An auditor who, at the request of the group engagement team, performs work on financial information related to a component
All the components whose financial information is included in the group financial statements. A group always has more than one component.
Objective of the audit according to ISA 200.11
Obtain reasonable assurance that financial statements are, as a whole, free from material misstatement from fraud or error.
Form an opinion on whether the financial statements follow the relevant reporting rules.
Report and communicate findings based on the financial statements as required by ISAs.
Reasonable assurance means a high, but not absolute, level of assurance!
Objective of the audit. - Group Management
Obtaining audit evidence of how the company's management controls and monitors their business (also for components)
Gaining a deeper understanding of the business, the environment and corporate risks
Objective of the audit. - Group components / Business processes
Tests of controls and monitoring measures with regard to assertions in the financial statements
Objective of the audit - risk orientation
Audit procedures must align with the assessed risks of material misstatement at the assertion level.
Tests are conducted to gather evidence for each assertion.
Tests of controls are performed to confirm the operating effectiveness of relevant controls, with more persuasive evidence required for greater reliance on controls.
Conduct specific substantive procedures for significant risks of misstatement.
Regardless of assessed risks, substantive procedures are designed and performed for each material class of transactions, account balance, and disclosure.
Management makes implicit or explicit assertions regarding the recognition, measurement, and presentation of assets, liabilities, equity, income, expenses, and disclosures in financial statements.
For example, in the balance sheet, if properties are shown, management is claiming:
Existence: The properties exist at the end of the reporting period, representing the company's complete financial situation.
Rights/obligations: The entity owns or controls the properties.
Accurate valuation: The properties are valued accurately based on the measurement basis.
Completeness: All properties owned and controlled by the entity are included in the carrying amount.
Assertions Examples about classes of transactions and events for the period under audit OCACC
Occurence: Transactions and events that have been recorded have occured
Completeness: All transactions and events that should have been recorded have been recorded
Accuracy: Amounts and other data have been recorded appropriately
Cutoff: Transactions and events have been recorded in the correct accounting period
Classification: Transactions and events have been recorded in the proper accounts
Assertions Examples about account balances at period end ERVC
Existence: Assets, liabilities and equity exist
Rights and obligations: Entity holds or controls rights / obligations the rights to assets / liabilities
Valuation and allocations: ALE are included in the financial statements at appropriate amounts
Completeness: ALE that should have been recorded have been recorded
Audit Process Model - 1. Client Acceptance EDCPSO
Evaluate the client's background and reasons for the audit
Determine whether the auditor is able to meet the ethical requirements regarding the client
Communicate with previous auditor
Prepare client proposal
Select staff to perform the audit and determine if there is a need for other professionals
Obtain an engagement letter
Audit Process Model - 2. Planning the audit PADP
Perform audit procedures to understand the entity, its environment, and the entity's internal controls
Assess the risks of material misstatements of the financial statements
Prepare the planning memorandum and audit program containing the auditor's response to the identified risks
Audit Process Model - 3. Testing and evidence TAT
Test of internal controls
Analytical procedures on financial information
Tests of details of balances
Audit Process Model - 4. Evaluation and reporting PRPPRP
Perform procedures to identify subsequent events
Review financial statements and other reported material
Perform wrap-up procedures
Prepare final documentation
Report to the board of directors
Prepare Audit report
Audit risk definition
Audit risk is the risk that an auditor gives an inappropriate audit opinion when the financial statements are materially misstated.
It is a measure of how reliable the information used by the accounting system is
Components of audit risk
Inherent risk: Risk inherent in transactions that cannot be avoided. Management is expected to mitigate inherent risk through internal controls.
Control risk: Risk that internal controls will not mitigate inherent risk. It refers to the risk that a material misstatement will not be prevented or detected, and corrected by the internal controls in a timely manner.
Risk of Material Misstatement
Risk of material misstatement: The risk of significant errors or fraud (material misstatements) in financial statements before the audit.
Auditor assesses risk, which cannot be changed by the auditor.
Assessment considers inherent risk and control risk from the client's risk assessment process.
Audit Plan: A plan designed to detect all material misstatements in the client's financial statements.
Detection risk: The risk that the procedures performed by the auditor to reduce audit risk to an acceptable level will not detect a material misstatement
The effectiveness of the auditing procedures and their application by the auditor influences the level of this risk.
The level of assurance (accepted audit risk) determines the extent of evidence that the auditor needs to gather.