ICAP Training Seminar Training Seminar: Students of Small and Medium Sized Practices February 17, 2007 BDO International ICAP Training Seminar 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 The Future is Here… 2 BDO International ICAP Training Seminar In other words… ISA 240/315 • What could go wrong? The Future is Here… ISA 330 • What are we going to do about it? 3 BDO International ICAP Training Seminar Why? Risk of Material Misstatement Fraud The Future is Here… Error 4 BDO International ICAP Training Seminar 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 The Future is Here… 5 BDO International ICAP Training Seminar Mandatory team discussion to be held (ISA 300) Fraud should be considered in context of errors/testing results Professional Scepticism The Standard & The Audit May want to hold final discussion at completion? The Future is Here… 6 BDO International ICAP Training Seminar Definition of Risk Audit Risk = Inherent Risk x Control Risk x Detection Risk Risk of Material Misstatement The Future is Here… 7 BDO International ICAP Training Seminar 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” The Future is Here… 8 BDO International ICAP Training Seminar Requirements of ISA 315 Risk assessment procedures and Understanding the sources of information about the entity entity and its and its environment, including IC environment including IC OVERALL REQUIREMENTS Assessing the risks of material misstatement Communicating with those charged with governance Documentation and management The Future is Here… 9 BDO International ICAP Training Seminar 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 The Future is Here… 10 BDO International ICAP Training Seminar 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 The Future is Here… 11 BDO International ICAP Training Seminar Assertions – how much do you know? • P&L – – – – – Occurrence Completeness Accuracy Cutoff Classification • BS – – – – – Existence Completeness Rights & Obligations Valuation Presentation & Disclosure The Future is Here… 12 BDO International ICAP Training Seminar Assessing the risk of material misstatement Identify risk Risk of material misstatement Relate risk to what can go wrong at the assertion level at FS and Consider assertion level magnitude of risks of risks General Risk The Future is Here… Likelihood Specific Risk 13 BDO International ICAP Training Seminar 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 The Future is Here… 14 BDO International ICAP Training Seminar Nature of Procedures ToCs SAPs OSPs ASSURANCE Risk The Future is Here… 15 BDO International ICAP Training Seminar 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.” The Future is Here… 16 BDO International ICAP Training Seminar 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 The Future is Here… 17 BDO International