Review of Accounting and Auditing Practices ASSESSMENT OF AUDITING ...

Final Draft
October 2000
Part -4

Review of Accounting and Auditing Practices

ASSESSMENT OF AUDITING PRACTICES
(Assessment of Auditing Standards as Designed and as Practiced)


This tool is designed for use in conducting a facilitated discussion among professional accountants and
representatives of audit firms in the country. The purpose of the discussion is:


• To determine the conformity of country’s local auditing standards/requirements with

International Standards on Auditing (ISA) promulgated by the International Federation

of Accountants (IFAC). and



• To assess the degree of compliance with local auditing standards/requirements.







Country:


Date of Preparation:


Individual Responsible for Preparation:


Organizational Affiliation:


Address:






Contact Phone Number:


Fax Number:


E-mail Address:

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1. Objective and General Principles Governing an Audit of Financial Statements
(ISA 200)
Outline

ISA 200 requires that the auditor should conduct an audit in accordance with International Standards on
Auditing (ISAs). The procedures should be determined by the auditor having regard to the requirements of
ISAs, relevant professionals bodies, legislation, regulations and, where appropriate, the terms of the audit
engagement and reporting requirements.

The standard requires the auditor to plan and perform the audit with an attitude of professional scepticism.

It also requires the auditor to comply with the “Code of Ethics for Professional Accountants” issued by the
International Federation of Accountants.

Selected Paragraphs

1.1 The objective of an audit of financial statements is to enable the auditor to express an opinion whether
the financial statements are prepared, in all material respects, in accordance with an identified financial
reporting framework.

1.2 The auditor should comply with the “Code of Ethics for Professional Accountants,” based on the
following ethical principles governing the auditor’s professional responsibilities: (a) independence; (b)
integrity; (c) objectivity; (d) professional competence and due care; (e) confidentiality; (f) professional
behavior; and (g) technical standards.

1.3 The auditor should plan and perform the audit with an attitude of professional skepticism recognizing
that circumstances may exist which cause the financial statements to be materially misstated. For
example, the auditor would verify reliability of management representations and not assume they are
necessarily correct.

1.4 The “scope of an audit” (audit procedures deemed necessary in the circumstances to achieve the
objective of the audit) should be determined by the auditor having regard to the requirements of
generally accepted auditing standards, relevant professional bodies, legislation, regulations and, where
appropriate, the terms of the audit engagement and reporting requirements.

1.5 An audit is designed to provide reasonable assurance that the financial statements taken as a whole are
free from material misstatement. Reasonable assurance relates to the whole audit process.

Assessment of Local Requirement and Actual Practice
(Please consider the whole ISA. Particularly focus on the outline and selected paragraphs provided above)
Local regulations
Yes
No
1(a) Is there a local standard covering this particular area?


1(b) Is it materially comparable to the ISA?


1(c) Does local body issue guidance to amplify the standard?



1(d) To what extent, if any, does generally accepted practice tend to differ from the strict wording of
written local standards?





Comment (“No” answer to any of the above questions requires additional explanation):
Country Assessment of Auditing Practices Page: 1

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2. Terms of Audit Engagements (ISA 210)

Outline

ISA 210 establishes standards and provides guidance to the auditor on agreeing with clients the terms of
engagements, and on the auditors’ response to a request by a client to change the terms of an engagement.

The standard requires that the auditor and the client should agree on the terms of engagement. For recurring
audits, it requires the auditor to consider whether circumstances require the terms of the engagement to be
revised and therefore whether there is a need to remind the client of the existing terms of the engagement.

Selected Paragraphs

2.1 The auditor and the client should agree on the terms of the engagement. The agreed terms would need
to be recorded in an audit engagement letter or other suitable form of contract.

2.2 An auditor who, before the completion of the engagement, is requested to change the engagement to
one which provides a lower level of assurance, should consider the appropriateness of doing so.
• A change in circumstances that affects the entity’s requirements or a misunderstanding concerning
the nature of service originally requested would ordinarily be considered a reasonable basis for
requesting a change in the engagement.
• A change would not be considered reasonable if it appeared that the change relates to information
that is incorrect, incomplete or otherwise unsatisfactory.

2.3 The auditor should not agree to a change of engagement where there is no reasonable justification for
doing so. An example might be an audit engagement where the auditor is unable to obtain sufficient
appropriate audit evidence regarding receivables and the client asks for the engagement to be changed
to a review engagement to avoid a qualified audit opinion or a disclaimer of opinion.

2.4 If the auditor is unable to agree to a change of the engagement and is not permitted to continue the
original engagement, the auditor should withdraw and consider whether there is any obligation, either
contractual or otherwise, to report to other parties, such as the board of directors or shareholders, the
circumstances necessitating the withdrawal.

Assessment of Local Requirement and Actual Practice
(Please consider the whole ISA. Particularly focus on the outline and selected paragraphs provided above)
Local regulations
Yes
No
2(a) Is there a local standard covering this particular area?


2(b) Is it materially comparable to the ISA?


2(c) Does local body issue guidance to amplify the standard?



2(d) To what extent, if any, does generally accepted practice tend to differ from the strict wording of
written local standards?





Comment (“No” answer to any of the above questions requires additional explanation):
Country Assessment of Auditing Practices Page: 2

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3. Quality Control for Audit Work (ISA 220)

Outline

ISA 220 establishes standards and provides guidance on quality control relating to the policies and
procedures of an audit firm regarding audit work generally, and procedures regarding the work delegated to
assistants on an individual audit. The standard requires that quality control policies and procedures should
be implemented at both the level of the audit firm and on individual audits. The audit firm should
implement quality control policies and procedures designed to ensure that all audits are conducted in
accordance with International Standards on Auditing or relevant national standards or practices

Selected Paragraphs

3.1 Quality control policies and procedures should be implemented at both the level of the audit firm and
on individual audits. The “audit firm” means either the partners of a firm providing audit services or a
sole practitioner providing audit services, as appropriate.

3.2 The audit firm should implement quality control policies and procedures designed to ensure that all
audits are conducted in accordance with the generally accepted auditing standards.

3.3 The firm’s general quality control policies and procedures should be communicated to its personnel in
a manner that provides reasonable assurance that the policies and procedures are understood and
implemented. The “personnel” means all partners and professional staff engaged in the audit practice
of the firm.

3.4 The auditor should implement those quality control procedures which are, in the context of the policies
and procedures of the firm, appropriate to the individual audit. The “auditor” means the person with
final responsibility for the audit.
Illustrative Examples of Quality Control Procedures for an Audit Firm
3.5 Policy on Professional Requirements: Personnel in the firm are to adhere to the principles of
independence, integrity, objectivity, confidentiality and professional behavior.
3.6 Policy on Skills and Competence: The firm is to be staffed by personnel who have attained and
maintain the technical standards and professional competence required to enable them to fulfill their
responsibilities with due care.
3.7 Policy on Assignment: Audit work is to be assigned to personnel who have the degree of technical
training and proficiency required in the circumstances.
3.8 Policy on Delegation: There is to be sufficient direction, supervision and review of work at all levels to
provide reasonable assurance that the work performed meets appropriate standards of quality.
3.9 Policy on Consultation: Whenever necessary, consultation within or outside the firm is to occur with
those who have appropriate expertise.
3.10 Policy on Acceptance and Retention of Clients: An evaluation of prospective clients and a review, on
an ongoing basis, of existing clients is to be conducted. In making a decision to accept or retain a
client, the firm’s independence and ability to serve the client properly and the integrity of the client’s
management are to be considered.
3.11 Policy on Monitoring: The continued adequacy and operational effectiveness of quality control policies
and procedures is to be monitored.
Assessment of Local Requirement and Actual Practice
(Please consider the whole ISA. Particularly focus on the outline and selected paragraphs provided above)
Local regulations
Yes
No
3(a) Is there a local standard covering this particular area?


3(b) Is it materially comparable to the ISA?


3(c) Does local body issue guidance to amplify the standard?



3(d) To what extent, if any, does generally accepted practice tend to differ from the strict wording of
written local standards?

Comment (“No” answer to any of the above questions requires additional explanation):
Country Assessment of Auditing Practices Page: 3

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4. Documentation (ISA 230)

Outline

ISA 230 establishes standards and provides guidance regarding documentation in the context of the audit of
financial statements. The standard requires the auditor to document matters which are important in
providing evidence to support the audit opinion and evidence that the audit was carried out in accordance
with International Standards on Auditing.

The standard requires the auditor to prepare working papers which are sufficiently complete and detailed to
provide an overall understanding of the audit. The auditor should record in working papers information on
planning the audit work, the nature, timing and extent of the audit procedures performed, the results
thereof, and the conclusions drawn from the audit evidence obtained.

Selected Paragra[js

4.1 The auditor should document matters which are important in providing evidence to support the audit
opinion and evidence that the audit was carried out in accordance with generally accepted auditing
standards.

4.1 The auditor should prepare working papers which are sufficiently complete and detailed to provide an
overall understanding of the audit.

4.2 The auditor should record in the working papers information on planning the audit work, the nature,
timing and extent of the audit procedures performed, the results thereof, and the conclusions drawn
from the audit evidence obtained.

4.3 The auditor should adopt appropriate procedures for maintaining the confidentiality and safe custody
of the working papers and for retaining them for a period sufficient to meet the needs of the practice
and in accordance with legal and professional requirements of record retention.

Assessment of Local Requirement and Actual Practice
(Please consider the whole ISA. Particularly focus on the outline and selected paragraphs provided above)
Local regulations
Yes
No
4(a) Is there a local standard covering this particular area?


4(b) Is it materially comparable to the ISA?


4(c) Does local body issue guidance to amplify the standard?



4(d) To what extent, if any, does generally accepted practice tend to differ from the strict wording of
written local standards?





Comment (“No” answer to any of the above questions requires additional explanation):
Country Assessment of Auditing Practices Page: 4

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5. Fraud and Error (ISA 240)

Outline

The standard requires the auditor to assess the risk that fraud and error may cause the financial statements
to contain material misstatements and to inquire of management as to any fraud or significant error which
has been discovered. Based on the risk assessment, the auditor should design audit procedures to obtain
reasonable assurance that misstatements arising from fraud and error that are material to the financial
statements taken as a whole are detected.

Selected Paragraphs

5.1 When planning and performing audit procedures and in evaluating and reporting the results thereof, the
auditor should consider the risk of material misstatements in the financial statements resulting from
fraud or error.

5.2 In planning the audit, the auditor should assess the risk that fraud and error may cause the financial
statements to contain material misstatements and should inquire of management as to any fraud or
significant error which has been discovered.

5.3 Based on the risk assessment, the auditor should design audit procedures to obtain reasonable
assurance that misstatements arising from fraud and error that are material to the financial statements
taken as a whole are detected.

5.4 The auditor should plan and perform the audit with an attitude of professional skepticism, recognizing
that conditions or events may be found that indicate that fraud or error may exist.

5.5 When the application of audit procedures designed from the risk assessment indicates the possible
existence of fraud or error, the auditor should consider the potential effect on the financial statements.
If the auditor believes the indicated fraud or error could have a material effect on the financial
statements, the auditor should perform appropriate modified or additional procedures..

5.6 Where suspicion of fraud or error is not dispelled by the result of modified or additional procedures,
the auditor should discuss the matter with management and consider whether the matter has been
properly reflected or corrected in the financial statements. The auditor should consider the possible
impact on the auditor’s report.

5.7 The auditor should consider the implications of fraud and significant error in relation to other aspects
of the audit, particularly the reliability of management representations. In this regard, the auditor
reconsiders the risk assessment and the validity of management representations, in case of fraud and
error not detected by internal controls or not included in management representations.

5.8 The auditor should communicate factual findings to management as soon as practicable if: (a) the
auditor suspects fraud may exist, even if the potential effect on the financial statements would be
immaterial; or (b) fraud or significant error is actually found to exist. In most cases involving fraud, it
would be appropriate to report the matter to a level in the organization structure of the entity above that
responsible for the persons believed to be implicated.

5.9 If the auditor concludes that the fraud or error has a material effect on the financial statements and has
not been properly reflected or corrected in the financial statements, the auditor should express a
qualified or an adverse opinion.

5.10 If the auditor is precluded by the entity from obtaining sufficient appropriate audit evidence to evaluate
whether fraud or error that may be material to the financial statements, has, or is likely to have,
occurred, the auditor should express a qualified opinion or a disclaimer of opinion on the financial
statements on the basis of a limitation on the scope of the audit.

Country Assessment of Auditing Practices Page: 5

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5.11 On receipt of an enquiry from the proposed auditor, the existing auditor should advise whether there
are any professional reasons why the proposed auditor should not accept the appointment. If
permission from the client to discuss its affairs with the proposed auditor is denied by the client, that
fact should be disclosed to the proposed auditor.

Assessment of Local Requirement and Actual Practice
(Please consider the whole ISA. Particularly focus on the outline and selected paragraphs provided above)
Local regulations
Yes
No
5(a) Is there a local standard covering this particular area?


5(b) Is it materially comparable to the ISA?


5(c) Does local body issue guidance to amplify the standard?



5(d) To what extent, if any, does generally accepted practice tend to differ from the strict wording of
written local standards?





Comment (“No” answer to any of the above questions requires additional explanation):
Country Assessment of Auditing Practices Page: 6

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6. Consideration of Laws and Regulations in an Audit of Financial Statements
(ISA 250)

Outline

In planning the audit, the auditor should obtain a general understanding of the legal and regulatory
framework applicable to the entity and the industry and how the entity is complying with that framework.
After obtaining the general understanding, the auditor should perform procedures to help identify instances
of non-compliance with those laws and regulations where non-compliance should be considered when
preparing financial statements.

ISA 250 also requires the auditor to obtain sufficient appropriate audit evidence about compliance with
these laws and regulations generally recognised by the auditor to have an effect on the determination of
material amounts and disclosures in financial statements.

Selected Paragraphs

6.1 When planning and performing audit procedures and in evaluating and reporting the results thereof, the
auditor should recognize that noncompliance by the entity with laws and regulations may materially
affect the financial statements.

6.2 The auditor should plan and perform the audit with an attitude of professional skepticism recognizing
that the audit may reveal conditions or events that would lead to questioning whether an entity is
complying with laws and regulations.

6.3 In order to plan the audit, the auditor should obtain a general understanding of the legal and regulatory
framework applicable to the entity and the industry and how the entity is complying with that
framework.

6.4 After obtaining the general understanding, the auditor should perform procedures to help identify
instances of noncompliance with those laws and regulations where noncompliance should be
considered when preparing financial statements, specifically: (a) inquiring of management as to
whether the entity is in compliance with such laws and regulations; (b) inspecting correspondence with
the relevant licensing or regulatory authorities.

6.5 The auditor should obtain sufficient appropriate audit evidence about compliance with those laws and
regulations generally recognized by the auditor to have an effect on the determination of material
amounts and disclosures in financial statements. The auditor should have a sufficient understanding of
these laws and regulations in order to consider them when auditing the assertions related to the
determination of the amounts to be recorded and the disclosures to be made.

6.6 The auditor should be alert to the fact that procedures applied for the purpose of forming an opinion on
the financial statements may bring instances of possible noncompliance with laws and regulations to
the auditor’s attention. For example, such procedures include reading minutes; inquiring of the entity’s
management and legal counsel concerning litigation, claims and assessments; and performing
substantive tests of details of transactions or balances.

6.7 The auditor should obtain written representations that management has disclosed to the auditor all
known actual or possible noncompliance with laws and regulations whose effects should be considered
when preparing financial statements.

6.8 When the auditor becomes aware of information concerning a possible instance of noncompliance, the
auditor should obtain an understanding of the nature of the act and the circumstances in which it has
occurred, and sufficient other information to evaluate the possible effect on the financial statements.

6.9 The auditor should consider the implications of noncompliance in relation to other aspects of the audit,
particularly the reliability of management representations. In this regard, the auditor reconsiders the
risk assessment and the validity of management representations, in case of noncompliance not detected
Country Assessment of Auditing Practices Page: 7

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risk assessment and the validity of management representations, in case of noncompliance not detected
by internal controls or not included in management representations.

6.10 If the auditor suspects that members of senior management, including members of the board of
directors, are involved in noncompliance, the auditor should report the matter to the next higher level
of authority at the entity, if it exists, such as an audit committee or a supervisory board.

6.11 If the auditor concludes that the noncompliance has a material effect on the financial statements, and
has not been properly reflected in the financial statements, the auditor should express qualified or an
adverse opinion.

6.12 If the auditor is precluded by the entity from obtaining sufficient appropriate audit evidence to evaluate
whether noncompliance that may be material to the financial statements, has, or is likely to have,
occurred, the auditor should express a qualified opinion or a disclaimer of opinion on the financial
statements on the basis of a limitation on the scope of the audit.

Assessment of Local Requirement and Actual Practice
(Please consider the whole ISA. Particularly focus on the outline and selected paragraphs provided above)
Local regulations
Yes
No
6(a) Is there a local standard covering this particular area?


6(b) Is it materially comparable to the ISA?


6(c) Does local body issue guidance to amplify the standard?



6(d) To what extent, if any, does generally accepted practice tend to differ from the strict wording of
written local standards?





Comment (“No” answer to any of the above questions requires additional explanation):
Country Assessment of Auditing Practices Page: 8

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7. Planning (ISA 300)

Outline

The standard requires the auditor to plan the work so that the audit will be performed in an effective
manner. The auditor should develop and document an overall audit plan describing the expected scope and
conduct of the audit. ISA 300 requires that the auditor should develop and document an audit program
setting out the nature, timing and extent of planned audit procedures required to implement the overall audit
plan. The overall audit plan and the audit program should be revised as necessary during the course of the
audit.

Selected Paragraphs

7.1 The auditor should develop and document an overall audit plan describing the expected scope and
conduct of the audit.

7.2 Matters to be considered by the auditor in developing the overall audit plan include:
• Knowledge of the business.
• Understanding the Accounting and Internal Control systems.
• Risk and Materiality.
• Nature, Timing and Extent of Procedures.
• Coordination, Direction, Supervision and Review.
• Other Matters including the possibility that the going concern assumption may be subject to
question, existence of related parties and other conditions requiring special attention, the terms of
engagement, and the nature and timing of reports.

7.3 The auditor should develop and document an audit program setting out the nature, timing and extent of
planned audit procedures required to implement the overall audit plan. The audit program serves as a
set of instructions to assistants involved in the audit and as a means to control and record the execution
of the work.

7.4 The overall audit plan and the audit program should be revised as necessary during the course of the
audit.

Assessment of Local Requirement and Actual Practice
(Please consider the whole ISA. Particularly focus on the outline and selected paragraphs provided above)
Local regulations
Yes
No
7(a) Is there a local standard covering this particular area?


7(b) Is it materially comparable to the ISA?


7(c) Does local body issue guidance to amplify the standard?



7(d) To what extent, if any, does generally accepted practice tend to differ from the strict wording of
written local standards?





Comment (“No” answer to any of the above questions requires additional explanation):






Country Assessment of Auditing Practices Page: 9

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