HLB INTERNATIONAL AUDIT AND ASSURANCE MANUAL
TABLE OF CONTENTS
DISCLAIMER
PART A AUDIT OBJECTIVES, RESPECTIVE RESPONSIBILITIES AND AUDIT FILE
CONTENTS
1 Introduction
2 Audit objectives and respective responsibilities (Incorporating ISA 200)
3 Audit files and working papers (Incorporating ISA 230)
PART B: QUALITY CONTROL AND CLIENT ACCEPTANCE
4 Quality control in relation to audit engagements (incorporating ISQC1, ISA 220 and COE)
5 Audit Engagement (Incorporating ISQC 1, ISA 210 and ISA 220)
PART C PLANNING
6 Planning (Incorporating ISA 300)
7 Identifying and assessing the risks of material misstatement through understanding the entity
and its environment and the auditor’s responses to assessed risk (Incorporating ISA 315 and
330)
8 Auditors responsibility to consider Fraud (Incorporating ISA 240)
9 Consideration of laws and regulations in an audit of financial statements (Incorporating ISA
250)
10 Special Accounting Frameworks
11 Materiality (Incorporating ISA 320)
12 Audit Considerations Relating to an Entity Using a Service Organisation (Incorporating ISA
402)
PART D EXECUTION
13 Audit evidence (Incorporating ISA 500, 501 and 505)
14 Initial Audit Engagements - Opening Balances (Incorporating ISA 510)
15 Comparative Information - Corresponding Figures and Comparative Financial Statements
(Incorporating ISA 710)
16 Analytical procedures (Incorporating ISA 520)
17 Sampling (Incorporating ISA 530)
18 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related
Disclosures (Incorporating ISA 540)
19 Related Parties (Incorporating ISA 550)
20 Subsequent events and contingencies (Incorporating ISA 560)
21 Going Concern (Incorporating ISA 570)
22 Written Representations (Incorporating ISA 580)
PART E REVIEW AND COMPLETION
23 Evaluation of MisStatements Identified During the Audit (Incorporating ISA 450)
24 Completion and review
25 Audit Report (Incorporating ISA 700, 705 and 706)
26 The Auditor’s responsibilities relating to other information in documents containing audited
financial statements (Incorporating ISA 720)
27 Communication of audit matters with those charged with Governance (Incorporating ISA 260)
28 Communicating Deficiencies in Internal Control to Those Charged with Governance
PART F USING THE WORK OF OTHERS
29 Using the work of internal auditors and auditor’s experts (Incorporating ISA 610 and 620)
30 Special considerations - audits of group financial statements
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PART G REVIEW ENGAGEMENTS
31 Review of engagements
PART H AGREED UPON PROCEDURES
32 Agreed upon procedures
PART I AUDIT FILE CONTENTS
Administration
Audit Programs
PART J REVIEW FILE CONTENTS
PART K AGREED UPON PROCEDURES CONTENTS
Questionnaire - Agreed upon procedures
PART L GROUP AUDIT INSTRUCTIONS
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PART I AUDIT FILE CONTENTS
1. Financial Statements and 216 Emolument certificate multi
Reports - Final company
101 Copy of the signed financial 3. Audit Completion and Review
statements 310 Overall audit conclusion
311 Partner’s review checklist
102 Management letter with client 312 Engagement quality control
comments
review checklist
103 Signed letter of representation 320 Consultations and conclusions
330 Client meeting agenda
2. Financial Statements and 335 Summary of unadjusted errors
Reports 370 Discussions with engagement
201 Financial statements team and de-briefing notes
201.1 Client’s draft financial statements 371 Points brought forward from
202 Management letter
203 Draft letter of representation previous audit
204 Audit of other information 391 Client discussion notes
208 Companies Act checklist 392.1 Partner’s review notes
209 International Financial Reporting 392.2 Engagement quality control
Standards checklist review notes
210 Calling over checklist 392.3 Summary of outstanding issues
211 Other checklists 392.4 Manager’s / senior’s review
212 Previous year’s management
notes
letter 393.1 Matters for partner’s attention
213 Previous year’s approved 393.2 Matters for manager’s / senior’s
financial statements attention
214 Closing letter to Those Charged 395 Points carried forward to
With Governance subsequent audit
215 Emolument certificate
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4. Planning and Control 511.1 Internal control questionnaire
401 Audit planning checklist 511.2 Understanding the entity and its
402 Overall audit strategy and plan
405 Client acceptance questionnaire internal control
410 Engagement continuation 522 Assessment of fraud risk
524 Analytical review
questionnaire 524 Analytical review working papers
416 Audit engagement letter 525 Related parties audit programme
417 Standard terms of Business 530 Journal testing audit programme
420 Materiality
424 Risk assessment and approach 6. Trial Balance and Adjustments
to assessed risk 6.3 Trial balance
436 Lawyer’s letter 6.4 Adjusting journal entries
437 Related parties transactions 6.15 Audit programme trial balance
438 Planning letter to Those Charged 625 Going concern review
programme
With Governance 635 Fair values and estimates
450 Time budget 650 Subsequent events review
455 Discussions with management
programme
regarding fraud
460 Systems notes A. Intangible Assets
465 Permanent audit file review A.01 Lead schedule
A.101 Audit programme
checklist A.102 Working papers
470 Using the work of an Auditor’s
B. Property, Plant and Equipment
Expert B.01 Lead schedule
475 Standard audit ticks B.101 Audit programme
B.102 Working papers
5. Risk assessment and B.120 Test of controls
response
510 Understanding the entity’s 4 of 13
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C. Investment Property G.01 Lead schedule
C.01 Lead schedule G.101 Audit programme
C.101 Audit programme G.102 Working papers
C.102 Working papers G.110 Attendance at year-end count
C.120 Test of controls G.120 Test of controls
D. Investments in Subsidiaries H. Trade and Other Receivables
and Associates H.01 Lead schedule - trade
D.01 Lead schedule receivables
D.101 Audit programme H.02 Lead schedule - other
D.102 Audit programme consolidation
D.103 Working papers receivables
H.101 Audit programme
E. Other Financial Assets H.102 Working papers
E.01 Lead schedule H.110 Circularisation
E.101 Audit programme H.120 Test of controls
E.102 Working papers
F.120 Test of controls I. Cash and Bank Balances
I.01 Lead schedule
F. Inventories I.101 Audit programme
F.01 Lead schedule I.102 Working papers
F.101 Audit programme I.110 Bank circularisation and cash
F.102 Working papers
F.110 Stock attendance certificates
F.120 Test of controls I.120 Test of controls
G. Biological Assets J. Related Party Disclosures
J.01 Lead schedule
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J.120 Test of controls N.02 Proof of tax
J.110 Circularisation N.03 Tax account
N.101 Audit programme
K. Trade and Other Payables N.102 Working papers
K.01 Lead schedule - trade payables
K.02 Lead schedule - other payables O. Deferred Tax
O.01 Deferred tax computation
and accruals O.101 Audit programme
K.101 Audit programme O.102 Working papers
K.102 Working papers
K.110 Circularisation P. Capital and Reserves
K.120 Test of controls P.01 Lead schedule - share capital
P.02 Lead schedule - reserves
L. Borrowings P.101 Audit programme
L.01 Lead schedule - loans P.102 Working papers
L.02 Lead schedule - finance leases P.110 Copy of board minutes
L.03 Lead schedule - overdraft P.120 Copy of shareholders’ minutes
L.101 Audit programme
L.102 Working papers Q. Commitments and
L.120 Test of controls Contingencies
M. Provisions for Liabilities and Q.01 Lead schedule - operating
Charges leases
M.01 Lead schedule Q.02 Lead schedule - capital
M.101 Audit programme commitments
M.102 Working papers
M.120 Test of controls Q.03 Lead schedule - contingencies
N. Current Tax Q.101 Audit programme
N.01 Tax computation Q.102 Working papers
Q.120 Test of controls
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Q.130 Lawyer’s replies U. Expenditure
U.01 Lead schedule - cost of sales
R. Directors’ Emoluments and U.02 Working papers - cost of sales
Transactions U.03 Lead schedule - direct costs
U.04 Working papers - direct costs
R.01 Lead schedule - U.05 Lead schedule - employment
directors’/shareholders’ loan
expenses
R.02 Lead schedule - directors’ U.06 Working papers - employment
emoluments
expenses
R.101 Audit programme U.07 Lead schedule - administrative
R.102 Working papers
expenses
S. Cash Flow Statement U.08 Working papers - administrative
S.01 Lead schedule
S.101 Audit programme expenses
U.09 Lead schedule - establishment
T. Income
T.01 Lead schedule - turnover expenses
T.02 Lead schedule - other income U.10 Working papers - establishment
T.101 Audit programme
T.102 Gross profit analysis expenses
T.103 Working papers U.11 Lead schedule - selling and
T.120 Test of controls
distribution expenses
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distribution expenses
U.13 Lead schedule - finance costs
U.14 Working papers - finance costs
U.101 Audit programme
U.120 Test of control
U.120 Test of controls
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PART J REVIEW FILE CONTENTS
ISRE 2400 Toolkit Index
A01 - 001 Independence Review Program
A01 - 020 Quality Control Review Program
A01 - 021 Engagement Continuance Checklist
A01 - 022 Example Half Year Review Engagement Letter
A02 - 001 Knowledge of Business Review Program
A02 - 020 Matters From Prior Years Review Program
A02 - 040 Stock Exchange Announcements Review Program
A03 - 001 Planning Memorandum Review Program
A03 - 002 Planning Memorandum Review Template
A03 - 003 Understanding the Entity and its Environment Checklist
A03 - 020 Materiality Review Program
A04 - 001 Fraud and Compliance with Laws and Regulations Review Program
A04 - 002 Fraud Checklist
A04 - 003 Compliance with Laws and Regulations Checklist
A05 - 001 Internal Audit Review Program
A05 - 002 Internal Audit Evaluation checklist
A06 - 001 Engagement Budget Review Program
A07 - 001 Work Performed by Others Review Program
B01 - 001 Elements of Internal Control Review Program
B01 - 002 Control environment Checklist
B01 - 003 Risk Assessment Process Checklist
B01 - 004 Information System Checklist
B01 - 005 Control Activities Checklist
B01 - 006 Monitoring of Control Checklist
D03 - 020 Enquiries of those responsible for financial and accounting matters Review Program
D03 - 040 Operations Review Program
E01 - 001 Bank Reconciliation Review Program
E02 - 001 Receivables Review Program
E03 - 001 Investments (Including Associated Entities and Financial Instruments) Review Program
E04 - 001 Inventories Review Program
E06 - 001 Fixed Assets Review Program
E12 - 001 Prepaid Expenses, Intangibles and Other Assets Review Program
F02 - 001 Payables Review Program
F03 - 001 Borrowings Review Program
F06 - 001 Employee Entitlements Review Program
F07 - 001 Tax Computation Review Program
G01 - 001 Asset Revaluation Reserve Review Program
G03 - 001 Contributed Equity Review Program
G04 - 001 Other Reserves Review Program
H01 - 001 Going Concern Review Program
H01 - 002 Going Concern Checklist
H02 - 001 Subsequent Events Review Program
H03 - 001 ISRE 2410 Appendix 2
H04 - 001 Contingencies Review Program
H04 - 002 Contingencies Checklist
H04 - 020 Management Representations Review Program
H04 - 021 Example Management Representation Letter
I01 - 001 Compliance with stock Exchange Listing Rules Review Program
J01 - 001 Financial Statements review Program
J01 - 002 Review of Interim Financial Information Checklist
J01 - 003 Procedures to Review Half Year End Financial Statements
J01 - 020 Accompanying Information Review Program
J01 - 040 Communication Review Program
J02 - 001 Adjusting Journal Entries Review Program
J03 - 001 Trial Balance Review Program
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PART J REVIEW FILE CONTENTS
ISRE 2400 Toolkit Index
K01 - 001 Management Letter Review Program
K02 - 001 Review Report
K02 - 002 Half-year Review Report - Single Disclosing Entity
K02 - 003 Half-year Review Report - Consolidated Entity
L01 - 001 Partner Clearance Review Program
L01 - 002 Partner Review Clearance Checklist
L01 - 003 Review Partner Clearance Program
L01 - 020 Review File Completion Program
L01 - 021 Review File Completion Checklist
Appendix 1 Procedure Checklist
Appendix 2 ISRE 2400 Checklist
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PART J REVIEW FILE CONTENTS
ISRE 2410 Toolkit Index
A01 - 001 Independence Review Program
A01 - 020 Quality Control Review Program
A01 - 021 Engagement Continuance Checklist
A01 - 022 Appendix 1 Example Half Year Review Engagement Letter
A02 - 001 Knowledge of Business Review Program
A02 - 020 Matters From Prior Years Review Program
A02 - 040 Stock Exchange Announcements Review Program
A03 - 001 Planning Memorandum Review Program
A03 - 002 Planning and Startegy
A03 - 003 Understanding the Entity and its Environment Checklist
A03 - 020 Materiality Review Program
A04 - 001 Fraud and Compliance with Laws and Regulations Review Program
A04 - 002 Fraud Checklist
A04 - 003 Compliance with Laws and Regulations Checklist
A05 - 001 Internal Audit Review Program
A05 - 002 Internal Audit Evaluation checklist
A06 - 001 Engagement Budget Review Program
A07 - 001 Work Performed by Others Review Program
B01 - 001 Elements of Internal Control Review Program
B01 - 002 Control environment Checklist
B01 - 003 Risk Assessment Process Checklist
B01 - 004 Information System Checklist
B01 - 005 Control Activities Checklist
B01 - 006 Monitoring of Control Checklist
D03 - 020 Enquiries of those responsible for financial and accounting matters Review Program
D03 - 040 Operations Review Program
E01 - 001 Bank Reconciliation Review Program
E02 - 001 Receivables Review Program
E03 - 001 Investments (Including Associated Entities and Financial Instruments) Review Program
E04 - 001 Inventories Review Program
E06 - 001 Fixed Assets Review Program
E12 - 001 Prepaid Expenses, Intangibles and Other Assets Review Program
F02 - 001 Payables Review Program
F03 - 001 Borrowings Review Program
F06 - 001 Employee Entitlements Review Program
F07 - 001 Tax Computation Review Program
G01 - 001 Asset Revaluation Reserve Review Program
G03 - 001 Contributed Equity Review Program
G04 - 001 Other Reserves Review Program
H01 - 001 Going Concern Review Program
H01 - 002 Going Concern Checklist
H02 - 001 Subsequent Events Review Program
H03 - 001 ISRE 2410 Appendix 2
H04 - 001 Contingencies Review Program
H04 - 002 Contingencies Checklist
H04 - 020 Management Representations Review Program
H04 - 021 Appendix 2 Example Management Representation Letter
I01 - 001 Compliance with stock Exchange Listing Rules Review Program
J01 - 001 Financial Statements review Program
J01 - 002 Review of Interim Financial Information Checklist
J01 - 003 Procedures to Review Half Year End Financial Statements
J01 - 020 Accompanying Information Review Program
J01 - 040 Communication Review Program
J02 - 001 Adjusting Journal Entries Review Program
J03 - 001 Trial Balance Review Program
K01 - 001 Management Letter Review Program
K02 - 001 Review Report
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PART J REVIEW FILE CONTENTS
ISRE 2410 Toolkit Index
K02 - 002 Appendix 3 Half-year Review Report - Single Disclosing Entity
K02 - 003 Appendix 3 Half-year Review Report - Consolidated Entity
L01 - 001 Partner Clearance Review Program
L01 - 002 Partner Review Clearance Checklist
L01 - 003 Review Partner Clearance Program
L01 - 020 Review File Completion Program
L01 - 021 Review File Completion Checklist
Appendix 4 ISRE 2400 Checklist
Appendix 5 Procedure Checklist
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PART L GROUP AUDIT INSTRUCTIONS
1. Introduction..............................................................................................................................
2. Engagement and Client Teams ................................................................................................
2.1. Group Engagement Team.................................................................................................
2.2. Client Contact ...................................................................................................................
3. Timetable.................................................................................................................................
4. Scope of Work Required and Strategy .....................................................................................
4.1. Group Overview and Background .....................................................................................
4.2. Scope of Work Required ...................................................................................................
4.3. Significant Accounting Policies..........................................................................................
4.4. Materiality .........................................................................................................................
4.5. Critical Audit Issues/Significant Risks (including Fraud) Relating to the Group Financial
Statements .......................................................................................................................
4.6. Critical Accounting Issues Relating to the Group Financial Statements..............................
4.7. Material Weaknesses in Internal Controls .........................................................................
4.8. Going Concern .................................................................................................................
4.9. Subsequent Events...........................................................................................................
5. Component Auditor‘s Report ....................................................................................................
6. Completion Memorandum ........................................................................................................
7. Summary of Unadjusted Differences ........................................................................................
8. Management Letter..................................................................................................................
9. Representation Letter...............................................................................................................
10 List of Related Parties ..............................................................................................................
11.Independence Confirmation......................................................................................................
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PART L GROUP AUDIT INSTRUCTIONS
Appendices
I Component Auditor’s Confirmations
II Early Warning Memorandum
IIIa Component Auditor’s Report on the Group Reporting Package (Audit Report)
IIIb Component Auditor’s Report on the Group Reporting Package (Review Report)
IVa Completion Memorandum (Audit)
IVb Completion Memorandum (Specified Audit Procedures or Review)
V Summary of Unadjusted Differences
VI Tax Review Memorandum
VII Management Letter
VIII Subsequent Events Memorandum
IX Letter of Representation
Xa Audit Questionaire (short form)
Xb Audit Questionaire (long form)
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DISCLAIMER
The HLB International Audit Manual provides an audit methodology that member firms may
adopt while carrying out an audit using the International Standards on Auditing. Member
firms should note that the audit approach for each audit is dependent upon understanding
the nature and size of the business; the risks inherent in the business and structures
developed to identify, measure, monitor and control the risks; the evaluation of the control
environment and the effectiveness of internal controls; the scope of the assignment taking
into consideration the specific legal requirements of each economic sector; the style of
management; and the economic environment in which the business operates, amongst
other factors. Users should therefore tailor their audit approach for each audit to take into
account these factors and not use the Audit Manual or the programmes contained in this
Manual without covering the specific requirements and risks associated with each audit.
Moreover, the Audit Programmes set out in Part I of the Manual are based on the reporting
requirements of the International Financial Reporting Standards and will need to be tailored
by each member firm based on the financial and legal reporting requirements specific to
their country and the relevant regulatory authorities.
The Manual has been produced in English and HLB takes no responsibility for translation
into other languages, including Spanish. The definitive guide is the English version and the
International Standards on Auditing, International Auditing Practice Statements and the
Code of Ethics for Professional Accountants should always be consulted.
The Manual is not an attempt to summarise the International Standards on Auditing,
International Auditing Practice Statements and the Code of Ethics for Professional
Accountants and, where applicable, reference should be made to these pronouncements.
In addition, where there is a conflict between these pronouncements and the Manual, the
pronouncements prevail.
Whilst every care has been exercised in ensuring the accuracy and the completeness of the
information contained in this Manual, neither HLB International nor any of its member firms
will accept any liability for any errors or omissions contained herein whether caused by
negligence or otherwise, or for any loss or damage, however caused or sustained by
anyone who places reliance on the contents of this Manual.
The Audit Manual is for the exclusive use of member firms of HLB International
and no part may be reproduced or published in any form whatsoever without the
prior written consent of HLB International. Where such consent is given,
acknowledgement should be accorded to HLB International.
Disclaimer
1st July 2010
HLB INTERNATIONAL AUDIT AND ASSURANCE MANUAL
1. INTRODUCTION
1.1. Scope of the manual
1.1.1 The Audit and Assurance Manual has been designed to guide HLB International member
firms in the conduct of audits in accordance with the International Standards on Auditing and
incorporates International Standards on Auditing and International Auditing Practice
Statements in force at 30 April 2009, the conduct of review engagements in accordance with
International Standards on Review Engagements, the conduct of agreed upon procedures in
accordance with International Standards on Related Services. This includes all the changes
resulting from the IAASB’s program to comprehensively review all of its ISAs and ISQC to
improve their clarity, which resulted in 36 newly updated and clarified ISAs and a clarified
ISQC. The manual incorporates relevant parts of the revised IFAC Code of Ethics for
Professional Accountants (the IESBA Code) issued by the International Ethics Standards
Board of Accountants (IESBA). The revised IESBA Code is effective on January 1, 2011 with
early adoption permitted. The principles set out in the manual will be of general application to
all audits but the audit approach will need to be tailored when auditing ‘special’ entities, such
as companies engaged in the financial services sector, professional firms and non-government
organisations.
An audit of financial statements
1.1.2 The purpose of an audit is to enhance the degree of confidence of intended users in the
financial statements. This is achieved by the expression of an opinion by the auditor on
whether the financial statements are prepared, in all material respects, in accordance with an
applicable financial reporting framework. In the case of most general purpose frameworks, that
opinion is on whether the financial statements are presented fairly, in all material respects, or
give a true and fair view in accordance with the framework. An audit conducted in accordance
with ISAs and relevant ethical requirements enables the auditor to form that opinion.
1.1.3 The auditor’s opinion on the financial statements deals with whether the financial
statements are prepared, in all material respects, in accordance with the applicable financial
reporting framework. Such an opinion is common to all audits of financial statements. The
auditor’s opinion therefore does not assure, for example, the future viability of the entity nor the
efficiency or effectiveness with which management has conducted the affairs of the entity. In
some jurisdictions, however, applicable law or regulation may require auditors to provide
opinions on other specific matters, such as the effectiveness of internal control, or the
consistency of a separate management report with the financial statements. While the ISAs
include requirements and guidance in relation to such matters to the extent that they are
relevant to forming an opinion on the financial statements, the auditor would be required to
undertake further work if the auditor had additional responsibilities to provide such opinions.
1.1.4 Member firms are required to have policies and methodologies for the conduct of
transnational audits that are based, to the extent practicable, on the International Standards on
Auditing issued by the IAASB. As explained in detail in section 1.1.1 this manual contains
policies and methodologies for the conduct of audits which are based on the International
Standards on Auditing issued by the IAASB.
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1.2. Structure of the manual
1.2.1 The Manual is presented in twelve parts:
Part A: Audit Objectives, Respective Responsibilities and Audit File Contents
Part B: Quality Control and Client Acceptance
Part C: Planning
Part D: Execution
Part E: Review and Completion
Part F: Using the Work of Others
Part G: Review Engagements
Part H:- Agreed Upon Procedures – pending
Part I: Audit File Contents
Part J:- Review File Contents
Part K:- Agreed Upon Procedures Contents – pending
Part L:- Group Audit Instructions
1.3. Key features of the HLBI audit approach
1.3.1 The key features of the HLBI audit approach that help accomplish our objective of
providing high quality service are:
An emphasis on firms’ partners setting a tone at the top to recognize that quality is
essential in performing engagements.
An emphasis on obtaining a thorough understanding of the client’s business, the industry in
which the client operates and the internal control environment. This helps us to identify
potential areas of risk associated with the particular entity that have an impact on the audit,
to communicate more effectively with management, and to develop client service objectives
that enhance the benefits that the client will receive from our audit.
An account balance focus that enables us to identify promptly significant accounts and
high-risk areas. This is done by encouraging consideration of business and environmental
aspects of the client in deciding “what could go wrong” and by focusing attention on the
client’s estimation / judgment processes separately from the routine and non-routine data
processes.
The integration into our approach of the impact of information systems in recognition of
their use in most businesses today.
A risk assessment process that is central to the audit approach and provides the basis for
planning the minimum effort necessary to hold audit risk in each area to an acceptably low
level. This process enables us to plan our efforts to be responsive to the likelihood of errors
of audit importance, and to select audit procedures that directly relate to the client’s
particular situation.
The recognition of the importance of engagement economics and staff utilisation by
providing for judgement and flexibility in performing work at the planning stage. At the same
time, however, the approach recognises that the audit effort in respect of the period
between the planning stage and the year-end should be commensurate with the level of
risk.
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Considerations specific to smaller entities
1.3.2 For purposes of specifying additional considerations to audits of smaller entities, a
“smaller entity” refers to an entity which typically possesses qualitative characteristics such as:
Concentration of ownership and management in a small number of individuals (often a
single individual – either a natural person or another enterprise that owns the entity
provided the owner exhibits the relevant qualitative characteristics); and
One or more of the following:
• Straightforward or uncomplicated transactions;
• Simple record-keeping;
• Few lines of business and few products within business lines;
• Few internal controls;
• Few levels of management with responsibility for a broad range of controls; or
• Few personnel, many having a wide range of duties.
1.3.3 These qualitative characteristics are not exhaustive, they are not exclusive to smaller
entities, and smaller entities do not necessarily display all of these characteristics.
The considerations specific to smaller entities included in the ISAs have been developed
primarily with unlisted entities in mind. Some of the considerations, however, may be helpful in
audits of smaller listed entities.
The ISAs refer to the proprietor of a smaller entity who is involved in running the entity on a
day-to-day basis as the “owner-manager.”
1.4. Matters not dealt with in the manual
1.4.1 The Manual does not attempt to reproduce everything covered in International Standards
on Auditing, International Auditing Practice Statements and the Code of Ethics for Professional
Accountants and, where necessary, reference should be made to these. In particular, the
Manual does not cover:
Compliance with all the requirements of International Standard on Quality Control 1, which
establishes standards and provides guidance regarding a firm’s responsibilities for its
system of quality control for audits and reviews of historical financial information, and for
other assurance and related service engagements. (A separate manual, the HLBI ISQC
manual is available on the GCS); and
Non-assurance assignments including the provision of accounting services.
1.5. Implementation of the manual
1.5.1 The Manual is structured in a way that it can be adopted by a member firm as its audit
manual. However, there are certain sections in the Manual which need to be customised for
specific use and such sections are in Italics. Each firm is also required to develop policies
which comply with the requirements of ISQC 1 and the COE and procedures to monitor
compliance with such policies. While it is not possible to cover all the requirements of ISQC 1
and the COE within the scope of this Manual, Chapter 4 of the Manual provides a framework
which covers the key aspects of ISQC 1 and the COE in relation to audit engagements that
firms may adopt in developing their policies and procedures. The policies and procedures in
relation to ISQC 1 and the COE should be communicated to the firm’s personnel and others
subject to them.
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1.5.2 Once the Manual has been customised, it should be approved by the Board of Partners
who have the ultimate responsibility for the firm’s quality control. It is also necessary that users
of the Manual develop an implementation schedule which should include training as a key
component of the implementation phase. Users should also note that part implementation of
the Manual will not result in compliance with ISA’s.
1.6. Glossary of terms
COE: Code of Ethics for Professional Accountants
CU: Currency unit of the respective country
Entity: Refers to an audit client
GAAP’s: Generally Accepted Accounting Principles
IAPS: International Auditing Practice Statements
ISA: International Standards on Auditing
ISAE:- International Standards on Assurance Engagements
ISQC 1: International Standard on Quality Control 1
ISRE: International Standards on Review Engagements
ISRS:- International Standards on Related Services
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2. AUDIT OBJECTIVES AND RESPECTIVE RESPONSIBILITIES (INCORPORATING ISA
200)
2.0.1 The purpose of this chapter is to define the objectives of an audit and to give an outline
of HLBI’s audit approach. Chapters 3 to 30 of the Manual provide detailed guidance on the
conduct of an audit.
2.1. Objectives and general principles of an audit
2.1.1 Under the principles of ISA 200, the objective of an audit of financial statements is to:
To obtain reasonable assurance about whether the financial statements as a whole are free
from material mis-statement, 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 by the ISAs, in
accordance with the auditor’s findings.
2.1.2 In all cases when reasonable assurance cannot be obtained and a qualified opinion in
the auditor’s report is insufficient in the circumstances for purposes of reporting to the intended
users of the financial statements, the ISAs require that the auditor disclaim an opinion or
withdraw (or resign) from the engagement, where withdrawal is possible under applicable law
and regulation.
2.1.3 The objective applies to a full scope audit of any entity’s financial statements, whether or
not the entity is profit oriented or the assignment is a non-statutory audit.
2.1.4 In carrying out an audit, when the audit is conducted in accordance with ISAs, the firm
and each member of the engagement team is required to:
Comply with the ethical requirements, including those pertaining to independence, relating
to audit engagements which comprise the Code of Ethics as promulgated by the respective
member firm Institute, which may be more restrictive than the IFAC Code. In general, each
member of the engagement team is required to behave with integrity in all professional
relationships which implies honesty, fair dealing, sincerity and professional independence.
An auditor should be objective in all judgements and not allow prejudice, bias or any other
interest to influence the auditor’s objectivity. HLBI member firms are required to respect the
confidentiality of information obtained in the course of an audit and not disclose any
information to a third party unless it is legally or professionally required of us. Moreover,
each member firm should only undertake work which it is competent and experienced to
perform and all professional work must be conducted with due care, skill and diligence.
Comply with the quality control requirements as stipulated in ISA 220 which requires the
engagement partner to take responsibility for the overall quality on each audit engagement,
but recognises that the engagement team is entitled to rely on the firm’s systems in
meeting its responsibilities with respect to quality control procedures applicable to the
individual audit engagement. Each member firm should therefore establish quality control
systems that comply with the requirements of ISQC 1.
Conduct the audit in accordance with relevant ISA’s which provide the basic principles and
essential procedures which have to be applied in the context of explanatory notes and
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appendices. In addition to this, we should consider the International Audit Practice
Statements applicable to the audit engagement. In determining the scope of an audit, the
engagement team should comply with each ISA relevant to the audit and should not
represent compliance with ISA’s in the auditor’s report unless we have complied with all of
the ISA’s relevant to the audit. An ISA is relevant to the audit when the ISA is in effect and
the circumstances addressed by the ISA exist. The auditor should have an understanding
of the entire text of an ISA, including its application and other explanatory material, to
understand its objectives and to apply its requirements properly. In exceptional
circumstances the auditor may consider it necessary to depart from a relevant requirement
in a ISA. In such circumstances the auditor shall perform alternative audit procedures to
achieve the aim of that requirement. The need for the auditor to depart from a relevant
requirement is expected to arise only where the requirement is for a specific procedure to
be performed and in the specific circumstances of the audit, that procedure would be
ineffective in achieving the aim of the requirement. The reason for any departure from an
ISA should be documented on the audit file.
Plan and perform an audit with an attitude of professional scepticism recognising that
circumstances may exist that cause the financial statements to be materially misstated. The
engagement team is required to make a critical assessment of the validity of the audit
evidence obtained and should be alert to evidence that contradicts or brings into question
the reliability of documents and responses to inquiries and other information obtained from
the management and those charged with governance. The attitude of professional
scepticism is necessary throughout the audit to reduce the risk of overlooking unusual
circumstances, of over generalising conclusions drawn from audit observation, and of using
incorrect assumptions in determining the nature, timing and extent of the audit procedures
and evaluating the results.
The auditor shall exercise professional judgement in planning and performing an audit of
financial statements. To achieve the overall objectives of the audit, the auditor shall use the
objectives stated in the relevant ISAs in planning and performing the audit having regard to
the interrelationships among the ISAs to (a) to determine if any audit procedures in addition
to those required by the ISAs are necessary in pursuance of the objectives stated in the
ISAs and (b) evaluate whether sufficient audit evidence has been obtained.
Obtain reasonable assurance that the financial statements taken as a whole are free from
material misstatement, whether due to fraud or error. This is applicable to the whole audit
process and requires the accumulation of audit evidence necessary for the engagement
team to conclude that there are no material misstatements in the financial statements taken
as a whole. Material misstatements are considered at both (i) the overall financial
statement level; and (ii) at the assertion level for classes of transactions, account balances,
and disclosures and related assertions. Due to the inherent limitations in the use of testing
and the operations of internal controls, most audit evidence is persuasive and not
conclusive.
The preparation of the financial statements requires management to make a number of
judgments or assumptions that affect significant accounting estimates and to monitor the
reasonableness of such estimates on an ongoing basis. Fraudulent financial reporting is
often accomplished through intentional misstatement of accounting estimates. This may be
achieved by, for example, understating or overstating all provisions or reserves in the same
fashion so as to be designed either to smooth earnings over two or more accounting
periods, or to achieve a designated earnings level in order to deceive financial statement
users by influencing their perceptions as to the entity’s performance and profitability.
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As absolute assurance is unattainable, an audit is therefore not a guarantee that the
financial statements are free from material misstatement. Moreover, an audit opinion does
not assure the future viability of an entity nor the efficiency or effectiveness with which the
management conducts the affairs of the entity.
Plan and perform the audit to reduce the audit risk to an acceptably low level that is
consistent with the objectives of an audit. Audit risk is the risk that the auditor expresses an
inappropriate audit opinion when the financial statements are materially misstated. The
engagement team reduces this risk by designing and performing audit procedures to obtain
sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to
base the audit opinion. Reasonable assurance is obtained when the audit risk has been
reduced to an acceptably low level.
Determine whether the financial reporting framework adopted by the management in
preparing the financial statements is acceptable in view of the nature of the entity and the
objective of the financial statements. Each jurisdiction will have a framework that is
determined by legislation or the profession. However, in exceptional circumstances, where
the reporting is done for other purposes e.g. financial statements prepared for specific
reporting to donor agencies or to comply with the reporting framework of the parent
company, the engagement team should compare the accounting conventions adopted to
the requirements of an existing acceptable framework. Where the engagement team
concludes that the framework adopted by the management is not acceptable, the
engagement partner should consider the implications in relation to engagement acceptance
(ISA 210) and the auditor’s report (ISA 700).
Failure to achieve an Objective in a relevant ISA requires the auditor to 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 auditor’s opinion or
withdraw from the engagement (where withdrawal is possible under law or regulation).
Failure to achieve an objective represents a significant matter requiring documentation in
accordance with ISA 230.
2.2. Stages of an audit
2.2.0.1 The suggested audit approach is designed to gather sufficient and appropriate
evidence to support the audit opinion in the most efficient and effective way. There is no
difference between the stages of an audit of a large and a small entity except that the
procedures adopted may differ depending on the particular circumstances of each audit. The
table below summarises the stages of an audit and the relevant ISA’s applicable at each stage.
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Preliminary STAGES OF AN AUDIT AND THE
Engagement Planning
Activities • 200 - Objective and General Principles • 230
• 210 - Terms of Audit Governing an Audit of Financial • 330
Statements
Engagement Res
• 230 - Documentation
• 220 - Quality Control • 402
• 240 - The Auditor’s Responsibility to
for Audits of to an
Historical Financial Consider Fraud in an Audit of Financial Orga
Information Statements
• 500
• 300 - Planning an • 250 - Consideration of Laws and
• 501
Audit of Financial Regulations in an Audit of Financial
Statements Statements Con
• 510 - Initial • 260 - Communication of Audit Matters • 505
Engagements - with Those Charged with Governance • 520
Opening Balances
• 265 – Communicating Deficiencies in • 530
Internal Control to Those Charged with of T
Governance and Management
• 540
• 300 - Planning an Audit of Financial
Estim
Statements Acco
Disc
• 315 - Understanding the Entity and its
• 550
Environment and Assessing the Risk of
Material Misstatement • 600
• 320 - Audit Materiality Stat
• 330 - The Auditor’s Procedures in • 610
Response to Assessed Risks Aud
• 505 - External Confirmations • 620
• 520 - Analytical Procedures Aud
• 600 - Using the Work of Another Auditor • 710
• 610 – Using the Work of Internal
Auditors
2. Audit Objectives and Respective Responsibilities
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E ISA’s APPLICABLE AT EACH STAGE
Execution Review and Completion Reporting
- Documentation • 220 - Quality Control • 260 -
- The Auditor’s Procedures in for Audits of Historical Communication of
sponse to Assessed Risks Financial Information Audit Matters with
Those Charged with
- Audit considerations Relating • 230 – Documentation Governance
n Entity Using a Service
anisation • 450 – Evaluation of • 700 - The
- Audit Evidence Misstatements Independent
Identified during the Auditor’s Report on
- Audit Evidence - Additional Audit a Complete Set of
nsideration for Specific Items General Purpose
• 520 - Analytical Financial
- External Confirmations Statements
Procedures
- Analytical Procedures • 705 – Modifications
• 560 - Subsequent
- Sampling and Other Means to the Opinion in the
Testing Events Independent
Auditor’s Report
- Audit of Accounting • 570 - Going Concern
mates including Fair Value • 706 – Emphasis of
ounting Estimates and Related • 580 - Written
closures matter paragraphs
Representations and Other Matter
- Related Parties Paragraphs in the
Independent
- Audits of Group Financial Auditor’s Report
tements
• 720 - Other
- Using the Work of Internal
ditors Information in
Documents
- Using the Work of an Containing the
ditor’s Expert Audited Financial
Statements
- Comparatives
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2.2.1. Preliminary engagement activities (Covered in chapters 3 to 5 in parts A and
B of the manual)
2.2.1.1 At the planning stage, the engagement partner ensures that:
The client acceptance and continuation procedures have been carried out;
The terms of engagement have been agreed in writing; and
The quality control aspects for the assignment have been reviewed including review of
the competency of the team to carry out the assignment and review of compliance with
the ethical requirements, including review of the independence requirements.
2.2.2. Planning (Covered in chapters 6 to 12 in part C of the manual)
2.2.2.1 Planning is an essential component in focusing the audit efforts. The key
components of planning are:
Identifying the scope of the engagement. This would involve establishing the client
service and other planning objectives, determining significant users of the financial
statements and client locations.
Developing:
• an audit strategy taking into consideration the scope of the engagement;
• the business and the regulatory environment in which the entity operates;
• entity specific issues including reliance on the work of internal audit;
• reporting objectives, timing of the audit and the nature of communication
required;
• matters affecting the direction of the audit including preliminary setting of
materiality levels, preliminary review of risk including fraud risk, preliminary
review of internal control including the control environment and the process
adopted by the entity to identify, measure, monitor and control risks.
Developing, based on the above, the overall audit plan detailing the nature, timing and
extent of the audit procedures to be performed in order to reduce the audit risk to an
acceptably low level; the nature of tests to be adopted; procedures to be conducted at
the assertion level; and tailoring the audit programmes.
Ascertaining the nature and the extent of the resources required to perform the audit.
2.2.3. Execution (Covered in chapters 13 to 22 in part D of the manual)
2.2.3.1 The key components of the execution stage are:
Carrying out the test of controls and substantive tests on transactions and balances
including substantive analytical procedures to obtain sufficient and appropriate audit
evidence to enable the engagement team to draw reasonable conclusions on which to
base the audit opinion.
Evaluating significant assumptions used in fair value measurement to determine the
reasonableness of the basis used and the disclosures.
Identification of related parties and obtaining sufficient and appropriate audit evidence in
respect of measurement and disclosure of related party transactions.
Documenting the nature, timing and extent of the audit procedures performed and the
results and conclusions drawn from the audit evidence obtained.
2.2.3.2 While pre-printed forms and programmes are available in the Manual, the extent
and timing of the tests should be tailored to the specific assignment. Different tests and
different levels will be appropriate for each assignment. The control of the audit at this
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stage must be maintained by a senior team member with the appropriate experience and
expertise.
2.2.4. Completion and other audit areas (Covered in chapters 23 to 30 in parts E and
F of the manual)
2.2.4.1 The review and completion procedures focus on ensuring that sufficient and
appropriate evidence has been obtained to support the audit opinion. This involves
ensuring that:
All outstanding matters have been cleared.
Consultations on difficult or contentious matters have been documented and adequately
resolved and conclusions therefrom implemented.
Analytical procedures have been performed to form a conclusion on whether the
financial statements taken as a whole are consistent with the firm’s knowledge of the
business.
Where other appropriate audit evidence cannot be reasonably obtained, written
management representations have been obtained on areas material to the financial
statements.
Review has been carried out of events or conditions that may exist which alone or in
aggregate cast a significant doubt on the entity’s ability to continue as a going concern.
There is evidence that the engagement team has considered and confirmed that the
financial reporting framework adopted by the entity is acceptable, and that the financial
statements comply with the framework as to both recognition and measurement and
presentation and disclosure.
The engagement partner has reviewed the audit file and is satisfied that sufficient and
appropriate evidence has been obtained to support the conclusions derived and the
audit opinion to be issued.
Where applicable, sufficient and appropriate procedures have been performed to
identify subsequent events up to the date of the audit report and ensure that all items
that require adjustment or disclosure in the financial statements have been
appropriately dealt with.
Where appropriate, an engagement quality control review has been undertaken and all
issues arising from the review have been fully dealt with and cleared with the reviewer.
At the end of each audit the audit objectives set out for the assignment have been
achieved.
2.2.4.2 Though not covered by the terms of audit engagement, the engagement team may,
as part of the audit process, carry out a business review of the key issues facing the entity
and take a strategic look at the business and at areas where the firm can add value to the
entity. In providing other value added services, the firm and in particular, the engagement
partner should be conscious of the independence requirements of the Code of Ethics.
Supervision of the engagement team
2.2.4.3 A key aspect of a successful engagement is the supervision of the engagement
team at all the stages of an audit. At the planning stage, the engagement partner needs to
communicate the audit objectives to the engagement team. This is necessary to assist the
less experienced members of the engagement team to clearly understand the objectives of
the assigned work. Effective supervision includes:
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Considering whether the individual members of the engagement team understand the
instructions and ensuring that the work is being carried out in accordance with the
planned approach.
Tracking the progress of the engagement.
Addressing significant issues arising during the engagement, considering their
significance and modifying the planned approach appropriately.
Identifying matters for consultation or consideration by more experienced engagement
team members.
Overall review responsibilities
2.2.4.4 Review responsibilities are determined on the basis that the more experienced
engagement team members, including the engagement partner, review work performed by
the less experienced engagement team members. Reviewers consider whether:
The work has been performed in accordance with professional standards and legal and
regulatory requirements.
Significant matters have been raised for further consideration.
Appropriate consultations have taken place and the resulting conclusions documented
and implemented.
There is need to revise the nature, timing and the extent of work performed.
The work performed supports the conclusions reached and is appropriately
documented.
The evidence obtained is sufficient and appropriate to reduce audit risk to an acceptably
low level and to support the report.
The objectives of the engagement have been achieved.
2.3. Use of standard forms and programmes
2.3.1 The use of pre-printed forms, programmes and standard letters is to:
Help ensure the quality of work.
Provide an aid to training and for guidance purposes.
Help achieve efficiency.
2.3.2 However, each audit is unique and requires the approach to be tailored. It is therefore
the responsibility of the engagement partner to ensure that the standard checklists and
programmes are tailored to take into consideration the audit strategy and plan for each
assignment.
2.4. Responsibility for the financial statements
2.4.1 The responsibility for the preparation and presentation of the financial statements in
accordance with an applicable financial reporting framework is that of management of the
entity, with oversight from governance. The management is also responsible for identifying
the financial reporting framework to be used in the preparation of the financial statements.
2.4.2 The term ‘financial statements’ is referred to in ISA 200 as a structured representation
of historical financial information, including disclosures, derived from accounting records
and intended to communicate at a point in time an entity’s economic resources or
obligations in accordance with a financial reporting framework. The term “financial
statements” can refer to a complete set of financial statements, but can also refer to a
single financial statement e.g. balance sheet. Disclosures comprise explanatory or
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descriptive information, set out as required, expressly permitted or otherwise allowed by the
applicable financial reporting framework, on the face of the financial statement, or in the
notes, or incorporated therin by cross-reference.
2.5. Responsibilities of the engagement team
General responsibilities
2.5.1 These include:
Maintaining the very highest ethical and professional standards in the conduct of their
work.
Maintaining an attitude of professional scepticism and having the ability to apply
professional judgement.
Develop an understanding of the industry in which the entity operates and the issues
affecting the industry.
Appropriate understanding of the entity’s operations including knowledge of relevant
information technology.
Appropriate understanding of the professional standards and regulatory and legal
requirements.
Demonstrating a genuine interest in the requirements of the entity, including attending
promptly to any specific issues.
Carrying out the audit in accordance with the audit plan and within the time budget.
Reviewing the engagement.
Identifying areas of time savings and increased efficiency in future audits.
Developing the engagement team by providing on-the-job training to persons being
directly supervised.
2.5.2 ISA 220 places the responsibility for the implementation of the quality control
procedures applicable to the engagement on the engagement team.
Engagement partner
2.5.3 The engagement partner has the principal responsibility for the assignment and for
the overall quality on each audit. The engagement partner is responsible for the direction,
supervision and performance of the audit engagement in compliance with professional
standards and legal and regulatory requirements, and ensuring that the audit approach
adopted provides sufficient and relevant evidence to support the audit opinion, which is
appropriate in the circumstances. The engagement partner is also expected to discuss the
audit with the engagement team. Where more than one partner is involved in the conduct of
an engagement, the respective responsibilities need to be clearly defined and understood
by the engagement team. The specific responsibilities at each stage of the audit include:
2.5.4 Preliminary engagement activities:
Ensuring that the engagement acceptance and continuation procedures have been
complied with.
Agreeing the terms of engagement in writing with the entity.
Ensuring compliance with the ethical and independence requirements, and allocating an
engagement team, including specialist staff, which possesses the necessary capability
and competence and has sufficient time to perform the engagement.
Ensuring that the quality control procedures that are applicable to the audit engagement
are complied with.
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2.5.5 Planning:
Contact with the entity especially with those charged with governance.
Where necessary, the engagement partner should seek appropriate consultations and
ensure that the conclusions therefrom are implemented.
Preliminary discussions with the engagement team and briefing them on the
responsibility of the engagement team, the audit risk, the problems that may be
encountered and on any other key factors.
Setting the overall objectives for the assignment.
To sign-off the audit strategy and the audit plan.
2.5.6 Performance:
To oversee that the audit is proceeding according to plan and to interject and guide the
engagement team when required.
Conducting timely reviews at appropriate stages to ensure that significant matters are
resolved on a timely basis, and where appropriate, modifying the planned audit
approach.
Identifying matters for consultation or consideration by another person.
2.5.7 Review:
The engagement partner need not review all audit documentation. The engagement
partner should however review critical areas, especially those relating to judgement,
contentious matters identified during the audit, significant risks and other areas
considered important by the engagement partner. A review of the audit file may cover:
• Matters for partner’s attention and ensuring that these are satisfactorily disposed
of.
• Summary of unadjusted errors and ensuring that these are not individually and
collectively material.
• Lead schedules and audit conclusions for each material area and where
necessary, a more detailed review of the specific areas.
• Audit strategy and plan to ensure that the original strategy and plan is still
appropriate and consider any further tests and evidence required.
• Sufficiency and appropriateness of the audit evidence to support the audit
opinion and the adequacy of the management representations being obtained
from the entity.
• Financial statements and ensuring that they comply with the reporting framework
adopted by the entity, and the appropriateness of the reporting framework
adopted.
A detailed review of any documentation to be sent to the entity including:
• Audited financial statements.
• Draft letter of representation.
• Management letter.
In addition to the review, the engagement partner should discuss the audit with the
engagement team.
2.5.8 A new engagement partner taking over an audit during engagement must review the
work performed to the date of change and ensure that the engagement has been planned
and performed in accordance with the professional standards and the legal and regulatory
requirements.
2.5.9 Reporting:
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Ensuring that all engagement partners’ review notes have been cleared satisfactorily
prior to signing the financial statements.
Ensuring that all consultations have been documented and any contentious issues are
fully resolved and the conclusions from the consultations implemented.
Ensuring that where necessary, an engagement quality control review has been
undertaken by an engagement quality control reviewer and all issues arising have been
satisfactorily dealt with.
Ensuring that the work has been performed in accordance with professional standards
and legal and regulatory requirements.
Discussing the financial statements, key audit issues, management letter and other
strategic business issues with the entity and providing assistance where necessary,
without compromising independence.
Signing all the checklists including independence, engagement partner’s review and
audit finalisation.
Ensuring the form of opinion is in accordance with the applicable financial reporting
framework and any applicable law or regulation.
Signing and dating the audit report.
2.5.10 De-briefing:
De-brief the audit team.
Appraise the team and identify areas of potential training.
Review and approve any post-meeting action programme. This task can be delegated
to the manager, and the partner will only appraise the audit manager in this case.
Engagement quality control reviewer
2.5.11 If the engagement is one that requires the appointment of an engagement quality
control reviewer, the engagement quality control reviewer is required to conduct the review
in a timely manner and at appropriate stages thereby ensuring that significant matters are
promptly resolved prior to the issue of the report. The reviewer should be introduced to the
audit team and where appropriate, to the entity. The role of the reviewer includes:
Reviewing the scope of the assignment with the engagement partner.
Reviewing the independence of the firm and the engagement team.
Ensuring that the working papers selected for review reflect the work performed in
relation to significant judgements and support the conclusions reached.
Reviewing significant risks identified during the engagement and responses to those
risks including the engagement team’s assessment of, and response to, the risk of
fraud.
Reviewing judgements made, particularly with respect to materiality and significant
risks.
Ensuring that appropriate consultations have taken place on matters involving
differences of opinion or on difficult and contentious matters, and that the matters have
been satisfactorily concluded.
Reviewing the significance and disposition of corrected and uncorrected misstatements
identified during the engagement.
Review of matters to be communicated to the management and those charged with
governance and to other parties including regulatory authorities.
Reviewing the appropriateness of the auditor’s report to be issued.
The detailed procedures for the conduct of an Engagement Quality Control Review
are set out in Chapters 4.19.20 and 4.21 of the Manual.
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2.5.12 Manager (or equivalent)
2.5.13 The manager has the overall responsibility for achieving the objectives set by the
engagement partner. The manager's key responsibilities will be to manage the services
provided to the entity, and to ensure that the audit is conducted efficiently and effectively. The
specific responsibilities at each stage include:
2.5.14 Planning:
Initial discussion with the partner.
Planning the detailed audit work, concentrating on:
• Changes in the entity’s business.
• Likely problems, including points brought forward from last year.
• Critical audit areas including the audit risks identified for each audit area including
the risk of error or fraud; results of analytical procedures; and assessment of the
control environment and internal controls.
• Levels of materiality.
• Informing the senior of all factors relevant to the audit.
Reviewing the time costs and expenses budget.
Organising and attending the pre-audit meeting with the entity.
To develop the audit strategy and the audit plan for partner approval taking into
consideration the risk and proposed response to identified risks, audit materiality,
analytical procedures, budgets and the audit programmes.
Briefing the engagement team.
2.5.15 Execution:
Monitoring the progress of the audit, including progress against the audit plan and
performance of the engagement team.
Approving any changes to the audit plan and programmes after consultation with the
engagement partner.
Keeping the engagement partner abreast of the progress of the audit, and of any
important issues arising.
2.5.16 Review:
Reviewing the financial statements in detail to ensure that they comply with the financial
reporting framework as to both recognition and measurement and presentation and
disclosure, and that the significant assumptions made by the management are
appropriate to the entity.
Assessing the results of the analytical procedures adopted at the planning, execution and
review stages.
Reviewing any adjusting journal entries made in the accounting records.
Ensuring key issues have been satisfactorily treated.
Ensuring the audit file contains sufficient and appropriate audit evidence to support the
audit opinion.
Reviewing and editing the points for partner’s attention, management letter, letter of
representation, audit time summary schedule and the proposed fee.
Reviewing the senior's working papers, and ensuring the senior has satisfactorily
reviewed the assistants' working papers.
Ensuring all review points have been satisfactorily cleared.
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2.5.17 Senior (or equivalent)
2.5.18 The senior has an overall responsibility for ensuring that the objectives set by the
engagement partner and manager are attained and to carry out the audit in accordance with
the audit plan and programmes. The senior's key responsibilities will be to deal with the
entity's affairs on a day-to-day basis, and to ensure that the audit work is carried out
thoroughly and completed within budgets and deadlines. The specific responsibilities include:
2.5.19 Planning:
Assisting the manager in drafting the audit plan and programmes.
Preparing the time costs and expenses budgets.
Briefing assistants.
2.5.20 Fieldwork:
Completing the work in accordance with the timetable and budgets.
Allocating work to and controlling the work of assistants.
Providing on-the-job training to assistants.
Keeping the manager informed of any problems which arise (whether technical or
administrative or with personnel).
Implementing any changes to the audit plan and programmes, after discussion with the
manager.
Ensuring that all the conclusions are supported by the work done and the audit evidence
obtained is sufficient and appropriate to support the audit conclusion.
Noting any evidence necessary to support suggestions and recommendations to be
included in the management letter.
2.5.21 Review:
Reviewing the financial statements for compliance with local legislation and with the
financial reporting framework using, where necessary, appropriate checklists.
Drafting the points for partner’s attention.
Preparing summary of outstanding issues and summary of unadjusted errors.
Noting any points to be carried forward to the subsequent audit.
Drafting the management letter.
Drafting the letter of representation.
Completing other tasks as required.
Reviewing the work of assistants.
Ensuring that all review points are cleared and all evidence obtained is satisfactory.
2.5.22 Assistant (or equivalent)
2.5.23 The assistant is primarily responsible for performing the procedures delegated by the
senior. The specific responsibilities of an assistant include:
Carrying out tasks in specific areas.
Informing the senior promptly of any problems experienced or discrepancies found.
Providing explanations, on-the-job training and appraisals to assistants with less
experience.
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3. DOCUMENTATION INCLUDING AUDIT FILES AND WORKING PAPERS
(INCORPORATING ISA 230)
3.1. Types of audit files
3.1.1 An audit file is one or more folders or other storage media, in physical or electronic form,
containing the records that comprise the audit documentation for a specific engagement.
3.1.2 The purpose of this chapter is to explain how typical audit files may be structured and what
they may contain. Depending on the size of the assignment two types of files might be
maintained, one a current audit file ("CAF") and the other a permanent audit file (“PAF”).
3.1.3 The distinction between the two files is as follows:
CAF - contains information and audit evidence relating to the accounting period currently
under review, the purpose of which is to support the opinions and statements made in
the audit report.
PAF - contains information of continuing importance which may be updated at each audit.
Such information could be useful background; other information would include terms of
engagement, internal control and accounting systems notes, and other documents of
historical record e.g. copies of leases and copies of financial statements for prior years.
Form 5.16 – If relevant a permanent audit file review checklist should be updated at each
audit to ensure that the file has been updated with current information.
3.2. Layout of audit files
3.2.1 All files should follow a standard numerical and alphabetical sequence. This degree of
standardisation of layout is desirable from the points of view of efficiency and minimising risk. If
maintained in physical form, the use of hard section dividers or coloured paper dividers should
be used to clearly distinguish the file sections. Individual working papers should be numbered
and filed logically within a common framework.
3.2.2 The suggested current audit file index is set out as Form 0.00 in Part I of the Manual, while
the permanent audit file index is set out as Form 465 in Part I of the Manual.
3.2.3 Part I of the manual: Audit file contents provides standard formats for working papers,
checklists and audit programmes as a basis for preparing documents to be used in the conduct
of an audit.
3.3. Working papers contents
3.3.0.1 The objective of the auditor is to prepare documentation that provides:
A sufficient and appropriate record of the basis for the audit report; and
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Evidence that the audit was planned and performed in accordance with ISAs and
applicable legal and regulatory requirements.
3.3.0.2 ISA 230 Audit Documentation requires the auditor to prepare audit documentation on a
timely basis. Documentation prepared after the audit work has been performed is likely to be
less accurate than documentation prepared at the time such work was performed.
3.3.0.3 ISA 230 also requires that the audit documentation is sufficient to enable an
experienced auditor, having no previous connection with the audit, to understand:
The nature, timing and extent of the audit procedures performed to comply with the ISAs
and applicable legal and regulatory requirements:
The results of the audit procedures performed and the audit evidence obtained; and
Significant matters arising during the audit, the conclusions reached thereon, and
significant professional judgements made in reaching those conclusions.
3.3.0.4 The form, content and extent of audit documentation depend on factors such as:
The size and complexity of the entity.
The nature of the audit procedures to be performed.
The identified risks of material misstatement.
The significance of the audit evidence obtained.
The nature and extent of exceptions identified.
The need to document a conclusion or the basis for a conclusion not readily determinable
from the documentation of the work performed or audit evidence obtained.
The audit methodology and tools used.
3.3.0.5 In documenting the nature, timing and extent of the audit procedures performed, the
auditor should record:
The identifying characteristics of the specific items or matters raised;
Who performed the audit work and the date such work was completed; and
Who reviewed the audit work performed and the date and extent of such review.
3.3.0.6 The auditor shall document discussions of significant matters with management and
those charged with governance and others, to include the nature of the significant matters
discussed and when and with whom the discussions took place.
3.3.0.7 If the auditor identifies information that is inconsistent with the auditor’s final conclusion
regarding a significant matter, the auditor shall document how the inconsistency was
addressed.
3.3.0.8 The auditor shall also document any departure from a relevant requirement in an ISA,
the reasons therefore, and explain how the alternative procedures performed achieve the aim
of that requirement
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3.3.0.9 Superseded drafts of working papers and financial statements, notes that reflect
incomplete or preliminary thinking, previous copies of documents corrected for typographical or
other errors, and duplicates of documents can be excluded from the audit documentation.
3.3.0.10 When exceptional circumstances arise after the date of the auditor’s report that
require the engagement team to perform new or additional audit procedures or that lead the
engagement team to reach new conclusions, the engagement team should document as part
of the working papers:
The circumstances encountered;
The new or additional audit procedures performed, audit evidence obtained, and
conclusions reached and their effect on the auditor’s report; and
When and by whom the resulting changes to audit documentation were made, and (where
applicable) reviewed.
3.3.0.11 Such exceptional circumstances include the discovery of facts regarding the audited
financial information that existed at the date of the auditor’s report that might have affected the
auditor’s report had the auditor then been aware of them.
3.3.1. Nature of audit documentation
3.3.1.1 The form, content and extent of audit documentation depend on factors such as:
The size and complexity of the entity;
The nature of the audit procedures to be performed;
The identified risks of material misstatement;
The significance of the audit evidence obtained;
The nature and extent of exceptions identified; and
The need to document a conclusion or the basis for a conclusion not readily determinable
from the documentation of the work performed or audit evidence obtained.
The audit methodology and tools used.
3.3.1.2 Audit documentation may be recorded on paper or on electronic or other media.
Examples of audit documentation include:
Audit programs;
Analyses;
Issues memoranda;
Summaries of significant matters;
Letters of confirmation and representation;
Checklists; and
Correspondence (including e-mail) concerning significant matters.
3.3.1.3 The auditor may include abstracts or copies of the entity’s records (for example,
significant and specific contracts and agreements) as part of audit documentation. Audit
documentation, however, is not a substitute for the entity’s accounting records.
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3.3.1.4 The use of standardised working papers e.g. checklists, specimen letters and working
papers can improve the efficiency with which working papers are prepared and reviewed. They
facilitate the delegation of work while providing a means to control quality.
3.3.2. Form of audit documentation
3.3.2.1 Audit documentation may be recorded on paper or on electronic or other media.
Examples of audit documentation include:
Audit programs;
Analyses;
Issues memoranda;
Summaries of significant matters;
Letters of confirmation and representation;
Checklists; and
Correspondence (including e-mail) concerning significant matters.
3.3.2.2 The auditor may include abstracts or copies of the entity’s records (for example,
significant and specific contracts and agreements) as part of audit documentation. Audit
documentation, however, is not a substitute for the entity’s
accounting records.
3.3.2.3 Preparation of working papers
3.3.2.4 The objective of this section is to guide the engagement team on the presentation of
working papers.
3.3.2.5 All working papers should be clean, neat and legible. To ensure that working papers are
easily identifiable, they should clearly contain the:
Client's name;
Subject matter;
Accounting period;
Preparer's initials and the date prepared;
Reviewer's initials and the date reviewed; and
Schedule reference (within a sequential indexing system).
3.3.2.6 The table of contents for both the Current and Permanent Audit Files should be updated
by cancelling sections not containing working papers. If this is not done, papers may be thought
to be missing in sections not cancelled.
3.3.2.7 A lead schedule should be prepared for each audit section which agrees with the figure
or note in the financial statements. The schedule should include comparative figures; an overall
conclusion for the section, if this is not given elsewhere; and should be cross-referenced to
supporting schedules. Lead schedules must be updated to reflect audit adjustments to the client
draft financial statements.
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3.3.2.8 For each test of transaction and balance carried out, the audit schedule may normally
contain, where relevant:
The objective of the test
The work done
The method of determining any sample size and the method of selecting the sample
The source of information (if this is not evident from the work performed)
Audit ticks or symbols used and their explanation
Cross references to other supporting schedules
Results of the test
An evaluation of errors cross referenced to the Summary of Unadjusted Errors
Evaluation and reasons for any judgements made and the adequacy of the disclosure in the
financial statements
The conclusions drawn from results of the test
Recommendations or points carried forward, if any.
3.3.2.9 The above requirements can be regarded as satisfied if some of the information is
summarised or recorded elsewhere and can easily be found by the reviewer.
3.3.2.10 As part of the planning process consideration should be given as to what
documentation should be prepared by the client. Such material should be marked as “Prepared
by Client”, together with the date obtained.
3.3.2.11 File notes should be prepared of all telephone and other conversations with clients or
with third parties which provide audit evidence. The notes should record the entity’s name and
date of conversation, the persons involved, the matters discussed and any conclusions reached
or action agreed. The note should be filed in the audit file, and if appropriate, a copy sent to the
other party to confirm the accuracy.
3.3.2.12 The audit documentation for the audit of a smaller entity is generally less extensive
than that for the audit of a larger entity. Further, in the case of an audit where the engagement
partner performs all the audit work, the documentation will not include matters that might have
to be documented solely to inform or instruct members of an engagement team, or to provide
evidence of review by other members of the team (for example, there will be no matters to
document relating to team discussions or supervision). Nevertheless, the engagement partner
complies with the overriding requirement in paragraph 8 of ISA 230 to prepare audit
documentation that can be understood by an experienced auditor, as the audit documentation
may be subject to review by external parties for regulatory or other purposes.
3.3.2.13 When preparing audit documentation, the auditor of a smaller entity may also find it
helpful and efficient to record various aspects of the audit together in a single document, with
cross-references to supporting working papers as appropriate. Examples of matters that may
be documented together in the audit of a smaller entity include the understanding of the entity
and its internal control, the overall audit strategy and audit plan, materiality determined in
accordance with ISA 320, assessed risks, significant matters noted during the audit, and
conclusions reached.
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3.4. Ownership, safe custody and retention of working papers and files
3.4.1 The firm shall establish policies and procedures designed to maintain the
confidentiality, safe custody, integrity, accessibility and retrievability of engagement
documentation.
3.4.2 Care should be taken to safeguard working papers and working paper files. When working
at a client’s premises, wherever possible, files should not be left at the premises overnight. If
they have to be left overnight, they must be stored securely under lock.
3.4.3 ISA 230 requires the auditor to adopt appropriate procedures for maintaining the
confidentiality and safe custody of the working papers and for retaining them for a period to
meet the needs of the practice and in accordance with the legal and professional requirements
of record retention.
3.4.4 The working papers are the property of the auditor. The engagement team should
maintain strict confidentiality of the information obtained during the course of the audit. In
certain cases, the working papers may have to be availed to third parties where required by
law or for quality control reviews. To protect the firm, the instances where the papers may have
to be made available to third parties must be notified to the client in the engagement letter.
3.5. Assembly of the final audit file
3.5.1 The auditor shall assemble the audit documentation in an audit file and complete the
administrative process of assembling the final audit file (this does not involve the performance
of new audit procedures or the drawing of new conclusions) on a timely basis after the date of
the auditor’s report. (Refer to firm’s ISQC1 document for policy here, e.g. 6.20 of the HLB
ISQC manual)
After the assembly of the audit file has been completed, the auditor shall not delete or discard
audit documentation of any nature before the end of its retention period.
The auditor shall, regardless of the nature of modifications or additions, document the reasons
for making them and when and by whom they were made and reviewed.
3.5.2 There is a permanent audit file review checklist in part I –465
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4. QUALITY CONTROL IN RELATION TO AUDIT ENGAGEMENTS (INCORPORATING
ISQC 1, ISA 220 and COE)
4.1. Objectives – firm quality control
4.1.1 Quality control systems, including policies and procedures, are the responsibility of
the audit firm. Under ISQC 1, the firm has an obligation to establish and maintain a system
of quality control to provide it with reasonable assurance that:
The firm and its personnel comply with professional standards and applicable legal and
regulatory requirements; and
The reports issued by the firm or engagement partners are appropriate in the
circumstances.
4.2. Objectives – quality control for assurance engagements
4.2.1 The objective of the auditor is to implement quality control procedures at the
engagement level that provide the auditor with reasonable assurance that:
The audit complies with professional standards and applicable legal and regulatory
requirements; and
The auditor’s report issued is appropriate in the circumstances.
4.2.2 Within the context of the firm’s system of quality control, audit engagement teams
have a responsibility to implement quality control procedures that are applicable to the audit
engagement and provide the firm with relevant information to enable the functioning of that
part of the firm’s system of quality control relating to independence.
4.2.3 Engagement teams are entitled to rely on the firm’s system of quality control, unless
information provided by the firm or other parties suggests otherwise.
4.3. Quality control
4.3.1 The firm should ensure that it fully complies with the quality control requirements as
stipulated in ISQC 1. Each partner and each of the firm’s personnel has a personal
responsibility for quality and is expected to comply with the firm’s requirements in respect to
quality as stipulated in this Manual and other Polices and Procedures promulgated by the
Board of Partners or similar group who have the ultimate responsibility for the firm’s quality
control.
4.4. Leadership
4.4.1 The engagement partner shall take responsibility for the overall quality on each audit
engagement to which that partner is assigned.
4.5. Ethical requirements for audit engagements
4.5.1 In accordance with ISQC 1 and ISA 220, the policies and procedures in this Chapter
are designed to provide the firm with reasonable assurance that the firm and its personnel
comply with relevant ethical requirements.
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4.5.2 Throughout the engagement, the engagement partner shall remain alert, through
observation and making enquiries as necessary, for evidence of non-compliance with
relevant ethical requirements by members of the engagement team. If matters come to the
engagement partner’s attention through the firm’s system of quality control or otherwise
that members of the engagement team have not complied with relevant ethical
requirements, the engagement partner, in consultation with others in the firm, shall
determine the appropriate course of action.
4.6. Fundamental principles
4.6.1 Part A and Part B of the COE establish fundamental principles which are required to
be followed by the firm and include:
Integrity;
Objectivity;
Professional competence and due care;
Confidentiality; and
Professional behaviour.
4.7. Integrity and objectivity
4.7.1 Integrity implies not merely being straightforward and honest but also fair dealing and
truthfulness.
4.7.2 The principle of objectivity imposes an obligation on all professional accountants not
to allow bias, conflict of interest or the undue influence of others to override professional or
business judgements This includes a requirement that an auditor must be independent of
an assurance client. While it is not possible to identify all potential cases of conflict of
interest, partners and staff should be constantly conscious of and be alert to factors which
give rise to such conflicts. The following are some of the situations which may impair
objectivity:
Undue pressure exerted by the client or an overbearing supervisor or partner.
Relationships, including family and personal, which allow prejudice, bias or influence
should be avoided. Reasonableness should prevail in establishing relationships that
could impair objectivity.
Accepting or offering gifts which might have a significant or improper influence on
professional judgement or which bring the profession into disrepute.
Being asked to act contrary to a technical and / or a professional standard.
Divided loyalty between the professional accountant’s superior and a professional
standard.
4.8. Professional Competence
4.8.1 The firm or its personnel should not portray themselves as having expertise or
experience unless they possess the necessary professional competence. Professional
competence imposes an obligation to maintain professional knowledge and skill at the level
required to ensure that clients receive competent professional service and to act diligently
in accordance with applicable technical and professional standards when providing
professional services. The engagement partner should ensure that all those working under
his authority have appropriate training and supervision.
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4.9. Confidentiality
4.9.1 Partners and staff of the firm have a duty to maintain confidentiality on all information
obtained during the course of professional and business relationships and, therefore,
refrain from disclosing any such information to third parties without proper and specific
authority or unless there is a legal or professional right or duty to disclose and refraining
from using confidential information acquired for personal advantage or for the advantage of
a third party. The duty continues even after the end of a professional relationship with the
client or with the employer who services the client. It also applies to prospective clients. In
certain cases, the working papers may have to be availed to third parties where required by
law or if there is a professional duty e.g. for quality control and peer reviews. To protect the
firm, the instances where the working papers may be availed to third parties must be
agreed with the client. It is the duty of the firm to ensure that staff and persons who form
part of the engagement or from whom professional advice is obtained also respect the
principle of confidentiality.
4.9.2 A professional accountant should maintain confidentiality even in a social
environment. The professional accountant should be alert to the possibility of inadvertent
disclosure, particularly in circumstances involving long association with a business
associate or a close or immediate family member.
4.9.3 Where required to disclose confidential information, the following points should be
considered:
Whether all the relevant facts are known and substantiated to the extent that it is
practical to do so. When the situation involves unsubstantiated facts, incomplete
information or unsubstantiated conclusions, professional judgement shall be used in
determining the type of disclosure to be made;
The type of communication expected and the addressee. In particular, one should be
satisfied that the parties to whom the communication is to be addressed to are
appropriate recipients and have the responsibility to act on it; and
Whether any legal liability would be incurred and the consequences thereof. In all
cases, it is important to consult legal counsel and / or the professional accounting body
one is a member of.
4.10. Professional behaviour
4.10.1 Partners and staff should comply with relevant laws and regulations and refrain from
acts that discredit the profession. This includes actions that a reasonable and informed third
party, weighing all the specific facts and circumstances available to the professional
accountant at that time, would be likely to conclude adversely affects the good reputation of
the profession.
4.11. Ethical conflicts
4.11.1 Where ethical conflicts arise, the following should be considered:
Review the conflict with an immediate superior. If this does not resolve the issue, then
go to the next higher level. Where the superior is involved in the conflict, then one
should go to the next higher level.
Seek counselling on a confidential basis with an independent adviser, HLBI or the
professional accounting bodies they are members of.
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If the significant ethical conflict still exists, one should consider resigning from the
position and submit the appropriate details to an appropriate representative of the
organisation. One could also consider reporting the issue to the professional
accounting body which one is a member of.
4.12. Threats to compliance with the fundamental principles
4.12.1 Whilst it is not possible to list all potential threats to compliance with the
Fundamental principles of ethics, the occurrence of the following instances may affect
compliance:
4.12.2 Self-interest threat – the threat that a financial or other interest will inappropriately
influence the firm’s or engagement team’s judgement or behaviour. These include:
Direct financial interest or a material indirect financial interest;
Loan or guarantee from the client or any of its directors of officers;
Undue dependence on total fees from a client or a group;
Concerns about the possibility of losing the engagement;
Close business relationship with the client;
Potential employment with the client;
Contingency fees relating to assurance assignments; and
Discovering a significant error when evaluating the results of a previous professional
service performed the firm.
4.12.3 Self-review threat - the threat that the firm or engagement team will not appropriately
evaluate the results of a previous judgement made or a service performed by the
professional accountant, or by another individual within the firm or network on which the
engagement partner will rely when forming a judgement as part of providing an assurance
service.
4.12.4 Advocacy threat which occurs when a firm or a member of the engagement team
promotes or may be perceived to promote the client’s position or opinion to the point that
objectivity may or perceived to be compromised. This may occur where the firm or member
of the engagement team promotes the debt or equity securities of the client or acts as an
advocate on behalf of the client in a litigation or dispute resolution with third parties.
4.12.5 Familiarity threat which occurs when, by virtue of a close relationship with the client,
it’s directors, officers or employees, the firm or a member of the engagement team
becomes too sympathetic to the client’s interest or too accepting of their work. Such threats
could occur where:
An immediate family member of a person on the engagement team is an employee of
the client with the ability to exert significant influence on an engagement related matter,
or is a director or an officer of the assurance client;
A former partner of the firm is an employee of the client with the ability to exert
significant influence on an engagement related matter, or is a director or an officer of
the assurance client;
There is a long association of a senior member of the engagement team with the client;
or
The firm or any member of the engagement team accepts a gift from the client, its
directors, officers or employees whose value is significant.
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4.12.6 Intimidation threat which occurs when a member of the engagement team may be
deterred from acting objectively and exercising professional scepticism by threats, actual or
perceived, from the directors, officers or employees of the client, including attempts to exert
undue influence. Such threats could include:
Threats over replacement over a disagreement with the application of an accounting
principle; or
Pressures to reduce inappropriately the scope of work or the fees.
4.13. Safeguards
4.13.1 The following safeguards should be put in place to eliminate threats or reduce them
to an acceptable level. The nature of the safeguard applied will vary depending on the
individual circumstances. Consideration should always be given to what a reasonable and
informed third party having knowledge of all the relevant information, including safeguards
applied, would reasonably conclude to be unacceptable threats to independence. All
decisions should be documented. Safeguards fall into three broad categories:
Safeguards created by the profession, legislation or regulation; and
Safeguards in the work environment.
4.13.2 Safeguards created by the profession, legislation or regulations include:
Education, training and experience requirements for entry into the profession;
Continuing professional development requirements;
Corporate governance regulations;
Adherence to professional standards;
Professional or regulatory monitoring and disciplinary procedures;
External review of the firm’s quality control systems by a legally empowered third party
of the reports, returns, communications or information produced by a professional
accountant; and
Adherence to legislation governing the independence requirements of the firm.
4.13.3 Safeguards in the work environment include firm-wide safeguards, such as:
Leadership of the firm that stresses the importance of compliance with the fundamental
principles;
Leadership of the firm that establishes the expectation that members of an assurance
team will act in the public interest;
Policies and procedures to implement and monitor quality control of engagements.
Documented policies regarding the need to identify threats to compliance with the
fundamental principles, evaluate the significance of those threats, and apply
safeguards to eliminate or reduce the threats to an acceptable level or, when
appropriate safeguards are not available or cannot be applied, terminate or decline the
relevant engagement;
Documented internal policies and procedures requiring compliance with the
fundamental principles;
Policies and procedures that will enable the identification of interests or relationships
between the firm or members of engagement teams and clients;
Policies and procedures to monitor and, if necessary, manage the reliance on revenue
received from a single client;
Using different partners and engagement teams with separate reporting lines for the
provision of non-assurance services to an assurance client;
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Policies and procedures to prohibit individuals who are not members of an engagement
team from inappropriately influencing the outcome of the engagement;
Timely communication of a firm’s policies and procedures, including any changes to
them, to all partners and professional staff, and appropriate training and education on
such policies and procedures;
Designating a member of senior management to be responsible for overseeing the
adequate functioning of the firm’s quality control system;
Advising partners and professional staff of assurance clients and related entities from
which independence is required;
A disciplinary mechanism to promote compliance with policies and procedures; and
Published policies and procedures to encourage and empower staff to communicate to
senior levels within the firm any issue relating to compliance with the fundamental
principles that concern them
4.13.4 Safeguards in the work environment include engagement-specific safeguards, such
as:
Having a professional accountant who was not a member of the assurance team review
the assurance work performed or otherwise advise as necessary.
Consulting an independent third party, such as a committee of independent directors, a
professional regulatory body or another professional accountant.
Discussing ethical issues with those charged with governance of the client.
Disclosing to those charged with governance of the client the nature of services
provided and extent of fees charged.
Involving another firm to perform or re-perform part of the engagement.
Rotating senior assurance team personnel.
4.13.5 Safeguards within the client’s systems and procedures - Depending on the nature of
the engagement, a professional accountant in public practice may also be able to rely on
safeguards that the client has implemented. However it is not possible to rely solely on
such safeguards to reduce threats to an acceptable level.
4.13.6 Examples of safeguards within the client’s systems and procedures include:
The client requires persons other than management to ratify or approve the
appointment of a firm to perform an engagement;
The client has competent employees with experience and seniority to make managerial
decisions;
The client has implemented internal procedures that ensure objective choices in
commissioning non-assurance engagements; and
The client has a corporate governance structure that provides appropriate oversight and
communications regarding the firm’s services.
4.14. Independence
4.14.1 Independence requires:
Independence of mind that permits the provision of an opinion without being affected by
influences that compromise professional judgement, allowing an individual to act with
integrity, and exercise objectivity and professional scepticism; and
Independence in appearance which involves the avoidance of facts and circumstances
that are so significant that a reasonable and informed third party, having knowledge of
all relevant information, would reasonably conclude that the firm’s or a member of the
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engagement team’s integrity, objectivity or professional scepticism have been
compromised.
4.14.2 In the case of assurance engagements it is in the public interest, and therefore,
required by the Code of Ethics, that members of assurance teams, firms and network firms
be independent of assurance clients.
4.14.3 The engagement partner shall form a conclusion on compliance with independence
requirements that apply to the audit engagement. In doing so, the engagement partner
shall:
Obtain relevant information from the firm and, where applicable, network firms, to
identify and evaluate circumstances and relationships that create threats to
independence;
Evaluate information on identified breaches, if any, of the firm’s independence policies
and procedures to determine whether they create a threat to independence for the
audit engagement;
Take appropriate action to eliminate such threats or reduce them to an acceptable
level by applying safeguards, or, if considered appropriate, to withdraw from the audit
engagement, where withdrawal is possible under applicable law or regulation. The
engagement partner shall promptly report to the firm any inability to resolve the matter
for appropriate action; and
Document issues that were identified and how they were resolved.
4.15. Annual independence declaration
4.15.1 At least annually, the firm will obtain written confirmation from its personnel that they
have complied with the independence requirements. A specimen Independence
confirmation is set out in Appendix 1 of this chapter.
4.16. Familiarity threat and rotation of engagement partner
4.16.1 Long association with an audit client may create a familiarity threat.
4.16.2 The firm will apply measures to ensure compliance with the ethical principles in
relation to the threat of long association.
4.16.3 Such measures may include:
Rotation of the engagement partner and senior members of the engagement team;
Requiring an engagement quality control review by an appropriate person; or
Requiring another form of review of the engagement prior to its completion by an
additional professional accountant who is not a member of the engagement team
4.16.4 When considering the existence of a familiarity threat, the firm will take into account
factors such as:
The length of time that the individual member has been a member of the assurance
team;
The role of the person on the team;
The structure of the firm; and
The nature of the assurance engagement.
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4.16.5 The key audit partners of listed entities will be rotated after a period of seven years,
in accordance with the COE, or such shorter period as required by legislation. Moreover, an
outgoing partner will not participate in the audit engagement until a period of at least two
years has elapsed from the date of rotation.
4.16.6 The key audit partner is defined by the COE as the engagement partner, the
individual responsible for the engagement quality control review, and other audit partners, if
any, on the engagement team who make key decisions or judgments on significant matters
with respect to the audit of the financial statements on which the firm will express an
opinion. Depending upon the circumstances and the role of the individuals on the audit,
“other audit partners” may include, for example, audit partners responsible for significant
subsidiaries or divisions.
4.16.7 The engagement partner on the following audits shall be rotated at least once every
seven years:
All audits of companies whose equity and debt securities are listed on a securities
exchange;
All companies which offer to the public investment and savings products including
insurance products, mutual funds, collective investment schemes, hedge funds,
options, medical covers and micro-finance schemes which have a savings element;
All engagements of public interest entities. This would include audits of clients in
banks, insurance companies, co-operative societies including savings and credit
cooperative organisations and associations which are of public nature and whose
membership is open to the public; and
Engagements or classes of engagements which display unusual circumstances or
risk. This could include sectors facing an economic downturn.
4.16.8 In the case of sole proprietors or small audit firms where the rotation of the
engagement partner may not be possible and there is no limit set by legal or professional
requirements, the firm should consider engaging the services of a suitable external person
to review the engagement to reduce the familiarity threat to an acceptable level.
4.16.9 Any persons rotated from an engagement should not participate in the engagement
for at least two years from the date of rotation.
4.17. Acceptance and continuance of client relationships and audit engagements
4.17.1 The firm’s quality control manual includes policies and procedures in relation to
acceptance and continuance of client relationships and audit engagements. These include
policies and procedures on:
New clients and new engagements for existing clients;
Continuing engagements;
Withdrawal form engagements; and
Engagement letters.
4.17.2 These policies require the audit engagement partner to be satisfied that appropriate
procedures in relation to acceptance and continuance of client relationships and audit
engagements have been followed, and that conclusions reached in this regard are
appropriate.
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4.18. Assignment of engagement teams
4.18.1 The engagement partner shall be satisfied that the engagement team, and any
auditor’s experts who are not part of the engagement team, collectively have the
appropriate competence and capabilities to:
Perform the audit engagement in accordance with professional standards and
applicable legal and regulatory requirements; and
Enable an auditor’s report that is appropriate in the circumstances to be issued.
4.19. Engagement Performance
4.19.1 Direction
The engagement partner takes responsibility for the direction of the engagement. This
involves informing the members of the engagement team of matters such as:
Their responsibilities, including the need to comply with relevant ethical requirements,
and to plan and perform an audit with professional scepticism;
Responsibilities of respective partners where more than one partner is involved in the
conduct of an audit engagement;
The objectives of the work to be performed;
The nature of the entity’s business;
Risk-related issues;
Problems that may arise; and
The detailed approach to the performance of the engagement.
4.19.2 Supervision
The engagement partner takes responsibility for supervision of the engagement.
Supervision includes:
Tracking the progress of the audit engagement;
Considering the competence and capabilities of individual members of the
engagement team, including whether they have sufficient time to carry out their work,
whether they understand their instructions and whether the work is being carried out
in accordance with the planned approach to the audit engagement;
Addressing significant matters arising during the audit engagement, considering their
significance and modifying the planned approach appropriately; and
Identifying matters for consultation or consideration by more experienced engagement
team members during the audit engagement.
4.19.3 Review
The engagement partner takes responsibility for reviews being performed.
The work of less experienced team members is reviewed by more experienced team
members. A review consists of consideration whether, for example:
The work has been performed in accordance with professional standards and
applicable legal and regulatory requirements;
Significant matters have been raised for further consideration;
Appropriate consultations have taken place and the resulting conclusions have been
documented and implemented;
There is a need to revise the nature, timing and extent of work performed;
The work performed supports the conclusions reached and is appropriately
documented;
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The evidence obtained is sufficient and appropriate to support the auditor’s report;
and
The objectives of the engagement procedures have been achieved.
4.19.4 Before signing a report on an engagement, the engagement partner shall, through a
review of the audit documentation and discussion with the engagement team, be satisfied
that sufficient appropriate audit evidence has been obtained to support the conclusions
reached and for the auditor’s report to be issued.
4.19.5 The engagement partner’s review responsibilities include review of the following:
Critical areas of judgment, especially those relating to difficult or contentious matters
identified during the course of the engagement;
Significant risks; and
Other areas the engagement partner considers important.
4.19.6 The engagement partner need not review all audit documentation, but may do so.
However, as required by ISA 230, the partner documents the extent and timing of the
reviews.
4.19.7 Consultation
The engagement partner shall:
Take responsibility for the engagement team undertaking appropriate consultation on
difficult or contentious matters;
Be satisfied that members of the engagement team have undertaken appropriate
consultation during the course of the engagement, both within the engagement team
and between the engagement team and others at the appropriate level within or
outside the firm;
Be satisfied that the nature and scope of, and conclusions resulting from, such
consultations are agreed with the party consulted; and
Determine that conclusions resulting from such consultations have been implemented.
4.19.8 Consultations could also be undertaken where there are issues on client acceptance
and continuation considerations. Such consultations, through the use of collective
experience and the technical expertise of the team, help to promote quality and improve the
application of professional judgement. Consultations should be recognised as a strength
and a key component of quality control and reduction of audit risk.
4.19.9 When consultation is sought, those consulted must:
Be given all the relevant facts that will enable them to provide informed advice; and
Have appropriate knowledge, seniority and experience.
4.19.10 Consultations should be obtained from individuals within or outside the firm who
have the specialised expertise to resolve such difficult or contentious matters. Effective
consultation requires that those consulted be given all the relevant facts that will enable
them to provide advice on technical, ethical or other matters.
4.19.11 Consultations should be undertaken with a person at the next highest level of
authority following the procedures below:
Differences between members of the staff should be referred to the engagement
manager;
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Differences between members of the staff and the engagement manager should be
referred to the engagement partner.;
Differences between a manager and the engagement partner should be referred to
the head of audit in the engagement office or technical partner, where one exists; and
Differences between the engagement partner and head of audit in the engagement
office/ technical partner should be referred to:
• the firm’s technical department;
• the HLB International help desk; or
• a suitably qualified external person, who may be within the HLBI network.
4.19.12 If after consultation the matter remains unresolved, the technical or senior partner
will convene a meeting of audit partners to determine the firm’s view on the matter.
4.19.13 As a matter of courtesy, it may be appropriate to inform the managing partner of
the office of existence of the difference of opinion and the action being taken to resolve it,
especially if this is between two partners.
4.19.14 Each member of the firm should feel completely free to request a higher level of
authority to review a difference of professional opinion.
4.19.15 It is neither possible nor desirable to prescribe detailed procedures to cover every
difference of opinion which may be encountered in the firm. If a situation occurs which is
related to, but not expressly covered by, the above, it should be dealt with by giving effect
to the spirit of these guidelines.
4.19.16 Sole proprietors and small firms which may not have such expertise in-house
should develop relationships with other practitioners, network firms or other relevant bodies
that have the necessary experience and expertise to provide such consultations.
4.19.17 All consultations, including those obtained verbally, should be sufficiently
documented to enable an understanding of the issue on which the consultation was sought,
the results of the consultation, the decision taken and the basis of the decision, and how
they were implemented. It is also important to record who was consulted, and if necessary
on highly technical matters, the reason for selecting the person.
Part I of the Manual contains Form 320 - Consultations and Conclusions, which should be
used to record all consultations and the conclusions therefrom.
4.19.20 Engagement quality control review
ISA 220 defines an “Engagement quality control review” as follows:
“A process designed to provide an objective evaluation, on or before the date of
the auditor’s report, of the significant judgments the engagement team made and
the conclusions it reached in formulating the auditor’s report. The engagement
quality control review process is for audits of financial statements of listed entities
and those other audit engagements, if any, for which the firm has determined an
engagement quality control review is required.”
4.19.21 ISA 220 defines an “Engagement quality control reviewer” as follows: 11 of 43
“A partner, other person in the firm, suitably qualified external person, or a team
made up of such individuals, none of whom is part of the engagement team, with
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sufficient and appropriate experience and authority to objectively evaluate the
significant judgments the engagement team made and the conclusions it reached
in formulating the auditor’s report.”
4.19.22 The firm may require an engagement quality control review for high risk audits, and
audits of public interest entities.
4.19.23 The extent of the review will depend on the complexity of the engagement and the
risk that the audit report may not be appropriate in the circumstances. Where the
engagement quality control reviewer makes recommendations that the engagement partner
does not accept and the matter is not resolved to the reviewer’s satisfaction, the report
should not be issued until the matter is resolved, following the firm’s procedures for dealing
with differences of opinion. This could involve the use of an arbitrator who possesses the
relevant experience and has the independence to make appropriate recommendations.
Appointment of engagement quality control reviewers
4.19.24 In accordance with ISQC 1, the following polices and procedures will be adopted
by the firm covering the appointment of engagement quality control reviewers and
establishing their eligibility through defining the:
Technical qualifications, experience and the authority required to perform the role; and
The degree to which an engagement quality control reviewer can be consulted on an
engagement without compromising the reviewer’s objectivity.
4.19.25 On the aspect of technical qualification and experience, as a minimum, the person
should be a member of a recognised professional accounting body with sufficient and
appropriate experience in handling the type of engagements being undertaken by the firm.
4.19.26 On the aspect of authority, the reviewer should be sufficiently independent
reporting directly to the partner or the board of partners who have the ultimate responsibility
for the firm’s system of quality control. To ensure that the authority and objectivity of the
reviewer be maintained, the reviewer will not:
Be selected by the engagement partner;
Participate in the engagement;
Make decisions for the engagement team; and
Be subject to considerations that would threaten his objectivity.
4.19.27 In the case of sole proprietors and small firms, suitably qualified external persons
may be contracted to carry out the engagement quality control review or alternatively, the
group of firms may use each other to facilitate the reviews. In all such cases, it is important
to ensure that the authority of the reviewer is maintained. This is demonstrated by ensuring
that all the procedures in respect of the review are duly carried out, and that all the issues
arising out of the review are resolved to the satisfaction of the reviewer prior to the issue of
the audit report.
4.19.28 The engagement partner may consult the engagement quality control reviewer, but
such consultations should not compromise the reviewer’s eligibility to perform the review or
his objectivity. Where such consultations compromise the objectivity, another suitably
qualified person should be engaged to take on the role of the engagement quality control
reviewer or the person to be consulted. Situations which may lead to the engagement
quality control reviewer’s objectivity being compromised when consulted include:
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Where the unadjusted errors are individually or collectively material.
Which display unusual circumstances or risk.
Of companies which are required by law or regulations to undergo such reviews.
Where there are unresolved differences between the partner and other members of the
engagement team on fundamental matters, or engagements where the partner is going
to take a firm stand with the client on a particular accounting or disclosure issue or over
fees.
4.20. Responsibilities of the engagement partner
4.20.1 Where an engagement quality control review is required, the engagement partner
shall:
Determine that an engagement quality control reviewer has been appointed;
Discuss significant matters arising during the audit engagement, including those
identified during the engagement quality control review, with the engagement quality
control reviewer; and
Not date the auditor’s report until the completion of the engagement quality control
review.
4.21. Responsibilities of the engagement quality control reviewer
4.21.1 The engagement quality control reviewer shall perform an objective evaluation of the
significant judgments made by the engagement team, and the conclusions reached in
formulating the auditor’s report. This evaluation shall involve:
Discussion of significant matters with the engagement partner;
Review of the financial statements and the proposed auditor’s report;
Review of selected audit documentation relating to the significant judgments the
engagement team made and the conclusions it reached; and
Evaluation of the conclusions reached in formulating the auditor’s report and
consideration of whether the proposed auditor’s report is appropriate.
4.21.2 For audits of financial statements of listed entities, the engagement quality control
reviewer, on performing an engagement quality control review, shall also consider the
following:
The engagement team’s evaluation of the firm’s independence in relation to the audit
engagement;
Whether appropriate consultation has taken place on matters involving differences of
opinion or other difficult or contentious matters, and the conclusions arising from those
consultations; and
Whether audit documentation selected for review reflects the work performed in relation
to the significant judgments and supports the conclusions reached.
Part I of the manual contains form 392.2 - Engagement quality control review notes which
should be used by the engagement quality control reviewer to record all points arising from
the review and the clearance of the issues raised, while form 312 - Engagement quality
control review checklist provides areas which the Engagement Quality Control Reviewer is
required to cover during the review.
4.22. Differences of opinion
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