ICAP Training Seminar

Training Seminar:

Students of Small and Medium Sized Practices

February 17, 2007

BDO International

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Outline of the Day

• Introduction to Risk– ISA 315 “Understanding the Entity and Its Environment and

Assessing the Risks of Material Misstatement”

• Responses to Risk– ISA 330 “Responses to Risk”

• Practical aspects of Planning the Audit Work– ISA 300/320

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In other words…

ISA 240/315• What could go wrong?

ISA 330• What are we going to do

about it?

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Why?

Risk of Material Misstatement

Fraud Error

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Our Responsibilities

• ‘An auditor is not bound to be a detective, or, as was said, to approach his work with suspicion or with a foregone conclusion that there is something wrong. He is a watchdog but not a bloodhound.’

Re: Kingston Cotton Mill CO (No 2) 1896

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May want to hold final discussion at

completion?

Fraud should be considered in context

of errors/testing results

The Standard & The Audit

Mandatory team discussion to be held (ISA 300)

Pro

fess

iona

l S

cept

icis

m

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Definition of Risk

Audit Risk =

Inherent Risk x Control Risk x Detection Risk

Risk of Material Misstatement

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ISA 315 - Overview (Para 2, ISA 315)

“The auditor should obtain an understanding of the entity and its environment, including its internal control, sufficient to identify and 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”

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Requirements of ISA 315

OVERALL REQUIREMENTS

Risk assessment procedures and

sources of information about the entity

and its environment, including IC

Understanding the

entity and its

environment including IC

Assessing the risks

of material misstatement

Communicating with

those charged with governance

and management

Documentation

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Risk Assessment

• “…continuous, dynamic process of gathering, updating and analysing information throughout the audit” (Para 6, ISA 315)

• Planning Meeting• Risk assessment procedures:

– Enquiries of management and others within the entity– Analytical procedures– Observation and inspection

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ISA 330 - requirements

• Overall responses to risks of material misstatement at the financial statement level

• Audit procedures responsive to risks of material misstatement at the assertion level

• Evaluating the sufficiency and appropriateness of audit evidence obtained

• Documentation

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Assertions – how much do you know?

• P&L– Occurrence– Completeness– Accuracy– Cutoff– Classification

• BS– Existence– Completeness– Rights & Obligations– Valuation– Presentation & Disclosure

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Assessing the risk of material misstatement

Risk of material

misstatement

at FS and

assertion level

Identify risk Relate risk to what can go wrong at the assertion level

Consider

magnitude of risks

Likelihood

of risks

Specific RiskGeneral Risk

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General Risks and General Controls

General Risks are those risks that affect multiple financial statement areas or tend to be pervasive to the financial statements.

General Controls are those controls that are pervasive to the organisation

Information Gathering

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Nature of Procedures

ASSURANCE

Risk

ToCs SAPs OSPs

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ISA 300

• Preliminary engagement activities• Planning activities• Initial audit engagements

“The auditor should plan the audit so that the engagement will be performed in an effective manner.”

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ISA 320 – Audit Materiality

Planning Materiality• Materiality refers to the size or nature of a misstatement that, in

the light of the surrounding circumstances, makes it probable that the judgement of a reasonable user of the financial statements would have been changed or influenced as a result of the misstatement.

• Only material misstatements and uncertainties will affect our audit opinion. Our audit procedures should not therefore be concerned with detecting misstatements that could not be material; they need to be focused on obtaining assurance that material misstatements do not exist