AUDIT CLARITY PROJECT In 2004, the International Auditing and Assurance Standards Board (IAASB) undertook a programme to enhance

the clarity of its International Standard on Auditing (ISAs). The IAASB said that the overall aim of its clarity project was to make the ISAs more easily understandable to enable them to be more consistently applied, which would in turn improve audit quality on a worldwide level. All of the ISAs have been rewritten and are effective for audits of financial statements commencing for periods beginning on or after 15 December 2009 (essentially December 2010 year ends). Each standard is now structured in a new way, with clear objectives, definitions and requirements, together with application and other explanatory material. The structure of the new standards makes it easier to understand what is required and what purely guidance is. In addition, ISQC 1 has also been rewritten and the revised guidance on quality control procedures will also become effective at the same time as the clarified ISAs. The new Clarity standards are structured as follows:

Introduction: This identifies the purpose, scope and subject matter of the standard. Objective: This clearly states the objectives of an auditor in the area addressed by the standard. Definitions: This clearly defines applicable terms. Requirements: each objective is supported by requirements expressed by the phrase the auditor shall; which are the equivalent to the bold type paragraphs in the old standards. Application: application to an audit of other historical financial information. Application and Other explanatory material: explains more precisely what a requirement means or is instead to cover, or includes appropriate examples.

THE CLARIFIED ISAs The final suite of clarity standards comprises 36 ISAs and a clarified International Standard On Quality Control (ISQC 1) including: > 16 standards containing new and revised requirements, in addition to the application of the new clarity conventions (revised and redrafted ISAs) > 20 standards redrafted to apply the new clarity conventions and to reflect matters of general clarity only (redrafted ISAs and redrafted ISQC 1) > One new standard, addressing the communication of deficiencies in internal control. At an international level, the clarity ISAs are effective for audits of financial statements for Periods beginning on or after 15 December 2009, while ISQC 1 is effective as at 15 December 2009.

REVISED AND REDRAFTED ISAs Sixteen ISAs have been subject to more substantive revisions by the IAASB. Revisions to these standards were in progress or nearly complete when the Clarity Project began and, as a result, changes to these standards go beyond the application of the clarity conventions. > ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing > ISA 260 Communication with Those Charged with Governance > ISA 320 Materiality in Planning and Performing an Audit

> ISA 402 Audit Considerations Relating to an Entity Using a Service Organisation > ISA 405 Evaluation of Misstatements Identified During the Audit > ISA 505 External Confirmations > ISA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related Disclosures > ISA 550 Related Parties > ISA 580 Written Representations > ISA 600 Special Considerations Audit of Group Financial Statements (Including the Work of Component Auditors) > ISA 620 Using the Work of an Auditors Expert > ISA 705 Modifications to the Opinion in the Independent Auditors Report > ISA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditors Report > ISA 800 Special Considerations Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks > ISA 805 Special Considerations Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement > ISA 810 Engagements to Report on Summary Financial Statements.

IMPLICATIONS FOR AUSTRALIAN AUDITORS On 30 October 2009, the AUASB issued the suite of Australian Auditing Standards (ASAs) revised and redrafted in Clarity format which are available on the AUASBs website. As noted above, the Clarity ASAs conform to March 2010 I Charter 63 the Clarity ISAs with minimal amendments made by the AUASB only. In Australia, the ASAs apply to audits of financial reports for financial periods commencing on or after 1 January 2010. To ensure the successful implementation of the new Clarity ASAs, auditors in Australia should: > understand the main changes to the ASAs arising from the project, particularly those standards subject to substantive revisions > review the firms systems of quality control, audit methodologes, manuals and software to ensure compliance with the Clarity ASAs > develop, or update, training programs and conduct these programs on a timely basis > understand the timing of application of the new Clarity ASAs for different year-end audits. For example, for entities with a 31 December year-end, the first time application of the Clarity ASAs will be for the 31 December 2010 year-end audit. Conversely, entities with a 30 September year-end need not apply the Clarity ASAs until the 30 September 2011 year-end audit > review the application of the Clarity ASAs on individual engagements as part of the firms monitoring activities and evaluate, communicate and remedy deficiencies identified.

ISA 260

> imposes an obligation on the auditor to promote effective two-way communication between the auditor and those charged with governance and to evaluate

whether the twoway communication has been adequate > is much more specific about matters to be communicated to those charged with governance, including the auditors responsibilities in relation to the audit, the planned scope and timing of the audit, significant findings from the audit and significant difficulties encountered during the audit > requires matters communicated orally to be documented > includes specific considerations where management and those charged with governance > a new standard > all requirements and guidance relating to the communication of internal control deficiencies in the extant ISAs are now contained in ISA 265 > the term material weaknesses is no longer used and two new terms deficiency in internal control and significant deficiency are introduced. However, the IAASB does not intend that further work be performed beyond practice of communicating material weaknesses under the existing ISAs > enhanced guidance provided on judging when an identified deficiency in

ISA 265

ISA 540

internal control is significant and communicating significant deficiencies to those charged with governance > new requirement concerning the content of written communications with those charged with governance > extant ISA 545 Auditing Fair Value Measurements and Disclosures now integrated in ISA 540 (with the extant ISA 545 withdrawn), reflecting the fact that the principles in auditing fair values and the more traditional accounting estimates are the same > a risk-based approach to the audit of accounting estimates, including fair value accounting estimates, adopted to conform with the risk-based approach reflected in ISA 315 and ISA 330 > inclusion of a number of new requirements, including: more specification regarding matters the auditor obtains an understanding of for the purpose of assessing risks reviewing the outcome of accounting estimates included in the prior period financial statements evaluating estimation uncertainty and determining whether estimates with high levels of uncertainty give rise to significant risks more specification of the procedures the auditor undertakes in response to assessed

ISA 550

risks, including developing a point estimate or a range to evaluate managements point estimate additional substantive procedures to respond to significant risks > new related party definition recognising that some financial reporting frameworks contain minimal or no related party requirements > inclusion of a number of new requirements, including: the audit team discussion to include consideration of the susceptibility of the financial statements to material misstatement due to fraud or error that could result from the entitys related party relationships and transactions auditor to remain alert for related-party relationships or transactions that management has not previously identified or disclosed, plus procedures to perform if these are identified by the auditor obtaining an understanding of the controls, if any, that management has established relating to related parties treating identified significant related party transactions outside the entitys normal course of business as giving rise to significant risks plus procedures to perform if these are identified by the auditor > when management has made an assertion that a related-party transaction was conducted on an arms length terms, the auditor is required to obtain evidence about

ISA 600

that assertion > communicating with those charged with governance about significant matters identified during the audit regarding related party relationships and transactions > documenting the names of identified related parties and the nature of related party transactions > application to all group audits, not just those involving other auditors. The determination of whether an entity is a group is based on the identification of components and is not necessarily restricted to situations where an entity produces consolidated financial statements > impact on existing group audit engagements will vary depending on how the group audit is currently executed > introduction of a significant number of new requirements, including in relation to: the application of risk assessment and quality control principles in a group audit context engagement acceptance and continuance overall audit strategy and audit plan understanding the group and its components identifying significant components and the work effect on components understanding of component auditors determination of materiality responding to assessed risks

 consolidation process subsequent events communication with management, those charged with governance and component auditors audit documentation

REFERENCES

1. 2. 3. 4.

http://www.passacca.net/main-changes-about-the-audit-clarity-project.html www.charteredaccountants.com.au www.auasb.gov.au Morden Auditing and Assurance Services by Lung, 5th Edition, 2011 ( an overview of an Audit Financial Statement pg no 249-250)