1️⃣ Objectives and Basic Principles Governing
an Audit
(ISA 200 – Overall Objectives of the Independent Auditor)
📖 Source:
Audit & Assurance
🔹 Definition: Audit of Financial Statements
According to ISA 200, the overall objectives of the auditor are:
1. To obtain reasonable assurance that:
Financial statements as a whole are free from material misstatement
Misstatements may arise due to:
o Fraud
o Error
Financial statements are prepared, in all material respects, in accordance with the
applicable financial reporting framework
2. To enable the auditor to:
Express an opinion on the financial statements
3. To report and communicate:
Report on financial statements
Communicate as required by ISAs in accordance with auditor’s findings
🔹 Key Exam Keywords (Remember These)
Reasonable assurance
Material misstatement
Fraud or error
Applicable financial reporting framework
Express an opinion
Report and communicate
🔹 Audit as an Assurance Engagement
📖 Source:
Audit & Assurance
The key elements are:
(a) Three party involvement
Shareholders → Users
Board of directors → Responsible party
Audit firm → Practitioner
(b) Subject matter
Financial statements
(c) Relevant criteria
Law
Accounting standards
(d) Evidence
Auditor must obtain sufficient appropriate audit evidence
(e) Written report
Issued in prescribed form (ISA 700)
🎯 Short Exam Conclusion (ISA 200)
The objective of an audit is:
To obtain reasonable assurance that the financial statements are free from material misstatement
and to express an opinion and report in accordance with ISAs.
2️⃣ Going Concern
(ISA 570 – Going Concern)
📖 Sources:
Audit & Assurance
Audit & Assurance
🔹 Meaning of Going Concern
Financial statements are prepared on the assumption that the entity will:
o Continue in operation
o Meet its liabilities as they fall due
Assessment period:
o At least 12 months from the date of approval of financial statements
(ISA 570 requirement)
🔹 Management Responsibilities
Management must:
Assess ability to continue as a going concern
Prepare financial forecasts and projections
Review borrowing facilities
Consider conditions and covenants
Identify material uncertainties
Make appropriate disclosures
Audit & Assurance
🔹 Auditor’s Responsibilities
Auditor shall:
Review management’s assessment
Consider:
o Financial forecasts
o Borrowing facilities
o Minutes and correspondence
Evaluate disclosures
Discuss going concern issues with management
Audit & Assurance
🔹 Audit Reporting – Going Concern (Very Important for
Exam)
📖
Audit & Assurance
1️⃣ Going concern appropriate
✔ Adequate disclosure
→ Unmodified opinion
→ Include “Conclusions relating to going concern” section
2️⃣ Going concern appropriate BUT material uncertainty exists
✔ Adequate disclosure
→ Unmodified opinion
→ Include “Material Uncertainty relating to Going Concern” section
3️⃣ Going concern inappropriate
→ Adverse opinion
4️⃣ Disclosure inadequate
→ Qualified or adverse opinion
🔹 If Financial Statements Prepared on Alternative Basis
Unmodified opinion (if disclosure adequate)
Consider including Emphasis of Matter paragraph
Audit & Assurance
🔹 Key Symptoms / Indicators (Exam Trigger Points)
Auditor reviews:
Trading losses
Cash flow problems
Breach of loan covenants
Insufficient finance
Forecast reliability
Audit & Assurance
🎯 Final Quick Revision Summary
ISA 200 – Objectives of Audit
✔ Obtain reasonable assurance
✔ Free from material misstatement
✔ Fraud or error
✔ Express opinion
✔ Report in accordance with ISAs
ISA 570 – Going Concern
✔ Management assesses going concern
✔ Minimum 12 months from approval date
✔ Auditor evaluates assessment
✔ Check disclosures
✔ Reporting depends on:
Appropriateness of basis
Existence of material uncertainty
Adequacy of disclosure
1️⃣ Auditing Engagement Letter
(ISA 210 – Terms of Audit Engagement)
🔹 Purpose of Engagement Letter
To agree the terms of audit engagement
To avoid misunderstanding between:
o Auditor
o Management / Those charged with governance
To confirm:
o Objective and scope of audit
o Responsibilities of auditor
o Responsibilities of management
🔹 Main Contents (Exam Points)
Engagement letter normally includes:
Objective and scope of the audit
Auditor’s responsibilities
Management’s responsibilities
Applicable financial reporting framework
Form and content of auditor’s report
Reference to inherent limitations of audit
Basis of fees
🔹 Importance (Exam Focus)
Provides written confirmation of acceptance
Reduces expectation gap
Clarifies reporting framework
Confirms management responsibility for preparation of financial statements
2️⃣ Planning
(ISA 300 – Planning)
📖 Source:
Audit & Assurance
🔹 Why Audits are Planned
To perform audit effectively
To reduce audit risk
To ensure appropriate attention to important areas
To identify potential problems on time
To properly assign work to engagement team
🔹 Overall Audit Strategy
Auditor determines:
Scope of engagement
Reporting objectives
Timing of audit
Direction of audit
🔹 Audit Plan Includes
Nature of procedures
Timing of procedures
Extent of procedures
Risk assessment procedures
Further audit procedures
🔹 Analytical Procedures (Planning Stage)
Used to:
Identify unusual trends
Highlight risk areas
Assist in risk assessment
Audit & Assurance
🔹 Going Concern Consideration at Planning
Auditor must consider going concern at planning stage
Audit & Assurance
3️⃣ First Year Audit Engagement
(ISA 510 – Initial Audit Engagements)
🔹 Key Issues in First Year Audit
Opening balances
Consistency of accounting policies
Previous auditor’s work (if any)
Risk of misstatement in opening balances
🔹 Auditor Must Obtain Evidence That:
Opening balances contain no material misstatement
Previous period closing balances correctly brought forward
Accounting policies are consistently applied
🔹 Additional Risk
Lack of cumulative knowledge
Greater audit effort required
Increased audit risk in first year
4️⃣ Risk Assessment and Internal Control
(ISA 315 & ISA 330)
📖 Source (Business risk definition):
Audit & Assurance
🔹 Risk Assessment
Auditor shall:
Obtain understanding of entity
Identify risks of material misstatement
Assess risks at:
o Financial statement level
o Assertion level
🔹 Types of Business Risk
ISA 315 defines business risk as risk from significant conditions, events, circumstances, actions
or inactions.
Three categories:
1️⃣ Financial risks
Cash flow problems
Overtrading
2️⃣ Operational risks
Loss of major supplier
3️⃣ Compliance risks
Non-compliance with laws and regulations
Audit & Assurance
🔹 Internal Control
Control risk:
Risk that misstatement will not be prevented or detected and corrected by entity’s
controls
Audit & Assurance
🔹 Auditor Response to Risk
(ISA 330 – Responding to Assessed Risks)
Auditor may:
Rely on controls (tests of controls)
Perform substantive procedures
Perform overall responses
Audit & Assurance
5️⃣ Knowledge of Business
(ISA 315 – Understanding the Entity and Its Environment)
🔹 Why Knowledge is Required
To identify and assess risks
To understand:
o Operations
o Industry conditions
o Regulatory environment
o Objectives and strategies
🔹 Areas of Knowledge
Nature of entity
Industry factors
Regulatory framework
Measurement and review of financial performance
Internal control system
🔹 Purpose in Exam Terms
Knowledge of business helps auditor to:
Identify unusual transactions
Understand significant events
Evaluate accounting policies
Assess going concern
Design appropriate audit procedures
🎯 Final Quick Revision Summary
Engagement Letter (ISA 210)
✔ Agree terms
✔ Define responsibilities
✔ Reduce misunderstanding
✔ Confirm reporting framework
Planning (ISA 300)
✔ Develop overall strategy
✔ Prepare audit plan
✔ Perform analytical procedures
✔ Consider going concern
First Year Audit (ISA 510)
✔ Check opening balances
✔ Check consistency of policies
✔ Higher risk
Risk & Internal Control (ISA 315 & 330)
✔ Identify risks
✔ Assess business risks
✔ Understand internal control
✔ Respond with controls or substantive testing
Knowledge of Business
✔ Understand entity & environment
✔ Identify risk areas
✔ Design effective audit procedures
1️⃣ Control of the Quality of Audit Work
(ISA 220 – Quality Control for an Audit)
🔹 Objective
Ensure audit is performed in accordance with:
o ISAs
o Applicable legal and regulatory requirements
Ensure auditor’s report is appropriate
🔹 Responsibilities of Engagement Partner
Overall responsibility for audit quality
Ensure compliance with ethical requirements
Ensure independence
Ensure appropriate direction, supervision and review
Ensure sufficient appropriate audit evidence obtained
🔹 Key Elements of Quality Control
Leadership responsibilities
Ethical requirements
Acceptance and continuance of client
Assignment of engagement team
Performance of engagement
Monitoring
2️⃣ Audit Evidence
(ISA 500 – Audit Evidence)
📖 Definition concept from glossary:
Audit & Assurance
🔹 Objective
Auditor shall obtain sufficient appropriate audit evidence to draw reasonable conclusions.
🔹 Meaning
Sufficiency → Quantity of evidence
Appropriateness → Quality (relevance and reliability)
🔹 Sources of Evidence
Inspection
Observation
External confirmation
Recalculation
Reperformance
Analytical procedures
Inquiry
🔹 Reliability of Evidence (Exam Point)
More reliable when:
Obtained from independent external sources
Obtained directly by auditor
Documentary form
Original documents
3️⃣ Documentation
(ISA 230 – Audit Documentation)
🔹 Purpose
Provide evidence of:
o Auditor’s basis for opinion
o Audit performed in accordance with ISAs
🔹 Audit Working Papers Should:
Be sufficient to enable an experienced auditor to understand:
o Nature of procedures
o Results
o Significant matters
o Conclusions reached
🔹 Importance
Supports audit opinion
Assists supervision and review
Provides evidence in case of legal dispute
4️⃣ Materiality & Audit Risk
(ISA 320 – Materiality)
(ISA 315 – Risk)
📖 Risk definition source:
Audit & Assurance
🔹 Materiality
Concept:
Information is material if its omission or misstatement could influence decisions of users.
🔹 When Materiality is Considered
Planning stage
Performing audit procedures
Evaluating misstatements
Forming audit opinion
🔹 Audit Risk
Audit risk = Risk that auditor expresses inappropriate opinion when financial statements are
materially misstated.
🔹 Components of Audit Risk
1️⃣ Inherent Risk
Risk of misstatement before considering controls.
2️⃣ Control Risk
Risk misstatement not prevented or detected by internal control.
📖
Audit & Assurance
3️⃣ Detection Risk
Risk that audit procedures fail to detect misstatement.
🔹 Business Risk (Important for Risk Assessment)
Three categories:
Financial risks
Operational risks
Compliance risks
Audit & Assurance
5️⃣ Frauds & Errors
(ISA 240 – Fraud)
🔹 Auditor’s Responsibility
Obtain reasonable assurance that financial statements are free from material misstatement
due to:
o Fraud
o Error
🔹 Fraud vs Error
Fraud → Intentional
Error → Unintentional
🔹 Fraud Risk Factors
Management bias
Pressure to meet targets
Weak internal controls
Override of controls
🔹 Auditor Actions
Maintain professional scepticism
Perform risk assessment procedures
Design procedures to address identified risks
6️⃣ Using the Work of Internal Auditor
(ISA 610 – Using the Work of Internal Auditors)
📖 Reference source:
Audit & Assurance
🔹 Before Using Internal Audit Work, External Auditor
Evaluates:
Objectivity of internal audit function
Technical competence
Systematic and disciplined approach
Proper documentation
🔹 External Auditor Must:
Evaluate adequacy of work performed
Perform some independent procedures
Remain responsible for audit opinion
7️⃣ Using the Work of an Expert
(ISA 620 – Auditor’s Expert)
📖 Definition source:
Audit & Assurance
🔹 Auditor’s Expert
An individual or organisation with expertise in a field other than accounting or auditing.
🔹 When Expert is Used
Complex valuation
Technical matters
Specialised industry issues
🔹 Auditor Must Evaluate:
Competence
Capabilities
Objectivity
Adequacy of expert’s work
🔹 Important
Auditor remains responsible for the audit opinion.
8️⃣ Analytical Procedures
(ISA 520 – Analytical Procedures)
📖 Example source:
Audit & Assurance
🔹 Meaning
Evaluation of financial information through analysis of relationships among financial and non-
financial data.
🔹 Used At:
Planning stage
Substantive procedures
Overall review stage
🔹 Purpose
Identify unusual transactions
Identify unexpected fluctuations
Highlight risk areas
Assist in forming overall conclusion
🔹 Example Risk Indicators
Increase in revenue without reason
Increase in gross profit percentage
Increase in receivable days
Decrease in payable days
📖
Audit & Assurance
🎯 Final Quick Memory Sheet
Quality Control
✔ Engagement partner responsible
✔ Ethical compliance
✔ Supervision & review
Audit Evidence
✔ Sufficient & appropriate
✔ Reliable & relevant
✔ External evidence stronger
Documentation
✔ Supports opinion
✔ Enables review
✔ Legal protection
Materiality & Risk
✔ Materiality affects decisions
✔ Audit risk = IR × CR × DR
✔ Assess at planning & completion
Fraud
✔ Intentional
✔ Professional scepticism
✔ Design risk procedures
Internal Audit
✔ Assess objectivity & competence
✔ Auditor still responsible
Expert
✔ Specialised knowledge
✔ Evaluate competence
✔ Auditor retains responsibility
Analytical Procedures
✔ Compare trends
✔ Identify unusual fluctuations
✔ Used at planning & final review
1️⃣ The Auditor’s Report on Financial
Statements
(ISA 700 – Forming an Opinion and Reporting on Financial Statements)
📖 Written report requirement:
Audit & Assurance
🔹 Objective
To form an opinion on the financial statements
To issue a written report in prescribed form
🔹 Structure of Auditor’s Report
1️⃣ Opinion Section
States whether financial statements:
o Give a true and fair view / are fairly presented
o In accordance with applicable financial reporting framework
2️⃣ Basis for Opinion
States that audit conducted in accordance with ISAs
States that sufficient appropriate audit evidence obtained
Confirms independence and ethical compliance
3️⃣ Going Concern Section
Reporting depends on circumstances:
Audit & Assurance
Going concern appropriate →
Include “Conclusions relating to going concern”
Material uncertainty exists (adequately disclosed) →
Unmodified opinion
Include “Material Uncertainty relating to Going Concern”
Disclosure inadequate →
Qualified or adverse opinion
Going concern inappropriate →
Adverse opinion
🔹 Types of Audit Opinion
✔ Unmodified Opinion
Financial statements fairly presented.
✔ Qualified Opinion
Material misstatement but not pervasive.
✔ Adverse Opinion
Material and pervasive misstatement.
✔ Disclaimer of Opinion
Insufficient appropriate audit evidence.
🔹 Emphasis of Matter
Used to draw attention to matter appropriately disclosed
Does not modify opinion
Audit & Assurance
2️⃣ Events After the Balance Sheet Date
(ISA 560 – Subsequent Events)
🔹 Meaning
Events occurring:
Between reporting date and date of auditor’s report
After date of auditor’s report
🔹 Types of Events
1️⃣ Adjusting Events
Provide evidence of conditions existing at reporting date
Require adjustment in financial statements
2️⃣ Non-Adjusting Events
Relate to conditions arising after reporting date
Disclosure required if material
🔹 Auditor’s Responsibilities
Perform procedures to identify subsequent events
Review minutes
Inquire of management
Obtain written representations
🔹 If Event Discovered After Report Date
Discuss with management
Determine whether financial statements need amendment
Take appropriate action
3️⃣ Representation by Management
(ISA 580 – Written Representations)
🔹 Purpose
Obtain written confirmation from management
Confirm responsibilities and specific matters
🔹 Management Confirms:
Responsibility for preparation of financial statements
Completeness of information provided
Disclosure of all relevant matters
Going concern assessment
🔹 Important Points
Written representations complement other evidence
Do not replace other audit evidence
If management refuses → possible scope limitation
4️⃣ Special Purpose Audit Report
(ISA 800 – Special Considerations – Special Purpose Frameworks)
🔹 Meaning
Audit of financial statements prepared in accordance with:
Special purpose framework
Specific basis of accounting
🔹 Examples
Tax basis
Cash basis
Regulatory basis
Contractual basis
🔹 Auditor Responsibilities
Understand purpose of financial statements
Evaluate acceptability of framework
Modify report appropriately
🔹 Report Must:
Describe special purpose framework
Restrict distribution where necessary
State basis of preparation
🎯 Quick Final Revision Summary
Auditor’s Report (ISA 7️00)
✔ Form opinion
✔ Written report
✔ Opinion section
✔ Basis for opinion
✔ Going concern section
✔ Emphasis of matter
Subsequent Events (ISA 560)
✔ Adjusting → adjust FS
✔ Non-adjusting → disclose
✔ Perform post year-end procedures
Written Representations (ISA 580)
✔ Management responsibility
✔ Completeness confirmation
✔ Complement evidence
✔ Refusal → scope issue
Special Purpose Report (ISA 800)
✔ Special framework
✔ Explain basis
✔ Restrict use if necessary