Advanced Auditing

AQ053-3-2

Audit of historical financial

information
PART A
 ISA 200

ISA 200 Summary : Overall Objectives of

the Independent Auditor and the Conduct
of an Audit in Accordance with
International Standards on Auditing

AQ053-3-2 AAD ADVANCED AUDITING

 ISA 200

• To obtain REASONABLE ASSURANCE about whether the

FS AS A WHOLE ARE FREE FROM MATERIAL
MISTATEMENT.........

HOW?

auditor need to perform risk assessment, to identify:

 areas more susceptible to material misstatement (MM)
 low risk area (testing can be reduced)

AQ053-3-2 AAD ADVANCED AUDITING

 ISA 200

Requirement:

•Auditor must fully understand and comply with all the ISAs
relevant to the audit
•Auditor need to plan and perform audit with:
professional judgement
professional skepticism
comply with ethical requirement

AQ053-3-2 AAD ADVANCED AUDITING

 Professional Scepticism

an attitude includes:
questioning mind
being alert to conditions which may indicate
possible misstatement
critical assessment of AE

 AE that contradicts other AE obtained

 Reliability of documents & responses to inquiries to be used an AE
 Be alert to conditions which may indicate possible misstatement conditions
that may indicate possible frauds
 circumstances that suggest for the need of additional procedures than
those required by ISA
AQ053-3-2 AAD ADVANCED AUDITING
 Professional Judgement
This means application of:
•relevant training
•Knowledge and experience
in making decision about
appropriate actions to be
taken in circumstances
of audit engagement

Professional judgement are required in :

•materiality computation and assessing audit risk
•nature, timing and extent of audit procedures
•evaluating whether S&A AE has been obtained
•evaluating management’s judgement in applying applicable FR
framework
•Drawing conclusion based on AE obtained

AQ053-3-2 AAD ADVANCED AUDITING

 Examples

Professional Scepticism
https://www.youtube.com/watch?v=o7A50ZYbNog

Professional Judgement
https://www.youtube.com/watch?v=DJe0cSvhx90

Ethical Intelligence: The Livent Deloitte-Touche

Case Study
https://www.youtube.com/watch?v=BlobsbxtXIE&t=615s

AQ053-3-2 AAD ADVANCED AUDITING

 Class discussions
Auditors are required to plan and perform an audit with
professional scepticism, to exercise professional judgement
and to comply with ethical standards.

REQUIRED:
•Explain what is meant by 'professional scepticism' and why it
is so important that the auditor maintains professional
scepticism throughout the audit.
•Define 'professional judgement' and describe two areas
where professional judgement is applied when planning an
audit of financial statements.

AQ053-3-2 AAD ADVANCED AUDITING

 Class discussions

KUALA LUMPUR (June 25): Serba Dinamik Holdings Bhd, whose share

price dropped to a fresh record low of 46.5 sen this morning, issued a
statement late last night to reiterate again its stance that its former external
auditor KPMG PLT had in fact committed a breach of contract, and that the
latter should have communicated its professional scepticism to the client
instead of prematurely reporting it to the regulators. 

https://www.theedgemarkets.com/article/auditors-should-communicate-
professional-scepticism-client-premature-reporting-regulators-
%E2%80%94

Question:
DO YOU THINK KPMG IS DOING THE RIGHT THING BASED ON THE
ABOVE NEWS?

AQ053-3-2 AAD ADVANCED AUDITING

 Business risk

• The risk that the business won't meet its objectives

• Assessing risk through PESTEL
1. Political risks
2. Economic risks
3. Social and taste changes
4. Technological changes
5. Environmental issues
6. Legal issues

AQ053-3-2 AAD ADVANCED AUDITING

 Business risk vs Financial
statement risk
• Business risks will affect the FS if not addressed by
management.
• Business risks can lead to errors on specific areas
of the FS (eg. Technological change leading to
obsolete stock)
• Business risk can have a more general effect on FS
(eg. Poor controls leading to errors)
• Business risks can lead to going concern problems.
This too would be a FS risk (wrong basis of
accounting)

AQ053-3-2 AAD ADVANCED AUDITING

 Audit Risk Model

Audit Risk = Inherent risk x Control risk x Detection risk

the risk that the auditor expresses an inappropriate audit

opinion when the financial statements are materially
misstated.
AR is a function of the risks of material misstatement and
detection risk.

AQ053-3-2 AAD ADVANCED AUDITING

 Audit Risk Model

Inherent risk
•the susceptibility of an assertion about a class of transaction,
account balance or disclosure to a misstatement that could be
material, either individually or when aggregated with other
misstatements, before consideration of any related controls.

Control risk
•the risk that a misstatement that could occur in an assertion
about a class of transaction, account balance or disclosure and
that could be material, either individually or when aggregated with
other misstatements, will not be prevented, or detected and
corrected, on a timely basis by the entity’s internal control.

AQ053-3-2 AAD ADVANCED AUDITING

 Audit Risk Model

Detection risk
•risk that the procedures performed by the auditor to reduce
audit risk to an acceptably low level will not detect a
misstatement that exists and that could be material, either
individually or when aggregated with other misstatements.
•Sampling risk and non-sampling risk are the components of
DR.

1. Incorrect sampling 1. Inadequate planning

techniques 2. Inappropriate staff
2. Incorrect sampling 3. Failing to apply professional
sizes scepticism

AQ053-3-2 AAD ADVANCED AUDITING

 Audit Risk Model

AR = IR x CR x DR

100 = 10 x 10 x 1

100 = 2 x 2 x 25

IR↓ x CR↓ x DR↑

IR↑ x CR↑ x DR ↓
AQ053-3-2 AAD ADVANCED AUDITING
 ISA 315
Risk assessment procedures shall include the following
1.Making inquiries of management and others within the entity who
in the auditor’s judgement may have information that is likely to assist in
identifying risk of material misstatement due to error or fraud
2.Analytical procedures helps the auditor in identifying unusual
transactions or positions. They may identify aspects of the entity of which
the auditor was unaware, and may assist in assessing the risks of
material misstatement in order to provide a basis for designing and
implementing responses to the assessed risks.
3.Observation and inspection e.g. observation or inspection of the
entity’s operations, documents, and reports prepared by management,
and also of the entity’s premises and plant facilities.
4.Audit team discussion of the susceptibility of the financial statements
to material misstatement

AQ053-3-2 AAD ADVANCED AUDITING

 Risk assessment procedures

AQ053-3-2 AAD ADVANCED AUDITING

 Question and Answer Session

Q&A

AQ053-3-2 AAD ADVANCED AUDITING Slide 18 (of 16)

 What we will cover next

 Audit of historical financial information (PART B)

AQ053-3-2 AAD ADVANCED AUDITING Slide 19 (of 16)