Definition of Auditing:

A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.

Definition of Assurance:

An engagement whereby a practicioner expresses a conclusion that enhances the degree of confidence of the users on a subject matter prepared by a responsible party.

The subject matter is compared and measured against established criteria

Level of Assurance:

1. Reasonable Assurance (Audit)- aimed at “Reducing Engagement Risk” to an acceptably low level

   • positive expression is thereby included in a practitioner’s report.

2. Limited Assurance (Review) - but that, there is a higher engagement risk

   than that when a reasonable assurance is promised

   • less extensive procedure

Elements of Assurance Engagement

• Three Party relationship

• Subject Matter

• Suitable Criteria

• Sufficient Appropriate Evidence

• Written Report

UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT

auditor’s responsibility to identify and assess the risks of material misstatement, through understanding the entity and its environment,

including the entity’s internal control,

Aspects that the auditor should understand

• Relevant industry, regulatory, and other external factors including the applicable financial reporting framework

• nature of the entity: operations, ownership and governance structures, types of investments, The way that the entity is structured and how it is financed, entity’s selection and application of accounting policies, entity’s objectives and strategies, and those related business risks, measurement and review of the entity’s financial performance

A. INDUSTRY, REGULATORY AND OTHER EXTERNAL FACTORS, INCLUDING THE APPLICABLE FINANCIAL REPORTING FRAMEWORK

auditor should obtain and understanding of relevant industry, regulatory, and other external factors including the applicable financial reporting framework.

• Industry conditions: competitive environment, supplier and customer relationships, technological development

• Regulatory environment encompassing: legal and political environment, . environmental requirements

B. NATURE OF THE ENTITY

auditor should obtain an understanding of the nature of the entity

• Entity’s operations

• Ownership and governance

• Types of investments that it is making and plans to make

• The way the entity is structured and finance

  An understanding of the nature of an entity enables the auditor to understand the classes of transactions,account balances, and disclosures to be expected in the financial statement

The auditor should obtain and understanding of the entity’s selection and application of accounting policies and consider whether they are appropriate for its business and consistent with the applicable financial reporting framework and accounting policies used in the relevant industry

C. OBJECTIVES AND STRATEGIES AND RELATED BUSINESS RISKS

Objectives -

are the overall plans for the entity defined by the entity’s management or those charged with governance

Strategies

-are the operational approaches by which management intends to achieve its objectives

Business risks-

result from significant conditions, events, circumstances, actions or inactions that could adversely affect the entity’s ability to achieve its objectives and execute its strategies, or through the setting of inappropriate objectives and strategies

D. MEASUREMENT AND REVIEW OF THE ENTITY’S FINANCIAL PERFORMANCE

The methods of measuring and reviewing performance are important to the auditors in determining the incentives of management and other employees because their compensations is often tied to the measures.

Obtaining an understanding of the entity’s performance measures assists the auditor in considering whether such pressures result in management actions that may have increased the risks of material misstatement

E. UNDERSTANDING THE CLIENT’S INTERNAL CONTROL

Internal control is designed to provide reasonable assurance of achieving objectives related to reliable financial reporting, efficiency and effectiveness of operations, and compliance with laws and regulations

• nature and extent of the audit work to be performed on a particular engagement depend largely upon the effectiveness of the client’s internal control

What is specialized industry?

A specialized industry is a distinct market that has a unique way of accounting for transactions and reporting its financial results

• Specialized industry is not necessarily rare or even unusual

  • likely either to have specific financial reporting standards applicable to them

  • distinct accounting policies which have been developed to account for specialized transactions and balances

• Characteristics of Specialized Industries

  • High risk (Publicly listed or with Public Accountability)

  • Strict and several compliances to laws and government agencies and its regulations

  • Complex accounting (revenue recognition)

• Audit Considerations

  • Competence

    • the audit firm needs to pay close attention to thecompetence of the audit firm to provide the service, , Quality Control for Firms That Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements requires the audit firm to consider whether the firm is competent to perform the engagement and has the capabilities, including time and resources, to do so

    • the ability to gain the necessary skills and knowledge

      effectively

  • Audit planning

    • Identification of the risk of material misstatement in a specialized industry should be approached in the same was as in

      any other audit- by obtaining appropriate understanding of the business and its environment

  • Reliance on experts

    • the audit firm must adhere to the requirements and principles of ISA 620, Using the Work of an Auditor’s Expert which deals with matters including the evaluation of the objectivity, competence and capabilities of the auditor’s expert, determining and communicating the scope and objectives of their work, and assessing their findings. It is particularly important that the auditor evaluates the relevance and adequacy of the expert’s findings or conclusions.