Chapter 07 - Auditor`s Report and External Oversight

Objective: Documentation for Auditor's Report

• Record basis for auditor's report

• Evidence of compliance with ISAs, legal, and regulatory requirements

Purposes:

• Aid in audit planning and execution

• Assist members of the engagement team responsible for supervision to direct and supervise the audit work, and to discharge their review responsibilities in accordance with ISA 22

• Ensure accountability for the engagement team's work

Purpose of Audit Documentation: Enable understanding by an experienced auditor without previous connection to the audit:

1. Nature, timing, and extent of audit procedures for ISAs and legal/regulatory compliance.

2. Results of audit procedures and obtained audit evidence.

3. Significant matters and conclusions, including professional judgments made.

In documenting the nature, time and extent of audit procedures, the auditor shall record (ISA 230.9)…

1. The identifying characteristics of the specific items or matters tested

   (It enables the engagement team to be accountable for its work and facilitates the investigation of exceptions or inconstistencies. Identifying characteristics will vary with the nature of the audit procedure and item or matter tested.)

2. Who performed the audit work and the date such work was completed; and

3. Who reviewed the audit work performed and the date and extent of such review.

Significant matters shall be documented and may be…

• Matters that give rise to significant risks (ISA 315R).

• Results of audit procedures indicating

  • (a) that the financial statements could be materially misstated, or

  • (b) a need to revise the auditor’s previous risk assessment and corresponding responses to that risk

• Circumstances that cause the auditor significant difficulty in applying necessary audit procedures

• Findings that could result in a modification to the audit opinion or the inclusion of an Emphasis of Matter paragraph in the auditor’s report

Significant matters need special consideration in evaluating the work and results. An important factor in deciding the form, content and extent of documentation of significant matters is professional judgment.

Engagement Leader's Responsibilities:

• Ensure compliance of financial statements with applicable reporting framework.

• Verify appropriateness of disclosure and presentation.

• Determine compliance with statutory and regulatory requirements.

Team Manager's Responsibilities:

• Verify completeness and accuracy of financial statements and audit file evidence.

• Confirm alignment with entity's records.

• Ensure support in the audit file.

• Conduct mathematical checks.

• Review for spelling or typographical errors.

• KAM are stated in the auditor’s opinion (public document). KAM are explained to the public, not only to management in long form report

• Auditor’s communication of significant matters to the Board (Those Charged with Governance ) should be the starting point to determine the Key Audit Matters

• The number of KAMs will vary depending on the size and complexity of the entity and the nature of its business environment

  • Goodwill impairment test is a key audit matter: because of a lot assumptions, complex calculations

  • Assumptions for capitalization of costs (R&D)

  • Big pension plans -> Defined benefit plans, huge amounts of pension liabilities (complex to audit as there is a complexity in calculation)

  • Financial derivatives (hedging)