Summary of Key ISAs Master Class

1. 200 Series: General Principles and Responsibilities

ISA 200: Overall Objectives of the Independent Auditor

This standard sets the foundation for all audits. The auditor's main objectives are to obtain reasonable assurance that the financial statements are free from material misstatement and to express an opinion on them. It also defines key terms you will use throughout your exam, such as the components of audit risk and the meaning of professional scepticism.

• Audit Risk: The risk of giving an inappropriate opinion on materially misstated financial statements. It's composed of Inherent Risk, Control Risk, and Detection Risk.
• Inherent Risk: The susceptibility of an account to misstatement before considering any internal controls.
• Control Risk: The risk that a misstatement won't be prevented or detected by the entity's internal controls.
• Detection Risk: The risk that the auditor's procedures fail to detect a material misstatement.
• Professional Scepticism: A questioning mind and a critical assessment of audit evidence.

ISA 210: Agreeing the Terms of Audit Engagements

This standard requires the auditor to establish the preconditions for an audit and document them in an engagement letter. The preconditions include management's responsibility for the financial statements, internal controls, and providing the auditor with full access to information and personnel.

ISA 230: Audit Documentation

Audit documentation serves as evidence of the basis for the auditor's report and that the audit was planned and performed in accordance with ISAs. It should be comprehensive enough for an experienced auditor with no prior connection to the engagement to understand the work done and the conclusions reached.

ISA 240: The Auditor's Responsibilities Relating to Fraud

The auditor's objective is to identify and assess risks of material misstatement due to fraud. The two main types of fraud are fraudulent financial reporting and misappropriation of assets. The auditor must always maintain professional scepticism and perform specific procedures to address fraud risk, such as testing journal entries and reviewing accounting estimates for bias.

2. 300 & 400 Series: Assessment and Response to Assessed Risks

ISA 300: Planning an Audit of Financial Statements

Proper planning is essential for an efficient and effective audit. The audit strategy sets the scope and direction of the audit, while the audit plan details the specific procedures to be performed. This helps the audit team to focus on important areas and resolve potential problems early.

ISA 320: Materiality in Planning and Performing an Audit

Materiality is a cornerstone of auditing. A misstatement is material if it could reasonably be expected to influence the economic decisions of users. The auditor determines materiality based on professional judgment, considering both the size (quantitative) and nature (qualitative) of a misstatement. Auditors also set a lower threshold, performance materiality, to reduce the risk that the aggregate of undetected misstatements exceeds overall materiality.

ISA 330: The Auditor's Responses to Assessed Risks

This standard requires the auditor to design and perform audit procedures that are responsive to the risks of material misstatement identified in the planning stage. These procedures include tests of controls (to evaluate the effectiveness of the client's internal controls) and substantive procedures (to directly detect material misstatements).

3. 500 Series: Evidence

ISA 500: Audit Evidence

Audit evidence must be both sufficient (enough of it) and appropriate (high quality). The reliability of evidence depends on its source—evidence from an independent external source is more reliable than client-generated evidence. Procedures to gather evidence include inspection, observation, inquiry, recalculation, and external confirmation.

ISA 530: Audit Sampling

Auditors use sampling to apply procedures to less than 100% of a population. A sample must be representative of the population to draw valid conclusions. The standard outlines methods for selecting a sample (e.g., random, systematic) and provides guidance on how factors like the assessed risk and tolerable misstatement affect sample size.

ISA 540 (Revised): Auditing Accounting Estimates

Accounting estimates are inherently risky because they involve management judgment. The auditor must separately assess inherent risk and control risk and increase professional scepticism in these areas. Procedures focus on understanding how management made the estimate, reviewing subsequent events, and sometimes developing an independent estimate.

4. 600 Series: Using the Work of Others

ISA 610: Using the Work of Internal Auditors

The external auditor may rely on the work of the client's internal audit function if they evaluate the function's objectivity, competence, and systematic approach. However, the external auditor cannot delegate responsibility for the audit opinion and must perform their own work to verify the internal auditor's findings.

ISA 620: Using the Work of an Auditor's Expert

If the auditor lacks the necessary expertise, they may use an auditor's expert. The auditor must evaluate the expert's competence, capability, and objectivity. The auditor remains responsible for the audit opinion and must evaluate the expert's work to ensure it provides sufficient appropriate evidence.

5. 700 Series: Audit Conclusions and Reporting

ISA 700 (Revised): Forming an Opinion and Reporting

This standard sets out the structure and content of the standard, unmodified auditor's report. It details the sections that must be included, such as the Auditor's Opinion, Basis for Opinion, and the Responsibilities of both management and the auditor. It also introduces the concept of Key Audit Matters for listed companies.

ISA 705: Modifications to the Audit Opinion

This standard governs the issuance of a modified opinion. The type of modification depends on whether the issue is a material misstatement or an inability to obtain sufficient appropriate evidence, and whether the issue is material but not pervasive or material and pervasive.