CHAPTER 2 THE AUDITING PROFESSION

2.1. The Regulatory Framework Governing Auditing

The International Auditing and Assurance Standards Board (IAASB) is an independent standard –
setting body that serves the public interest by setting high – quality international standards for
auditing, quality control, review, other assurance, and related services, and by facilitating the
convergence of international and national standards. In doing so, the IAASB enhances the quality
and uniformity of practice throughout the world and strengthens public confdence in the global
auditing and assurance profession.
The IAASB was established in 1978 by the International Federation of Accountants (IFAC). The
IAASB is composed of 22 members from around the world, who are appointed by the IFAC
Council. The IAASB's standards are adopted by national auditing organizations in over 180
countries.
The IAASB's standards are designed to provide guidance to auditors on how to perform their
work in a professional and responsible manner. The standards cover a wide range of topics,
including:
o Auditing of fnancial statements
o Assurance engagements
o Quality control
o Ethics
o Related services
The IAASB's standards are updated on a regular basis to refect changes in the accounting and
auditing landscape. The IAASB also publishes guidance materials, such as practice aids and
implementation guides, to help auditors apply the standards in practice.
The IAASB framework is based on the following principles:
o Independence: Auditors and assurance providers must be independent of their clients in
order to maintain their objectivity.
o Integrity: Auditors and assurance providers must act with integrity and uphold the highest
ethical standards.
o Professional competence and due care: Auditors and assurance providers must have the
necessary professional competence and due care to perform their engagements.
o Confidentiality: Auditors and assurance providers must maintain the confdentiality of client
information.
o Objectivity: Auditors and assurance providers must be objective in their judgments and
assessments.
The IAASB framework also includes a number of standards that provide guidance on specifc
aspects of auditing and assurance engagements. These standards cover a wide range of topics,
including:
o Audit planning
o Risk assessment
o Audit procedures
o Evidence gathering
o Reporting
Benefits of the IAASB Framework
The IAASB Framework provides a number of benefts to auditors, assurance providers, and users
of fnancial information. These benefts include:
o Improved audit quality: The Framework helps to ensure that audits and assurance
engagements are conducted in a high – quality manner.
o Increased confidence in financial reporting: The Framework helps to increase confdence
in the reliability of fnancial reporting, which benefts investors, creditors, and other users of
fnancial information.
o Enhanced comparability: The Framework helps to promote the comparability of fnancial
information across diferent jurisdictions.

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o Reduced costs: The Framework can help to reduce the costs of auditing and assurance
engagements by providing clear and concise guidance on how to perform these
engagements.

2.2. International Standards on Auditing (ISA).

The International Standards on Auditing (ISAs) are a set of professional standards that provide a
framework for the conduct of audits of fnancial statements. The purpose of the ISAs is to
promote the uniformity and quality of audits of fnancial statements throughout the world.
Development and Issuance of the ISAs
The ISAs are developed and issued by the International Auditing and Assurance Standards Board
(IAASB) of the International Federation of Accountants (IFAC). The IAASB is an independent body
that sets standards for auditing, assurance, and related services. The IAASB is composed of
representatives from over 180 countries and jurisdictions.
Scope of the ISAs
The ISAs cover a wide range of topics, including:
o Audit planning and risk assessment: The auditor's responsibility to plan the audit and
assess the risks of material misstatement in the fnancial statements.

o The performance of audit procedures: The auditor's responsibility to perform audit

procedures to obtain sufcient and appropriate audit evidence to support the assertions in
the fnancial statements.

o The evaluation of audit evidence: The auditor's responsibility to evaluate the audit
evidence obtained and form an opinion on whether the fnancial statements are fairly
presented in accordance with an applicable fnancial reporting framework.
o Reporting on the results of the audit: The auditor's responsibility to report on the
results of the audit in accordance with the ISAs.
Each part of the ISAs is divided into a number of individual ISAs. The ISAs are numbered from
100 to 999.
Compliance with the ISAs
Compliance with the ISAs is mandatory for auditors who are members of IFAC member bodies.
However, the ISAs are also widely adopted by auditors who are not members of IFAC member
bodies.

Benefits of Using the ISAs

There are a number of benefts to using the ISAs, including:
o Promotes uniformity and quality of audits: The ISAs provide a common framework for
audits, which helps to promote consistency and quality across diferent jurisdictions.

o Improves auditor performance: The ISAs provide guidance to auditors on how to plan,
perform, and report on audits, which can help auditors improve their performance.

o Enhances public confidence: The ISAs help to ensure that audits are conducted in a
rigorous and independent manner, which can enhance public confdence in the audit
profession.

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o Facilitates international trade: The ISAs promote the adoption of common auditing
standards, which can facilitate international trade by reducing the costs and complexities of
cross-border audits.

ISA 100 TO ISA 199 INTRODUCTORY MATTERS

The International Standards on Auditing (ISAs) are a set of standards that provide a framework
for the conduct of audits of fnancial statements. The ISAs are developed and issued by the
International Auditing and Assurance Standards Board (IAASB) of the International Federation of
Accountants (IFAC).
ISAs 100 to 199 deal with introductory matters, including:
o The purpose and scope of the ISAs
o The defnition of terms
o The use of the ISAs
o The responsibilities of the auditor
o The auditor's professional skepticism
o The auditor's use of professional judgment
o The auditor's consideration of internal control
o The auditor's communication of the results of the audit

ISAs 100 to 199 are important for auditors because they provide a set of standards that can help
them to perform high – quality audits. They are also important for investors and other users of
fnancial statements because they can help to ensure that the fnancial statements are reliable.
Here is a table summarizing the key points of ISAs 100 to 199:
ISA Key Point
ISA 100 The Purpose and Scope of the International Standards on Auditing
ISA 105 The Defnition of Terms
ISA 110 The Use of the International Standards on Auditing
ISA 120 Auditor's Responsibilities Relating to the Audit
ISA 130 The Auditor's Professional Skepticism
ISA 140 The Auditor's Use of Professional Judgment
ISA 100 The Purpose and Scope of the International Standards on Auditing
ISA 100 sets out the purpose and scope of the International Standards on Auditing (ISAs). The
ISAs are a set of standards that provide a framework for the conduct of audits of fnancial
statements. The purpose of the ISAs is to promote the uniformity and quality of audits of
fnancial statements throughout the world.
Key Points
o The ISAs are developed and issued by the International Auditing and Assurance Standards
Board (IAASB) of the International Federation of Accountants (IFAC).

o The ISAs are applicable to audits of fnancial statements of all types of entities, including
listed companies, non-listed companies, and government entities.

o The ISAs are designed to help auditors express an independent opinion on whether fnancial
statements are fairly presented in accordance with an applicable fnancial reporting
framework.
o The ISAs are also designed to help auditors communicate efectively with those charged with
governance.
Purpose of the ISAs
The ISAs are designed to achieve the following objectives:
o Promote the uniformity and quality of audits of fnancial statements throughout the world.

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o Provide a framework for auditors to plan, perform, and report on audits of fnancial
statements.

o Enhance the confdence of users of fnancial statements in the reliability of the information
they contain.

o Help auditors to identify and assess risks of material misstatement in fnancial statements.

o Help auditors to design and perform audit procedures that are efective in addressing
identifed risks of material misstatement.

o Help auditors to communicate the results of their audits to those charged with governance.

Scope of the ISAs

The ISAs apply to audits of fnancial statements of all types of entities, including listed
companies, non – listed companies, and government entities. The ISAs also apply to audits of
other information, such as performance information and compliance information.
Compliance with the ISAs
Auditors are required to comply with the ISAs when conducting audits of fnancial statements.
This means that auditors must apply the ISAs to all aspects of the audit engagement.

ISA 105 The Definition of Terms

ISA 105 provides defnitions for terms used in the International Standards on Auditing (ISAs).
The purpose of ISA 105 is to promote consistency and clarity in the application of the ISAs.

Definitions of Key Terms

ISA 105 defnes a number of key terms used in the ISAs, including:
o Audit engagement: An engagement to perform an audit of fnancial statements.

o Audit procedures: The actions performed by the auditor to obtain audit evidence.

o Audit evidence: The information obtained by the auditor in the course of the audit.

o Assertions: The representations made by management, usually in the form of explicit or

implicit statements, that are embodied in the fnancial statements.

o Financial reporting framework: A set of principles and rules that defne the basis for
preparing and presenting fnancial statements.

o Independence: The auditor's ability to perform an audit with an objective state of mind and
make unbiased judgments.

o Material misstatement: An omission or misstatement of information in the fnancial

statements that, individually or in the aggregate, could infuence the economic decisions of
users taken on the basis of the fnancial statements.

o Professional skepticism: The attitude that assumes that the information obtained during
the audit may be incomplete or inaccurate and that the auditor should critically assess all
audit evidence.
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o Reasonable assurance: A high level of assurance that the fnancial statements are free
from material misstatement.

o Risk of material misstatement: The possibility that there may be material misstatements
in the fnancial statements.

o Sampling: The selection of some items for examination from a universe of items.
o Testing: The evaluation of audit evidence obtained through audit procedures.
Importance of ISA 105
ISA 105 is an important ISA because it provides a common understanding of the terms used in
the ISAs. This helps to promote consistency and clarity in the application of the ISAs.
ISA 110 The Use of the International Standards on Auditing
ISA 110 provides guidance on the use of the International Standards on Auditing (ISAs). The
purpose of ISA 110 is to help auditors apply the ISAs consistently and efectively.
Key Points
o ISA 110 sets out the general principles for applying the ISAs.

o ISA 110 provides guidance on how to apply the ISAs to specifc engagements.
o ISA 110 emphasizes the importance of professional judgment in applying the ISAs.
General Principles for Applying the ISAs
The general principles for applying the ISAs are:
o Apply the ISAs to all audits of fnancial statements.

o Apply the ISAs independently of the fnancial reporting framework used.

o Consider the nature of the entity and its environment.

o Use professional judgment in applying the ISAs.

o Comply with all applicable laws and regulations.
Applying the ISAs to Specific Engagements
When applying the ISAs to specifc engagements, auditors should consider the following factors:
o The objectives of the audit.

o The size and complexity of the entity.

o The risks of material misstatement.

o The availability of audit evidence.

o The competence of the audit team.
Professional Judgment
Professional judgment is an essential part of auditing. Auditors must use professional judgment
to:
o Plan the audit.

o Perform audit procedures.

o Evaluate audit evidence.

o Form an opinion on the fnancial statements.

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Compliance with Laws and Regulations
Auditors must comply with all applicable laws and regulations. This includes the laws and
regulations of the jurisdiction in which the entity is located, as well as the laws and regulations of
the jurisdiction in which the auditor is practicing.
ISA 120 Auditor's Responsibilities Relating to the Audit
ISA 120 sets out the overall responsibilities of an auditor in relation to an audit of fnancial
statements. These responsibilities include:
o Planning the audit
o Performing the audit in accordance with ISAs
o Communicating the results of the audit

Planning the Audit

The auditor's responsibility to plan the audit includes:
o Identifying the risks of material misstatement.
o Assessing the materiality of identifed risks.
o Designing audit procedures to address identifed risks.
o Obtaining audit evidence to support the assertions in the fnancial statements.

Performing the Audit in Accordance with ISAs

The auditor's responsibility to perform the audit in accordance with ISAs includes:
o Obtaining sufcient appropriate audit evidence to support the assertions in the fnancial
statements.
o Assessing the audit evidence obtained.
o Forming an opinion on whether the fnancial statements are fairly presented in accordance
with the applicable fnancial reporting framework.
Communicating the Results of the Audit
The auditor's responsibility to communicate the results of the audit includes:
o Issuing an audit report that expresses an opinion on the fnancial statements.
o Communicating with those charged with governance about the audit.

Other Responsibilities
In addition to the responsibilities listed above, ISA 120 also sets out the following responsibilities
of an auditor:
o Maintaining confdentiality.
o Exercising professional skepticism.
o Using professional judgment.
o Complying with applicable laws and regulations.
ISA 130 The Auditor's Professional Skepticism
ISA 130 describes the concept of professional skepticism and its importance in the audit
process. Professional skepticism is the attitude that assumes that the information obtained
during the audit may be incomplete or inaccurate and that the auditor should critically assess all
audit evidence.
Key Points
o Professional skepticism is an essential part of auditing.
o Professional skepticism is applied throughout the audit process.
o Professional skepticism helps auditors to identify and assess risks of material misstatement.
o Professional skepticism helps auditors to obtain sufcient and appropriate audit evidence.
o Professional skepticism helps auditors to form an opinion on whether the fnancial statements
are fairly presented.
Definition of Professional Skepticism
ISA 130 defnes professional skepticism as: "A questioning mind and critical assessment of audit
evidence obtained during the performance of the audit."

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Applying Professional Skepticism
To apply professional skepticism, auditors should:
o Be alert to the possibility of misstatement.

o Question information that appears to be inconsistent or unusual.

o Test assumptions and assertions made by management.

o Consider alternative explanations for audit evidence.
Benefit of Profett onal Skepti i t
Professional skepticism helps auditors to:
o Identify and assess risks of material misstatement.

o Obtain sufcient and appropriate audit evidence.

o Form an opinion on whether the fnancial statements are fairly presented.

o Reduce the risk of issuing an incorrect audit opinion.

ISA 140 The Auditor's Use of Professional Judgment

ISA 140 provides guidance on the use of professional judgment in the audit process.
Professional judgment is the ability to apply knowledge, experience, and intuition to make
decisions and solve problems. It is an essential part of auditing, as auditors must use
professional judgment in all aspects of the audit process, from planning and performing the audit
to communicating the results of the audit.
Key Points
o Professional judgment is an essential part of auditing.
o Professional judgment is applied throughout the audit process.
o Professional judgment is based on knowledge, experience, and intuition.
o Professional judgment should be sound and justifable.
o Professional judgment should be documented.
Definition of Professional Judgment
ISA 140 defnes professional judgment as: "The application of the auditor's knowledge and
experience to make decisions about audit procedures, the evaluation of audit evidence, and the
formation of the auditor's opinion."
Applying Professional Judgment
Auditors should apply professional judgment in all aspects of the audit process, including:
o Planning the audit:
o Identifying the risks of material misstatement.
o Assessing the materiality of identifed risks.
o Designing audit procedures to address identifed risks.
o Performing the audit:
o Obtaining sufcient and appropriate audit evidence.
o Evaluating the audit evidence obtained.
o Forming an opinion on whether the fnancial statements are fairly presented.
o Communicating the results of the audit:
o Writing the audit report.
o Discussing the audit fndings with those charged with governance.
Factors Afecting Professional Judgment
A number of factors can afect professional judgment, including:

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o The auditor's knowledge and experience.
o The complexity of the entity and its environment.
o The risks of material misstatement.
o The availability of audit evidence.
o The auditor's gut feeling.

Sound and Justifiable Professional Judgment

Professional judgment should be sound and justifable. This means that the auditor should be
able to explain the reasons for their decisions. The auditor should also be able to support their
decisions with audit evidence.
Documenting Professional Judgment
Auditors should document their professional judgment throughout the audit process. This
documentation can help to ensure that the auditor's decisions are sound and justifable. It can
also help to support the auditor's opinion on the fnancial statements.
ISA 200 TO ISA 299 GENERAL PRINCIPLES AND RESPONSIBILITIES

ISAs 200 to 299 are a set of International Standards on Auditing (ISAs) that deal with the general
principles and responsibilities of auditors. The ISAs are developed and issued by the International
Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants
(IFAC).

ISAs 200 to 299 are divided into four parts:

Part A: Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance
with International Standards on Auditing (ISA 200)
Part B: Agreements on the Terms of Audit Engagements (ISA 210)
Part C: Quality Control for an Audit of Financial Statements (ISA 220)
Part D: Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements (ISA 240)
Part A: Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with International Standards on Auditing (ISA 200)
ISA 200 sets out the overall objectives of an auditor in relation to an audit of fnancial
statements. It covers topics such as:
o The auditor's responsibility to obtain reasonable assurance about whether the fnancial
statements are free from material misstatement
o The auditor's professional skepticism
o The auditor's use of professional judgment
o The auditor's consideration of internal control
o The auditor's communication of the results of the audit
o The auditor's responsibility for the audit report, including the auditor's opinion
Part B: Agreements on the Terms of Audit Engagements (ISA 210)
ISA 210 sets out the requirements for agreements on the terms of audit engagements. It covers
topics such as:
o The objective of an audit engagement
o The auditor's responsibility to plan the audit
o The auditor's responsibility to perform the audit in accordance with ISAs
o The auditor's responsibility to communicate the results of the audit
o The auditor's fees and other charges
o The termination of an audit engagement
Part C: Quality Control for an Audit of Financial Statements (ISA 220)
ISA 220 sets out the requirements for quality control for an audit of fnancial statements. It
covers topics such as:
o The frm's quality control policies and procedures

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o The frm's leadership and governance
o The frm's risk assessment and risk management procedures
o The frm's recruitment, training, and supervision of personnel
o The frm's monitoring and evaluation of audit performance

Part D: Auditor's Responsibilities Relating to Fraud in an Audit of Financial

Statements (ISA 240)
ISA 240 sets out the auditor's responsibilities relating to fraud in an audit of fnancial statements.
It covers topics such as:
o The auditor's responsibility to identify and assess the risks of fraud
o The auditor's procedures for detecting and responding to fraud
o The auditor's communication of fraud to those charged with governance
ISAs 200 to 299 are designed to help auditors perform high – quality audits of fnancial
statements. They are also designed to help auditors communicate their fndings to those charged
with governance.
The following are some of the key benefts of using ISAs 200 to 299:
o They provide a framework for planning and performing audits of fnancial statements
o They help auditors to identify and assess the risks of material misstatement
o They help auditors to design and perform audit procedures that are efective in addressing
identifed risks
o They help auditors to communicate the results of their audits to those charged with
governance
ISAs 200 to 299 are important for auditors because they provide a set of standards that can help
them to perform high-quality audits. They are also important for investors and other users of
fnancial statements because they can help to ensure that the fnancial statements are reliable.
ISA 300 to ISA 499 RISK ASSESSMENT AND RESPONSE TO ASSESSED RISKS
ISAs 300 to 499 are a set of International Standards on Auditing (ISAs) that deal with the
evaluation of risk and the auditor's response to assessed risks. The ISAs are developed and
issued by the International Auditing and Assurance Standards Board (IAASB) of the International
Federation of Accountants (IFAC).
ISAs 300 to 499 are divided into two parts:
Part A: Planning an Audit of Financial Statements
Part B: The Auditor's Responses to Assessed Risks
Part A of ISAs 300 to 499 sets out the requirements for planning an audit of fnancial statements.
It covers topics such as:
o The auditor's objectives
o The auditor's responsibilities
o The auditor's independence
o The auditor's professional skepticism
o The auditor's risk assessment
o The auditor's audit plan
Part B of ISAs 300 to 499 sets out the auditor's responses to assessed risks. It covers topics such
as:
o The auditor's evaluation of internal control
o The auditor's testing of controls
o The auditor's substantive procedures
o The auditor's consideration of fraud and error
o The auditor's communication with those charged with governance

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ISAs 300 to 499 are designed to help auditors plan and execute audits of fnancial statements in
an efective manner. They are also designed to help auditors communicate the results of their
audits to those charged with governance.
The following are some of the key benefts of using ISAs 300 to 499:
o They provide a framework for planning and executing audits of fnancial statements
o They help auditors to identify and assess risks
o They help auditors to design and perform audit procedures that are efective in addressing
identifed risks
o They help auditors to communicate the results of their audits to those charged with
governance

ISAs 300 to 499 are important for auditors because they provide a set of standards that can help
them to perform high-quality audits. They are also important for investors and other users of
fnancial statements because they can help to ensure that the fnancial statements are reliable.
ISA 500 TO ISA 599 AUDIT EVIDENCE
ISAs 500 to 599 are a set of International Standards on Auditing (ISAs) that deal with audit
evidence. The ISAs are developed and issued by the International Auditing and Assurance
Standards Board (IAASB) of the International Federation of Accountants (IFAC).
ISAs 500 to 599 are divided into two parts:
Part A: General Guidance on Audit Evidence
Part B: Specifc Considerations for Selected Items
Part A of ISAs 500 to 599 sets out the general requirements for audit evidence. It covers topics
such as:
o The concept of audit evidence
o The quantity and quality of audit evidence
o The timing of audit procedures
o The use of audit evidence

Part B of ISAs 500 to 599 sets out the specifc considerations for audit evidence for selected
items. It covers topics such as:
o Accounts receivable
o Inventories
o Investments
o Property, plant, and equipment
o Intangible assets
o Accounts payable and accrued expenses
o Revenue
o Expenses
o Related party disclosures
o Subsequent events
ISAs 500 to 599 are designed to help auditors obtain sufcient appropriate audit evidence to be
able to draw reasonable conclusions on which to base the auditor's opinion. They also help
auditors to identify and assess the risks of material misstatement in the fnancial statements.
The following are some of the key benefts of using ISAs 500 to 599:
o They provide a framework for obtaining sufcient appropriate audit evidence
o They help auditors to identify and assess the risks of material misstatement
o They help auditors to design and perform audit procedures that are efective in addressing
identifed risks
o They help auditors to communicate the results of their audits to those charged with
governance

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ISAs 500 to 599 are important for auditors because they provide a set of standards that can help
them to perform high-quality audits. They are also important for investors and other users of
fnancial statements because they can help to ensure that the fnancial statements are reliable.
ISAs 500 to 599 are a set of International Standards on Auditing (ISAs) that deal with audit
evidence. The ISAs are developed and issued by the International Auditing and Assurance
Standards Board (IAASB) of the International Federation of Accountants (IFAC).

ISAs 500 to 599 are important for auditors because they provide a set of standards that can help
them to perform high – quality audits. They are also important for investors and other users of
fnancial statements because they can help to ensure that the fnancial statements are reliable.

ISA 600 TO ISA 699 USING THE WORKS OF OTHERS

ISAs 600 to 699 are a set of International Standards on Auditing (ISAs) that deal with using the
works of others. The ISAs are developed and issued by the International Auditing and Assurance
Standards Board (IAASB) of the International Federation of Accountants (IFAC).
ISAs 600 to 699 are divided into three parts:
Part A: Using the Work of Internal Auditors
Part B: Using the Work of an Auditor's Expert
Part C: Special Considerations — Audits of Group Financial Statements (Including the Work of
Component Auditors)
Part A of ISAs 600 to 699 sets out the requirements for using the work of internal auditors. It
covers topics such as:
o The auditor's responsibilities when using the work of internal auditors
o The auditor's evaluation of the competence and independence of internal auditors
o The auditor's consideration of the work of internal auditors in the auditor's risk assessment
and audit plan
o The auditor's use of the work of internal auditors in the auditor's testing of controls and
substantive procedures
Part B of ISAs 600 to 699 sets out the requirements for using the work of an auditor's expert. It
covers topics such as:
o The auditor's responsibilities when using the work of an auditor's expert
o The auditor's evaluation of the competence and independence of an auditor's expert
o The auditor's consideration of the work of an auditor's expert in the auditor's risk assessment
and audit plan
o The auditor's use of the work of an auditor's expert in the auditor's testing of controls and
substantive procedures
Part C of ISAs 600 to 699 sets out the special considerations for audits of group fnancial
statements, including the work of component auditors. It covers topics such as:
o The auditor's responsibility for the group fnancial statements as a whole
o The auditor's consideration of the work of component auditors when planning the audit of the
group fnancial statements
o The auditor's use of the work of component auditors in the auditor's testing of controls and
substantive procedures
o The auditor's communication with component auditors
ISAs 600 to 699 are designed to help auditors use the work of others in a way that is efective
and efcient. They also help auditors to ensure that the work of others is properly considered in
the auditor's overall audit opinion.
The following are some of the key benefts of using ISAs 600 to 699:

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o They provide a framework for using the work of others in a way that is efective and efcient
o They help auditors to ensure that the work of others is properly considered in the auditor's
overall audit opinion
o They help auditors to reduce the cost of the audit by using the work of others
o They help auditors to improve the quality of the audit by using the expertise of others
ISAs 600 to 699 are important for auditors because they provide a set of standards that can help
them to perform high-quality audits. They are also important for investors and other users of
fnancial statements because they can help to ensure that the fnancial statements are reliable.
ISA 700 TO ISA 799 AUDIT CONCLUSIONS AND REPORTING
ISAs 700 to 799 are a set of International Standards on Auditing (ISAs) that deal with audit
conclusions and reporting. The ISAs are developed and issued by the International Auditing and
Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC).

ISAs 700 to 799 are divided into four parts:

Part A: The Auditor's Responsibilities Relating to Financial Statements (ISA 700)
Part B: The Auditor's Report on Financial Statements (ISA 705)
Part C: The Auditor's Communication on Other Information in Documents Containing Financial
Statements (ISA 706)
Part D: The Auditor's Responsibilities in Relation to Subsequent Events (ISA 710)
Part A: The Auditor's Responsibilities Relating to Financial Statements (ISA 700)
ISA 700 sets out the overall objectives and responsibilities of an auditor in relation to the audit of
fnancial statements. It covers topics such as:
o The auditor's objective of obtaining reasonable assurance about whether the fnancial
statements are free from material misstatement
o The auditor's responsibility to comply with ISAs
o The auditor's responsibility to use professional judgment
o The auditor's responsibility to obtain sufcient appropriate audit evidence
o The auditor's responsibility to communicate the results of the audit
Part B: The Auditor's Report on Financial Statements (ISA 705)
ISA 705 sets out the requirements for the auditor's report on fnancial statements. It covers
topics such as:
o The structure and content of the auditor's report
o The auditor's opinion on the fnancial statements
o The auditor's communication of key audit matters
o The auditor's communication of other information in the auditor's report
Part C: The Auditor's Communication on Other Information in Documents Containing
Financial Statements (ISA 706)
ISA 706 sets out the requirements for the auditor's communication on other information in
documents containing fnancial statements. It covers topics such as:
o The auditor's responsibility to identify and consider other information
o The auditor's communication of the auditor's conclusions on other information
o The auditor's communication of identifed inconsistencies between other information and the
fnancial statements
Part D: The Auditor's Responsibilities in Relation to Subsequent Events (ISA 710)
ISA 710 sets out the requirements for the auditor's responsibilities in relation to subsequent
events. It covers topics such as:
o The auditor's procedures for identifying subsequent events
o The auditor's evaluation of the efect of subsequent events on the fnancial statements
o The auditor's communication of subsequent events

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ISAs 700 to 799 are designed to help auditors form an opinion on fnancial statements and to
communicate their fndings to those charged with governance. They also help auditors to ensure
that their reports are clear, concise, and informative.
The following are some of the key benefts of using ISAs 700 to 799:
o They provide a framework for forming an opinion on fnancial statements
o They help auditors to communicate their fndings to those charged with governance
o They help auditors to ensure that their reports are clear, concise, and informative
o They help auditors to improve the quality of their audits
ISAs 700 to 799 are important for auditors because they provide a set of standards that can help
them to perform high-quality audits. They are also important for investors and other users of
fnancial statements because they can help to ensure that the fnancial statements are reliable.

ISA 800 TO ISA 899 SPECIALIZED AREAS

ISAs 800 to 899 are a set of International Standards on Auditing (ISAs) that deal with specialized
areas of auditing. The ISAs are developed and issued by the International Auditing and Assurance
Standards Board (IAASB) of the International Federation of Accountants (IFAC).
ISAs 800 to 899 are divided into two parts:
Part A: Special Considerations — Audits of Financial Statements Prepared in Accordance with
Special Purpose Frameworks (ISA 800)
Part B: Special Considerations — Audits of Single Financial Statements and Specifc Elements,
Accounts or Items of a Financial Statement (ISA 805)
Part A: Special Considerations — Audits of Financial Statements Prepared in
Accordance with Special Purpose Frameworks (ISA 800)
ISA 800 sets out the special considerations that auditors need to take into account when auditing
fnancial statements prepared in accordance with special purpose frameworks. It covers topics
such as:
o The purpose of special purpose frameworks
o The types of special purpose frameworks
o The auditor's responsibilities when auditing fnancial statements prepared in accordance with
special purpose frameworks
o The auditor's communication of the auditor's conclusions on fnancial statements prepared in
accordance with special purpose frameworks
Part B: Special Considerations — Audits of Single Financial Statements and Specific
Elements, Accounts or Items of a Financial Statement (ISA 805)
ISA 805 sets out the special considerations that auditors need to take into account when auditing
single fnancial statements and specifc elements, accounts, or items of a fnancial statement. It
covers topics such as:
o The purpose of auditing single fnancial statements and specifc elements, accounts, or items
of a fnancial statement
o The types of single fnancial statements and specifc elements, accounts, or items of a
fnancial statement
o The auditor's responsibilities when auditing single fnancial statements and specifc elements,
accounts, or items of a fnancial statement
o The auditor's communication of the auditor's conclusions on single fnancial statements and
specifc elements, accounts, or items of a fnancial statement
ISAs 800 to 899 are designed to help auditors of fnancial statements prepared in accordance
with special purpose frameworks and single fnancial statements and specifc elements,
accounts, or items of a fnancial statement. The ISAs help auditors to plan and perform audits of
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these types of fnancial statements in a way that is efective and efcient. They also help
auditors to communicate their fndings to those charged with governance.
The following are some of the key benefts of using ISAs 800 to 899:
o They provide a framework for auditing fnancial statements prepared in accordance with
special purpose frameworks and single fnancial statements and specifc elements, accounts,
or items of a fnancial statement
o They help auditors to identify and assess the risks of material misstatement in these types of
fnancial statements
o They help auditors to design and perform audit procedures that are efective in addressing
identifed risks
o They help auditors to communicate the results of their audits to those charged with
governance
ISAs 800 to 899 are important for auditors because they provide a set of standards that can help
them to perform high-quality audits. They are also important for investors and other users of
fnancial statements because they can help to ensure that these types of fnancial statements
are reliable.

2.3. Professional Ethics: Fundamental Principles, Threats and Safeguards

The International Standards on Auditing (ISAs) issued by the International Auditing and
Assurance Standards Board (IAASB) include a number of fundamental principles, threats, and
safeguards related to professional ethics.
Fundamental principles
The following are the fundamental principles of professional ethics for auditors, as set forth in ISA
200, Overall Objective of the Independent Auditor and the Conduct of an Audit in Accordance
with International Standards on Auditing:
o Integrity: Auditors must be honest and truthful in their professional and business
relationships.
o Objectivity: Auditors must not allow bias, confict of interest, or undue infuence to
compromise their professional judgment.
o Professional competence and due care: Auditors must have and maintain the
knowledge and skill necessary to perform audits in accordance with professional standards
and to exercise due care in the performance of their work.
o Confidentiality: Auditors must respect the confdentiality of information acquired in the
course of their professional work and must not use or disclose such information without
proper and specifc authority.
o Professional behavior: Auditors must act in a manner that is consistent with the
reputation of the profession and must avoid any conduct that might discredit the profession.
Threats
The following are some of the threats to the fundamental principles of professional ethics for
auditors:
o Self – interest: A self – interest threat exists when the auditor's personal fnancial interest
could infuence their professional judgment. For example, an auditor who owns shares in a
client company may be reluctant to report a material misstatement in the client's fnancial
statements.
o Advoiaiy: An advocacy threat exists when the auditor becomes too closely aligned with the
interests of their client and loses their independence. For example, an auditor who has been
engaged to provide a variety of services to a client may be reluctant to challenge the client's
management on difcult issues.

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o Familiarity: A familiarity threat exists when the auditor becomes too friendly with the
client's management or employees. This can lead to the auditor losing their objectivity and
becoming less critical of the client's fnancial statements.
o Intimidation: An intimidation threat exists when the auditor is pressured by the client or
others to compromise their professional judgment. For example, an auditor may be
threatened with being fred if they insist on reporting a material misstatement in the client's
fnancial statements.
Safeguards
The following are some of the safeguards that auditors can use to mitigate the threats to the
fundamental principles of professional ethics:
o Independence: Auditors can maintain their independence by avoiding any fnancial or
personal relationships with the client that could infuence their professional judgment.
Auditors should also be aware of any potential conficts of interest and should take steps to
mitigate those conficts.
o Objectivity: Auditors can maintain their objectivity by remaining skeptical throughout the
audit process and by challenging the client's management on difcult issues. Auditors should
also be aware of their own biases and should take steps to mitigate those biases.
o Professional competence and due care: Auditors can maintain their professional
competence and due care by completing relevant continuing professional education courses
and by staying up-to-date on the latest auditing standards and procedures. Auditors should
also perform their work with due care and diligence.
o Confidentiality: Auditors can maintain the confdentiality of information acquired in the
course of their professional work by restricting access to that information to only those who
need to know. Auditors should also have policies and procedures in place to protect the
confdentiality of client information.
o Professional behavior: Auditors can maintain their professional behavior by adhering to
the code of ethics of their professional body and by avoiding any conduct that might discredit
the profession.
Professional ethics is essential for auditors. By adhering to the fundamental principles of
professional ethics, auditors can help to ensure that their audits are conducted in a fair and
impartial manner and that their audit reports are reliable and informative. This is important for
investors, creditors, and other users of fnancial statements, who rely on audit reports to make
informed decisions.
2.4. Legal Liability of Auditors
Auditors have a legal liability to ensure that the fnancial statements they audit are fairly
presented in accordance with the applicable fnancial reporting framework. The legal liability of
auditors has expanded in recent years, due to a number of factors, including:
o The increasing complexity of financial reporting: Financial reporting has become
increasingly complex in recent years, due to the adoption of new accounting standards and
the introduction of new fnancial products and services. This has made it more difcult for
auditors to identify and assess all of the risks of material misstatement in fnancial
statements.
o The increasing reliance on audit reports by third parties: Audit reports are
increasingly relied upon by third parties, such as investors, creditors, and regulators, to make
informed decisions. This has led to an increase in the number of lawsuits fled against
auditors by third parties who have sufered losses as a result of auditor negligence or fraud.
o The increasing scrutiny of auditors by regulatory bodies: Regulatory bodies are
increasingly scrutinizing auditors and holding them accountable for their work. This has led to
an increase in the number of enforcement actions taken against auditors by regulatory
bodies.
Legal liability of auditors arises from both common law and statute.

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Common law liability
Under common law, auditors can be held liable for negligence, breach of contract, and
fraud.
o Negl genie: Auditors can be held liable for negligence if they fail to exercise due care and
skill in the performance of their audit. This could include failing to identify a material
misstatement in the fnancial statements or failing to perform the necessary audit
procedures.
o Breaih of ioniraii: Auditors can be held liable for breach of contract if they fail to comply
with the terms of their engagement letter with the client. The engagement letter typically
sets out the scope of the audit and the auditor's responsibilities.
o Fraud: Auditors can be held liable for fraud if they knowingly or recklessly misrepresent the
results of their audit. This could include issuing an unqualifed audit report when the fnancial
statements contain a material misstatement.
Negligence
Negligence in auditing is the failure of an auditor to exercise the care that a reasonably
competent auditor would exercise in similar circumstances. This can result in the auditor failing
to identify and report on material misstatements in the fnancial statements, which can have
serious consequences for investors, creditors, and other stakeholders.
There are four main types of negligence in auditing:
o Failure to obtain reasonable assurance. This means that the auditor did not perform
sufcient audit procedures to obtain reasonable assurance that the fnancial statements are
free from material misstatement.
o Failure to comply with ISAs. This means that the auditor did not follow International
Standards on Auditing (ISAs) when performing the audit.
o Failure to exercise due professional care. This means that the auditor did not
exercise the same level of care that a reasonably competent auditor would exercise in similar
circumstances.
o Negligent misrepresentation. This means that the auditor made false or misleading
statements about the fnancial statements, knowing or being reckless about whether the
statements were true.

Examples of negligence in auditing include:

o Failing to test the accuracy of the accounting system.
o Failing to review key journal entries.
o Failing to perform physical inventory counts.
o Failing to obtain appropriate audit evidence for signifcant transactions.
o Issuing an unqualifed audit opinion when the fnancial statements are materially misstated.
o Making false or misleading statements about the fnancial statements in the audit report.

Negligence in auditing can have serious consequences for investors, creditors, and other
stakeholders. If an auditor fails to identify and report on material misstatements in the fnancial
statements, stakeholders may rely on inaccurate information when making fnancial decisions.
This can lead to signifcant fnancial losses.
In addition to the fnancial losses that can result from negligence in auditing, auditors who are
found to be negligent may also face legal liability. Auditors can be sued by investors, creditors,
and other stakeholders for damages caused by their negligence.
Auditors have a professional duty to perform their work with due care. By following ISAs and
other auditing standards, auditors can help to reduce the risk of negligence and ensure that they
are providing high – quality audit services.
Breach of contract
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Breach of contract in auditing occurs when an auditor fails to fulfll their contractual obligations
to their client. This can happen in a number of ways, such as:
o Failing to perform the audit in accordance with ISAs.
o Failing to identify and report on material misstatements in the fnancial statements.
o Failing to communicate the fndings of the audit to the client in a timely and accurate
manner.
o Disclosing confdential information to third parties without the client's consent.
The consequences of a breach of contract in auditing can vary depending on the severity of the
breach and the impact on the client. For example, if an auditor fails to identify and report on a
material misstatement in the fnancial statements, the client may sufer fnancial losses if they
rely on the inaccurate fnancial statements to make business decisions.
In addition to fnancial losses, the client may also sufer reputational damage if the breach of
contract results in negative publicity. In some cases, the client may also be able to sue the
auditor for damages.
Auditors can avoid breaching their contracts with their clients by:
o Carefully reading and understanding the terms of the audit contract.
o Performing the audit in accordance with ISAs.
o Communicating the fndings of the audit to the client in a timely and accurate manner.
o Maintaining the confdentiality of the client's information.
If an auditor believes that they may be in breach of their contract with their client, they should
immediately seek legal advice.
Here are some examples of breach of contract in auditing:
o An auditor fails to perform a physical inventory count, as required by the audit contract.
o An auditor fails to identify and report on a material misstatement in the fnancial statements.
o An auditor issues an unqualifed audit opinion even though they know that the fnancial
statements are materially misstated.
o An auditor discloses confdential information about the client to a third party without the
client's consent.
If a client believes that their auditor has breached their contract, they should contact the auditor
to discuss the issue. If the issue cannot be resolved through discussion, the client may need to
take legal action against the auditor.

Fraud
Fraud is a serious crime, and auditors can be held legally liable for fraud if they fail to detect and
report it. This is because auditors have a professional duty to perform their work with due care
and to identify and report on material misstatements in the fnancial statements, whether caused
by fraud or error.
Auditors can be held liable for fraud in a number of ways, including:
o Negligence. If an auditor fails to exercise due care in performing the audit, and this failure
results in the auditor failing to detect and report on fraud, the auditor may be held liable for
negligence.
o Breach of contract. If the audit contract specifcally requires the auditor to detect and
report on fraud, and the auditor fails to do so, the auditor may be held liable for breach of
contract.
o Aiding and abetting fraud. If an auditor knowingly or recklessly assists a client in
committing fraud, the auditor may be held liable for aiding and abetting fraud.
In addition to these legal liabilities, auditors who fail to detect and report on fraud may also face
reputational damage and disciplinary action from their professional body.
Auditors can reduce their risk of being held legally liable for fraud by:
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o Following ISAs and other auditing standards.
o Performing thorough risk assessments.
o Obtaining sufcient and appropriate audit evidence to support the auditor's opinion.
o Communicating any suspicions of fraud to the appropriate parties.
If an auditor does suspect fraud, they should immediately report their suspicions to the client's
management and board of directors. The auditor should also document their suspicions and the
steps they have taken to investigate the matter.
Here are some examples of how auditors can be held legally liable for fraud:
o An auditor fails to perform a physical inventory count, which allows the client to conceal
fraudulent inventory shrinkage.
o An auditor fails to review key journal entries, which allows the client to record fraudulent
transactions.
o An auditor ignores red fags of fraud, such as unusual fuctuations in account balances or
inconsistencies between diferent sources of information.
o An auditor knowingly or recklessly assists a client in committing fraud, such as by preparing
false fnancial statements or backdating documents.
If an auditor is found to be liable for fraud, they may face a variety of penalties, including:
o Monetary damages. The auditor may be ordered to pay damages to the victim of the fraud.
o Injunctive relief. The auditor may be ordered to cease and desist from certain activities,
such as practicing auditing.
o Criminal prosecution. In some cases, auditors who commit fraud may also face criminal
prosecution.
Auditors should take all reasonable steps to prevent fraud and to detect and report on fraud
when it does occur. By following ISAs and other auditing standards, and by performing thorough
risk assessments and audits, auditors can help to protect themselves from legal liability for
fraud.
Statutory liability
In addition to their common law liability, auditors may also have a statutory liability under
various laws and regulations. For example, in the United States, auditors of publicly traded
companies are subject to the Sarbanes – Oxley Act of 2002. The Sarbanes-Oxley Act imposes a
number of requirements on auditors, including the requirement to review the efectiveness of the
company's internal controls over fnancial reporting.
Who can sue auditors?
Auditors can be sued by a variety of parties, including:
o Clients: Clients can sue auditors for breach of contract, negligence, and fraud.
o Third parties: Third parties, such as investors and creditors, can sue auditors for negligence
if they rely on the audit report to their detriment. For example, an investor may sue an
auditor for negligence if they invest in a company based on an unqualifed audit report that
contains a material misstatement.
o Government: The government can sue auditors for fraud and other violations of law. For
example, the government may sue an auditor for fraud if the auditor knowingly or recklessly
issues an unqualifed audit report when the fnancial statements contain a material
misstatement.
Auditors have a signifcant legal liability. It is important for auditors to be aware of their legal
responsibilities and to take steps to minimize their risk of liability. This includes maintaining their
professional competence and due care, complying with the terms of their engagement letters,
and avoiding situations that could create conficts of interest.
2.5. Rights and Duties, Appointment, Dismissal and Resignation of an Auditor
Rights and duties of an auditor
Auditors have a number of rights and duties, including the following:

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Rights
o The right to access all relevant records and information of the company being audited.
o The right to obtain explanations and information from the company's management and
employees.
o The right to attend meetings of the company's board of directors and other relevant
committees.
o The right to communicate directly with the company's audit committee.
Duties
o To perform the audit in accordance with International Standards on Auditing (ISAs).
o To report on whether the fnancial statements are fairly presented in accordance with the
applicable fnancial reporting framework.
o To communicate any signifcant fndings to the company's management and audit committee.
Appointment of an auditor
In most countries, companies are required to appoint an auditor to audit their fnancial
statements. The auditor is typically appointed by the company's shareholders at the annual
general meeting.
Removal of an auditor
Shareholders can remove an auditor at any time by passing a resolution at a general meeting.
The auditor can also be removed by the company's board of directors, but this is typically only
done in exceptional circumstances.
Resignation of an auditor
An auditor can resign at any time by giving written notice to the company. The auditor may also
be required to resign if they are no longer independent of the company or if they are unable to
fulfll their professional duties.
Implications of the rights and duties of an auditor
The rights and duties of auditors are important for ensuring the quality and reliability of audits.
By having the right to access all relevant information and to communicate directly with the audit
committee, auditors are able to perform their work independently and to report on their fndings
objectively.
The right of shareholders to remove an auditor is also important, as it ensures that the auditor is
accountable to the shareholders. However, it is important to note that the auditor should not be
removed simply because they have issued an unqualifed audit report.
Auditors play an important role in the fnancial reporting process. Their rights and duties are
designed to ensure that they can perform their work independently and objectively, and that
they can report on their fndings in a reliable manner.

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