2016 2017 IAASB Handbook Volume 1.pdf - 4 PDF

INTERNATIONAL STANDARD ON AUDITING 800
(REVISED)
SPECIAL CONSIDERATIONS—AUDITS OF FINANCIAL
STATEMENTS PREPARED IN ACCORDANCE WITH
SPECIAL PURPOSE FRAMEWORKS
(Effective for audits of financial statements for periods
ending on or after December 15, 2016)
CONTENTS
Paragraph
Introduction
Scope of this ISA .................................................................................... 1–3
Effective Date ......................................................................................... 4
Objective ................................................................................................ 5
Definitions .............................................................................................. 6–7
Requirements
Considerations When Accepting the Engagement .................................. 8
Considerations When Planning and Performing the Audit ..................... 9–10
Forming an Opinion and Reporting Considerations ............................... 11–14
Application and Other Explanatory Material
Definition of Special Purpose Framework .............................................. A1–A4
Considerations When Accepting the Engagement .................................. A5–A8
Considerations When Planning and Performing the Audit ..................... A9–A12
Forming an Opinion and Reporting Considerations ............................... A13–A21
Appendix: Illustrations of Independent Auditor’s Reports on Special Purpose
Financial Statements
International Standard on Auditing (ISA) 800 (Revised), Special

Considerations—Audits of Financial Statements Prepared in Accordance with
Special Purpose Frameworks, should be read in conjunction with ISA 200,
Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with International Standards on Auditing.
953 ISA 800 (REVISED)

SPECIAL CONSIDERATIONS—AUDITS OF FINANCIAL STATEMENTS PREPARED IN
ACCORDANCE WITH SPECIAL PURPOSE FRAMEWORKS
Introduction
Scope of this ISA
1. The International Standards on Auditing (ISAs) in the 100–700 series apply
to an audit of financial statements. This ISA deals with special considerations
in the application of those ISAs to an audit of financial statements prepared
in accordance with a special purpose framework.
2. This ISA is written in the context of a complete set of financial statements
prepared in accordance with a special purpose framework. ISA 805
(Revised) 1 deals with special considerations relevant to an audit of a single
financial statement or of a specific element, account or item of a financial
statement.
3. This ISA does not override the requirements of the other ISAs; nor does it
purport to deal with all special considerations that may be relevant in the
circumstances of the engagement.
Effective Date
4. This ISA is effective for audits of financial statements for periods ending on
or after December 15, 2016.
Objective
5. The objective of the auditor, when applying ISAs in an audit of financial
statements prepared in accordance with a special purpose framework, is to
address appropriately the special considerations that are relevant to:
(a) The acceptance of the engagement;
(b) The planning and performance of that engagement; and
(c) Forming an opinion and reporting on the financial statements.
Definitions
6. For purposes of the ISAs, the following terms have the meanings attributed
below:
(a) Special purpose financial statements – Financial statements prepared
in accordance with a special purpose framework. (Ref: Para. A4)
(b) Special purpose framework – A financial reporting framework designed
to meet the financial information needs of specific users. The financial
1
ISA 805 (Revised), Special Considerations—Audits of Single Financial Statements and Specific
Elements, Accounts or Items of a Financial Statement
ISA 800 (REVISED) 954

reporting framework may be a fair presentation framework or a

compliance framework. 2 (Ref: Para. A1–A4)
7. Reference to “financial statements” in this ISA means “a complete set of
special purpose financial statements. The requirements of the applicable
financial reporting framework determine the presentation structure, and
content of the financial statements, and what constitutes a complete set of
financial statements. Reference to “special purpose financial statements”
includes the related disclosures.
Requirements
Considerations When Accepting the Engagement
Acceptability of the Financial Reporting Framework
8. ISA 210 requires the auditor to determine the acceptability of the financial
reporting framework applied in the preparation of the financial statements. 3
In an audit of special purpose financial statements, the auditor shall obtain an
understanding of: (Ref: Para. A5–A8)
(a) The purpose for which the financial statements are prepared;
(b) The intended users; and
(c) The steps taken by management to determine that the applicable
financial reporting framework is acceptable in the circumstances.
Considerations When Planning and Performing the Audit

9. ISA 200 requires the auditor to comply with all ISAs relevant to the audit. 4
In planning and performing an audit of special purpose financial statements,
the auditor shall determine whether application of the ISAs requires special
consideration in the circumstances of the engagement. (Ref: Para. A9–A12)
10. ISA 315 (Revised) requires the auditor to obtain an understanding of the
entity’s selection and application of accounting policies. 5 In the case of
financial statements prepared in accordance with the provisions of a contract,
the auditor shall obtain an understanding of any significant interpretations of
the contract that managemsent made in the preparation of those financial
statements. An interpretation is significant when adoption of another
2
ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance
with International Standards on Auditing, paragraph 13(a)
3
ISA 210, Agreeing the Terms of Audit Engagements, paragraph 6(a)
4
ISA 200, paragraph 18
5
ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment, paragraph 11(c)

reasonable interpretation would have produced a material difference in the

information presented in the financial statements.
Forming an Opinion and Reporting Considerations

11. When forming an opinion and reporting on special purpose financial
statements, the auditor shall apply the requirements in ISA 700
(Revised). 6 (Ref: Para. A13–A19)
Description of the Applicable Financial Reporting Framework

12. ISA 700 (Revised) requires the auditor to evaluate whether the financial
statements adequately refer to or describe the applicable financial reporting
framework. 7 In the case of financial statements prepared in accordance with
the provisions of a contract, the auditor shall evaluate whether the financial
statements adequately describe any significant interpretations of the contract
on which the financial statements are based.
13. ISA 700 (Revised) deals with the form and content of the auditor’s report,
including the specific ordering for certain elements. In the case of an
auditor’s report on special purpose financial statements:
(a) The auditor’s report shall also describe the purpose for which the
financial statements are prepared and, if necessary, the intended users,
or refer to a note in the special purpose financial statements that
contains that information; and
(b) If management has a choice of financial reporting frameworks in the
preparation of such financial statements, the explanation of
management’s 8 responsibility for the financial statements shall also
make reference to its responsibility for determining that the applicable
financial reporting framework is acceptable in the circumstances.
Alerting Readers that the Financial Statements Are Prepared in Accordance with a
Special Purpose Framework
14. The auditor’s report on special purpose financial statements shall include an
Emphasis of Matter paragraph alerting users of the auditor’s report that the
financial statements are prepared in accordance with a special purpose
framework and that, as a result, the financial statements may not be suitable
for another purpose. (Ref: Para. A20–A21)
***
6
ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements
7
ISA 700 (Revised), paragraph 15
8
Or other term that is appropriate in the context of the legal framework in the particular jurisdiction


Definition of Special Purpose Framework (Ref: Para. 6)
A1. Examples of special purpose frameworks are:
• A tax basis of accounting for a set of financial statements that
accompany an entity’s tax return;
• The cash receipts and disbursements basis of accounting for cash flow
information that an entity may be requested to prepare for creditors;
• The financial reporting provisions established by a regulator to meet
the requirements of that regulator; or
• The financial reporting provisions of a contract, such as a bond
indenture, a loan agreement, or a project grant.
A2. There may be circumstances where a special purpose framework is based on
a financial reporting framework established by an authorized or recognized
standards setting organization or by law or regulation, but does not comply
with all the requirements of that framework. An example is a contract that
requires financial statements to be prepared in accordance with most, but not
all, of the Financial Reporting Standards of Jurisdiction X. When this is
acceptable in the circumstances of the engagement, it is inappropriate for the
description of the applicable financial reporting framework in the special
purpose financial statements to imply full compliance with the financial
reporting framework established by the authorized or recognized standards
setting organization or by law or regulation. In the above example of the
contract, the description of the applicable financial reporting framework may
refer to the financial reporting provisions of the contract, rather than make
any reference to the Financial Reporting Standards of Jurisdiction X.
A3. In the circumstances described in paragraph A2, the special purpose
framework may not be a fair presentation framework even if the financial
reporting framework on which it is based is a fair presentation framework.
This is because the special purpose framework may not comply with all the
requirements of the financial reporting framework established by the
authorized or recognized standards setting organization or by law or
regulation that are necessary to achieve fair presentation of the financial
statements.
A4. Financial statements prepared in accordance with a special purpose
framework may be the only financial statements an entity prepares. In such
circumstances, those financial statements may be used by users other than
those for whom the financial reporting framework is designed. Despite the
broad distribution of the financial statements in those circumstances, the
financial statements are still considered to be special purpose financial
statements for purposes of the ISAs. The requirements in paragraphs 13–14

are designed to avoid misunderstandings about the purpose for which the
financial statements are prepared. Disclosures comprise explanatory or
descriptive information, set out as required, expressly permitted or otherwise
allowed by the applicable financial reporting framework, on the face of
financial statements, or in the notes, or incorporated therein by cross-
reference. 9

Acceptability of the Financial Reporting Framework (Ref: Para. 8)
A5. In the case of special purpose financial statements, the financial information
needs of the intended users are a key factor in determining the acceptability
of the financial reporting framework applied in the preparation of the
financial statements.
A6. The applicable financial reporting framework may encompass the financial
reporting standards established by an organization that is authorized or
recognized to promulgate standards for special purpose financial statements.
In that case, those standards will be presumed acceptable for that purpose if
the organization follows an established and transparent process involving
deliberation and consideration of the views of relevant stakeholders. In some
jurisdictions, law or regulation may prescribe the financial reporting
framework to be used by management in the preparation of special purpose
financial statements for a certain type of entity. For example, a regulator may
establish financial reporting provisions to meet the requirements of that
regulator. In the absence of indications to the contrary, such a financial
reporting framework is presumed acceptable for special purpose financial
statements prepared by such entity.
A7. Where the financial reporting standards referred to in paragraph A6 are
supplemented by legislative or regulatory requirements, ISA 210 requires the
auditor to determine whether any conflicts between the financial reporting
standards and the additional requirements exist, and prescribes actions to be
taken by the auditor if such conflicts exist. 10
A8. The applicable financial reporting framework may encompass the financial
reporting provisions of a contract, or sources other than those described in
paragraphs A6 and A7. In that case, the acceptability of the financial
reporting framework in the circumstances of the engagement is determined
by considering whether the framework exhibits attributes normally exhibited
by acceptable financial reporting frameworks as described in Appendix 2 of
ISA 210. In the case of a special purpose framework, the relative importance
to a particular engagement of each of the attributes normally exhibited by
9
ISA 200, paragraph 13(f)
10

acceptable financial reporting frameworks is a matter of professional

judgment. For example, for purposes of establishing the value of net assets
of an entity at the date of its sale, the vendor and the purchaser may have
agreed that very prudent estimates of allowances for uncollectible accounts
receivable are appropriate for their needs, even though such financial
information is not neutral when compared with financial information
prepared in accordance with a general purpose framework.
Considerations When Planning and Performing the Audit (Ref: Para. 9)

A9. ISA 200 requires the auditor to comply with (a) relevant ethical requirements,
including those pertaining to independence, relating to financial statement
audit engagements, and (b) all ISAs relevant to the audit. It also requires the
auditor to comply with each requirement of an ISA unless, in the
circumstances of the audit, the entire ISA is not relevant or the requirement
is not relevant because it is conditional and the condition does not exist. In
exceptional circumstances, the auditor may judge it necessary to depart from
a relevant requirement in an ISA by performing alternative audit procedures
to achieve the aim of that requirement. 11
A10. Application of some of the requirements of the ISAs in an audit of special
purpose financial statements may require special consideration by the
auditor. For example, in ISA 320, judgments about matters that are material
to users of the financial statements are based on a consideration of the
common financial information needs of users as a group. 12 In the case of an
audit of special purpose financial statements, however, those judgments are
based on a consideration of the financial information needs of the intended
users.
A11. In the case of special purpose financial statements, such as those prepared in
accordance with the requirements of a contract, management may agree with
the intended users on a threshold below which misstatements identified
during the audit will not be corrected or otherwise adjusted. The existence of
such a threshold does not relieve the auditor from the requirement to
determine materiality in accordance with ISA 320 for purposes of planning
and performing the audit of the special purpose financial statements.
A12. ISA 260 (Revised) requires the auditor to determine the appropriate person(s)
within the entity’s governance structure with whom to communicate. 13 ISA
260 (Revised) notes that, in some cases, all of those charged governance are
involved in managing the entity, and the application of the communication
11
ISA 200, paragraphs 14, 18, and 22–23
12
ISA 320, Materiality in Planning and Performing an Audit, paragraph 2
13
ISA 260 (Revised), Communication with Those Charged with Governance

requirements is modified to recognize this position. 14 When a complete set

of general purpose financial statements is also prepared by the entity, those
person(s) responsible for the oversight of the preparation of the special
purpose financial statements may not be the same as those charged with
governance responsible for the oversight of the preparation of those general
purpose financial statements.
Forming an Opinion and Reporting Considerations (Ref: Para. 11)

A13. The Appendix to this ISA contains illustrations of independent auditor’s
reports on special purpose financial statements. Other illustrations of
auditor’s reports may be relevant to reporting on special purpose financial
statements (see for example, the Appendices to ISA 700 (Revised), ISA 705
(Revised), 15 ISA 570 (Revised), 16 ISA 720 (Revised), 17 and ISA 706
(Revised)). 18
Application of ISA 700 (Revised) When Reporting on Special Purpose Financial

Statements
A14. Paragraph 11 of this ISA explains that the auditor is required to apply ISA
700 (Revised) when forming an opinion and reporting on special purpose
financial statements. In doing so, the auditor is also required to apply the
reporting requirements in other ISAs and may find the special considerations
addressed in paragraphs A15–A19 below helpful.
Going Concern
A15. Special purpose financial statements may or may not be prepared in
accordance with a financial reporting framework for which the going concern
basis of accounting is relevant (e.g., the going concern basis of accounting is
not relevant for some financial statements prepared on a tax basis in particular
jurisdictions). 19 Depending on the applicable financial reporting framework
used in the preparation of the special purpose financial statements, the
description in the auditor’s report of management’s responsibilities 20 relating
to going concern may need to be adapted as necessary. The description in the
14
ISA 260 (Revised), paragraph A8
15
ISA 705 (Revised), Modifications to the Opinion in the Independent Auditor’s Report
16
ISA 570 (Revised), Going Concern
17
ISA 720 (Revised), The Auditor’s Responsibilities Relating to Other Information
18
ISA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent
Auditor’s Report
19
20
See ISA 700 (Revised), paragraphs 34(b) and A48.

auditor’s report of the auditor’s responsibilities 21 may also need to be adapted

as necessary depending on how ISA 570 (Revised) applies in the
Key Audit Matters

A16. ISA 700 (Revised) requires the auditor to communicate key audit matters in
accordance with ISA 701 22 for audits of complete sets of general purpose
financial statements of listed entities. For audits of special purpose financial
statements, ISA 701 only applies when communication of key audit matters
in the auditor’s report on the special purpose financial statements is required
by law or regulation or the auditor otherwise decides to communicate key
audit matters. When key audit matters are communicated in the auditor’s
report on special purpose financial statements, ISA 701 applies in its
entirety. 23
Other Information
A17. ISA 720 (Revised) deals with the auditor’s responsibilities relating to other
information. In the context of this ISA, reports containing or accompanying
the special purpose financial statements—the purpose of which is to provide
owners (or similar stakeholders) with information on matters presented in the
special purpose financial statements—are considered to be annual reports for
the purpose of ISA 720 (Revised). In the case of financial statements prepared
using a special purpose framework, the term “similar stakeholders” includes
the specific users whose financial information needs are met by the design of
the special purpose framework used to prepare the special purpose financial
statements. When the auditor determines that the entity plans to issue such a
report, the requirements in ISA 720 (Revised) apply to the audit of the special
purpose financial statements.
Name of the Engagement Partner

A18. The requirement in ISA 700 (Revised) for the auditor to include the name of
the engagement partner in the auditor’s report also applies to audits of special
purpose financial statements of listed entities. 24 The auditor may be required
by law or regulation to include the name of the engagement partner in the
auditor’s report or may otherwise decide to do so when reporting on special
purpose financial statements of entities other than listed entities.
21
See ISA 700 (Revised), paragraph 39(b)(iv).
22
ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report
23
24
See ISA 700 (Revised), paragraphs 45 and A56–A58

Inclusion of a Reference to the Auditor’s Report on the Complete Set of General

Purpose Financial Statements
A19. The auditor may deem it appropriate to refer, in an Other Matter paragraph
in the auditor’s report on the special purpose financial statements, to the
auditor’s report on the complete set of general purpose financial statements
or to matter(s) reported therein (see ISA 706 (Revised)). 25 For example, the
auditor may consider it appropriate to refer in the auditor’s report on the
special purpose financial statements to a Material Uncertainty Related to
Going Concern section included in the auditor’s report on the complete set
of general purpose financial statements.
Alerting Readers that the Financial Statements Are Prepared in Accordance with a
Special Purpose Framework (Ref: Para. 14)
A20. The special purpose financial statements may be used for purposes other than
those for which they were intended. For example, a regulator may require
certain entities to place the special purpose financial statements on public
record. To avoid misunderstandings, the auditor alerts users of the auditor’s
report by including an Emphasis of Matter paragraph explaining that the
financial statements are prepared in accordance with a special purpose
framework and, therefore, may not be suitable for another purpose. ISA 706
(Revised) requires this paragraph to be included within a separate section of
the auditor’s report with an appropriate heading that includes the term
“Emphasis of Matter”. 26
Restriction on Distribution or Use (Ref: Para. 14)

A21. In addition to the alert required by paragraph 14, the auditor may consider it
appropriate to indicate that the auditor’s report is intended solely for the
specific users. Depending on the law or regulation of the particular
jurisdiction, this may be achieved by restricting the distribution or use of the
auditor’s report. In these circumstances, the paragraph referred to in
paragraph 14 may be expanded to include these other matters, and the
heading modified accordingly (see illustrations in the Appendix to this ISA).
25
See ISA 706 (Revised), paragraphs 10–11.
26
See paragraph 9(a) of ISA 706 (Revised)

Appendix
(Ref: Para. A14)
Illustrations of Independent Auditor’s Reports on Special Purpose

• Illustration 1: An auditor’s report on a complete set of financial statements of
an entity other than a listed entity prepared in accordance with the financial
reporting provisions of a contract (for purposes of this illustration, a compliance
framework).
• Illustration 2: An auditor’s report on a complete set of financial statements of
an entity other than a listed entity prepared in accordance with the tax basis of
accounting in Jurisdiction X (for purposes of this illustration, a compliance
framework).
• Illustration 3: An auditor’s report on a complete set of financial statements of a
listed entity prepared in accordance with the financial reporting provisions
established by a regulator (for purposes of this illustration, a fair presentation
framework).
963 ISA 800 (REVISED) APPENDIX

Illustration 1: An auditor’s report on a complete set of financial statements

of an entity other than a listed entity prepared in accordance with the
financial reporting provisions of a contract (for purposes of this illustration,
a compliance framework).
For purposes of this illustrative auditor’s report, the following circumstances
are assumed:
• The financial statements have been prepared by management of the
entity in accordance with the financial reporting provisions of a
contract (that is, a special purpose framework). Management does not
have a choice of financial reporting frameworks.
• The applicable financial reporting framework is a compliance
framework.
• An auditor’s report on the complete set of general purpose financial
statements was not issued.
• The terms of the audit engagement reflect the description of
management’s responsibility for the financial statements in ISA 210.
• The auditor has concluded an unmodified (i.e., “clean”) opinion is
appropriate based on the audit evidence obtained.
• The relevant ethical requirements that apply to the audit are those of
the jurisdiction.
• Based on the audit evidence obtained, the auditor has concluded that a
material uncertainty does not exist related to events or conditions that
may cast significant doubt on the entity’s ability to continue as a going
concern in accordance with ISA 570 (Revised).
• Distribution and use of the auditor’s report are restricted.
• The auditor is not required, and has otherwise not decided, to
communicate key audit matters in accordance with ISA 701.
• The auditor has determined that there is no other information (i.e., the
requirements of ISA 720 (Revised) do not apply).
• Those responsible for oversight of the financial reporting process differ
from those responsible for the preparation of the financial statements.
• The auditor has no other reporting responsibilities required under
local law or regulation.
INDEPENDENT AUDITOR’S REPORT

[Appropriate Addressee]
Opinion
We have audited the financial statements of ABC Company (the Company), which
comprise the balance sheet as at December 31, 20X1, and the income statement,
ISA 800 (REVISED) APPENDIX 964

statement of changes in equity and cash flow statement for the year then ended, and
notes to the financial statements, including a summary of significant accounting
policies.
In our opinion, the accompanying financial statements of the Company for the year
ended December 31, 20X1 are prepared in all material respects, in accordance with
the financial reporting provisions of Section Z of the contract dated January 1, 20X1
between the Company and DEF Company (“the contract”).
Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs).
Our responsibilities under those standards are further described in the Auditor’s
Responsibilities for the Audit of the Financial Statements section of our report. We are
independent of the Company in accordance with the ethical requirements that are relevant
to our audit of the financial statements in [jurisdiction], and we have fulfilled our other
ethical responsibilities in accordance with these requirements. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Emphasis of Matter – Basis of Accounting and Restriction on Distribution and

Use
We draw attention to Note X to the financial statements, which describes the basis of
accounting. The financial statements are prepared to assist the Company in complying
with the financial reporting provisions of the contract referred to above. As a result,
the financial statements may not be suitable for another purpose. Our report is intended
solely for the Company and DEF Company and should not be distributed to or used
by parties other than the Company or DEF Company. Our opinion is not modified in
respect of this matter.
Responsibilities of Management and Those Charged with Governance for the

Financial Statements 27
Management is responsible for the preparation of the financial statements in
accordance with the financial reporting provisions of Section Z of the contract and for
such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether
due to fraud or error.
In preparing the financial statements, management is responsible for assessing the
Company’s ability to continue as a going concern, disclosing, as applicable, matters
relating to going concern and using the going concern basis of accounting unless
management either intends to liquidate the Company or to cease operations, or has no
realistic alternative but to do so.
27
Throughout these illustrative auditor’s reports, the terms management and those charged with
governance may need to be replaced by another term that is appropriate in the context of the legal
framework in the particular jurisdiction.

Those charged with governance are responsible for overseeing the Company’s
financial reporting process.
Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud or
error, and to issue an auditor’s report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit conducted in accordance
with ISAs will always detect a material misstatement when it exists. Misstatements can
arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on
the basis of these financial statements.
Paragraph 41(b) of ISA 700 (Revised) explains that the shaded material below can be located in an Appendix
to the auditor’s report. Paragraph 41(c) of ISA 700 (Revised) explains that when law, regulation or national
auditing standards expressly permit, reference can be made to a website of an appropriate authority that
contains the description of the auditor’s responsibilities, rather than including this material in the auditor’s
report, provided that the description on the website addresses, and is not inconsistent with, the description
of the auditor’s responsibilities below.
As part of an audit in accordance with ISAs, we exercise professional judgment and

maintain professional skepticism throughout the audit. We also:
• Identify and assess the risks of material misstatement of the financial
statements, whether due to fraud or error, design and perform audit procedures
responsive to those risks, and obtain audit evidence that is sufficient and
appropriate to provide a basis for our opinion. The risk of not detecting a
material misstatement resulting from fraud is higher than for one resulting from
error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit 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 the Company’s
internal control. 28
• Evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made by
management.
• Conclude on the appropriateness of management’s use of the going concern
basis of accounting and, based on the audit evidence obtained, whether a
material uncertainty exists related to events or conditions that may cast
significant doubt on the Company’s ability to continue as a going concern. If
28
This sentence would be modified, as appropriate, in circumstances when the auditor also has
responsibility to issue an opinion on the effectiveness of internal control in conjunction with the audit
of the financial statements.

we conclude that a material uncertainty exists, we are required to draw attention

in our auditor’s report to the related disclosures in the financial statements or,
if such disclosures are inadequate, to modify our opinion. Our conclusions are
based on the audit evidence obtained up to the date of our auditor’s report.
However, future events or conditions may cause the Company to cease to
continue as a going concern.
We communicate with those charged with governance regarding, among other matters,
the planned scope and timing of the audit and significant audit findings, including any
significant deficiencies in internal control that we identify during our audit.
Signature in the name of the audit firm, the personal name of the auditor, or both, as
appropriate for the particular jurisdiction]
[Auditor address] [Placement of date and address reversed)]
[Date]

Illustration 2: An auditor’s report on a complete set of financial statements

of an entity other than a listed entity prepared in accordance with the tax
basis of accounting in Jurisdiction X (for purposes of this illustration, a
compliance framework).
are assumed:
• Audit of a complete set of financial statements that have been prepared
by management of a partnership in accordance with the tax basis of
accounting in Jurisdiction X (that is, a special purpose framework) to
assist the partners in preparing their individual income tax returns.
Management does not have a choice of financial reporting frameworks.
framework.
the jurisdiction.
• Distribution of the auditor’s report is restricted.
communicate key audit matters in accordance with ISA 701.
• Those responsible for oversight of the financial statements differ from
those responsible for the preparation of the financial statements.

Opinion
We have audited the financial statements of ABC Partnership (the Partnership), which
comprise the balance sheet as at December 31, 20X1 and the income statement for the

year then ended, and notes to the financial statements, including a summary of
significant accounting policies.
In our opinion, the accompanying financial statements of the Partnership for the year
ended December 31, 20X1 are prepared, in all material respects, in accordance with
[describe the applicable income tax law] of Jurisdiction X.
Basis for Opinion

independent of the Partnership in accordance with the ethical requirements that are
relevant to our audit of the financial statements in [jurisdiction], and we have fulfilled our
other ethical responsibilities in accordance with these requirements. We believe that the
audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Emphasis of Matter – Basis of Accounting and Restriction on Distribution

accounting. The financial statements are prepared to assist the partners of the
Partnership in preparing their individual income tax returns. As a result, the financial
statements may not be suitable for another purpose. Our report is intended solely for
the Partnership and its partners and should not be distributed to parties other than the
Partnership or its partners. Our opinion is not modified in respect of this matter.

accordance with the tax basis of accounting in Jurisdiction X and for such internal
control as management determines is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or error.
Those charged with governance are responsible for overseeing the Partnership’s
29
Or other terms that are appropriate in the context of the legal framework in the particular jurisdiction


with International Standards on Auditing (ISAs) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of these

the purpose of expressing an opinion on the effectiveness of the Partnership’s
30


management.
We communicate with those charged with governance regarding, among other matters,
the planned scope and timing of the audit and significant audit findings, including any
[Signature in the name of the audit firm, the personal name of the auditor, or both,
as appropriate for the particular jurisdiction]
[Date]

Illustration 3: An auditor’s report on a complete set of financial statements of

a listed entity prepared in accordance with the financial reporting provisions
established by a regulator (for purposes of this illustration, a fair presentation
framework).
are assumed:
• Audit of a complete set of financial statements of a listed entity that
have been prepared by management of the entity in accordance with
the financial reporting provisions established by a regulator (that is, a
special purpose framework) to meet the requirements of that regulator.
Management does not have a choice of financial reporting frameworks.
• The applicable financial reporting framework is a fair presentation
framework.
the jurisdiction.
significant doubt on the entity’s ability to continue as a going concern
in accordance with ISA 570 (Revised). The disclosure of the material
uncertainty in the financial statements is adequate.
• Distribution or use of the auditor’s report is not restricted.
• The auditor is required by the regulator to communicate key audit
matters in accordance with ISA 701.
• The Other Matter paragraph refers to the fact that the auditor has also
issued an auditor’s report on financial statements prepared by ABC
Company for the same period in accordance with a general purpose
framework.
• Those responsible for oversight of the financial statements differ from
those responsible for the preparation of the financial statements.
• The auditor has no other reporting responsibilities required under local
law or regulation.

[To the Shareholders of ABC Company or Appropriate Addressee]

Opinion
We have audited the financial statements of ABC Company (the Company), which
comprise the balance sheet as at December 31, 20X1, and the income statement,
statement of changes in equity and cash flow statement for the year then ended, and
notes to the financial statements, including a summary of significant accounting
policies.
In our opinion, the accompanying financial statements present fairly, in all material
respects, (or give a true and fair view of) the financial position of the Company as at
December 31, 20X1, and (of) its financial performance and its cash flows for the year
then ended in accordance with the financial reporting provisions of Section Y of
Regulation Z.
Basis for Opinion

to our audit of the financial statements in [jurisdiction], and we have fulfilled our other
Emphasis of Matter – Basis of Accounting

accounting. The financial statements are prepared to assist the Company to meet the
requirements of Regulator DEF. As a result, the financial statements may not be
suitable for another purpose. Our opinion is not modified in respect of this matter.
Material Uncertainty Related to Going Concern

We draw attention to Note 6 in the financial statements, which indicates that the
Company incurred a net loss of ZZZ during the year ended December 31, 20X1 and,
as of that date, the Company’s current liabilities exceeded its total assets by YYY. As
stated in Note 6, these events or conditions, along with other matters as set forth in
Note 6, indicate that a material uncertainty exists that may cast significant doubt on
the Company’s ability to continue as a going concern. Our opinion is not modified in
Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the financial statements of the current period. These matters
were addressed in the context of our audit of the financial statements as a whole, and in
forming our opinion thereon, and we do not provide a separate opinion on these matters.
In addition to the matter described in the Material Uncertainty Related to Going Concern

section above, we have determined the matters described below to be key audit matters to
be communicated in our report.
[Description of each key audit matter in accordance with ISA 701 as applied to this audit.]
Other Matter
The Company has prepared a separate set of financial statements for the year ended
December 31, 20X1 in accordance with International Financial Reporting Standards
on which we issued a separate auditor’s report to the shareholders of the Company
dated March 31, 20X2.

Management is responsible for the preparation and fair presentation of the financial
statements in accordance with the financial reporting provisions of Section Y of
Regulation Z 32 and for such internal control as management determines is necessary
to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.

with International Standards on Auditing (ISAs) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of these
31
Or other terms that are appropriate in the context of the legal framework in the particular jurisdiction
32
Where management’s responsibility is to prepare financial statements that give a true and fair view,
this may read: “Management is responsible for the preparation of a financial statements that give a
true and fair view in accordance with the financial reporting provisions of section Y of Regulation Z
and for such …”


• Obtain an understanding of internal control relevant to audit 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 the Company internal
control. 33
management.
• Evaluate the overall presentation, structure and content of the financial
statements, including the disclosures, and whether the financial statements
represent the underlying transactions and events in a manner that achieves fair
presentation.
33

We communicate with those charged with governance regarding, among other matters, the
planned scope and timing of the audit and significant audit findings, including any
We also provide those charged with governance with a statement that we have complied
with relevant ethical requirements regarding independence, and to communicate with them
all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine
those matters that were of most significance in the audit of the financial statements of
the current period and are therefore the key audit matters. We describe these matters
in our auditor’s report unless law or regulation precludes public disclosure about the
matter or when, in extremely rare circumstances, we determine that a matter should not
be communicated in our report because the adverse consequences of doing so would
reasonably be expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor’s report is
[name].
[Date]

(REVISED)
SPECIAL CONSIDERATIONS—AUDITS OF SINGLE
FINANCIAL STATEMENTS AND SPECIFIC
ELEMENTS, ACCOUNTS OR ITEMS OF A
FINANCIAL STATEMENT
(Effective for audits for periods
CONTENTS
Paragraph
Introduction
Scope of this ISA .................................................................................... 1–3
Effective Date ......................................................................................... 4
Objective ................................................................................................ 5
Definitions .............................................................................................. 6
Requirements
Considerations When Accepting the Engagement .................................. 7–9
Considerations When Planning and Performing the Audit ..................... 10
Forming an Opinion and Reporting Considerations ............................... 11–17
Scope of this ISA .................................................................................... A1–A4
Considerations When Accepting the Engagement .................................. A5–A9
Considerations When Planning and Performing the Audit ..................... A10–A15
Forming an Opinion and Reporting Considerations ............................ A16–A28
Appendix 1: Examples of Specific Elements, Accounts or Items of a
Financial Statement
Appendix 2: Illustrations of Auditor’s Reports on a Single Financial
Statement and on a Specific Element of a Financial Statement

SPECIAL CONSIDERATIONS—AUDITS OF SINGLE FINANCIAL STATEMENTS AND SPECIFIC
ELEMENTS, ACCOUNTS OR ITEMS OF A FINANCIAL STATEMENT
International Standard on Auditing (ISA) 805 (Revised), Special Considerations—

Audits of Single Financial Statements and Specific Elements, Accounts or Items of
a Financial Statement, should be read in conjunction with ISA 200, Overall
Objectives of the Independent Auditor and the Conduct of an Audit in Accordance
with International Standards on Auditing.

Introduction
Scope of this ISA
1. The International Standards on Auditing (ISAs) in the 100–700 series apply
to an audit of financial statements and are to be adapted as necessary in the
circumstances when applied to audits of other historical financial
information. This ISA deals with special considerations in the application of
those ISAs to an audit of a single financial statement or of a specific element,
account or item of a financial statement. The single financial statement or the
specific element, account or item of a financial statement may be prepared in
accordance with a general or special purpose framework. If prepared in
accordance with a special purpose framework, ISA 800 (Revised) 1 also
applies to the audit. (Ref: Para. A1–A4)
2. This ISA does not apply to the report of a component auditor, issued as a
result of work performed on the financial information of a component at the
request of a group engagement team for purposes of an audit of group
financial statements (see ISA 600). 2
3. This ISA does not override the requirements of the other ISAs; nor does it
purport to deal with all special considerations that may be relevant in the
Effective Date
4. This ISA is effective for audits of single financial statements or of specific
elements, accounts or items for periods ending on or after December 15,
2016. In the case of audits of single financial statements or of specific
elements, accounts or items of a financial statement as at a specific date, this
ISA is effective for audits of such information as at a date on or after
December 15, 2016.
Objective
5. The objective of the auditor, when applying ISAs in an audit of a single
financial statement or of a specific element, account or item of a financial
statement, is to address appropriately the special considerations that are
relevant to:
(a) The acceptance of the engagement;
(b) The planning and performance of that engagement; and
1
ISA 800 (Revised), Special Considerations—Audits of Financial Statements Prepared in
Accordance with Special Purpose Frameworks
2
ISA 600, Special Considerations—Audits of Group Financial Statements (Including the Work of
Component Auditors)

(c) Forming an opinion and reporting on the single financial statement or

on the specific element, account or item of a financial statement.
Definitions
6. For purposes of this ISA, reference to:
(a) “Element of a financial statement” or “element” means an “element,
account or item of a financial statement;”
(b) “International Financial Reporting Standards” means the International
Financial Reporting Standards (IFRSs) issued by the International
Accounting Standards Board; and
(c) A single financial statement or to a specific element of a financial
statement includes the related disclosures. The related disclosures
ordinarily comprise explanatory or other descriptive information
relevant to the financial statement or to the element. (Ref: Para. A2)
Requirements
Application of ISAs
7. ISA 200 requires the auditor to comply with all ISAs relevant to the audit. 3
In the case of an audit of a single financial statement or of a specific element
of a financial statement, this requirement applies irrespective of whether the
auditor is also engaged to audit the entity’s complete set of financial
statements. If the auditor is not also engaged to audit the entity’s complete
set of financial statements, the auditor shall determine whether the audit of a
single financial statement or of a specific element of those financial
statements in accordance with ISAs is practicable. (Ref: Para. A5–A6)
Acceptability of the Financial Reporting Framework

8. ISA 210 requires the auditor to determine the acceptability of the financial
reporting framework applied in the preparation of the financial statements. 4
In the case of an audit of a single financial statement or of a specific element
of a financial statement, this shall include whether application of the financial
reporting framework will result in a presentation that provides adequate
disclosures to enable the intended users to understand the information
conveyed in the financial statement or the element, and the effect of material
3
with International Standards on Auditing, paragraph 18
4
ISA 210, Agreeing the Terms of Audit Engagements, paragraph 6(a)

transactions and events on the information conveyed in the financial

statement or the element. (Ref: Para. A7)
Form of Opinion
9. ISA 210 requires that the agreed terms of the audit engagement include the
expected form of any reports to be issued by the auditor. 5 In the case of an
audit of a single financial statement or of a specific element of a financial
statement, the auditor shall consider whether the expected form of opinion is
appropriate in the circumstances. (Ref: Para. A8–A9)
Considerations When Planning and Performing the Audit

10. ISA 200 states that ISAs are written in the context of an audit of financial
statements; they are to be adapted as necessary in the circumstances when
applied to audits of other historical financial information. 6,7 In planning and
performing the audit of a single financial statement or of a specific element
of a financial statement, the auditor shall adapt all ISAs relevant to the audit
as necessary in the circumstances of the engagement. (Ref: Para. A10–A15)
Forming an Opinion and Reporting Considerations

11. When forming an opinion and reporting on a single financial statement or on
a specific element of a financial statement, the auditor shall apply the
requirements in ISA 700 (Revised), 8 and, when applicable, ISA 800
(Revised) adapted as necessary in the circumstances of the engagement. (Ref:
Para. A16–A22)
Reporting on the Entity’s Complete Set of Financial Statements and on a Single

Financial Statement or on a Specific Element of Those Financial Statements
12. If the auditor undertakes an engagement to report on a single financial
statement or on a specific element of a financial statement in conjunction
with an engagement to audit the entity’s complete set of financial statements,
the auditor shall express a separate opinion for each engagement.
13. The audited single financial statement or the audited specific element of a
financial statement may be published together with the entity’s audited
complete set of financial statements. If the auditor concludes that the
presentation of the single financial statement or of the specific element of a
financial statement does not differentiate it sufficiently from the complete set
5
ISA 210, paragraph 10(e)
6
7
ISA 200, paragraph 13(f), explains that the term “financial statements” ordinarily refers to a complete
set of financial statements as determined by the requirements of the applicable financial reporting
framework.
8
ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements

of financial statements, the auditor shall ask management to rectify the

situation. Subject to paragraphs 15 and 16, the auditor shall also differentiate
the opinion on the single financial statement or on the specific element of a
financial statement from the opinion on the complete set of financial
statements. The auditor shall not issue the auditor’s report containing the
opinion on the single financial statement or on the specific element of a
financial statement until satisfied with the differentiation.
Considering the Implications of Certain Matters Included in the Auditor’s
Report on the Entity’s Complete Set of Financial Statements for the Audit of
the Single Financial Statement or the Specific Element of a Financial
Statement and for the Auditor’s Report Thereon.
14. If the auditor’s report on an entity’s complete set of financial statements
includes:
(a) A modified opinion in accordance with ISA 705 (Revised); 9
(b) An Emphasis of Matter paragraph or an Other Matter paragraph in
accordance with ISA 706 (Revised); 10
(c) A Material Uncertainty Related to Going Concern section in
(d) Communication of key audit matters in accordance with ISA 701; 12 or
(e) A statement that describes an uncorrected material misstatement of the
other information in accordance with ISA 720 (Revised); 13
the auditor shall consider the implications, if any, that these matters have for
the audit of the single financial statement or of the specific element of a
financial statement and for the auditor’s report thereon. (Ref: Para. A23–A27)
Adverse Opinion or Disclaimer of Opinion in the Auditor’s Report on the Entity’s

Complete Set of Financial Statements
15. If the auditor concludes that it is necessary to express an adverse opinion or
disclaim an opinion on the entity’s complete set of financial statements as a
whole, ISA 705 (Revised) does not permit the auditor to include in the same
auditor’s report an unmodified opinion on a single financial statement that
forms part of those financial statements or on a specific element of those
9
ISA 705 (Revised), Modifications to the Opinion in the Independent Auditor’s Report
10
Auditor’s Report
11
ISA 570 (Revised), Going Concern, paragraph 22
12
ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report, paragraph 13
13
ISA 720 (Revised), The Auditor’s Responsibilities Relating to Other Information, paragraph 22(e)(ii)

financial statements. 14 This is because such an unmodified opinion would

contradict the adverse opinion or disclaimer of opinion on the entity’s
complete set of financial statements as a whole. (Ref: Para. A28)
16. If the auditor concludes that it is necessary to express an adverse opinion or
disclaim an opinion on the entity’s complete set of financial statements as a
whole but, in the context of a separate audit of a specific element of those
financial statements, the auditor nevertheless considers it appropriate to
express an unmodified opinion on that element, the auditor shall only do so
if:
(a) The auditor is not prohibited by law or regulation from doing so;
(b) That opinion is expressed in an auditor’s report that is not published
together with the auditor’s report containing the adverse opinion or
disclaimer of opinion; and
(c) The element does not constitute a major portion of the entity’s
complete set of financial statements.
17. The auditor shall not express an unmodified opinion on a single financial
statement of a complete set of financial statements if the auditor has
expressed an adverse opinion or disclaimed an opinion on the complete set
of financial statements as a whole. This is the case even if the auditor’s report
on the single financial statement is not published together with the auditor’s
report containing the adverse opinion or disclaimer of opinion. This is
because a single financial statement is deemed to constitute a major portion
of those financial statements.
***
Scope of this ISA (Ref: Para. 1, 6(c))
A1. ISA 200 defines the term “historical financial information” as information
expressed in financial terms in relation to a particular entity, derived
primarily from that entity’s accounting system, about economic events
occurring in past time periods or about economic conditions or circumstances
at points in time in the past. 15
A2. ISA 200 defines the term “financial statements” as a structured representation
of historical financial information, including disclosures, intended to
communicate an entity’s economic resources or obligations at a point in time
or the changes therein for a period of time in accordance with a financial
14
15
ISA 200, paragraph 13(g)

reporting framework. The term “financial statements” ordinarily refers to a

complete set of financial statements as determined by the requirements of the
applicable financial reporting framework, but can also refer to a single
financial statement. Disclosures comprise explanatory or descriptive
information, set out as required, expressly permitted or otherwise allowed by
the applicable financial reporting framework, on the face of a financial
statement, or in the notes, or incorporated therein by cross-reference. 16 As
noted in paragraph 6(c), reference to a single financial statement or specific
element of a financial statement includes the related disclosures.
A3. ISAs are written in the context of an audit of financial statements; 17 they are
to be adapted as necessary in the circumstances when applied to an audit of
other historical financial information, such as a single financial statement or
a specific element of a financial statement. This ISA assists in this regard.
(Appendix 1 lists examples of such other historical financial information.)
A4. A reasonable assurance engagement other than an audit of historical financial
information is performed in accordance with International Standard on
Assurance Engagements (ISAE) 3000 (Revised). 18

Application of ISAs (Ref: Para. 7)
A5. ISA 200 requires the auditor to comply with (a) relevant ethical requirements,
including those pertaining to independence, relating to financial statement
audit engagements, and (b) all ISAs relevant to the audit. It also requires the
auditor to comply with each requirement of an ISA unless, in the
circumstances of the audit, the entire ISA is not relevant or the requirement
is not relevant because it is conditional and the condition does not exist. In
exceptional circumstances, the auditor may judge it necessary to depart from
a relevant requirement in an ISA by performing alternative audit procedures
to achieve the aim of that requirement. 19
A6. Compliance with the requirements of ISAs relevant to the audit of a single
financial statement or of a specific element of a financial statement may not
be practicable when the auditor is not also engaged to audit the entity’s
complete set of financial statements. In such cases, the auditor often does not
have the same understanding of the entity and its environment, including its
internal control, as an auditor who also audits the entity’s complete set of
financial statements. The auditor also does not have the audit evidence about
16
17
18
ISAE 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial
Information
19
ISA 200, paragraphs 14, 18, and 22–23

the general quality of the accounting records or other accounting information

that would be acquired in an audit of the entity’s complete set of financial
statements. Accordingly, the auditor may need further evidence to
corroborate audit evidence acquired from the accounting records. In the case
of an audit of a specific element of a financial statement, certain ISAs require
audit work that may be disproportionate to the element being audited. For
example, although the requirements of ISA 570 (Revised) are likely to be
relevant in the circumstances of an audit of a schedule of accounts receivable,
complying with those requirements may not be practicable because of the
audit effort required. If the auditor concludes that an audit of a single
financial statement or of a specific element of a financial statement in
accordance with ISAs may not be practicable, the auditor may discuss with
management whether another type of engagement might be more practicable.
Acceptability of the Financial Reporting Framework (Ref: Para. 8)

A7. A single financial statement or a specific element of a financial statement
may be prepared in accordance with an applicable financial reporting
framework that is based on a financial reporting framework established by
an authorized or recognized standards setting organization for the preparation
of a complete set of financial statements (for example, IFRSs). If this is the
case, determination of the acceptability of the applicable framework may
involve considering whether that framework includes all the requirements of
the framework on which it is based that are relevant to the presentation of a
single financial statement or of a specific element of a financial statement
that provides adequate disclosures.
Form of Opinion (Ref: Para. 9)

A8. The form of opinion to be expressed by the auditor depends on the applicable
financial reporting framework and any applicable laws or regulations. 20 In
accordance with ISA 700 (Revised): 21
(a) When expressing an unmodified opinion on a complete set of financial
statements prepared in accordance with a fair presentation framework,
the auditor’s opinion, unless otherwise required by law or regulation,
uses one of the following phrases:
(i) the financial statements present fairly, in all material respects,
in accordance with [the applicable financial reporting
framework]; or
(ii) the financial statements give a true and fair view in accordance
with [the applicable financial reporting framework]; and
20
21
ISA 700 (Revised), paragraphs 25–26

(b) When expressing an unmodified opinion on a complete set of financial

statements prepared in accordance with a compliance framework, the
auditor’s opinion states that the financial statements are prepared, in
all material respects, in accordance with [the applicable financial
reporting framework].
A9. In the case of a single financial statement or of a specific element of a
financial statement, the applicable financial reporting framework may not
explicitly address the presentation of the financial statement or of the specific
element of the financial statement. This may be the case when the applicable
financial reporting framework is based on a financial reporting framework
established by an authorized or recognized standards setting organization for
the preparation of a complete set of financial statements (for example,
IFRSs). The auditor therefore considers whether the expected form of
opinion is appropriate in the light of the applicable financial reporting
framework. Factors that may affect the auditor’s consideration as to whether
to use the phrases “presents fairly, in all material respects,” or “gives a true
and fair view” in the auditor’s opinion include:
• Whether the applicable financial reporting framework is explicitly or
implicitly restricted to the preparation of a complete set of financial
statements.
• Whether the single financial statement or the specific element of a
financial statement will:
○ Comply fully with each of those requirements of the framework
relevant to the particular financial statement or the particular
element, and the presentation of the financial statement or the
specific element of a financial statement include the related
disclosures.
○ If necessary to achieve fair presentation, provide disclosures
beyond those specifically required by the framework or, in
exceptional circumstances, depart from a requirement of the
framework.
The auditor’s decision as to the expected form of opinion is a matter of
professional judgment. It may be affected by whether use of the phrases
“presents fairly, in all material respects,” or “gives a true and fair view” in
the auditor’s opinion on a single financial statement or on a specific element
of a financial statement prepared in accordance with a fair presentation
framework is generally accepted in the particular jurisdiction.

Considerations When Planning and Performing the Audit (Ref: Para. 10)
A10. The relevance of each of the ISAs requires careful consideration. Even when
only a specific element of a financial statement is the subject of the audit,
ISAs such as ISA 240, 22 ISA 550 23 and ISA 570 (Revised) are, in principle,
relevant. This is because the element could be misstated as a result of fraud,
the effect of related party transactions, or the incorrect application of the
going concern basis of accounting under the applicable financial reporting
framework.
A11. ISA 260 (Revised) requires the auditor to determine the appropriate person(s)
within the entity’s governance structure with whom to communicate. 24 ISA
260 (Revised) notes that, in some cases, all of those charged with governance
are involved in managing the entity, and the application of communication
requirements is modified to recognize this position. 25 When a complete set
of financial statements is also prepared by the entity, those person(s)
responsible for the oversight of the preparation of the single financial
statement or the element may not be the same as those charged with
governance responsible for the oversight of the preparation of the complete
set of financial statements. A12. Furthermore, ISAs are written in the
context of an audit of financial statements; they are to be adapted as necessary
in the circumstances when applied to the audit of a single financial
statement 26 or of a specific element of a financial statement. For example,
written representations from management about the complete set of financial
statements would be replaced by written representations about the
presentation of the financial statement or the element in accordance with the
applicable financial reporting framework.A13. Matters included in
the auditor’s report on the complete set of financial statements may have
implications for the audit of a single financial statement or of an element of
a financial statement (see paragraph 14). When planning and performing an
audit of a single financial statement or a specific element of a financial
statement in conjunction with the audit of the entity’s complete set of
financial statements, the auditor may be able to use audit evidence obtained
as part of the audit of the entity’s complete set of financial statements in the
audit of the financial statement or the element. ISAs, however, require the
auditor to plan and perform the audit of the financial statement or element to
obtain sufficient appropriate audit evidence on which to base the opinion on
the financial statement or on the element.
22
ISA 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements
23
ISA 550, Related Parties
24
ISA 260 (Revised), Communication with Those Charged with Governance, paragraph 11
25
ISA 260 (Revised), paragraph 10(b), 13, A1 (third bullet), A2 and A8.
26

A14. The individual financial statements that comprise a complete set of financial
statements, and many of the specific elements of those financial statements,
including their related disclosures, are interrelated. Accordingly, when
auditing a single financial statement or a specific element of a financial
statement, the auditor may not be able to consider the financial statement or
the element in isolation. Consequently, the auditor may need to perform
procedures in relation to the interrelated items to meet the objective of the
audit.
A15. Furthermore, the materiality determined for a single financial statement or
for a specific element of a financial statement may be lower than the
materiality determined for the entity’s complete set of financial statements;
this will affect the nature, timing and extent of the audit procedures and the
evaluation of uncorrected misstatements.
Forming an Opinion and Reporting Considerations (Ref: Para. 11)

A16. ISA 700 (Revised) requires the auditor, in forming an opinion, to evaluate
whether the financial statements provide adequate disclosures to enable the
intended users to understand the effect of material transactions and events on
the information conveyed in the financial statements. 27 In the case of a single
financial statement or of a specific element of a financial statement, it is
important that the financial statement or the element, in view of the
requirements of the applicable financial reporting framework, provides
adequate disclosures to enable the intended users to understand the
information conveyed in the financial statement or the element, and the effect
of material transactions and events on the information conveyed in the
financial statement or the element.
A17. Appendix 2 contains illustrations of independent auditor’s reports on a single
financial statement and on a specific element of a financial statement. Other
illustrations of auditor’s reports may be relevant to reporting on a single
financial statement or on a specific element of a financial statement (see, for
example, the Appendices to ISA 700 (Revised), ISA 705 (Revised), ISA 570
(Revised), ISA 720 (Revised), and ISA 706 (Revised)).
Application of ISA 700 (Revised) When Reporting on a Single Financial Statement or

on a Specific Element of a Financial Statement
A18. Paragraph 11 of this ISA explains that the auditor is required to apply the
requirements in ISA 700 (Revised), adapted as necessary in the
circumstances of the engagement, when forming an opinion and reporting on
a single financial statement or on a specific element of a financial
statement. In doing so, the auditor is also required to apply the reporting
requirements in other ISAs adapted as necessary in the circumstances of the
27
ISA 700 (Revised), paragraph 13(e)

engagement, and may find the considerations addressed in paragraphs A19–

A21 below helpful.
Going Concern
A19. Depending on the applicable financial reporting framework used in the
preparation of the single financial statement or the specific element of a
financial statement, the description in the auditor's report of management’s
responsibilities 28 relating to going concern may need to be adapted as
necessary. The description in the auditor’s report of the auditor’s
responsibilities 29 may also need to be adapted as necessary depending on how
ISA 570 (Revised) applies in the circumstances of the engagement.
Key Audit Matters

A20. ISA 700 (Revised) requires the auditor to communicate key audit matters in
accordance with ISA 701 for audits of complete sets of general purpose
financial statements of listed entities. 30 For audits of a single financial
statement or a specific element of a financial statement, ISA 701 only applies
when communication of key audit matters in the auditor’s report on such
financial statements or elements is required by law or regulation, or the
auditor otherwise decides to communicate key audit matters. When key audit
matters are communicated in the auditor’s report on a single financial
statement or a specific element of a financial statement, ISA 701 applies in
its entirety. 31
Other Information
information. In the context of this ISA, reports containing or accompanying
the single financial statement or specific element of a financial statement—
the purpose of which is to provide owners (or similar stakeholders) with
information on matters presented in the single financial statement or the
specific element of a financial statement—are considered to be annual reports
for purposes of ISA 720 (Revised). When the auditor determines that the
entity plans to issue such a report, the requirements in ISA 720 (Revised)
apply to the audit of the single financial statement or the element.
Name of the Engagement Partner

A22. The requirement in ISA 700 (Revised) for the auditor to include the name of
28
See ISA 700 (Revised), paragraphs 34(b) and A48.
29
See ISA 700 (Revised), paragraphs 39(b)(iv).
30
31

the engagement partner in the auditor’s report also applies to audits of single
financial statements of listed entities or specific elements of financial
statements of listed entities. 32 The auditor may be required by law or
regulation to include the name of the engagement partner in the auditor’s
report or may otherwise decide to do so when reporting on a single financial
statement or on an element of a financial statement of entities other than listed
entities.
Reporting on the Entity’s Complete Set of Financial Statements and on a Single

Financial Statement or on a Specific Element of a Financial Statement (Ref: Para.
14)
Considering the Implications of Certain Matters Included in the Auditor’s Report on
the Entity’s Complete Set of Financial Statements for the Audit of the Single
Financial Statement or the Specific Element of a Financial Statement and for the
Auditor’s Report Thereon
A23. Paragraph 14 requires the auditor to consider the implications, if any, of
certain matters included in the auditor’s report on the complete set of
financial statements for the audit of the single financial statement or the
specific element of a financial statement and for the auditor’s report thereon.
Considering whether a matter included in the auditor’s report on the complete
set of financial statements is relevant in the context of an engagement to
report on a single financial statement or a specific element of a financial
statement involves professional judgment.
A24. Factors that may be relevant in considering those implications include:
• The nature of the matter(s) being described in the auditor’s report on
the complete set of financial statements and the extent to which it
relates to what is included in the single financial statement or a specific
element of a financial statement.
• The pervasiveness of the matter(s) described in the auditor’s report on
the complete set of financial statements.
• The nature and extent of the differences between the applicable
financial reporting frameworks.
• The extent of the difference between the period(s) covered by the
complete set of the financial statements compared to the period(s) or
dates of the single financial statement or the element of a financial
statement.
• The time elapsed since the date of the auditor’s report on the complete
set of the financial statements.
32
See ISA 700 (Revised), paragraphs 46 and A61–A63.

A25. For example, in the case when there is a qualification of the auditor’s opinion
in relation to accounts receivable in the auditor’s report on the complete set
of financial statements, and the single financial statement includes accounts
receivable, or the specific element of a financial statement relates to accounts
receivable, it is likely that there would be implications for the audit. On the
other hand, if the qualification of the auditor’s opinion on the complete set of
financial statements relates to classification of long-term debt, then it is less
likely that there would be implications for an audit of the single financial
statement that is the income statement, or if the specific element of the
financial statement relates to accounts receivable.
A26. Key audit matters that are communicated in the auditor’s report on the
complete set of financial statements may have implications for an audit of a
single financial statement or the specific element of the financial statement.
The information included in the Key Audit Matters section about how the
matter was addressed in the audit of the complete set of financial statements
may be useful to the auditor’s determination of how to address the matter
when it is relevant to the audit of the single financial statement or the specific
element of the financial statement.
Inclusion of a reference to the auditor’s report on the complete set of financial

statements
A27. Even when certain matters included in the auditor’s report on the complete
set of financial statements do not have implications for the audit of, or for the
auditor’s report on, the single financial statement or the specific element of a
financial statement, the auditor may deem it appropriate to refer to the
matter(s) in an Other Matter paragraph in an auditor’s report on the single
financial statement or on the specific element of a financial statement (see
ISA 706 Revised)). 33 For example, the auditor may consider it appropriate to
refer in the auditor’s report on the single financial statement or a specific
element of the financial statement to a Material Uncertainty Related to Going
Concern section included in the auditor’s report on the complete set of
Adverse Opinion or Disclaimer of Opinion in the Auditor’s Report on the Entity’s

Complete Set of Financial Statements (Ref: Para. 15)
A28. In the auditor’s report on an entity’s complete set of financial statements, the
expression of a disclaimer of opinion regarding the results of operations and
cash flows, where relevant, and an unmodified opinion regarding the
financial position is permitted since the disclaimer of opinion is being issued
in respect of the results of operations and cash flows only and not in respect
33
See ISA 706 (Revised), paragraphs 10–11.

of the financial statements as a whole. 34
34
ISA 510, Initial Audit Engagements—Opening Balances, paragraph A8, and ISA 705 (Revised), paragraph
A16

Appendix 1
(Ref: Para. A3)
Examples of Specific Elements, Accounts or Items of a Financial

Statement
• Accounts receivable, allowance for doubtful accounts receivable, inventory, the
liability for accrued benefits of a private pension plan, the recorded value of
identified intangible assets, or the liability for “incurred but not reported”
claims in an insurance portfolio, including related notes.
• A schedule of externally managed assets and income of a private pension plan,
including related notes.
• A schedule of net tangible assets, including related notes.
• A schedule of disbursements in relation to a lease property, including
explanatory notes.
• A schedule of profit participation or employee bonuses, including explanatory
notes.
993 ISA 805 (REVISED) APPENDIX 1

Appendix 2
(Ref: Para. A17)
Illustrations of Independent Auditor`s Reports on a Single

Financial Statement and on a Specific Element of a Financial
Statement
• Illustration 1: An auditor’s report on a single financial statement of an entity
other than a listed entity prepared in accordance with a general purpose
framework (for purposes of this illustration, a fair presentation framework).
• Illustration 2: An auditor’s report on a single financial statement of an entity
other than a listed entity prepared in accordance with a special purpose
• Illustration 3: An auditor’s report on a specific element of a financial statement
of a listed entity prepared in accordance with a special purpose framework (for
purposes of this illustration, a compliance framework).
ISA 805 (REVISED) APPENDIX 2 994

Illustration 1: An auditor’s report on a single financial statement of an entity

other than a listed entity prepared in accordance with a general purpose
are assumed:
• Audit of a balance sheet (that is, a single financial statement) of an
entity other than a listed entity.
• The balance sheet has been prepared by management of the entity in
accordance with the requirements of the Financial Reporting
Framework in Jurisdiction X relevant to preparing a balance sheet.
framework designed to meet the common financial information needs
of a wide range of users.
• The auditor has determined that it is appropriate to use the phrase
“presents fairly, in all material respects,” in the auditor’s opinion.
the jurisdiction.
significant doubt on the entity’s ability to continue as a going concern
in accordance with ISA 570 (Revised). The disclosure of the material
uncertainty in the single financial statement is adequate.
communicate key audit matters in accordance with ISA 701 in the
context of the audit of the balance sheet.
• Those responsible for oversight of the financial statement differ from
those responsible for the preparation of the financial statement.

Opinion
We have audited the balance sheet of ABC Company (the Company) as at December
31, 20X1 and notes to the financial statement, including a summary of significant

accounting policies (together “the financial statement”).

In our opinion, the accompanying financial statement presents fairly, in all material
respects, the financial position of the Company as at December 31, 20X1 in
accordance with those requirements of the Financial Reporting Framework in
Jurisdiction X relevant to preparing such a financial statement. [Opinion section
positioned first as required in ISA 700 (Revised)]
Basis for Opinion

Responsibilities for the Audit of the Financial Statement section of our report. We are
to our audit of the financial statement in [jurisdiction], and we have fulfilled our other
evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion. [The first and last sentences in this section used to be in the Auditor’s
Responsibility section. Also, the Basis for Opinion section is positioned immediately
after the Opinion section as required in ISA 700 (Revised).]
Material Uncertainty Related to Going Concern

We draw attention to Note 6 in the financial statement, which indicates that the
Company incurred a net loss of ZZZ during the year ended December 31, 20X1 and,
as of that date, the Company’s current liabilities exceeded its total assets by YYY. As
stated in Note 6, these events or conditions, along with other matters as set forth in Note 6,
indicate that a material uncertainty exists that may cast significant doubt on the Company’s
ability to continue as a going concern. Our opinion is not modified in respect of this matter.

Financial Statement 35
Management is responsible for the preparation and fair presentation of the financial
statement in accordance with those requirements of the Financial Reporting
Framework in Jurisdiction X relevant to preparing such a financial statement, and for
such internal control as management determines is necessary to enable the
preparation of a financial statement that is free from material misstatement, whether
due to fraud or error.
In preparing the financial statement, management is responsible for assessing the
35
Throughout these illustrative auditor’s reports, the terms management and those charged with
governance may need to be replaced by another term that is appropriate in the context of the legal
framework in the particular jurisdiction.


Auditor’s Responsibilities for the Audit of the Financial Statement

Our objectives are to obtain reasonable assurance about whether the financial statement
as a whole is free from material misstatement, whether due to fraud or error, and to issue
an auditor’s report that includes our opinion. Reasonable assurance is a high level of
assurance, but is not a guarantee that an audit conducted in accordance with ISAs will
always detect a material misstatement when it exists. Misstatements can arise from fraud
or error and are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the basis
of this financial statement.

• Identify and assess the risks of material misstatement of the financial statement,
whether due to fraud or error, design and perform audit procedures responsive
to those risks, and obtain audit evidence that is sufficient and appropriate to
provide a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting from error, as
fraud may involve collusion, forgery, intentional omissions, misrepresentations,
or the override of internal control.
reasonableness of accounting estimates, if any, and related disclosures made by
management.
36
of the financial statement.


statement, including the disclosures, and whether the financial statement
represents the underlying transactions and events in a manner that achieves fair
presentation.
[Date]

Illustration 2: An auditor’s report on a single financial statement of an entity

other than a listed entity prepared in accordance with a special purpose
framework.
are assumed:
• Audit of a statement of cash receipts and disbursements (that is, a
single financial statement) of an entity other than a listed entity.
• An auditor’s report on the complete set of financial statements was not
issued.
• The financial statement has been prepared by management of the
entity in accordance with the cash receipts and disbursements basis of
accounting to respond to a request for cash flow information received
from a creditor. Management has a choice of financial reporting
frameworks.
framework designed to meet the financial information needs of specific
users. 37
• The auditor has determined that it is appropriate to use the phrase
“presents fairly, in all material respects,” in the auditor’s opinion.
the jurisdiction.
• Distribution or use of the auditor’s report is not restricted.
context of the audit of the statement of cash receipts and
disbursements.
• Management is responsible for the preparation of the financial
statement and oversight of the financial reporting process to prepare
this financial statement.

Opinion
We have audited the statement of cash receipts and disbursements of ABC Company
(the Company) for the year ended December 31, 20X1 and notes to the statement of
cash receipts and disbursements, including a summary of significant accounting
policies (together “the financial statement”).
In our opinion, the accompanying financial statement presents fairly, in all material
respects, the cash receipts and disbursements of the Company for the year ended
December 31, 20X1 in accordance with the cash receipts and disbursements basis of
accounting described in Note X. [Opinion section positioned first as required in ISA
700 (Revised)]
Basis for Opinion

Responsibilities for the Audit of the Financial Statement section of our report. We are
to our audit of the financial statement in [jurisdiction], and we have fulfilled our other
[The first and last sentences in this section used to be in the Auditor’s Responsibility
section. Also, the Basis for Opinion section is positioned immediately after the Opinion
section as required in ISA 700 (Revised).]
Emphasis of Matter – Basis of Accounting

We draw attention to Note X to the financial statement, which describes the basis of
accounting. The financial statement is prepared to provide information to XYZ
Creditor. As a result, the statement may not be suitable for another purpose. Our
opinion is not modified in respect of this matter.

Financial Statement 38
Management is responsible for preparation and fair presentation of the financial
statement in accordance with the cash receipts and disbursements basis of accounting
described in Note X; this includes determining that the cash receipts and disbursements
basis of accounting is an acceptable basis for the preparation of the financial statement
in the circumstances, and for such internal control as management determines is
37
ISA 800 (Revised) contains requirements and guidance on the form and content of financial statements
prepared in accordance with a special purpose framework.
38
Or other terms that are appropriate in the context of the legal framework in the particular jurisdiction.

necessary to enable the preparation of a financial statement that is free from material
misstatement, whether due to fraud or error.
In preparing the financial statement, management is responsible for assessing the
Auditor’s Responsibilities for the Audit of the Financial Statement

Our objectives are to obtain reasonable assurance about whether the financial statement
as a whole is free from material misstatement, whether due to fraud or error, and to
issue an auditor’s report that includes our opinion. Reasonable assurance is a high level
of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will
always detect a material misstatement when it exists. Misstatements can arise from fraud
or error and are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the basis
of this financial statement.

• Identify and assess the risks of material misstatement of the financial statement,
whether due to fraud or error, design and perform audit procedures responsive
to those risks, and obtain audit evidence that is sufficient and appropriate to
provide a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting from error, as
fraud may involve collusion, forgery, intentional omissions, misrepresentations,
or the override of internal control.
basis of accounting and based on the audit evidence obtained, whether a
39
of the financial statement.


in our auditor’s report to the related disclosures in the financial statement or, if
such disclosures are inadequate, to modify our opinion. Our conclusions are
management.
statement, including the disclosures, and whether the financial statement
represents the underlying transactions and events in a manner that achieves fair
presentation.
[Date]

Illustration 3: An auditor’s report on a specific element of a financial

statement of a listed entity prepared in accordance with a special purpose
framework.
are assumed:
• Audit of an accounts receivable schedule (that is, element, account or
item of a financial statement).
• The financial information has been prepared by management of the
entity in accordance with the financial reporting provisions established
by a regulator to meet the requirements of that regulator. Management
does not have a choice of financial reporting frameworks.
framework designed to meet the financial information needs of specific
users. 40
the jurisdiction.
• Distribution of the auditor’s report is restricted.
• The auditor is not required, and has otherwise not decided to
context of the audit of the accounts receivable schedule.
• Those responsible for oversight of the financial statement differ from
those responsible for the preparation of the financial statement.


[To the Shareholders of ABC Company or Other Appropriate Addressee]
Opinion
We have audited the accounts receivable schedule of ABC Company (the Company)
as at December 31, 20X1 (“the schedule”).
In our opinion, the financial information in the schedule of the Company as at
December 31, 20X1 is prepared, in all material respects, in accordance with [describe
the financial reporting provisions established by the regulator]. [Opinion section
positioned first as required ISA 700 (Revised)]
Basis for Opinion

Responsibilities for the Audit of the Schedule section of our report. We are independent of
the Company in accordance with the ethical requirements that are relevant to our audit of
the schedule in [jurisdiction], and we have fulfilled our other ethical responsibilities in
accordance with these requirements. We believe that the audit evidence we have obtained
is sufficient and appropriate to provide a basis for our opinion. [The first and last sentences
in this section used to be in the Auditor’s Responsibility section. Also, the Basis for Opinion
section is positioned immediately after opinion section as required in ISA 700 (Revised).]
Emphasis of Matter – Basis of Accounting and Restriction on Distribution

We draw attention to Note X to the schedule, which describes the basis of accounting.
The schedule is prepared to assist the Company to meet the requirements of Regulator
DEF. As a result, the schedule may not be suitable for another purpose. Our report is
intended solely for the Company and Regulator DEF and should not be distributed to
parties other than the Company or Regulator DEF. Our opinion is not modified in

Schedule 41
Management is responsible for the preparation of the schedule in accordance with
[describe the financial reporting provisions established by the regulator], and for such
internal control as management determines is necessary to enable the preparation of
the schedule that is free from material misstatement, whether due to fraud or error.
In preparing the schedule, management is responsible for assessing the Company’s
ability to continue as a going concern, disclosing, as applicable, matters relating to
40
ISA 800 (Revised) contains requirements and guidance on the form and content of financial statements
prepared in accordance with a special purpose framework.
41
Or other terms that are appropriate in the context of the legal framework in the particular jurisdiction.

going concern and using the going concern basis of accounting unless management
either intends to liquidate the Company or to cease operations, or has no realistic
alternative but to do so.
Auditor’s Responsibilities for the Audit of the Schedule

Our objectives are to obtain reasonable assurance about whether the schedule is free
from material misstatement, whether due to fraud or error, and to issue an auditor’s
report that includes our opinion. Reasonable assurance is a high level of assurance, but
is not a guarantee that an audit conducted in accordance with ISAs will always detect a
material misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of this schedule.

• Identify and assess the risks of material misstatement of the schedule, whether
due to fraud or error, design and perform audit procedures responsive to those
risks, and obtain audit evidence that is sufficient and appropriate to provide a
basis for our opinion. The risk of not detecting a material misstatement resulting
from fraud is higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations, or the override of
internal control.
42
of the schedule.

in our auditor’s report to the related disclosures in the schedule or, if such
disclosures are inadequate, to modify our opinion. Our conclusions are based
on the audit evidence obtained up to the date of our auditor’s report. However,
future events or conditions may cause the Company to cease to continue as a
going concern.
management.
We also provide those charged with governance with a statement that we have complied
with relevant ethical requirements regarding independence, and to communicate with them
all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is
[name].
[Date]

(REVISED)
ENGAGEMENTS TO REPORT ON SUMMARY
FINANCIAL STATEMENTS
(Effective for engagements to report on summary financial statements for periods
CONTENTS
Paragraph
Introduction
Scope of this ISA .................................................................................... 1
Effective Date ......................................................................................... 2
Objectives ............................................................................................... 3
Definitions .............................................................................................. 4
Requirements
Engagement Acceptance ......................................................................... 5−7
Nature of Procedures .............................................................................. 8
Form of Opinion ..................................................................................... 9−11
Timing of Work and Events Subsequent to the Date of the Auditor’s
Report on the Audited Financial Statements ................................... 12−13
Information in Documents Containing Summary Financial Statements .. 14−15
Auditor’s Report on Summary Financial Statements .............................. 16−21
Restriction on Distribution or Use or Alerting Readers to the
Basis of Accounting ......................................................................... 22
Comparatives .......................................................................................... 23−24
Unaudited Supplementary Information Presented with Summary Financial
Statements ........................................................................................ 25
Auditor Association ................................................................................. 26−27
Engagement Acceptance ......................................................................... A1−A7
Evaluating the Availability of the Audited Financial Statements ........... A8

ENGAGEMENTS TO REPORT ON SUMMARY FINANCIAL STATEMENTS
Form of Opinion ..................................................................................... A9

Timing of Work and Events Subsequent to the Date of the Auditor’s Report on the
Audited Financial Statements .......................................................... A10
Information in Documents Containing Summary Financial Statements A11−A16
Auditor’s Report on Summary Financial Statements ........................... A17−A23
Comparatives ....................................................................................... A24−A25
Statements ........................................................................................ A26
Auditor Association ................................................................................ A27
Appendix: Illustrations of Independent Auditor’s Reports on
Summary Financial Statements
International Standard on Auditing (ISA) 810 (Revised), Engagements to Report

on Summary Financial Statements, should be read in conjunction with ISA 200,
Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with International Standards on Auditing.

Introduction
Scope of this ISA
1. This International Standard on Auditing (ISA) deals with the auditor’s
responsibilities relating to an engagement to report on summary financial
statements derived from financial statements audited in accordance with
ISAs by that same auditor.
Effective Date
2. This ISA is effective for engagements to report on summary financial
statements for periods ending on or after December 15, 2016.
Objectives
3. The objectives of the auditor are:
(a) To determine whether it is appropriate to accept the engagement to
report on summary financial statements; and
(b) If engaged to report on summary financial statements:
(i) To form an opinion on the summary financial statements based
on an evaluation of the conclusions drawn from the evidence
obtained; and
(ii) To express clearly that opinion through a written report that
also describes the basis for that opinion.
Definitions
4. For purposes of this ISA, the following terms have the meanings attributed
below:
(a) Applied criteria – The criteria applied by management in the
preparation of the summary financial statements.
(b) Audited financial statements – Financial statements 1 audited by the
auditor in accordance with ISAs, and from which the summary
financial statements are derived.
(c) Summary financial statements – Historical financial information that
is derived from financial statements but that contains less detail than
the financial statements, while still providing a structured
1
with International Standards on Auditing, paragraph 13(f), defines the term “financial statements.”

representation consistent with that provided by the financial

statements of the entity’s economic resources or obligations at a point
in time or the changes therein for a period of time. 2 Different jurisdictions
may use different terminology to describe such historical financial
information.
Requirements
Engagement Acceptance
5. The auditor shall accept an engagement to report on summary financial
statements in accordance with this ISA only when the auditor has been engaged
to conduct an audit in accordance with ISAs of the financial statements from
which the summary financial statements are derived. (Ref: Para. A1)
6. Before accepting an engagement to report on summary financial statements,
the auditor shall: (Ref: Para. A2)
(a) Determine whether the applied criteria are acceptable; (Ref: Para. A3–
A7)
(b) Obtain the agreement of management that it acknowledges and
understands its responsibility:
(i) For the preparation of the summary financial statements in
accordance with the applied criteria;
(ii) To make the audited financial statements available to the
intended users of the summary financial statements without
undue difficulty (or, if law or regulation provides that the
audited financial statements need not be made available to the
intended users of the summary financial statements and
establishes the criteria for the preparation of the summary
financial statements, to describe that law or regulation in the
summary financial statements); and
(iii) To include the auditor’s report on the summary financial
statements in any document that contains the summary
financial statements and that indicates that the auditor has
reported on them.
(c) Agree with management the form of opinion to be expressed on the
summary financial statements (see paragraphs 9–11).
7. If the auditor concludes that the applied criteria are unacceptable or is unable
to obtain the agreement of management set out in paragraph 6(b), the auditor
shall not accept the engagement to report on the summary financial
2

statements, unless required by law or regulation to do so. An engagement

conducted in accordance with such law or regulation does not comply with
this ISA. Accordingly, the auditor’s report on the summary financial
statements shall not indicate that the engagement was conducted in
accordance with this ISA. The auditor shall include appropriate reference to
this fact in the terms of the engagement. The auditor shall also determine the
effect that this may have on the engagement to audit the financial statements
from which the summary financial statements are derived.
Nature of Procedures
8. The auditor shall perform the following procedures, and any other procedures
that the auditor may consider necessary, as the basis for the auditor’s opinion on
the summary financial statements:
(a) Evaluate whether the summary financial statements adequately disclose
their summarized nature and identify the audited financial statements.
(b) When summary financial statements are not accompanied by the audited
financial statements, evaluate whether they describe clearly:
(i) From whom or where the audited financial statements are
available; or
(ii) The law or regulation that specifies that the audited financial
statements need not be made available to the intended users of the
summary financial statements and establishes the criteria for the
preparation of the summary financial statements.
(c) Evaluate whether the summary financial statements adequately disclose
the applied criteria.
(d) Compare the summary financial statements with the related information
in the audited financial statements to determine whether the summary
financial statements agree with or can be recalculated from the related
information in the audited financial statements.
(e) Evaluate whether the summary financial statements are prepared in
accordance with the applied criteria.
(f) Evaluate, in view of the purpose of the summary financial statements,
whether the summary financial statements contain the information
necessary, and are at an appropriate level of aggregation, so as not to be
misleading in the circumstances.
(g) Evaluate whether the audited financial statements are available to the
intended users of the summary financial statements without undue
difficulty, unless law or regulation provides that they need not be made
available and establishes the criteria for the preparation of the summary
financial statements. (Ref: Para. A8)

Form of Opinion
9. When the auditor has concluded that an unmodified opinion on the summary
financial statements is appropriate, the auditor’s opinion shall, unless otherwise
required by law or regulation, use one of the following phrases: (Ref: Para. A9)
(a) The accompanying summary financial statements are consistent, in all
material respects, with the audited financial statements, in accordance
with [the applied criteria]; or
(b) The accompanying summary financial statements are a fair summary of
the audited financial statements, in accordance with [the applied criteria].
10. If law or regulation prescribes the wording of the opinion on summary financial
statements in terms that are different from those described in paragraph 9, the
auditor shall:
(a) Apply the procedures described in paragraph 8 and any further procedures
necessary to enable the auditor to express the prescribed opinion; and
(b) Evaluate whether users of the summary financial statements might
misunderstand the auditor’s opinion on the summary financial statements
and, if so, whether additional explanation in the auditor’s report on the
summary financial statements can mitigate possible misunderstanding.
11. If, in the case of paragraph 10(b), the auditor concludes that additional
explanation in the auditor’s report on the summary financial statements cannot
mitigate possible misunderstanding, the auditor shall not accept the engagement,
unless required by law or regulation to do so. An engagement conducted in
accordance with such law or regulation does not comply with this ISA.
Accordingly, the auditor’s report on the summary financial statements shall not
indicate that the engagement was conducted in accordance with this ISA.
Timing of Work and Events Subsequent to the Date of the Auditor’s Report on
the Audited Financial Statements
12. The auditor’s report on the summary financial statements may be dated later than
the date of the auditor’s report on the audited financial statements. In such cases,
the auditor’s report on the summary financial statements shall state that the
summary financial statements and audited financial statements do not reflect the
effects of events that occurred subsequent to the date of the auditor’s report on
the audited financial statements. (Ref: Para. A10)
13. The auditor may become aware of facts that existed at the date of the auditor’s
report on the audited financial statements, but of which the auditor previously
was unaware. In such cases, the auditor shall not issue the auditor’s report on
the summary financial statements until the auditor’s consideration of such

facts in relation to the audited financial statements in accordance with ISA

560 3 has been completed.
Information in Documents Containing Summary Financial Statements

14. The auditor shall read the information included in a document containing the
summary financial statements and the auditor’s report thereon and consider
whether there is a material inconsistency between that information and the
summary financial statements.
15. If the auditor identifies a material inconsistency, the auditor shall discuss the
matter with management and determine whether the summary financial
statements or the information included in the document containing the summary
financial statements and the auditor’s report thereon needs to be revised. If the
auditor determines that the information needs to be revised and management
refuses to revise the information as necessary, the auditor shall take appropriate
action in the circumstances, including considering the implications for the
auditor’s report on the summary financial statements. (Ref: Para. A11−A16)
Auditor’s Report on Summary Financial Statements

Elements of the Auditor’s Report
16. The auditor’s report on summary financial statements shall include the
following elements: 4 (Ref: Para. A23)
(a) A title clearly indicating it as the report of an independent auditor.
(Ref: Para. A17)
(b) An addressee. (Ref: Para. A18)
(c) Identification of the summary financial statements on which the auditor is
reporting, including the title of each statement included in the summary
financial statements. (Ref: Para. A19)
(d) Identification of the audited financial statements.
(e) Subject to paragraph 20, a clear expression of an opinion (see
paragraphs 9–11).
(f) A statement indicating that the summary financial statements do not
contain all the disclosures required by the financial reporting framework
applied in the preparation of the audited financial statements, and that
reading the summary financial statements and the auditor’s report
thereon is not a substitute for reading the audited financial statements
and the auditor’s report thereon.
3
ISA 560, Subsequent Events
4
Paragraphs 19–20, which deal with circumstances where the auditor’s report on the audited financial
statements has been modified, require additional elements to those listed in this paragraph.

(g) Where applicable, the statement required by paragraph 12.

(h) Reference to the auditor’s report on the audited financial statements, the
date of that report, and, subject to paragraphs 19–20, the fact that an
unmodified opinion is expressed on the audited financial statements.
(i) A description of management’s 5 responsibility for the summary
financial statements, explaining that management 6 is responsible for
the preparation of the summary financial statements in accordance
with the applied criteria.
(j) A statement that the auditor is responsible for expressing an opinion,
based on the auditor’s procedures conducted in accordance with this
ISA, on whether the summary financial statements are consistent, in
all material respects, with [or are a fair summary of] the audited
(k) The auditor’s signature.
(l) The auditor’s address.
(m) The date of the auditor’s report. (Ref: Para. A20)
17. If the addressee of the summary financial statements is not the same as the
addressee of the auditor’s report on the audited financial statements, the
auditor shall evaluate the appropriateness of using a different addressee. (Ref:
Para. A18)
18. The auditor shall date the auditor’s report on the summary financial statements
no earlier than: (Ref: Para. A20)
(a) The date on which the auditor has obtained sufficient appropriate evidence
on which to base the opinion, including evidence that the summary
financial statements have been prepared and those with the recognized
authority have asserted that they have taken responsibility for them; and
(b) The date of the auditor’s report on the audited financial statements.
Reference to the Auditor’s Report on the Audited Financial Statements (Ref: Para.
A23)
19. When the auditor’s report on the audited financial statements includes:
7
(a) A qualified opinion in accordance with ISA 705 (Revised);
5
6
7
ISA 705 (Revised), Modifications to the Opinion in the Independent Auditor's Report

(b) An Emphasis of Matter paragraph or an Other Matter paragraph in

(c) A Material Uncertainty Related to Going Concern section in
(d) Communication of key audit matters in accordance with ISA 701; 10 or
(e) A statement that describes an uncorrected material misstatement of the
other information in accordance with ISA 720 (Revised); 11
and the auditor is satisfied that the summary financial statements are consistent,
in all material respects, with or are a fair summary of the audited financial
statements, in accordance with the applied criteria, the auditor’s report on the
summary financial statements shall, in addition to the elements in paragraph 16:
(i) State that the auditor’s report on the audited financial statements
includes a qualified opinion, an Emphasis of Matter paragraph, an
Other Matter paragraph, a Material Uncertainty Related to Going
Concern section, communication of key audit matters, or a statement
that describes an uncorrected material misstatement of the other
information; and (Ref: Para. A21)
(ii) Describe: (Ref: Para. A22)
a. The basis for the qualified opinion on the audited financial
statements and the effect thereof, if any, on the summary
financial statements;
b. The matter referred to in the Emphasis of Matter paragraph, the
Other Matter paragraph, or the Material Uncertainty Related to
Going Concern section in the auditor’s report on the audited
financial statements and the effect(s) thereof, if any, on the
summary financial statements; or
c. The uncorrected material misstatement of the other information
and the effect(s) thereof, if any, on the information included in
a document containing the summary financial statements and
the auditor’s report thereon. (Ref: Para. A15)
8
Auditor’s Report
9
ISA 570 (Revised), Going Concern, paragraph 22
10
11
ISA 720 (Revised), The Auditor’s Responsibilities Related to Other Information

20. When the auditor’s report on the audited financial statements contains an adverse
opinion or a disclaimer of opinion, the auditor’s report on the summary financial
statements shall, in addition to the elements in paragraph 16:
(a) State that the auditor’s report on the audited financial statements
contains an adverse opinion or disclaimer of opinion;
(b) Describe the basis for that adverse opinion or disclaimer of opinion; and
(c) State that, as a result of the adverse opinion or disclaimer of opinion on
the audited financial statements, it is inappropriate to express an opinion
on the summary financial statements. (Ref: Para. A23)
Modified Opinion on the Summary Financial Statements

21. If the summary financial statements are not consistent, in all material
respects, with or are not a fair summary of the audited financial statements,
in accordance with the applied criteria, and management does not agree to
make the necessary changes, the auditor shall express an adverse opinion on
the summary financial statements. (Ref: Para. A23)
Restriction on Distribution or Use or Alerting Readers to the Basis of

Accounting
22. When distribution or use of the auditor’s report on the audited financial
statements is restricted, or the auditor’s report on the audited financial statements
alerts readers that the audited financial statements are prepared in accordance
with a special purpose framework, the auditor shall include a similar restriction
or alert in the auditor’s report on the summary financial statements.
Comparatives
23. If the audited financial statements contain comparatives, but the summary
financial statements do not, the auditor shall determine whether such
omission is reasonable in the circumstances of the engagement. The auditor
shall determine the effect of an unreasonable omission on the auditor’s report
on the summary financial statements. (Ref: Para. A24)
24. If the summary financial statements contain comparatives that were reported on
by another auditor, the auditor’s report on the summary financial statements shall
also contain the matters that ISA 710 requires the auditor to include in the
auditor’s report on the audited financial statements. 12 (Ref: Para. A25)
12
ISA 710, Comparative Information—Corresponding Figures and Comparative Financial Statements


Statements
25. The auditor shall evaluate whether any unaudited supplementary information
presented with the summary financial statements is clearly differentiated from
the summary financial statements. If the auditor concludes that the entity’s
presentation of the unaudited supplementary information is not clearly
differentiated from the summary financial statements, the auditor shall ask
management to change the presentation of the unaudited supplementary
information. If management refuses to do so, the auditor shall explain in the
auditor’s report on the summary financial statements that such information is not
covered by that report. (Ref: Para. A26)
Auditor Association
26. If the auditor becomes aware that the entity plans to state that the auditor has
reported on summary financial statements in a document containing the
summary financial statements, but does not plan to include the related
auditor’s report, the auditor shall request management to include the auditor’s
report in the document. If management does not do so, the auditor shall
determine and carry out other appropriate actions designed to prevent
management from inappropriately associating the auditor with the summary
financial statements in that document. (Ref: Para. A27)
27. The auditor may be engaged to report on the financial statements of an entity,
while not engaged to report on the summary financial statements. If, in this
case, the auditor becomes aware that the entity plans to make a statement in
a document that refers to the auditor and the fact that summary financial
statements are derived from the financial statements audited by the auditor,
the auditor shall be satisfied that:
(a) The reference to the auditor is made in the context of the auditor’s
report on the audited financial statements; and
(b) The statement does not give the impression that the auditor has
reported on the summary financial statements.
If (a) or (b) are not met, the auditor shall request management to change the
statement to meet them, or not to refer to the auditor in the document.
Alternatively, the entity may engage the auditor to report on the summary
financial statements and include the related auditor’s report in the document. If
management does not change the statement, delete the reference to the auditor,
or include an auditor’s report on the summary financial statements in the
document containing the summary financial statements, the auditor shall advise
management that the auditor disagrees with the reference to the auditor, and the
auditor shall determine and carry out other appropriate actions designed to
prevent management from inappropriately referring to the auditor. (Ref: Para.
A27)

***

Engagement Acceptance (Ref: Para. 5–6)
A1. The audit of the financial statements from which the summary financial
statements are derived provides the auditor with the necessary knowledge to
discharge the auditor’s responsibilities in relation to the summary financial
statements in accordance with this ISA. Application of this ISA will not provide
sufficient appropriate evidence on which to base the opinion on the summary
financial statements if the auditor has not also audited the financial statements
from which the summary financial statements are derived.
A2. Management’s agreement with the matters described in paragraph 6 may be
evidenced by its written acceptance of the terms of the engagement.
Criteria (Ref: Para. 6(a))

A3. The preparation of summary financial statements requires management to
determine the information that needs to be reflected in the summary financial
statements so that they are consistent, in all material respects, with or
represent a fair summary of the audited financial statements. Because
summary financial statements by their nature contain aggregated information
and limited disclosure, there is an increased risk that they may not contain
the information necessary so as not to be misleading in the circumstances.
This risk increases when established criteria for the preparation of summary
financial statements do not exist.
A4. Factors that may affect the auditor’s determination of the acceptability of the
applied criteria include:
• The nature of the entity;
• The purpose of the summary financial statements;
• The information needs of the intended users of the summary financial
statements; and
• Whether the applied criteria will result in summary financial statements
that are not misleading in the circumstances.
A5. The criteria for the preparation of summary financial statements may be
established by an authorized or recognized standards setting organization or
by law or regulation. Similar to the case of financial statements, as explained
in ISA 210, 13 in many such cases, the auditor may presume that such criteria
are acceptable.
13
ISA 210, Agreeing the Terms of Audit Engagements, paragraphs A3 and A8–A9

A6. Where established criteria for the preparation of summary financial

statements do not exist, criteria may be developed by management, for
example, based on practice in a particular industry. Criteria that are
acceptable in the circumstances will result in summary financial statements
that:
(a) Adequately disclose their summarized nature and identify the audited
(b) Clearly describe from whom or where the audited financial statements
are available or, if law or regulation provides that the audited financial
statements need not be made available to the intended users of the
summary financial statements and establishes the criteria for the
preparation of the summary financial statements, that law or
regulation;
(c) Adequately disclose the applied criteria;
(d) Agree with or can be recalculated from the related information in the
audited financial statements; and
(e) In view of the purpose of the summary financial statements, contain
the information necessary, and are at an appropriate level of
aggregation, so as not to be misleading in the circumstances.
A7. Adequate disclosure of the summarized nature of the summary financial
statements and the identity of the audited financial statements, as referred to
in paragraph A6(a), may, for example, be provided by a title such as
“Summary Financial Statements Prepared from the Audited Financial
Statements for the Year Ended December 31, 20X1.”
Evaluating the Availability of the Audited Financial Statements (Ref: Para. 8(g))
A8. The auditor’s evaluation whether the audited financial statements are
available to the intended users of the summary financial statements without
undue difficulty is affected by factors such as whether:
• The summary financial statements describe clearly from whom or
where the audited financial statements are available;
• The audited financial statements are on public record; or
• Management has established a process by which the intended users of
the summary financial statements can obtain ready access to the
audited financial statements.
Form of Opinion (Ref: Para. 9)

A9. A conclusion, based on an evaluation of the evidence obtained by performing the
procedures in paragraph 8, that an unmodified opinion on the summary financial

statements is appropriate enables the auditor to express an opinion containing one

of the phrases in paragraph 9. The auditor’s decision as to which of the phrases
to use may be affected by generally accepted practice in the particular
jurisdiction.
Timing of Work and Events Subsequent to the Date of the Auditor’s Report on
the Audited Financial Statements (Ref: Para. 12)
A10. The procedures described in paragraph 8 are often performed during or immediately
after the audit of the financial statements. When the auditor reports on the summary
financial statements after the completion of the audit of the financial statements, the
auditor is not required to obtain additional audit evidence on the audited financial
statements, or report on the effects of events that occurred subsequent to the date of
the auditor’s report on the audited financial statements since the summary financial
statements are derived from the audited financial statements and do not update
them.
Information in Documents Containing Summary Financial Statements (Ref:

Para. 14–15)
information in an audit of financial statements. In the context of ISA 720
(Revised), other information is financial or non-financial information (other than
financial statements and the auditor’s report thereon) included in an entity’s
annual report. An annual report contains or accompanies the financial statements
and the auditor’s report thereon.
A12. In contrast, paragraphs 14–15 deal with the auditor’s responsibilities relating to
information included in a document that also contains the summary financial
statements and the auditor’s report thereon. This information may include:
• Some or all of the same matters as those dealt with in the other information
included in the annual report (e.g., when the summary financial statements
and the auditor’s report thereon are included in a summary annual report);
or
• Matters that are not dealt with in the other information included in the
annual report.
A13. In reading the information included in a document containing the summary
financial statements and the auditor’s report thereon, the auditor may become
aware that such information is misleading and may need to take appropriate
action. Relevant ethical requirements 14 require the auditor to avoid being
knowingly associated with information that the auditor believes contains a
materially false or misleading statement, statements or information furnished
14
International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants
(IESBA Code), paragraph 110.2

recklessly, or omits or obscures information required to be included where such

omission or obscurity would be misleading.
Information in a Document Containing the Summary Financial Statements that Deals

with Some or All of the Same Matters as the Other Information in the Annual Report
A14. When information is included in a document containing the summary financial
statements and the auditor’s report thereon and that information deals with some
or all of the same matters as the other information included in the annual report,
the work performed on that other information in accordance with ISA 720
(Revised) may be adequate for the purposes of paragraphs 14–15 of this ISA.
A15. When an uncorrected material misstatement of the other information has been
identified in the auditor’s report on the audited financial statements and that
uncorrected material misstatement relates to a matter that is dealt with in the
information in a document containing the summary financial statements and the
auditor’s report thereon, a material inconsistency between the summary financial
statements and that information may exist or the information may be misleading.
Information in a Document Containing the Summary Financial Statements that Deals

with Matters Not Dealt with in the Other Information in the Annual Report
A16. ISA 720 (Revised), adapted as necessary in the circumstances, may be helpful to
the auditor in determining the appropriate action to respond to management’s
refusal to make necessary revisions to the information, including considering the
implications for the auditor’s report on the summary financial statements.
Auditor’s Report on Summary Financial Statements

Elements of the Auditor’s Report
Title (Ref: Para. 16(a))
A17. A title indicating the report is the report of an independent auditor, for example,
“Report of the Independent Auditor,” affirms that the auditor has met all of the
relevant ethical requirements regarding independence. This distinguishes the
report of the independent auditor from reports issued by others.
Addressee (Ref: Para. 16(b), 17)

A18. Factors that may affect the auditor’s evaluation of the appropriateness of the
addressee of the summary financial statements include the terms of the
engagement, the nature of the entity, and the purpose of the summary
Identification of the Summary Financial Statements (Ref: Para. 16(c))

A19. When the auditor is aware that the summary financial statements will be included
in a document that contains information other than the summary financial
statements and the auditor’s report thereon, the auditor may consider, if the form

of presentation allows, identifying the page numbers on which the summary

financial statements are presented. This helps readers to identify the summary
financial statements to which the auditor’s report relates.
Date of the Auditor’s Report (Ref: Para. 16(m), 18)

A20. The person or persons with recognized authority to conclude that the
summary financial statements have been prepared and take responsibility for
them depend on the terms of the engagement, the nature of the entity, and the
purpose of the summary financial statements.
Reference to the Auditor’s Report on the Audited Financial Statements (Ref: Para.
19)
A21. Paragraph 19(i) of this ISA requires the auditor to include a statement in the
auditor’s report on the summary financial statements when the auditor’s
report on the audited financial statements includes communication of one or
more key audit matters described in accordance with ISA 701. 15 However,
the auditor is not required to describe the individual key audit matters in the
auditor’s report on the summary financial statements.
A22. The statement(s) and description(s) required by paragraph 19 are intended to
draw attention to those matters and are not a substitute for reading the
auditor’s report on the audited financial statements. The required descriptions
are intended to convey the nature of the matter(s), and need not repeat the
corresponding text in the auditor’s report on the audited financial statements
in its entirety.
Illustrations (Ref: Para. 16, 19–21)

A23. The Appendix to this ISA contains illustrations of auditors’ reports on
summary financial statements that variously:
(a) Contain unmodified opinions;
(b) Are derived from audited financial statements on which the auditor
issued modified opinions;
(c) Contain a modified opinion;
(d) Are derived from audited financial statements where the auditor’s
report thereon includes a statement describing an uncorrected material
misstatement of the other information in accordance with ISA 720
(Revised); and
(e) Are derived from audited financial statements where the auditor’s
report thereon includes a Material Uncertainty Related to Going
Concern section and communication of other key audit matters.
15

Comparatives (Ref: Para. 23–24)

A24. If the audited financial statements contain comparatives, there is a
presumption that the summary financial statements also would contain
comparatives. Comparatives in the audited financial statements may be
regarded as corresponding figures or as comparative financial information.
ISA 710 describes how this difference affects the auditor’s report on the
financial statements, including, in particular, reference to other auditors who
audited the financial statements for the prior period.
A25. Circumstances that may affect the auditor’s determination whether an
omission of comparatives is reasonable include the nature and objective of
the summary financial statements, the applied criteria, and the information
needs of the intended users of the summary financial statements.

Statements (Ref: Para. 25)
16
A26. ISA 700 (Revised) contains requirements and guidance to be applied when
unaudited supplementary information is presented with audited financial
statements that, adapted as necessary in the circumstances, may be helpful in
applying the requirement in paragraph 25.
Auditor Association (Ref: Para. 26–27)

A27. Other appropriate actions the auditor may take when management does not take
the requested action may include informing the intended users and other known
third-party users of the inappropriate reference to the auditor. The auditor’s
course of action depends on the auditor’s legal rights and obligations.
Consequently, the auditor may consider it appropriate to seek legal advice.
16
ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements, paragraphs 53–54

Appendix
(Ref: Para. A23)
Illustrations of Independent Auditor’s Reports on Summary

• Illustration 1: An auditor’s report on summary financial statements prepared in
accordance with established criteria. An unmodified opinion is expressed on the
audited financial statements. The auditor’s report on the summary financial
statements is dated later than the date of the auditor’s report on the financial
statements from which summary financial statements are derived. The auditor's
report on the audited financial statements includes a Material Uncertainty Related
to Going Concern section and communication of other key audit matters.
accordance with criteria developed by management and adequately disclosed in the
summary financial statements. The auditor has determined that the applied criteria
are acceptable in the circumstances. An unmodified opinion is expressed on the
audited financial statements. The auditor’s report on the summary financial
statements is dated the same as the date of the auditor’s report on the financial
statements from which the summary financial statements are derived. The auditor’s
report on the audited financial statements includes a statement that describes an
uncorrected material misstatement of the other information. The other information
to which this uncorrected material misstatement relates is also information included
in a document containing the summary financial statements and the auditor’s report
thereon.
are acceptable in the circumstances. A qualified opinion is expressed on the audited
financial statements. The auditor’s report on the summary financial statements is
dated the same as the date of the auditor’s report on the financial statements from
which the summary financial statements are derived.
are acceptable in the circumstances. An adverse opinion is expressed on the audited
financial statements. The auditor’s report on the summary financial statements is
dated the same as the date of the auditor’s report on the financial statements from


accordance with established criteria. An unmodified opinion is expressed on the
audited financial statements. The auditor concludes that it is not possible to express
an unmodified opinion on the summary financial statements. The auditor’s report
on the summary financial statements is dated the same as the date of the auditor’s
report on the financial statements from which the summary financial statements are
derived.

Illustration 1:
Circumstances include the following:
• An unmodified opinion is expressed on the audited financial statements
of a listed entity.
• Established criteria for the preparation of summary financial
statements exist.
• The auditor’s report on the summary financial statements is dated later
than the date of the auditor’s report on the financial statements from
• The auditor’s report on the audited financial statements includes a
Material Uncertainty Related to Going Concern section.
• The auditor’s report on the audited financial statements includes
communication of other key audit matters. 17
REPORT OF THE INDEPENDENT AUDITOR ON THE SUMMARY

Opinion
The summary financial statements, which comprise the summary balance sheet as at
December 31, 20X1, the summary income statement, summary statement of changes in
equity and summary cash flow statement for the year then ended, and related notes, are
derived from the audited financial statements of ABC Company for the year ended
December 31, 20X1.
In our opinion, the accompanying summary financial statements are consistent, in all
material respects, with (or a fair summary of) the audited financial statements, in
accordance with [describe established criteria].

The summary financial statements do not contain all the disclosures required by [describe
financial reporting framework applied in the preparation of the audited financial statements
of ABC Company]. Reading the summary financial statements and the auditor’s report
thereon, therefore, is not a substitute for reading the audited financial statements and the
auditor’s report thereon. The summary financial statements and the audited financial
statements do not reflect the effects of events that occurred subsequent to the date of
our report on the audited financial statements.
17
As explained in paragraph 15 of ISA 701, a material uncertainty related to going concern is, by its
nature, a key audit matter but is required to be reported in a separate section of the auditor’s report in
accordance with paragraph 22 of ISA 570 (Revised).

The Audited Financial Statements and Our Report Thereon

We expressed an unmodified audit opinion on the audited financial statements in our report
dated February 15, 20X2. That report also includes:
• A Material Uncertainty Related to Going Concern section that draws attention to
Note 6 in the audited financial statements. Note 6 of the audited financial statements
indicates that ABC Company incurred a net loss of ZZZ during the year ended
December 31, 20X1 and, as of that date, ABC Company’s current liabilities
exceeded its total assets by YYY. These events or conditions, along with other
matters as set forth in Note 6 of the audited financial statements, indicate that a
material uncertainty exists that may cast significant doubt on ABC Company’s
ability to continue as a going concern. These matters are addressed in Note 5 of the
summary financial statements.
• The communication of other 18 key audit matters. [Key audit matters are those
matters that, in our professional judgment, were of most significance in our audit of
the financial statements of the current period.] 19
Management’s 20 Responsibility for the Summary Financial Statements

Auditor’s Responsibility
Our responsibility is to express an opinion on whether the summary financial statements
are consistent, in all material respects, with (or are a fair summary of) the audited financial
statements based on our procedures, which were conducted in accordance with
International Standard on Auditing (ISA) 810 (Revised), Engagements to Report on
Summary Financial Statements.
[Auditor’s signature]
[Auditor’s address]
[Date of the auditor’s report]
18
In the circumstances where there is no material uncertainty related to going concern, inclusion of the
word "other" in the statement for the communication of key audit matters would not be necessary.
19
The auditor may include additional explanation about key audit matters considered helpful to users of
the auditor’s report on the summary financial statements.
20

Illustration 2:
• An unmodified opinion is expressed on the audited financial statements.
• Criteria are developed by management and adequately disclosed in Note
X. The auditor has determined that the criteria are acceptable in the
circumstances.
• The auditor’s report on the summary financial statements is dated the
same as the date of the auditor’s report on the financial statements from
• The auditor’s report on the audited financial statements includes a
statement that describes an uncorrected material misstatement of the
other information. The other information to which this uncorrected
material misstatement relates is also information included in a
document containing the summary financial statements and the
auditor’s report thereon.

Opinion
December 31, 20X1, the summary income statement, summary statement of changes
in equity and summary cash flow statement for the year then ended, and related notes,
are derived from the audited financial statements of ABC Company for the year ended
December 31, 20X1.
material respects, with (or a fair summary of) the audited financial statements, on the
basis described in Note X.


We expressed an unmodified audit opinion on the audited financial statements in our
report dated February 15, 20X2. [The audited financial statements are included in the
20X1 Annual Report. The auditor’s report on the audited financial statements includes

a statement that describes an uncorrected material misstatement of other information

within Management’s Discussion and Analysis of the 20X1 Annual Report.
Management’s Discussion and Analysis, and the uncorrected material misstatement of
the other information therein, are also contained in the 20X1 Summary Annual
Report.] [Describe the uncorrected material misstatement of the other information].

Management is responsible for the preparation of the summary financial statements on
the basis described in Note X.
21

Illustration 3:
• A qualified opinion is expressed on the audited financial statements.
circumstances.

Opinion
The summary financial statements, which comprise the summary statement of
financial position as at December 31, 20X1, the summary statement of comprehensive
income, summary statement of changes in equity and summary statement of cash flows
for the year then ended, and related notes, are derived from the audited financial
statements of ABC Company (the Company) for the year ended December 31, 20X1.
We expressed a qualified audit opinion on those financial statements in our report
dated February 15, 20X2. 22
material respects, with (or a fair summary of) the audited financial statements, on the
basis described in Note X. However, the summary financial statements are misstated
to the equivalent extent as the audited financial statements of ABC Company for the
year ended December 31, 20X1.

The summary financial statements do not contain all the disclosures required by
[describe financial reporting framework applied in the preparation of the audited
financial statements of ABC Company]. Reading the summary financial statements
and the auditor’s report thereon, therefore, is not a substitute for reading the audited
financial statements and the auditor’s report thereon.
22
The positioning of this reference to the qualified opinion in the auditor’s report on the audited financial
statements in the Opinion paragraph on the summary financial statements assists users in
understanding that although the auditor has expressed an unmodified opinion on the summary financial
statements, the summary financial statements reflect audited financial statements that are materially
misstated.


We expressed a qualified audit opinion on the audited financial statements in our
report dated February 15, 20X2. The basis for our qualified audit opinion was [that
management has not stated the inventories at the lower of cost and net realizable value
but has stated them solely at cost, which constitutes a departure from International
Financial Reporting Standards]. The Company’s records indicate that had
management stated the inventories at the lower of cost and net realizable value, an
amount of xxx would have been required to write the inventories down to their net
realizable value. Accordingly, cost of sales would have been increased by xxx, and
income tax, net income and shareholders’ equity would have been reduced by xxx,
xxx and xxx, respectively.

Management is responsible for the preparation of the summary financial statements on
the basis described in Note X.
Our responsibility is to express an opinion on whether the summary financial
statements are consistent, in all material respects, with (or are a fair summary of) the
audited financial statements based on our procedures, which were conducted in
accordance with International Standard on Auditing (ISA) 810 (Revised),
Engagements to Report on Summary Financial Statements.
23

Illustration 4:
• An adverse opinion is expressed on the audited financial statements.
circumstances.

Denial of Opinion
December 31, 20X1.
As a result of the adverse opinion on the audited financial statements discussed in The
Audited Financial Statements and our Report Thereon section of our report, it is
inappropriate to express an opinion on the accompanying summary financial
statements.


In our report dated February 15, 20X2, we expressed an adverse opinion on the audited
financial statements of ABC Company for the year ended December 31, 20X1. The
basis for our adverse opinion was [describe basis for adverse audit opinion].


Management is responsible for the preparation of the financial statements on the basis
described in Note X.
24

Illustration 5:
• An unmodified opinion is expressed on the audited financial statements.
• Established criteria for the preparation of summary financial
statements exist.
• The auditor concludes that it is not possible to express an unmodified
opinion on the summary financial statements.

Adverse Opinion
December 31, 20X1.
In our opinion, because of the significance of the matter described in the Basis for
Adverse Opinion section, the accompanying summary financial statements are not
consistent with (or a fair summary of) the audited financial statements of ABC
Company for the year ended December 31, 20X1, in accordance with [describe
established criteria].
Basis for Adverse Opinion

[Describe matter that caused the summary financial statements not to be consistent, in
all material respects, with (or a fair summary of) the audited financial statements, in
accordance with the applied criteria.



We expressed an unmodified audit opinion on the audited financial statements in our
report dated February 15, 20X2.
Management’s 25 Responsibility for the Summary Audited Financial Statements

Management is responsible for the preparation of the summary financial statements in
25

INTERNATIONAL AUDITING PRACTICE NOTE 1000
SPECIAL CONSIDERATIONS IN AUDITING FINANCIAL
INSTRUMENTS
CONTENTS
Paragraph
Introduction ............................................................................................ 1–10
Section I—Background Information about Financial Instruments .. 11–69
Purpose and Risks of Using Financial Instruments .................................. 14–19
Controls Relating to Financial Instruments ............................................. 20–23

Completeness, Accuracy and Existence .................................................. 24–33
Trade Confirmations and Clearing Houses ...................................... 25–26
Reconciliations with Banks and Custodians .................................... 27–30
Other Controls over Completeness, Accuracy, and Existence .......... 31–33
Valuation of Financial Instruments ......................................................... 34–64
Financial Reporting Requirements .................................................. 34–37
Observable and Unobservable Inputs .............................................. 38–39
Effects of Inactive Markets .............................................................. 40–42
Management’s Valuation Process .................................................... 43–63
Models ...................................................................................... 47–49
An Example of a Common Financial Instrument ..................... 50–51
Third-Party Pricing Sources......................................................... 52–62
Use of Valuation Experts ........................................................... 63
Issues Relating to Financial Liabilities ............................................ 64
Presentation and Disclosure about Financial Instruments ....................... 65–69

Categories of Disclosures ................................................................ 67–69
Section II—Audit Considerations Relating to Financial Instruments 70–145
Professional Skepticism .......................................................................... 71–72
IAPN 1000 1036

SPECIAL CONSIDERATIONS IN AUDITING FINANCIAL INSTRUMENTS
Planning Considerations ......................................................................... 73–84
Understanding the Accounting and Disclosure Requirements ......... 74

Understanding the Financial Instruments ........................................ 75–77
Using Those with Specialized Skills and Knowledge in the Audit . 78–80
Understanding Internal Control ....................................................... 81
Understanding the Nature, Role and Activities of the Internal

Audit Function ......................................................................... 82–83
Understanding Management’s Methodology for Valuing

Financial Instruments ............................................................... 84
Assessing and Responding to the Risks of Material Misstatement ......... 85–105
Overall Considerations Relating to Financial Instruments .............. 85

Fraud Risk Factors ........................................................................... 86–88
Assessing the Risk of Material Misstatement .................................. 89-90
Factors to Consider in Determining Whether, and to What Extent,

to Test the Operating Effectiveness of Controls ....................... 91–95
Substantive Procedures .................................................................... 96–97
Dual-Purpose Tests .......................................................................... 98
Timing of the Auditor’s Procedures ................................................ 99–102
Procedures Relating to Completeness, Accuracy, Existence,

Occurrence and Rights and Obligations ........................................... 103–105
Valuation of Financial Instruments ......................................................... 106–137
Financial Reporting Requirements ..................................................... 106–108
Assessing the Risk of Material Misstatement Related to Valuation ... 109–113
Significant Risks........................................................................ 110–113
Developing an Audit Approach ........................................................ 114–115
Audit Considerations When Management Uses a Third-Party

Pricing Source ........................................................................... 116–120
Audit Considerations When Management Estimates Fair

Values Using a Model ............................................................... 121–132
1037 IAPN 1000
Evaluating Whether the Assumptions Used by Management

Are Reasonable................................................................... 129–132
Audit Considerations When a Management’s Expert Is Used by

the Entity .................................................................................. 133–135
Developing a Point Estimate or Range ............................................. 136–137

Presentation and Disclosure of Financial Instruments ............................ 138–141
Procedures Relating to the Presentation and Disclosure of

Financial Instruments ............................................................... 140–141
Other Relevant Audit Considerations ..................................................... 142–145
Written Representations ................................................................... 142
Communication with Those Charged with Governance and Others 143–145

Communications with Regulators and Others .......................... 145
Appendix: Examples of Controls Relating to Financial Instruments
International Auditing Practice Note (IAPN) 1000, Special Considerations in Auditing

Financial Instruments, should be read in conjunction with the Preface to the
International Quality Control, Auditing, Review, Other Assurance, and Related
Services Pronouncements. IAPNs do not impose additional requirements on auditors
beyond those included in the International Standards on Auditing (ISAs), nor do they
change the auditor’s responsibility to comply with all ISAs relevant to the audit.
IAPNs provide practical assistance to auditors. They are intended to be disseminated
by those responsible for national standards, or used in developing corresponding
national material. They also provide material that firms can use in developing their
training programs and internal guidance.
IAPN 1000 1038

Introduction
1. Financial instruments may be used by financial and non-financial entities of all
sizes for a variety of purposes. Some entities have large holdings and
transaction volumes while other entities may only engage in a few financial
instrument transactions. Some entities may take positions in financial
instruments to assume and benefit from risk while other entities may use
financial instruments to reduce certain risks by hedging or managing
exposures. This International Auditing Practice Note (IAPN) is relevant to all
of these situations.
2. The following International Standards on Auditing (ISAs) are particularly
relevant to audits of financial instruments:
(a) ISA 540 1 deals with the auditor’s responsibilities relating to auditing
accounting estimates, including accounting estimates related to
financial instruments measured at fair value;
(b) ISA 315 (Revised) 2 and ISA 330 3 deal with identifying and assessing
risks of material misstatement and responding to those risks; and
(c) ISA 500 4 explains what constitutes audit evidence and deals with the
auditor’s responsibility to design and perform audit procedures to obtain
sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the auditor’s opinion.
3. The purpose of this IAPN is to provide:
(a) Background information about financial instruments (Section I); and
(b) Discussion of audit considerations relating to financial instruments
(Section II).
IAPNs provide practical assistance to auditors. They are intended to be
disseminated by those responsible for national standards, or used in developing
corresponding national material. They also provide material that firms can use
in developing their training programs and internal guidance.
4. This IAPN is relevant to entities of all sizes, as all entities may be subject to
risks of material misstatement when using financial instruments.
1
ISA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related
Disclosures
2
ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement through Understanding
the Entity and Its Environment
3
ISA 330, The Auditor’s Responses to Assessed Risks
4
ISA 500, Audit Evidence
1039 IAPN 1000

5. The guidance on valuation 5 in this IAPN is likely to be more relevant for

financial instruments measured or disclosed at fair value, while the guidance on
areas other than valuation applies equally to financial instruments either
measured at fair value or amortized cost. This IAPN is also applicable to both
financial assets and financial liabilities. This IAPN does not deal with
instruments such as:
(a) The simplest financial instruments such as cash, simple loans, trade
accounts receivable and trade accounts payable;
(b) Investments in unlisted equity instruments; or
(c) Insurance contracts.
6. Also, this IAPN does not deal with specific accounting issues relevant to
financial instruments, such as hedge accounting, profit or loss on inception
(often known as “Day 1” profit or loss), offsetting, risk transfers or impairment,
including loan loss provisioning. Although these subject matters can relate to
an entity’s accounting for financial instruments, a discussion of the auditor’s
consideration regarding how to address specific accounting requirements is
beyond the scope of this IAPN.
7. An audit in accordance with ISAs is conducted on the premise that
management and, where appropriate, those charged with governance have
acknowledged certain responsibilities. Such responsibilities subsume making
fair value measurements. This IAPN does not impose responsibilities on
management or those charged with governance nor override laws and
regulation that govern their responsibilities.
8. This IAPN has been written in the context of general purpose fair presentation
financial reporting frameworks, but may also be useful, as appropriate in the
circumstance, in other financial reporting frameworks such as special purpose
financial reporting frameworks.
9. This IAPN focuses on the assertions of valuation, and presentation and
disclosure, but also covers, in less detail, completeness, accuracy, existence,
and rights and obligations.
10. Financial instruments are susceptible to estimation uncertainty, which is
defined in ISA 540 as “the susceptibility of an accounting estimate and related
disclosures to an inherent lack of precision in its measurement.” 6 Estimation
uncertainty is affected by the complexity of financial instruments, among other
factors. The nature and reliability of information available to support the
measurement of financial instruments varies widely, which affects the
5
In this IAPN, the terms “valuation” and “measurement” are used interchangeably.
6
ISA 540, paragraph 7(c)
IAPN 1000 1040

estimation uncertainty associated with their measurement. This IAPN uses the
term “measurement uncertainty” to refer to the estimation uncertainty
associated with fair value measurements.
Section I—Background Information about Financial Instruments

11. Different definitions of financial instruments may exist among financial
reporting frameworks. For example, International Financial Reporting
Standards (IFRS) define a financial instrument as any contract that gives rise to
a financial asset of one entity and a financial liability or equity instrument of
another entity. 7 Financial instruments may be cash, the equity of another entity,
the contractual right or obligation to receive or deliver cash or exchange
financial assets or liabilities, certain contracts settled in an entity’s own equity
instruments, certain contracts on non-financial items, or certain contracts issued
by insurers that do not meet the definition of an insurance contract. This
definition encompasses a wide range of financial instruments from simple loans
and deposits to complex derivatives, structured products, and some commodity
contracts.
12. Financial instruments vary in complexity, though the complexity of the
financial instrument can come from difference sources, such as:
• A very high volume of individual cash flows, where a lack of
homogeneity requires analysis of each one or a large number of grouped
cash flows to evaluate, for example, credit risk (for example,
collateralized debt obligations (CDOs)).
• Complex formulae for determining the cash flows.
• Uncertainty or variability of future cash flows, such as that arising from
credit risk, option contracts or financial instruments with lengthy
contractual terms.
The higher the variability of cash flows to changes in market conditions, the
more complex and uncertain the fair value measurement of the financial
instrument is likely to be. In addition, sometimes financial instruments that,
ordinarily, are relatively easy to value become complex to value because of
particular circumstances, for example, instruments for which the market has
become inactive or which have lengthy contractual terms. Derivatives and
structured products become more complex when they are a combination of
individual financial instruments. In addition, the accounting for financial
instruments under certain financial reporting frameworks or certain market
conditions may be complex.
7
International Accounting Standard (IAS) 32, Financial Instruments: Presentation, paragraph 11
1041 IAPN 1000

13. Another source of complexity is the volume of financial instruments held or

traded. While a “plain vanilla” interest rate swap may not be complex, an entity
holding a large number of them may use a sophisticated information system to
identify, value and transact these instruments.
Purpose and Risks of Using Financial Instruments

14. Financial instruments are used for:
• Hedging purposes (that is, to change an existing risk profile to which an
entity is exposed). This includes:
○ The forward purchase or sale of currency to fix a future
exchange rate;
○ Converting future interest rates to fixed rates or floating rates
through the use of swaps; and
○ The purchase of option contracts to provide an entity with
protection against a particular price movement, including
contracts which may contain embedded derivatives;
• Trading purposes (for example, to enable an entity to take a risk
position to benefit from short term market movements); and
• Investment purposes (for example, to enable an entity to benefit from
long term investment returns).
15. The use of financial instruments can reduce exposures to certain business risks,
for example changes in exchange rates, interest rates and commodity prices, or
a combination of those risks. On the other hand, the inherent complexities of
some financial instruments also may result in increased risk.
16. Business risk and the risk of material misstatement increase when management
and those charged with governance:
• Do not fully understand the risks of using financial instruments and
have insufficient skills and experience to manage those risks;
• Do not have the expertise to value them appropriately in accordance
with the applicable financial reporting framework;
• Do not have sufficient controls in place over financial instrument
activities; or
• Inappropriately hedge risks or speculate.
17. Management’s failure to fully understand the risks inherent in a financial
instrument can have a direct effect on management’s ability to manage these
risks appropriately, and may ultimately threaten the viability of the entity.
IAPN 1000 1042

18. The principal types of risk applicable to financial instruments are listed below.
This list is not meant to be exhaustive and different terminology may be used to
describe these risks or classify the components of individual risks.
(a) Credit (or counterparty) risk is the risk that one party to a financial
instrument will cause a financial loss to another party by failing to
discharge an obligation and is often associated with default. Credit risk
includes settlement risk, which is the risk that one side of a transaction
will be settled without consideration being received from the customer
or counterparty.
(b) Market risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market prices.
Examples of market risk include currency risk, interest rate risk,
commodity and equity price risk.
(c) Liquidity risk includes the risk of not being able to buy or sell a
financial instrument at an appropriate price in a timely manner due to a
lack of marketability for that financial instrument.
(d) Operational risk relates to the specific processing required for financial
instruments. Operational risk may increase as the complexity of a
financial instrument increases, and poor management of operational risk
may increase other types of risk. Operational risk includes:
(i) The risk that confirmation and reconciliation controls are
inadequate resulting in incomplete or inaccurate recording of
financial instruments;
(ii) The risks that there is inappropriate documentation of
transactions and insufficient monitoring of these transactions;
(iii) The risk that transactions are incorrectly recorded, processed or
risk managed and, therefore, do not reflect the economics of the
overall trade;
(iv) The risk that undue reliance is placed by staff on the accuracy of
valuation techniques, without adequate review, and transactions
are therefore incorrectly valued or their risk is improperly
measured;
(v) The risk that the use of financial instruments is not adequately
incorporated into the entity’s risk management policies and
procedures;
(vi) The risk of loss resulting from inadequate or failed internal
processes and systems, or from external events, including the
risk of fraud from both internal and external sources;
1043 IAPN 1000

(vii) The risk that there is inadequate or non-timely maintenance of

valuation techniques used to measure financial instruments; and
(viii) Legal risk, which is a component of operational risk, and relates
to losses resulting from a legal or regulatory action that
invalidates or otherwise precludes performance by the end user
or its counterparty under the terms of the contract or related
netting arrangements. For example, legal risk could arise from
insufficient or incorrect documentation for the contract, an
inability to enforce a netting arrangement in bankruptcy, adverse
changes in tax laws, or statutes that prohibit entities from
investing in certain types of financial instruments.
19. Other considerations relevant to risks of using financial instruments include:
• The risk of fraud that may be increased if, for example, an employee in
a position to perpetrate a financial fraud understands both the financial
instruments and the processes for accounting for them, but management
and those charged with governance have a lesser degree of
understanding.
• The risk that master netting arrangements 8 may not be properly
reflected in the financial statements.
• The risk that some financial instruments may change between being
assets or liabilities during their term and that such change may occur
rapidly.
Controls Relating to Financial Instruments

20. The extent of an entity’s use of financial instruments and the degree of
complexity of the instruments are important determinants of the necessary level
of sophistication of the entity’s internal control. For example, smaller entities
may use less structured products and simple processes and procedures to
achieve their objectives.
21. Often, it is the role of those charged with governance to set the tone regarding,
and approve and oversee the extent of use of, financial instruments while it is
management’s role to manage and monitor the entity’s exposures to those risks.
Management and, where appropriate, those charged with governance are also
responsible for designing and implementing a system of internal control to
enable the preparation of financial statements in accordance with the applicable
financial reporting framework. An entity’s internal control over financial
8
An entity that undertakes a number of financial instrument transactions with a single counterparty may
enter into a master netting arrangement with that counterparty. Such an agreement provides for a single
net settlement of all financial instruments covered by the agreement in the event of default of any one
contract.
IAPN 1000 1044

instruments is more likely to be effective when management and those charged

with governance have:
(a) Established an appropriate control environment, active participation by
those charged with governance in controlling the use of financial
instruments, a logical organizational structure with clear assignment of
authority and responsibility, and appropriate human resource policies
and procedures. In particular, clear rules are needed on the extent to
which those responsible for financial instrument activities are permitted
to act. Such rules have regard to any legal or regulatory restrictions on
using financial instruments. For example, certain public sector entities
may not have the power to conduct business using derivatives;
(b) Established a risk management process relative to the size of the entity
and the complexity of its financial instruments (for example, in some
entities a formal risk management function may exist);
(c) Established information systems that provide those charged with
governance with an understanding of the nature of the financial
instrument activities and the associated risks, including adequate
documentation of transactions;
(d) Designed, implemented and documented a system of internal control to:
○ Provide reasonable assurance that the entity’s use of financial
instruments is within its risk management policies;
○ Properly present financial instruments in the financial
statements;
○ Ensure that the entity is in compliance with applicable laws and
regulations; and
○ Monitor risk.
The Appendix provides examples of controls that may exist in an entity
that deals in a high volume of financial instrument transactions; and
(e) Established appropriate accounting policies, including valuation
policies, in accordance with the applicable financial reporting
framework.
22. Key elements of risk management processes and internal control relating to an
entity’s financial instruments include:
• Setting an approach to define the amount of risk exposure that the entity
is willing to accept when engaging in financial instrument transactions
(this may be referred to as its “risk appetite”), including policies for
investing in financial instruments, and the control framework in which
the financial instrument activities are conducted;
1045 IAPN 1000

• Establishing processes for the documentation and authorization of new

types of financial instrument transactions which consider the
accounting, regulatory, legal, financial and operational risks that are
associated with such instruments;
• Processing financial instrument transactions, including confirmation
and reconciliation of cash and asset holdings to external statements, and
the payments process;
• Segregation of duties between those investing or trading in the financial
instruments and those responsible for processing, valuing and
confirming such instruments. For example, a model development
function that is involved in assisting in pricing deals is less objective
than one that is functionally and organizationally separate from the
front office;
• Valuation processes and controls, including controls over data obtained
from third-party pricing sources; and
• Monitoring of controls.
23. The nature of risks often differs between entities with a high volume and
variety of financial instruments and those with only a few financial instrument
transactions. This results in different approaches to internal control. For
example:
• Typically, an institution with high volumes of financial instruments will
have a dealing room type environment in which there are specialist
traders and segregation of duties between those traders and the back
office (which refers to the operations function that data-checks trades
that have been conducted, ensuring that they are not erroneous, and
transacting the required transfers). In such environments, the traders
will typically initiate contracts verbally over the phone or via an
electronic trading platform. Capturing relevant transactions and
accurately recording financial instruments in such an environment is
significantly more challenging than for an entity with only a few
financial instruments, whose existence and completeness often can be
confirmed with a bank confirmation to a few banks.
• On the other hand, entities with only a small number of financial
instruments often do not have segregation of duties, and access to the
market is limited. In such cases, although it may be easier to identify
financial instrument transactions, there is a risk that management may
rely on a limited number of personnel, which may increase the risk that
unauthorized transactions may be initiated or transactions may not be
recorded.
IAPN 1000 1046

Completeness, Accuracy, and Existence

24. Paragraphs 25–33 describe controls and processes which may be in place in
entities with a high volume of financial instrument transactions, including those
with trading rooms. By contrast, an entity that does not have a high volume of
financial instrument transactions may not have these controls and processes but
may instead confirm their transactions with the counterparty or clearing house.
Doing so may be relatively straightforward in that the entity may only transact
with one or two counterparties.
Trade Confirmations and Clearing Houses

25. Generally, for transactions undertaken by financial institutions, the terms of
financial instruments are documented in confirmations exchanged between
counterparties and legal agreements. Clearing houses serve to monitor the
exchange of confirmations by matching trades and settling them. A central
clearing house is associated with an exchange and entities that clear through
clearing houses typically have processes to manage the information delivered
to the clearing house.
26. Not all transactions are settled through such an exchange. In many other
markets there is an established practice of agreeing the terms of transactions
before settlement begins. To be effective, this process needs to be run
separately from those who trade the financial instruments to minimize the risk
of fraud. In other markets, transactions are confirmed after settlement has
begun and sometimes confirmation backlogs result in settlement beginning
before all terms have been fully agreed. This presents additional risk because
the transacting entities need to rely on alternative means of agreeing trades.
These may include:
• Enforcing rigorous reconciliations between the records of those trading
the financial instruments and those settling them (strong segregation of
duties between the two are important), combined with strong
supervisory controls over those trading the financial instruments to
ensure the integrity of the transactions;
• Reviewing summary documentation from counterparties that highlights
the key terms even if the full terms have not been agreed; and
• Thorough review of traders’ profits and losses to ensure that they
reconcile to what the back office has calculated.
Reconciliations with Banks and Custodians

27. Some components of financial instruments, such as bonds and shares, may be
held in separate depositories. In addition, most financial instruments result in
payments of cash at some point and often these cash flows begin early in the
contract’s life. These cash payments and receipts will pass through an entity’s
1047 IAPN 1000

bank account. Regular reconciliation of the entity’s records to external banks’

and custodians’ records enables the entity to ensure transactions are properly
recorded.
28. It should be noted that not all financial instruments result in a cash flow in the
early stages of the contract’s life or are capable of being recorded with an
exchange or custodian. Where this is the case, reconciliation processes will not
identify an omitted or inaccurately recorded trade and confirmation controls are
more important. Even where such a cash flow is accurately recorded in the
early stages of an instrument’s life, this does not ensure that all characteristics
or terms of the instrument (for example, the maturity or an early termination
option) have been recorded accurately.
29. In addition, cash movements may be quite small in the context of the overall
size of the trade or the entity’s own balance sheet and may therefore be difficult
to identify. The value of reconciliations is enhanced when finance, or other
back office staff, review entries in all general ledger accounts to ensure that
they are valid and supportable. This process will help identify if the other side
to cash entries relating to financial instruments has not been properly recorded.
Reviewing suspense and clearing accounts is important regardless of the
account balance, as there may be offsetting reconciling items in the account.
30. In entities with a high volume of financial instrument transactions,
reconciliation and confirmation controls may be automated and, if so, adequate
IT controls need to be in place to support them. In particular, controls are
needed to ensure that data is completely and accurately picked up from external
sources (such as banks and custodians) and from the entity’s records and is not
tampered with before or during reconciliation. Controls are also needed to
ensure that the criteria on which entries are matched are sufficiently restrictive
to prevent inaccurate clearance of reconciling items.
Other Controls over Completeness, Accuracy, and Existence

31. The complexity inherent in some financial instruments means that it will not
always be obvious how they should be recorded in the entity’s systems. In such
cases, management may set up control processes to monitor policies that
prescribe how particular types of transactions are measured, recorded and
accounted for. These policies are typically established and reviewed in advance
by suitably qualified personnel who are capable of understanding the full
effects of the financial instruments being booked.
32. Some transactions may be cancelled or amended after initial execution.
Application of appropriate controls relating to cancellation or amendment can
mitigate the risks of material misstatement due to fraud or error. In addition, an
entity may have a process in place to reconfirm trades that are cancelled or
amended.
IAPN 1000 1048

33. In financial institutions with a high volume of trading, a senior employee

typically reviews daily profits and losses on individual traders’ books to
evaluate whether they are reasonable based on the employee’s knowledge of
the market. Doing so may enable management to determine that particular
trades were not completely or accurately recorded, or may identify fraud by a
particular trader. It is important that there are transaction authorization
procedures that support the more senior review.
Valuation of Financial Instruments

Financial Reporting Requirements
34. In many financial reporting frameworks, financial instruments, including
embedded derivatives, are often measured at fair value for the purpose of
balance sheet presentation, calculating profit or loss, and/or disclosure. In
general, the objective of fair value measurement is to arrive at the price at
which an orderly transaction would take place between market participants at
the measurement date under current market conditions; that is, it is not the
transaction price for a forced liquidation or distressed sale. In meeting this
objective, all relevant available market information is taken into account.
35. Fair value measurements of financial assets and financial liabilities may arise
both at the initial recording of transactions and later when there are changes in
value. Changes in fair value measurements that occur over time may be treated
in different ways under different financial reporting frameworks. For example,
such changes may be recorded as profit or loss, or may be recorded in the other
comprehensive income. Also, depending on the applicable financial reporting
framework, the whole financial instrument or only a component of it (for
example, an embedded derivative when it is separately accounted for) may be
required to be measured at fair value.
36. Some financial reporting frameworks establish a fair value hierarchy to develop
increased consistency and comparability in fair value measurements and related
disclosures. The inputs may be classified into different levels such as:
• Level 1 inputs―Quoted prices (unadjusted) in active markets for
identical financial assets or financial liabilities that the entity can access
at the measurement date.
• Level 2 inputs―Inputs other than quoted prices included within level 1
that are observable for the financial asset or financial liability, either
directly or indirectly. If the financial asset or financial liability has a
specified (contractual) term, a level 2 input must be observable for
substantially the full term of the financial asset or financial liability.
Level 2 inputs include the following:
○ Quoted prices for similar financial assets or financial liabilities
in active markets.
1049 IAPN 1000

○ Quoted prices for identical or similar financial assets or financial

liabilities in markets that are not active.
○ Inputs other than quoted prices that are observable for the
financial asset or financial liability (for example, interest rates
and yield curves observable at commonly quoted intervals,
implied volatilities and credit spreads).
○ Inputs that are derived principally from, or corroborated by,
observable market data by correlation or other means (market-
corroborated inputs).
• Level 3 inputs―Unobservable inputs for the financial asset or financial
liability. Unobservable inputs are used to measure fair value to the
extent that relevant observable inputs are not available, thereby
allowing for situations in which there is little, if any, market activity for
the financial asset or financial liability at the measurement date.
In general, measurement uncertainty increases as a financial instrument moves
from level 1 to level 2, or level 2 to level 3. Also, within level 2 there may be a
wide range of measurement uncertainty depending on the observability of inputs,
the complexity of the financial instrument, its valuation, and other factors.
37. Certain financial reporting frameworks may require or permit the entity to
adjust for measurement uncertainties, in order to adjust for risks that a market
participant would make in the pricing to take account of the uncertainties of the
risks associated with the pricing or cash flows of the financial instrument. For
example:
• Model adjustments. Some models may have a known deficiency or the
result of calibration may highlight the deficiency for the fair value
measurement in accordance with the financial reporting framework.
• Credit-risk adjustments. Some models do not take into account credit
risk, including counterparty risk or own credit risk.
• Liquidity adjustments. Some models calculate a mid-market price, even
though the financial reporting framework may require use of a liquidity
adjusted amount such as a bid/offer spread. Another, more judgmental,
liquidity adjustment recognizes that some financial instruments are
illiquid which affects the valuation.
• Other risk adjustments. A value measured using a model that does not
take into account all other factors that market participants would
consider in pricing the financial instrument may not represent fair value
on the measurement date, and therefore may need to be adjusted
separately to comply with the applicable financial reporting framework.
IAPN 1000 1050

Adjustments are not appropriate if they adjust the measurement and valuation of
the financial instrument away from fair value as defined by the applicable
financial reporting framework, for example for conservatism.
Observable and Unobservable Inputs

38. As mentioned above, financial reporting frameworks often categorize inputs
according to the degree of observability. As activity in a market for financial
instruments declines and the observability of inputs declines, measurement
uncertainty increases. The nature and reliability of information available to
support valuation of financial instruments varies depending on the
observability of inputs to its measurement, which is influenced by the nature of
the market (for example, the level of market activity and whether it is through
an exchange or over-the-counter (OTC)). Accordingly, there is a continuum of
the nature and reliability of evidence used to support valuation, and it becomes
more difficult for management to obtain information to support a valuation when
markets become inactive and inputs become less observable.
39. When observable inputs are not available, an entity uses unobservable inputs (level
3 inputs) that reflect the assumption that market participants would use when
pricing the financial asset or the financial liability, including assumptions about
risk. Unobservable inputs are developed using the best information available in the
circumstances. In developing unobservable inputs, an entity may begin with its own
data, which is adjusted if reasonably available information indicates that (a) other
market participants would use different data or (b) there is something particular to
the entity that is not available to other market participants (for example, an entity-
specific synergy).
Effects of Inactive Markets

40. Measurement uncertainty increases and valuation is more complicated when the
markets in which financial instruments or their component parts are traded
become inactive. There is no clear point at which an active market becomes
inactive, though financial reporting frameworks may provide guidance on this
issue. Characteristics of an inactive market include a significant decline in the
volume and level of trading activity, available prices vary significantly over time
or among market participants or the prices are not current. However, assessing
whether a market is inactive requires judgment.
41. When markets are inactive, prices quoted may be stale (that is, out of date),
may not represent prices at which market participants may trade or may
represent forced transactions (such as when a seller is required to sell an asset
to meet regulatory or legal requirements, needs to dispose of an asset
immediately to create liquidity or the existence of a single potential buyer as a
result of the legal or time restrictions imposed). Accordingly, valuations are
developed based on level 2 and level 3 inputs. Under such circumstances,
entities may have:
1051 IAPN 1000

• A valuation policy that includes a process for determining whether level

1 inputs are available;
• An understanding of how particular prices or inputs from external
sources used as inputs to valuation techniques were calculated in order
to assess their reliability. For example, in an active market, a broker
quote on a financial instrument that has not traded is likely to reflect
actual transactions on a similar financial instrument, but, as the market
becomes less active, the broker quote may rely more on proprietary
valuation techniques to determine prices;
• An understanding of how deteriorating business conditions affect the
counterparty, as well as whether deteriorating business conditions in
entities similar to the counterparty may indicate that the counterparty
may not fulfill its obligations (that is, non-performance risk);
• Policies for adjusting for measurement uncertainties. Such adjustments
can include model adjustments, lack of liquidity adjustments, credit risk
adjustments, and other risk adjustments;
• The capability to calculate the range of realistic outcomes given the
uncertainties involved, for example by performing a sensitivity
analysis; and
• Policies for identifying when a fair value measurement input moves to a
different level of the fair value hierarchy.
42. Particular difficulties may develop where there is severe curtailment or even
cessation of trading in particular financial instruments. In these circumstances,
financial instruments that have previously been valued using market prices may
need to be valued using a model.
Management’s Valuation Process

43. Techniques that management may use to value their financial instruments
include observable prices, recent transactions, and models that use observable
or unobservable inputs. Management may also make use of:
(a) A third-party pricing source, such as a pricing service or broker quote;
or
(b) A valuation expert.
Third-party pricing sources and valuation experts may use one or more of these
valuation techniques.
44. In many financial reporting frameworks, the best evidence of a financial
instrument’s fair value is found in contemporaneous transactions in an active
market (that is, level 1 inputs). In such cases, the valuation of a financial
instrument may be relatively simple. Quoted prices for financial instruments
IAPN 1000 1052

that are listed on exchanges or traded in liquid over-the-counter markets may

be available from sources such as financial publications, the exchanges
themselves or third-party pricing sources. When using quoted prices, it is
important that management understand the basis on which the quote is given to
ensure that the price reflects market conditions at the measurement date.
Quoted prices obtained from publications or exchanges may provide sufficient
evidence of fair value when, for example:
(a) The prices are not out of date or “stale” (for example, if the quote is
based on the last traded price and the trade occurred some time ago);
and
(b) The quotes are prices at which dealers would actually trade the financial
instrument with sufficient frequency and volume.
45. Where there is no current observable market price for the financial instrument
(that is, a level 1 input), it will be necessary for the entity to gather other price
indicators to use in a valuation technique to value the financial instrument.
Price indicators may include:
• Recent transactions, including transactions after the date of the financial
statements in the same instrument. Consideration is given to whether an
adjustment needs to be made for changes in market conditions between
the measurement date and the date the transaction was made, as these
transactions are not necessarily indicative of the market conditions that
existed at the date of the financial statements. In addition it is possible
that the transaction represents a forced transaction and is therefore not
indicative of a price in an orderly trade.
• Current or recent transactions in similar instruments, often known as
“proxy pricing.” Adjustments will need to be made to the price of the
proxy to reflect the differences between them and the instrument being
priced, for example, to take account of differences in liquidity or credit
risk between the two instruments.
• Indices for similar instruments. As with transactions in similar
instruments, adjustments will need to be made to reflect the difference
between the instrument being priced and the instrument(s) from which
the index used is derived.
46. It is expected that management will document its valuation policies and model
used to value a particular financial instrument, including the rationale for the
model(s) used, the selection of assumptions in the valuation methodology, and
the entity’s consideration of whether adjustments for measurement uncertainty
are necessary.
1053 IAPN 1000

Models
47. Models may be used to value financial instruments when the price cannot be
directly observed in the market. Models can be as simple as a commonly used
bond pricing formula or involve complex, specifically developed software tools
to value financial instruments with level 3 inputs. Many models are based on
discounted cash flow calculations.
48. Models comprise a methodology, assumptions and data. The methodology
describes rules or principles governing the relationship between the variables in
the valuation. Assumptions include estimates of uncertain variables which are
used in the model. Data may comprise actual or hypothetical information about
the financial instrument, or other inputs to the financial instrument.
49. Depending on the circumstances, matters that the entity may address when
establishing or validating a model for a financial instrument include whether:
• The model is validated prior to usage, with periodic reviews to ensure it
is still suitable for its intended use. The entity’s validation process may
include evaluation of:
○ The methodology’s theoretical soundness and mathematical
integrity, including the appropriateness of parameters and
sensitivities.
○ The consistency and completeness of the model’s inputs with
market practices, and whether the appropriate inputs are
available for use in the model.
• There are appropriate change control policies, procedures and security
controls over the model.
• The model is appropriately changed or adjusted on a timely basis for
changes in market conditions.
• The model is periodically calibrated, reviewed and tested for validity by
a separate and objective function. Doing so is a means of ensuring that
the model’s output is a fair representation of the value that marketplace
participants would ascribe to a financial instrument.
• The model maximizes the use of relevant observable inputs and
minimizes the use of unobservable inputs.
• Adjustments are made to the output of the model to reflect the
assumptions marketplace participants would use in similar
circumstances.
• The model is adequately documented, including the model’s intended
applications and limitations and its key parameters, required data,
IAPN 1000 1054

results of any validation analysis performed and any adjustments made

to the output of the model.
An Example of a Common Financial Instrument

50. The following describes how models may be applied to value a common
financial instrument, known as an asset backed security. 9 Because asset backed
securities are often valued based on level 2 or 3 inputs, they are frequently
valued using models and involve:
• Understanding the type of security—considering (a) the underlying
collateral; and (b) the terms of the security. The underlying collateral is
used to estimate the timing and amounts of cash flows such as mortgage
or credit card interest and principal payments.
• Understanding the terms of the security—this includes evaluating
contractual cash flow rights, such as the order of repayment, and any
default events. The order of repayment, often known as seniority, refers
to terms which require that some classes of security holders (senior
debt) are repaid before others (subordinated debt). The rights of each
class of security holder to the cash flows, frequently referred to as the
cash flow “waterfall,” together with assumptions of the timing and
amount of cash flows are used to derive a set of estimated cash flows
for each class of security holder. The expected cash flows are then
discounted to derive an estimated fair value.
51. The cash flows of an asset backed security may be affected by prepayments of
the underlying collateral and by potential default risk and resulting estimated
loss severities. Prepayment assumptions, if applicable, are generally based on
evaluating market interest rates for similar collateral to the rates on the
collateral underlying the security. For example, if market interest rates for
mortgages have declined then the underlying mortgages in a security may
experience higher prepayment rates than originally expected. Estimating
potential default and loss severity involves close evaluation of the underlying
collateral and borrowers to estimate default rates. For example, when the
underlying collateral comprises residential mortgages, loss severities may be
affected by estimates of residential housing prices over the term of the security.
Third-Party Pricing Sources

52. Entities may use third-party pricing sources in order to obtain fair value
information. The preparation of an entity’s financial statements, including the
valuation of financial instruments and the preparation of financial statement
9
An asset backed security is a financial instrument which is backed by a pool of underlying assets (known
as the collateral, such as credit card receivables or vehicle loans) and derives value and income from
those underlying assets.
1055 IAPN 1000

disclosures relating to these instruments, may require expertise that

management does not possess. Entities may not be able to develop appropriate
valuation techniques, including models that may be used in a valuation, and
may use a third-party pricing source to arrive at a valuation or to provide
disclosures for the financial statements. This may particularly be the case in
smaller entities or in entities that do not engage in a high volume of financial
instruments transactions (for example, non-financial institutions with treasury
departments). Even though management has used a third-party pricing source,
management is ultimately responsible for the valuation.
53. Third-party pricing sources may also be used because the volume of securities
to price over a short timeframe may not be possible by the entity. This is often
the case for traded investment funds that must determine a net asset value each
day. In other cases, management may have their own pricing process but use
third-party pricing sources to corroborate their own valuations.
54. For one or more of these reasons most entities use third-party pricing sources
when valuing securities either as a primary source or as a source of
corroboration for their own valuations. Third-party pricing sources generally
fall into the following categories:
• Pricing services, including consensus pricing services; and
• Brokers proving broker quotes.
Pricing services
55. Pricing services provide entities with prices and price-related data for a variety
of financial instruments, often performing daily valuations of large numbers of
financial instruments. These valuations may be made by collecting market data
and prices from a wide variety of sources, including market makers, and, in
certain instances, using internal valuations techniques to derive estimated fair
values. Pricing services may combine a number of approaches to arrive at a
price. Pricing services are often used as a source of prices based on level 2
inputs. Pricing services may have strong controls around how prices are
developed and their customers often include a wide variety of parties, including
buy and sell side investors, back and middle office functions, auditors and
others.
56. Pricing services often have a formalized process for customers to challenge the
prices received from the pricing services. These challenge processes usually
require the customer to provide evidence to support an alternative price, with
challenges categorized based on the quality of evidence provided. For example,
a challenge based on a recent sale of that instrument that the pricing service
was not aware of may be upheld, whereas a challenge based on a customer’s
own valuation technique may be more heavily scrutinized. In this way, a
pricing service with a large number of leading participants, both buy and sell
IAPN 1000 1056

side, may be able to constantly correct prices to more fully reflect the
information available to market participants.
Consensus pricing services

57. Some entities may use pricing data from consensus pricing services which
differ from other pricing services. Consensus pricing services obtain pricing
information about an instrument from several participating entities
(subscribers). Each subscriber submits prices to the pricing service. The pricing
service treats this information confidentially and returns to each subscriber the
consensus price, which is usually an arithmetical average of the data after a data
cleansing routine has been employed to eliminate outliers. For some markets,
such as for exotic derivatives, consensus prices might constitute the best
available data. However, many factors are considered when assessing the
representational faithfulness of the consensus prices including, for example:
• Whether the prices submitted by the subscribers reflect actual
transactions or just indicative prices based on their own valuation
techniques.
• The number of sources from which prices have been obtained.
• The quality of the sources used by the consensus pricing service.
• Whether participants include leading market participants
58. Typically consensus prices are only available to subscribers who have
submitted their own prices to the service. Accordingly not all entities will have
direct access to consensus prices. Because a subscriber generally cannot know
how the prices submitted were estimated, other sources of evidence in addition
to information from consensus pricing services may be needed for management
to support their valuation. In particular, this may be the case if the sources are
providing indicative prices based on their own valuation techniques and
management is unable to obtain an understanding of how these sources
calculated their prices.
Brokers providing broker quotes

59. As brokers provide quotes only as an incidental service for their clients, quotes
they provide differ in many respects from prices obtained in pricing services.
Brokers may be unwilling to provide information about the process used to
develop their quote, but may have access to information on transactions about
which a pricing service may not be aware. Broker quotes may be executable or
indicative. Indicative quotes are a broker’s best estimate of fair value, whereas
an executable quote shows that the broker is willing to transact at this price.
Executable quotes are strong evidence of fair value. Indicative quotes are less
so because of the lack of transparency into the methods used by the broker to
establish the quote. In addition the rigor of controls over the brokers’ quote
1057 IAPN 1000

often will differ depending on whether the broker also holds the same security
in its own portfolio. Broker quotes are often used for securities with level 3
inputs and sometimes may be the only external information available.
Further considerations relating to third-party pricing sources

60. Understanding how the pricing sources calculated a price enables management
to determine whether such information is suitable for use in its valuation,
including as an input to a valuation technique and in what level of inputs the
security should be categorized for disclosure purposes. For example, third-
party pricing sources may value financial instruments using proprietary models,
and it is important that management understands the methodology, assumptions
and data used.
61. If fair value measurements obtained from third-party pricing sources are not
based on the current prices of an active market, it will be necessary for
management to evaluate whether the fair value measurements were derived in a
manner that is consistent with the applicable financial reporting framework.
Management’s understanding of the fair value measurement includes:
• How the fair value measurement was determined―for example,
whether the fair value measurement was determined by a valuation
technique, in order to assess whether it is consistent with the fair value
measurement objective;
• Whether the quotes are indicative prices, indicative spread, or binding
offers; and
• How frequently the fair value measurement is estimated by the third-
party pricing sources―in order to assess whether it reflects market
conditions at the measurement date.
Understanding the bases on which third-party pricing sources have determined their
quotes in the context of the particular financial instruments held by the entity
assists management in evaluating the relevance and reliability of this evidence to
support its valuations.
62. It is possible that there will be disparities between price indicators from
different sources. Understanding how the price indicators were derived, and
investigating these disparities, assists management in corroborating the
evidence used in developing its valuation of financial instruments in order to
evaluate whether the valuation is reasonable. Simply taking the average of the
quotes provided, without doing further research, may not be appropriate,
because one price in the range may be the most representative of fair value and
this may not be the average. To evaluate whether its valuations of financial
instruments are reasonable, management may:
IAPN 1000 1058

• Consider whether actual transactions represent forced transactions

rather than transactions between willing buyers and willing sellers. This
may invalidate the price as a comparison;
• Analyze the expected future cash flows of the instrument. This could be
performed as an indicator of the most relevant pricing data;
• Depending on the nature of what is unobservable, extrapolate from
observed prices to unobserved ones (for example, there may be
observed prices for maturities up to ten years but not longer, but the ten
year price curve may be capable of being extrapolated beyond ten years
as an indicator). Care is needed to ensure that extrapolation is not
carried so far beyond the observable curve that its link to observable
prices becomes too tenuous to be reliable;
• Compare prices within a portfolio of financial instruments to each other
to make sure that they are consistent among similar financial
instruments;
• Use more than one model to corroborate the results from each one,
having regard to the data and assumptions used in each; or
• Evaluate movements in the prices for related hedging instruments and
collateral.
In coming to its judgment as to its valuation, an entity may also consider other
factors that may be specific to the entity’s circumstances.
Use of Valuation Experts

63. Management may engage a valuation expert from an investment bank, broker,
or other valuation firm to value some or all of its securities. Unlike pricing
services and broker quotes, generally the methodology and data used are more
readily available to management when they have engaged an expert to perform
a valuation on their behalf. Even though management has engaged an expert,
management is ultimately responsible for the valuation used.
Issues Related to Financial Liabilities

64. Understanding the effect of credit risk is an important aspect of valuing both
financial assets and financial liabilities. This valuation reflects the credit quality
and financial strength of both the issuer and any credit support providers. In
some financial reporting frameworks, the measurement of a financial liability
assumes that it is transferred to a market participant at the measurement date.
Where there is not an observable market price for a financial liability, its value
is typically measured using the same method as a counterparty would use to
measure the value of the corresponding asset, unless there are factors specific
1059 IAPN 1000

to the liability (such as third-party credit enhancement). In particular, the

entity’s own credit risk 10 can often be difficult to measure.
Presentation and Disclosure about Financial Instruments

65. Most financial reporting frameworks require disclosures in the financial
statements to enable users of the financial statements to make meaningful
assessments of the effects of the entity’s financial instrument activities,
including the risks and uncertainties associated with financial instruments.
66. Most frameworks require the disclosure of quantitative and qualitative
information (including accounting policies) relating to financial instruments.
The accounting requirements for fair value measurements in financial
statement presentation and disclosures are extensive in most financial reporting
frameworks and encompass more than just valuation of the financial
instruments. For example, qualitative disclosures about financial instruments
provide important contextual information about the characteristics of the
financial instruments and their future cash flows that may help inform investors
about the risks to which entities are exposed.
Categories of Disclosures
67. Disclosure requirements include:
(a) Quantitative disclosures that are derived from the amounts included in
the financial statements―for example, categories of financial assets and
liabilities;
(b) Quantitative disclosures that require significant judgment―for
example, sensitivity analysis for each type of market risk to which the
entity is exposed; and
(c) Qualitative disclosures―for example, those that describe the entity’s
governance over financial instruments; objectives; controls, policies and
processes for managing each type of risk arising from financial
instruments; and the methods used to measure the risks.
68. The more sensitive the valuation is to movements in a particular variable, the
more likely it is that disclosure will be necessary to indicate the uncertainties
surrounding the valuation. Certain financial reporting frameworks may also
require disclosure of sensitivity analyses, including the effects of changes in
assumptions used in the entity’s valuation techniques. For example, the
additional disclosures required for financial instruments with fair value
measurements that are categorized within level 3 inputs of the fair value
10
Own credit risk is the amount of change in fair value that is not attributable to changes in market
conditions.
IAPN 1000 1060

hierarchy are aimed at informing users of financial statements about the effects
of those fair value measurements that use the most subjective inputs.
69. Some financial reporting frameworks require disclosure of information that enables
users of the financial statements to evaluate the nature and extent of the risks
arising from financial instruments to which the entity is exposed at the reporting
date. This disclosure may be contained in the notes to the financial statements, or in
management’s discussion and analysis within its annual report cross-referenced
from the audited financial statements. The extent of disclosure depends on the
extent of the entity’s exposure to risks arising from financial instruments. This
includes qualitative disclosures about:
• The exposures to risk and how they arise, including the possible effects
on an entity’s future liquidity and collateral requirements;
• The entity’s objectives, policies and processes for managing the risk
and the methods used to measure the risk; and
• Any changes in exposures to risk or objectives, policies or processes for
managing risk from the previous period.
Section II―Audit Considerations Relating to Financial

Instruments
70. Certain factors may make auditing financial instruments particularly
challenging. For example:
• It may be difficult for both management and the auditor to understand
the nature of financial instruments and what they are used for, and the
risks to which the entity is exposed.
• Market sentiment and liquidity can change quickly, placing pressure on
management to manage their exposures effectively.
• Evidence supporting valuation may be difficult to obtain.
• Individual payments associated with certain financial instruments may
be significant, which may increase the risk of misappropriation of
assets.
• The amounts recorded in the financial statements relating to financial
instruments may not be significant, but there may be significant risks
and exposures associated with these financial instruments.
• A few employees may exert significant influence on the entity’s
financial instruments transactions, in particular where their
compensation arrangements are tied to revenue from financial
instruments, and there may be possible undue reliance on these
individuals by others within the entity.
1061 IAPN 1000

These factors may cause risks and relevant facts to be obscured, which may
affect the auditor’s assessment of the risks of material misstatement, and latent
risks can emerge rapidly, especially in adverse market conditions.
Professional Skepticism 11
71. Professional skepticism is necessary to the critical assessment of audit evidence
and assists the auditor in remaining alert for possible indications of
management bias. This includes questioning contradictory audit evidence and
the reliability of documents, responses to inquiries and other information
obtained from management and those charged with governance. It also includes
being alert to conditions that may indicate possible misstatement due to error or
fraud and considering the sufficiency and appropriateness of audit evidence
obtained in light of the circumstances.
72. Application of professional skepticism is required in all circumstances, and the
need for professional skepticism increases with the complexity of financial
instruments, for example with regard to:
• Evaluating whether sufficient appropriate audit evidence has been
obtained, which can be particularly challenging when models are used
or in determining if markets are inactive.
• Evaluating management’s judgments, and the potential for management
bias, in applying the entity’s applicable financial reporting framework,
in particular management’s choice of valuation techniques, use of
assumptions in valuation techniques, and addressing circumstances in
which the auditor’s judgments and management’s judgments differ.
• Drawing conclusions based on the audit evidence obtained, for example
assessing the reasonableness of valuations prepared by management’s
experts and evaluating whether disclosures in the financial statements
achieve fair presentation.
Planning Considerations 12
73. The auditor’s focus in planning the audit is particularly on:
• Understanding the accounting and disclosure requirements;
• Understanding the financial instruments to which the entity is exposed,
and their purpose and risks;
11
12
ISA 300, Planning an Audit of Financial Statements, deals with the auditor’s responsibility to plan an
audit of financial statements.
IAPN 1000 1062

• Determining whether specialized skills and knowledge are needed in

the audit;
• Understanding and evaluating the system of internal control in light of
the entity’s financial instrument transactions and the information
systems that fall within the scope of the audit;
• Understanding the nature, role and activities of the internal audit
function;
• Understanding management’s process for valuing financial instruments,
including whether management has used an expert or a service
organization; and
• Assessing and responding to the risk of material misstatement.
Understanding the Accounting and Disclosure Requirements

74. ISA 540 requires the auditor to obtain an understanding of the requirements of
the applicable financial reporting framework relevant to accounting estimates,
including related disclosures and any regulatory requirements. 13 The
requirements of the applicable financial reporting framework regarding
financial instruments may themselves be complex and require extensive
disclosures. Reading this IAPN is not a substitute for a full understanding of all the
requirements of the applicable financial reporting framework. Certain financial
reporting frameworks require consideration of areas such as:
• Hedge accounting;
• Accounting for “Day 1” profits or losses;
• Recognition and derecognition of financial instrument transactions;
• Own credit risk; and
• Risk transfer and derecognition, in particular where the entity has been
involved in the origination and structuring of complex financial
instruments.
Understanding the Financial Instruments

75. The characteristics of financial instruments may obscure certain elements of
risk and exposure. Obtaining an understanding of the instruments in which the
entity has invested or to which it is exposed, including the characteristics of the
instruments, helps the auditor to identify whether:
• Important aspects of a transaction are missing or inaccurately recorded;
13
ISA 540, paragraph 8(a)
1063 IAPN 1000

• A valuation appears appropriate;

• The risks inherent in them are fully understood and managed by the
entity; and
• The financial instruments are appropriately classified into current and
non-current assets and liabilities.
76. Examples of matters that the auditor may consider when obtaining an
understanding of the entity’s financial instruments include:
• To which types of financial instruments the entity is exposed.
• The use to which they are put.
• Management’s and, where appropriate, those charged with governance’s
understanding of the financial instruments, their use and the accounting
requirements.
• Their exact terms and characteristics so that their implications can be
fully understood and, in particular where transactions are linked, the
overall impact of the financial instrument transactions.
• How they fit into the entity’s overall risk management strategy.
Inquiries of the internal audit function, the risk management function, if such
functions exist, and discussions with those charged with governance may inform
the auditor’s understanding.
77. In some cases, a contract, including a contract for a non-financial instrument
may contain a derivative. Some financial reporting frameworks permit or
require such “embedded” derivatives to be separated from the host contract in
some circumstances. Understanding management’s process for identifying, and
accounting for, embedded derivatives will assist the auditor in understanding
the risks to which the entity is exposed.
Using Those with Specialized Skills and Knowledge in the Audit 14

78. A key consideration in audits involving financial instruments, particularly
complex financial instruments, is the competence of the auditor. ISA 220 15
14
When such a person’s expertise is in auditing and accounting, regardless of whether the person is from within
or external to the firm, this person is considered to be part of the engagement team and is subject to the
requirements of ISA 220, Quality Control for an Audit of Financial Statements. When such a person’s expertise
is in a field other than accounting or auditing, such person is considered to be an auditor’s expert, and the
provisions of ISA 620, Using the Work of an Auditor’s Expert, apply. ISA 620 explains that distinguishing
between specialized areas of accounting or auditing, and expertise in another field, will be a matter of
professional judgment, but notes the distinction may be made between expertise in methods of accounting for
financial instruments (accounting and auditing expertise) and expertise in complex valuation techniques for
financial instruments (expertise in a field other than accounting or auditing).
15
IAPN 1000 1064

requires the engagement partner to be satisfied that the engagement team, and
any auditor’s experts who are not part of the engagement team, collectively
have the appropriate competence and capabilities to perform the audit
engagement in accordance with professional standards and applicable legal and
regulatory requirements and to enable an auditor’s report that is appropriate in
the circumstances to be issued. Further, relevant ethical requirements 16 require
the auditor to determine whether acceptance of the engagement would create
any threats to compliance with the fundamental principles, including the
professional competence and due care. Paragraph 79 below provides examples
of the types of matters that may be relevant to the auditor’s considerations in
the context of financial instruments.
79. Accordingly, auditing financial instruments may require the involvement of one
or more experts or specialists, for example, in the areas of:
• Understanding the financial instruments used by the entity and their
characteristics, including their level of complexity. Using specialized
skills and knowledge may be needed in checking whether all aspects of
the financial instrument and related considerations have been captured
in the financial statements, and evaluating whether adequate disclosure
in accordance with the applicable financial reporting framework has
been made where disclosure of risks is required.
• Understanding the applicable financial reporting framework, especially
when there are areas known to be subject to differing interpretations, or
practice is inconsistent or developing.
• Understanding the legal, regulatory, and tax implications resulting from
the financial instruments, including whether the contracts are
enforceable by the entity (for example, reviewing the underlying
contracts), may require specialized skills and knowledge.
• Assessing the risks inherent in a financial instrument.
• Assisting the engagement team gather evidence to support
management’s valuations or to develop a point estimate or range,
especially when fair value is determined by a complex model; when
markets are inactive and data and assumptions are difficult to obtain;
when unobservable inputs are used; or when management has used an
expert.
• Evaluating information technology controls, especially in entities with a
high volume of financial instruments. In such entities information
technology may be highly complex, for example when significant
information about those financial instruments is transmitted, processed,
16
IESBA Code of Ethics for Professional Accountants paragraphs 210.1 and 210.6
1065 IAPN 1000

maintained or accessed electronically. In addition, it may include

relevant services provided by a service organization.
80. The nature and use of particular types of financial instruments, the complexities
associated with accounting requirements, and market conditions may lead to a
need for the engagement team to consult 17 with other accounting and audit
professionals, from within or outside the firm, with relevant technical
accounting or auditing expertise and experience, taking into account factors
such as:
• The capabilities and competence of the engagement team, including the
experience of the members of the engagement team.
• The attributes of the financial instruments used by the entity.
• The identification of unusual circumstances or risks in the engagement,
as well as the need for professional judgment, particularly with respect
to materiality and significant risks.
• Market conditions.
Understanding Internal Control

81. ISA 315 (Revised) establishes requirements for the auditor to understand the
entity and its environment, including its internal control. Obtaining an
understanding of the entity and its environment, including the entity’s internal
control, is a continuous, dynamic process of gathering, updating and analyzing
information throughout the audit. The understanding obtained enables the
auditor to identify and assess the risks of material misstatement at the financial
statement and assertion levels, thereby providing a basis for designing and
implementing responses to the assessed risks of material misstatement. The
volume and variety of the financial instrument transactions of an entity
typically determines the nature and extent of controls that may exist at an
entity. An understanding of how financial instruments are monitored and
controlled assists the auditor in determining the nature, timing and extent of
audit procedures. The Appendix describes controls that may exist in an entity
that deals in a high volume of financial instrument transactions.
Understanding the Nature, Role and Activities of the Internal Audit Function
82. In many large entities, the internal audit function may perform work that
enables senior management and those charged with governance to review and
evaluate the entity’s controls relating to the use of financial instruments. The
17
ISA 220, paragraph 18(b), requires the engagement partner to be satisfied that members of the
engagement team have undertaken appropriate consultation during the course of the engagement, both
within the engagement team and between the engagement team and others at the appropriate level within
or outside the firm.
IAPN 1000 1066

internal audit function may assist in identifying the risks of material

misstatement due to fraud or error. However, the knowledge and skills required
of an internal audit function to understand and perform procedures to provide
assurance to management or those charged with governance on the entity’s use
of financial instruments are generally quite different from those needed for
other parts of the business. The extent to which the internal audit function has
the knowledge and skill to cover, and has in fact covered, the entity’s financial
instrument activities, as well as the competence and objectivity of the internal
audit function, is a relevant consideration in the external auditor’s
determination of whether the internal audit function is likely to be relevant to
the overall audit strategy and audit plan.
83. Areas where the work of the internal audit function may be particularly
relevant are: 18
• Developing a general overview of the extent of use of financial
instruments;
• Evaluating the appropriateness of policies and procedures and
management’s compliance with them;
• Evaluating the operating effectiveness of financial instrument control
activities;
• Evaluating systems relevant to financial instrument activities; and
• Assessing whether new risks relating to financial instruments are
identified, assessed and managed.
Understanding Management’s Methodology for Valuing Financial Instruments

84. Management’s responsibility for the preparation of the financial statements
includes applying the requirements of the applicable financial reporting
framework to the valuation of financial instruments. ISA 540 requires the
auditor to obtain an understanding of how management makes accounting
estimates and the data on which accounting estimates are based. 19
Management’s approach to valuation also takes into account the selection of an
appropriate valuation methodology and the level of the evidence expected to be
available. To meet the objective of a fair value measurement, an entity develops
a valuation methodology to measure the fair value of financial instruments that
considers all relevant market information that is available. A thorough
understanding of the financial instrument being valued allows an entity to
identify and evaluate the relevant market information available about identical
18
Work performed by functions such as the risk management function, model review functions, and
product control, may also be relevant.
19
1067 IAPN 1000

or similar instruments that should be incorporated into the valuation

methodology.
Assessing and Responding to the Risks of Material Misstatement

Overall Considerations Relating to Financial Instruments
85. ISA 540 20 explains that the degree of estimation uncertainty affects the risk of
material misstatement of accounting estimates. The use of more complex
financial instruments, such as those that have a high level of uncertainty and
variability of future cash flows, may lead to an increased risk of material
misstatement, particularly regarding valuation. Other matters affecting the risk
of material misstatement include:
• The volume of financial instruments to which the entity is exposed.
• The terms of the financial instrument, including whether the financial
instrument itself includes other financial instruments.
• The nature of the financial instruments.
Fraud Risk Factors 21

86. Incentives for fraudulent financial reporting by employees may exist where
compensation schemes are dependent on returns made from the use of financial
instruments. Understanding how an entity’s compensation policies interact with
its risk appetite, and the incentives that this may create for its management and
traders, may be important in assessing the risk of fraud.
87. Difficult financial market conditions may give rise to increased incentives for
management or employees to engage in fraudulent financial reporting: to
protect personal bonuses, to hide employee or management fraud or error, to
avoid breaching regulatory, liquidity or borrowing limits or to avoid reporting
losses. For example, at times of market instability, unexpected losses may arise
from extreme fluctuations in market prices, from unanticipated weakness in
asset prices, through trading misjudgments, or for other reasons. In addition,
financing difficulties create pressures on management concerned about the
solvency of the business.
88. Misappropriation of assets and fraudulent financial reporting may often involve
override of controls that otherwise may appear to be operating effectively. This
may include override of controls over data, assumptions and detailed process
controls that allow losses and theft to be hidden. For example, difficult market
20
21
See ISA 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements, for
requirements and guidance dealing with fraud risk factors.
IAPN 1000 1068

conditions may increase pressure to conceal or offset trades as they attempt to

recover losses.
Assessing the Risk of Material Misstatement

89. The auditor’s assessment of the identified risks at the assertion level in
accordance with ISA 315 (Revised) includes evaluating the design and
implementation of internal control. It provides a basis for considering the
appropriate audit approach for designing and performing further audit
procedures in accordance with ISA 330, including both substantive procedures
and tests of controls. The approach taken is influenced by the auditor’s
understanding of internal control relevant to the audit, including the strength of
the control environment and any risk management function, the size and
complexity of the entity’s operations and whether the auditor’s assessment of
the risks of material misstatement include an expectation that controls are
operating effectively.
90. The auditor’s assessment of the risk of material misstatement at the assertion
level may change during the course of the audit as additional information is
obtained. Remaining alert during the audit, for example, when inspecting
records or documents may assist the auditor in identifying arrangements or
other information that may indicate the existence of financial instruments that
management has not previously identified or disclosed to the auditor. Such
records and documents may include, for example:
• Minutes of meetings of those charged with governance; and
• Specific invoices from, and correspondence with, the entity’s
professional advisors.
Factors to Consider in Determining Whether, and to What Extent, to Test the

Operating Effectiveness of Controls
91. An expectation that controls are operating effectively may be more common
when dealing with a financial institution with well-established controls, and
therefore controls testing may be an effective means of obtaining audit
evidence. When an entity has a trading function, substantive tests alone may
not provide sufficient appropriate audit evidence due to the volume of contracts
and the different systems used. Tests of controls, however, will not be sufficient
on their own as the auditor is required by ISA 330 to design and perform
substantive procedures for each material class of transactions, account balance
and disclosure. 22
92. Entities with a high volume of trading and use of financial instruments may have
more sophisticated controls, and an effective risk management function, and
22
1069 IAPN 1000

therefore the auditor may be more likely to test controls in obtaining evidence
about:
• The occurrence, completeness, accuracy, and cutoff of the transactions;
and
• The existence, rights and obligations, and completeness of account
balances.
93. In those entities with relatively few financial instrument transactions:
• Management and those charged with governance may have only a
limited understanding of financial instruments and how they affect the
business;
• The entity may only have a few different types of instruments with little
or no interaction between them;
• There is unlikely to be a complex control environment (for example, the
controls described in the Appendix may not be in place at the entity);
• Management may use pricing information from third-party pricing
sources to value their instruments; and
• Controls over the use of pricing information from third-party pricing
sources may be less sophisticated.
94. When an entity has relatively few transactions involving financial instruments,
it may be relatively easy for the auditor to obtain an understanding of the
entity’s objectives for using the financial instruments and the characteristics of
the instruments. In such circumstances, much of the audit evidence is likely to
be substantive in nature, the auditor may perform the majority of the audit work
at year-end, and third-party confirmations are likely to provide evidence in
relation to the completeness, accuracy, and existence of the transactions.
95. In reaching a decision on the nature, timing and extent of testing of controls,
the auditor may consider factors such as:
• The nature, frequency and volume of financial instrument transactions;
• The strength of controls, including whether controls are appropriately
designed to respond to the risks associated with an entity’s volume of
financial instrument transactions and whether there is a governance
framework over the entity’s financial instrument activities;
• The importance of particular controls to the overall control objectives
and processes in place at the entity, including the sophistication of the
information systems to support financial instrument transactions;
• The monitoring of controls and identified deficiencies in control
procedures;
IAPN 1000 1070

• The issues the controls are intended to address, for example, controls
related to the exercise of judgments compared with controls over
supporting data. Substantive tests are more likely to be effective than
relying on controls related to the exercise of judgment;
• The competency of those involved in the control activities, for example
whether the entity has adequate capacity, including during periods of
stress, and ability to establish and verify valuations for the financial
instruments to which it is exposed;
• The frequency of performance of these control activities;
• The level of precision the controls are intended to achieve;
• The evidence of performance of control activities; and
• The timing of key financial instrument transactions, for example,
whether they are close to the period end.
Substantive Procedures
96. Designing substantive procedures includes consideration of:
• The use of analytical procedures 23―While analytical procedures
undertaken by the auditor can be effective as risk assessment
procedures to provide the auditor with information about an entity’s
business, they may be less effective as substantive procedures when
performed alone. This is because the complex interplay of the drivers of
the valuation often mask any unusual trends that might arise.
• Non-routine transactions―Many financial transactions are negotiated
contracts between an entity and its counterparty (often known as “over
the counter” or OTC.) To the extent that financial instrument
transactions are not routine and outside an entity’s normal activities, a
substantive audit approach may be the most effective means of
achieving the planned audit objectives. In instances where financial
instrument transactions are not undertaken routinely, the auditor’s
responses to assessed risk, including designing and performing audit
procedures, have regard to the entity’s possible lack of experience in
this area.
23
ISA 315 (Revised), paragraph 6(b), requires the auditor to apply analytical procedures as risk assessment
procedures to assist in assessing the risks of material misstatement in order to provide a basis for
designing and implementing responses to the assessed risks. ISA 520, Analytical Procedures, paragraph
6, requires the auditor to use analytical procedures in forming an overall conclusion on the financial
statements. Analytical procedures may also be applied at other stages of the audit.
1071 IAPN 1000

• Availability of evidence―For example, when the entity uses a third-

party pricing source, evidence concerning the relevant financial
statement assertions may not be available from the entity.
• Procedures performed in other audit areas―Procedures performed in
other financial statement areas may provide evidence about the
completeness of financial instrument transactions. These procedures
may include tests of subsequent cash receipts and payments, and the
search for unrecorded liabilities.
• Selection of items for testing―In some cases, the financial instrument
portfolio will comprise instruments with varying complexity and risk.
In such cases, judgmental sampling may be useful.
97. For example, in the case of an asset-backed security, in responding to the risks
of material misstatement for such a security, the auditor may consider
performing some of the following audit procedures:
• Examining contractual documentation to understand the terms of the
security, the underlying collateral and the rights of each class of security
holder.
• Inquiring about management’s process of estimating cash flows.
• Evaluating the reasonableness of assumptions, such as prepayment
rates, default rates and loss severities.
• Obtaining an understanding of the method used to determine the cash
flow waterfall.
• Comparing the results of the fair value measurement with the valuations
of other securities with similar underlying collateral and terms.
• Reperforming calculations.
Dual-Purpose Tests
98. Although the purpose of a test of controls is different from the purpose of a test
of details, it may be efficient to perform both at the same time by, for example:
• Performing a test of controls and a test of details on the same
transaction (for example, testing whether a signed contract has been
maintained and whether the details of the financial instrument have
been appropriately captured in a summary sheet; or
• Testing controls when testing management’s process of making
valuation estimates.
IAPN 1000 1072

Timing of the Auditor’s Procedures 24

99. After assessing the risks associated with financial instruments, the engagement
team determines the timing of planned tests of controls and substantive audit
procedures. The timing of planned audit procedures varies depending on a
number of factors, including the frequency of the control operation, the
significance of the activity being controlled, and the related risk of material
misstatement.
100. While it is necessary to undertake most of the audit procedures in relation to
valuation and presentation at the period end, audit procedures in relation to
other assertions such as completeness and existence can usefully be tested at an
interim period. For example tests of controls may be performed at an interim
period for more routine controls, such as IT controls and authorizations for new
products. Also, it may be effective to test the operating effectiveness of controls
over new product approval by gathering evidence of the appropriate level of
management sign-off on a new financial instrument for an interim period.
101. Auditors may perform some tests on models as of an interim date, for example,
by comparing the output of the model to market transactions. Another possible
interim procedure for instruments with observable inputs is to test the
reasonableness of the pricing information provided by a third-party pricing
source.
102. Areas of more significant judgment are often tested close to, or at, the period
end as:
• Valuations can change significantly in a short period of time, making it
difficult to compare and reconcile interim balances with comparable
information at the balance sheet date;
• An entity may engage in an increased volume of financial instrument
transactions between an interim period and year-end;
• Manual journal entries may only be made after the end of the
accounting period; and
• Non-routine or significant transactions may take place late in the
accounting period.
Procedures Relating to Completeness, Accuracy, Existence, Occurrence and Rights

and Obligations
103. Many of the auditor’s procedures can be used to address a number of
assertions. For example, procedures to address the existence of an account
24
Paragraphs 11–12 and 22–23 of ISA 330 establish requirements when the auditor performs procedures at
an interim period and explains how such audit evidence can be used.
1073 IAPN 1000

balance at period end will also address the occurrence of a class of transactions,
and may also assist in establishing proper cut-off. This is because financial
instruments arise from legal contracts and, by verifying the accuracy of the
recording of the transaction, the auditor can also verify its existence, and obtain
evidence to support the occurrence and rights and obligations assertions at the
same time, and confirm that transactions are recorded in the correct accounting
period.
104. Procedures that may provide audit evidence to support the completeness,
accuracy, and existence assertions include:
• External confirmation 25 of bank accounts, trades, and custodian
statements. This can be done by direct confirmation with the
counterparty (including the use of bank confirmations), where a reply is
sent to the auditor directly. Alternatively this information may be
obtained from the counterparty’s systems through a data feed. Where
this is done, controls to prevent tampering with the computer systems
through which the information is transmitted may be considered by the
auditor in evaluating the reliability of the evidence from the
confirmation. If confirmations are not received, the auditor may be able
to obtain evidence by reviewing contracts and testing relevant controls.
External confirmations, however, often do not provide adequate audit
evidence with respect to the valuation assertion though they may assist
in identifying any side agreements.
• Reviewing reconciliations of statements or data feeds from custodians
with the entity’s own records. This may necessitate evaluating IT
controls around and within automated reconciliation processes and to
evaluate whether reconciling items are properly understood and
resolved.
• Reviewing journal entries and the controls over the recording of such
entries. This may assist in, for example:
o Determining if entries have been made by employees other than
those authorized to do so.
o Identifying unusual or inappropriate end-of-period journal entries,
which may be relevant to fraud risk.
• Reading individual contracts and reviewing supporting documentation
of the entity’s financial instrument transactions, including accounting
25
ISA 505, External Confirmations, deals with the auditor’s use of external confirmation procedures to
obtain audit evidence in accordance with the requirements of ISA 330 and ISA 500, Audit Evidence. See
also the Staff Audit Practice Alert, Emerging Practice Issues Regarding the Use of External
Confirmations in an Audit of Financial Statements, issued in November 2009.
IAPN 1000 1074

records, thereby verifying existence and rights and obligations. For

example, an auditor may read individual contracts associated with
financial instruments and review supporting documentation, including
the accounting entries made when the contract was initially recorded,
and may also subsequently review accounting entries made for
valuation purposes. Doing so allows the auditor to evaluate whether the
complexities inherent in a transaction have been fully identified and
reflected in the accounts. Legal arrangements and their associated risks
need to be considered by those with suitable expertise to ensure that
rights exist.
• Testing controls, for example by reperforming controls.
• Reviewing the entity’s complaints management systems. Unrecorded
transactions may result in the entity’s failure to make a cash payment to
a counterparty, and may be detected by reviewing complaints received.
• Reviewing master netting arrangements to identify unrecorded
instruments.
105. These procedures are particularly important for some financial instruments,
such as derivatives or guarantees. This is because they may not have a large
initial investment, meaning it may be hard to identify their existence. For
example, embedded derivatives are often contained in contracts for non-
financial instruments which may not be included in confirmation procedures.
Valuation of Financial Instruments

Financial Reporting Requirements
106. Fair presentation financial reporting frameworks often use fair value
hierarchies, for example those used in IFRS and U.S. GAAP. This usually
means that the volume and detail of the required disclosures increases as the
level of measurement uncertainty increases. The distinction between the levels in
the hierarchy may require judgment.
107. The auditor may find it useful to obtain an understanding of how the financial
instruments relate to the fair value hierarchy. Ordinarily, the risk of material
misstatement, and the level of audit procedures to be applied, increases as the
level of measurement uncertainty increases. The use of level 3, and some level
2, inputs from the fair value hierarchy may be a useful guide to the level of
measurement uncertainty. Level 2 inputs vary from those which are easily
obtained to those which are closer to level 3 inputs. The auditor evaluates
available evidence and understands both the fair value hierarchy and the risk of
management bias in management’s categorization of financial instruments in
the fair value hierarchy.
1075 IAPN 1000

108. In accordance with ISA 540, 26 the auditor considers the entity’s valuation
policies and methodology for data and assumptions used in the valuation
methodology. In many cases, the applicable financial reporting framework does
not prescribe the valuation methodology. When this is the case, matters that
may be relevant to the auditor’s understanding of how management values
financial instruments include, for example:
• Whether management has a formal valuation policy and, if so, whether
the valuation technique used for a financial instrument is appropriately
documented in accordance with that policy;
• Which models may give rise to the greatest risk of material
misstatement;
• How management considered the complexity of the valuation of the
financial instrument when selecting a particular valuation technique;
• Whether there is a greater risk of material misstatement because
management has internally developed a model to be used to value
financial instruments or is departing from a valuation technique
commonly used to value the particular financial instrument;
• Whether management made use of a third-party pricing source;
• Whether those involved in developing and applying the valuation
technique have the appropriate skills and expertise to do so, including
whether a management’s expert has been used; and
• Whether there are indicators of management bias in selecting the
valuation technique to be used.
Assessing the Risk of Material Misstatement Related to Valuation

109. When evaluating whether the valuation techniques used by an entity are
appropriate in the circumstances, and whether controls over valuation
techniques are in place, the factors considered by the auditor may include:
• Whether the valuation techniques are commonly used by other market
participants and have been previously demonstrated to provide a reliable
estimate of prices obtained from market transactions;
• Whether the valuation techniques operate as intended and there are no
flaws in their design, particularly under extreme conditions, and whether
they have been objectively validated. Indicators of flaws include
inconsistent movements relative to benchmarks;
• Whether the valuation techniques take account of the risks inherent in
26
IAPN 1000 1076

the financial instrument being valued, including counterparty

creditworthiness, and own credit risk in the case of valuation techniques
used to measure financial liabilities;
• How the valuation techniques are calibrated to the market, including the
sensitivity of the valuation techniques to changes in variables;
• Whether market variables and assumptions are used consistently and
whether new conditions justify a change in the valuation techniques,
market variables or assumptions used;
• Whether sensitivity analyses indicate that valuations would change
significantly with only small or moderate changes in assumptions;
• The organizational structure, such as the existence of an internal
department responsible for developing models to value certain
instruments, particularly where level 3 inputs are involved. For
example, a model development function that is involved in assisting in
pricing deals is less objective than one which is functionally and
organizationally segregated from the front office; and
• The competence and objectivity of those responsible for the
development and application of the valuation techniques, including
management’s relative experience with particular models that may be
newly developed.
The auditor (or auditor’s expert) may also independently develop one or more
valuation techniques to compare its output with that of the valuation techniques
used by management.
Significant Risks
110. The auditor’s risk assessment process may lead the auditor to identify one or
more significant risks relating to the valuation of financial instruments, when
any of the following circumstances exist:
• High measurement uncertainty related to the valuation of financial
instruments (for example, those with unobservable inputs). 27
• Lack of sufficient evidence to support management’s valuation of its
financial instruments.
27
Where the auditor determines that the high estimation uncertainty related to the valuation of complex
financial instruments gives rise to a significant risk, ISA 540 requires the auditor to perform substantive
procedures and evaluate the adequacy of the disclosure of their estimation uncertainty. See ISA 540,
paragraphs 11, 15 and 20.
1077 IAPN 1000

• Lack of management understanding of its financial instruments or

expertise necessary to value such instruments properly, including the
ability to determine whether valuation adjustments are needed.
• Lack of management understanding of complex requirements in the
applicable financial reporting framework relating to measurement and
disclosure of financial instruments, and inability of management to
make the judgments required to properly apply those requirements.
• The significance of valuation adjustments made to valuation technique
outputs when the applicable financial reporting framework requires or
permits such adjustments.
111. For accounting estimates that give rise to significant risks, in addition to other
substantive procedures performed to meet the requirements of ISA 330, ISA
540 28 requires the auditor to evaluate the following:
(a) How management has considered alternative assumptions or outcomes,
and why it has rejected them, or how management has otherwise
addressed measurement uncertainty in making the accounting estimate;
(b) Whether the significant assumptions used by management are
reasonable; and
(c) Where relevant to the reasonableness of the significant assumptions
used by management, or the appropriate application of the applicable
financial reporting framework, management’s intent to carry out
specific courses of action and its ability to do so.
112. As markets become inactive, the change in circumstances may lead to a move
from valuation by market price to valuation by model, or may result in a
change from one particular model to another. Reacting to changes in market
conditions may be difficult if management does not have policies in place prior
to their occurrence. Management may also not possess the expertise necessary
to develop a model on an urgent basis, or select the valuation technique that
may be appropriate in the circumstances. Even where valuation techniques
have been consistently used, there is a need for management to examine the
continuing appropriateness of the valuation techniques and assumptions used
for determining valuation of financial instruments. Further, valuation
techniques may have been selected in times where reasonable market
information was available, but may not provide reasonable valuations in times
of unanticipated stress.
113. The susceptibility to management bias, whether intentional or unintentional,
increases with the subjectivity of the valuation and the degree of measurement
28
ISA 540, paragraph 15(a)-(b)
IAPN 1000 1078

uncertainty. For example, management may tend to ignore observable

marketplace assumptions or data and instead use their own internally-developed
model if the model yields more favorable results. Even without fraudulent
intent, there may be a natural temptation to bias judgments towards the most
favorable end of what may be a wide spectrum, rather than the point in the
spectrum that might be considered to be most consistent with the applicable
financial reporting framework. Changing the valuation technique from period to
period without a clear and appropriate reason for doing so may also be an
indicator of management bias. Although some form of management bias is
inherent in subjective decisions relating to the valuation of financial
instruments, when there is intention to mislead, management bias is fraudulent
in nature.
Developing an Audit Approach

114. In testing how management values the financial instrument and in responding
to the assessed risks of material misstatement in accordance with ISA 540,29 the
auditor undertakes one or more of the following procedures, taking account of
the nature of the accounting estimates:
(a) Test how management made the accounting estimate and the data on
which it is based (including valuation techniques used by the entity in
its valuations).
(b) Test the operating effectiveness of the controls over how management
made the accounting estimate, together with appropriate substantive
procedures.
(c) Develop a point estimate or a range to evaluate management’s point
estimate.
(d) Determine whether events occurring up to the date of the auditor’s
report provide audit evidence regarding the accounting estimate.
Many auditors find that a combination of testing how management valued the
financial instrument, and the data on which it is based, and testing the operating
effectiveness of controls, will be an effective and efficient audit approach. While
subsequent events may provide some evidence about the valuation of financial
instruments, other factors may need to be taken into account to address any
changes in market conditions subsequent to the balance sheet date. 30 If the auditor
is unable to test how management made the estimate, the auditor may choose
to develop a point estimate or range.
29
ISA 540, paragraphs 12–14
30
Paragraphs A63–A66 of ISA 540 provide examples of some of the factors that may be relevant.
1079 IAPN 1000

115. As described in Section I, to estimate the fair value of financial instruments

management may:
• Utilize information from third-party pricing sources;
• Gather data to develop their own estimate using various techniques
including models; and
• Engage an expert to develop an estimate.
Management often may use a combination of these approaches. For example,
management may have their own pricing process but use third-party pricing
sources to corroborate their own values.
Audit Considerations When Management Uses a Third-Party Pricing Source

116. Management may make use of a third-party pricing source, such as a pricing
service or broker, in valuing the entity’s financial instruments. Understanding
how management uses the information and how the pricing service operates
assists the auditor in determining the nature and extent of audit procedures
needed.
117. The following matters may be relevant where management uses a third-party
pricing source:
• The type of third-party pricing source – Some third-party pricing
sources make more information available about their process. For
example, a pricing service often provides information about their
methodology, assumptions and data in valuing financial instruments at
the asset class level. By contrast, brokers often provide no, or only
limited, information about the inputs and assumptions used in
developing the quote.
• The nature of inputs used and the complexity of the valuation technique
– The reliability of prices from third-party pricing sources varies
depending on the observability of inputs (and accordingly, the level of
inputs in the fair value hierarchy), and the complexity of the
methodology for valuing a specific security or asset class. For example,
the reliability of a price for an equity investment actively traded in a
liquid market is higher than that of a corporate bond traded in a liquid
market that has not traded on the measurement date, which, in turn, is
more reliable than that of an asset-backed security that is valued using a
discounted cash flow model.
• The reputation and experience of the third-party pricing source – For
example, a third-party pricing source may be experienced in a certain
type of financial instrument, and be recognized as such, but may not be
similarly experienced in other types of financial instruments. The
IAPN 1000 1080

auditor’s past experience with the third-party pricing source may also be
relevant in this regard.
• The objectivity of the third-party pricing source – For example, if a price
obtained by management comes from a counterparty such as the broker who
sold the financial instrument to the entity, or an entity with a close
relationship with the entity being audited, the price may not be reliable.
• The entity’s controls over the use of third-party pricing sources – The
degree to which management has controls in place to assess the reliability of
information from third-party pricing sources affects the reliability of the fair
value measurement. For example, management may have controls in place
to:
○ Review and approve the use of the third-party pricing source,
including consideration of the reputation, experience and
objectivity of the third-party pricing source.
○ Determine the completeness, relevance and accuracy of the
prices and pricing-related data.
• The third-party pricing source’s controls – The controls and processes
over valuations for the asset classes of interest to the auditor. For
example, a third-party pricing source may have strong controls around how
prices are developed, including the use of a formalized process for
customers, both buy and sell side, to challenge the prices received from the
pricing service, when supported by appropriate evidence, which may enable
the third-party pricing source to constantly correct prices to more fully
reflect the information available to market participants.
118. Possible approaches to gathering evidence regarding information from third-

party pricing sources may include the following:
• For level 1 inputs, comparing the information from third-party pricing
sources with observable market prices.
• Reviewing disclosures provided by third-party pricing sources about
their controls and processes, valuation techniques, inputs and
assumptions.
• Testing the controls management has in place to assess the reliability of
information from third-party pricing sources.
• Performing procedures at the third-party pricing source to understand
and test the controls and processes, valuation techniques, inputs and
assumptions used for asset classes or specific financial instruments of
interest.
1081 IAPN 1000

• Evaluating whether the prices obtained from third-party pricing sources

are reasonable in relation to prices from other third-party pricing
sources, the entity’s estimate or the auditor’s own estimate.
• Evaluating the reasonableness of valuation techniques, assumptions and
inputs.
• Developing a point estimate or a range for some financial instruments
priced by the third-party pricing source and evaluating whether the
results are within a reasonable range of each other.
• Obtaining a service auditor’s report that covers the controls over
validation of the prices. 31
119. Obtaining prices from multiple third-party pricing sources may also provide
useful information about measurement uncertainty. A wide range of prices may
indicate higher measurement uncertainty and may suggest that the financial
instrument is sensitive to small changes in data and assumptions. A narrow
range may indicate lower measurement uncertainty and may suggest less
sensitivity to changes in data and assumptions. Although obtaining prices from
multiple sources may be useful, when considering financial instruments that
have inputs categorized at levels 2 or 3 of the fair value hierarchy, in particular,
obtaining prices from multiple sources is unlikely to provide sufficient
appropriate audit evidence on its own. This is because:
(a) What appear to be multiple sources of pricing information may be
utilizing the same underlying pricing source; and
(b) Understanding the inputs used by the third-party pricing source in
determining the price may be necessary in order to categorize the
financial instrument in the fair value hierarchy.
120. In some situations, the auditor may be unable to gain an understanding of the
process used to generate the price, including any controls over the process of
how reliably the price is determined, or may not have access to the model,
including the assumptions and other inputs used. In such cases, the auditor may
decide to undertake to develop a point estimate or a range to evaluate
management’s point estimate in responding to the assessed risk.
31
Some pricing services may provide reports for users of its data to explain their controls over pricing
data, that is, a report prepared in accordance with International Standard on Assurance Engagements
(ISAE) 3402, Assurance Reports on Controls at a Service Organization. Management may request, and
the auditor may consider obtaining, such a report to develop an understanding of how the pricing data is
prepared and evaluate whether the controls at the pricing service can be relied upon.
IAPN 1000 1082

Audit Considerations When Management Estimates Fair Values Using a Model

121. Paragraph 13(b) of ISA 540 requires the auditor, if testing management’s
process of making the accounting estimate, to evaluate whether the method of
measurement used is appropriate in the circumstances and the assumptions
used by management are reasonable in light of the measurement objectives of
the applicable financial reporting framework.
122. Whether management has used a third-party pricing source, or is undertaking
its own valuation, models are often used to value financial instruments,
particularly when using inputs at levels 2 and 3 of the fair value hierarchy. In
determining the nature, timing and extent of audit procedures on models, the
auditor may consider the methodology, assumptions and data used in the
model. When considering more complex financial instruments such as those
using level 3 inputs, testing all three may be a useful source of audit evidence.
However, when the model is both simple and generally accepted, such as some
bond price calculations, audit evidence obtained from focusing on the
assumptions and data used in the model may be a more useful source of
evidence.
123. Testing a model can be accomplished by two main approaches:
(a) The auditor can test management’s model, by considering the
appropriateness of the model used by management, the reasonableness
of the assumptions and data used, and the mathematical accuracy; or
(b) The auditor can develop their own estimate, and then compare the
auditor’s valuation with that of the entity.
124. Where valuation of financial instruments is based on unobservable inputs (that
is, level 3 inputs), matters that the auditor may consider include, for example,
how management supports the following:
• The identification and characteristics of marketplace participants
relevant to the financial instrument.
• How unobservable inputs are determined on initial recognition.
• Modifications it has made to its own assumptions to reflect its view of
assumptions marketplace participants would use.
• Whether it has incorporated the best input information available in the
circumstances.
• Where applicable, how its assumptions take account of comparable
transactions.
• Sensitivity analysis of models when unobservable inputs are used and
whether adjustments have been made to address measurement
uncertainty.
1083 IAPN 1000

125. In addition, the auditor’s industry knowledge, knowledge of market trends,

understanding of other entities’ valuations (having regard to confidentiality) and
other relevant price indicators informs the auditor’s testing of the valuations and
the consideration of whether the valuations appear reasonable overall. If the
valuations appear to be consistently overly aggressive or conservative, this may be
an indicator of possible management bias.
126. Where there is a lack of observable external evidence, it is particularly
important that those charged with governance have been appropriately engaged
to understand the subjectivity of management’s valuations and the evidence
that has been obtained to support these valuations. In such cases, it may be
necessary for the auditor to evaluate whether there has been a thorough review
and consideration of the issues, including any documentation, at all appropriate
management levels within the entity, including with those charged with
governance.
127. When markets become inactive or dislocated, or inputs are unobservable,
management’s valuations may be more judgmental and less verifiable and, as
result, may be less reliable. In such circumstances, the auditor may test the model
by a combination of testing controls operated by the entity, evaluating the design
and operation of the model, testing the assumptions and data used in the model, and
comparing its output to a point estimate or range developed by the auditor or to
other third-party valuation techniques. 32
128. It is likely that in testing the inputs used in an entity’s valuation methodology, 33
for example, where such inputs are categorized in the fair value hierarchy, the
auditor will also be obtaining evidence to support the disclosures required by
the applicable financial reporting framework. For example, the auditor’s
substantive procedures to evaluate whether the inputs used in an entity’s
valuation technique (that is, level 1, level 2 and level 3 inputs) are appropriate,
and tests of an entity’s sensitivity analysis, will be relevant to the auditor’s
evaluation of whether the disclosures achieve fair presentation.
Evaluating Whether the Assumptions Used by Management Are Reasonable

129. An assumption used in a model may be deemed to be significant if a reasonable
variation in the assumption would materially affect the measurement of the
financial instrument. 34 Management may have considered alternative
32
ISA 540, paragraph 13(d) describes requirements when the auditor develops a range to evaluate
management’s point estimate. Valuation techniques developed by third parties and used by the auditor
may, in some circumstances be considered the work of an auditor’s expert and subject to the
requirements in ISA 620.
33
See, for example, paragraph 15 of ISA 540 for requirements relative to the auditor’s evaluation of
management’s assumption regarding significant risks.
34
See ISA 540, paragraph A107.
IAPN 1000 1084

assumptions or outcomes by performing a sensitivity analysis. The extent of

subjectivity associated with assumptions influences the degree of measurement
uncertainty and may lead the auditor to conclude there is a significant risk, for
example in the case of level 3 inputs.
130. Audit procedures to test the assumptions used by management, including those
used as inputs to models, may include evaluating:
• Whether, and if so, how, management has incorporated market inputs
into the development of assumptions, as it is generally preferable to seek
to maximize the use of relevant observable inputs and minimize
unobservable inputs;
• Whether the assumptions are consistent with observable market
conditions, and the characteristics of the financial asset or financial
liability;
• Whether the sources of market-participant assumptions are relevant and
reliable, and how management has selected the assumptions to use when
a number of different marketplace assumptions exist; and
• Whether sensitivity analyses indicate that valuations would change
significantly with only small or moderate changes in assumptions.
See paragraphs A77 to A83 of ISA 540 for further considerations relative to
evaluating the assumptions used by management.
131. The auditor’s consideration of judgments about the future is based on
information available at the time at which the judgment is made. Subsequent
events may result in outcomes that are inconsistent with judgments that were
reasonable at the time they were made.
132. In some cases, the discount rate in a present value calculation may be adjusted
to account for the uncertainties in the valuation, rather than adjusting each
assumption. In such cases, an auditor’s procedures may focus on the discount
rate, by looking at an observable trade on a similar security to compare the
discount rates used or developing an independent model to calculate the
discount rate and compare with that used by management.
Audit Considerations When a Management’s Expert Is Used by the Entity

133. As discussed in Section I, management may engage a valuation expert to value
some or all of their securities. Such experts may be brokers, investment
bankers, pricing services that also provide expert valuation services, or other
specialized valuation firms.
134. Paragraph 8 of ISA 500 contains requirements for the auditor when evaluating
evidence from an expert engaged by management. The extent of the auditor’s
procedures in relation to a management’s expert and that expert’s work depend
on the significance of the expert’s work for the auditor’s purposes. Evaluating
1085 IAPN 1000
the appropriateness of management’s expert’s work assists the auditor in

assessing whether the prices or valuations supplied by a management’s expert
provide sufficient appropriate audit evidence to support the valuations.
Examples of procedures the auditor may perform include:
• Evaluating the competence, capabilities and objectivity of management’s
expert for example: their relationship with the entity; their reputation and
standing in the market; their experience with the particular types of
instruments; and their understanding of the relevant financial reporting
framework applicable to the valuations;
• Obtaining an understanding of the work of the management’s expert, for
example by assessing the appropriateness of the valuation technique(s)
used and the key market variables and assumptions used in the valuation
technique(s);
• Evaluating the appropriateness of that expert’s work as audit evidence.
At this point, the focus is on the appropriateness of the expert’s work at
the level of the individual financial instrument. For a sample of the
relevant instruments, it may be appropriate to develop an estimate
independently (see paragraphs 136 to 137 on developing a point
estimate or range), using different data and assumptions, then compare
that estimate to that of the management’s expert; and
• Other procedures may include:
o Modeling different assumptions to derive assumptions in
another model, then considering the reasonableness of those
derived assumptions.
o Comparing management’s point estimates with the auditor’s
point estimates to determine if management’s estimates are
consistently higher or lower.
135. Assumptions may be made or identified by a management’s expert to assist
management in valuing its financial instruments. Such assumptions, when used
by management, become management’s assumptions that the auditor needs to
consider in the same manner as management’s other assumptions.
Developing a Point Estimate or Range

136. An auditor may develop a valuation technique and adjust the inputs and
assumptions used in the valuation technique to develop a range for use in
evaluating the reasonableness of management’s valuation. Paragraphs 106 to
135 of this IAPN may assist the auditor in developing a point estimate or range.
In accordance with ISA 540, 35 if the auditor uses assumptions, or
35
IAPN 1000 1086

methodologies that differ from management’s, the auditor shall obtain an

understanding of management’s assumptions or methodologies sufficient to
establish that the auditor’s range takes into account relevant variables and to
evaluate any significant differences from management’s valuation. The auditor
may find it useful to use the work of an auditor’s expert to evaluate the
reasonableness of management’s valuation.
137. In some cases, the auditor may conclude that sufficient evidence cannot be
obtained from the auditor’s attempts to obtain an understanding of
management’s assumptions or methodology, for example when a third-party
pricing source uses internally developed models and software and does not
allow access to relevant information. In such cases, the auditor may not be able
to obtain sufficient appropriate audit evidence about the valuation if the auditor
is unable to perform other procedures to respond to the risks of material
misstatement, such as developing a point estimate or a range to evaluate
management’s point estimate. 36 ISA 705 37 describes the implications of the
auditor’s inability to obtain sufficient appropriate audit evidence.
Presentation and Disclosure of Financial Instruments

138. Management’s responsibilities include the preparation of the financial
statements in accordance with the applicable financial reporting framework. 38
Financial reporting frameworks often require disclosures in the financial
statements to enable users of the financial statements to make meaningful
assessments of the effects of the entity’s financial instrument activities,
including the risks and uncertainties associated with these financial
instruments. The importance of disclosures regarding the basis of measurement
increases as the measurement uncertainty of the financial instruments increases and
is also affected by the level of the fair value hierarchy.
139. In representing that the financial statements are in accordance with the applicable
financial reporting framework, management implicitly or explicitly makes
assertions regarding the presentation and disclosure of the various elements of
financial statements and related disclosures. Assertions about presentation and
disclosure encompass:
(a) Occurrence and rights and obligations—disclosed events, transactions,
and other matters have occurred and pertain to the entity.
(b) Completeness—all disclosures that should have been included in the
financial statements have been included.
36
ISA 540, paragraph 13(d)
37
ISA 705, Modifications to the Opinion in the Independent Auditor’s Report
38
See paragraphs 4 and A2 of ISA 200.
1087 IAPN 1000

(c) Classification and understandability—financial information is

appropriately presented and described, and disclosures are clearly
expressed.
(d) Accuracy and valuation—financial and other information are disclosed
fairly and at appropriate amounts.
The auditor’s procedures around auditing disclosures are designed in
consideration of these assertions.
Procedures Relating to the Presentation and Disclosure of Financial Instruments

140. In relation to the presentation and disclosures of financial instruments, areas of
particular importance include:
• Financial reporting frameworks generally require additional disclosures
regarding estimates, and related risks and uncertainties, to supplement
and explain assets, liabilities, income, and expenses. The auditor’s focus
may need to be on the disclosures relating to risks and sensitivity
analysis. Information obtained during the auditor’s risk assessment
procedures and testing of control activities may provide evidence in
order for the auditor to conclude about whether the disclosures in the
financial statements are in accordance with the requirements of the
applicable financial reporting framework, for example about:
○ The entity’s objectives and strategies for using financial
instruments, including the entity’s stated accounting policies;
○ The entity’s control framework for managing its risks associated
with financial instruments; and
○ The risks and uncertainties associated with the financial
instruments.
• Information may come from systems outside traditional financial
reporting systems, such as risk systems. Examples of procedures that the
auditor may choose to perform in responding to assessed risks relative
to disclosures include testing:
o The process used to derive the disclosed information; and
o The operating effectiveness of the controls over the data used in
the preparation of disclosures.
• In relation to financial instruments having significant risk, 39 even where the
disclosures are in accordance with the applicable financial reporting
39
ISA 540, paragraph 20, requires the auditor to perform further procedures on disclosures relating to
accounting estimates that give rise to significant risks to evaluate the adequacy of the disclosure of their
IAPN 1000 1088

framework, the auditor may conclude that the disclosure of estimation

uncertainty is inadequate in light of the circumstances and facts involved
and, accordingly, the financial statements may not achieve fair
presentation. ISA 705 provides guidance on the implications for the
auditor’s opinion when the auditor believes that management’s
disclosures in the financial statements are inadequate or misleading.
• Auditors may also consider whether the disclosures are complete and
understandable, for example, all relevant information may be included
in the financial statements (or accompanying reports) but it may be
insufficiently drawn together to enable users of the financial statements
to obtain an understanding of the position or there may not be enough
qualitative disclosure to give context to the amounts recorded in the
financial statements. For example, even when an entity has included
sensitivity analysis disclosures, the disclosure may not fully describe the
risks and uncertainties that may arise because of changes in valuation,
possible effects on debt covenants, collateral requirements, and the
entity’s liquidity. ISA 260 40 contains requirements and guidance about
communicating with those charged with governance, including the
auditor’s views about significant qualitative aspects of the entity’s
accounting practices, including accounting policies, accounting
estimates and financial statement disclosures.
141. Consideration of the appropriateness of presentation, for example on short-term
and long-term classification, in substantive testing of financial instruments is
relevant to the auditor’s evaluation of the presentation and disclosure.
Other Relevant Audit Considerations

Written Representations
142. ISA 540 requires the auditor to obtain written representations from
management and, where appropriate, those charged with governance whether
they believe significant assumptions used in making accounting estimates are
reasonable. 41 ISA 580 42 requires that if, in addition to such required
estimation uncertainty in the financial statements in the context of the applicable financial reporting
framework.
40
ISA 260, Communication with Those Charged with Governance
41
ISA 540, paragraph 22. Paragraph 4 of ISA 580, Written Representations, states that written
representations from management do not provide sufficient appropriate audit evidence on their own
about any of the matters with which they deal. If the auditor is otherwise unable to obtain sufficient
appropriate audit evidence, this may constitute a limitation on the scope of the audit that may have
implications for the auditor’s report (see ISA 705, Modification to the Opinion in the Independent
Auditor’s Report).
42
1089 IAPN 1000

representations, the auditor determines that it is necessary to obtain one or

more written representations to support other audit evidence relevant to the
financial statements or one or more specific assertions in the financial
statements, the auditor shall request such other written representations.
Depending on the volume and degree of complexity of financial instrument
activities, written representations to support other evidence obtained about
financial instruments may also include:
• Management’s objectives with respect to financial instruments, for example,
whether they are used for hedging, asset/liability management or
investment purposes;
• Representations about the appropriateness of presentation of the financial
statements, for example the recording of financial instrument transactions as
sales or financing transactions;
• Representations about the financial statement disclosures concerning
financial instruments, for example that:
○ The records reflect all financial instrument transactions; and
○ All embedded derivative instruments have been identified;
• Whether all transactions have been conducted at arm’s length and at market
value;
• The terms of transactions;
• The appropriateness of the valuations of financial instruments;
• Whether there are any side agreements associated with any financial
instruments;
• Whether the entity has entered into any written options;
• Management’s intent and ability to carry out certain actions; 43 and
• Whether subsequent events require adjustment to the valuations and
disclosures included in the financial statements.
Communication with Those Charged with Governance and Others

143. Because of the uncertainties associated with the valuation of financial
instruments, the potential effects on the financial statements of any significant
risks are likely to be of governance interest. The auditor may communicate the
nature and consequences of significant assumptions used in fair value
measurements, the degree of subjectivity involved in the development of the
43
Paragraph A80 of ISA 540 provides examples of procedures that may be appropriate in the
circumstances.
IAPN 1000 1090

assumptions, and the relative materiality of the items being measured at fair
value to the financial statements as a whole. In addition, the need for
appropriate controls over commitments to enter into financial instrument
contracts and over the subsequent measurement processes are matters that may
give rise to the need for communication with those charged with governance.
144. ISA 260 deals with the auditor’s responsibility to communicate with those
charged with governance in an audit of financial statements. With respect to
financial instruments, matters to be communicated to those charged with
governance may include:
• A lack of management understanding of the nature or extent of the
financial instrument activities or the risks associated with such
activities;
• Significant deficiencies in the design or operation of the systems of
internal control or risk management relating to the entity’s financial
instrument activities that the auditor has identified during the audit; 44
• Significant difficulties encountered when obtaining sufficient
appropriate audit evidence relating to valuations performed by
management or a management’s expert, for example, where
management is unable to obtain an understanding of the valuation
methodology, assumptions and data used by the management’s experts,
and such information is not made available to the auditor by
management’ s expert;
• Significant differences in judgments between the auditor and
management or a management’s expert regarding valuations;
• The potential effects on the entity’s financial statements of material
risks and exposures required to be disclosed in the financial statements,
including the measurement uncertainty associated with financial
instruments;
• The auditor’s views about the appropriateness of the selection of
accounting policies and presentation of financial instrument transactions
in the financial statements;
• The auditor’s views about the qualitative aspects of the entity’s
accounting practices and financial reporting for financial instruments; or
44
ISA 265, Communicating Deficiencies in Internal Control to Those Charged with Governance and
Management, establishes requirements and provides guidance on communicating deficiencies in internal
control to management, and communicating significant deficiencies in internal control to those charged with
governance. It explains that deficiencies in internal control may be identified during the auditor’s risk
assessment procedures in accordance with ISA 315 (Revised) or at any other stage of the audit.
1091 IAPN 1000

• A lack of comprehensive and clearly stated policies for the purchase, sale
and holding of financial instruments, including operational controls,
procedures for designating financial instruments as hedges, and monitoring
exposures.
The appropriate timing for communications will vary with the circumstances of the
engagement; however, it may be appropriate to communicate significant difficulties
encountered during the audit as soon as practicable if those charged with
governance are able to assist the auditor to overcome the difficulty, or if it is likely
to lead to a modified opinion.
Communications with Regulators and Others

145. In some cases, auditors may be required, 45 or may consider it appropriate, to
communicate directly with regulators or prudential supervisors, in addition to
those charged with governance, regarding matters relating to financial
instruments. Such communication may be useful throughout the audit. For
example, in some jurisdictions, banking regulators seek to cooperate with
auditors to share information about the operation and application of controls
over financial instrument activities, challenges in valuing financial instruments
in inactive markets, and compliance with regulations. This coordination may be
helpful to the auditor in identifying risks of material misstatement.
45
For example, ISA 250, Consideration of Laws and Regulations in an Audit of Financial Statements, requires
auditors to determine whether there is a responsibility to report identified or suspected non-compliance with
laws and regulations to parties outside the entity. In addition, requirements concerning the auditor’s
communication to banking supervisors and others may be established in many countries either by law, by
supervisory requirement or by formal agreement or protocol.
IAPN 1000 1092

Appendix
(Ref: Para. A14)
Examples of Controls Relating to Financial Instruments

1. The following provides background information and examples of controls that
may exist in an entity that deals in a high volume of financial instrument
transactions, whether for trading or investing purposes. The examples are not
meant to be exhaustive and entities may establish different control
environments and processes depending on their size, the industry in which they
operate, and the extent of their financial instrument transactions. Further
information on the use of trade confirmations and clearing houses is contained
in paragraphs 25–26.
2. As in any control system, it is sometimes necessary to duplicate controls at
different control levels (for example, preventative, detective and monitoring) to
avoid the risk of material misstatement.
The Entity’s Control Environment

Commitment to Competent Use of Financial Instruments
3. The degree of complexity of some financial instrument activities may mean
that only a few individuals within the entity fully understand those activities or
have the expertise necessary to value the instruments on an ongoing basis. Use
of financial instruments without relevant expertise within the entity increases
the risk of material misstatement.
Participation by Those Charged with Governance

4. Those charged with governance oversee and concur with management’s
establishment of the entity’s overall risk appetite and provide oversight over the
entity’s financial instrument activities. An entity’s policies for the purchase,
sale and holding of financial instruments are aligned with its attitude toward
risk and the expertise of those involved in financial instrument activities. In
addition, an entity may establish governance structures and control processes
aimed at:
(a) Communicating investment decisions and assessments of all material
measurement uncertainty to those charged with governance; and
(b) Evaluating the entity’s overall risk appetite when engaging in financial
instrument transactions.
Organizational Structure
5. Financial instrument activities may be run on either a centralized or a
decentralized basis. Such activities and related decision making depend heavily
1093 IAPN 1000 APPENDIX

on the flow of accurate, reliable, and timely management information. The

difficulty of collecting and aggregating such information increases with the
number of locations and businesses in which an entity is involved. The risks of
material misstatement associated with financial instrument activities may
increase with greater decentralization of control activities. This may especially
be true where an entity is based in different locations, some perhaps in other
countries.
Assignment of Authority and Responsibility

Investment and Valuation Policies
6. Providing direction, through clearly stated policies approved by those charged
with governance for the purchase, sale, and holding of financial instruments
enables management to establish an effective approach to taking and managing
business risks. These policies are most clear when they state the entity’s
objectives with regard to its risk management activities, and the investment and
hedging alternatives available to meet these objectives, and reflect the:
(a) Level of management’s expertise;
(b) Sophistication of the entity’s internal control and monitoring systems;
(c) Entity’s asset/liability structure;
(d) Entity’s capacity to maintain liquidity and absorb losses of capital;
(e) Types of financial instruments that management believes will meet its
objectives; and
(f) Uses of financial instruments that management believes will meet its
objectives, for example, whether derivatives may be used for
speculative purposes or only for hedging purposes.
7. Management may design policies aligned with its valuation capabilities and
may establish controls to ensure that these policies are adhered to by those
employees responsible for the entity’s valuation. These may include:
(a) Processes for the design and validation of methodologies used to
produce valuations, including how measurement uncertainty is
addressed; and
(b) Policies regarding maximizing the use of observable inputs and the
types of information to be gathered to support valuations of financial
instruments.
8. In smaller entities, dealing in financial instruments may be rare and
management’s knowledge and experience limited. Nevertheless, establishing
policies over financial instruments helps an entity to determine its risk appetite
and consider whether investing in particular financial instruments achieves a
stated objective.
IAPN 1000 APPENDIX 1094

Human Resource Policies and Practices

9. Entities may establish policies requiring key employees, both front office and
back office, to take mandatory time off from their duties. This type of control is
used as a means of preventing and detecting fraud, in particular if those
engaged in trading activities are creating false trades or inaccurately recording
transactions.
Use of Service Organizations

10. Entities may also use service organizations (for example asset managers) to
initiate the purchase or sale of financial instruments, to maintain records of
transactions for the entity or to value financial instruments. Some entities may
be dependent on these service organizations to provide the basis of reporting
for the financial instruments held. However, if management does not have an
understanding about the controls in place at a service organization, the auditor
may not be able to obtain sufficient appropriate audit evidence to rely on
controls at that service organization. See ISA 402, 1 which establishes
requirements for the auditor to obtain sufficient appropriate audit evidence
when an entity uses the services of one or more service organizations.
11. The use of service organizations may strengthen or weaken the control
environment for financial instruments. For example, a service organization’s
personnel may have more experience with financial instruments than the entity’s
management or may have more robust internal control over financial reporting.
The use of the service organization also may allow for greater segregation of duties.
On the other hand, the service organization may have a poor control environment.
The Entity’s Risk Assessment Process

12. An entity’s risk assessment process exists to establish how management
identifies business risks that derive from its use of financial instruments,
including how management estimates the significance of the risks, assesses the
likelihood of their occurrence and decides upon actions to manage them.
13. The entity’s risk assessment process forms the basis for how management
determines the risks to be managed. Risk assessment processes exist with the
objective of ensuring that management:
(a) Understands the risks inherent in a financial instrument before
management enters into it, including the objective of entering into the
transaction and its structure (for example, the economics and business
purpose of the entity’s financial instrument activities);
1
ISA 402, Audit Considerations Relating to an Entity Using a Service Organization

(b) Performs adequate due diligence commensurate with the risks

associated with particular financial instruments;
(c) Monitors the entity’s outstanding positions to understand how market
conditions are affecting the entity’s exposures;
(d) Has procedures in place to reduce or change risk exposure if necessary
and for managing reputational risk; and
(e) Subjects these processes to rigorous supervision and review.
14. The structure implemented to monitor and manage exposure to risks should:
(a) Be appropriate and consistent with the entity’s attitude toward risk as
determined by those charged with governance;
(b) Specify the approval levels for the authorization of different types of
financial instruments and transactions that may be entered into and for
what purposes. The permitted instruments and approval levels should
reflect the expertise of those involved in financial instrument activities,
demonstrating management’s commitment to competence;
(c) Set appropriate limits for the maximum allowable exposure to each type
of risk (including approved counterparties). Levels of allowable
exposure may vary depending on the type of risk, or counterparty;
(d) Provide for the objective and timely monitoring of the financial risks
and control activities;
(e) Provide for the objective and timely reporting of exposures, risks and
the results of financial instrument activities in managing risk; and
(f) Evaluate management’s track record for assessing the risks of particular
financial instruments.
15. The types and levels of risks an entity faces are directly related to the types of
financial instruments with which it deals, including the complexity of these
instruments and the volume of financial instruments transacted.
Risk Management Function

16. Some entities, for example large financial institutions with a high volume of
financial instrument transactions, may be required by law or regulation, or may
choose, to establish a formal risk management function. This function is
separated from those responsible for undertaking and managing financial
instrument transactions. The function is responsible for reporting on and
monitoring financial instrument activities, and may include a formal risk
committee established by those charged with governance. Examples of key
responsibilities in this area may include:

(a) Implementing the risk management policy set by those charged with
governance (including analyses of the risks to which an entity may be
exposed);
(b) Designing risk limit structures and ensuring these risk limits are
implemented in practice;
(c) Developing stress scenarios and subjecting open position portfolios to
sensitivity analysis, including reviews of unusual movements in
positions; and
(d) Reviewing and analyzing new financial instrument products.
17. Financial instruments may have the associated risk that a loss might exceed the
amount, if any, of the value of the financial instrument recognized on the
balance sheet. For example, a sudden fall in the market price of a commodity
may force an entity to realize losses to close a forward position in that
commodity due to collateral, or margin, requirements. In some cases, the
potential losses may be enough to cast significant doubt on the entity’s ability
to continue as a going concern. The entity may perform sensitivity analyses or
value-at-risk analyses to assess the future hypothetical effects on financial
instruments subject to market risks. However, value-at-risk analysis does not
fully reflect the extent of the risks that may affect the entity; sensitivity and
scenario analyses also may be subject to limitations.
18. The volume and sophistication of financial instrument activity and relevant
regulatory requirements will influence the entity’s consideration whether to
establish a formal risk management function and how the function may be
structured. In entities that have not established a separate risk management
function, for example entities with relatively few financial instruments or
financial instruments that are less complex, reporting on and monitoring
financial instrument activities may be a component of the accounting or finance
function’s responsibility or management’s overall responsibility, and may
include a formal risk committee established by those charged with governance
The Entity’s Information Systems

19. The key objective of an entity’s information system is that it is capable of
capturing and recording all the transactions accurately, settling them, valuing
them, and producing information to enable the financial instruments to be risk
managed and for controls to be monitored. Difficulties can arise in entities that
engage in a high volume of financial instruments, in particular if there is a
multiplicity of systems that are poorly integrated and have manual interfaces
without adequate controls.
20. Certain financial instruments may require a large number of accounting entries.
As the sophistication or level of the financial instrument activities increases, it

is necessary for the sophistication of the information system to also increase.

Specific issues which can arise with respect to financial instruments include:
(a) Information systems, in particular for smaller entities, not having the
capability or not being appropriately configured to process financial
instrument transactions, especially when the entity does not have any
prior experience in dealing with financial instruments. This may result
in an increased number of manual transactions which may further
increase the risk of error;
(b) The potential diversity of systems required to process more complex
transactions, and the need for regular reconciliations between them, in
particular when the systems are not interfaced or may be subject to
manual intervention;
(c) The potential that more complex transactions, if they are only traded by
a small number of individuals, may be valued or risk managed on
spreadsheets rather than on main processing systems, and for the
physical and logical password security around those spreadsheets to be
more easily compromised;
(d) A lack of review of systems exception logs, external confirmations and
broker quotes, where available, to validate the entries generated by the
systems;
(e) Difficulties in controlling and evaluating the key inputs to systems for
valuation of financial instruments, particularly where those systems are
maintained by the group of traders known as the front office or a third-
party service provider and/or the transactions in question are non-
routine or thinly traded;
(f) Failure to evaluate the design and calibration of complex models used
to process these transactions initially and on a periodic basis;
(g) The potential that management has not set up a library of models, with
controls around access, change and maintenance of individual models,
in order to maintain a strong audit trail of the accredited versions of
models and in order to prevent unauthorized access or amendments to
those models;
(h) The disproportionate investment that may be required in risk
management and control systems, where an entity only undertakes a
limited number of financial instrument transactions, and the potential
for misunderstanding of the output by management if they are not used
to these types of transactions;
(i) The potential requirement for third-party systems provision, for
example from a service organization, to record, process, account for or
risk manage appropriately financial instrument transactions, and the

need to reconcile appropriately and challenge the output from those

providers; and
(j) Additional security and control considerations relevant to the use of an
electronic network when an entity uses electronic commerce for
financial instrument transactions.
21. Information systems relevant to financial reporting serve as an important
source of information for the quantitative disclosures in the financial
statements. However, entities may also develop and maintain non-financial
systems used for internal reporting and to generate information included in
qualitative disclosures, for example regarding risks and uncertainties or
sensitivity analyses.
The Entity’s Control Activities

22. Control activities over financial instrument transactions are designed to prevent
or detect problems that hinder an entity from achieving its objectives. These
objectives may be either operational, financial reporting, or compliance in
nature. Control activities over financial instruments are designed relative to the
complexity and volume of transactions of financial instruments and will
generally include an appropriate authorization process, adequate segregation of
duties, and other policies and procedures designed to ensure that the entity’s
control objectives are met. Process flow charts may assist in identifying an
entity’s controls and lack of controls. This IAPN focuses on control activities
related to completeness, accuracy and existence, valuation, and presentation
and disclosure.
Authorization
23. Authorization can affect the financial statement assertions both directly and
indirectly. For example, even if a transaction is executed outside an entity’s
policies, it nonetheless may be recorded and accounted for accurately.
However, unauthorized transactions could significantly increase risk to the
entity, thereby significantly increasing the risk of material misstatement since
they would be undertaken outside the system of internal control. To mitigate
this risk, an entity will often establish a clear policy as to what transactions can
be traded by whom and adherence to this policy will then be monitored by an
entity’s back office. Monitoring trading activities of individuals, for example
by reviewing unusually high volumes or significant gains or losses incurred,
will assist management in ensuring compliance with the entity’s policies,
including the authorization of new types of transactions, and evaluating
whether fraud has occurred.
24. The function of an entity’s deal initiation records is to identify clearly the
nature and purpose of individual transactions and the rights and obligations
arising under each financial instrument contract, including the enforceability of

the contracts. In addition to the basic financial information, such as a notional

amount, complete and accurate records at a minimum typically include:
(a) The identity of the dealer;
(b) The identity of the person recording the transaction (if not the dealer),
when the transaction was initiated (including the date and time of the
transaction), and how it was recorded in the entity’s information
systems; and
(c) The nature and purpose of the transaction, including whether or not it is
intended to hedge an underlying commercial exposure.
Segregation of Duties
25. Segregation of duties and the assignment of personnel is an important control
activity, particularly when exposed to financial instruments. Financial
instrument activities may be segregated into a number of functions, including:
(a) Executing the transaction (dealing). In entities with a high volume of
financial instrument transactions, this may be done by the front office;
(b) Initiating cash payments and accepting cash receipts (settlements);
(c) Sending out trade confirmations and reconciling the differences
between the entity’s records and replies from counterparties, if any;
(d) Recording of all transactions correctly in the accounting records;
(e) Monitoring risk limits. In entities with a high volume of financial
instrument transactions, this may be performed by the risk management
function; and
(f) Monitoring positions and valuing financial instruments.
26. Many organizations choose to segregate the duties of those investing in
financial instruments, those valuing financial instruments, those settling
financial instruments and those accounting/recording financial instruments.
27. Where an entity is too small to achieve proper segregation of duties, the role of
management and those charged with governance in monitoring financial instrument
activities is of particular importance.
28. A feature of some entities’ internal control is an independent price verification
(IPV) function. This department is responsible for separately verifying the price
of some financial instruments, and may use alternative data sources,
methodologies and assumptions. The IPV provides an objective look at the
pricing that has been developed in another part of the entity.
29. Ordinarily, the middle or back office is responsible for establishing policies on
valuation and ensuring adherence to the policy. Entities with a greater use of
financial instruments may perform daily valuations of their financial instrument

portfolio and examine the contribution to profit or loss of individual financial

instrument valuations as a test of the reasonableness of valuations.
Completeness, Accuracy, and Existence

30. Regular reconciliation of the entity’s records to external banks’ and custodians’
records enables the entity to ensure transactions are properly recorded.
Appropriate segregation of duties between those transacting the trades and
those reconciling them is important, as is a rigorous process for reviewing
reconciliations and clearing reconciling items.
31. Controls may also be established that require traders to identify whether a
complex financial instrument may have unique features, for example embedded
derivatives. In such circumstances, there may be a separate function that
evaluates complex financial instrument transactions at their initiation (which
may be known as a product control group), working in connection with an
accounting policy group to ensure the transaction is accurately recorded. While
smaller entities may not have product control groups, an entity may have a
process in place relating to the review of complex financial instrument
contracts at the point of origination in order to ensure they are accounted for
appropriately in accordance with the applicable financial reporting framework.
Monitoring of Controls
32. The entity’s ongoing monitoring activities are designed to detect and correct
any deficiencies in the effectiveness of controls over transactions for financial
instruments and their valuation. It is important that there is adequate
supervision and review of financial instrument activity within the entity. This
includes:
(a) All controls being subject to review, for example, the monitoring of
operational statistics such as the number of reconciling items or the
difference between internal pricing and external pricing sources;
(b) The need for robust information technology (IT) controls and
monitoring and validating their application; and
(c) The need to ensure that information resulting from different processes
and systems is adequately reconciled. For example, there is little benefit
in a valuation process if the output from it is not reconciled properly
into the general ledger.
33. In larger entities, sophisticated computer information systems generally keep
track of financial instrument activities, and are designed to ensure that
settlements occur when due. More complex computer systems may generate
automatic postings to clearing accounts to monitor cash movements, and
controls over processing are put in place with the objective of ensuring that
financial instrument activities are correctly reflected in the entity’s records.

Computer systems may be designed to produce exception reports to alert

management to situations where financial instruments have not been used
within authorized limits or where transactions undertaken were not within the
limits established for the chosen counterparties. However, even a sophisticated
computer system may not ensure the completeness of the recording of financial
instrument transactions. Accordingly, management frequently puts additional
procedures in place to increase the likelihood that all transactions will be
recorded.

(REVISED)
CONSIDERATION OF LAWS AND REGULATIONS IN AN
AUDIT OF FINANCIAL STATEMENTS
(Effective for audits of financial statements for periods beginning
on or after December 15, 200917)
CONTENTS
[MARKED FROM EXTANT]
Paragraph
Introduction
Scope of this ISA .................................................................................... 1
Effect of Laws and Regulations .............................................................. 2
Responsibility for Compliance with Laws and Regulations ................... 3−89
Effective Date ......................................................................................... 910
Objectives .............................................................................................. 1011
Definition ............................................................................................... 1112
Requirements
The Auditor’s Consideration of Compliance with Laws
and Regulations ................................................................................ 123−178
Audit Procedures When Non-Compliance iIs Identified or Suspected .... 198−221
Communicating and Reporting of Identified or Suspected Non-
Compliance ....................................................................................... 223−289
Documentation ........................................................................................ 2930
Responsibility for Compliance with Laws and Regulations ................... A1−A86
Definition ................................................................................................. A9−A10
The Auditor’s Consideration of Compliance with Laws
and Regulations ………………. ...................................................... A711−A162
Audit Procedures When Non-Compliance Iis Identified
or Suspected.................................................................................... A173−A2518
Communicating and Reporting of Identified or Suspected
Non-Compliance ........................................................................... A2619−A3420

CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS
Documentation ........................................................................................ A2135−A36
International Standard on Auditing (ISA) 250 (Revised), Consideration of Laws

and Regulations in an Audit of Financial Statements, should be read in conjunction
with ISA 200, Overall Objectives of the Independent Auditor and the Conduct of
an Audit in Accordance with International Standards on Auditing.
ISA 250 (Revised) has received the approval of the Public Interest Oversight Board
(PIOB) which concluded that due process was followed in the development of the
standard and that proper regard was paid to the public interest.

Introduction
Scope of this ISA
1. This International Standard on Auditing (ISA) deals with the auditor’s
responsibility to consider laws and regulations in an audit of financial
statements. This ISA does not apply to other assurance engagements in which
the auditor is specifically engaged to test and report separately on compliance
with specific laws or regulations.
Effect of Laws and Regulations

2. The effect on financial statements of laws and regulations varies
considerably. Those laws and regulations to which an entity is subject
constitute the legal and regulatory framework. The provisions of some laws
or regulations have a direct effect on the financial statements in that they
determine the reported amounts and disclosures in an entity’s financial
statements. Other laws or regulations are to be complied with by management
or set the provisions under which the entity is allowed to conduct its business
but do not have a direct effect on an entity’s financial statements. Some
entities operate in heavily regulated industries (such as banks and chemical
companies). Others are subject only to the many laws and regulations that
relate generally to the operating aspects of the business (such as those related
to occupational safety and health, and equal employment opportunity). Non-
compliance with laws and regulations may result in fines, litigation or other
consequences for the entity that may have a material effect on the financial
statements.
Responsibility for Compliance with Laws and Regulations (Ref: Para. A1–A68)
3. 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, including
compliance with the provisions of laws and regulations that determine the
reported amounts and disclosures in an entity’s financial statements.
Responsibility of the Auditor

4. The requirements in this ISA are designed to assist the auditor in identifying
material misstatement of the financial statements due to non-compliance with
laws and regulations. However, the auditor is not responsible for preventing
non-compliance and cannot be expected to detect non-compliance with all
laws and regulations.
5. The auditor is responsible for obtaining reasonable assurance that the financial
statements, taken as a whole, are free from material misstatement, whether

caused bydue to fraud or error. 1 In conducting an audit of financial statements,

the auditor takes into account the applicable legal and regulatory framework.
Owing to the inherent limitations of an audit, there is an unavoidable risk that
some material misstatements in the financial statements may not be detected,
even though the audit is properly planned and performed in accordance with
the ISAs. 2 In the context of laws and regulations, the potential effects of
inherent limitations on the auditor’s ability to detect material misstatements are
greater for such reasons as the following:
• There are many laws and regulations, relating principally to the
operating aspects of an entity, that typically do not affect the financial
statements and are not captured by the entity’s information systems
relevant to financial reporting.
• Non-compliance may involve conduct designed to conceal it, such as
collusion, forgery, deliberate failure to record transactions,
management override of controls or intentional misrepresentations
being made to the auditor.
• Whether an act constitutes non-compliance is ultimately a matter for
legal determinationto be determined by a court of law or other
appropriate adjudicative body.
Ordinarily, the further removed non-compliance is from the events and
transactions reflected in the financial statements, the less likely the auditor is
to become aware of it or to recognize the non-compliance.
6. This ISA distinguishes the auditor’s responsibilities in relation to compliance
with two different categories of laws and regulations as follows: (Ref: Para.
A6, A12–A13)
(a) The provisions of those laws and regulations generally recognized to
have a direct effect on the determination of material amounts and
disclosures in the financial statements such as tax and pension laws
and regulations (see paragraph 1314) (Ref: Para. A12); and
(b) Other laws and regulations that do not have a direct effect on the
determination of the amounts and disclosures in the financial
statements, but compliance with which may be fundamental to the
operating aspects of the business, to an entity’s ability to continue its
business, or to avoid material penalties (for examplee.g., compliance
with the terms of an operating license, compliance with regulatory
solvency requirements, or compliance with environmental
regulations); non-compliance with such laws and regulations may
1
with International Standards on Auditing, paragraph 5
2
ISA 200, paragraphs A53–A54

therefore have a material effect on the financial statements (see

paragraph 1415) (Ref: Para. A13).
7. In this ISA, differing requirements are specified for each of the above
categories of laws and regulations. For the category referred to in paragraph
6(a), the auditor’s responsibility is to obtain sufficient appropriate audit
evidence regarding compliance with the provisions of those laws and
regulations. For the category referred to in paragraph 6(b), the auditor’s
responsibility is limited to undertaking specified audit procedures to help
identify non-compliance with those laws and regulations that may have a
material effect on the financial statements.
8. The auditor is required by this ISA to remain alert to the possibility that other
audit procedures applied for the purpose of forming an opinion on financial
statements may bring instances of identified or suspected non-compliance to
the auditor’s attention. Maintaining professional skepticism throughout the
audit, as required by ISA 200, 3 is important in this context, given the extent
of laws and regulations that affect the entity.
9. The auditor may have additional responsibilities under law, regulation or
relevant ethical requirements regarding an entity’s non-compliance with laws
and regulations, which may differ from or go beyond this ISA, such as: (Ref:
Para. A8)
(a) Responding to identified or suspected non-compliance with laws and
regulations, including requirements in relation to specific
communications with management and those charged with
governance, assessing the appropriateness of their response to non-
compliance and determining whether further action is needed;
(b) Communicating identified or suspected non-compliance with laws and
regulations to other auditors (e.g., in an audit of group financial
statements); and
(c) Documentation requirements regarding identified or suspected non-
compliance with laws and regulations.
Complying with any additional responsibilities may provide further
information that is relevant to the auditor’s work in accordance with this and
other ISAs (e.g., regarding the integrity of management or, where
appropriate, those charged with governance).
Effective Date
910. This ISA is effective for audits of financial statements for periods beginning
on or after December 15, 20092017.
3

Objectives
110. The objectives of the auditor are:
(a) To obtain sufficient appropriate audit evidence regarding compliance
with the provisions of those laws and regulations generally recognized
to have a direct effect on the determination of material amounts and
disclosures in the financial statements;
(b) To perform specified audit procedures to help identify instances of
non-compliance with other laws and regulations that may have a
material effect on the financial statements; and
(c) To respond appropriately to non-compliance identified or suspected
non-compliance with laws and regulations identified during the audit.
Definition
121. For the purposes of this ISA, the following term has the meaning attributed
below:
Non-compliance – Acts of omission or commission by the entity, either
intentional or unintentional, committed by the entity, or by those charged with
governance, by management or by other individuals working for or under the
direction of the entity, which are contrary to the prevailing laws or
regulations. Such acts include transactions entered into by, or in the name of,
the entity, or on its behalf, by those charged with governance, management
or employees. Non-compliance does not include personal misconduct
(unrelated to the business activities of the entity) by those charged with
governance, management or employees of the entity. (Ref: Para. A9–A10)
Requirements
The Auditor’s Consideration of Compliance with Laws and Regulations
132. As part of obtaining an understanding of the entity and its environment in
accordance with ISA 315 (Revised), 4 the auditor shall obtain a general
understanding of:
(a) The legal and regulatory framework applicable to the entity and the
industry or sector in which the entity operates; and
(b) How the entity is complying with that framework. (Ref: Para. A711)
143. The auditor shall obtain sufficient appropriate audit evidence regarding
compliance with the provisions of those laws and regulations generally
4
ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment, paragraph 11

recognized to have a direct effect on the determination of material amounts

and disclosures in the financial statements. (Ref: Para. A128)
154. The auditor shall perform the following audit procedures to help identify
instances of non-compliance with other laws and regulations that may have
a material effect on the financial statements: (Ref: Para. A139–A140)
(a) Inquiring of management and, where appropriate, those charged with
governance, as to whether the entity is in compliance with such laws
and regulations; and
(b) Inspecting correspondence, if any, with the relevant licensing or
regulatory authorities.
165. During the audit, the auditor shall remain alert to the possibility that other
audit procedures applied may bring instances of non-compliance or suspected
non-compliance with laws and regulations to the auditor’s attention. (Ref:
Para. A151)
176. The auditor shall request management and, where appropriate, those charged
with governance, to provide written representations that all known instances
of non-compliance or suspected non-compliance with laws and regulations
whose effects should be considered when preparing financial statements have
been disclosed to the auditor. (Ref: Para. A126)
187. In the absence of identified or suspected non-compliance, the auditor is not
required to perform audit procedures regarding the entity’s compliance with
laws and regulations, other than those set out in paragraphs 132–176.
Audit Procedures When Non-Compliance Is Identified or Suspected

198. If the auditor becomes aware of information concerning an instance of non-
compliance or suspected non-compliance with laws and regulations, the
auditor shall obtain: (Ref: Para. A173–A18)
(a) An understanding of the nature of the act and the circumstances in
which it has occurred; and
(b) Further information to evaluate the possible effect on the financial
statements. (Ref: Para. A194)
1920. If the auditor suspects there may be non-compliance, the auditor shall discuss
the matter, unless prohibited by law or regulation, with the appropriate level
of management and, where appropriate, those charged with governance. If
management or, as appropriate, those charged with governance do not
provide sufficient information that supports that the entity is in compliance
with laws and regulations and, in the auditor’s judgment, the effect of the
suspected non-compliance may be material to the financial statements, the
auditor shall consider the need to obtain legal advice. (Ref: Para. A2015–
A2216)
210. If sufficient information about suspected non-compliance cannot be obtained,

the auditor shall evaluate the effect of the lack of sufficient appropriate audit
evidence on the auditor’s opinion.
221. The auditor shall evaluate the implications of identified or suspected non-
compliance in relation to other aspects of the audit, including the auditor’s
risk assessment and the reliability of written representations, and take
appropriate action. (Ref: Para. A2317–A2518)
Communicating and Reporting of Identified or Suspected Non-Compliance

CommunicatingReporting Identified or Suspected Non-Compliance withto Those
Charged with Governance
232. Unless all of those charged with governance are involved in management of
the entity, and therefore are aware of matters involving identified or
suspected non-compliance already communicated by the auditor, 5 the auditor
shall communicate, unless prohibited by law or regulation, with those
charged with governance matters involving non-compliance with laws and
regulations that come to the auditor’s attention during the course of the audit,
other than when the matters are clearly inconsequential.
234. If, in the auditor’s judgment, the non-compliance referred to in paragraph 232
is believed to be intentional and material, the auditor shall communicate the
matter withto those charged with governance as soon as practicable.
254. If the auditor suspects that management or those charged with governance
are involved in non-compliance, the auditor shall communicate the matter to
the next higher level of authority at the entity, if it exists, such as an audit
committee or supervisory board. Where no higher authority exists, or if the
auditor believes that the communication may not be acted upon or is unsure
as to the person to whom to report, the auditor shall consider the need to
obtain legal advice.
Potential ReportingImplications of Identified or Suspected Non-Compliance infor the

Auditor’s Report on the Financial Statements(Ref: Para. A26–A27)
265. If the auditor concludes that the identified or suspected non-compliance has
a material effect on the financial statements, and has not been adequately
reflected in the financial statements, the auditor shall, in accordance with ISA
705 (Revised), express a qualified opinion or an adverse opinion on the
financial statements. 6
5
6
ISA 705 (Revised), Modifications to the Opinion in the Independent Auditor’s Report, paragraphs 7–
8

276. If the auditor is precluded by management or those charged with governance

from obtaining sufficient appropriate audit evidence to evaluate whether non-
compliance that may be material to the financial statements has, or is likely
to have, occurred, the auditor shall express a qualified opinion or disclaim an
opinion on the financial statements on the basis of a limitation on the scope
of the audit in accordance with ISA 705 (Revised). 7
287. If the auditor is unable to determine whether non-compliance has occurred
because of limitations imposed by the circumstances rather than by
management or those charged with governance, the auditor shall evaluate the
effect on the auditor’s opinion in accordance with ISA 705 (Revised).
Reporting Identified or Suspected Non-Compliance to Regulatory and Enforcement

Authoritiesan Appropriate Authority outside the Entity
298. If the auditor has identified or suspects non-compliance with laws and
regulations, the auditor shall determine whether law, regulation or relevant
ethical requirements:the auditor has a responsibility to report the identified
or suspected non-compliance to parties outside the entity. (Ref: Para. A2819–
A3420)
(a) Require the auditor to report to an appropriate authority outside the
entity.
(b) Establish responsibilities under which reporting to an appropriate
authority outside the entity may be appropriate in the circumstances.
Documentation
2930. The auditor shall include in the audit documentation 8 identified or suspected
non-compliance with laws and regulations and: the results of discussion with
management and, where applicable, those charged with governance and other
parties outside the entity. 9 (Ref: Para. A3521–A36)
(a) The audit procedures performed, the significant professional
judgments made and the conclusions reached thereon; and
(b) The discussions of significant matters related to the non-compliance
with management, those charged with governance and others,
including how management and, where applicable, those charged with
governance have responded to the matter.
***
7
ISA 705 (Revised), paragraphs 7 and 9
8
ISA 230, Audit Documentation, paragraphs 8–11, and A6
9
ISA 230, Audit Documentation, paragraphs 8–11, and A6


Responsibility for Compliance with Laws and Regulations (Ref: Para. 3–89)
A1. 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 laws and regulations. Laws and regulations may affect an
entity’s financial statements in different ways: for example, most directly,
they may affect specific disclosures required of the entity in the financial
statements or they may prescribe the applicable financial reporting
framework. They may also establish certain legal rights and obligations of
the entity, some of which will be recognized in the entity’s financial
statements. In addition, laws and regulations may impose penalties in cases
of non-compliance.
A2. The following are examples of the types of policies and procedures an entity
may implement to assist in the prevention and detection of non-compliance
with laws and regulations:
• Monitoring legal requirements and ensuring that operating procedures
are designed to meet these requirements.
• Instituting and operating appropriate systems of internal control.
• Developing, publicizing and following a code of conduct.
• Ensuring employees are properly trained and understand the code of
conduct.
• Monitoring compliance with the code of conduct and acting
appropriately to discipline employees who fail to comply with it.
• Engaging legal advisors to assist in monitoring legal requirements.
• Maintaining a register of significant laws and regulations with which
the entity has to comply within its particular industry and a record of
complaints.
In larger entities, these policies and procedures may be supplemented by
assigning appropriate responsibilities to the following:
• An internal audit function.
• An audit committee.
• A compliance function.
Responsibility of the Auditor

A3. Non-compliance by the entity with laws and regulations may result in a
material misstatement of the financial statements. Detection of non-
compliance, regardless of materiality, may affect other aspects of the audit

including, for example, the auditor’s consideration of the integrity of

management, those charged with governance or employees.
A4. Whether an act constitutes non-compliance with laws and regulations is a
matter for legal determinationto be determined by a court or other appropriate
adjudicative body, which is ordinarily beyond the auditor’s professional
competence to determine. Nevertheless, the auditor’s training, experience
and understanding of the entity and its industry or sector may provide a basis
to recognize that some acts, coming to the auditor’s attention, may constitute
non-compliance with laws and regulations.
A5. In accordance with specific statutory requirements, the auditor may be
specifically required to report, as part of the audit of the financial statements,
on whether the entity complies with certain provisions of laws or regulations.
In these circumstances, ISA 700 (Revised) 10 or ISA 800 (Revised) 11 deal with
how these audit responsibilities are addressed in the auditor’s report.
Furthermore, where there are specific statutory reporting requirements, it
may be necessary for the audit plan to include appropriate tests for
compliance with these provisions of the laws and regulations.
Categories of Laws and Regulations (Ref: Para. 6)
A6. The nature and circumstances of the entity may impact whether relevant laws
and regulations are within the categories of laws and regulations described in
paragraphs 6(a) or 6(b). Examples of laws and regulations that may be
included in the categories described in paragraph 6 include those that deal
with:
• Fraud, corruption and bribery.
• Money laundering, terrorist financing and proceeds of crime.
• Securities markets and trading.
• Banking and other financial products and services.
• Data protection.
• Tax and pension liabilities and payments.
• Environmental protection.
• Public health and safety.
10
ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements, paragraph 4243
11
ISA 800 (Revised), Special Considerations—Audits of Financial Statements Prepared in Accordance
with Special Purpose Frameworks, paragraph 11

Considerations Specific to Public Sector Entities

A67. In the public sector, there may be additional audit responsibilities with
respect to the consideration of laws and regulations which may relate to the
audit of financial statements or may extend to other aspects of the entity’s
operations.
Additional Responsibilities Established by Law, Regulation or Relevant Ethical

Requirements (Ref: Para. 9)
A8. Law, regulation or relevant ethical requirements may require the auditor to
perform additional procedures and take further actions. For example, the
Code of Ethics for Professional Accountants issued by the International
Ethics Standards Board for Accountants (IESBA Code) requires the auditor
to take steps to respond to identified or suspected non-compliance with laws
and regulations and determine whether further action is needed. Such steps
may include the communication of identified or suspected non-compliance
with laws and regulations to other auditors within a group, including a group
engagement partner, component auditors or other auditors performing work
at components of a group for purposes other than the audit of the group
Definition (Ref: Para. 12)

A9. Acts of non-compliance with laws and regulations include transactions
entered into by, or in the name of, the entity, or on its behalf, by those charged
with governance, by management or by other individuals working for or
under the direction of the entity.
A10. Non-compliance also includes personal misconduct related to the business
activities of the entity, for example, in circumstances where an individual in
a key management position, in a personal capacity, has accepted a bribe from
a supplier of the entity and in return secures the appointment of the supplier
to provide services or contracts to the entity.
The Auditor’s Consideration of Compliance with Laws and Regulations

Obtaining an Understanding of the Legal and Regulatory Framework (Ref: Para.
132)
A117. To obtain a general understanding of the legal and regulatory framework, and
how the entity complies with that framework, the auditor may, for example:
• Use the auditor’s existing understanding of the entity’s industry,
regulatory and other external factors;
12
See, for example, Sections 225.21–225.22 of the IESBA Code.

• Update the understanding of those laws and regulations that directly

determine the reported amounts and disclosures in the financial
statements;
• Inquire of management as to other laws or regulations that may be
expected to have a fundamental effect on the operations of the entity;
• Inquire of management concerning the entity’s policies and
procedures regarding compliance with laws and regulations; and
• Inquire of management regarding the policies or procedures adopted
for identifying, evaluating and accounting for litigation claims.
Laws and Regulations Generally Recognized to Have a Direct Effect on the

Determination of Material Amounts and Disclosures in the Financial Statements
(Ref: Para. 136, 14)
A812. Certain laws and regulations are well-established, known to the entity and
within the entity’s industry or sector, and relevant to the entity’s financial
statements (as described in paragraph 6(a)). They could include those that
relate to, for example:
• The form and content of financial statements;
• Industry-specific financial reporting issues;
• Accounting for transactions under government contracts; or
• The accrual or recognition of expenses for income tax or pension costs.
Some provisions in those laws and regulations may be directly relevant to
specific assertions in the financial statements (for examplee.g., the
completeness of income tax provisions), while others may be directly
relevant to the financial statements as a whole (for examplee.g., the required
statements constituting a complete set of financial statements). The aim of
the requirement in paragraph 1314 is for the auditor to obtain sufficient
appropriate audit evidence regarding the determination of amounts and
disclosures in the financial statements in compliance with the relevant
provisions of those laws and regulations.
Non-compliance with other provisions of such laws and regulations and other
laws and regulations may result in fines, litigation or other consequences for
the entity, the costs of which may need to be provided for in the financial
statements, but are not considered to have a direct effect on the financial
statements as described in paragraph 6(a).
Procedures to Identify Instances of Non-Compliance—Other Laws and Regulations

(Ref: Para. 146, 15)
A139. Certain other laws and regulations may need particular attention by the
auditor because they have a fundamental effect on the operations of the entity
(as described in paragraph 6(b)). Non-compliance with laws and regulations

that have a fundamental effect on the operations of the entity may cause the
entity to cease operations, or call into question the entity’s continuance as a
going concern. 13 For example, non-compliance with the requirements of the
entity’s license or other entitlement to perform its operations could have such
an impact (e.g.for example, for a bank, non-compliance with capital or
investment requirements). There are also many laws and regulations relating
principally to the operating aspects of the entity that typically do not affect
the financial statements and are not captured by the entity’s information
systems relevant to financial reporting.
A140. As the financial reporting consequences of other laws and regulations can
vary depending on the entity’s operations, the audit procedures required by
paragraph 1415 are directed to bringing to the auditor’s attention instances of
non-compliance with laws and regulations that may have a material effect on
the financial statements.
Non-Compliance Brought to the Auditor’s Attention by Other Audit Procedures (Ref:

Para. 1516)
A151. Audit procedures applied to form an opinion on the financial statements may
bring instances of non-compliance or suspected non-compliance with laws
and regulations to the auditor’s attention. For example, such audit procedures
may include:
• Reading minutes;
• Inquiring of the entity’s management and in-house legal counsel or
external legal counsel concerning litigation, claims and assessments;
and
• Performing substantive tests of details of classes of transactions,
account balances or disclosures.
Written Representations (Ref: Para. 1617)

A162. Because the effect on financial statements of laws and regulations can vary
considerably, written representations provide necessary audit evidence about
management’s knowledge of identified or suspected non-compliance with
laws and regulations, whose effects may have a material effect on the
financial statements. However, written representations do not provide
sufficient appropriate audit evidence on their own and, accordingly, do not
affect the nature and extent of other audit evidence that is to be obtained by
the auditor. 14
13
See ISA 570 (Revised), Going Concern.
14
ISA 580, Written Representations, paragraph 4

Audit Procedures When Non-Compliance Iis Identified or Suspected

Indications of Non-Compliance with Laws and Regulations (Ref: Para. 1819)
A17. The auditor may become aware of information concerning an instance of
non-compliance with laws and regulations other than as a result of
performing the procedures in paragraphs 13–17 (e.g., when the auditor is
alerted to non-compliance by a whistle blower).
A183. If the auditor becomes aware of the existence of, or information about tThe
following matters, it may be an indication of non-compliance with laws and
regulations:
• Investigations by regulatory organizations and government
departments or payment of fines or penalties.
• Payments for unspecified services or loans to consultants, related
parties, employees or government employees.
• Sales commissions or agent’s fees that appear excessive in relation to
those ordinarily paid by the entity or in its industry or to the services
actually received.
• Purchasing at prices significantly above or below market price.
• Unusual payments in cash, purchases in the form of cashiers’ checks
payable to bearer or transfers to numbered bank accounts.
• Unusual transactions with companies registered in tax havens.
• Payments for goods or services made other than to the country from
which the goods or services originated.
• Payments without proper exchange control documentation.
• Existence of an information system which fails, whether by design or
by accident, to provide an adequate audit trail or sufficient evidence.
• Unauthorized transactions or improperly recorded transactions.
• Adverse media comment.
Matters Relevant to the Auditor’s Evaluation (Ref: Para. 1819(b))

A194. Matters relevant to the auditor’s evaluation of the possible effect on the
financial statements include:
• The potential financial consequences of identified or suspected non-
compliance with laws and regulations on the financial statements
including, for example, the imposition of fines, penalties, damages,
threat of expropriation of assets, enforced discontinuation of
operations, and litigation.

• Whether the potential financial consequences require disclosure.

• Whether the potential financial consequences are so serious as to call
into question the fair presentation of the financial statements, or
otherwise make the financial statements misleading.
Audit Procedures and Communicating Identified or Suspected Non-Compliance with

Management and Those Charged with Governance (Ref: Para. 1920)
A2015.The auditor may is required to discuss the findings with suspected non-
compliance with the appropriate level of management and, where
appropriate, those charged with governance where, as they may be able to
provide additional audit evidence. For example, the auditor may confirm that
management and, where appropriate, those charged with governance have the
same understanding of the facts and circumstances relevant to transactions or
events that have led to the possibility of suspected non-compliance with laws
and regulations.
A21. However, in some jurisdictions, law or regulation may restrict the auditor’s
communication of certain matters with management and those charged with
governance. Law or regulation may specifically prohibit a communication,
or other action, that might prejudice an investigation by an appropriate
authority into an actual, or suspected, illegal act, including alerting the entity,
for example, when the auditor is required to report the identified or suspected
non-compliance to an appropriate authority pursuant to anti-money
laundering legislation. In these circumstances, the issues considered by the
auditor may be complex and the auditor may consider it appropriate to obtain
legal advice.
A2216.If management or, as appropriate, those charged with governance do not
provide sufficient information to the auditor that the entity is in fact in
compliance with laws and regulations, the auditor may consider it appropriate
to consult with the entity’s in-house legal counsel or external legal counsel
about the application of the laws and regulations to the circumstances,
including the possibility of fraud, and the possible effects on the financial
statements. If it is not considered appropriate to consult with the entity’s legal
counsel or if the auditor is not satisfied with the legal counsel’s opinion, the
auditor may consider it appropriate to consult the auditor’s own legal counsel
on a confidential basis with others within the firm, a network firm, a
professional body, or with the auditor’s legal counsel as to whether a
contravention of a law or regulation is involved, the possible legal
consequences,including the possibility of fraud, the possible legal
consequences, and what further action, if any, the auditor would take.

Evaluating the Implications of Identified or Suspected Non-Compliance (Ref: Para.

2122)
A2317.As required by paragraph 2122, the auditor evaluates the implications of
identified or suspected non-compliance in relation to other aspects of the
audit, including the auditor’s risk assessment and the reliability of written
representations. The implications of particular instances ofidentified or
suspected non-compliance identified by the auditor will depend on the
relationship of the perpetration and concealment, if any, of the act to specific
control activities and the level of management or employeesindividuals
working for, or under the direction of, the entity involved, especially
implications arising from the involvement of the highest authority within the
entity. As noted in paragraph 9, the auditor’s compliance with law, regulation
or relevant ethical requirements may provide further information that is
relevant to the auditor’s responsibilities in accordance with paragraph 22.
A24. Examples of circumstances that may cause the auditor to evaluate the
implications of identified or suspected non-compliance on the reliability of
written representations received from management and, where applicable,
those charged with governance include when:
• The auditor suspects or has evidence of the involvement or intended
involvement of management and, where applicable, those charged
with governance in any identified or suspected non-compliance.
• The auditor is aware that management and, where applicable, those
charged with governance have knowledge of such non-compliance
and, contrary to legal or regulatory requirements, have not reported, or
authorized reporting of, the matter to an appropriate authority within
a reasonable period.
A1825.In certain circumstancesexceptional cases, the auditor may consider whether
withdrawingal from the engagement, where withdrawal is possible under
applicablepermitted by law or regulation, for exampleis necessary when
management or those charged with governance do not take the remedial
action that the auditor considers appropriate in the circumstances, or the
identified or suspected non-compliance raises questions regarding the
integrity of management or those charged with governance, even when the
non-compliance is not material to the financial statements. When deciding
whether withdrawal from the engagement is necessary, tThe auditor may
consider it appropriate to obtain seeking legal advice to determine whether
withdrawal from the engagement is appropriate. If withdrawal from the
engagement is not possible, the auditor may consider alternative actions,
including describing the non-compliance in an Other Matter paragraph in the

auditor’s report. 15When the auditor determines that withdrawing from the
engagement would be appropriate, doing so would not be a substitute for
complying with other responsibilities under law, regulation or relevant
ethical requirements to respond to identified or suspected non-compliance.
Furthermore, paragraph A8a of ISA 220 16 indicates that some ethical
requirements may require the predecessor auditor, upon request by the
proposed successor auditor, to provide information regarding non-
compliance with laws and regulations to the successor auditor.
Communicating and Reporting ofIdentified or Suspected Non-Compliance

Potential Implications of Identified or Suspected Non-Compliance for the Auditor’s
Report (Ref: Para. 26–28)
A26. Identified or suspected non-compliance with laws and regulation is
communicated in the auditor’s report when the auditor modifies the opinion
in accordance with paragraphs 26–28. In certain other circumstances, the
auditor may communicate identified or suspected non-compliance in the
auditor’s report, for example:
• When the auditor has other reporting responsibilities, in addition to the
auditor’s responsibilities under the ISAs, as contemplated by
paragraph 43 of ISA 700 (Revised);
• When the auditor determines that the identified or suspected non-
compliance is a key audit matter and accordingly communicates the
matter in accordance with ISA 701, 17 unless paragraph 14 of that ISA
applies; or
• In exceptional cases when management or those charged with
governance do not take the remedial action that the auditor considers
appropriate in the circumstances and withdrawal from the engagement
is not possible (see paragraph A25), the auditor may consider
describing the identified or suspected non-compliance in an Other
Matter paragraph in accordance with ISA 706 (Revised). 18
A27. Law or regulation may preclude public disclosure by either management,
those charged with governance or the auditor about a specific matter. For
example, law or regulation may specifically prohibit a communication, or
other action, that might prejudice an investigation by an appropriate authority
into an actual, or suspected, illegal act, including a prohibition on alerting the
15
ISA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s
Report, paragraph 8
16
ISA 220, Quality Control for an Audit of Financial Statements
17
18
Auditor’s Report

entity. When the auditor intends to communicate identified or suspected non-

compliance in the auditor’s report under the circumstances set out in
paragraph A26 or otherwise, such law or regulation may have implications
for the auditor’s ability to describe the matter in the auditor’s report, or in
some circumstances to issue the auditor’s report. In such cases, the auditor
may consider obtaining legal advice to determine the appropriate course of
action.
Reporting Identified or Suspected Non-Compliance to Regulatory and Enforcement an

Appropriate Authorityies outside the Entity (Ref: Para. 298)
A19. The auditor’s professional duty to maintain the confidentiality of client
information may preclude reporting identified or suspected non-compliance
with laws and regulations to a party outside the entity. However, the auditor’s
legal responsibilities vary by jurisdiction and, in certain circumstances, the
duty of confidentiality may be overridden by statute, the law or courts of law.
In some jurisdictions, the auditor of a financial institution has a statutory duty
to report the occurrence, or suspected occurrence, of non-compliance with
laws and regulations to supervisory authorities. Also, in some jurisdictions,
the auditor has a duty to report misstatements to authorities in those cases
where management and, where applicable, those charged with governance
fail to take corrective action. The auditor may consider it appropriate to
obtain legal advice to determine the appropriate course of action.
A28. Reporting identified or suspected non-compliance with laws and regulations
to an appropriate authority outside the entity may be required or appropriate
in the circumstances because:
(a) Law, regulation or relevant ethical requirements require the auditor to
report (see paragraph A29);
(b) The auditor has determined reporting is an appropriate action to
respond to identified or suspected non-compliance in accordance with
relevant ethical requirements (see paragraph A30); or
(c) Law, regulation or relevant ethical requirements provide the auditor
with the right to do so (see paragraph A31).
A29. In some jurisdictions, the auditor may be required by law, regulation or
relevant ethical requirements to report identified or suspected non-
compliance with laws and regulations to an appropriate authority outside the
entity. For example, in some jurisdictions, statutory requirements exist for
the auditor of a financial institution to report the occurrence, or suspected
occurrence, of non-compliance with laws and regulations to a supervisory
authority. Also, misstatements may arise from non-compliance with laws or
regulations and, in some jurisdictions, the auditor may be required to report
misstatements to an appropriate authority in cases where management or
those charged with governance fail to take corrective action.

A30. In other cases, the relevant ethical requirements may require the auditor to
determine whether reporting identified or suspected non-compliance with
laws and regulations to an appropriate authority outside the entity is an
appropriate action in the circumstances. For example, the IESBA Code
requires the auditor to take steps to respond to identified or suspected non-
compliance with laws and regulations and determine whether further action
is needed, which may include reporting to an appropriate authority outside
the entity. 19 The IESBA Code explains that such reporting would not be
considered a breach of the duty of confidentiality under the IESBA Code. 20
A31. Even if law, regulation or relevant ethical requirements do not include
requirements that address reporting identified or suspected non-compliance,
they may provide the auditor with the right to report identified or suspected
non-compliance to an appropriate authority outside the entity. For example,
when auditing the financial statements of financial institutions, the auditor
may have the right under law or regulation to discuss matters such as
identified or suspected non-compliance with laws and regulations with a
supervisory authority.
A32. In other circumstances, the reporting of identified or suspected non-
entity may be precluded by the auditor’s duty of confidentiality under law,
regulation or relevant ethical requirements.
A33. The determination required by paragraph 29 may involve complex
considerations and professional judgments. Accordingly the auditor may
consider consulting internally (e.g., within the firm or a network firm) or on
a confidential basis with a regulator or professional body (unless doing so is
prohibited by law or regulation or would breach the duty of confidentiality).
The auditor may also consider obtaining legal advice to understand the
auditor’s options and the professional or legal implications of taking any
particular course of action.
Considerations Specific to Public Sector Entities

A3420.A public sector auditor may be obliged to report on instances ofidentified or
suspected non-compliance to the legislature or other governing body or to
report them in the auditor’s report.
Documentation (Ref: Para. 2930)
A3521.The auditor’s documentation of findings regarding identified or suspected
non-compliance with laws and regulations may include, for example:
• Copies of records or documents.
19
See, for example, Section 225.29 and Sections 225.33–225.36 of the IESBA Code.
20
See, for example, Section 140.7 and Section 225.35 of the IESBA Code.

• Minutes of discussions held with management, those charged with

governance or parties outside the entity.
A36. Law, regulation or relevant ethical requirements may also set out additional
documentation requirements regarding identified or suspected non-
compliance with laws and regulations. 21
21
See, for example, Section 225.37 of the IESBA Code.

CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS
Note: The following are conforming amendments to other International Standards as
a result of the approval of ISA 250 (Revised). These amendments will become
effective at the same time as ISA 250 (Revised), and are shown with marked changes
from the latest approved versions of the International Standards that are amended. The
footnote numbers within these amendments do not align with the International
Standards that are amended, and reference should be made to those International
Standards. These conforming amendments have received the approval of the PIOB
which concluded that due process was followed in the development of the conforming
amendments and that proper regard was paid to the public interest.
ISQC 1, Quality Control for Firms that Perform Audits and Reviews
of Financial Statements, and Other Assurance and Related Services
Engagements
Confidentiality, Safe Custody, Integrity, Accessibility and Retrievability of
Engagement Documentation (Ref: Para. 46)
A56. Relevant ethical requirements establish an obligation for the firm’s personnel
to observe at all times the confidentiality of information contained in
engagement documentation, unless specific client authority has been given
to disclose information, or there are responsibilities under law, regulation or
relevant ethical requirements is a legal or professional duty to do so. 22
Specific laws or regulations may impose additional obligations on the firm’s
personnel to maintain client confidentiality, particularly where data of a
personal nature are concerned.
ISA 210, Agreeing the Terms of Audit Engagements

Agreement on Audit Engagement Terms
A26. When relevant, the following points could also be made in the audit
engagement letter:
• Arrangements concerning the involvement of other auditors and
experts in some aspects of the audit.
• Arrangements concerning the involvement of internal auditors and
other staff of the entity.
22

CONFORMING AMENDMENTS TO OTHER INTERNATIONAL STANDARDS
• Arrangements to be made with the predecessor auditor, if any, in the

case of an initial audit.
• A reference to, and description of, the auditor’s responsibilities under
law, regulation or relevant ethical requirements that address reporting
identified or suspected non-compliance with laws and regulations to
an appropriate authority outside the entity.
• Any restriction of the auditor’s liability when such possibility exists.
• A reference to any further agreements between the auditor and the
entity.
• Any obligations to provide audit working papers to other parties.
An example of an audit engagement letter is set out in Appendix 1.
ISA 220, Quality Control for an Audit of Financial Statements

Acceptance and Continuance of Client Relationships and Audit Engagements
(Ref: Para. 12)
A8a. Law, regulation, or relevant ethical requirements 23 may require the auditor to
request, prior to accepting the engagement, the predecessor auditor to provide
known information regarding any facts or circumstances that, in the
predecessor auditor’s judgment, the auditor needs to be aware of before
deciding whether to accept the engagement. In some circumstances, the
predecessor auditor may be required, on request by the proposed successor
auditor, to provide information regarding identified or suspected non-
compliance with laws and regulations to the proposed successor auditor. For
example, where the predecessor auditor has withdrawn from the engagement
as a result of identified or suspected non-compliance with laws and
regulations, the IESBA Code requires that the predecessor auditor, on request
by a proposed successor auditor, provides all such facts and other information
concerning such non-compliance that, in the predecessor auditor’s opinion,
the proposed successor auditor needs to be aware of before deciding whether
to accept the audit appointment. 24
ISA 240, The Auditor’s Responsibilities Relating to Fraud in an Audit

of Financial Statements
Introduction
Responsibility for the Prevention and Detection of Fraud
23
See, for example, Sections 210.14 of the IESBA Code.
24
See, for example, Sections 225.31 of the IESBA Code.

Responsibilities of the Auditor

…
8a. The auditor may have additional responsibilities under law, regulation or
and regulations, including fraud, which may differ from or go beyond this
and other ISAs, such as: (Ref: Para. A5a)
governance, assessing the appropriateness of their response to non-
compliance and determining whether further action is needed;
regulations to other auditors (e.g., in an audit of group financial
statements); and
information that is relevant to the auditor’s work in accordance with this and
other ISAs (e.g., regarding the integrity of management or, where
appropriate, those charged with governance).
Requirements
Communications to Management and with Those Charged with Governance
40. If the auditor has identified a fraud or has obtained information that indicates
that a fraud may exist, the auditor shall communicate these matters, unless
prohibited by law or regulation, on a timely basis withto the appropriate level
of management in order to inform those with primary responsibility for the
prevention and detection of fraud of matters relevant to their responsibilities.
(Ref: Para. A59a–A60)
41. Unless all of those charged with governance are involved in managing the
entity, if the auditor has identified or suspects fraud involving:
(a) management;
(b) employees who have significant roles in internal control; or
(c) others where the fraud results in a material misstatement in the
financial statements,
the auditor shall communicate these matters withto those charged with
governance on a timely basis. If the auditor suspects fraud involving
management, the auditor shall communicate these suspicions withto those

charged with governance and discuss with them the nature, timing and extent
of audit procedures necessary to complete the audit. Such communications
with those charged with governance are required unless the communication
is prohibited by law or regulation. (Ref: Para. A59a, A61–A63)
42. The auditor shall communicate, unless prohibited by law or regulation, with
those charged with governance any other matters related to fraud that are, in
the auditor’s judgment, relevant to their responsibilities. (Ref: Para. A59a,
A64)
Communications to Regulatory and Enforcement Authorities Reporting Fraud

to an Appropriate Authority Outside the Entity
43. If the auditor has identified or suspects a fraud, the auditor shall determine
whether law, regulation or relevant ethical requirements:there is a
responsibility to report the occurrence or suspicion to a party outside the
entity. Although the auditor’s professional duty to maintain the
confidentiality of client information may preclude such reporting, the
auditor’s legal responsibilities may override the duty of confidentiality in
some circumstances. (Ref: Para. A65–A67)
(a) Require the auditor to report to an appropriate authority outside the
entity.
authority outside the entity may be appropriate in the circumstances.

Responsibility for the Prevention and Detection of Fraud
Responsibilities of the Auditor (Ref: Para. 8a)
A5a. Law, regulation or relevant ethical requirements may require the auditor to
perform additional procedures and take further actions. For example, the
Code of Ethics for Professional Accountants issued by the International
Ethics Standards Board for Accountants (IESBA Code) requires the auditor
to take steps to respond to identified or suspected non-compliance with laws
and regulations and determine whether further action is needed. Such steps
may include the communication of identified or suspected non-compliance
with laws and regulations to other auditors within a group, including a group
engagement partner, component auditors or other auditors performing work
at components of a group for purposes other than the audit of the group
25

Communications to Management and with Those Charged with Governance

(Ref: Para. 40–42)
A59a. In some jurisdictions, law or regulation may restrict the auditor’s
communication of certain matters with management and those charged with
for example, when the auditor is required to report the fraud to an appropriate
authority pursuant to anti-money laundering legislation. In these
circumstances, the issues considered by the auditor may be complex and the
auditor may consider it appropriate to obtain legal advice.
Communications to Regulatory and Enforcement AuthoritiesReporting Fraud

to an Appropriate Authority outside the Entity (Ref: Para. 43)
A65. ISA 250 (Revised) 26 provides further guidance with respect to the auditor’s
determination of whether reporting identified or suspected non-compliance
with laws or regulations to an appropriate authority outside the entity is
required or appropriate in the circumstances, including consideration of the
auditor’s duty of confidentiality. The auditor’s professional duty to maintain
the confidentiality of client information may preclude reporting fraud to a
party outside the client entity. However, the auditor’s legal responsibilities
vary by country and, in certain circumstances, the duty of confidentiality may
be overridden by statute, the law or courts of law. In some countries, the
auditor of a financial institution has a statutory duty to report the occurrence
of fraud to supervisory authorities. Also, in some countries the auditor has a
duty to report misstatements to authorities in those cases where management
and those charged with governance fail to take corrective action.
A66. The determination required by paragraph 43 may involve complex
considerations and professional judgments. Accordingly, tThe auditor may
consider consulting internally (e.g., within the firm or a network firm) or on
a confidential basis with a regulator or professional body (unless doing so is
prohibited by law or regulation or would breach the duty of confidentiality).
The auditor may also consider it appropriate to obtaining legal advice to
understand the auditor’s options and the professional or legal implications of
taking any particular determine the appropriate course of action in the
circumstances, the purpose of which is to ascertain the steps necessary in
considering the public interest aspects of identified fraud.
26
ISA 250 (Revised), Consideration of Laws and Regulations in an Audit of Financial Statements,
paragraphs A28–A34

ISA 260 (Revised), Communication with Those Charged with

Governance
Introduction
The Role of Communication
7. In some jurisdictions, Llaw or regulation may restrict the auditor’s
communication of certain matters with those charged with governance. For
example, lLaws or regulations may specifically prohibit a communication, or
other action, that might prejudice an investigation by an appropriate authority
into an actual, or suspected, illegal act, including alerting the entity, for
example, when the auditor is required to report identified or suspected non-
compliance with laws and regulations to an appropriate authority pursuant to
anti-money laundering legislation. In some these circumstances, the issues
considered by the auditor potential conflicts between the auditor’s
obligations of confidentiality and obligations to communicate may be
complex. In such cases, and the auditor may consider it appropriate to
obtaining legal advice.
ISA 450, Evaluation of Misstatements Identified During the Audit

Requirements
Communication and Correction of Misstatements
8. The auditor shall communicate, unless prohibited by law or regulation, on a
timely basis all misstatements accumulated during the audit with the
appropriate level of management, unless prohibited by law or regulation. 27
The auditor shall request management to correct those misstatements. (Ref:
Para. A7–A9)

Communication and Correction of Misstatements (Ref: Para. 8–9)
A11. In some jurisdictions, lLaw or regulation may restrict the auditor’s
communication of certain misstatements to management, or others, within
the entity. For example, Llaws or regulations may specifically prohibit a
communication, or other action, that might prejudice an investigation by an
appropriate authority into an actual, or suspected, illegal act, including
alerting the entity, for example, when the auditor is required to report
identified or suspected non-compliance with law or regulation to an
appropriate authority pursuant to anti-money laundering legislation. In
somethese circumstances, potential conflicts between the auditor’s
obligations of confidentiality and obligations to communicate may be
complex. In such cases,the issues considered by the auditor may be complex
27

and the auditor may consider seekingit appropriate to obtain legal advice.
ISA 500, Audit Evidence

Requirements
Information to Be Used as Audit Evidence
7. When designing and performing audit procedures, the auditor shall consider the
relevance and reliability of the information to be used as audit evidence. (Ref:
Para. A26–A33a)

Information to Be Used as Audit Evidence
Relevance and Reliability (Ref: Para. 7)
A26. As noted in paragraph A1, while audit evidence is primarily obtained from
audit procedures performed during the course of the audit, it may also include
information obtained from other sources such as, for example, previous
audits, in certain circumstances, and a firm’s quality control procedures for
client acceptance and continuance and complying with certain additional
responsibilities under law, regulation or relevant ethical requirements (e.g.,
regarding an entity’s non-compliance with laws and regulations). The quality
of all audit evidence is affected by the relevance and reliability of the
information upon which it is based.
A33a. ISA 250 (Revised) 28 provides further guidance with respect to the auditor
complying with any additional responsibilities under law, regulation or
relevant ethical requirements regarding an entity’s identified or suspected
non-compliance with laws and regulations that may provide further
information that is relevant to the auditor’s work in accordance with ISAs
and evaluating the implications of such non-compliance in relation to other
aspects of the audit.
ISRE 2400 (Revised), Engagements to Review Historical Financial

Statements
Requirements
Performing the Engagement
Designing and Performing Procedures
48. The practitioner’s inquiries of management and others within the entity, as
appropriate, shall include the following: (Ref: Para. A84–A87a)
28
ISA 250 (Revised), Consideration of Laws and Regulations in an Audit of Financial Statements,
paragraph 9

…
(d) The existence of any actual, suspected or alleged:
(i) Fraud or illegal acts affecting the entity; and
(ii) Non-compliance with provisions of laws and regulations that
are generally recognized to have a direct effect on the
determination of material amounts and disclosures in the
financial statements, such as tax and pension laws and
regulations;
Fraud and non-compliance with laws andor regulations
52. When there is an indication that fraud or non-compliance with laws andor
regulations, or suspected fraud or non-compliance with laws andor
regulations, has occurred in the entity, the practitioner shall:
(a) Communicate that matter, unless prohibited by law or regulation, with
to the appropriate level of senior management or those charged with
governance as appropriate; (Ref: Para. A91a)
(b) Request management’s assessment of the effect(s), if any, on the
(c) Consider the effect, if any, of management’s assessment of the effects
of identified or suspected fraud or non-compliance with laws andor
regulations communicated to the practitioner on the practitioner’s
conclusion on the financial statements and on the practitioner’s report;
and
(d) Determine whether law, regulation or relevant ethical
requirements:there is a responsibility to report the occurrence or
suspicion of fraud or illegal acts to a party outside the entity. (Ref:
Para. A92–A92d)
(i) Require the practitioner to report to an appropriate authority
outside the entity.
(ii) Establish responsibilities under which reporting to an
appropriate authority outside the entity may be appropriate in
the circumstances.


Performing the Engagement
Designing and Performing Procedures (Ref: Para. 47, 55)
Inquiry (Ref: Para. 46–48)
A87a. The practitioner may have additional responsibilities under law, regulation or
and regulations, including fraud, which may differ from or go beyond this
ISRE, such as:
governance and considering whether further action is needed;
regulations to an auditor, for example a group engagement partner; 29
and
information that is relevant to the practitioner’s work in accordance with this
ISRE (e.g., regarding the integrity of management or, where appropriate,
those charged with governance).
Procedures to Address Specific Circumstances

Fraud and non-compliance with laws orand regulations (Ref: Para. 52(a) and (d))
Communication with management and those charged with governance
A91a. In some jurisdictions, law or regulation may restrict the practitioner’s
communication of certain matters with management or those charged with
for example, when the practitioner is required to report identified or
suspected non-compliance with laws and regulations to an appropriate
authority pursuant to anti-money laundering legislation. In these
circumstances, the issues considered by the practitioner may be complex and
the practitioner may consider it appropriate to obtain legal advice.
29

Reporting of identified or suspected non-compliance with laws and regulations to an

appropriate authority outside the entity
A92. Under this ISRE, if the practitioner has identified or suspects fraud or
illegalacts, the practitioner is required to determine whether there is a
responsibility to report the occurrence or suspicion to a party outside the
entity. Reporting identified or suspected non-compliance with laws and
regulations to an appropriate authority outside the entity may be required or
appropriate in the circumstances because:
(a) Law, regulation or relevant ethical requirements require the
practitioner to report;
(b) The practitioner has determined reporting is an appropriate action to
relevant ethical requirements (see paragraph A92a); or
(c) Law, regulation or relevant ethical requirements provide the
practitioner with the right to do so (see paragraph A92b).
Although the practitioner’s professional duty to maintain the confidentiality
of client information may preclude such reporting, the practitioner’s legal
responsibilities may override the duty of confidentiality in some
circumstances.
A92a. In some cases, the relevant ethical requirements may require the practitioner
to report or to consider whether reporting identified or suspected fraud or
non-compliance with laws and regulations to an appropriate authority outside
the entity is an appropriate action in the circumstances. For example, the
IESBA Code requires the practitioner to take steps to respond to identified or
suspected non-compliance with laws and regulations, and consider whether
further action is needed, which may include reporting to an appropriate
authority outside the entity. 30 The IESBA Code explains that such reporting
would not be considered a breach of the duty of confidentiality under the
IESBA Code. 31
A92b. Even if law, regulation or relevant ethical requirements do not include
requirements that address reporting identified or suspected non-compliance,
they may provide the practitioner with the right to report identified or
suspected fraud or non-compliance with laws and regulations to an
appropriate authority outside the entity.
A92c. In other circumstances, the reporting of identified or suspected non-
30
See, for example, Section 225.51 to 225.52 of the IESBA Code.
31

entity may be precluded by the practitioner’s duty of confidentiality under

law, regulation or relevant ethical requirements.
A92d. The determination required by paragraph 52(d) may involve complex
considerations and professional judgments. Accordingly, the practitioner
may consider consulting internally (e.g., within the firm or a network firm)
or on a confidential basis with a regulator or a professional body (unless
doing so is prohibited by law or regulation or would breach the duty of
confidentiality). The practitioner may also consider obtaining legal advice to
understand the practitioner’s options and the professional or legal
implications of taking any particular course of action.
ISAE 3000 (Revised), Assurance Engagements other than Audits or

Reviews of Historical Financial Information
Requirements
Planning and Performing the Engagement
Understanding the Underlying Subject Matter and Other Engagement
Circumstances
45. The practitioner shall make inquiries of the appropriate party(ies) regarding:
(a) Whether they have knowledge of any actual, suspected or alleged
intentional misstatement or non-compliance with laws and regulations
affecting the subject matter information; (Ref: Para. A101–A101a)
(b) Whether the responsible party has an internal audit function and, if so,
make further inquiries to obtain an understanding of the activities and
main findings of the internal audit function with respect to the subject
matter information; and
(c) Whether the responsible party has used any experts in the preparation
of the subject matter information.
Other Communication Responsibilities

78. The practitioner shall consider whether, pursuant to the terms of the
engagement and other engagement circumstances, any matter has come to
the attention of the practitioner that is to be communicated with the
responsible party, the measurer or evaluator, the engaging party, those
charged with governance or others. (Ref: Para. A192–A192f)


Planning and Performing the Engagement
Understanding the Engagement Circumstances (Ref: Para. 45–47R)
A101a.The practitioner may have additional responsibilities under law, regulation
or relevant ethical requirements regarding an entity’s non-compliance with
laws and regulations, which may differ from or go beyond the practitioner’s
responsibilities under this ISAE, such as:
governance and considering whether further action is needed;
regulations to an auditor; 32 and
information that is relevant to the practitioner’s work in accordance with this
and any other ISAE (e.g., regarding the integrity of the responsible party or
those charged with governance). Paragraphs A192a–A192e further address
the practitioner’s responsibilities under law, regulation or relevant ethical
requirements regarding communicating and reporting identified or suspected
non-compliance with laws and regulations.
Other Communication Responsibilities (Ref: Para. 78)

Communication with Management and Those Charged with Governance
A192a. Relevant ethical requirements may include a requirement to report identified
or suspected non-compliance with laws and regulations to an appropriate
level of management or those charged with governance. In some
jurisdictions, law or regulation may restrict the practitioner’s communication
of certain matters with the responsible party, management or those charged
with governance. Law or regulation may specifically prohibit a
communication, or other action, that might prejudice an investigation by an
appropriate authority into an actual, or suspected, illegal act, including
alerting the entity, for example, when the practitioner is required to report the
identified or suspected non-compliance to an appropriate authority pursuant
to anti-money laundering legislation. In these circumstances, the issues
considered by the practitioner may be complex and the practitioner may
consider it appropriate to obtain legal advice.
32

Reporting of Identified or Suspected Non-Compliance with Laws and Regulations to

an Appropriate Authority outside the Entity
A192b.Law, regulation or relevant ethical requirements may:
(a) Require the practitioner to report identified or suspected non-
compliance with laws and regulations to an appropriate authority
outside the entity.
authority outside the entity may be appropriate in the circumstances. 33
A192c.Reporting identified or suspected non-compliance with laws and regulations
relevant ethical requirements; or.
practitioner with the right to do so.
A192d.The reporting of identified or suspected non-compliance with laws and
regulations in accordance with law, regulation or relevant ethical
requirements may include non-compliance with laws and regulations that the
practitioner comes across or is made aware of when performing the
engagement but which may not affect the subject matter information. Under
this ISAE, the practitioner is not expected to have a level of understanding of
laws and regulations beyond those affecting the subject matter information.
However, law, regulation or relevant ethical requirements may expect the
practitioner to apply knowledge, professional judgment and expertise in
responding to such non-compliance. Whether an act constitutes actual non-
compliance is ultimately a matter to be determined by a court or other
A192e.In some circumstances, the reporting of identified or suspected non-
law, regulation, or relevant ethical requirements. In other cases, reporting
identified or suspected non-compliance to an appropriate authority outside
the entity would not be considered a breach of the duty of confidentiality
under the relevant ethical requirements. 34
33
34

A192f.The practitioner may consider consulting internally (e.g., within the firm or
network firm), obtaining legal advice to understand the professional or legal
implications of taking any particular course of action, or consulting on a
confidential basis with a regulator or a professional body (unless doing so is
prohibited by law or regulations or would breach the duty of
confidentiality). 35
ISAE 3402, Assurance Reports on Controls at a Service

Organization
Requirements
56. If the service auditor becomes aware of non-compliance with laws and
regulations, fraud, or uncorrected errors attributable to the service
organization that are not clearly trivial and may affect one or more user
entities, the service auditor shall determine whether the matter has been
communicated appropriately to affected user entities. If the matter has not
been so communicated and the service organization is unwilling to do so, the
service auditor shall take appropriate action. (Ref: Para. A53)

Other Communication Responsibilities (Ref: Para. 56)
A53. Appropriate actions to respond to the circumstances identified in paragraph
56, unless prohibited by law or regulation, may include:
• Obtaining legal advice about the consequences of different courses of
action.
• Communicating with those charged with governance of the service
organization.
• Determining whether to communicate with third parties (e.g., law,
regulation or relevant ethical requirements may require the service
auditor to report to an appropriate authority outside the entity or the
external auditor of the service organization, 36 or establish
responsibilities under which such reporting may be appropriate in the
circumstances).Communicating with third parties (for example, a
regulator) when required to do so.
• Modifying the service auditor’s opinion, or adding an Other Matter
paragraph.
• Withdrawing from the engagement.
35
36

ISAE 3410, Assurance Engagements on Greenhouse Gas Statements

Requirements
78. The practitioner shall communicate, unless prohibited by law or regulation,
with to those person(s) with oversight responsibilities for the GHG statement
the following matters that come to the practitioner’s attention during the
course of the engagement, and shall determine whether there is a
responsibility to report them to another party within or outside the entity:
(a) Deficiencies in internal control that, in the practitioner’s professional
judgment, are of sufficient importance to merit attention;
(b) Identified or suspected fraud; and
(c) Matters involving identified or suspected non-compliance with laws
andor regulations, other than when the matters are clearly trivial. (Ref:
Para. A87)
ISRS 4410 (Revised), Compilation Engagements

Requirements
Ethical Requirements
21. The practitioner shall comply with relevant ethical requirements. (Ref: Para.
A19–A21e)
Communication with Management and Those Charged with Governance

27. The practitioner shall communicate with management or those charged with
governance, as appropriate, on a timely basis during the course of the
compilation engagement, all matters concerning the compilation engagement
that, in the practitioner’s professional judgment, are of sufficient importance
to merit the attention of management or those charged with governance, as
appropriate. (Ref: Para. A41–A41a)
Ethical Requirements (Ref: Para. 21)

Reporting of Identified or Suspected Non-Compliance with Laws and Regulations to
an Appropriate Authority outside the Entity
A21a. Law, regulation or relevant ethical requirements may:
(a) Require the practitioner to report identified or suspected non-
compliance with laws and regulations to an appropriate authority
outside the entity.


authority outside the entity may be appropriate in the circumstances. 37
A21b. Reporting identified or suspected non-compliance with laws and regulations
relevant ethical requirements; or
practitioner with the right to do so.
A21c. Under paragraph 28 of this ISRS, the practitioner is not expected to have a
level of understanding of laws and regulations beyond that necessary to be
able to perform the compilation engagement. However, law, regulation or
relevant ethical requirements may expect the practitioner to apply
knowledge, professional judgment and expertise in responding to identified
or suspected non-compliance. Whether an act constitutes actual non-
compliance is ultimately a matter to be determined by a court or other
A21d. In some circumstances, the reporting of identified or suspected non-
law, regulation or relevant ethical requirements. In other cases, reporting
identified or suspected non-compliance to an appropriate authority outside
the entity would not be considered a breach of the duty of confidentiality
under the relevant ethical requirements. 38
A21e. The practitioner may consider consulting internally (e.g., within the firm or
network firm), obtaining legal advice to understand the professional or legal
implications of taking any particular course of action, or consulting on a
confidential basis with a regulator or a professional body (unless doing so is
prohibited by law or regulations or would breach the duty of
confidentiality). 39
37
38
39

Communication with Management and Those Charged with Governance (Ref:

Para. 27)
A41a.Relevant ethical requirements may include a requirement to report identified
or suspected non-compliance with laws and regulations to an appropriate
level of management or those charged with governance. In some
jurisdictions, law or regulation may restrict the practitioner’s communication
of certain matters with management or those charged with governance. Law
or regulation may specifically prohibit a communication, or other action, that
might prejudice an investigation by an appropriate authority into an actual,
or suspected, illegal act, including alerting the entity, for example, when the
practitioner is required to report the identified or suspected non-compliance
to an appropriate authority pursuant to anti-money laundering legislation. In
these circumstances, the issues considered by the practitioner may be
complex and the practitioner may consider it appropriate to obtain legal
advice.

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INTERNATIONAL STANDARD ON AUDITING 800

International Standard on Auditing (ISA) 800 (Revised), Special

953 ISA 800 (REVISED)

ISA 800 (REVISED) 954

reporting framework may be a fair presentation framework or a

Considerations When Planning and Performing the Audit

955 ISA 800 (REVISED)

reasonable interpretation would have produced a material difference in the

Forming an Opinion and Reporting Considerations

Description of the Applicable Financial Reporting Framework

ISA 800 (REVISED) 956

Application and Other Explanatory Material

957 ISA 800 (REVISED)

Considerations When Accepting the Engagement

ISA 800 (REVISED) 958

acceptable financial reporting frameworks is a matter of professional

Considerations When Planning and Performing the Audit (Ref: Para. 9)

959 ISA 800 (REVISED)

requirements is modified to recognize this position. 14 When a complete set

Forming an Opinion and Reporting Considerations (Ref: Para. 11)

Application of ISA 700 (Revised) When Reporting on Special Purpose Financial

ISA 800 (REVISED) 960

auditor’s report of the auditor’s responsibilities 21 may also need to be adapted

Key Audit Matters

Name of the Engagement Partner

961 ISA 800 (REVISED)

Inclusion of a Reference to the Auditor’s Report on the Complete Set of General

Restriction on Distribution or Use (Ref: Para. 14)

ISA 800 (REVISED) 962

Illustrations of Independent Auditor’s Reports on Special Purpose

963 ISA 800 (REVISED) APPENDIX

Illustration 1: An auditor’s report on a complete set of financial statements

INDEPENDENT AUDITOR’S REPORT

ISA 800 (REVISED) APPENDIX 964

Basis for Opinion

Emphasis of Matter – Basis of Accounting and Restriction on Distribution and

Responsibilities of Management and Those Charged with Governance for the

965 ISA 800 (REVISED) APPENDIX

Auditor’s Responsibilities for the Audit of the Financial Statements

As part of an audit in accordance with ISAs, we exercise professional judgment and

ISA 800 (REVISED) APPENDIX 966

we conclude that a material uncertainty exists, we are required to draw attention

967 ISA 800 (REVISED) APPENDIX

Illustration 2: An auditor’s report on a complete set of financial statements

INDEPENDENT AUDITOR’S REPORT

ISA 800 (REVISED) APPENDIX 968

Basis for Opinion

Emphasis of Matter – Basis of Accounting and Restriction on Distribution

Responsibilities of Management and Those Charged with Governance for the

969 ISA 800 (REVISED) APPENDIX

Auditor’s Responsibilities for the Audit of the Financial Statements

As part of an audit in accordance with ISAs, we exercise professional judgment and

ISA 800 (REVISED) APPENDIX 970

However, future events or conditions may cause the Company to cease to

971 ISA 800 (REVISED) APPENDIX

Illustration 3: An auditor’s report on a complete set of financial statements of

INDEPENDENT AUDITOR’S REPORT

ISA 800 (REVISED) APPENDIX 972

Basis for Opinion

Emphasis of Matter – Basis of Accounting

Material Uncertainty Related to Going Concern

Key Audit Matters

973 ISA 800 (REVISED) APPENDIX