Using the work of internal auditors (ISA 610) using the work of an auditor’s expert (ISA 620) THE AUDITOR’S RESPONSIBILITIES RELATING TO OTHER INFORMATION IN DOCUMENTS CONTAINING AUDITED FINANCIAL STATEMENTS (ISA 720)
Khawar Shahzad Jaffar ACCA, CPA
ISA 610 – Introduction 3. The objectives of the internal audit function are determined by management and, where applicable, those charged with governance. While the objectives of the internal audit function and the external auditor are different, some of the ways in which the internal audit function and the external auditor achieve their respective objectives may be similar. 4. Irrespective of the degree of autonomy and objectivity of the internal audit function, such function is not independent of the entity as is required of the external auditor when expressing an opinion on financial statements. The external auditor has sole responsibility for the audit opinion expressed, and that responsibility is not reduced by the external auditor’s use of the work of the internal auditors.
ISA 610 – Objective 6. The objectives of the external auditor, where the entity has an internal audit function that the external auditor has determined is likely to be relevant to the audit, are: a. To determine whether, and to what extent, to use specific work of the internal auditors; and b. If using the specific work of the internal auditors, to determine whether that work is adequate for the purposes of the audit.
ISA 610 – Definitions 7. For purposes of the ISAs, the following terms have the meanings attributed below: a. Internal audit function – An appraisal activity established or provided as a service to the entity. Its functions include, amongst other things, examining, evaluating and monitoring the adequacy and effectiveness of internal control. b. Internal auditors – Those individuals who perform the activities of the internal audit function. Internal auditors may belong to an internal audit department or equivalent function.
ISA 610 – Requirements Determining Whether and to What Extent to Use the Work of the Internal Auditors 8. The external auditor shall determine: a.
Whether the work of the internal auditors is likely to be adequate for purposes of the audit; and
b.
If so, the planned effect of the work of the internal auditors on the nature, timing or extent of the external auditor’s procedures.
9. In determining whether the work of the internal auditors is likely to be adequate for purposes of the audit, the external auditor shall evaluate: a.
The objectivity of the internal audit function;
b.
The technical competence of the internal auditors;
c.
Whether the work of the internal auditors is likely to be carried out with due professional care; and
d.
Whether there is likely to be effective communication between the internal auditors and the external auditor.
ISA 610 – Requirements 10.In determining the planned effect of the work of the internal auditors on the nature, timing or extent of the external auditor’s procedures, the external auditor shall consider: a.
The nature and scope of specific work performed, or to be performed, by the internal auditors;
b.
The assessed risks of material misstatement at the assertion level for particular classes of transactions, account balances, and disclosures; and
c.
The degree of subjectivity involved in the evaluation of the audit evidence gathered by the internal auditors in support of the relevant assertions.
ISA 610 – Requirements Using Specific Work of the Internal Auditors 11.In order for the external auditor to use specific work of the internal auditors, the external auditor shall evaluate and perform audit procedures on that work to determine its adequacy for the external auditor’s purposes. 12.To determine the adequacy of specific work performed by the internal auditors for the external auditor’s purposes, the external auditor shall evaluate whether: a.
The work was performed by internal auditors having adequate technical training and proficiency;
b.
The work was properly supervised, reviewed and documented;
c.
Adequate audit evidence has been obtained to enable the internal auditors to draw reasonable conclusions;
d.
Conclusions reached are appropriate in the circumstances and any reports prepared by the internal auditors are consistent with the results of the work performed; and
e.
Any exceptions or unusual matters disclosed by the internal auditors are properly resolved.
ISA 610 – Documentation 13. If the external auditor uses specific work of the internal auditors, the external auditor shall include in the audit documentation the conclusions reached regarding the evaluation of the adequacy of the work of the internal auditors, and the audit procedures performed by the external auditor on that work, in accordance with paragraph 11.
ISA 620 – Introduction & Objective 3. The auditor has sole responsibility for the audit opinion expressed, and that responsibility is not reduced by the auditor’s use of the work of an auditor’s expert. Nonetheless, if the auditor using the work of an auditor’s expert, having followed this ISA, concludes that the work of that expert is adequate for the auditor’s purposes, the auditor may accept that expert’s findings or conclusions in the expert’s field as appropriate audit evidence. 6. The objectives of the auditor are: a.
To determine whether to use the work of an auditor’s expert; and
b.
If using the work of an auditor’s expert, to determine whether that work is adequate for the auditor’s purposes.
ISA 620 – Definitions 6. For purposes of the ISAs, the following terms have the meanings attributed below: a.
Auditor’s expert – An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence. An auditor’s expert may be either an auditor’s internal expert (who is a partner or staff, including temporary staff, of the auditor’s firm or a network firm), or an auditor’s external expert.
b.
Expertise – Skills, knowledge and experience in a particular field.
c.
Management’s expert – An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the financial statements.
ISA 620 – Requirements Determining the Need for an Auditor’s Expert 7. If expertise in a field other than accounting or auditing is necessary to obtain sufficient appropriate audit evidence, the auditor shall determine whether to use the work of an auditor’s expert.
ISA 620 – Requirements Nature, Timing and Extent of Audit Procedures 8. The nature, timing and extent of the auditor’s procedures with respect to the requirements in paragraphs 9–13 of this ISA will vary depending on the circumstances. In determining the nature, timing and extent of those procedures, the auditor shall consider matters including: a.
The nature of the matter to which that expert’s work relates;
b.
The risks of material misstatement in the matter to which that expert’s work relates;
c.
The significance of that expert’s work in the context of the audit;
d.
The auditor’s knowledge of and experience with previous work performed by that expert; and
e.
Whether that expert is subject to the auditor’s firm’s quality control policies and procedures.
ISA 620 – Requirements The Competence, Capabilities and Objectivity of the Auditor’s Expert 9. The auditor shall evaluate whether the auditor’s expert has the necessary competence, capabilities and objectivity for the auditor’s purposes. In the case of an auditor’s external expert, the evaluation of objectivity shall include inquiry regarding interests and relationships that may create a threat to that expert’s objectivity. Obtaining an Understanding of the Field of Expertise of the Auditor’s Expert 11.The auditor shall obtain a sufficient understanding of the field of expertise of the auditor’s expert to enable the auditor to: a.
Determine the nature, scope and objectives of that expert’s work for the auditor’s purposes; and
b.
Evaluate the adequacy of that work for the auditor’s purposes.
ISA 620 – Requirements Agreement with the Auditor’s Expert 11.The auditor shall agree, in writing when appropriate, on the following matters with the auditor’s expert: a.
The nature, scope and objectives of that expert’s work;
b.
The respective roles and responsibilities of the auditor and that expert;
c.
The nature, timing and extent of communication between the auditor and that expert, including the form of any report to be provided by that expert; and
d.
The need for the auditor’s expert to observe confidentiality requirements.
ISA 620 – Requirements Evaluating the Adequacy of the Auditor’s Expert’s Work 12.The auditor shall evaluate the adequacy of the auditor’s expert’s work for the auditor’s purposes, including: a.
The relevance and reasonableness of that expert’s findings or conclusions, and their consistency with other audit evidence;
b.
If that expert’s work involves use of significant assumptions and methods, the relevance and reasonableness of those assumptions and methods in the circumstances; and
c.
If that expert’s work involves the use of source data that is significant to that expert’s work, the relevance, completeness, and accuracy of that source data.
14.If the auditor determines that the work of the auditor’s expert is not adequate for the auditor’s purposes, the auditor shall: a.
Agree with that expert on the nature and extent of further work to be performed by that expert; or
b.
Perform additional audit procedures appropriate to the circumstances.
ISA 620 – Requirements Reference to the Auditor’s Expert in the Auditor’s Report 14.The auditor shall not refer to the work of an auditor’s expert in an auditor’s report containing an unmodified opinion unless required by law or regulation to do so. If such reference is required by law or regulation, the auditor shall indicate in the auditor’s report that the reference does not reduce the auditor’s responsibility for the auditor’s opinion. 15.If the auditor makes reference to the work of an auditor’s expert in the auditor’s report because such reference is relevant to an understanding of a modification to the auditor’s opinion, the auditor shall indicate in the auditor’s report that such reference does not reduce the auditor’s responsibility for that opinion.
ISA 720 – Introduction 1. This International Standard on Auditing (ISA) deals with the auditor’s responsibilities relating to other information in documents containing audited financial statements and the auditor’s report thereon. In the absence of any separate requirement in the particular circumstances of the engagement, the auditor’s opinion does not cover other information and the auditor has no specific responsibility for determining whether or not other information is properly stated. However, the auditor reads the other information because the credibility of the audited financial statements may be undermined by material inconsistencies between the audited financial statements and other information.
ISA 720 – Introduction 2. In this ISA “documents containing audited financial statements” refers to annual reports (or similar documents), that are issued to owners (or similar stakeholders), containing audited financial statements and the auditor’s report thereon. This ISA may also be applied, adapted as necessary in the circumstances, to other documents containing audited financial statements, such as those used in securities offerings.
ISA 720 – Objective 4. The objective of the auditor is to respond appropriately when documents containing audited financial statements and the auditor’s report thereon include other information that could undermine the credibility of those financial statements and the auditor’s report.
ISA 720 – Definitions 5. For purposes of the ISAs the following terms have the meanings attributed below: a.
Other information – Financial and non-financial information (other than the financial statements and the auditor’s report thereon) which is included, either by law, regulation or custom, in a document containing audited financial statements and the auditor’s report thereon.
b.
Inconsistency – Other information that contradicts information contained in the audited financial statements. A material inconsistency may raise doubt about the audit conclusions drawn from audit evidence previously obtained and, possibly, about the basis for the auditor’s opinion on the financial statements.
c.
Misstatement of fact – Other information that is unrelated to matters appearing in the audited financial statements that is incorrectly stated or presented. A material misstatement of fact may undermine the credibility of the document containing audited financial statements.
ISA 720 – Requirements Reading Other Information 6. The auditor shall read the other information to identify material inconsistencies, if any, with the audited financial statements. 7. The auditor shall make appropriate arrangements with management or those charged with governance to obtain the other information prior to the date of the auditor’s report. If it is not possible to obtain all the other information prior to the date of the auditor’s report, the auditor shall read such other information as soon as practicable. Material Inconsistencies 10.If, on reading the other information, the auditor identifies a material inconsistency, the auditor shall determine whether the audited financial statements or the other information needs to be revised.
ISA 720 – Requirements Material Inconsistencies Identified in Other Information Obtained Prior to the Date of the Auditor’s Report 9. If revision of the audited financial statements is necessary and management refuses to make the revision, the auditor shall modify the opinion in the auditor’s report in accordance with ISA 705. 10.If revision of the other information is necessary and management refuses to make the revision, the auditor shall communicate this matter to those charged with governance, unless all of those charged with governance are involved in managing the entity; and a.
Include in the auditor’s report an Other Matter paragraph describing the material inconsistency in accordance with ISA 706;
b.
Withhold the auditor’s report; or
c.
Withdraw from the engagement, where withdrawal is possible under applicable law or regulation.
ISA 720 – Requirements Material Inconsistencies Identified in Other Information Obtained Subsequent to the Date of the Auditor’s Report 11.If revision of the audited financial statements is necessary, the auditor shall follow the relevant requirements in ISA 560. 12.If revision of the other information is necessary and management agrees to make the revision, the auditor shall carry out the procedures necessary under the circumstances. 13.If revision of the other information is necessary, but management refuses to make the revision, the auditor shall notify those charged with governance, unless all of those charged with governance are involved in managing the, entity, of the auditor’s concern regarding the other information and take any further appropriate action.
ISA 720 – Requirements Material Misstatements of Fact 14.If, on reading the other information for the purpose of identifying material inconsistencies, the auditor becomes aware of an apparent material misstatement of fact, the auditor shall discuss the matter with management. 15.If, following such discussions, the auditor still considers that there is an apparent material misstatement of fact, the auditor shall request management to consult with a qualified third party, such as the entity’s legal counsel, and the auditor shall consider the advice received. 16.If the auditor concludes that there is a material misstatement of fact in the other information which management refuses to correct, the auditor shall notify those charged with governance, unless all of those charged with governance are involved in managing the entity, of the auditor’s concern regarding the other information and take any further appropriate action.