Introduction

1. The purpose of this International Standard on Auditing (ISA) is to establish standards and provide guidance on the objective and general principles governing an audit of financial statements. This ISA is to be read in conjunction with ISA 120 'Framework of International Standards on Auditing.'

Objective of an Audit

2. The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework. The phrases used to express the auditor’s opinion are 'give a true and fair view' or 'present fairly, in all material respects,' which are equivalent terms.

3. Although the auditor’s opinion enhances the credibility of the financial statements, the user cannot assume that the opinion is an assurance as to the future viability of the entity nor the efficiency or effectiveness with which management has conducted the affairs of the entity.

General Principles of an Audit

4. The auditor should comply with the 'Code of Ethics for Professional Accountants' issued by the International Federation of Accountants. Ethical principles governing the auditor’s professional responsibilities are:

(a) independence;
(b) integrity;
(c) objectivity;
(d) professional competence and due care;
(e) confidentiality;
(f) professional behavior; and
(g) technical standards.

5. The auditor should conduct an audit in accordance with ISAs. These contain basic principles and essential procedures together with related guidance in the form of explanatory and other material.

6. The auditor should plan and perform the audit with an attitude of professional skepticism recognizing that circumstances may exist which cause the financial statements to be materially misstated. For example, the auditor would ordinarily expect to find evidence to support management representations and not assume they are necessarily correct.

Scope of an Audit

7. The term 'scope of an audit' refers to the audit procedures deemed necessary in the circumstances to achieve the objective of the audit. The procedures required to conduct an audit in accordance with ISAs should be determined by the auditor having regard to the requirements of ISAs, relevant professional bodies, legislation, regulations and, where appropriate, the terms of the audit engagement and reporting requirements.

Reasonable Assurance

8. An audit in accordance with ISAs is designed to provide reasonable assurance that the financial statements taken as a whole are free from material misstatement. Reasonable assurance is a concept relating to the accumulation of the audit evidence necessary for the auditor to conclude that there are no material misstatements in the financial statements taken as a whole. Reasonable assurance relates to the whole audit process.

9. However, there are inherent limitations in an audit that affect the auditor’s ability to detect material misstatements. These limitations result from factors such as:

· The use of testing.
· The inherent limitations of any accounting and internal control system (for example, the possibility of collusion).
· The fact that most audit evidence is persuasive rather than conclusive.

10. Also, the work undertaken by the auditor to form an opinion is permeated by judgment, in particular regarding:

(a) the gathering of audit evidence, for example, in deciding the nature, timing and extent of audit procedures; and
(b) the drawing of conclusions based on the audit evidence gathered, for example, assessing the reasonableness of the estimates made by management in preparing the financial statements.

11. Further, other limitations may affect the persuasiveness of evidence available to draw conclusions on particular financial statement assertions (for example, transactions between related parties). In these cases certain ISAs identify specified procedures which will, because of the nature of the particular assertions, provide sufficient appropriate audit evidence in the absence of:

(a) unusual circumstances which increase the risk of material misstatement beyond that which would ordinarily be expected; or
(b) any indication that a material misstatement has occurred.

Responsibility for the Financial Statements

12. While the auditor is responsible for forming and expressing an opinion on the financial statements, the responsibility for preparing and presenting the financial statements is that of the management of the entity. The audit of the financial statements does not relieve management of its responsibilities.

Public Sector Perspective

1. Irrespective of whether an audit is being conducted in the private or public sector, the basic principles of auditing remain the same. What may differ for audits carried out in the public sector is the audit objective and scope. These factors are often attributable to differences in the audit mandate and legal requirements or the form of reporting (for example, public sector entities may be required to prepare additional financial reports).

2. When carrying out audits of public sector entities, the auditor will need to take into account the specific requirements of any other relevant regulations, ordinances or ministerial directives which affect the audit mandate and any special auditing requirements, including the need to have regard to issues of national security. Audit mandates may be more specific than those in the private sector, and often encompass a wider range of objectives and a broader scope than is ordinarily applicable for the audit of private sector financial statements. The mandates and requirements may also effect, for example, the extent of the auditor’s discretion in establishing materiality, in reporting fraud and error, and in the form of the audit report. Differences in audit approach and style may also exist. However, these differences would not constitute a difference in the basic principles and essential procedures.