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WILEYInterpretationand Applicationof InternationalStandards onAuditing



WILEYInterpretationand Applicationof InternationalStandards onAuditing

Steven CollingsLeavitt Walmsley Associates Ltd

A John Wiley and Sons, Ltd., Publication


This edition first published 2011C© 2011 Steven John Collings

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Extracts from Final IFAC Publications or Exposure Drafts of Proposed IFAC Publications

All extracts from the 2010 Handbook of International Quality Control, Auditing, Review, Other Assurance,and Related Services Pronouncements (April 2010) of the International Auditing and Assurance Board,published by the International Federation of Accountants (IFAC) in April 2010 are used with permission ofIFAC.

Library of Congress Cataloging-in-Publication Data

Collings, StevenInterpretation and application of international standards on auditing / Steven Collings.

p. cm.ISBN 978-0-470-66112-3 (paperback)

1. Auditing – Standards. 2. Financial Statements – Standards. I. Title.HF5626.C653 2011657′.450218–dc22

A catalogue record for this book is available from the British Library.

ISBN 978-0-470-66112-3 (paperback); ISBN 978-0-470-97970-9 (ebk);ISBN 978-1-119-97378-2 (epub); ISBN 978-1-119-97379-9 (emobi)

Typeset in 10/11pt Times by Aptara Inc., New Delhi, IndiaPrinted and bound in the United Kingdom by TJ International, Padstow, Cornwall

http://www.wiley.com


CONTENTS

PageChapter Title No.

Preface ix

Acknowledgements xi

About the Author xiii

1 The History of Auditing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2 The Clarity Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

3 The Code of Ethics for Professional Accountants . . . . . . . . . . . . . . . . . . 15

4 ISA 200 (revised and redrafted) Overall Objectives of the IndependentAuditor and the Conduct of an Audit in Accordance with InternationalStandards on Auditing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

5 ISA 210 (redrafted) Agreeing the Terms of Audit Engagements . . . . . 35

6 ISA 220 (redrafted) Quality Control for an Audit of FinancialStatements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

7 ISA 230 (revised) Audit Documentation . . . . . . . . . . . . . . . . . . . . . . . . . . 45

8 ISA 240 (redrafted) The Auditor’s Responsibilities Relating to Fraudin an Audit of Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

9 ISA 250 (redrafted) Consideration of Laws and Regulations in an Auditof Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

10 ISA 260 (revised and redrafted) Communication with ThoseCharged with Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

11 ISA 265 Communicating Deficiencies in Internal Control to ThoseCharged with Governance and Management . . . . . . . . . . . . . . . . . . . . . . 79

12 ISA 300 (redrafted) Planning an Audit of Financial Statements . . . . . . 85

13 ISA 315 (redrafted) Identifying and Assessing the Risks ofMaterial Misstatement Through Understanding the Entity andits Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

14 ISA 320 (revised and redrafted) Materiality in Planning and Performingan Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121

15 ISA 330 (redrafted) The Auditor’s Responses to Assessed Risks . . . . . 127

16 ISA 402 (revised and redrafted) Audit Considerations Relating to anEntity Using a Service Organisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

17 ISA 450 (revised and redrafted) Evaluation of Misstatements Identifiedduring the Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

18 ISA 500 (redrafted) Audit Evidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

19 ISA 501 (redrafted) Audit Evidence — Specific Considerations forSelected Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157


vi Contents


20 ISA 505 (revised and redrafted) External Confirmations . . . . . . . . . . . . 165

21 ISA 510 (redrafted) Initial Audit Engagements —Opening Balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

22 ISA 520 (redrafted) Analytical Procedures . . . . . . . . . . . . . . . . . . . . . . . . 173

23 ISA 530 (redrafted) Audit Sampling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181

24 ISA 540 (revised and redrafted) Auditing Accounting Estimates,Including Fair Value Accounting Estimates, and RelatedDisclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191

25 ISA 550 (revised and redrafted) Related Parties . . . . . . . . . . . . . . . . . . . . 203

26 ISA 560 (redrafted) Subsequent Events . . . . . . . . . . . . . . . . . . . . . . . . . . . 213

27 ISA 570 (redrafted) Going Concern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221

28 ISA 580 (revised and redrafted) Management Representations . . . . . . . 231

29 ISA 600 (revised and redrafted) Special Considerations — Auditsof Group Financial Statements (Including the Work ofComponent Auditors) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239

30 ISA 610 (redrafted) Using the Work of Internal Auditors . . . . . . . . . . . 249

31 ISA 620 (revised and redrafted) Using the Work of anAuditor’s Expert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253

32 ISA 700 (revised) Forming an Opinion on the FinancialStatements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257

33 ISA 705 (revised and redrafted) Modifications to the Opinion in theIndependent Auditor’s Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265

34 ISA 706 (revised and redrafted) Emphasis of Matter Paragraphsand Other Matter(s) Paragraphs in the Independent Auditors’Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269

35 ISA 710 (redrafted) Comparative Information — Corresponding Fig-ures and Comparative Financial Statements . . . . . . . . . . . . . . . . . . . . . . 273

36 ISA 720 (redrafted) The Auditor’s Responsibilities Relating toOther Information in Documents Containing Audited FinancialStatements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279

37 ISA 800 (revised and redrafted) Special Considerations — Audits ofFinancial Statements Prepared in Accordance with Special PurposeFrameworks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283

38 ISA 805 (revised and redrafted) Special Considerations — Auditsof Single Financial Statements and Specific Elements, Accounts orItems of a Financial Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287

39 ISA 810 (revised and redrafted) Engagements to Report on SummaryFinancial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291

40 The Framework for the Preparation and Presentation of FinancialStatements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299


Contents vii


41 IFRS for Small and Medium Entities (SMEs) . . . . . . . . . . . . . . . . . . . . . . 307

42 ISQC 1 ‘Quality Control for Firms that Perform Audits and Reviewsof Financial Statements, and Other Assurance and Related ServicesEngagements’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321

Appendix 1: Overview of IFRS and IAS . . . . . . . . . . . . . . . . . . . . . . . . . . 335

Appendix 2: Illustrative Audit Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 433

Appendix 3: Illustrative Financial Statements . . . . . . . . . . . . . . . . . . . . . 445

Appendix 4: Illustrative Auditor Report (UK and Ireland) . . . . . . . . . . 607

Index 617



PREFACE

Auditing throughout the world has undergone a substantial amount of change in recent years.The well-publicised corporate disasters that rocked the profession over the last few years havelargely contributed to these changes. In many countries domestic standards were replaced withInternational Standards on Auditing (ISAs) in an attempt to ensure that auditors throughoutthe world were applying the same level of standards throughout an audit assignment and, thus,ensuring that audit quality remained consistent on a country by country basis.

Standards, whether they are International Financial Reporting Standards (IFRS) or ISAs,frequently change in an attempt to improve and clarify their application throughout the auditand accounting profession. This publication aims to assist auditors in the interpretation andapplication of auditing standards as it is often the case that many ISAs can be extremelycomplex and difficult to apply in real life situations. Throughout the profession, audit firms areoften criticised for failing to apply auditing standards sufficiently enough to enable an efficientaudit to take place. In today’s modern profession the correct application of auditing standardsis pivotal — not only to demonstrate to professional regulators that auditing standards havebeen applied throughout an audit assignment — but also to ensure the audit client receives aservice that is both beneficial and cost effective to them, and undertaken in accordance with aprescribed framework.

This publication looks at the full ISAs. Most jurisdictions have adopted ISAs but have tailoredthem to their specific requirements, for example the UK has adopted ISAs but they are termedISA (UK and Ireland). This publication has been written following the IAASB ‘Clarity Project’which is discussed in Chapter 2. The final versions of the Clarified standards were issued inOctober 2009. The new standards, on which this publication is based, come into effect foraudits for periods commencing on or after 15 December 2009, thus, in many cases, auditorswill not be affected by this deadline until audits of December 2010 year ends.

Notwithstanding that the Clarified standards may not affect some auditors until December2010 year ends, it is imperative that auditors are in the process of considering how they willbe ready to implement the Clarified standards and this publication aims to assist accountantsand auditors in understanding the requirements of each Clarified standard together with theEthical standards by which professional accountants are bound.

Packed with illustrations, this publication illustrates the practicalities in applying the ClarifiedISAs, providing a summary of the main technical content of the IFRS/IAS and providingillustrative financial statements and auditors’ reports.



ACKNOWLEDGEMENTS

Writing a book, whether a professional title or a work of fiction, is a project which bringswith it a whole host of challenges and is certainly not a one-person project. This book wouldnot have seen the light of day had it not been for certain individuals who have contributedsignificantly to its production. Every individual who knows me has, in one way or another,influenced my career and my writing and it is to all those that do know me that I express myheartfelt thanks and gratitude.

I would like to place on record my sincere thanks and gratitude to the publishing team at JohnWiley & Sons. In particular I would like to thank the Executive Commissioning Editor at JohnWiley & Sons, Jenny McCall, for her support during the writing and publishing stages as wellas her colleague Gemma Valler for her support during the production of this book. Withoutthe support and input of these individuals, this book would not have been possible.

I would like to thank Francesca Warren for all her help in the copyediting process.

I would like to thank Mr Les Leavitt, Managing Director of Leavitt Walmsley Associates Ltdfor his support over the years. Les has been extremely supportive of this project and has beenclosely involved with its production.

I would like to express my sincere thanks to my technical reviewers: the lecturer and author,Mr Roger Bryant MSc BSc (Econ) FCA FCCA of Small Company Reporting Ltd, CarolineFox BA ACA, Chartered Accountant and Mrs Annette Smyth MAAT ACCA of Bob Collyer &Co Accountants, for their input into this book and whose opinions and comments have beeninvaluable during the writing of this book.

I would also like to thank the team at IRIS Software for their permission to use some aspectsof their audit methodologies contained in their AUDITOR Programme.

Last, but certainly not least, I would like to thank all my family and friends, all of whomfeature in this book at some point, for their support during the course of this project.

All errors are my own and come with apologies.



ABOUT THE AUTHOR

Steven Collings FMAAT FCCA is the Audit and Technical Director at Leavitt WalmsleyAssociates Limited, who are based in Manchester in the United Kingdom. Steven qualifiedas a Member of the Association of Accounting Technicians (AAT) in 2000 and then wenton to qualify as an Associate Chartered Certified Accountant (ACCA) in 2005. Steven alsoholds the ACCA Diploma in International Financial Reporting Standards (DipIFRS) and theCertificates in IFRS and International Auditing Standards from ACCA. Steven also holdsStatutory Auditor status in the United Kingdom.

Steven has specialised in auditing and financial reporting issues and has been writing profes-sionally for several years. He has written several articles which have been published in thevarious accounting media concerning auditing and financial reporting. Steven writes exten-sively for AccountingWEB.co.uk on financial reporting and auditing issues, and has also hadseveral articles published in various professional journals.

Steven lectures on all aspects of financial reporting and auditing issues and regularly speaksat events held for accountants in practice.

Some examples of Steven’s articles can be found on the book’s companion website atwww.wiley.com/go/collings