ISA 200 Summary : Overall Objectives of the Independent

Auditor and the Conduct of an Audit in Accordance with

International Standards on Auditing

ISA 200 deals with the independent auditors overall responsibilities when

conducting an audit of financial statements in accordance with ISAs.

Explains the scope, authority and structure of the ISAs.
ISAs are written in the context of an audit of financial statements.

An audit in accordance with ISAs is conducted on the premise that

management and, where appropriate, those charged with governance have

acknowledged certain responsibilities that are fundamental to the conduct of the

audit.
The audit of the financial statements does not relieve management or those
charged with governance of their responsibilities

Effective Date of ISA 200: for periods beginning on or after 15 December 2009
ISA 200 Objective

To obtain reasonable assurance about whether the financial statements as a

whole are free from material misstatement, whether due to fraud or error, thereby
enabling the auditor to express an opinion on whether the financial statements
are prepared, in all material respects, in accordance with an applicable financial

reporting framework; and

To report on the financial statements, and communicate as required bythe
ISAs, in accordance with the auditors findings.

Definitions
For definitions refer definition page
ISA 200 Requirements

Compliance with ethical requirement relating to audit of financial statement.

Auditor shall exercise professional judgement in planning and performing

audit of financial statement.

Auditor shall obtain sufficient appropriate audit evidence to reduce audit risk

to an acceptably low level for expression of opinion

Auditor shall comply with all ISAs relevant to the audit.

Auditor shall comply with each requirement of an ISA unless, entire ISA is

irrelevant or requirement is conditional and condition doesnt exist

In case of departure from ISA auditor shall perform alternative audit

procedures to achieve the aim of that requirement.

If objective of ISA cannot be achieved auditor shall evaluate whether this
prevents the auditor from achieving the overall objectives of the auditor and
thereby requires the auditor, in accordance with the ISAs, to modify the auditors
opinion or withdraw from the engagement. Document the same in accordance
with ISA 230.

One of the standards that was revised and redrafted as part of the Clarity Project
was ISA 200.
Studying this technical article and answering the related questions can count towards your verifiable
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This article was first published in the July 2010 edition of Accounting and Business magazine.
The International Auditing and Assurance Standards Board (IAASB) makes it clear that an understanding of this
ISA is crucial to auditors, as this ISA sets out how the objectives, requirements, application and explanatory
material contained in all ISAs are to be understood and applied.
ISA 200 should be seen as the starting point in developing an understanding of the Clarified ISAs. It contains
basic objectives and requirements that should be followed in all audits of historical information. It is such a
fundamental standard that all the other ISAs contain a prompt saying they should be read in conjunction with ISA
200. So while some of the points made below will be familiar and should be obvious to the competent auditor, the
points are worthy of revision. There are several key elements to ISA 200:

Objectives that clearly state the overall objectives of the auditor;

Definitions that clarify key terms relevant to auditing generally; and

Requirements that set out the conduct of an audit.

ISA 200 also contains a useful introduction that sets out the scope of the standard and explains some of the basic
concepts used by auditors. In common with all Clarified ISAs, application and other explanatory material is
provided to enhance the understanding and provide suggestions as to how a requirement could be addressed.

OBJECTIVES
ISA 200 states there are two overall objectives of the auditor. First: 'To obtain reasonable assurance about
whether the financial statements as a whole are free from material misstatement, whether due to fraud or error,
thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial reporting framework.' Secondly: 'To report on the
financial statements, and communicate as required by the ISAs in accordance with the auditor's findings.'
In addition, ISA 200 contains an objective relating to situations where reasonable assurance cannot be obtained,
in which case the auditor, depending on the circumstances, may qualify the audit opinion, or disclaim an opinion,
or withdraw from the assignment.
The IAASB believe these objectives are clearly worded and reflect what the auditor ultimately is responsible for
achieving. The achievement of these objectives is supported by the other Clarified ISAs.

REQUIREMENTS
ISA 200 contains five separate requirements.

ETHICAL REQUIREMENTS
'The auditor shall comply with relevant ethical requirements, including those pertaining to independence, related
to financial statement audit engagements.' ISA 200 reminds us that the auditor is bound by one or more ethical
codes, depending on the jurisdiction in which the auditor operates. The ethical code, including compliance with
quality control measures, therefore underpins the conduct of an audit. Similar wording was used in the old version
of ISA 200.

PROFESSIONAL SCEPTICISM

'The auditor shall plan and perform an audit with professional scepticism, recognising that circumstances may
exist which cause the financial statements to be materially misstated.' The ISA explains that it is necessary to
maintain an attitude of scepticism throughout the audit, and is especially important in the critical assessment of
audit evidence. Again, this was a requirement of the old ISA 200.

PROFESSIONAL JUDGMENT
'The auditor shall exercise professional judgment in planning and performing an audit of financial statements.'
The old version of ISA 200, though recognising the need to exercise professional judgment during the audit, did
not have a specific requirement in relation to it. The Clarified ISA 200 states that professional judgment is
essential to the proper conduct of the audit; for example, in making decisions regarding materiality, the evaluation
of management's judgments, and the drawing of conclusions. In fact, professional judgment will be used in almost
all key decisions regarding the conduct of the audit.
A definition of professional judgment is provided in ISA 200: 'The application of relevant training, knowledge and
experience, within the context provided by auditing, accounting and ethical standards, in making informed
decisions about the courses of action that are appropriate in the circumstances of the audit engagement.'
The IAASB considers that this definition explains what is meant by professional judgment and hopes the new
requirement will emphasise the importance of sound professional judgment as part of the audit process. ISA 200
also recognises that consultation on contentious matters may assist the auditor in making informed and
reasonable judgments. There is also a need for professional judgment to be appropriately documented.

SUFFICIENT APPROPRIATE AUDIT EVIDENCE AND AUDIT RISK

'To obtain reasonable assurance, the auditor shall obtain sufficient appropriate audit evidence to reduce audit risk
to an acceptably low level and thereby enable the auditor to draw reasonable conclusions on which to base the
auditor's opinion.' This covers old ground and the relevant application material summarises what is meant by
sufficient and appropriate evidence, and emphasises the concepts enshrined in the risk-based approach to
auditing. The IAASB sees this as augmentation of existing guidance, and does not change the underlying
principles relating to the use of the audit risk model.

CONDUCT OF AN AUDIT IN ACCORDANCE WITH ISAS

This is possibly the most significant area of ISA 200, as it contains several requirements specific to ensuring that
the auditor complies with the objectives and requirements of the Clarified ISAs. Each requirement relating to the
conduct of the audit in accordance with ISAs will be looked at in turn.
1.
'The auditor shall comply with all ISAs relevant to the audit.' One of the matters that will need to be
addressed in planning an audit is whether there are any ISAs that are not relevant. For example, in the audit
of an SME that does not have an internal audit function, the requirements of ISA 610, Using the Work of
Internal Auditors is irrelevant.
2.
'The auditor shall have an understanding of the entire text of an ISA, including its application and other
explanatory material, to understand its objectives and apply its requirements properly.' It is necessary to
understand the new structure of the Clarified ISAs in order to appreciate the importance of this requirement.
ISA contains an introduction, objectives, definitions (where relevant), requirements, and finally, application
and explanatory material. The structure may imply that the application and explanatory material is less
important than the rest. However, it should be seen as integral to the standard, and it is necessary to read this
material in order to understand and achieve the overall objectives of the standard, and to properly apply the
requirements of the standard.
Another important point is that the application and explanatory material often contains guidance aimed at the
auditors of SMEs. The IAASB is of the opinion that an SME audit needs to be of the same standard and
based on the same ISA requirements as the audit of larger entities. However, it is also recognised that ISAs
should be applied proportionately with the size and/or complexity of the entity being audited.

3.

4.

To assist the auditors of SMEs, ISAs contain, where relevant, separate sections entitled Considerations
Specific to Smaller Entities, which explain how the requirements of the ISA should be addressed when
auditing a smaller entity. ISA 200 also contains a useful summary of the characteristics of the smaller entity
(A64) and explains that while the considerations specific to smaller entities have been developed with regard
to unlisted entities, the considerations may be helpful in the audit of smaller listed entities (A65).
'The auditor shall not represent compliance with ISAs in the auditor's report unless the auditor has
complied with the requirements of this ISA and all other ISAs relevant to the audit.' No explanatory material is
provided in relation to this requirement, which seems to re-emphasise the point that the auditor must be
careful to identify which ISAs are relevant to a particular assignment before stating compliance with ISAs in
the audit report.
'To achieve the overall objectives of the auditor, the auditor shall use the objectives stated in relevant
ISAs in planning and performing the audit, having regard to the interrelationships among the ISAs, to:
Determine whether audit procedures in addition to those required by the ISAs are necessary; and
Evaluate whether sufficient appropriate audit evidence has been obtained.'

5.

Each individual ISA contains objectives that should be seen as a link between the requirements of that ISA
and the overall objectives of the auditor; ie, to reach an opinion and to report that opinion. The auditor should
understand the specific objective of an ISA in order to decide what needs to be accomplished, and use
professional judgment in deciding the extent of work that needs to be carried out in order to achieve
objectives. In reviewing the results of audit procedures, the auditor should bear in mind whether the objective
of the relevant ISA has been met and, if not, what additional procedures may be necessary.
'The auditor shall comply with each requirement of an ISA unless in the circumstances of the audit:
The entire ISA is not relevant; or
The requirement is not relevant because it is conditional, and the condition does not exist.'
Requirements exist to enable the auditor to achieve objectives. The fundamental principle here is that the
auditor is only expected to comply with requirements that are relevant to the circumstances of the audit
engagement. In some audits, whole ISAs can be deemed not relevant. This may be especially common in the
audit of smaller entities as mentioned above. The auditor will need to use professional judgment in deciding
whether a requirement within an ISA is relevant to an audit engagement.

6.

ISA 200 also discusses exceptional circumstances in which the auditor may deem it necessary to depart from
a relevant requirement. In these cases, the auditor is required to perform alternative audit procedures to
achieve the aim of that requirement. In other words, the objective of the ISA should be addressed by using
alternative means. It is stated in ISA 200 that this need should only arise where the requirement is for a
specific procedure to be performed which, in the specific circumstances of the audit, would be ineffective. In
this case, ISA 230, Audit Documentation requires the auditor to document the reason for the departure and
how the alternative procedures achieve the aim of the requirement.
The final requirement of ISA 200 deals with the failure to achieve an objective. To paraphrase this long
requirement: when the auditor fails to achieve an objective, the auditor shall evaluate whether this prevents
the overall objective of the audit being achieved. In other words, does failing to meet the objective mean the
auditor cannot express an unmodified opinion? It is a matter of professional judgment, based on evaluation of
evidence obtained and whether the objective of the auditor has been met. Failure to achieve an objective is a
significant matter and the situation should be fully documented.

CONCLUSION

The objectives and requirements of ISA 200 underpin all audits of historical financial statements, regardless of
the size or complexity of the entity being audited. The IAASB states that ISA 200 should be read and studied by
all auditors, even though many of the concepts are familiar from the previous incarnation of the standard.

Lisa Weaver is ACCA's examiner for advanced audit and assurance