SPECIALISED AND COMPLEX

AUDIT SITUATIONS

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Objectives:
 Examine a number of specialized audit
situations & the effect of auditing standards
on the work of the auditor
 Reliance on work of other auditors, e.g.,

auditors of subsidiaries, joint audit

responsibilities
 Reliance on work of other specialist’s work
 Duties in reporting on financial institutions

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 Audit of group financial
statements (including the work
of component auditors)

[ISA 600]

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Scope
 Apply to group audits
 Deals with special considerations, in

particular those that involve component

auditors
 The purpose of the group engagement team

is to obtain sufficient appropriate audit

evidence on which to base the audit opinion
on the group financial statements.

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Definitions:
 Component auditor – an auditor who, at the
request of the group engagement team,
performs work of financial information
related to a component for the group audit.
 Group – all the components whose financial

information is included in the group fin.

stats. a group always has more than one
component

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Audit procedures:
 Group engagement partner:- responsible for
the direction, supervision & performance of
the group audit engagement
 Comply with professional standards &

applicable legal & regulatory requirements, &

decide whether the auditor’s report is
appropriate in the circumstances.
 Where impossible to obtain sufficient audit

evidence due to management restrictions,

turn down or withdraw from the engagement.

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Audit procedures…
 Group engagement team shall establish an
overall group audit strategy & develop a
group audit plan [ISA 300]
 Identify & assess the risks of material

misstatement through obtaining an

understanding of the entity & its environment
 Group engagement team shall determine the

materiality for the group fin stats as a whole

when establishing the overall group audit
strategy

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Using the work of
internal auditors
[ISA 610]

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Scope:
 Deals with the external auditor’s
responsibilities relating to the work of
internal auditors when the external auditor
has determined that the Internal audit
function is likely to be relevant to the audit.
 To determine whether, & to what extent, to

use specific work of the internal auditors &

determine whether that work is adequate for
the purpose of the audit.

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Audit Procedures
 Determine whether work by internal auditors
adequate for purposes of the audit & if so,
the planned effect of the work on nature,
timing or extent of the external auditor’s
procedures.
 In determining adequacy, auditor evaluates;

objectivity of I a function, competence, due

professional care etc.

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Audit Procedures…
 External auditor to consider; nature & scope
of specific work performed by internal
auditors, degree of subjectivity involved in
the evaluation of audit evidence gathered
 In determining adequacy of specific work

performed by internal auditors; evaluate

whether work done by trained & proficient
staff, work properly supervised, adequate
audit evidence
 More later

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Using the work of an
auditor’s expert
[ISA 620]

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Scope
 Auditor’s responsibilities relating to work
of an individual or organization in a field
of expertise other than accounting or
auditing, when that work is used to
assist the auditor in obtaining sufficient
audit evidence.
 Determine whether to use the work of an

auditor’s expert & whether that work is

adequate for the auditor’s purposes

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Audit Procedures
 If expertise in field other than accounting or
auditing is necessary to obtain sufficient
audit evidence, determine whether to use the
work of an auditor’s expert.
 In determining the nature, timing & extent of

those procedures considers:

- nature of matter to which that expert’s
work relates
- risk of material misstatement
- auditor’s knowledge of & experience
with previous work performed by that expert
 Study the standard ISA 620 in detail

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 SPECIAL AUDIT
INVESTIGATIONS

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Objective:

 Focuses on special audit

investigations auditor can provide
to the client

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Definitions & examples:
 These comprise investigations by
practitioners for clients of information
other than annual financial statements.
 Performance audit – to determine

whether the client’s business is operated

in an economic, efficient & effective
manner

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Definitions & examples…

Fraud investigations:
Investigations to determine whether; fraud
has occurred and& where fraud has
been confirmed, the amount thereof (e.g., for
insurance purposes)

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Definitions & examples…
 Mergers/takeovers

reasonableness of information
contained in the statements
 Compliance with contracts
whether provisions of contracts are
being met
 Compliance with corporate

governance principles

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Definitions & examples…
 Environmental audits – to determine
whether client complies with laws &
regulations regarding policies iro.
environmental issues
 Due diligence investigations – determine

the reasonableness of information in

financial statements, contracts, etc.
NB. Most above covered under assurance
engagements

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Principles that have to be met
 Nature of the investigation & report
provided – will determine level of
assurance expressed/unexpressed, &/or
the reporting on the findings of the
procedures performed
 Reasonable or limited assurance – will

apply where there are suitable criteria

against which to measure the subject
matter. Assurance in report, in positive
(reasonable assurance) or negative
(limited assurance) terms
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Principles that have to be met…

 Reportof the factual findings: –

applies where auditor expresses no
assurance but reports on the result of
the agreed-upon procedures
performed

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 DUE DILIGENCE
INVESTIGATIONS

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Definition
 Comprise special investigations to
provide assurance to the parties
involved in a transaction e.g., iro.
take-over a financial advisor on the
object company to verify the
reasonableness of information on
fin stats, as well as to search for
unrecorded liabilities.

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Circumstances when required
 Take-overs, mergers &
acquisitions
 Compliance with contracts
 Entering into agreements, etc..

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Procedures to follow
 Pre-engagement activities
 Plan the work & the areas to cover
 Perform the investigation
 Reporting

Study on the areas to cover &

procedures to perform during due
diligence investigations

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The consideration of environmental
matters in the audit of financial
statements:
 Background
 Inrespect of provisions, valuation of
assets & disclosures, examples
 Management’s responsibility
 The auditor’s responsibility
 Impact on the auditor’s procedures

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 AUDITS OF FINANCIAL
STATEMENTS OF BANKS
[IAPS 1006]

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Audit of financial institutions

 Audit of financial statements of banks

 Auditing derivative financial

statements
 Electronic commerce – effect on the

audit of financial statements

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 AUDIT OF SMALL
BUSINESSES
The special considerations in the audit of small
entities
[IAPS 1005]

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Objectives:

 Principles regarding audits of small

business
 Special circumstances in the audit of

small business [IAPS 1005]

 Special audit considerations

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Introduction
 IASscontain basic principles &
essential procedures that apply to the
audit of the fin stats of any entity,
irrespective of its size, legal form,
ownership or nature of activities.

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Introduction…
 International Auditing & Assurance
Standard Board (IAASB) recognizes
that small entities give rise to a
number of special audit onsiderations
 All audit of small entities are to be

considered in accordance with ISAs

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Objective of IAPS 1005

 Todescribe the characteristics

commonly found in small entities &
indicate how they may affect the
application of ISAs

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Characteristics of small entities

 Differencewith large entities:

- documentation unsophisticated
less complex & performed by
fewer assistants.

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Characteristics of small entities…

 IAPsdefines a small firm as one where

concentration of ownership &
management is in a small number of
individuals & one or more of the
following are found:

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Characteristics of small entities…
 Few sources of income
 limited range of products/services
 operate from a single or limited number

of locations
 Easy to audit due to knowledge,

population etc.
 Unsophisticated record-keeping &

therefore fraud or error easily detected

 Employ few personnel, outsource some

services
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Characteristics of small entities…
 Limited internal control: size &
economic considerations mean
unsophisticated internal controls
 supervisory controls exercised on a

day-to-day basis by the owner-

manger
 Effect of owner-manager has potential

for management override of internal

controls?
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Commentary on the application of
international standards on auditing
Guidance is a supplement, not
substitute to relevant ISAs:
 ISA 210: Terms of audit engagements:

owner-managers not fully aware of

their responsibilities or those of their
auditors. Appendix to ISA provides an
example of an audit engagement
letter

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Commentary on the application of
international standards on auditing…
 ISA 220: Quality control for audit work
 ISA 230: Audit documentation
 ISA 250: Consideration for laws &

regulations in an audit of financial

statements
 ISA 320: Audit of materiality
 ISA 520: Analytical procedures
 ISA 700: The auditor’s report on financial

statements

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