Audits

The purpose of an audit is to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework, which enhances the degree of confidence that intended users can place in the financial statements.

At Sawyer Assurance, we have designed our Audit process to be highly efficient and to produce a high-quality product.

FREQUENTLY ASKED QUESTIONS (FAQ) ABOUT AUDITS

What is the purpose of an audit?

The purpose of an audit is to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework, which enhances the degree of confidence that intended users can place in the financial statements.

What are the objectives of an audit?

The overall objectives of the auditor, in conducting an audit of financial statements, are to

  • obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework; and

  • report on the financial statements, and communicate as required by GAAS, in accordance with the auditor's findings.

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, GAAS require that the auditor disclaim an opinion or withdraw from the engagement, when withdrawal is possible under applicable law or regulation.

Does an unmodified (i.e., clean) audit opinion mean that the financial statements are perfectly accurate?

No. As the basis for the auditor's opinion, auditing standards require the auditor to obtain "reasonable assurance" about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. Reasonable assurance is a high, but not absolute, level of assurance. Reasonable assurance is not an absolute level of assurance because there are inherent limitations of an audit that result in most of the audit evidence, on which the auditor draws conclusions and bases the auditor's opinion, being persuasive rather than conclusive.

Will all transactions and account balances of the financial statements be verified/tested during an audit?

No. The concept of materiality is applied by the auditor when both planning and performing the audit, and in evaluating the effect of identified misstatements on the audit and uncorrected misstatements, if any, on the financial statements. In general, misstatements, including omissions, are considered to be material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements. Judgments about materiality are made in light of surrounding circumstances, and involve both qualitative and quantitative considerations. These judgments are affected by the auditor's perception of the financial information needs of users of the financial statements, and by the size or nature of a misstatement, or both. The auditor's opinion addresses the financial statements as a whole. Therefore, the auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by fraud or error, that are not material to the financial statements as a whole, are detected.

What is the general process for performing an audit?

In general, the auditor will

  • identify and assess risks of material misstatement, whether due to fraud or error, based on an understanding of the entity and its environment, including the entity's internal control.

  • obtain sufficient appropriate audit evidence about whether material misstatements exist, through designing and implementing appropriate responses to the assessed risks.

  • form an opinion on the financial statements, or determine that an opinion cannot be formed, based on an evaluation of the audit evidence obtained. The form of opinion expressed by the auditor will depend upon the applicable financial reporting framework and any applicable law or regulation.

The auditor also may have certain other communication and reporting responsibilities to users, management, those charged with governance, or parties outside the entity, regarding matters arising from the audit. These responsibilities may be established by GAAS or by applicable law or regulation.

Is an auditor required to be independent?

Yes. The auditor must be independent of the entity when performing an engagement in accordance with GAAS unless (a) GAAS provides otherwise or (b) the auditor is required by law or regulation to accept the engagement and report on the financial statements. When the auditor is not independent and neither (a) nor (b) are applicable, the auditor is precluded from issuing a report under GAAS.

What preconditions must exist before the auditor can accept an engagement?

In order to accept an audit engagement, the auditor must determine that:

  • the financial reporting framework to be applied in the preparation of the financial statements is acceptable

  • management acknowledges and understands its responsibility

    • for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework;

    • . for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; and

    • to provide the auditor with

      • access to all information of which management is aware that is relevant to the preparation and fair presentation of the financial statements, such as records, documentation, and other matters;

      • additional information that the auditor may request from management for the purpose of the audit; and

      • unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.

In addition, the Auditor will speak with the predecessor auditor, if applicable, to determine whether to accept the engagement; such discussion topics include:

  • Information that might bear on the integrity of management

  • Disagreements with management about accounting policies, auditing procedures, or other similarly significant matters

  • Communications to those charged with governance regarding fraud and noncompliance with laws or regulations by the entity

  • Communications to management and those charged with governance regarding significant deficiencies and material weaknesses in internal control

  • The predecessor auditor's understanding about the reasons for the change of auditors

  • The predecessor auditor's understanding of the nature of the entity's relationships and transactions with related parties and significant unusual transactions

What will be included in the Engagement Letter (i.e., the contract between the auditor and the entity under audit)?

The agreed-upon terms of the audit engagement will be documented in an audit engagement letter or other suitable form of written agreement and will include the following:

  • The objective and scope of the audit of the financial statements

  • The responsibilities of the auditor

  • The responsibilities of management

  • A statement that because of the inherent limitations of an audit, together with the inherent limitations of internal control, an unavoidable risk exists that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with GAAS

  • Identification of the applicable financial reporting framework for the preparation of the financial statements

  • Reference to the expected form and content of any reports to be issued by the auditor and a statement that circumstances may arise in which a report may differ from its expected form and content

What quality control policies does the Auditor follow to ensure that the audit complies with professional standards and applicable legal and regulatory requirements?

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

  • reports issued by the firm are appropriate in the circumstances.

To do so, the firm designs and implements quality control policies to cover the following areas:

  • Leadership Responsibilities: The engagement partner will take responsibility for the overall quality on each audit engagement to which that partner is assigned.

  • Relevant Ethical Requirements: The engagement team follows the AICPA Code of Professional Conduct, which includes requirements for maintaining Responsibilities, The Public Interest , Integrity, Objectivity and Independence, Due Care in all its engagements.

  • Acceptance and Continuance of Client Relationships: The Auditor only accepts engagements where management of the entity are deemed to have integrity, the engagement team is competent and capable, and the firm can comply with its ethical requirements.

  • Assignment of Engagement Teams: The engagement partner must be satisfied that the engagement team and any auditor's external specialists, 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.

  • Engagement Performance: The engagement partner takes responsibility for the direction, supervision, and performance of the audit engagement in compliance with professional standards, applicable legal and regulatory requirements, and the firm's policies and procedures .

  • Monitoring: The firm implements a monitoring process designed to provide the firm with reasonable assurance that its policies and procedures relating to the system of quality control are relevant, adequate, and operating effectively

What documentation does the Auditor include in the audit file?

The auditor prepares audit documentation that 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

  • the results of the audit procedures performed, and the audit evidence obtained; and

  • significant findings or issues arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions

The auditor will assemble the audit documentation in an audit file and complete the administrative process of assembling the final audit file on a timely basis, no later than 60 days following the report release date. The audit file will be retained for at least five years from the report release date.

What procedures does the Auditor perform around detecting fraud?

The primary responsibility for the prevention and detection of fraud rests with the management and those charged with governance of the entity. The Auditor is responsible for obtaining reasonable assurance that the financial statements as a whole are free from material misstatement, whether caused by fraud or error. In order to identify and assess the risks of material misstatement due to fraud and in designing procedures to detect such misstatement, the Auditor will:

  • Maintain professional skepticism throughout the audit and investigate any inconsistencies with information obtained

  • Have an exchange of ideas or brainstorming among the engagement team members about how and where the entity's financial statements (including the individual statements and the disclosures) might be susceptible to material misstatement due to fraud, how management could perpetrate and conceal fraudulent financial reporting, and how assets of the entity could be misappropriated.

  • Hold discussions with management and others within the entity regarding the risk of fraud within the entity and its policies for mitigating that risk

  • Perform analytical procedures to identify unusual or unexpected relationships or transactions

  • Assess the risk of material misstatement due to fraud, and consider the whether controls have been suitably designed and implemented to mitigate such fraud risks

  • Evaluate whether the selection and application of accounting policies by the entity may be indicative of fraudulent financial reporting

  • Incorporate an element of unpredictability in the selection of the nature, timing, and extent of audit procedures.

  • Test the appropriateness of journal entries recorded in the general ledger and other adjustments made in the preparation of the financial statements

  • Review accounting estimates for biases

  • Evaluate whether the business purpose of significant unusual transactions suggests that they may have been entered into to engage in fraudulent financial reporting or to conceal misappropriation of assets

What procedures does the Auditor perform around whether the entity has complied with applicable laws and regulations?

It is the responsibility of management, with the oversight of those charged with governance, to ensure that the entity's operations are conducted in accordance with the provisions of laws and regulations. The Auditor is required to identify material misstatement of the financial statements due to noncompliance with laws and regulations. However, the auditor is not responsible for preventing noncompliance and cannot be expected to detect noncompliance with all laws and regulations. The Auditor's procedures include the following:

  • Obtain a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework

  • Inquire of management and, when appropriate, those charged with governance about whether the entity is in compliance with such laws and regulations

  • Inspect correspondence, if any, with the relevant licensing or regulatory authorities

  • If the auditor becomes aware of information concerning an instance of noncompliance or suspected noncompliance with laws and regulations, the auditor will obtain an understanding of the nature of the act and the circumstances in which it has occurred and further information to evaluate the possible effect on the financial statements.

What does the Auditor communicate to those charged with governance (e.g., the board of directors)?

Recognizing the importance of effective two-way communication in an audit of financial statements, the Auditor is required to communicate the following to an appropriate person(s) within the governance structure:

At the beginning of the audit:

  • The auditor's responsibilities with regard to the financial statement audit

  • The planned scope and timing of the audit

After the audit is completed:

  • The auditor's views about qualitative aspects of the entity's significant accounting practices, including accounting policies, accounting estimates, and financial statement disclosures.

  • Significant unusual transactions, if any

  • Significant difficulties, if any, encountered during the audit.

  • Disagreements with management, if any

  • Circumstances that affect the form and content of the auditor's report, if any

  • Matters that are difficult or contentious for which the auditor consulted outside the engagement team

  • Other findings or issues, if any, arising during the audit that are, in the auditor's professional judgment, significant and relevant to those charged with governance regarding their responsibility to oversee the financial reporting process

  • Uncorrected misstatements accumulated by the auditor and the effect that they, individually or in the aggregate, may have on the opinion in the auditor's report

  • Material, corrected misstatements that were brought to the attention of management as a result of audit procedures.

What does the auditor communicate to management regarding the entity's internal controls?

The auditor will appropriately communicate to those charged with governance and management deficiencies in internal control that the auditor has identified during the audit and that, in the auditor's professional judgment, are of sufficient importance to merit their respective attentions. Such communications will be made in writing within 60 days following the auditor's report release date, and will include the following:

  • The definition of the term material weakness and, when relevant, the definition of the term significant deficiency

  • A description of the significant deficiencies and material weaknesses identified during the audit (including those that were remediated during the audit), and an explanation of their potential effects.

  • Other deficiencies in internal control identified during the audit that have not been communicated to management by other parties and that, in the auditor's professional judgment, are of sufficient importance to merit management's attention.

  • Sufficient information to enable those charged with governance and management to understand the context of the communication, in particular that:

    • the purpose of the audit was for the auditor to express an opinion on the financial statements

    • the audit included consideration of internal control over financial reporting in order to design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of internal control.

    • the auditor is not expressing an opinion on the effectiveness of internal control.

    • the auditor's consideration of internal control was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies, and therefore, material weaknesses or significant deficiencies may exist that were not identified

What procedures does the Auditor perform when planning the audit?

In developing the audit plan, the auditor will establish an overall audit strategy that sets the scope, timing, and direction of the audit by doing the following:

  • identify the characteristics of the engagement that define its scope

  • ascertain the reporting objectives of the engagement in order to plan the timing of the audit and the nature of the communications required

  • consider the factors that, in the auditor's professional judgment, are significant in directing the engagement team's efforts

  • consider the results of preliminary engagement activities and, when applicable, whether knowledge gained on other engagements performed by the engagement partner for the entity is relevant

  • ascertain the nature, timing, and extent of resources necessary to perform the engagement

  • determine the nature and extent of planned risk assessment procedures

  • update and change the overall audit strategy and audit plan, as necessary, during the course of the audit

  • plan the nature, timing, and extent of direction and supervision of engagement team members and the review of their work.

  • consider whether specialized skills are needed in performing the audit; and if so, seek the assistance of a professional possessing such skills, who either may be on the auditor's staff or an outside professional

  • Communicating with the predecessor auditor when there has been a change of auditors

  • Document the overall audit strategy, the audit plan, and any significant changes made during the audit engagement to the overall audit strategy or the audit plan and the reasons for such changes

What procedures does the auditor perform when gaining an understanding of the entity and its environment and assessing the risks of material misstatement?

The auditor is required to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and relevant assertion levels through understanding the entity and its environment, including the entity's internal control, thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement. To do so, the auditor will

  • Inquire of management, appropriate individuals within the internal audit function (if such function exists), or others within the entity who, in the auditor's professional judgment, may have information that is likely to assist in identifying risks of material misstatement due to fraud or error

  • Perform analytical procedures

  • Observe and inspect relevant information

  • Consider information obtained in other engagements with the entity

Through these methods, the auditor will gain an understanding of and document the following:

  • The Entity and its Environment: relevant industry, regulatory, or other external factors; nature of the entity (e.g., its operations, ownership/governance structure, types of investments, structure/financing); accounting policies selected; objectives and strategies; performance measurement policies

  • The Entity's Internal Control: control environment, risk assessment process, information system, control activities, monitoring of controls

Based on this information, the auditor will identify and assess the risk of material misstatement at the financial statement and assertion levels, and determine whether any risks are "significant" or those for which substantive procedures alone would not be sufficient as a response.

How does the auditor apply materiality in planning and performing the audit?

The concept of materiality is applied by the auditor both in planning and performing the audit; evaluating the effect of identified misstatements on the audit and the effect of uncorrected misstatements, if any, on the financial statements; and in forming the opinion in the auditor's report. In planning the audit, the auditor makes judgments about misstatements that will be considered material. These judgments provide a basis for determining the nature and extent of risk assessment procedures; identifying and assessing the risks of material misstatement; and determining the nature, timing, and extent of further audit procedures.

The materiality determined when planning the audit does not necessarily establish an amount below which uncorrected misstatements, individually or in the aggregate, will always be evaluated as immaterial. The circumstances related to some misstatements may cause the auditor to evaluate them as material even if they are below materiality. Therefore, when evaluating the effect on the financial statements of all uncorrected misstatements, the auditor considers not only the size but also the nature of uncorrected misstatements, and the particular circumstances of their occurrence.

How does the auditor design and implement responses to identified risks of material misstatement and evaluate the audit evidence obtained in an audit of financial statements?

In designing audit procedures to be performed, the auditor considers the reasons for the assessed risk of material misstatement and the likelihood of material misstatement, then obtains more persuasive audit evidence the higher the auditor's assessment of risk. The auditor's procedures fall into two categories: tests of controls and substantive procedures.

  • Tests of Controls: Tests of Controls are an audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level. The auditor might perform tests of controls when the auditor's assessment of risks of material misstatement at the relevant assertion level includes an expectation that the controls are operating effectively or when substantive procedures alone cannot provide sufficient appropriate audit evidence at the relevant assertion level.

  • Substantive Procedures: Substantive Procedures are an audit procedure designed to detect material misstatements at the assertion level. Substantive procedures comprise tests of details and analytical procedures. Irrespective of the assessed risks of material misstatement, the auditor designs and performs substantive procedures for all relevant assertions. Such procedures might include inspection, observation, inquiry, confirmation, recalculation, reperformance, or analytical procedures.

Based on the audit procedures performed and the audit evidence obtained, the auditor will evaluate, before the conclusion of the audit, whether the assessments of the risks of material misstatement at the relevant assertion level remain appropriate, and whether sufficient appropriate audit evidence has been obtained. If the auditor has not obtained sufficient appropriate audit evidence about a relevant assertion, the auditor will attempt to obtain further audit evidence. If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor should express a qualified opinion or disclaim an opinion on the financial statements.

What additional procedures are performed when the entity uses a service provider?

Many entities outsource aspects of their business activities to organizations that provide services ranging from performing a specific task under the direction of the entity to replacing entire business units or functions of the entity. Services provided by a service organization are relevant to the audit of a user entity's financial statements when those services and the controls over them affect the user entity's information system, including related business processes, relevant to financial reporting.

The auditor will first obtain an understanding of how the user entity uses the services of a service organization in the user entity's operations. The auditor will then evaluate the design and implementation of relevant controls at the user entity that relate to the services provided by the service organization, including those that are applied to the transactions processed by the service organization. To do this, the auditor will perform one of the following procedures:

  • Obtain and reading a type 1 or type 2 report, if available

  • Contact the service organization, through the user entity, to obtain specific information

  • Visit the service organization and performing procedures that will provide the necessary information about the relevant controls at the service organization

  • Use another auditor to perform procedures that will provide the necessary information about the relevant controls at the service organization

Based on this information, the auditor will then assess the risk of material misstatement related to the classes of transactions relevant to the service organization's procedures. In responding to assessed risks, the auditor will determine whether sufficient appropriate audit evidence concerning the relevant financial statement assertions is available from records held at the user entity and, if not, perform further audit procedures to obtain sufficient appropriate audit evidence or use another auditor to perform those procedures at the service organization on the user auditor's behalf .

What happens if misstatements are identified in the audit?

Throughout the audit, the auditor will accumulate misstatements identified during the audit, other than those that are clearly trivial. The auditor will then communicate on a timely basis with the appropriate level of management all misstatements accumulated during the audit, and request management to correct those misstatements. If management refuses to correct some or all of the misstatements communicated by the auditor, the auditor will obtain an understanding of management's reasons for not making the corrections and will take that understanding into account when evaluating whether the financial statements as a whole are free from material misstatement. The auditor will then determine whether uncorrected misstatements are material, individually or in the aggregate, based on the size and nature of the misstatements, both in relation to particular classes of transactions, account balances, or disclosures and the financial statements as a whole, and the particular circumstances of their occurrence and the effect of uncorrected misstatements related to prior periods on the relevant classes of transactions, account balances, or disclosures and the financial statements as a whole.

What are the different types of audit procedures that the auditor performs?

The auditor designs and performs audit procedures that are appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence. Sufficiency is the measure of the quantity of audit evidence. Appropriateness is the measure of the quality of audit evidence (that is, its relevance and reliability in providing support for the conclusions on which the auditor's opinion is based). Relevance relates to the logical connection with, or bearing upon, the purpose of the audit procedure and, when appropriate, the assertion under consideration. The reliability of information to be used as audit evidence and, therefore, of the audit evidence itself is influenced by its source and nature and the circumstances under which it is obtained, including the controls over its preparation and maintenance, when relevant.

The different types of audit procedures include the following:

  • Inspection: Inspection involves examining records or documents, whether internal or external, in paper form, electronic form, or other media or a physical examination of an asset.

  • Observation: Observation consists of looking at a process or procedure being performed by others (for example, the auditor's observation of inventory counting by the entity's personnel or the performance of control activities).

  • External Confirmation: An external confirmation represents audit evidence obtained by the auditor as a direct written response to the auditor from a third party (the confirming party) in paper form or by electronic or other medium.

  • Recalculation: Recalculation consists of checking the mathematical accuracy of documents or records.

  • Reperformance: Reperformance involves the independent execution of procedures or controls that were originally performed as part of the entity's internal control.

  • Analytical Procedures: Analytical procedures consist of evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data.

  • Inquiry: Inquiry consists of seeking information of knowledgeable persons, both financial and nonfinancial, within the entity or outside the entity

What specific procedures does the auditor perform around investments in securities and derivative instruments?

When investments in securities are valued based on an investee's financial results, excluding investments accounted for using the equity method of accounting, the auditor will obtain sufficient appropriate audit evidence in support of the investee's financial results, as follows:

  • Obtain and read available financial statements of the investee and the accompanying audit report, if any, including determining whether the report of the other auditor is satisfactory for this purpose.

  • If the investee's financial statements are not audited, or if the audit report on such financial statements is not satisfactory to the auditor, apply, or request that the investor entity arrange with the investee to have another auditor apply appropriate auditing procedures to such financial statements.

  • If the carrying amount of the investment reflects factors that are not recognized in the investee's financial statements or fair values of assets that are materially different from the investee's carrying amounts, obtain sufficient appropriate audit evidence in support of such amounts.

  • If the difference between the financial statement period of the entity and the investee has or could have a material effect on the entity's financial statements, determine whether the entity's management has properly considered the lack of comparability and determine the effect, if any, on the auditor's report.

With respect to investments in derivative instruments and securities measured or disclosed at fair value, the auditor will

  • determine whether the applicable financial reporting framework specifies the method to be used to determine the fair value of the entity's derivative instruments and investments in securities and

  • evaluate whether the determination of fair value is consistent with the specified valuation method.

The auditor will also evaluate management's conclusion (including the relevance of the information considered) about the need to recognize an impairment loss for a decline in a security's fair value below its cost or carrying amount and obtain sufficient appropriate audit evidence supporting the amount of any impairment adjustment recorded, including evaluating whether the requirements of the applicable financial reporting framework have been complied with. The auditor will also obtain sufficient appropriate audit evidence about the amount of unrealized appreciation or depreciation in the fair value of a derivative that is recognized or that is disclosed because of the ineffectiveness of a hedge, including evaluating whether the requirements of the applicable financial reporting framework have been complied with .

What specific procedures does the auditor perform around inventory?

If inventory is material to the financial statements, the auditor will obtain evidence regarding the existence and condition of inventory by

  • attending physical inventory counting, unless impracticable

  • performing audit procedures over the entity's final inventory records to determine whether they accurately reflect actual inventory count results.

If attendance at physical inventory counting is impracticable, the auditor will perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory (e.g., by inspecting purchase and sales invoices).

In addition, if inventory under the custody and control of a third party is material to the financial statements, the auditor will

  • request confirmation from the third party regarding the quantities and condition of inventory held on behalf of the entity

  • perform inspection or other audit procedures appropriate in the circumstances

What specific procedures does the auditor perform around litigation, claims, and assessments?

The auditor will design and perform audit procedures to identify litigation, claims, and assessments involving the entity that may give rise to a risk of material misstatement; such procedures might include the following:

  • inquiring of management and, when applicable, others within the entity, including in-house legal counsel;

  • obtaining from management a description and evaluation of litigation, claims, and assessments that existed at the date of the financial statements being reported on;

  • reviewing minutes of meetings of those charged with governance; documents obtained from management concerning litigation, claims, and assessments; and correspondence between the entity and its external legal counsel;

  • reviewing legal expense accounts and invoices from external legal counsel.

If the audit procedures above indicate that actual or potential litigation, claims, or assessments exist, the auditor will seek direct communication with the entity's external legal counsel through a letter of inquiry prepared by management and sent by the auditor requesting the entity's external legal counsel to communicate directly with the auditor.

What responsibilities does the auditor have around performing external confirmations?

Audit evidence is more reliable when it is obtained from independent sources outside the entity, when it is obtained directly by the auditor, and when it exists in documentary form, whether paper, electronic, or other medium. As such, the auditor will:

  • determine the information to be confirmed or requested;

  • selecting the appropriate confirming party;

  • design the confirmation requests, including determining that requests are properly directed to the appropriate confirming party and provide for being responded to directly to the auditor; and

  • send the requests, including follow-up requests, when applicable, to the confirming party.

  • in the case of each nonresponse, the auditor should perform alternative audit procedures to obtain relevant and reliable audit evidence.

  • investigate exceptions to determine whether they are indicative of misstatements.

What responsibilities does the auditor have regarding opening balances in an initial audit engagement?

To obtain sufficient appropriate audit evidence about whether the opening balances contain misstatements that materially affect the current period's financial statements, the auditor will:

  • determine whether the prior period's closing balances have been correctly brought forward to the current period

  • determine whether the opening balances reflect the application of appropriate accounting policies

  • when the prior year financial statements were audited, review the predecessor auditor's audit documentation to obtain evidence regarding the opening balances

  • obtain sufficient appropriate audit evidence about whether the accounting policies reflected in the opening balances have been consistently applied in the current period's financial statements and whether changes in the accounting policies have been appropriately accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework.


What responsibilities does the auditor have when performing substantive analytical procedures?

When designing and performing analytical procedures, the auditor will

  • determine the suitability of particular substantive analytical procedures for given assertions

  • evaluate the reliability of data from which the auditor's expectation of recorded amounts or ratios is developed

  • develop an expectation of recorded amounts or ratios and evaluate whether the expectation is sufficiently precise to identify a misstatement

  • determine the amount of any difference of recorded amounts from expected values that is acceptable without further investigation

  • compare the recorded amounts, or ratios developed from recorded amounts, with the expectations

If analytical procedures performed in accordance with this section identify fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount, the auditor will investigate such differences by

  • inquiring of management and obtaining appropriate audit evidence relevant to management's responses and

  • performing other audit procedures as necessary in the circumstances.


What responsibilities does the auditor have when sampling a population for testing?

When designing an audit sample, the auditor will

  • consider the purpose of the audit procedure and the characteristics of the population from which the sample will be drawn

  • determine a sample size sufficient to reduce sampling risk to an acceptably low level

  • select items for the sample in such a way that the auditor can reasonably expect the sample to be representative of the relevant population

The auditor will then perform audit procedures, appropriate to the purpose, on each item selected. If the audit procedure is not applicable to the selected item, the auditor will perform the procedure on a replacement item. If the auditor is unable to apply the designed audit procedures, or suitable alternative procedures, to a selected item, the auditor will treat that item as a deviation .

The auditor will investigate the nature and cause of any deviations or misstatements identified and evaluate their possible effect on the purpose of the audit procedure and on other areas of the audit; and project the results of audit sampling to the population. The auditor will then evaluate the results of the sample, including sampling risk, and determine whether the use of audit sampling has provided a reasonable basis for conclusions about the population that has been tested.

AUDIT STANDARDS

AU-C Section 200: Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With GAAS

AU-C Section 210: Terms of Engagement

AU-C Section 220: Quality Control for an Engagement Conducted in Accordance with GAAS

AU-C Section 230: Audit Documentation

AU-C Section 240: Consideration of Fraud in a Financial Statement Audit

AU-C Section 250: Consideration of Laws and Regulations in an Audit of Financial Statements

AU-C Section 260: The Auditor's Communication with Those Charged with Governance

AU-C Section 265: Communicating Internal Control Related Matters Identified in an Audit

AU-C Section 300: Planning an Audit

AU-C Section 315: Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement

AU-C Section 320: Materiality in Planning and Performing an Audit

AU-C Section 330: Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained

AU-C Section 402: Audit Considerations Relating to an Entity Using a Service Organization

AU-C Section 450: Evaluation of Misstatements Identified During the Audit

AU-C Section 500: Audit Evidence

AU-C Section 501: Audit Evidence—Specific Considerations for Selected Items

AU-C Section 505: External Confirmations

AU-C Section 510: Opening Balances—Initial Audit Engagements, Including Reaudit Engagements

AU-C Section 520: Analytical Procedures

AU-C Section 530: Audit Sampling

AU-C Section 540: Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures

AU-C Section 550: Related Parties

AU-C Section 560: Subsequent Events and Subsequently Discovered Facts

AU-C Section 570: The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern

AU-C Section 580: Written Representations

AU-C Section 585: Consideration of Omitted Procedures After the Report Release Date

AU-C Section 600: Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors)

AU-C Section 610: Using the Work of Internal Auditors

AU-C Section 620: Using the Work of an Auditor’s Specialist

AU-C Section 700: Forming an Opinion and Reporting on Financial Statements

AU-C Section 705: Modifications to the Opinion in the Independent Auditor’s Report

AU-C Section 706: Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditor’s Report

AU-C Section 708: Consistency of Financial Statements

AU-C Section 720: Other Information in Documents Containing Audited Financial Statements

AU-C Section 725: Supplementary Information in Relation to the Financial Statements as a Whole

AU-C Section 730: Required Supplementary Information

AU-C Section 800: Special Considerations—Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks

AU-C Section 805: Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement

AU-C Section 806: Reporting on Compliance With Aspects of Contractual Agreements or Regulatory Requirements in Connection With Audited Financial Statements

AU-C Section 810: Engagements to Report on Summary Financial Statements

AU-C Section 905: Alert That Restricts the Use of the Auditor's Written Communication

AU-C Section 910: Financial Statements Prepared in Accordance With a Financial Reporting Framework Generally Accepted in Another Country

AU-C Section 915: Reports on Application of Requirements of an Applicable Financial Reporting Framework

AU-C Section 920: Letters for Underwriters and Certain Other Requesting Parties

AU-C Section 925: Filings With the U.S. Securities and Exchange Commission Under the Securities Act of 1933

AU-C Section 930: Interim Financial Information

AU-C Section 935: Compliance Audits

AU-C Section 940: An Audit of Internal Control Over Financial Reporting That Is Integrated With an Audit of Financial Statements

AU-C Section 945: Auditor Involvement With Exempt Offering Documents