-asset ratio, Debt-equity ratio), Ceased
Important Concepts for Case Studies:
substantial manufacturing activities, Serious accident damaging environment or injuring people.
Partial compliance with AFRF is not allowed e.g. “Financial statements are in substantial compliance with IFRS”.
Risk at F/S level: Issue of Shares is planned, Sale of business is planned, Contingent remuneration of CFO/CEO, Other fraud risk factors
Tax: Pending tax litigations, Deferred tax,
Other Risks: You are appointed this year, Non-compliance with Laws and Regulations (fines/bribery paid), Implementation of New IT system, Related Party Transactions, Reduction in
staff, Company deals in large number of products, Recording contingent asset as receivable, Weak internal controls: e.g. Reconciliations not being prepared (in bank, debtors, creditors,
inventory), Predecessor auditor did not wish to be reappointed, or expressed modified opinion, Restricted time schedule for audit, Predecessor auditor expressed modified opinion.