  

    

            
          
  
            
         

           
         
           
 
   
       
   
               
          
          

       

               
               
              
        

         

         
    
          
 
        
   
       
          
       
            

 
                
           
              
   
             
               
 
              
            
              
               
                 
               
               
              
  
                
               

Which subsidiary board of International Federation of Accountants (IFAC) is authorized to

develop and promote International Standards on Auditing (ISAs)? State the reasons why
does an auditor need to learn about the key principles and requirements of the International
Standards on Auditing (ISAs)?

    

             
           
    

                
  

                 
     
               
                
           
 

Key Activities of the Internal Audit Function:

Following are the key activities of Internal Audit Department:
 Ensure that a company is complying with the best practices of corporate governance
 Risk identification and management
 Effectiveness of internal controls
 Reliability of financial and operating information
 Economy, efficiency and effectiveness of operating activities
 Assessing compliance with the laws and regulations
 Prevention and detection of fraud.
Materiality:
Materiality is defined as follows:
Misstatements, including omissions, are considered to be material if they, individually or in
aggregate, could reasonably be expected to influence the economic decisions of users taken on
the basis of the financial statements.
 In assessing the level of materiality there are a number of areas that should be considered.
Firstly the auditor must consider both the amount (quantity) and the nature (quality) of any
misstatements, or a combination of both. The quantity of the misstatement refers to the
relative size of it and the quality refers to an amount that might be low in value but due to its
prominence could influence the user’s decision, for example; directors’ transactions.
 In assessing materiality the auditor must consider that a number of errors each with a low
value may when aggregated amount to a material misstatement.
 The assessment of what is material is ultimately a matter of the auditors’ professional
judgment, and it is affected by the auditor’s perception of the financial information needs of
users of the financial statements.
 In calculating materiality the auditor should also consider setting the performance materiality
level. This is the amount set by the auditor, it is below materiality, and is used for particular
transactions, account balances and disclosures.
 Materiality is often calculated using benchmarks such as 5% of profit before tax or 1% of
revenue. These values are useful as a starting point for assessing materiality.

Written Representation:
A written statement by management provided to the auditor to confirm certain matters or to
support other audit evidence. Written representations in this context do not include financial
statement, the assertions therein, or supporting books and records.
Written representation is a form of audit evidence. They are written by the company’s directors
and sent to the auditors, just before the audit report is signed.
Written representations are required for two reasons:
(i) The directors can acknowledge their collective responsibility for the preparation of the
financial statements and to confirm that they have approved those statements.
(ii) To confirm any matters which are material to the financial statements where representations
are crucial to obtaining sufficient and appropriate audit evidence.
In this case audit evidence are normally unavailable because knowledge of the facts is
confined to management and the matter is one of judgment or opinion.
Obtaining written representations does not mean that other evidence does not have to be
obtained. Audit evidence will still be collected and the representation will support that
evidence. Any contradictions between sources of evidence should, as always, be
investigated.
(i) Position of these Standards relating to External Audit Process :
International Standards on Auditing provide guidance on the performance of an audit. ISAs
only apply to the audit of historical financial information. They are written in the context of an
audit of financial statements by an independent auditor. Basic principles and essential
procedures are provided to be followed.
There is related guidance in the form of explanatory material and appendices.
These should be read in their entirety and the principles applied to the audit. The basic
principles and essential procedures of an ISA are to be applied in all cases. If in exceptional
cases the auditor deems it necessary to depart from an ISA to achieve the overall aim of the
audit, then this departure must be justified.

(ii) The extent to which an auditor must follow ISAs:

An auditor should follow the ISAs wherever possible. However, in some situations an auditor
may consider it necessary to depart from the ISA so that the objectives of the audit can be
achieved more efficiently. In this situation, the auditor can depart from the ISA, but he or she
must be prepared to justify the departure. It is expected that departure from any ISA will be the
exception rather than the rule.

(iii) The extent to which ISAs apply to small entities:

To be clear, ISAs are meant to be applicable to the audit of any entity, no matter what its size.
However, in small entities, the auditor may have to amend the audit approach to fit the
circumstances of that business. For example, there will be greater reliance on substantive
testing and management representations. However, the appropriate ISAs should be followed.

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