The Clarified International Standards on Auditing

1. The Clarified International Standards on Auditing Brian Smith June 8, 2011

2. The Clarified International Standards on Auditing • WHY? • WHAT? • HOW?

3. The Clarified International Standards on Auditing • The Background • The Timetable • RBI and the Forum of Firms • The Overall Approach • The Important Changes • Reference Material Available • Action Needed

4. The Background • Concerns of the Regulators • Difficulty of Getting Wide Acceptance of Standards • All Standards Reviewed – 2007 -2009 • More Open and Structured Process • Input from all Interested Parties

5. The Timetable • The Clarified Standards Apply for Audits for Periods Starting on or After December 15, 2009 • Some Countries Have Adopted as National Standards Consistent With This Timing • Others Are One Year Late • Others Are Waiting

6. RBI and the Forum of Firms • RBI is a Member of the Forum of Firms • Members are Required to Comply with the Forum’s Obligations for Transnational Audits • This Includes Complying with ISA

7. RBI and the Forum of Firms THE CLARIFIED STANDARDS APPLY TO RBI MEMBERS WHETHER OR NOT THE STANDARDS HAVE BEEN INCORPORATED INTO NATIONAL STANDARDS

8. The Background and Timetable Questions

9. The Clarified Standards – The Overall Approach • Setting Out an Objective for Each Standard • Splitting Requirements (SHALL) from Guidance • Eliminating Ambiguities • Improving Readability • Reducing Complexity …… But This Does Not Look Very Interesting!

10. The Clarified Standards – The Overall Approach • 12 Standards have Revisions as well as Clarifications • That is Where the Main Impact is • Not all the Changes will Impact Every Audit or Every Firm But Many Will

11. The Important Changes • ISA 200, Overall Objectives • ISA 210, Engagement Terms • ISA 260 and 265, Communication with Directors • ISA 320, Materiality • ISA 450, Misstatements • ISA 540, Accounting Estimates • ISA 550, Related Parties • ISA 580, Written Representations • ISA 600, Group Audits ……. Cover a major part of the basic structure of an audit

12. The Overall Approach Questions

13. ISA 200 Overall Objectives of the Audit • Each Standard now has an OBJECTIVE • Two Basic Questions to Ask in Each Area: • Are There Any Additional Procedures necessary to achieve the OBJECTIVES? • Has Sufficient Audit Evidence Been Obtained?

14. ISA 220Terms of the Engagement • Required to Get Management’s Agreement as to its Responsibilities for: • Preparation of the Financial Statements • Internal Control • Providing Access for the Auditor ….. Annual Engagement Letters

15. ISA 260Communication with the Directors • A Significant Expansion of Requirements: • Acceptable but not Best Practices • Significant Difficulties Encountered • Significant Discussions With Management ….. Must be Documented

16. ISA 265Deficiencies in Internal Control • Deficiencies Must be Communicated to Management and the Directors • A Deficiency Exists When: A Control is Designed, Implemented or Operated In Such a Way That it is Unable to Prevent, or Detect and Correct, Misstatements in the Financial Statements on a Timely Basis ….This Should Produce More Communications

17. ISA 320Materiality • Uses the Concept of Performance Materiality • Materiality May be at a Lower Level for some Classes of Transactions or Balances • Documentation is Required

18. ISA 450Misstatements • Evaluation Must Consider the Nature as Well as the Amount of Misstatements • Materiality May Need to be Reassessed at the End of the Audit • More Documentation is Required Materiality is not Just an Arithmetic Calculation

19. ISA 540Accounting Estimates • Requirement for Greater RIGOUR and SCEPTICISM • Need to Consider Indications of MANAGEMENT BIAS • Focus on RISK and ESTIMATION UNCERTAINTY • Consideration of ALTERNATIVE ASSUMPTIONS by Management • Review of outcome of past estimates

20. ISA 550Related Parties • Those Outside Normal Course of Business are Significant Risks • Need to Assess Fraud Possibilities • Sets Out Specific Audit Procedures • Must Communicate With the Directors

21. ISA 580Written Representations • Management Representations Required Regarding Responsibilities for: • Preparation of the Financial Statements • Providing Auditors With Access • Recording All Transactions … Representations Alone DO NOT PROVIDE SUFFICIENT AUDIT EVIDENCE

22. ISA 600Group Audits • Applies Whenever Other Auditors Are Used Including RBI Members • Greater Responsibility on the Principal Auditor • Requires Involvement With the Audit of ALL SIGNIFICANT COMPONENTS • Must Obtain an Understanding of the Competence of Component Auditors

23. The Detailed Changes Questions

24. The Important Changes • Overall Audit Approach – 200 (Objectives), 220 (Engagement Terms) • The Audit Itself – 320 (Materiality), 540 (Accounting Estimates), 550 (Related Parties), 600 (Group Audits) • Completing the Audit – 450 (Misstatements), 580 (Representations) • Communicating Results – 260 (Directors), 265 (Internal Control)

25. The Clarified StandardsReference Material Available • The Standards Themselves • Translated Versions in Most Countries • IFAC Guide – Using ISA for SMEs • IFAC Adoption and Implementation Videos • RBI Summary Available Shortly

26. The Clarified StandardsAction Needed • Decide Which Changes Have Most Impact on Practice • Review Changes in Detail • Incorporate into Standard Programmes or Checklists • Hold Training Sessions • Use Audit Quality Control Questionnaires to Check Degree of Compliance

27. The Clarified StandardsHow Important Are They? • The Process and the Outcome are More Acceptable to the Regulators • The Standards Will Have Wide Acceptance • They Will Narrow the Gap Between Country Standards • They Provide the Opportunity to Strengthen Common Practices Across the World

28. The Clarified StandardsMembership of the Forum of Firms • Forum Members are Required to Comply with ISA on Transnational Audits • RBI Member Firms are Required to Comply Whether or Not National Standards Have Been Adjusted to Comply with the Clarified Standards • RBI Member Firms Must Comply for all Transnational Audits with Year Ends Starting on or After December 15, 2009 ….. If Audits are Primarily December 31, the Clarified Standards Applied to 2010 Audits

29. The Clarified International Standards on Auditing • IMPORTANT • SIGNIFICANT ……. And NOW

30. Questions