64891015-Audit-Manual.pdf - Australian Audit Manual and Toolkit 2010 Using Clarity Standards For Small and Medium Sized Entities Thomson

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Unformatted text preview: Australian Audit Manual and Toolkit 2010, Using Clarity Standards For Small and Medium Sized Entities Thomson Reuters (Professional) Australia Limited 100 Harris Street Pyrmont NSW 2009 Tel: (02) 8587 7000 Fax: (02) 8587 7100 [email protected] For all customer enquiries please ring 1300 304 195 (for calls within Australia only) INTERNATIONAL AGENTS & DISTRIBUTORS NORTH AMERICA Thomson Reuters Eagan United States of America ASIA PACIFIC Thomson Reuters Sydney Australia LATIN AMERICA Thomson Reuters São Paulo Brazil EUROPE Thomson Reuters London United Kingdom This book has been printed on paper certified by the Programme for the Endorsement of Forest Certification (PEFC). PEFC is committed to sustainable forest management through third party forest certification of responsibly managed forests. For more info: Australian Audit Manual and Toolkit 2010, Using Clarity Standards For Small and Medium Sized Entities Published in Sydney by Thomson Reuters (Professional) Australia Limited ABN 64 058 914 668 100 Harris Street, Pyrmont, NSW National Library of Australia Cataloguing-in-Publication entry Australian audit manual and toolkit 2010, using clarity standards : for small and medium sized entities / Institute of Chartered Accountants in Australia. 2nd ed. 9780864607003 (pbk) Auditing — Australia — Handbooks, manuals, etc. Small business — Australia — Auditing. Other Authors/Contributors: Institute of Chartered Accountants in Australia. 657.450994 Manual based on a final IFAC publication The Audit Manual component of the Australian Audit Manual and Toolkit 2010, Using Clarity Standards is based on the Guide to Using International Standards on Auditing in the Audits of Small-and Medium-sized Entities of the Small and Medium Practices Committee, published by the International Federation of Accountants (IFAC) in October 2010, and is used with the permission of IFAC. Copyright © October 2010 by the International Federation of Accountants (IFAC). All rights reserved. Permission is granted to make copies of this work provided that such copies are for use in academic classrooms or for personal use and are not sold or disseminated and provided that each copy bears the following credit line: ‘Copyright © October 2010 by the International Federation of Accountants (IFAC). All rights reserved. Used with permission of IFAC. Contact [email protected] for permission to reproduce, store or transmit this document. Otherwise, written permission from IFAC is required to reproduce, store or transmit, or to make other similar uses of, this document, except as permitted by law. Toolkit based on a final CICA publication The Audit Toolkit CD component of the Australian Audit Manual and Toolkit 2010, Using Clarity Standards, copyright © 2010 by the Canadian Institute of Accountants (CICA). All rights reserved. Permission is granted to make copies of the Audit Toolkit provided that such copies are for use in academic classrooms or for personal use and are not sold or disseminated and provided that each copy bears the following credit line: ‘Copyright © 2010 by the Canadian Institute of Chartered Accountants (CICA). All rights reserved. Used with permission of CICA. Contact [email protected] for permission to reproduce, store or transmit this document. Otherwise, written permission from CICA is required to reproduce, store or transmit, or to make other similar uses of this document, except as permitted by law. © The Institute of Chartered Accountants in Australia Commonwealth Copyright All Commonwealth data herein are reproduced by permission but do not purport to be the official or authorised versions. They are subject to Commonwealth of Australia copyright. The Copyright Act 1968 permits certain reproduction and publication of Commonwealth legislation. In particular, section 182A of the Act enables a complete copy to be made by or on behalf of a particular person. For reproduction or publication beyond that permitted by the Act, permission should be sought in writing. Requests should be addressed to Commonwealth Copyright Administration, Copyright Law Brand, Attorney-General’s Department, Robert Garran Offices, National Circuit, Barton ACT 2600, or posted at . v Foreword I am delighted to present the second edition of the Australian Audit Manual and Toolkit (the Manual) on behalf of the Institute of Chartered Accountants in Australia (the Institute). The Institute recognised the need for audit practitioners, particularly those who deal with small- to medium-sized entities (SMEs) to have access to reference materials that encapsulate all the requirements of the Australian Auditing Standards (ASAs). This edition builds upon the previous work and incorporates requirements of the Clarity auditing standards, providing an up-to-date guide to assist practitioners, academics and students. In October 2009 the Auditing and Assurance Standards Board (AUASB) completed the reissuing of the auditing and assurance standards, as a result of the International Auditing and Assurance Board’s (IAASB) decision to revise and update all its standards to present them in a clearer, more consistent format (known as the Clarity project). Practitioners using this book should be aware that the Clarity style standards contained in this Manual are applicable for financial reporting periods commencing on or after 1 January 2010. The Manual and Toolkit have been developed to promote consistent application of the standards and help audit practitioners conduct high quality, cost-effective audits of SMEs. We hope this Manual will provide the knowledge and tools needed to effectively apply the ASAs. The Institute gratefully acknowledges the International Federation of Accountants (IFAC) for its generous assistance with this project; members of the Institute’s Audit Advisory Committee for their invaluable feedback; and the Institute’s team which, with the assistance of external specialists, successfully ‘Australianised’ the content for our local audience and led the project to its successful conclusion. On behalf of the Institute, thank you to all for your generous time and contributions to this important initiative. Michael Spinks FCA President Institute of Chartered Accountants in Australia (2nd edition, October 2010) Request for comment This is the second version of the Manual. While we consider this Manual to be useful and of high quality, it can be improved and we are committed to updating it regularly to ensure it remains current. We welcome feedback. These comments will be used to assess the Manual’s usefulness and to improve it prior to publishing the next edition. In particular, we welcome views on: > How do you use the Manual? For example, do you use it as a basis for training and/or as a practical reference guide, or in some other way? > Do you consider the Manual to be sufficiently tailored to the audit of SMEs? > Do you find the Manual easy to navigate? If not, can you suggest how navigation can be improved? > In what other ways do you think the Manual can be made more useful? > Are you aware of any derivative products – such as training materials, forms, checklists, and programs – that have been developed based on the Manual? If so, please provide details. Please submit your comments to Andrew Stringer, Head of Audit at: Email: [email protected] Fax: +61 2 9262 1310 Mail: The Institute of Chartered Accountants in Australia 33 Erskine Street Sydney NSW 2001 Disclaimer This Manual is designed to assist practitioners in the implementation of the Australian Auditing Standards (ASAs) on the audit of small- and mediumsized entities, but is not intended to be a substitute for the ASAs themselves. Furthermore, a practitioner should utilise this Manual in light of their professional judgement and the facts and circumstances involved in each particular audit. The Institute disclaims any responsibility or liability that may occur, directly or indirectly, as a consequence of the use and application of this Manual. Table of contents vii Contents Foreword .......................................................................................................v Request for comment...................................................................................vi Disclaimer.......................................................................................................vi How to use the Manual .................................................................................xix Content and organisation ...............................................................................xx Glossary of terms ...........................................................................................xxii Acronyms used in the Manual ........................................................................xxiv Clarified ASAs ..............................................................................................xxvi ASA index and cross-references ...................................................................xxviii The audit process...........................................................................................xxxiii Part A 1. The risk-based audit – overview ..............................................................3 1.1 Overview...................................................................................................4 1.2 Audit risk...................................................................................................7 1.3 How to perform a risk-based audit ..........................................................10 1.4 Documentation .........................................................................................17 1.5 Benefits of the risk-based audit................................................................18 1.6 ASAs for smaller audits ............................................................................18 2. Ethics, ASAs and quality control ............................................................23 2.1 Overview...................................................................................................25 2.2 Quality control systems ............................................................................27 2.3 The control environment ...........................................................................28 2.4 Firm risk assessment ................................................................................30 2.5 Information systems ................................................................................33 viii Australian Audit Manual and Toolkit 2010, Using Clarity Standards 2.6 Control activities .......................................................................................34 2.7 Monitoring.................................................................................................36 2.8 Compliance with relevant ASAs ...............................................................37 3. Internal control – purpose and components..........................................40 3.1 Overview...................................................................................................40 3.2 Internal control objectives ........................................................................41 3.3 The control environment ...........................................................................43 3.4 Risk assessment.......................................................................................49 3.5 Information system ...................................................................................51 3.6 Control activities .......................................................................................55 3.7 Understanding IT risks and controls ........................................................59 3.8 Monitoring.................................................................................................61 3.9 Understanding of internal controls relevant to the audit ..........................62 3.10 Manual versus automated controls ........................................................63 3.11 Pervasive controls ..................................................................................65 3.12 Anti-fraud controls ..................................................................................68 4. Financial report assertions......................................................................70 4.1 Overview...................................................................................................70 4.2 Description of assertions ..........................................................................71 4.3 Combined assertions ...............................................................................72 4.4 Using assertions in auditing .....................................................................74 5. Materiality and audit risk..........................................................................77 5.1 Overview...................................................................................................78 5.2 Financial report users ...............................................................................79 5.3 Nature of misstatements ..........................................................................80 Table of contents ix 5.4 Materiality and audit risk ..........................................................................81 5.5 Materiality levels .......................................................................................82 5.6 Documentation of materiality ....................................................................87 6. Risk assessment procedures ..................................................................89 6.1 Overview...................................................................................................90 6.2 Audit evidence .........................................................................................90 6.3 The three risk assessment procedures ....................................................92 6.4 Enquiries of management and others (including enquiries relating to fraud) .............................................................................................93 6.5 Analytical procedures ..............................................................................96 6.6 Observation and inspection .....................................................................97 6.7 Design and implementation of internal controls .......................................98 6.8 Other sources of information about risks .................................................98 7. Responding to assessed risks ................................................................100 7.1 Overview...................................................................................................101 7.2 Overall responses to risks at the financial report level.............................102 7.3 Response to assessed risks at the assertion level...................................107 8. Further audit procedures .........................................................................112 8.1 Overview...................................................................................................112 8.2 Substantive procedures ...........................................................................114 8.3 External confirmations ..............................................................................117 8.4 Substantive analytical procedures ...........................................................121 8.5 Tests of controls........................................................................................127 9. Accounting estimates ..............................................................................136 9.1 Overview...................................................................................................137 x Australian Audit Manual and Toolkit 2010, Using Clarity Standards 9.2 Risk assessment.......................................................................................139 9.3 Responses to assessed risks ...................................................................142 9.4 Reporting ..................................................................................................145 9.5 Documentation .........................................................................................146 10. Related parties ........................................................................................147 10.1 Overview.................................................................................................148 10.2 Risk assessment.....................................................................................151 10.3 Risk response .........................................................................................154 10.4 Reporting ................................................................................................157 11. Subsequent events .................................................................................159 11.1 Overview.................................................................................................159 11.2 Dual dating ............................................................................................166 12. Going concern ........................................................................................167 12.1 Overview.................................................................................................167 12.2 Risk assessment procedures .................................................................168 12.3 Evaluating management’s assessment ..................................................170 12.4 Risk response – when events are identified ...........................................173 12.5 Reporting ................................................................................................175 13. Summary of other ASA requirements ..................................................177 13.1 Overview.................................................................................................177 13.2 ASA 250 – Consideration of Laws and Regulations in an Audit of a Financial Report .............................................................................178 13.3 ASA 402 – Audit Considerations Relating to an Entity Using a Service Organisation ...................................................................................183 13.4 ASA 501– Audit Evidence – Specific Considerations for Inventory and Segment Information ...............................................................191 Table of contents xi 13.5 ASA 502 – Audit Evidence – Specific Considerations for Litigation and Claims ......................................................................................193 13.6 ASA 510 – Initial Audit Engagements – Opening Balances ..................195 13.7 ASA 600 – Special Considerations – Audits of a Group Financial Report (Including the Work of Component Auditors)......................198 13.8 ASA 610 – Using the Work of Internal Auditors .....................................204 13.9 ASA 620 – Using the Work of an Auditor’s Expert ..................................208 13.10 ASA 720 – The Auditor’s Responsibilities Relating to Other Information in Documents Containing an Audited Financial Report ..............216 14. Audit documentation ..............................................................................219 14.1 Overview.................................................................................................219 14.2 Audit file organisation .............................................................................221 14.3 Common questions about audit documentation ....................................223 14.4 Specific documentation requirements ...................................................224 14.5 The experienced auditor ....................................................................
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