PSA 210 [AMENDED BY THE PSA 700 (REVISED)]

1 The purpose of this standard is to establish standards and provide guidelines on:
a Agreeing the terms of the engagement with the client; and
b The auditors response to a request by a client to change the terms of an engagement to
one that provides a lower level of assurance.
2 Audit Engagement Letters
It is in the interest of both client and auditor that the auditor sends an engagement letter,
preferably before the commencement of the engagement, to help in avoiding misunderstandings with
respect to the engagement.
3 Acceptance of a Change in Engagement
1 An auditor who, before the completion of the engagement, is requested to change the
engagement tone which provides a lower level of assurance, should consider the
appropriateness of doing so.
2 A request from the client for the auditor to change the engagement may result from:
a A change in circumstances affecting the need for the service;
b A misunderstanding as to the nature of an audit or related service originally
requested; or
c A restriction on the scope of the engagement, whether imposed by management
or caused by circumstances.
(NOTE: A or B would ordinarily be a reasonable basis for requesting a
change in the engagement)
3 A change would not be considered reasonable if it appeared that the change relates to
information that is incorrect, incomplete or otherwise unsatisfactory.
4 Before agreeing to change an audit engagement to a related service, an auditor would
also consider any legal or contractual implications of the change.
5 If the auditor concludes that there is reasonable justification to change the engagement
and if the audit work performed complies with the PSAs applicable to the change
engagement, the report issued would be that appropriate for the revised terms of the
engagement.
6 In order to avoid confusing the reader, the report would not include reference to:
a The original engagement; or
b Any procedures that may have been performed by the original engagement,
except where the engagement is changed to undertake agreed-upon procedures.
7 Where the terms of the engagement are changed, the auditor and the client should
agree in the new terms.
8 The auditor should not agree to a change of engagement where there is no reasonable
justification for doing so.
9 If the auditor is unable to agree to a change of engagement and is not permitted to
continue the original engagement, the auditor should withdraw and consider whether
there is any obligation, contractual or otherwise, to report to other parties, such as the
board of directors or shareholders, the circumstances necessitating the withdrawal.
PSA 300 (Rev.)
PLANNING AN AUDIT OF FINANCIAL STATEMENTS
PSA 315
UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT AND ASSESSING
THE RISKS OF MATERIAL MISTATEMENT

PSA 300 (Rev.)

PLANNING AN AUDIT OF FINANCIAL STATEMENTS
1

Planning an audit involves:

establishing the overall audit strategy for the engagement and
developing an audit plan,
in order to reduce audit risk to an acceptably low level.

Preliminary Engagement Activities

2

The auditor should perform the following activities at the beginning of the current audit engagement:

Perform procedures regarding the continuance of the client relationship and the specific audit
engagement.
Evaluate compliance with ethical requirements, including independence.
Establish an understanding of the terms of the engagement.

Planning Activities
3

The auditor should establish the overall audit strategy for the audit. The overall audit strategy sets
the scope, timing and direction of the audit, and guides the development of the more detailed audit
plan

The establishment of the overall audit strategy involves:

a Determining the characteristics of the engagement that define its scope;
b Ascertaining the reporting objectives of the engagement to plan the timing of the audit and the
nature of the communication required; and
c Considering the important factors that will determine the focus of the engagement teams efforts.

The auditor should develop an audit plan for the audit in order to reduce audit risk to an acceptably
low level.
The audit plan is more detailed than the overall audit strategy and includes the nature, timing and
extent of audit procedures to be performed by engagement team members in order to obtain
sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.

The audit plan includes:

A description of the nature, timing and extent of planned risk assessment procedures sufficient to
assess the risks of material misstatement as determined under PSA 315, Understanding the Entity
and its Environment and Assessing the Risks of Material Misstatement.;
A description of the nature, timing and extent of planned further audit procedures at the assertion
level for each material class of transactions, account balance, and disclosure, as determined under
PSA 330, The Auditors Procedures in Response to Assessed Risks,; and
Such other procedures required to be carried out for the engagement in order to comply with PSAs

Changes to Planning Decisions during the Course of the Audit

The overall audit strategy and the audit plan should be updated and changed as necessary during the
course of the audit.
Direction, Supervision and Review
1

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

The nature, timing and extent of the direction and supervision of engagement team members and
review of their work vary depending on many factors, including:

The
The
The
The

size and complexity of the entity;

area of audit;
risks of material misstatement; and
capabilities and competence of personnel performing the audit work.

The auditor plans the nature, timing and extent of direction and supervision of engagement team
members based on the assessed risk of material misstatement.

Documentation
The auditor should document the overall audit strategy and the audit plan, including any significant
changes made during the audit engagement.

Communications with Those Charged with Governance and Management

1

The auditor may discuss elements of planning with those charged with governance and the entitys
management.

Discussions with those charged with governance ordinarily include the overall audit strategy and
timing of the audit, including any limitations thereon, or any additional requirements.

When discussion of matters included in the overall audit strategy or audit plan occur, care is required
in order not to compromise the effectiveness of the audit.

Additional Considerations in Initial Audit Engagements

The auditor should perform the following activities prior to starting an initial audit:
1

Perform procedures regarding the acceptance of the client relationship and the specific audit
engagement.

Communicate with the previous auditor, where there has been a change of auditors, in compliance
with relevant ethical requirements.

PSA 315
UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL
MISSTATEMENT
1

The auditor should obtain an understanding of the entity and its environment, including its internal
control, sufficient to identify and assess the risks of material misstatement of the financial statements
whether due to fraud or error, and sufficient to design and perform further audit procedures.

The auditor should perform the following risk assessment procedures to obtain an understanding of
the entity and its environment, including its internal control:
a
b
c
d
e

Industry, regulatory, and other external factors, including the applicable financial reporting
framework.
Nature of the entity, including the entitys selection and application of accounting policies.
Objectives and strategies and the related business risks that may result in a material
misstatement of the financial statements.
Measurement and review of the entitys financial performance.
Internal control.

INTERNAL CONTROL
1 Internal control is the process designed and effected by those charged with governance, management,
and other personnel to provide reasonable assurance about the achievement of the entitys objectives
with regard to:

Reliability of financial reporting;

Effectiveness and efficiency of operations; and

Compliance with applicable laws and regulations.

The auditor uses the understanding of internal control to:

Identify types of potential misstatements;

Consider factors that affect the risks of material misstatement; and


3.

Design the nature, timing and extent of further audit procedures.

Internal control consists of the following components:

1.) The control environment.
2.) The entitys risk assessment process.
3.) The information system, including the related business processes, relevant to financial reporting,
and communication.
4.) Control activities.
5.) Monitoring of controls.
The control environment includes the governance and management functions and the attitudes,
awareness, and actions of those charged with governance and management concerning the entitys
internal control and its importance in the entity.
Elements of control environment:
a Communication of enforcement of integrity and ethical values.
b

Commitment to competence.

Participation by those charged with governance.

Managements philosophy and operating style.

Organizational structure.

Assignments of authority and responsibility.

Human resource policies and practices.

The auditor should obtain an understanding of the entitys risk assessment process, i.e., the
entity process for identifying business risks relevant to financial reporting objectives and deciding
about actions to address those risks, and the results thereof.
The auditor should obtain an understanding of the information system, including the related
business processes, relevant to financial reporting, including the following areas:

The classes of transactions in the entitys operations that is significant to the financial
statements.

The procedures, within both IT and manual systems, by which those transactions are initiated,
recorded, processed and reported in the financial statements.

The related accounting records, whether electronic or manual, supporting information, and
specific accounts in the financial statements, in respect of initiating, recording, processing and
reporting transactions.

How the information system captures events and conditions, other than classes of transactions
that are significant to the financial statements.

The financial reporting process used to prepare the entitys financial statements, including
significant accounting estimates and disclosures.

Control activities are the policies and procedures to help ensure that management directives are
carried out. Examples of control activities include those relating to the following:
Authorization

Performance reviews.

Information processing.

Physical controls.

Segregation of duties.

Monitoring of controls involves assessing the design and operation of controls on a timely basis and
taking the necessary corrective actions modified for changes in conditions.
4.

Obtaining an understanding of internal control involves:

a

Evaluating the design of a control; and

Determining whether it has been implemented.

ASSESSING THE RISKS OF MAERIAL MISSTATEMENT

1

The auditor should identify and assess the risks of material misstatement at the financial statements
level, and at the assertion level for classes of transactions, account balances, and disclosures.

The auditor:

Identifies risks throughout the process of obtaining an understanding of the entity and its
environment, including relevant controls that relate to the risks, and by considering the classes
of transactions, account balances, and disclosures in the financial statements;

Relates the identified risks to what can go wrong at the assertion level;

Considers whether the risks are of a magnitude that could result in a material misstatement of
the financial statements; and

Considers the likelihood that the risks could result in a material misstatement of the financial
statements.
PSA 330
THE AUDITORS PROCEDURES IN REPONSE TO ASSESSED RISKS

Overall responses
1 The auditor should determine overall responses to address the risks of material misstatement at the
financial statement level. Such responses may include:
Emphasizing to the audit team the need to maintain professional skepticism n
gathering and evaluating audit evidence
Assigning more experienced staff or those with special skills or using experts

Providing more supervision

Incorporating additional elements of unpredictability in the selection of further audit
procedures to be performed
Making general changes to the nature, timing or extent of audit procedures

Audit Procedures Responsive to Risks of Material Misstatement at the Assertion Level

1 In designing further audit procedures, the auditor considers the following:
The significance of the risk
The likelihood that the material misstatement will occur
The characteristics of the class transactions, account balance, or disclosure involved.
The nature of the specific controls used by the entity and in particular whether they
are manual or automated
Whether the auditor expects to obtain audit evidence to determine if the entitys
controls are effective n preventing, or detecting and correcting, material
misstatements
2 Considering the nature, timing and extent of further audit procedures
The nature of further audit procedures refers to their:
a Purpose- tests of controls or substantive procedures
b Type - inspection, observation, inquiry, confirmation, recalculation,
reperformance, or analytical procedures.
Timing refers to when audit procedures are performed or the period or date to which the audit
evidence applies.
Extent includes the quantity of a specific audit procedure to be performed.
TESTS OF CONTROLS
1 The auditor is required to perform tests of controls when:
a The auditors risk assessment includes an expectation of the operating effectiveness of
controls; or
b When the substantive procedures alone do not provide sufficient appropriate audit
evidence at the assertion level
2
3

Tests of the operating effectiveness of controls are performed only on those controls that the
auditor has determined are suitably designed to prevent, or detect and correct, a material
misstatement in an assertion
Testing the operating effectiveness of controls includes obtaining evidence about:
a How controls were applied at relevant times during the period under audit;
b The consistency with which they were applied; and
c By whom or by what means they were applied.

SUBSTANTIVE PROCEDURES
1 Substantive test procedures are performed in order to detect material misstatements at the
assertion level, and include:
Tests of details of classes of transactions, account balances, and disclosures; and
Substantive analytical procedures
2 The auditors substantive procedures should include the following audit procedures related to the
financial statement closing process:
Agreeing or reconciling the financial statements with accounting records; and
Examining material journal entries and other adjustments made during the course of
preparing the financial statements
3 The auditor should perform audit procedures to evaluate whether the overall presentation of the
financial statements, including the related disclosures, are in accordance with the applicable
financial reporting framework.
Evaluating the sufficiency and appropriateness of audit evidence obtained

1
2
3

Based on the audit procedures performed and the audit evidence obtained, the auditor should
evaluate whether the assessments of the risks of material misstatement at the assertion level
remain appropriate.
The auditor should conclude whether the assessments of the risks of material misstatement in the
financial statements.
If the auditor has not obtained sufficient appropriate audit evidence as to a material financial
statement assertion, the auditor should attempt to obtain further audit evidence. If the auditor is
unable to obtain further audit evidence, the auditor should express a qualified opinion or a
disclaimer of opinion.

Documentation
1 The auditor should document:
The overall responses to address the assessed risks of material misstatement at the
financial statement level and the nature, timing, and extent of the further audit
procedures;
The linkage of those procedures with the assessed risks at the assertion level; and
The results of the audit procedures
2 If the auditor plans to use audit evidence about the operating effectiveness of controls obtained in
prior audits, the auditor should document the conclusions reached with regard to relying on vcfsuch
controls that were tested in a prior audit.
3 The auditors documentation should demonstrate that the financial statements agree or reconcile
with the underlying accounting records.

PSA
PSA
PSA
PSA
PSA

320
520
550
610
620

AUDIT MATERIALITY (amended by PSA 240 [Revised 2005])

ANALYTICAL PROCEDURES
RELATED PARTIES
CONSIDERING THE WORK OF INTERNAL AUDIT
USING THE WORK OF AN EXPERT

PSA 320
AUDIT MATERIALITY
1 Materiality should be considered by the auditor when:
Determining the nature, timing and extent of audit procedures; and
Evaluating the effect of misstatements
2 There is an inverse relationship between materiality and the level of audit risk
3 In evaluating whether the financial statements are prepared, in all material respects, in accordance
with an applicable financial reporting framework, the auditor should assess whether the aggregate
of uncorrected misstatements that have been identified during the audit is material.
4 If the auditor concludes that the aggregate of uncorrected misstatements may be material, the
auditor needs to consider:
Reducing audit risk by extending audit procedures; or
requesting management to adjust the financial statements for the misstatements
identified
5 If management refuses to adjust the financial statements and the results of extended audit
procedures do not enable the auditor to conclude that the aggregate of uncorrected misstatements
is not material, the auditor should consider the appropriate modification to the auditors report.
6 If the auditor has identified a material misstatement resulting from error, the auditor should
communicate the misstatements to the appropriate level of management on a timely basis, and
consider the need to report it to those charged with governance.
PSA 520
ANALYTICAL PROCEDURES
1 Analytical procedures means the analysis of significant ratios and trends including the resulting
investigation of fluctuations and relationships that are inconsistent with other relevant information
or which deviate from predicted amounts.
2 Analytical procedures also include consideration of comparisons of the entitys financial statements:
a Comparable information for prior periods

4
5
6

8
9

Anticipated results of the entity, such as budgets or forecasts, or expectations of the

auditor, such as an estimation of depreciation
c Similar industry information
Analytical procedures also include consideration of relationships:
a Among elements of financial information that would be expected to conform to a
predictable patter based on the entitys experience, such as gross margin percentages.
b Between financial information and relevant no-financial information, such as payroll costs
to numbers and employees
The auditor should apply analytical procedures at the planning stage to assist in understanding the
business and in identifying areas of potential risk. Analytical procedures in planning the use both
financial and non-financial information.
The auditor should apply analytical procedures at or near the end of the audit when performing an
overall conclusion as to whether the financial statements as a whole are consistent with the
auditors knowledge of the business.
The application of analytical procedures is based on the expectation that relationships among data
exist and continue in the absence of known conditions to the contrary. The presence of these
relationships provides audit evidence as to the completeness, accuracy and validity of the data
produced by the accounting system
The extent of reliance that the auditor places on the results of analytical procedures depends on the
following factors:
a Materiality of the items involved
b Other audit procedures directed toward the same audit objectives
c Accuracy with which the expected results of analytical procedures can be predicted.
When analytical procedures identify significant fluctuations or relationships that are inconsistent
with other relevant information or that deviate from predicted amounts, the auditor should
investigate and obtain adequate explanations and appropriate corroborative evidence.
The investigation of unusual fluctuations and relationships ordinarily begins with inquiries of
management, followed by:
a Corroboration of management responses; and
b Consideration of the need to apply other audit procedures based on the results of such
inquiries, if management is unable to provide an explanation or if the explanation is not
considered adequate.

PSA 550
RELATED PARTIES
1 Management is responsible for the identification and disclosure of related parties and transactions
with such parties.
2 The auditor should perform audit procedures designed to obtain sufficient appropriate audit
evidence regarding the identification and disclosure by management of related parties and the
effect of related party transactions that are material to the financial statements. However, an audit
cannot be expected to detect all related party transactions.
3 The auditor needs to have a sufficient understanding of the entity and its environment to enable
identification of the events, transactions and practices that may result in a risk of material
misstatement regarding related parties and transactions with such parties.
4 When obtaining an understanding of the entitys internal control, the auditor should consider the
adequacy of control activities over the authorization and recording of related party transactions.
5 In examining the identified related party transactions, the auditor should obtain sufficient
appropriate audit evidence as to whether these transactions have been properly recorded and
disclosed.
6 The auditor should obtain a written representation from management concerning:
a The completeness of information provided regarding the identification of related parties;
and
b The adequacy of related party disclosures in the financial statements
7 The auditor is unable to obtain sufficient appropriate audit evidence concerning related parties and
transactions with such parties or concludes that their disclosure in the financial statements is not
adequate; the auditor should modify the audit report appropriately.

PSA 610
CONSIDERING THE WORK OF INTERNAL AUDIT

The external auditor should obtain a sufficient understanding of internal audit activities to identify
and assess the risks of material misstatement of the financial statements and to design and
perform further audit procedures.
2 The external auditor should perform an assessment of the internal audit function when internal
auditing is relevant to the external auditors risk assessment.
3 When obtaining an understanding and performing a preliminary assessment of the internal audit
function, the important criteria are:
a Organizational status
b Scope of the function
c Technical competence
d Due professional care
4 When planning to use the work of internal auditing, the external auditor will need to consider
internal auditings tentative plan for the period and discuss it as early a stage as possible.
5 Where the work of internal auditing is to be a factor in determining the nature, timing and extent of
the external auditors procedures, it is desirable to agree in advance the timing of such work, the
extent of audit coverage, materiality levels and proposed methods of sample selection,
documentation of the work performed and review and reporting procedures.
6 A liaison with internal auditing is more effective when meetings are held at appropriate intervals
during the period.
7 When the external auditor intends to use specific work of internal auditing, the external auditor
should evaluate and perform audit procedures on that work to confirm its adequacy for the external
auditors purposes.
8 The evaluation of specific work of internal auditing involves consideration of the adequacy of the
scope of the work and related programs and whether the preliminary assessment of the internal
auditing remains appropriate.
9 The nature, timing and extent of audit procedures performed on the specific work of internal
auditing will depend on:
The external auditors judgment as to the risk of material misstatement of the area
concerned;
The assessment of internal auditing; and
The evaluation of the specific work by internal auditing.
10 The external auditor would record conclusions regarding the specific internal auditing work that has
been evaluated and the audit procedures performed on the internal auditors work.
PSA 620
USING THE WORK OF AN EXPERT
1 Expert means a person or firm possessing special skill, knowledge and experience in a particular
filed other than accounting and auditing.
2 An expert may be:
a Contracted by the entity;
b Contracted by the auditor;
c Employed by the entity; or
d Employed by the auditor.
3 When determining the need to use the work of an expert, the auditor would consider:
a The materiality of the financial statement item being considered;
b The risk of misstatement based on the nature and complexity of the matter being
considered; and
c The quantity and quality of other audit evidence available
4 When planning t use the work of an expert, the auditor should evaluate the professional
competence and objectivity of the expert.
5 The risk that an experts objectivity will be impaired increases when the expert is:
a Employed by the entity; or
b Related in some other manner to the entity.
6 The auditor should obtain sufficient appropriate audit evidence that the scope of the experts work
is adequate for the purposes of the audit. Audit evidence may be obtained through a review of the
terms of reference which are often set out in written instructions from the entity to the expert.
Such instructions to the expert may cover matters such as:
a The objectives and scope of the experts work
b A general outline as to the specific matters the auditor expects the experts report to
cover

The intended use by the auditor of the experts work, including the possible
communication to third parties of the experts identity and extent f involvement
d The extent of the experts access to appropriate records and files
e Clarification of the experts relationship with the entity, if any.
f Confidentiality of the entitys information
g Information regarding the assumptions and methods intended to be used by the expert
and their consistency with those used in prior periods.
7 The auditor should evaluate the appropriateness of the experts work as audit evidence regarding
the financial statement assertion being considered. This will involve assessment of whether the
substance of the experts findings is properly reflected in the financial statements or supports the
financial statement assertions, and consideration of:
a Source data used.
b Assumptions and methods used and their consistency with prior periods
c Results of the experts work in the light of the auditors overall knowledge of the
business and of the results of other audit procedures.
8 When considering whether the expert has used source data which is appropriate in the
circumstances, the auditor would consider the following procedures:
a Making inquiries regarding any procedures undertaken by the expert to establish
whether the source data is sufficient, relevant and reliable.
b Reviewing or testing the data used by the expert
9 If the results of the experts work do not provide sufficient audit evidence or if the results are not
consistent with other audit evidence, the auditor should resolve the matter. This may involve:
a Discussions with the entity and the expert
b Applying additional audit procedures
c Including possibly engaging another expert; or
d Modifying the auditors report
10 When issuing an unmodified auditors report, the auditor should not refer to the work of an expert.
Such a reference might be misunderstood to be a qualification of the auditors opinion or a division
of responsibility, neither of which is intended.
11 If as a result of the work of an expert, the auditor decides to issue a modified auditors report, in
some circumstances it may be appropriate, in explaining the nature of the modification, to refer to
or describe the work o the expert (including the identity of the expert and the extent of the experts
involvement). In these circumstances, the auditor would obtain the permission of the expert before
making such a reference. If permission is refused and the auditor believes a reference is necessary,
the auditor may need to seek legal advice.

PSA
PSA
PSA
PSA

500(REVISED)
501
505
230

AUDIT EVIDENCE
AUDIT EVIDENCE ADDITIONAL CONSIDERATIONS ON SPECIFIC ITEMS
EXTERNAL CONFIRMATIONS
AUDIT DOCUMENTATION

PSA 500(REVISED)
AUDIT EVIDENCE
1 The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the audit opinion
2 Audit Evidence is all the information used by the auditor in arriving at the conclusions on which
the opinion is based, and includes the information contained in the accounting records underlying
the financial statements and other information
3 Accounting records generally include:
The records of initial entries and supporting records, such as checks and records of
electronic fund transfers;
Invoices
Contracts
The general and subsidiary ledgers, journal entries and other adjustments to the
financial statements that are not reflected in formal journal entries; and
Records such as work sheets and spreadsheets supporting cost allocations,
computations, reconciliations and disclosures
4 Other information that the auditor may use as audit evidence includes:

Minutes of the meetings

Confirmations from third parties
Analysts reports
Comparable data about competitors (benchmarking)
Control manuals
Information obtained by auditors from such audit procedures as inquiry, observation,
and inspection; and
Other information developed by, or available to, the auditor that permits the auditor
to reach conclusions through valid reasoning

Sufficient appropriate evidence

1 Sufficiency is the measure of the quantity of audit evidence
2 Appropriateness is the measure of the quality of audit evidence; that is, its relevance and its
reliability in providing support for, or detecting material misstatements in, the classes of
transactions, account balances, and disclosures and related assertions.
3 The following generalizations can be made about the reliability of audit evidence:
a Audit evidence I more reliable when it is obtained from independent sources outside the
entity
b Audit evidence that is generated internally is more reliable when the related controls
imposed by the entity are effective
c Audit evidence obtained directly by the auditor (for example, observation of the
application of a control) is more reliable than audit evidence obtained indirectly or by
inference (for example, the inquiry about the application of control)
d Audit evidence is more reliable when it exists in a documentary form, whether paper,
electronic, or other medium (for example, contemporaneously written record of a
meeting is more reliable than a subsequent oral representation of the matters discussed)
e Audit evidence provided by original documents is more reliable than audit evidence
provided by photocopies or facsimiles
4 An audit rarely involves the authentication of documentation, nor is the auditor trained as or
expected to be an expert in such authentication
5 When information produced by the entity is used by the auditor to perform audit procedures, the
auditor should obtain audit evidence about the accuracy and completeness of the information
6 In forming an audit opinion, the auditor does not examine all the information available because
conclusions ordinarily can be reached by using sampling approaches and other means of selecting
items for testing.
The use of assertions in obtaining audit evidence
1 Management is responsible for the fair presentation of financial statements that reflect the nature
and operations of the entity.
2 In representing that the financial statements are presented fairly, in all material respects, in
accordance with the applicable financial reporting framework, management implicitly or explicitly
makes assertions regarding the recognition, measurement, presentation, and disclosure of the
various elements of financial statements and related disclosures
3 The auditor should use assertions for classes of transactions, account balances, and presentation
and disclosures in sufficient detail to form a basis for the assessment of risks of material
misstatement and the design and performance of further audit procedures
CATEGORIES OF ASSERTIONS
a Assertions about classes of transactions and events for the period under audit:
1 OCCURRENCE
- transactions and events that have been recorded have occurred and
pertain to the entity
2 COMPLETENESS - all transactions and events that should have been recorded have
been recorded.
3 ACCURACY
- amounts and other data relating to recorded transactions and
events have been recorded appropriately
4 CUTOFF
- transactions and events have been recorded in the correct accounting
period
5 CLASSIFICATION - transactions and events have been recorded in the proper accounts
b Assertions about account balances at the period end:
1 EXISTENCE
-assets, liabilities, and equity interests exist

2
3
4

RIGHTS AND OBLIGATIONS

- the entity holds or controls the right to assets,
and liabilities are obligations of the entity
COMPLETENESS
- all assets, liabilities, and equity interests that should
have been recorded have been recorded
VALUATION AND ALLOCATION - assets, liabilities and equity interests are included in
the financial statements at appropriate amounts and any resulting valuation or allocation
adjustments are appropriately recorded

Assertions about presentation and disclosure:

1 OCCURRENCE AND RIGHTS AND OBLIGATIONS
Disclosed events, transactions, and other matters have occurred and pertain
to the entity
2 COMPLETENESS
All disclosures that should have been included in the financial statements
have been included
3 CLASSIFICATION AND UNDERSTANDABILITY
Financial information is appropriately presented and described and disclosures
are clearly expressed
4 ACCURACY AND VALUATION
Financial and other information are disclosed fairly and at appropriate
amounts

Audit procedures for obtaining audit evidence

1 RISK ASSESSMENT PROCEDURES
Obtain an understanding of the entity and its environment, including its internal control, to
assess the risk of material misstatement at the financial statement and assertion levels
2 TESTS OF CONTROLS
When necessary or when the auditor has determined to do so, test the operating
effectiveness of controls in preventing, or detecting and correcting, material misstatements
at the assertion level
3

SUBSTANTIVE PROCEDURES
Detect material misstatements at the assertion level. These include analytical review
procedures and tests of details

Examples of audit procedures

1 INSPECTION
Consists of examining records and documents, whether internal or external in paper form,
electronic form, or other media. Inspection of tangible assets consists of physical
examination of the assets.
2 OBSERVATION
Consists of looking at a process or procedure being performed by others
3 INQUIRY
Consists of seeking information of knowledgeable persons, both financial and nonfinancial,
throughout the entity or outside the entity
4 CONFIRMATION
The process of obtaining a representation of information or of an existing condition directly
from a third party
5 RECALCULATION
Consists of checking the mathematical accuracy of documents or records
6 REPERFORMANCE
The auditors independent execution of procedures or controls that were originally
performed as part of the entitys internal control, either manually or through the use of
CAATs
7 ANALYTICAL PROCEDURES
Consists of evaluations of financial information made by a study of plausible relationships
among both financial and nonfinancial data. It also encompasses the investigation of
identified fluctuations and relationships that are inconsistent with other relevant information
or deviate significantly from predicted amounts.

PSA 501
AUDIT EVIDENCE ADDITIONAL CONSIDERATIONS ON SPECIFIC ITEMS
Attendance at Physical Inventory Counting
1

When inventory is material to the financial statements, the auditor should obtain sufficient
appropriate audit evidence regarding its existence and condition by attendance at physical inventory
counting unless impracticable.

If unable to attend the physical inventory count on the date panned due to unforeseen
circumstances, the auditor should take or observe some physical counts on an alternative date and,
when necessary, perform tests of intervening transactions.

Where attendance is impracticable, due to factors such as the nature and location of the inventory,
the auditor should consider whether alternative procedures provide sufficient appropriate audit
evidence of existence and condition to conclude that the auditor need not make reference to a scope
limitation.

In planning attendance at the physical inventory count or the alternative procedures, the auditor
would consider:
The nature of the accounting and internal control systems used regarding inventory.
Inherent, control, and detection risks, and materiality related to inventory.
Whether adequate procedures are expected to be established and proper instructions issued for
physical inventory counting.
The timing of the count.
The locations at which inventory is held.
Whether an experts assistance is needed.

The auditor would review managements instructions regarding:

The application of control procedures, for example, the collection of used stocksheets, accounting
for unused stocksheets, and count and recount procedures.
Accurate identification of the stage of completion of work in progress, of slow moving, obsolete or
damaged items and inventory by a third party, for example, on consignment.
Whether appropriate arrangements are made regarding the movement of inventory between
areas and the shipping and receipt of inventory before and after the cutoff date.

To obtain assurance that managements procedures are adequately implemented the auditor would
observe employees procedures and perform test counts.

The auditor would also consider cutoff procedures including details of the movement of inventory just
prior to, during, and after the count so that the accounting for such movements can be checked at a
later date.

The auditor would test the final inventory listing to assess whether it accurately reflects actual
inventory counts.

When inventory is under the custody and control of a third party, the auditor would ordinarily obtain
direct conformation from the third party as to the quantities and condition of inventory held on behalf
of the entity. Depending on the materiality of this inventory, the auditor would consider:
The integrity and independence of the third party.
Observing, or arranging for another auditor to observe, the physical inventory count.
Obtaining another auditors report on the adequacy of third partys accounting and internal
control systems for ensuring that inventory is correctly counted and adequately safeguarded.
Inspecting documentation regarding inventory held by third parties, for example, warehouse
receipts, or obtaining confirmation from other parties when such inventory has been pledged as
collateral.

Procedures regarding litigation and claims

1

The auditor should carry out procedures in order to become aware of any litigation and claims
involving the entity, which may have a material effect on the financial statements.

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3

Such procedures would include:

Make appropriate inquiries of management including obtaining representations.
Review board minutes and correspondence with the entitys lawyers.
Examine legal expense accounts.
Use any information obtained regarding the entitys business including information obtained from
discussions with any inhouse legal department.
When litigation or claims have been identified or when the auditor believes they may exist, the
auditor should seek direct communication with the entitys lawyers.

The letter, which should be prepared by management and sent by the auditor, should request the
lawyer to communicate directly with the auditor. When it is considered unlikely that the lawyer will
respond to a general inquiry, the letter would ordinarily specify:
A list of litigation and claims.

Managements assessment of the outcome of the litigation or claim and its estimate of the financial
implications, including costs involved.

A request that the lawyer confirms the reasonableness of managements assessments and provides
the auditor with further information if the list is considered by the lawyer to be incomplete or
incorrect.

The auditor considers the status of legal matters up to date of the audit report.

If management refuses to give the auditor permission to communicate with the entitys lawyers, this
would be a scope limitation and should ordinarily lead to a qualified opinion or a disclaimer of
opinion.

Valuation and disclosure of long-term investments

1 When long-term investments are material to the financial statements, the auditor should obtain
sufficient appropriate audit evidence regarding their valuation and disclosure.
2

Audit procedures ordinarily include considering evidence as to whether the entity has the ability to
continue to hold the investments on a long-term basis and discussing with management whether the
entity will continue to hold the investments as long-term investments and obtaining written
representations to that effect.

Other procedures would ordinarily include considering related financial statements and other
information, such as market quotations, which provide an indication of value and comparing such
values to the carrying amount of the investments up to the date of the auditors report.

Segment information

When segment information is material to the financial statements, the auditor should obtain sufficient
appropriate audit evidence regarding its disclosure in accordance with the applicable financial
reporting framework.

The auditor considers segment information in relation to the financial statements taken as a whole,
and is not ordinarily required to apply auditing procedures that would be necessary to express an
opinion on the segment information standing alone.

Audit procedures regarding segment information ordinarily consist of analytical procedures and other
audit test appropriate in the circumstances.

The auditor would discuss with management the methods used in determining segment information,
and consider whether such methods are likely to result in disclosure in accordance with GAAP and
test the application of such methods.

PSA 505
EXTERNAL CONFIRMATIONS
1 External confirmation is the process of obtaining and evaluating audit evidence through a direct
communication from a third party in response to a request for information about a particular item
affecting assertions made by management in the financial statements.
Use of positive and negative external confirmations
2

A positive external confirmation request asks the respondent to reply to the auditor in all cases
either by indicating the respondents agreement with the given information, or by asking the
respondent to fill in the information.

A negative external confirmation request asks the respondent to reply only in the event of
disagreement with the information provided in the request.

Negative confirmation requests may be used to reduce the risk of material misstatement to an
acceptable level when:
The assessed risk of material misstatement is lower.
A large number of small balances are involved.
A substantial number of errors are not expected.
The auditor has no reason to believe that respondents will disregard these requests.

When performing confirmation procedures, the auditor should maintain control over the process of
selecting those to whom a request will be sent, the preparation and sending of confirmation requests,
and the responses to those requests.

The auditor should perform alternative procedures where no response is received to a positive
external confirmation request. The alternative audit procedures should be such as to provide the
evidence the evidence about the financial statement assertions that the confirmation request was
intended to provide.

When the auditor forms a conclusion that the confirmation process and alternative procedures have
not provided sufficient appropriate audit evidence regarding an assertion, the auditor should
undertake additional procedures to obtain sufficient audit evidence.

The auditor should evaluate whether the results of the external confirmation process together with
the results from any other procedures performed, provide sufficient appropriate audit evidence
regarding the assertion being audited.

PSA 230 (Revised)

AUDIT DOCUMENTATION
1 The auditor should prepare, on a timely basis, audit documentation that provides:
a sufficient and appropriate record of the basis for the auditors report; and

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5

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8

evidence that the audit was performed in accordance with PSAs and applicable legal and
regulatory requirements
Audit documentation means the record of audit procedures performed, relevant audit evidence
obtained, and conclusions the auditor reached (terms such as working papers or work papers
are also sometimes used).
experience auditor means an individual (whether internal or external to the firm) who has
reasonable understanding of
Audit processes;
PSAs and applicable legal and regulatory requirements
The business environment in which the entity operates; and
Auditing and financial reporting issues relevant to the entitys industry
Audit documentation may be recorded on paper or on electronic or other media
The auditor should prepare the audit documentation so as to enable an experiences auditor, having
no precious connection with the audit, to understand:
the nature, timing , and extent of the audit procedures performed to comply with PSAs and
applicable legal and regulatory requirements
the results of the audit procedures and the audit evidence obtained; and
significant matters arising during the audit and the conclusions reached thereon
in documenting the nature, timing and extent of audit procedures performed, the auditor should
record the identifying characteristics of the specific items or matters beig tested
the auditor should document discussions of significant matters with management and others on a
timely basis
where, in exceptional circumstances, the auditor judges it necessary to depart from a basic
principle or an essential procedure that is relevant in the circumstances of the audit, the auditor
should document how the alternative audit procedures performed achieved the objective of the
audit, and, unless otherwise clear, the reasons for the departure
the auditor should record:
who performed the audit work and the date such work was completed
who reviewed the audit work performed and the date and extent of such review

Assembly of the final audit file

10 The auditor should complete the assembly of the final audit file on a timely basis after the date of
the auditors report. As PSQC 1 indicates, 60 days after the date of the auditors report is ordinarily
an appropriate time limit within which to complete the assembly of the final audit file