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NAGAS (472 Pages)
NAGAS (472 Pages)
03. The Chilean Association of Accountants. and the Instituto de Auditores A.G.
are constituted in accordance with Decree Laws No. 2,757, 3,163 and 3,621.
05. The National Council of the Chilean Association of Accountants A.G. has
given the Committee the specific responsibility, among others, to propose
technical pronouncements and auditing standards for approval and
promulgation by the Board, in accordance with current legislation. This
enactment makes these standards mandatory for the practice of auditing in
Chile.
1 SECTION
The International Federation of Accountants - IFAC (International
Federation of Accountants)
07. The mandatory nature of the Auditing Standards is described in paragraph 05.
In the absence of specific pronouncements in Chile, the independent auditor
should consider the International Auditing Guides issued by IFAC, the
Statements of Auditing Standards ("SAS") of the American Institute of
Certified Public Accountants and other generally accepted pronouncements
issued by recognized professional associations.
08. The Auditing Standards are applied when an independent audit is carried out:
that is, in the independent examination of the financial information of an
entity, whether for profit or not, regardless of its size or legal form, when
such examination is carried out for the purpose of expressing an opinion. The
Standards may also have application, where appropriate, to other activities
related to auditors.
SECTION 2
SECTION 110
Audit Objective
02. The auditor's report is the means by which the auditor expresses his opinion
or, if circumstances so require, refrains from expressing an opinion. In any of
these cases, it shall indicate whether its audit has been conducted in
accordance with generally accepted auditing standards. These standards
require you to state whether, in your opinion, the financial statements are
presented in accordance with generally accepted accounting principles and to
identify those circumstances in which such principles have not been
consistently applied in the preparation of the financial statements for the
current period as compared with those of the preceding period.
03. The financial statements are the responsibility of management. The auditor's
responsibility is to express an opinion on the financial statements.
Management is responsible for adopting sound accounting policies and for
establishing and maintaining internal control relevant to, among other things,
recording, processing, summarizing and presenting financial information
consistent with management's assertions in the financial statements. Internal
control should include an accounting system to identify, collect, analyze,
3 SECTION
classify, record and present an entity's transactions and to maintain
accountability for the respective assets and liabilities. The transactions of the
entity and the respective assets and liabilities are within the direct knowledge
and control of management. The auditor's knowledge of these matters is
limited to that acquired through the audit. Accordingly, the fair presentation
of the financial position, results of operations and cash flows in conformity
with generally accepted accounting principles is implicitly and fully part of
management's responsibility. The independent auditor may make suggestions
on the form or content of the financial statements or prepare draft financial
statements, in whole or in part, based on information from management's
accounting system. However, the auditor's responsibility for the financial
statements he/she has audited is limited to expressing an opinion on them.
Professional Qualities
SECTION 4
Professional Responsibility
06. The independent auditor also has a responsibility to his profession, the
responsibility to comply with the standards accepted by his colleagues in the
practice of the profession. In relation to these matters, the Chilean
Association of Accountants A.G. has issued the corresponding Code of
Ethics, which is mandatory for all its members.
5 SECTION
SECTION 6
SECTION 150
01. An independent auditor plans, conducts and reports the results of an audit in
accordance with Generally Accepted Auditing Standards. Auditing standards
establish rules regarding the quality of the audit and the objectives to be
achieved by the audit. Audit procedures differ from auditing standards. Audit
procedures refer to the activities that the auditor performs during an audit to
comply with auditing standards.
Auditing Standards
02. The auditing standards generally accepted in Chile include general standards,
standards relating to the performance of the work and standards relating to the
report, which are generally accepted standards adopted by the Chilean
Association of Accountants. as follows:
A) General rules
2) In all matters relating to the work assigned, the auditor(s) shall maintain
an independent attitude of mind.
3) In the performance of the audit and in the preparation of the report, the
auditor(s) shall exercise due professional care.
1) Adequately plan and properly supervise the work of the audit team
members.
7 SECTION
3) Obtain sufficient competent evidence by inspection, observation, inquiry
and confirmation to provide a reasonable basis for expressing an opinion
on the financial statements under review.
1) The report should indicate whether the financial statements have been
presented in accordance with Generally Accepted Accounting Principles.
2) The report should indicate those situations in which these principles have
not been uniformly followed in the current period with respect to the
previous period.
03. Article 31 of the Manual of Ethical Standards (Code of Ethics) of the Chilean
Association of Accountants establishes the obligation to comply with
generally accepted auditing standards.
04. The auditor should have sufficient knowledge of generally accepted auditing
standards to apply them in his audit. Auditing standards require the auditor to
exercise professional judgment in applying them. Materiality and audit risk
form the basis for the application of all auditing standards, particularly those
relating to the performance of the work and the report (see section 312, "Risks
and materiality inherent in an audit examination"). The auditor should be
prepared to justify deviations from generally accepted auditing standards.
AUDIT CIRCULARS
05. The Audit Circulars issued by the Auditing Standards Committee of the
Chilean Association of Accountants do not modify the fundamentals of
generally accepted auditing standards and, in some cases, are interpretations
SECTION 8
of the standards for specific situations. Audit Circulars are binding on
auditors. (See definition in Audit Circular No. 1).
06. The auditor should be aware of and consider the Audit Circulars in the normal
course of his work. If the auditor does not apply the Audit Circulars, he/she
should be prepared to explain how he/she has complied with generally
accepted auditing standards.
OTHER PUBLICATIONS
08. If an auditor applies audit procedures based on other publications, he/she must
satisfy himself/herself that, in his/her judgment, this is relevant and
appropriate in the circumstances. In determining whether other publications
are appropriate, the auditor may consider the extent to which those
publications are recognized as supporting and understanding generally
accepted auditing standards and the extent to which the author is recognized
as an authority on auditing matters.
9 SECTION
SECTION 161
02. A firm of independent auditors must also comply with generally accepted
auditing standards when performing an audit. Thus, a firm should establish
quality control policies and procedures to provide reasonable assurance that
generally accepted auditing standards will be observed in its professional
engagements. The nature and scope of a firm's quality control policies and
procedures depend on factors such as its size, the degree of operational
autonomy allowed to its staff and offices in the conduct of audits, its
organization and cost-benefit considerations.
03. Generally accepted auditing standards refer to the conduct of individual audit
engagements; quality control standards refer to the conduct of a firm's audit
practice as a whole. Thus, generally accepted auditing standards and quality
control standards are interrelated, and the quality control policies and
procedures that a firm adopts affect the conduct of individual audit
engagements as well as the conduct of the firm's audit practice as a whole.
SECTION 10
11 SECTION
SECTION 201
01. The general standards are of a personal nature and relate to the auditor's
qualifications and the quality of his work, distinguishing between standards
relating to his work in the field and to his reporting activity. These personal,
or general, rules apply equally to the field work and reporting areas.
SECTION 12
SECTION 210
02. This standard recognizes that, no matter how capable the individual may be in
other fields (including business and finance), he or she cannot meet auditing
standards without adequate education and experience in the auditing field.
13 SECTION
must weigh these attributes in determining the extent of his supervision over
subordinates and his review of their work. It should be recognized that the
training of a professional includes a continuous perception of the processes
that occur in the commercial activity and in his or her profession. The
professional must study, understand and apply new pronouncements on
accounting principles and auditing procedures to the extent issued by the
competent bodies.
SECTION 14
SECTION 220
INDEPENDENCE
"In all matters relating to the work entrusted, the auditor(s) shall
maintain an independent attitude of mind."
03. It is of the utmost importance to the profession that the general public
maintains its confidence in the independence of the auditor. Public confidence
would be impaired if it were to find that independence was in fact lacking or
could also be impaired by the existence of circumstances that, in the judgment
of reasonable persons, might influence its independence. To be independent,
the auditor must be intellectually honest; to be recognized as independent, the
auditor must be free of any obligation or interest to the client, its management
or its owners. For example, an independent auditor auditing a company of
which he is also a director may be intellectually honest, but is unlikely to be
accepted by the public as independent, since he would in effect be auditing
decisions in which he himself has participated. Similarly, an auditor with a
substantial financial interest in a company may be unbiased in expressing an
opinion on the company's financial statements, but the public would be
reluctant to believe that he or she is. Auditors must be independent not only in
15 SECTION
fact, they must avoid situations that could lead third parties to doubt their
independence.
04. The Code of Ethics issued by the Colegio de Contadores de Chile A.G.,
regarding independence, mentions in different articles the obligation to
maintain it.
05. The independent auditor must carry out his practice in accordance with the
spirit of these precepts and rules if he is to achieve an appropriate degree of
independence in the performance of his work.
SECTION 16
SECTION 230
"In the conduct of the examination and in the preparation of the report,
the auditor(s) shall maintain due professional care."
02. This standard requires the independent auditor to perform its work with due
care. Due care imposes a responsibility on each person within an
independent audit organization to observe standards of fieldwork and
reporting. Exercising due care involves a critical review at each supervisory
level of the work performed and the judgment exercised by audit team
members.
03. The issue of due care concerns what the independent auditor does and how
well he does it.
17 SECTION
SECTION 310
Introduction
01. The first standard relating to the execution of the work states that:
"The work shall be properly planned and the work of the audit team
members shall be properly supervised."
02. Aspects related to the supervision of assistants are discussed in section 210,
"Technical Training and Professional Competence of the Independent
Auditor", and in section 311, "Planning and Supervision". Aspects relating to
the planning of the performance of the work and the timing of the audit
procedures are discussed in sections 311 "Planning and Supervision" and 313
"Substantive Testing Prior to the Closing Date of the Financial Statements".
05. The auditor must reach an agreement with the client regarding the services to
be rendered in each job. Such an agreement reduces the risk that either the
auditor or the client may misinterpret the other party's needs or expectations.
For example, it reduces the risk that the client may incorrectly rely on the
auditor to protect the entity from certain risks, or to perform certain functions
that are the responsibility of the client. The agreement should include the
objectives of the work, management's responsibilities, the auditor's
responsibilities and the limitations of the work. The auditor should document
the agreement in the working papers, preferably through a written
communication with the client. 1 If the auditor believes that an agreement has
not been established with the client, the auditor should not accept or perform
the work.
06. An agreement with the client on the audit of the financial statements generally
includes the following topics:
1
See Sample Letter in Audit Circular No. 10.
19 SECTION
- At the end of the work, management will provide the auditor with a
representation letter confirming certain representations made during the
audit.
07. A customer agreement may also include other issues, such as the following:
2
See the definition in paragraph 01 of Section 325 "Communication of Conditions Relating to Internal Control in an Audit
of Financial Statements.
SECTION 20
- Agreements involving the previous auditor.
21 SECTION
APPENDIX
LETTER OF ENGAGEMENT
Date,
Gentlemen (Customer)
Present
SECTION 22
Our audit does not have the express purpose of uncovering fraud and cannot be
relied upon for that purpose. 1
By virtue of the test nature and other inherent limitations of an audit, together with
the inherent limitations of any accounting and internal control system, there is an
unavoidable risk that even some material misstatements may remain undiscovered.
We remind you that the responsibility for the preparation of the financial
statements, including adequate disclosure, rests with the Company's management.
This includes the maintenance of adequate accounting records and internal
controls, the selection and application of accounting policies, and the safeguarding
of the Company's assets.
As part of our audit process, we will seek written confirmation from management
regarding representations made to us in the course of our audit. Because of the
importance of management representations to an effective audit, you agree to
1
The auditor should ensure that the management of the entity to be audited understands
the nature of the audit, its objectives, scope and the degree of responsibility assumed.
23 SECTION
indemnify our Firm against any costs and exposures arising from our audit
attributable to any misstatement of management contained in such written
confirmation.
We count on the full cooperation of your staff and trust that they will make
available to us all records, documentation and other information required in
connection with our audit.
The working papers prepared in connection with our audit are the property of our
Firm, contain confidential information and will be retained by us in accordance
with our policies and procedures. However, they may be requested by the
Superintendencia de Valores y Seguros (Superintendency of Securities and
Insurance) 1 However, they may be requested by the Superintendency of
Securities and Insurance, the courts of justice or other authorities, in which case
we will be legally obliged to provide them under the conditions of privacy and
confidentiality established by law.
Our fees, which will be billed as the work progresses[in x equal installments
starting at .....], are based on the time required by the people assigned to the job
plus direct expenses. Individual hourly rates vary according to the degree of
responsibility involved and the experience and expertise required. We estimate
our fee for the audit of the financial statements at .......
Any other services you wish us to provide will be subject to a separate prior
agreement. In the event that the Superintendency of Securities and Insurance, the
courts, another authority or any other person expressly authorized by you decides
to review our working papers, the fees for our participation in these reviews will
be based on the additional time invested.
1
Or other Superintendency.
SECTION 24
We would like to thank you for this opportunity to serve the Society. Please sign
and return the enclosed copy of this letter to indicate your understanding and
agreement to the arrangements for our audit of the financial statements.
Sincerely yours,
We express our understanding and agreement with the contents of this letter:
(Signature) _____________________________________
(Name) _____________________________________
(Cargo) _____________________________________
(Date) _____________________________________
25 SECTION
SECTION 311
Introduction
01. The first standard relating to the performance of the work requires that "the
work shall be properly planned and the work of the audit team members shall
be properly supervised". This section provides guidance to the independent
auditor performing an audit in accordance with generally accepted auditing
standards on considerations and procedures applicable to planning and
supervision, including preparing an audit program, obtaining an
understanding of the entity's business, and dealing with differences of opinion
among audit team members.This section provides guidance to the independent
auditor performing an audit in accordance with generally accepted auditing
standards regarding considerations and procedures applicable to planning and
supervision, including the preparation of an audit program, obtaining
knowledge of the entity's business and dealing with differences of opinion
among audit team members. Planning and monitoring is a continuous process
throughout the audit and the corresponding procedures often overlap.
02. The auditor who has ultimate responsibility for the audit may delegate some
of the planning and supervision of the audit to the other members of the team.
For purposes of this section, (a) the term "other team members" refers to
personnel of the firm other than the auditor having final responsibility for the
audit and (b) the term "auditor" refers to all team members including the
auditor having final responsibility for the audit.
PLANNING
03. Planning an audit involves developing an overall strategy for the expected
conduct and scope of the audit. The nature, scope and timing of the planning
will vary depending on the size and complexity of the entity under review, the
entity's experience and knowledge of the entity's business. When planning the
audit, the auditor should consider, among other aspects:
SECTION 26
c) The methods used by the entity to process significant accounting
information (see paragraph 09), including the use of external services.
04. Procedures that the auditor may consider in planning the audit normally
include review of files relating to the entity and meetings with both team
members and the entity. Examples of these procedures are:
b) Discussion of matters that could affect the audit with the firm's personnel
responsible for performing non-audit services.
e) Discussion of the type, scope and timing of the audit with the entity's
personnel, board of directors or audit committee.
27 SECTION
g) Coordination with the entity's personnel to obtain information.
05. In planning the audit, the auditor should consider the nature, scope and timing
of the work to be performed and should prepare a written program for each
audit. The audit program should indicate in sufficient detail the audit
procedures that the auditor considers necessary to fulfill the audit objectives.
The format of the audit program and its level of detail may vary depending on
the circumstances. In developing the program, the auditor should be guided
by the results of his or her considerations and planning procedures. As the
audit progresses, changing conditions may make it necessary to modify the
planned audit procedures.
06. The auditor should obtain a level of knowledge of the entity's business that
enables him/her to plan and perform the audit in accordance with generally
accepted auditing standards. This level of knowledge should enable him/her
to acquire an understanding of events, transactions and practices that, in
his/her judgment, may have a material effect on the financial statements. The
level of knowledge of the business normally possessed by the entity's
management is considerably greater than that which can be obtained by the
auditor in the course of his audit. Knowledge of the entity's business helps
the auditor:
07. The auditor should obtain knowledge of matters relating to the nature of the
business, its organization and the characteristics of its operation. Such
matters include, for example, the type of business, types of products and
services, equity structure, related parties, locations of operation, and methods
of production, distribution and compensation. The auditor should also
consider matters affecting the industry in which the entity operates, such as
economic conditions, legal provisions and changes in technology, as they
affect the audit. Other aspects, such as usual accounting practices in the
industry, competitive conditions and, if available, financial trends and ratios,
should also be considered by the auditor.
09. The auditor should consider, when planning the audit, the methods used by
the entity to process accounting information because they influence the design
of the internal control structure. To the extent used, computer processing in
significant accounting applications 1, as well as the complexity of that
processing, may also influence the nature, timing and extent of audit
procedures. Therefore, when evaluating the effect of an entity's computer
1
Significant accounting applications are those that relate to accounting information that could significantly affect
the financial statements being audited.
29 SECTION
processing on an audit of financial statements, the auditor should consider
matters such as:
10. The auditor should consider whether special expertise is required to study the
effect of computer processing on the audit, to understand the policies and
procedures of the internal control structure, or to design and perform audit
procedures. If special expertise is required, the auditor should seek the
assistance of a qualified professional with such expertise, which may be from
the audit staff or an outside professional. If the use of such a professional is
planned, the auditor should possess sufficient computer literacy to
communicate the objectives of the other professional's work, to evaluate
whether the specific procedures achieved the auditor's objectives, and to
evaluate the results of the procedures applied as they relate to the nature,
SECTION 30
timing, and extent of other planned audit procedures. The auditor's
responsibilities with respect to the employment of such a professional are
equivalent to those of other members of the audit team. 2
2
Since the employment of a specialist who actually participates as a member of the audit team is not included in
Section 336, "Use of a Specialist's Work," an audit specialist in a computer environment requires the same supervision and
review as another member of the team.
31 SECTION
SUPERVISION
11. Supervision involves directing the efforts of the audit team members in
achieving the audit objectives and in determining whether those objectives
were met. Elements of supervision include instructing audit team members,
keeping informed of significant issues identified, reviewing the work
performed, and managing differences of opinion among team members. The
degree of supervision appropriate in a given situation depends on many
factors, including the complexity of the issue and the experience of the people
performing the work.
12. The other members of the audit team should be informed of their
responsibilities and the objective of the procedures to be performed. They
should be informed of matters that may affect the nature, scope and timing of
the procedures to be performed, such as the nature of the entity's business as it
relates to the agreed-upon work, and potential accounting and auditing issues.
The auditor who has final responsibility for the audit should instruct the other
members of the team to inform him/her of significant accounting and auditing
matters arising during the examination so that he/she can assess their
significance.
13. The work done by each member of the audit team should be reviewed to
determine whether it was properly performed and to assess whether the results
are consistent with the conclusions to be presented in the auditor's report.
14. The auditor who has final responsibility for the audit and the other team
members should be informed of the procedures to be followed when there are
differences of opinion on accounting and auditing matters among the team
members participating in the audit. Such procedures shall allow the various
members of the team to document their disagreement with the conclusions
reached if, after appropriate consultations, they deem it necessary to
disassociate themselves from the resolution of the matter. In this situation,
the basis for the final resolution should also be documented.
SECTION 32
SECTION 312
Introduction
01. This Section provides guidance on the consideration that the auditor should
give to risk and materiality in planning and performing an audit of financial
statements in accordance with generally accepted auditing standards. Audit
risk and the Recognition of the materiality of certain matters affects the
application of generally accepted auditing standards, especially standards
relating to the performance of work and reporting, and is implicit in the
auditor's standard report. Audit risk and materiality, along with other matters,
need to be considered together in determining the nature, timing and extent of
audit procedures and in evaluating the results to be derived from those
procedures.
02. The existence of audit risk is recognized and implicit in the auditor's standard
report by stating that the auditor has obtained a "reasonable degree of
assurance" that the financial statements are free from material misstatement.
Audit risk (1) is the risk that the auditor unknowingly, inadvertently, may fail
to modify
___________________________
(1) In addition to audit risk, the auditor is also exposed to the risk of adverse publicity or other
events arising in connection with the financial statements on which he/she has audited and on
which he/she has expressed an opinion. This contingency is present even though the auditor has
conducted its examination in accordance with generally accepted auditing standards and reported
appropriately on those financial statements. Even if the auditor considers this contingency to be
33 SECTION
low, the auditor should not perform less extensive procedures than would otherwise be
appropriate in light of generally accepted auditing standards.
appropriately its opinion on financial statements that are materially misstated
(2)
.
03. The concept of materiality recognizes that some matters, either individually or
in their entirety, are important to the effects on the fair presentation of
financial statements in conformity with generally accepted accounting
principles (3) while others are not. The phrase "presented fairly, in all material
respects, in accordance with generally accepted accounting principles"
indicates that the auditor believes that the financial statements, taken as a
whole, are not materially misstated.
04. Financial statements are materially misstated when they contain errors or
irregularities, the effect of which, individually or in the aggregate, is material
enough to cause such statements to be misstated. The Company's
consolidated financial statements are presented fairly, in all material respects,
in conformity with generally accepted accounting principles. Errors and
irregularities are the result of the misapplication of such principles, deviations
from the facts or the omission of necessary information.
___________________________
(2) This definition of audit risk does not include the risk that the auditor may erroneously
conclude that the financial statements are materially misstated. In such a circumstance,
you should normally reconsider or expand your audit procedures and request that the client
perform specific tasks to reassess the correctness of the financial statements. Normally
these steps would lead the auditor to a correct conclusion. This definition also excludes the
risk of an inappropriate decision in issuing its report, not related to the finding and
assessment of misstatements in the financial statements, such as an inappropriate decision
regarding the form of the auditor's opinion because of an uncertainty or limitation on the
scope of the audit examination.
(3) The concepts of audit risk and materiality are also applicable to financial statements
presented in accordance with a sufficient basis of accounting other than generally accepted
accounting principles; the references in this Section to financial statements presented in
conformity with generally accepted accounting principles also extend to those
presentations.
05. In reaching a conclusion as to whether the effect of errors, individually or
cumulatively, is material, the auditor should normally consider their nature
SECTION 34
and amount in relation to the items shown in the financial statements under
review. For example, an amount that is material in the financial statements of
one entity may not be material in the financial statements of another entity of
a different size or characteristic. Moreover, what is material in the financial
statements of a particular entity may change from period to period.
06. The consideration that the auditor should give to materiality is a matter of
professional judgment and is influenced by the way in which the auditor
perceives the needs of a reasonable person who will rely on the financial
statements. For the purposes of this Section materiality is defined as: the
magnitude of an omission or error in the accounting information that, in light
of the circumstances, makes it probable that the judgment of a reasonable
person relying on the information would be likely to be changed or influenced
by that omission or error. This definition recognizes that materiality
judgments are formed in light of the circumstances present and necessarily
involve both qualitative and quantitative considerations and is consistent with
that contained in No. 12 of Title III of Technical Bulletin No. 1 "BASIC
THEORY OF ACCOUNTING" issued by the Chilean Association of
Accountants.G.
Audit Planning
08. The auditor should consider both audit risk and materiality:
35 SECTION
In the first circumstance, the auditor should consider the audit risk and
materiality in order to obtain sufficient competent supporting evidence
material to enable the auditor, in the second circumstance, to properly
evaluate the financial statements.
09. The auditor should plan the audit so as to limit the risk to a low level that, in
the auditor's professional judgment, is appropriate for expressing an opinion
on the financial statements. Audit risk can be assessed in quantitative or non-
quantitative terms.
10. Section 311 "Planning and Supervision" requires the auditor, in planning its
audit, to consider, among other matters, its preliminary judgment about
materiality levels for audit purposes. This judgment may or may not be
quantified.
11. In accordance with that Section, the nature, timing and extent of planning and,
therefore, of audit risk and materiality considerations vary according to the
size and complexity of the entity, the auditor's experience with it and
knowledge of its business. Certain entity-related factors also affect the nature,
timing and extent of audit procedures with respect to specific account
balances and types of transactions and related assertions. (See paragraphs 17
to 26).
12. In planning the audit, the auditor should use his or her judgment to keep audit
risk appropriately low. The auditor should also make a preliminary judgment
about materiality levels so as to obtain, within the limitations of the audit
process, sufficient supporting evidence to obtain reasonable assurance about
whether the financial statements are free from material misstatement.
Materiality levels include an overall level for each statement; however,
because the statements are interrelated, and for reasons of efficiency, the
auditor normally considers materiality for planning purposes based on the
smallest level of cumulative misstatement that could be considered significant
in any of the individual financial statements. For example, if the auditor
estimates that errors totaling about $ 1,000,000 would have a material effect
on profit, but that such errors would have to total about $ 2,000,000 to
significantly affect the financial position, it would not be appropriate for the
auditor to design audit procedures that result in finding errors only if they
total about $ 2,000,000.2,000,000 to have a material effect on the financial
SECTION 36
position, it would not be appropriate for him to design audit procedures that
would result in the finding of errors only if they totaled about $ 2,000,000.
13. The auditor generally plans the audit to obtain reasonable assurance about
whether to detect misstatements that the auditor believes are material enough,
individually or in the aggregate, to affect the financial statements in a
quantitatively significant manner. While the auditor should be alert to errors
that could be qualitatively significant, it is not usually practical to design
procedures to detect them. An auditor normally works within economic
limits; his opinion, to be economically useful, must be reached within a
reasonable period of time and at a reasonable cost.
14. In some situations, the auditor considers materiality for planning purposes
before the financial statements to be audited are prepared. In other situations,
your planning is done after the financial statements to be audited have been
prepared, but you may be aware that they require significant modification. In
both types of situations, the auditor's preliminary judgment of materiality may
be based on annualized interim financial statements or financial statements for
one or more prior annual periods, provided that it recognizes the effects of
major changes in circumstances affecting the entity (e.g., a significant
merger) and relevant changes in the economy taken as a whole or in the
industry in which the entity operates.
16. In planning the audit procedures, the auditor should also consider the nature,
cause (if known), and amount of misstatements of which he/she becomes
aware from the audit of the prior period's financial statements.
37 SECTION
Considerations at the Individual Account Balance or Transaction Types
Level
17. The auditor recognizes that there is an inverse relationship between audit risk
and materiality considerations. For example, the risk that an account balance
or a particular type of transaction could be misstated by an extremely large
amount could be very low, but the risk that it could be misstated by an
extremely low amount could be very high. Analyzing other planning
considerations, either a decrease in the level of audit risk that the auditor
judges appropriate in an account balance or type of transaction, or a decrease
in the amount of an error in the account balance or type of transaction that the
auditor believes may be material, would require the auditor to perform one or
more of the following steps: (a) select a more effective audit procedure, (b)
perform the audit procedures closer in time to the balance sheet date, or (c)
increase the scope of a particular audit procedure.
18. In determining the nature, timing and extent of audit procedures to be applied
to a specific account balance or type of transaction, (4) the auditor should
design procedures to obtain a reasonable degree of assurance of discovering
misstatements that he believes, based on his preliminary judgment about
materiality, might be material, when aggregated with
___________________________
(4) For purposes of this section, the phrase "account balance or type of transaction" also
extends to any component of an account balance or type of transaction or to any statement
in the respective financial statements.
19. The auditor needs to consider audit risk at the individual account balance or
transaction type level as such consideration directly assists the auditor in
SECTION 38
determining the extent of audit procedures to be applied to the account
balance or transaction type and related assertions. The auditor should seek to
limit audit risk at the individual account balance or transaction type level to
enable the auditor to express an opinion on the financial statements taken as a
whole at an appropriately low level of audit risk. Auditors use different
approaches to achieve this objective.
20. At the account balance or transaction type level, audit risk consists of (a) the
risk (comprised of inherent risk and control risk) that the account balance or
transaction type and related assertions are in error, which could be material to
the financial statements when aggregated with the error in other account
balances or transaction types.(b) the risk (detection risk) that the auditor does
not detect the error. The following discussion describes audit risk in terms of
three types of risks. The manner in which the auditor considers and combines
these types of risks involves professional judgment and depends on the
auditor's audit approach.
39 SECTION
(ii) Control risk is the risk that a material misstatement of a financial
statement assertion will not be prevented or detected in a timely manner
by internal control system policies or procedures. Such risk is a function
of the effectiveness of the design and operation of internal control system
policies or procedures in achieving the overall objectives of the internal
control system. However, given the inherent limitations of any internal
control system, there will always be some control risk.
(iii) Detection risk is the risk that the auditor will not detect a material
misstatement in a financial statement assertion. Detection risk is a
function of the effectiveness of an audit procedure and its application by
the auditor. This arises in part from uncertainties that exist when the
auditor does not examine 100% of the balance of an account or type of
transaction and, in part, from other uncertainties that exist even if the
auditor were to examine 100% of the account balance or type of
transaction. Such other uncertainties arise because an auditor might select
an inappropriate audit procedure, misapply an audit procedure, or
misinterpret audit results. These other uncertainties can be reduced to a
negligible level through proper planning and supervision and by
conducting the firm's audit practice in accordance with appropriate
quality control standards.
21. Inherent risk and control risk differ from detection risk in that they exist
independently of the financial statement audit, whereas detection risk is
related to the auditor's procedures and can be changed at the auditor's
discretion. Detection risk has an inverse relationship to inherent and control
risk. The lower the inherent and control risk that the auditor believes exists,
the higher the detection risk he can accept. Conversely, the greater the
inherent and control risk the auditor believes exists, the lower the detection
risk he can accept. These types of audit risk can be assessed in quantitative
terms, such as percentages, or in non-quantitative terms that range, for
example, from a minimum to a maximum.
22. When the auditor evaluates the inherent risk of an assertion related to an
account balance or type of transaction, he evaluates numerous factors
involving professional judgments. In doing so, it considers not only factors
peculiar to the assertion in question, but also other factors that influence the
financial statements taken as a whole, which may also influence the inherent
risks related to the assertion. If the auditor concludes that the effort required
to assess the inherent risk for an assertion would exceed the potential
reduction in the scope of his audit procedures arising from reliance on the
SECTION 40
assessment, he should assess the inherent risk as the maximum when
designing audit procedures.
23. The auditor also uses professional judgment in assessing the control risk of an
assertion related to an account balance or type of transaction. The auditor's
assessment of control risk is based on the sufficiency of the evidence obtained
to support the effectiveness of the internal control system policies or
procedures in preventing and detecting misstatements in the financial
statements. If the auditor believes that the policies or procedures of the
internal control system that relate to an assertion are not appropriate or that
their effectiveness is not appropriate, or if he believes that they may be
ineffective, he should estimate the control risk in respect of that assertion to
be at its maximum extent.
24. The auditor may make separate or combined assessments of inherent risk and
control risk. If you consider that the inherent risk and control risk, separately
or in combination, are less than the maximum, you should have an appropriate
basis for relying on your assessments. This basis may be achieved, for
example, through the use of questionnaires, checklists, instructions or other
similar materials and, in the case of control risk, through its review and
evaluation of the internal control system and its execution of tests of controls.
However, professional judgment is required to interpret, adapt or expand upon
such standardized material as appropriate in the circumstances.
25. The detection risk that the auditor can accept in the design of audit procedures
is based on the level to which he tries to restrict the audit risk that relates to
the account balance or type of transaction and on his assessment of inherent
and control risks. As the auditor's assessment of inherent and control risks
decreases, the risk of detection that he may accept increases. It is not
appropriate, however, for the auditor to rely entirely on his or her inherent
risk and control risk assessments to the extent of excluding the performance
of substantive tests of account balances or transaction types where potentially
material misstatements could exist when aggregated with misstatements of
other account balances or transaction types.
26. The audit of financial statements is a dynamic and cumulative process; as the
auditor performs planned audit procedures, the evidence obtained may cause
the auditor to modify the nature, timing and extent of other planned
41 SECTION
procedures. Information may come to the attention of the auditor, as a result
of performing audit procedures or from other sources during the examination,
that differs significantly from that on which the auditor based his or her audit
plan. For example, the number of errors you detect may alter your judgment
about the levels of inherent risk and control, and other information you obtain
about the financial statements may change your initial judgment about
materiality. In such cases, it may be necessary for the auditor to reassess the
audit procedures planned based on revised considerations of audit risk and
materiality with respect to all or certain account balances or types of
transactions and related assertions.
SECTION 42
Evaluation of the Audit Findings
27. In assessing whether the financial statements are fairly presented in all
material respects in accordance with generally accepted accounting principles,
the auditor should aggregate any errors that the entity has not corrected, so as
to enable the auditor to consider whether, in relation to the individual,
subtotal or total amounts in the financial statements, these errors materially
distort the financial statements taken as a whole. Qualitative considerations
also influence the auditor in concluding whether errors are material.
28. The aggregation of errors should include the auditor's best estimate of the
total error in the account balances or types of transactions examined (hereafter
called probable error), not just the amount of specifically identified errors
(hereafter called known error) (5). When the auditor tests an account balance or
type of transaction and related assertions by an analytical review procedure,
he would not normally be able to identify errors specifically, but would only
obtain an indication that the error would exist in the account balance or type
of transaction and possibly its approximate magnitude. If the analytical review
procedure indicates that an error may exist, but not its approximate amount,
the auditor would generally have to employ other procedures that would allow
him to estimate the probable error in the account balance or type of
transaction. When an auditor uses statistical audit sampling to test the balance
of an account or type of transaction, he projects the amount of known errors
he identified in his sample to the items in the account balance or type of
transaction from which he selected his sample. That projected error, together
with the results of other substantive tests, contributes to the auditor's
assessment of the probable error in the account balance or type of transaction.
___________________________
(5) If the auditor were to examine all items in an account balance or type of transaction, the
probable error applicable to the transactions recorded in "the account balance or type of
transaction" would be the sum of the known errors specifically identified.
43 SECTION
29. The risk of material misstatement in financial statements is generally greater
when account balances or types of transactions include accounting estimates
rather than substantially actual information, given the inherent subjectivity in
estimating future events. Estimates, such as those related to inventory
obsolescence, uncollectible accounts and contingent liabilities, are subject not
only to the impossibility of predicting future events, but also to errors that
may arise from using inadequate or inappropriate information or misapplying
the appropriate disclosures. Since no accounting estimate can be considered
accurate with certainty, the auditor recognizes that a difference between an
estimated amount best supported by audit evidence and the estimated amount
included in the financial statements may be reasonable, and such a difference
will not be considered a probable error. However, if the auditor believes that
the estimated amount included in the financial statements is not reasonable,
the auditor should treat the difference between this estimate and the most
reasonable estimate as a probable error and add it to other probable errors.
The auditor should also consider whether the difference between the estimates
best supported by audit evidence and the estimates included in the financial
statements, which are individually reasonable, indicate a possible bias on the
part of the entity's management. For example, if each accounting estimate
included in the financial statements is individually reasonable, but the effect
of the difference between each estimate and the estimate best supported by
audit evidence was to increase profit, the auditor should reconsider the
estimates taken as a whole.
30. In prior periods, the probable errors may not have been corrected by the entity
because they did not cause the financial statements for those periods to be
materially misstated. However, those could also affect the current period's
financial statements (6).If the auditor believes that there is an unacceptably
high risk that the current period's financial statements may be materially
misstated as a result of adding the probable errors of the current period to the
probable errors of the prior period, the auditor should include in the total of
probable errors affecting the current period's financial statements the probable
errors of the prior period.
___________________________
(6) The determination of the effect, if any, on the financial statements under review of
uncorrected errors in prior periods involves accounting considerations and, therefore, is
not analyzed in this standard.
31. If the auditor concludes, based on his accumulation of sufficient supporting
evidence, that the aggregate of the likely errors causes the financial statements
to be materially misstated, the auditor should require management to correct
them. If the material misstatements are not eliminated, the auditor should
SECTION 44
issue a qualified or adverse opinion on the financial statements. Material
misstatements can be eliminated by, for example, applying appropriate
accounting principles, adjusting figures, or adding appropriate disclosure of
matters that are inadequately disclosed in the financial statements. Although
the total effect of the probable errors on the financial statements may not be
material, the auditor should recognize that the accumulation of such errors in
the balance sheet could contribute to material misstatement of future financial
statements.
32. If the auditor concludes that the total probable errors do not cause the
financial statements to be materially misstated, the auditor should recognize
that the financial statements may nevertheless be materially misstated because
of other undiscovered errors. As the total number of probable errors increases,
the risk that the financial statements may be materially misstated increases.
Auditors generally reduce this risk of misrepresentation when planning the
audit by restricting the extent of detection risk they are willing to accept to
individual account balances or transaction types and the related assertion.
Auditors may also reduce the risk of misstatement by modifying the nature,
timing and extent of planned audit procedures on an ongoing basis during the
course of their review (see paragraph 26). However, if the auditor believes
that such risk is unacceptably high, the auditor should perform additional
audit procedures or satisfy himself that the entity has adjusted the financial
statements to reduce the risk of material misstatement to a reasonable level.
45 SECTION
SECTION 313
Introduction
01. This Section provides guidelines for audits of financial statements as they
relate to:
02. Interim audit testing may allow for early analysis of significant matters
affecting the year-end financial statements (e.g., related party transactions,
changes in both internal and external factors, recent accounting
pronouncements, and financial statement items that are likely to require
SECTION 46
adjustment). In addition, a significant part of the audit planning, including
obtaining knowledge about internal control, determining control risk and
applying substantive tests to transactions, may be performed prior to the
closing date of the financial statements. 1
03. Applying substantive tests relevant to asset, liability, income and expense
accounts at an interim date may increase the risk that errors existing at the
closing date of the financial statements will not be detected by the auditor.
This additional potential audit risk increases as the remaining period
increases. However, this audit risk can be controlled if the substantive testing
to cover the remaining period can be designed to provide a reasonable basis
for projecting the audit conclusions from the substantive testing at the interim
date to the closing date of the financial statements.
04. Before applying substantive tests relevant to asset, liability, income and
expense accounts at an interim date, the auditor should evaluate the difficulty
of controlling this additional audit risk. Paragraphs 05 to 07 analyze the
circumstances affecting that evaluation. In addition, the auditor should
consider the cost of substantive testing needed to cover the remaining period
to provide appropriate audit assurance at the closing date of the financial
statements. The application of substantive tests relevant to asset, liability,
income and expense accounts at an interim date may not be cost-effective due
to the level of control risk determined.
05. It is not necessary to have determined that control risk is below the maximum
level to have a reasonable basis for projecting audit conclusions from an
interim date to the date of the financial statements; however, if the auditor
determines control risk to be at the maximum level for the remaining period,
the auditor should consider whether the effectiveness of certain substantive
1
The following substantive tests may be applied to transactions occurring on any date(s) selected
prior to the closing date of the financial statements and completed as part of the year-end procedures: (1)
tests of detail of additions to or deletions from accounts such as fixed assets, investments and equity; (2)
tests of detail to transactions affecting income and expense accounts; (3) tests to accounts that might not be
audited because they will have insignificant balances, (e.g., suspense accounts, such as prepaid expenses,
bridge accounts, etc.); (4) tests of memorandum accounts; and (5) analytical procedures applied to income
and expense accounts.
47 SECTION
tests to cover that period will be impaired. For example, there may be a lack
of effective controls over internal documents that support transactions. Thus,
substantive evidence based on such documents and relating to the assertion of
completeness for the remaining period would be ineffective because the
documents may be incomplete. Also, the substantive tests covering the
remaining period and related to the assertion of existence at the closing date
of the financial statements would be ineffective in the absence of controls
over the custody and physical movement of assets. In both of the above
examples, if the auditor concludes that the effectiveness of such substantive
testing would be impaired, the auditor should either seek additional assurance
or examine the accounts as of the date of the financial statements.
06. The auditor should analyze whether there are any rapidly changing business
situations or circumstances that could predispose management to material
misstatement of the financial statements in the remaining period. If such
circumstances or conditions are present, the auditor may conclude that
substantive testing to cover the remaining period is not effective in controlling
the additional audit risk associated with such circumstances or conditions. In
such situations, the affected asset, liability, income and expense accounts
should be reviewed at the closing date of the financial statements.
07. The auditor should consider whether the year-end balances of the asset,
liability, income and expense accounts that could be selected for interim
review can be reasonably projected in terms of amount, materiality and
composition. It should also consider whether the entity's procedures are
appropriate for analyzing and adjusting such accounts to interim dates and for
establishing the correct accounting cut-offs. In addition, the auditor should
determine whether the accounting system will provide sufficient information
about balances at the date of the financial statements and transactions of the
remaining period to permit investigation of: (a) unusual and significant
transactions or accounting entries (including those at or near year-end); (b)
other causes of significant fluctuations or expected fluctuations that did not
occur; and (c) changes in the composition of account balances. If the auditor
concludes that the evidence relating to the above will not be sufficient to
control the audit risk, the account should be reviewed at the closing date of
the financial statements.
08. To achieve the audit objectives at the closing date of the financial statements,
SECTION 48
the design of the substantive tests covering the remaining period should
consider the degree of assurance of such tests and of the substantive tests
applied to the financial statement accounts at the interim date, as well as the
audit confidence provided by the control risk determined. Such tests should
include: (a) comparing information relating to the financial statements as of
the closing date, with comparable information as of the interim date, to
identify and investigate amounts that appear unusual and (b) other analytical
procedures or substantive tests, or a combination of both, to provide a
reasonable basis for projecting, as of the closing date of the financial
statements, audit conclusions regarding the assertions made in the financial
statements.(b) other analytical procedures or substantive tests, or a
combination of both, to provide a reasonable basis for projecting, as of the
reporting date, the audit conclusions regarding the assertions tested directly or
indirectly as of the interim date.2
09. If errors are detected in account balances at interim dates, the auditor should
evaluate the need to modify the nature, timing or extent of planned
substantive testing covering the remaining period that relate to those accounts,
or re-perform the audit procedures as of the date of the financial statements.
The assessment of the possible existence of errors at the closing date of the
financial statements should be based on the auditor's judgment regarding the
status of the particular account(s) at that date, after considering: (a) the
possible implications of the nature and cause of the errors detected at the
interim date, (b) their possible relationship with other phases of the audit, (c)
the corrections subsequently recorded by the entity, and (d) the results of the
audit procedures covering the remaining period (including those aimed at
covering possible specific errors). For example, the auditor might conclude
that the estimate of unrecorded credit notes at an interim date is representative
of such errors at the reporting date, based on the results of substantive tests
covering the remaining period. In other cases, the assessment of possible
effects on the financial statements at the closing date from other types of
errors in the accounting cut-off at an interim date should be based on the
results of substantive testing of the accounting cut-off at the closing date.
2
Factors to be considered in determining the appropriate mix of substantive testing and
analytical procedures include: (1) the nature of the transactions and balances in relation to the
related assertions (2) the availability of historical information and other criteria to be used in the
analytical procedures, and (3) the availability of records needed to perform effective substantive
testing and the nature of the tests that are susceptible to application.
49 SECTION
COORDINATION OF THE TIMELINESS OF AUDIT PROCEDURES
10. The timing of the audit procedures should also consider whether the related
audit procedures are properly coordinated. This includes, for example:
SECTION 50
51 SECTION
SECTION 315
Introduction
02. For purposes of this Section, the term "predecessor auditor" means an auditor
who (a) has issued an audit report on the most recent financial statements or
was engaged but did not complete the audit of any subsequent financial
statements(1 ) and (b) has resigned, has refused to accept reappointment, or
has been informed that his or her services have been terminated or may be
terminated. The term "successor auditor" refers to an auditor who is
considering accepting an engagement to perform an audit of financial
statements but has not communicated with the predecessor auditor in
accordance with paragraphs 07 to 10, as well as an auditor who has already
accepted such an engagement.
__________________________
(1)
If, for any circumstance, the successor auditor is replaced before concluding the audit
engagement and issuing its report, this auditor is also considered to be a predecessor auditor.
In such situations there are two predecessor auditors: the auditor who issued a report on the
most recently audited financial statements and the auditor who was engaged but did not
complete the audit of any subsequent financial statements.
CHANGE OF AUDITORS
05. Where more than one auditor is considering accepting an engagement, the
predecessor auditor is not expected to be willing to respond to inquiries from
them until one has been selected by the client and the client has accepted the
engagement subject to evaluation of communications with the predecessor
auditor in accordance with paragraphs 07 to 10.
08. The successor auditor should request permission from the potential client to
consult with the predecessor auditor prior to final acceptance of the
engagement. An auditor is prevented from disclosing confidential
53 SECTION
information obtained during such a process, unless the client specifically
consents. In this way, the successor auditor should ask the potential client to
authorize the predecessor auditor to answer all of the successor auditor's
queries. If a potential client refuses to allow the predecessor auditor to
respond or limits responses, the successor auditor should inquire as to the
reasons and consider the implications of such refusal on his or her decision
whether or not to accept the engagement.
09. The successor auditor should make specific and reasonable inquiries of the
predecessor auditor on matters that would assist him/her in determining
whether or not to accept the engagement. Matters subject to consultation
should include:
(2)
For entities that do not have an audit committee, the phrase "others with equivalent
authority and responsibility" may include the board of directors, or the owner in owner-
managed entities.
(3)
See Section 325, Communication of Conditions Relating to Internal Control in an Audit of
Financial Statements.
10. The predecessor auditor should respond promptly and fully, on the basis of
known facts, to queries made by the successor auditor. However, if the
predecessor auditor chooses not to respond fully to queries due to unusual
circumstances, such as impending, threatened or potential litigation;
disciplinary proceedings; or other unusual circumstances, it should clearly
state that the response is limited. If the successor auditor receives a limited
SECTION 54
response, it should consider its implications in deciding whether or not to
accept the engagement.
OTHER COMMUNICATIONS
11. The successor auditor should ask the client to authorize the predecessor auditor
to allow a review of his or her working papers. The predecessor auditor may
wish to request a letter of consent and acceptance from the client to document
this authorization in an effort to reduce potential misunderstandings about the
scope of the communicated authorizations(4). It is customary in such
circumstances for the same predecessor auditor to be made available to the
successor auditor and for certain working papers to be made available for
review. The predecessor auditor should determine which working papers
could be reviewed and which could be copied. The predecessor auditor
should normally allow the successor auditor to review the working papers,
including documentation of planning, internal control, audit results and other
permanent and significant accounting matters for the audit, such as the
working papers with the analysis of the balance sheet accounts and those
related to contingencies. In addition, the predecessor auditor should reach an
understanding with the successor auditor regarding the use of the working
papers(5). The extent to which the predecessor auditor allows access to the
working papers is a matter of professional judgment.
(4)
Appendix A contains an illustrative letter of consent and acceptance by the client.
(5)
Before allowing access to the working papers, the predecessor auditor may wish to obtain
written communication from the successor auditor regarding the use of the working papers.
Appendix B contains an illustrative letter of acceptance from the successor auditor.
USE OF THE SUCCESSOR AUDITOR'S COMMUNICATIONS
12. The successor auditor should obtain sufficient appropriate audit evidence to
provide a reasonable basis for expressing an opinion on the financial
statements he/she undertook to audit, including an assessment of the
consistency in the application of accounting principles. The audit evidence
55 SECTION
used to analyze the impact of the opening balances on the current year's
financial statements and the consistency of accounting principles is a matter
of professional judgment. Such audit evidence may include the most recent
audited financial statements, the predecessor auditor's report thereon, the
results of consultations with the predecessor auditor, the results of the
successor auditor's review of the predecessor auditor's working papers, and
audit procedures performed on transactions of the current period that may
provide evidence about the consistency of the opening balances. For example,
evidence gathered during the current year's audit could provide information
about the realization and existence of the notes receivable and inventories
recorded in the opening balances. The successor auditor may also apply
appropriate audit procedures to balances recorded at the beginning of the
period under review and to transactions of prior periods.
13. The successor auditor's review of the predecessor auditor's working papers
may affect the nature, timing and extent of the successor auditor's procedures
with respect to opening balances and consistency of accounting principles.
However, the nature, timing and extent of the audit work performed and the
conclusions reached are solely the responsibility of the successor auditor.
When issuing his opinion, the successor auditor should not refer to the
opinion or work of the predecessor auditor as a basis, in part, for issuing his
own opinion.
15. If the successor auditor accepts the engagement to perform a second audit,
he/she may consider information obtained from consultations with the
predecessor auditor, review of the predecessor auditor's report and working
papers in planning the second audit. However, the information obtained from
the consultations with the predecessor auditor, the review of the report and the
working papers is not sufficient to provide a basis for expressing an opinion.
SECTION 56
The nature, timing and scope of the audit work to be performed and the
conclusions reached during a second audit are solely the responsibility of the
successor auditor.
16. The successor auditor should plan and perform the second audit in
accordance with generally accepted auditing standards. The successor auditor
should not assume responsibility for the work of the predecessor auditor or
issue a report that reflects shared responsibility as defined in Section 543
"Part of the Audit Performed by Other Independent Auditors". It should also
be considered that the predecessor auditor is neither a specialist as defined in
Section 336, "Use of the Work of a Specialist", nor an internal auditor as
defined in Section 322, "Consideration by the Independent Auditor of the
Internal Audit Function in an Audit of Financial Statements".
17. If the successor auditor were to perform an audit of the current period, the
results of that audit could be considered in the planning and performance of
the second audit of the preceding period(s), and could provide supporting
evidence that would be useful in performing the second audit.
18. If, in a second audit engagement, the successor auditor is unable to obtain
sufficient audit evidence to express an opinion on the financial statements, the
successor auditor should issue a qualified opinion or disclaim an opinion
because of the inability to perform procedures that it considers necessary in
the circumstances.
19. The successor auditor should request the working papers corresponding to
the period or periods under second audit and the period prior to these.
However, the extent to which the predecessor auditor allows access to the
working papers is a matter of professional judgment (see paragraph 11 of this
Section).
20. In a second audit, the successor auditor generally may not observe inventories
or conduct physical counts as of the date or dates of such audit in the manner
57 SECTION
set forth in paragraphs 03 through 07 of Section 331, "Observation of
Physical Inventory Taking." In such cases, the successor auditor may
consider the knowledge gained through his or her review of the predecessor
auditor's working papers and consultation with the predecessor auditor to
determine the nature, timing and extent of the procedures that would apply in
such circumstances. The successor auditor performing the second audit
should observe or perform some physical counts of inventories at a date
subsequent to that of the period under second audit, if significant, and in
relation to the current audit, applying appropriate transaction tests.
Appropriate procedures may include tests of prior period transactions, reviews
of prior period account records and the application of analytical procedures,
such as tests of gross profit.
21. If during the audit or second audit, the successor auditor becomes aware of
information that leads him or her to believe that the financial statements
examined by the predecessor auditor may require modification, the successor
auditor should require the client to inform the predecessor auditor of this
situation and arrange for the three parties to discuss this information and
attempt to resolve the matter. The successor auditor should communicate to
the predecessor auditor any information that the predecessor auditor needs to
consider in accordance with Section 561, "Subsequent Discovery of Events
Existing at the Date of the Auditor's Report," which establishes the procedures
an auditor should follow when subsequent events are discovered that could
have affected the audit of previously reported financial statements (6).
22. If the client refuses to inform the predecessor auditor or if the successor
auditor is not satisfied with the resolution of the matter, the successor auditor
should evaluate (a) the possible implications on the existing engagement and
(b) determine whether or not to waive the engagement. In addition, the
successor auditor may wish to consult its legal counsel to determine the
appropriate course of action.
SECTION 58
(6) See section 508, Auditors' Report on the Financial Statements, paragraphs 77 to 82.
59 SECTION
APPENDIX A
Paragraph 11 of this Section states that "The successor auditor should request the
client to authorize the predecessor auditor to permit a review of his or her working
papers. The predecessor auditor may wish to have a consent and acceptance letter
requested from the client to document this authorization in an effort to reduce
misunderstandings about the scope of the communicated authorizations." The
following letter is presented for illustrative purposes only and is not required by
professional standards.
ABC Companies
[Address]
Please confirm your agreement with the above by signing and dating a copy of
this letter and returning it to us.
SECTION 60
Attached is the form letter that we will provide to[name of successor firm]
regarding the use of working papers.
Sincerely yours,
Por: ______________________________
Acceptance
ABC Companies
61 SECTION
APPENDIX B
Paragraph 11, in footnote 5, of this Section states "Before allowing access to the
working papers, the predecessor auditor may wish to obtain written
communication from the successor auditor regarding the use of the working
papers" The following letter is presented for illustrative purposes only and is not
required by professional standards.
Our audit of the financial statements of Empresas ABC and the related working
papers were not planned or conducted in contemplation of your review.
Therefore, the items that are of possible interest to you have not been specifically
addressed. The application of our professional judgment and assessment of risk
and materiality for the purpose of our examination implies that there may have
been matters that could have been assessed by you differently. We make no
representation as to the sufficiency or propriety of the information contained in
our working papers for your purposes.
We understand that the purpose of your review is to obtain information about
ABC Enterprises and the results of our 20X1 audit to assist you in planning your
20X2 audit of ABC Enterprises. For that purpose only, we will provide you with
access to our working papers related to that purpose.
SECTION 62
Upon request, we will provide you with copies of such working papers containing
specific information about ABC Enterprises. You agree to subject any copies of
such work papers or information derived from our work papers to your normal
work paper retention policy and protection of confidential customer information.
In addition, in the event of a request from third parties for access to your working
papers prepared and related to your audits of ABC Enterprises, you agree to obtain
our permission before voluntarily allowing any access to our working papers or
information otherwise derived from our working papers, and to obtain from us any
disclosures from such third parties. You agree to promptly notify us and provide
us with a copy of any subpoena, subpoena or other court order for access to your
work papers that include copies of our work papers or information derived
therefrom.
Please confirm your agreement with the above by signing and dating a copy of
this letter and forwarding it to us.
Sincerely yours,
By: _______________________________________
Acceptance:
Por:______________________________________Fecha:________________
Even with the client's consent, access to the predecessor auditor's working papers
may still be limited. Experience has shown that the predecessor auditor may be
willing to grant broader access if given additional assurance regarding the use of
the working papers. Therefore, the successor auditor might consider agreeing to
63 SECTION
the following limitations on the review of the predecessor auditor's working
papers in order to gain broader access:
The successor auditor shall not use the audit procedures or result thereof
documented in the work papers of the predecessor auditor as evidential
matter in rendering an opinion on the 20X2 financial statements of ABC
Enterprises.
SECTION 64
65 SECTION
SECTION 319
Introduction
01. This Section provides guidance on how the independent auditor should
consider an entity's internal control in an audit of financial statements
conducted in accordance with generally accepted auditing standards. This
section defines internal control 1, describes the objectives and components of
internal control, and explains how the auditor should consider internal control
when planning and performing an audit. In particular, this section provides
guidance on the implementation of the second performance standard, stating
that the auditor should gain a sufficient understanding of internal control to
plan the audit and to determine the nature, timing and extent of the tests to be
performed.
02. In all audits, the auditor should gain a sufficient understanding of internal
control to plan the audit. For this purpose, procedures should be performed to
gain an understanding of the design of controls relevant to an audit of
financial statements and whether such controls have been put into operation.
To gain such an understanding, the auditor considers how the entity makes
use of information technology (IT) 2 and manual procedures that may affect
controls relevant to the audit. The auditor then evaluates the control risk
corresponding to the assertions associated with the account balance, the type
of transaction and the disclosure of the components of the financial
statements.
1
Internal control can also be called internal control structure .
2
Information technology (IT) encompasses automated means of originating,
processing, storing and communicating information, and includes recording devices,
communication systems, computer systems (including hardware and software components and
data), and other electronic tools. An entity's use of IT may be extensive; the auditor is primarily
interested in the entity's use of IT to initiate, record, process and report transactions or other
financial data.
SECTION 66
03. The auditor may determine that assessing control risk under the maximum
level 1 for certain assertions should be effective and more efficient than
performing substantive testing alone (the increased likelihood that a material
misstatement could occur and not be prevented or detected in a timely manner
by an entity's internal control structure) because the auditor believes it is
unlikely that the procedures or policies are appropriate for an entity's internal
control structure.The auditor may determine that assessing control risk under
the maximum level for certain assertions should be effective and more
efficient than only performing substantive tests (the greater the likelihood that
a material misstatement could occur and not be prevented or detected in a
timely manner by an entity's internal control structure) because the auditor
believes that the procedures or policies are unlikely to be appropriate for an
assertion, or are unlikely to be effective, or that it would be inefficient to
evaluate their effectiveness. In addition, the auditor may determine that it is
impractical or impracticable to restrict detection risk to an acceptable level by
performing substantive tests on one or more assertions in the financial
statements. Alternatively, the auditor may obtain evidence about the
effectiveness of the design and operation of a policy or procedure that
supports a lower level of control risk. Such evidence may be obtained from
tests of controls planned and performed simultaneously with obtaining your
understanding 2, or by procedures performed to obtain that understanding that
were not specifically planned as tests of controls. After gaining an
understanding and establishing control risk, the auditor may seek a further
reduction in the determined level of risk for certain assertions. In such cases,
the auditor considers whether it would be possible to obtain sufficient
evidence to support such a reduction and whether it would be efficient to
perform additional tests of controls to obtain such evidence.
04. Alternatively, the auditor may determine control risk at its highest level
because the auditor believes that controls are not likely to be necessary with
respect to an assertion or are not likely to be effective, or because assessing
1
Control risk can be evaluated in quantitative terms, such as percentages, or non-
quantitative terms that vary, for example, from a maximum to a minimum. The term "maximum
level" is used in this Section to represent the highest probability that a material misstatement that
could occur in an assertion in the financial statements will not be prevented or detected on a
timely basis by an entity's internal control.
2
If the auditor is unable to obtain such evidence, he should refer to section 326, Evidence,
paragraphs 14 and 25.
67 SECTION
the effectiveness of controls would be inefficient. However, the auditor needs
to ensure that by performing substantive tests alone, the risk of detection
could be restricted to an acceptable level. When there is evidence that an
entity initiates, records or processes financial information electronically, the
auditor's ability to achieve the desired assurance from substantive testing
alone would be significantly diminished.
05. The auditor uses knowledge derived from an understanding of internal control
and the assessed level of control risk to determine the nature, timing and
extent of substantive testing of assertions in the financial statements.
08. There is a direct relationship between the objectives, which are what an entity
strives to achieve, and the components, which represent what is needed to
SECTION 68
achieve the objectives. In addition, internal control is relevant to the entire
entity, or to any of its operating units or business areas. These relationships
are shown in the following table:
Objetivos
o
ci es
ne
nt
os
an rm
ie
cio
er
im
fin nfo
ra
pl
pe
I
um
O
C
Ambiente de control
Unidades
Funciones
Componentes
Evaluación de Riesgo
Actividades de control
Información y comunicaciones
ad
tid
Monitoreo
En
09. Although an entity's internal control refers to objectives in each of the areas
mentioned in paragraph 6, not all of these objectives and related controls are
relevant to an audit of an entity's financial statements. Also, although internal
control is relevant to the entire entity or any of its operating units or business
areas, an understanding of internal control relevant to each of the entity's
operating units and business areas may not be necessary to plan and perform
an effective audit.
10. Generally, the controls that are relevant to an audit relate to the entity's
objective of preparing financial statements for external purposes, and that
such financial statements are fairly presented in accordance with generally
accepted accounting principles or on a basis of accounting other than
generally accepted accounting principles 1.
1
The term basis of accounting, other than generally accepted accounting principles is
defined in section 623, Special Reports, paragraph 04. Hereinafter, reference to generally
accepted accounting principles in this section includes, where applicable, the basis of
69 SECTION
Operations and Compliance Objectives
12. Generally, an entity has controls related to objectives that are not relevant to
an audit and therefore do not need to be considered. For example, controls
relating to compliance with health and safety regulations or concerning the
effectiveness and efficiency of certain decision-making processes (such as the
appropriate price to charge for its products or whether to make expenditures
for certain research and development or advertising activities), when material
to the entity, generally do not relate to an audit of financial statements.
Similarly, an entity is likely to use a sophisticated system of automated
controls to achieve efficient and effective operations (such as a commercial
airline's system of automated controls for maintaining flight schedules), but
generally these controls will not be relevant to the audit of the financial
statements and therefore need not be considered.
SECTION 70
Asset protection
Asset Protection
71 SECTION
Application of the Components of Internal Control to an Audit of Financial
Statements.
14. The division of internal control into five components provides a useful
framework for auditors to consider the impact of an entity's internal control
on the audit. However, this division does not necessarily reflect the way in
which an entity considers and implements internal control. Similarly, the
auditor's primary consideration is whether a specific control affects the
assertions in the financial statements rather than its classification within any
particular component. Controls relevant to the audit are those that,
individually or in conjunction with others, are likely to prevent or detect
material misstatements of the assertions in the financial statements. It is
possible that such controls exist in any of the five components.
15. The five components of internal control are applicable to the audit of any
entity. These components should be considered in the following context:
16. An entity's use of IT may affect any of the five components of internal control
that are relevant to the achievement of the financial, operational or
compliance reporting objectives of the entity and its operational units or
business functions. For example, an entity may use IT as part of separate
systems that support only specific business units, functions or activities, such
as a single accounts receivable system for a particular business unit or a
system that controls the operation of factory equipment. Alternatively, an
entity may have highly integrated complex systems that share data and are
used to support all aspects of the entity's financial, operational or compliance
reporting objectives.
SECTION 72
17. The use of IT also fundamentally affects the way transactions are initiated,
73 SECTION
recorded, processed and reported. 1 In a manual system, an entity uses manual
procedures and records in paper format (e.g., individuals may manually
record sales orders on paper or in registers, authorize credits, prepare dispatch
reports and invoices, and maintain accounts receivable records). In such a
system, controls are also manual and may include procedures such as
approvals and reviews of activities, and reconciliations and follow-ups of
reconciling items. Alternatively, an entity may have information systems that
use automated procedures to initiate, record, process and report transactions,
in which case records in electronic format replace paper documents such as
purchase orders, invoices, shipping documents and related accounting records.
20. The scope and nature of these internal control risks vary depending on the
nature and characteristics of the entity's information system. For example,
many users, whether external or internal, may access a common database with
information that affects financial reporting. In such circumstances, lack of
control at a single user entry point can compromise the security of the entire
database, which could result in inappropriate changes to or destruction of
data. When IT personnel or IT users are given access privileges or otherwise
obtain access privileges other than those necessary to perform their assigned
functions, a breakdown in segregation of duties may occur. This could result
in unauthorized transactions or changes in programs or data affecting the
financial statements. Therefore, the nature and characteristics of an entity's
use of IT in its information system affect the entity's internal control.
21. Internal control, however well designed and however well it operates, can
only provide reasonable assurance of the achievement of an entity's control
objectives. The possibility of achieving these objectives is affected by the
limitations inherent in internal control. These include the fact that human
judgment in making decisions can be flawed and that deviations in internal
control can occur due to human failures such as simple error or mistake. For
example, errors could occur in the design, maintenance or monitoring of
automated controls. If an entity's IT staff does not fully understand how an
order entry system processes sales transactions, they may mistakenly design
system changes to process sales of a new product line. On the other hand, it is
possible for such changes to be designed correctly but misinterpreted by
people translating the design into program code. Errors can also occur in the
use of IT-generated information. For example, automated controls can be
designed to report transactions that exceed a specified limit in pesos, for the
purpose of management review. But it is possible that those in charge of
conducting the review do not understand the purpose of such reports and,
therefore, do not review them or do not investigate unusual matters.
75 SECTION
22. In addition, manual or automated controls may be circumvented by the
collusion of two or more persons or inappropriate management may force
internal control. For example, management may enter into side agreements
with customers that alter the terms and conditions of the entity's standard
contracts in ways that could prevent revenue recognition. Similarly, software
program editing routines that are designed to identify and report transactions
that exceed specified credit limits may be forced or disabled.
23. Internal control is influenced by the quantitative and qualitative estimates and
judgments made by management in evaluating the cost-benefit relationship of
an entity's internal control. The cost of an entity's internal control should not
exceed the benefits expected from it. Although cost-benefit is a primary
criterion that should be considered when designing internal control, accurate
measurement of costs and benefits is generally not possible.
24. Custom, culture and the corporate governance system may inhibit
management fraud, but they are not absolute deterrents. Similarly, an
effective control environment can help reduce the risk of fraud. For example,
an effective Board of Directors, Audit Committee and Internal Audit function
could inhibit management misconduct. On the other hand, the control
environment may reduce the effectiveness of other components. For example,
when the presence of management incentives creates a condition that could
cause a material misstatement of the financial statements, the effectiveness of
control activities may be reduced.
25. In any audit, the auditor should obtain a sufficient understanding of each of
the five components of internal control by performing procedures to obtain an
understanding of the controls relevant to an audit of financial statements and
to determine whether they are in operation. In planning the audit, such
knowledge should be used to:
27. Determining whether a control has been put into operation at one point in
time differs from determining its operating effectiveness over time. By
obtaining an understanding of whether controls have been put into operation
the auditor determines that the entity is using them. On the other hand,
operational effectiveness has to do with how the control (manual or
automatic) was applied, the consistency with which it was applied, and who
applied it. The auditor determines whether controls have been put in place as
part of the understanding of internal control required to plan the audit. The
auditor evaluates the operational effectiveness of controls as part of the
control risk assessment, as described in paragraphs 62 to 83 of this section.
Although understanding internal control and assessing control risk are
discussed separately in this section, these activities can be performed at the
same time in an audit. Moreover, it is possible that some of the procedures
performed to gain an understanding of internal control may provide evidence
of the operational effectiveness of the controls relevant to certain assertions.
28. The auditor's understanding of internal control may sometimes raise doubts as
to whether an entity's financial statements are auditable. The questioning of
management's integrity may be so significant that it could lead the auditor to
conclude that the risk of management misrepresentations in the financial
77 SECTION
statements is such that an audit cannot be performed. Questioning the nature
and extent of an entity's records may lead the auditor to conclude that it is
probable that sufficient competent audit evidence is not available to support
an opinion on the financial statements.
31. The auditor should consider whether specialized skills are needed to enable
the auditor to determine the effect of IT on the audit, to understand IT
controls, or to design and perform tests of IT controls or substantive tests. It
may be that a professional with IT skills is on the auditor's team or an external
professional. In determining whether a professional with such characteristics
is needed on the audit team, the auditor considers factors such as the
following:
SECTION 78
The complexity of the entity's IT systems and controls and how they are
used to conduct the entity's business.
The importance of changes made to existing systems, or the
implementation of new systems.
The degree to which data is shared between systems
The degree of participation of the entity in electronic commerce. (e
business)
The entity's use of emerging technologies.
The importance of audit evidence that is available only in electronic
form.
32. Procedures that the auditor may assign to a professional with IT skills include:
inquiring with an entity's IT personnel about how data and transactions are
initiated, recorded, processed and reported and how IT controls have been
designed; inspecting systems documentation; observing the operation of IT
controls; and planning and performing tests of IT controls. If the use of a
professional with IT skills is planned, the auditor should have sufficient IT-
related knowledge to communicate the audit objectives to that professional, to
assess whether the specified procedures will meet the auditor's objectives, and
79 SECTION
to evaluate the results of the procedures in relation to the nature, extent and
SECTION 80
timing of other planned audit procedures. 1
Control environment
81 SECTION
board of directors may influence the philosophy and operating style of senior
management in larger entities. Alternatively, management's failure to commit
sufficient resources to address security risks presented by IT may adversely
affect internal control by allowing inappropriately authorized modifications to
computer programs or data, or by allowing unauthorized transactions to be
processed. However, human resources policies and practices aimed at hiring
competent personnel in the financial and accounting areas in charge of IT may
not mitigate a strong tendency of top management to overestimate profits.
Risk assessment
37. An entity's risk assessment for financial reporting purposes consists of its
identification, analysis and management of risks relevant to the preparation of
financial statements that are fairly presented in accordance with generally
accepted accounting principles. For example, risk assessment could refer to
how an entity considers the possibility of unrecorded transactions or identifies
and analyzes significant estimates recorded in the financial statements.
Relevant risks of reliable financial reporting may also relate to specific events
or transactions.
38. Risks relevant to financial reporting include events and circumstances, both
external and internal, that may occur and adversely affect an entity's ability to
initiate, record, process, summarize and report financial data consistent with
SECTION 82
management's assertions in the financial statements 1. Risks may arise or
change due to circumstances such as:
39. The auditor should obtain sufficient knowledge of the entity's risk assessment
process to understand how management considers the risks relevant to the
financial reporting objectives and decides on the actions to be taken to address
those risks. This knowledge could include an understanding of how
management identifies risks, estimates their significance, assesses the
likelihood of their occurrence and relates them to financial information. The
use of IT can be an important element in an entity's risk assessment process,
including the provision of timely information to facilitate risk identification
and management.
40. The risk assessment of an entity differs from the auditor's consideration of
audit risk in an audit of financial statements. The purpose of an entity's risk
assessment is to identify, analyze and manage risks that affect the entity's
objectives. In an audit of financial statements, the auditor assesses the
inherent and control risks in order to evaluate the likelihood of material
misstatement of the financial statements.
Control activities
41. Control activities are the policies and procedures that help ensure that
management's directives are executed. They help ensure that appropriate
actions are taken to address risks with a view to achieving the entity's
objectives. Control activities, whether automated or manual, have different
objectives and are applied at different organizational and functional levels.
83 SECTION
Generally control activities, which may be relevant to an audit, can be
categorized as policies and procedures related to the following:
42. The auditor should obtain an understanding of those control activities relevant
to planning the audit. Just as the auditor gains an understanding of the other
components, it is likely that he or she will also gain knowledge about some
control activities. For example, in obtaining and understanding the
documents, records and processing steps in the financial reporting information
system relating to cash, the auditor is likely to become aware of whether bank
accounts are reconciled. The auditor should consider knowledge about the
presence or absence of control activities obtained from knowledge of the other
components when determining whether additional attention is needed to gain
an understanding of the control activities in order to plan the audit. Generally,
audit planning does not require an understanding of the control activities
related to each account balance, type of transaction and disclosure in the
financial statements or for each relevant assertion.
45. General controls are policies and procedures related to various applications
and support the effective operation of application controls by helping to
ensure the proper and continuous operation of information systems. General
controls commonly include controls over data center and network operations;
systems software acquisition and maintenance; access security; and
application systems acquisition, development and maintenance.
46. The use of IT affects the way in which control activities are implemented. For
example, when IT is used in an information system, segregation of duties is
often achieved by implementing security controls.
49. The auditor should obtain sufficient knowledge of the relevant information
system to understand:
85 SECTION
processing and reporting of transactions.
The way in which the information system captures other facts and
conditions that are significant to the financial statements.
The process used to prepare the entity's financial statements, including
significant accounting estimates and disclosures.
52. In addition, the auditor should obtain sufficient knowledge of the means the
entity uses to communicate roles, responsibilities and significant matters
related to financial reporting.
Monitoring
55. The auditor should obtain sufficient knowledge of the main types of activities
that the entity uses to monitor internal control over financial reporting,
including the source of information related to those activities and how those
activities are used to initiate corrective actions. In gaining an understanding of
87 SECTION
the internal audit function, the auditor should follow the guidance included in
paragraphs 04 through 08 of Section No. 322, The Independent Auditor's
Consideration ofthe Internal Audit Function in an Audit of Financial
Statements.
56. The manner in which internal control objectives are achieved will vary
according to the size and complexity of an entity, among other considerations.
Specifically, small and medium-sized entities may use less formal means to
ensure that internal control objectives are achieved. For example, smaller
entities with active management involvement in the financial reporting
process may not have extensive descriptions of accounting procedures,
sophisticated information systems, or written policies. Smaller entities may
not have a written code of conduct but instead develop a culture that
emphasizes the importance of integrity and ethical conduct through word of
mouth and through the example of management. Similarly, smaller entities
may not have an independent or external member on their boards.
58. To obtain an understanding of the controls that are relevant to audit planning,
the auditor should perform procedures to obtain sufficient knowledge of the
design of the policies, procedures and records pertaining to each of the five
components of internal control and whether they are operating. This
knowledge is normally obtained through prior experience with the entity and
procedures such as (a) inquiries with appropriate management, supervisory or
administrative personnel, (b) inspection of the entity's documents and records,
and (c) observation of the entity's activities and operations. The nature and
scope of the procedures performed may vary from one entity to another and
depends on: (a) the size and complexity of the entity, (b) the auditor's
SECTION 88
previous experiences with the entity, (c) the nature of a particular control, and
(d) the nature of the documentation of specific controls.
59. For example, the auditor's prior experience with the entity may provide an
understanding of its types of transactions. Inquiries of appropriate entity
personnel and inspection of documents and records, such as source documents
and ledgers, may provide insight into the accounting records designed to
process those transactions. Similarly, in gaining an understanding of the
design of computer programmed control procedures and verifying whether
they have been put into operation, the auditor may make inquiries of
appropriate entity personnel and may inspect relevant systems documentation,
reports (e.g., exception reports or reports evidencing the processing of
transactions or the application of other controls), or other documents.
60. The auditor's assessments of inherent risk and judgment about the materiality
of particular account balances and types of transactions also affect the nature
and extent of the procedures performed to obtain understanding. For
example, the auditor might conclude that planning the audit of the prepaid
insurance account does not require specific procedures to obtain an
understanding of internal control.
61. The auditor should document the understanding obtained of the components
of the entity's internal control to plan the audit. The form and scope of this
documentation depends on the size and complexity of the entity, as well as the
nature of the entity's internal control. For example, documentation of the
understanding of internal control of a large and complex entity may include
flow charts, questionnaires or decision tables. However, for a small entity,
documentation in the form of a narrative may be sufficient. In general, the
more complex the internal control and the more extensive the procedures
performed, the more documentation the auditor should provide.
62. Section 326 on Auditing Evidence states that the major part of the
independent auditor's work in forming an opinion on the financial statements
consists of obtaining and evaluating evidence regarding the assertions
89 SECTION
contained in those financial statements. These assertions are incorporated in
the account balances, types of transactions and disclosures in the financial
statements, and are classified according to the following general categories:
- Existence or occurrence
- Integrity
- Rights and obligations
- Valuation or allocation
- Presentation and disclosure
SECTION 90
63. The risk of material misstatement 1 in the financial statements is comprised of
inherent risk, control risk and detection risk. Inherent risk represents the
susceptibility of a financial statement assertion to material misstatement,
assuming there are no related controls. Control risk is the risk that a material
misstatement of a financial statement assertion will not be prevented or
detected in a timely manner by the entity's internal control. Detection risk is
the risk that the auditor will not detect a material misstatement in an assertion
in the financial statements.
91 SECTION
65. After obtaining an understanding of internal control, the auditor may
SECTION 92
determine control risk at the highest level 1, for some or all assertions, because
the auditor believes that controls are not likely to be appropriate for an
assertion, are not effective, or that it would be ineffective to evaluate their
effectiveness. However, the auditor needs to perform only substantive tests
that reduce the risk of detection to an acceptable level to be satisfied. For
example, the auditor may determine that only performing substantive tests
will be more effective and efficient than performing tests of controls in the
case of assertions related to fixed assets and long-term debt in an entity where
a limited number of transactions relate to these components of the financial
statements, and where the auditor can readily obtain evidential evidence in the
form of documents and confirmations. Where the auditor is performing only
substantive tests to restrict the risk of detection to an acceptable level and
where the information used by the auditor to perform such substantive tests is
produced by the entity's information system, the auditor should obtain
evidence about the accuracy and completeness of the information.
In other circumstances, the auditor may determine that assessing control risk
below the maximum level for certain assertions would be sufficient and more
efficient than performing substantive testing alone. In addition, the auditor
may determine that it is not practical or possible to restrict detection risk to an
acceptable level only by performing substantive tests for one or more
assertions in the financial statements. In such circumstances, the auditor
93 SECTION
should obtain evidence about the effectiveness of the design and operation of
SECTION 94
controls to reduce the assessed level of control risk. 1
69. Examples of situations in which it may be impossible for the auditor to design
effective substantive tests that by themselves provide sufficient evidence that
certain assertions are free from material misstatement are:
95 SECTION
transactions, and automatically record such amounts in electronic accounting
records that are used to generate financial statements.
70. Determining the control risk below the maximum level implies:
71. The auditor's understanding of internal control should be used to identify the
types of potential errors that could occur and to consider factors that affect the
risk of material misstatement. In assessing control risk, the auditor should
identify controls that are intended to prevent or detect material misstatements
in specific assertions. In identifying the controls relevant to specific financial
statement assertions, the auditor should consider that it may have an effect
that extends over many assertions or a specific effect on an individual
assertion, depending on the nature of the particular internal control
components. For example, the conclusion that an entity's control environment
is very effective could influence the auditor's decision on the number of
locations in the entity where audit procedures will be performed or whether
certain audit procedures should be performed for some account balances or
type of transaction as of an interim date. Any such decisions affect how the
audit procedures are applied to specific assertions, even though the auditor
may not have specifically considered each individual assertion affected by
such decisions.
74. General controls relate to many applications and support the effective
operation of application controls by ensuring the continuous and proper
functioning of information systems. The auditor should consider the need to
identify not only application controls directly related to one or more
assertions, but also relevant general controls.
75. Procedures that address both the effectiveness of the design and operation of
controls are called testing of controls. Testing of controls directed at design
effectiveness refers to whether the controls are appropriately designed to
prevent or detect material misstatements of specific financial statement
assertions. Tests to obtain such evidence commonly include procedures such
as inquiries to appropriate entity personnel, inspection of documents and
reports, and observation of the application of specific controls. For entities
with complex internal control, the auditor should consider that the use of flow
charts, questionnaires or decision tables could facilitate the application of
design tests.
76. The procedures for obtaining evidence on the effectiveness of the operation of
a control are called tests of controls (paragraphs 90 to 104 of this section
discuss the characteristics of the evidence to be considered when testing
controls). Tests of controls aimed at verifying the effective operation of
controls relate to how the control (whether manual or automated) was applied,
how uniformly it was applied during the period audited and by whom it was
applied. These tests commonly include procedures such as inquiries of
appropriate entity personnel, inspection of documents, reports or electronic
files indicating control performance, observation of the application of the
control, and reprocessing of the auditor's application of the control. In some
circumstances a specific procedure may be aimed at testing the effectiveness
of both design and operation. However, a combination of procedures may be
necessary to evaluate the effectiveness of the control design or operation.
97 SECTION
77. In designing tests of automated controls, the auditor should consider the need
to obtain evidence to support the effective operation of controls directly
related to the assertions and other indirect controls on which these direct
controls depend. For example, the auditor may identify a "user review of a
credit sales exception report over the authorized credit limit for a customer" as
a direct control related to an assertion. In such cases, the auditor should
consider the effectiveness of the user's review of the report and also the
controls related to the accuracy of the information contained in the report
(e.g., general controls).
79. To test automated controls, the auditor may need to employ techniques that
are different from those used to test manual controls. For example, computer-
assisted auditing techniques can be used to test automated controls or
assertion-related data. Similarly, the auditor may use other automated tools or
IT-produced reports to test the operational effectiveness of general controls,
such as program change controls, access controls and system software
controls. The auditor should consider whether specialized skills are needed to
design and perform such tests of controls.
80. The conclusion reached as a result of the control risk determination is called
the "determined level of control risk". In determining the evidence needed to
support a specific level of control risk below the maximum level, the auditor
SECTION 98
should consider the characteristics of the supporting evidence on control risk
referred to in paragraphs 90 to 104. However, in general, the lower the level
of control risk determined, the greater the assurance that supporting evidence
should provide that the controls relevant to an assertion are designed and
operating effectively.
81. The auditor uses the determined level of control risk (together with the
determined level of inherent risk) to determine the acceptable level of
detection risk for financial statement assertions. The auditor uses the level of
acceptable detection risk to determine the nature, timing and extent of audit
procedures to be used to detect material misstatements in the financial
statements. Audit procedures designed to detect such errors are called
substantive tests.
82. As the acceptable level of detection risk decreases, the assurance provided by
substantive testing should increase. Accordingly, the auditor may take one or
more of the following actions:
99 SECTION
conclusion that the effectiveness of the design and operation of controls
supports that determined level. The nature and extent of the auditor's
documentation is influenced by the particular level of control risk used, the
nature of the entity's internal control and the nature of the entity's internal
control documentation.
85. Based on the determined level of control risk that the auditor expects to be
able to support and audit efficiency considerations, the auditor usually plans
to perform some testing of controls simultaneously with obtaining an
understanding of internal control. In addition, although some of the
procedures performed to obtain understanding may not have been specifically
planned as tests of controls, they may provide evidence about the
effectiveness of both the design and operation of controls relevant to certain
assertions. For example, in view of the inherent consistency of the processing
performed by IT, performing procedures to determine whether an automated
control has been put in place could serve as a test of the operational
effectiveness of that control, depending on factors such as whether the
program has been modified or whether there is a significant risk of
unauthorized change or other improper intervention. Also, in gaining an
understanding of the control environment, the auditor may have made
inquiries about management's use of budgets, observed management's
comparison of budgeted and actual monthly expenditures, and inspected
reports related to the investigation of variances between budgeted and actual
figures. Although these procedures provide knowledge about the design of
the entity's budget policies that have been put in place, they may also provide
supporting evidence about the effectiveness of the design and operation of the
budget policies in avoiding or detecting significant errors in the classification
of expenditures. In some circumstances, such supporting evidence may be
sufficient to support a particular level of control risk that is below the
SECTION 100
maximum level for presentation and disclosure assertions related to income
statement expenses.
86. When the auditor concludes that the procedures performed to obtain an
understanding of internal control also provide supporting evidence to establish
control risk, the auditor should consider paragraphs 90 to 104 to judge the
degree of assurance provided by that supporting evidence. Even if such
supporting evidence does not provide sufficient assurance to support a
particular level of control risk that is below the maximum level for certain
assertions, it may be useful for other assertions, providing a basis for
modifying the nature, timing, and extent of substantive testing that the auditor
plans for those assertions. However, such procedures are not sufficient to
support a given level of control risk below the maximum level if they do not
provide sufficient supporting evidence to evaluate the effectiveness of both
the design and operation of a control relevant to an assertion.
88. In considering efficiency, the auditor recognizes that additional audit evidence
supporting a further decrease in the determined level of control risk for an
assertion would result in less audit effort for substantive testing of that
assertion. The auditor weighs the increase in audit effort related to the other
tests of controls necessary to obtain such supporting evidence against the
resulting decrease in audit effort related to the reduction in substantive testing.
89. For those assertions where the auditor performs additional tests of controls,
the auditor establishes the level of control risk that the results of those tests
would support. That determined level of control risk is used to establish the
appropriate, acceptable detection risk for those assertions and, consequently,
101 SECTION
to determine the nature, timing and extent of substantive testing for those
assertions.
90. When the auditor determines the control risk to be below the maximum level,
the auditor should obtain sufficient supporting evidence to support that
determined level. The audit criteria is based on audit evidence that is
SECTION 102
sufficient to support a specific control risk. The audit evidence 1 varies
substantially in the assurance it provides to the auditor as the auditor develops
the determination of the level of control risk. The type of supporting
evidence, its source, its timeliness and the existence of other supporting
evidence related to the conclusions it leads to have an effect on the degree of
assurance it provides.
91. These characteristics influence the nature, timing and extent of the tests of
controls that the auditor applies to obtain supporting evidence about the
control risk. The auditor selects such tests from a variety of techniques, such
as inquiry, observation, inspection and reprocessing of a control related to an
assertion. There is no specific control test that is necessary, applicable or
equally effective in every circumstance.
92. The nature of a specific control relating to an assertion influences the type of
supporting evidence available to assess the effectiveness of the design or
operation of that control. For some controls there may be documentation of
their design or operation. In such circumstances, the auditor may decide to
inspect the documentation to obtain supporting evidence on the effectiveness
of the design or operation.
93. However, for other controls such documentation may not be available or
relevant. For example, design or operational documentation may not exist for
some elements of the control environment, such as the assignment of
authority and responsibility, or for some types of control activities such as
segregation of duties, or some control activities performed by computer. In
such circumstances, evidence of the effectiveness of the design or operation
could be obtained by observation or by using computer-assisted audit
techniques to reprocess the application of the relevant controls.
103 SECTION
performed by that person. However, the auditor should consider that the
observed application of a control may not be performed in the same manner
when the auditor is not present.
95. In general, inquiry alone will not provide sufficient supporting evidence to
support a conclusion about the effectiveness of the design or operation of a
specific control. When the auditor determines that a specific control may
have a significant effect in reducing control risk to a low level for a specific
assertion, the auditor will normally need to perform additional tests to obtain
sufficient supporting evidence to support the conclusion on the effectiveness
of that control.
96. The timeliness of the supporting evidence refers to when the evidence was
obtained and the part of the period subject to audit in which it is applied. In
assessing the degree of assurance provided by audit evidence, the auditor
should consider that audit evidence obtained from some tests of controls, such
as observation, relates only to the time at which the audit procedure was
applied. Consequently, such supporting evidence may be insufficient to
evaluate the effectiveness of the design or operation of controls for periods
not subject to such testing. In such circumstances, the auditor may decide to
supplement those tests with other tests of controls, which may provide
supporting evidence over the entire audit period. For example, for a control
activity performed by a computer program, the auditor could test the
operation of the control at a given point in time to obtain supporting evidence
as to whether the program effectively executes the control. The auditor may
then perform tests of controls directed at the design and operation of other
control activities relating to the modification and use of that computer
program to obtain audit evidence as to whether the programmed control
procedure operated consistently during the period under audit.
98. In considering audit evidence obtained from previous audits, the auditor
should obtain audit evidence in the current period as to whether there have
been any changes in internal control subsequent to the previous audit,
including procedures, policies and personnel, and the nature and extent of any
such changes. For example, in performing the previous audit, the auditor may
have determined that an automated control was functioning as it should. The
auditor should obtain evidence to determine whether changes have been made
to the automated control that affect its effective and continuous operation.
Consideration of the supporting evidence on these changes, together with the
considerations described in the previous paragraph, could support the increase
or decrease of additional supporting evidence on the effectiveness of the
design and operation to be obtained in the current period.
99. When the auditor obtains supporting evidence on the design or operation of
controls during an interim period, the auditor should determine the additional
supporting evidence to be obtained for the remaining period. In making that
determination, the auditor should consider the significance of the assertion
involved, the specific controls that were evaluated during the interim period,
the extent to which the design and effective operation of those controls were
evaluated, the results of the testing of the controls used in making that
evaluation, the duration of the remaining period, and the extent to which
substantive evidence about the design and operation of those controls may
result from substantive testing performed in the remaining period.In making
that determination, the auditor should consider the significance of the
assertion involved, the specific controls that were evaluated during the interim
period, the extent to which the design and effective operation of those
controls were evaluated, the results of the testing of the controls used to make
that evaluation, the length of the remaining period, and the evidence as to the
105 SECTION
design and operation that may result from substantive testing performed in the
remaining period. The auditor should obtain audit evidence about the nature
and extent of any significant changes in internal control that occur subsequent
to the interim period, including procedures, policies and personnel.
100. The auditor should consider the combined effect of different types of
supporting evidence relating to the same assertion when assessing the degree
of assurance that the same evidence provides. In some circumstances, a
single type of supporting evidence may not be sufficient to evaluate the
effectiveness of a control design or operation. In such circumstances, in
order to obtain sufficient supporting evidence the auditor may wish to
perform other tests of controls relevant to that control. For example, an
auditor may look at the procedures for opening mail and processing of
receivables for the purpose of assessing the operational effectiveness of
controls over such documents. Because an observation is appropriate only at
the time it is made, it is possible for the auditor to supplement the
observation with inquiries of the entity's personnel and inspection of
documentation on the operation of such controls at other times during the
audit period.
102. In general, when several types of supporting evidence support the same
conclusion about the design or operation of a control, the degree of
assurance provided increases. Conversely, if various types of evidential
evidence lead to different conclusions about the design or operation of a
control, the assurance provided is diminished. For example, based on
evidence that the control environment is effective, the auditor may have
reduced the number of locations where audit procedures would be
performed. However, if in evaluating specific control procedures the auditor
obtains evidence that such procedures are ineffective, the auditor may
SECTION 106
reconsider his conclusion about the control environment and, among other
things, decide to perform audit procedures in additional locations.
107 SECTION
"Sufficient and competent evidential material shall be obtained, by
inspection, observation, inquiry and confirmation, to achieve a
reasonable basis for expressing an opinion on the financial statements
under review."
106. After considering the level to which the auditor wishes to limit the risk of
material misstatement in the financial statements and the determined levels
of inherent and control risk, the auditor performs substantive tests to reduce
the risk of detection to an acceptable level. As the level of control risk
decreases, the acceptable level of detection risk increases. Accordingly, the
auditor may modify the nature, timing and/or extent of the substantive tests
to be performed.
107. Although the inverse relationship between control risk and detection risk
may allow the auditor to change the nature or timing of substantive testing
or limit its scope, the level of control risk determined will generally not be
low enough to eliminate the need for substantive testing to reduce the risk of
detection for all relevant assertions of significant account balances or types
of transactions. Accordingly, regardless of the level of control risk
determined, the auditor should perform substantive tests for significant
account balances and types of transactions.
SECTION 108
ANNEX
1. This Appendix discusses the five components of internal control set out in
paragraph 7 and described in paragraphs 34 to 57 in relation to an audit of
financial statements.
Control Environment
109 SECTION
c. Participation of the Board of Directors or Audit Committee. The control
consciousness of an entity is significantly influenced by the Board of
Directors or by the Audit Committee of that entity. Attributes of this
participation are the independence of the Board of Directors or the Audit
Committee from management, the experience and level of its members, the
extent of their participation and specific definition of activities, the
appropriateness of their actions, the degree to which difficult issues are
raised and discussed with management, and their interaction with internal
and external auditors.
4. Small and medium-sized entities may implement the elements of the control
environment differently from large entities. For example, small entities may
not have a written code of conduct but may instead develop a culture that
emphasizes the importance of integrity and ethical behavior through oral
communications and management example. Similarly, small entities may not
have an independent or external member on their boards of directors.
Risk assessment
6. Risks relevant to financial reporting include external and internal events and
circumstances, which may occur and adversely affect an entity's ability to
record, process, summarize and report financial data consistent with
management's assertions in the financial statements. Once risks are identified,
management considers their significance, the likelihood of their occurrence
and how they should be managed. Management may initiate plans, programs
111 SECTION
or actions to address specific risks or may decide to accept a risk due to cost
or other considerations. Risks may arise or change due to circumstances such
as:
SECTION 112
7. The basic concepts of risk assessment should be present in every entity,
regardless of size, but the risk assessment process is likely to be less formal
and less structured in small and medium-sized entities than in large
companies. All entities should have established financial reporting objectives,
but these may be implicitly rather than explicitly recognized in small entities.
Management may be able to learn about the risks related to these objectives
through direct personal involvement with employees and external parties.
Control activities
8. Control activities are the policies and procedures that help ensure that
management's directives are executed and that appropriate actions are taken to
address risks, with a view to achieving the entity's objectives. Control
activities, whether automated or manual, have different objectives and are
applied at different organizational and functional levels.
113 SECTION
main groups of information systems control activities are general
controls and application controls. General controls typically include
controls over site and network operations; acquisition, implementation
and maintenance of systems software; access security; and acquisition,
development, implementation and maintenance of application systems.
These controls apply to mainframe computers, minicomputers and end-
user environments. Application controls are used in the processing of
each individual application system. These controls help ensure that
transactions are valid, properly authorized and fully and accurately
processed. Examples of such general controls are program change
controls, controls that restrict access to programs or data, controls over
the implementation of new versions of software application packages,
and controls over system software that restrict access to, or monitor the
use of, system "utility software" that could change financial data or
records without leaving an audit trail.
10. It is very likely that the concepts underlying control activities in small and
medium-sized organizations are similar to those in larger entities, but the
SECTION 114
formality with which they operate varies. In addition, smaller entities may
determine that certain types of control activities are not relevant because of
the controls applied by management. For example, when management
maintains the authority to approve credit sales, major purchases and use of
lines of credit, these practices can constitute strong controls over such
activities, diminishing or eliminating the need for more detailed control
activities. A proper segregation of duties often seems to present difficulties
in small organizations. However, even companies with only a few
employees may be able to allocate their responsibilities to achieve
appropriate segregation or, if that is not possible, to have management
oversee activities that are incompatible with control objectives.
115 SECTION
They identify and record all valid transactions.
Describe in a timely manner, transactions in sufficient detail to allow
for proper classification of transactions for financial reporting.
They quantify the value of transactions in a manner that allows their
appropriate monetary value to be recorded in the financial statements.
They determine the time period in which transactions occurred to allow
the recording of transactions in the appropriate accounting period.
Adequately present appropriate transactions and disclosures in the
financial statements.
Monitoring
18. Ongoing monitoring activities are incorporated into the normal recurring
activities of an entity and include regular management and supervisory
activities. Sales, purchasing and production managers at divisional and
corporate levels are in contact with operations and may question reports that
differ significantly from their knowledge of operations.
21. Ongoing monitoring activities for small and medium-sized entities are more
likely to be informal and typically performed as part of the overall
management of an entity's operations. Close involvement of management in
operations will often identify significant variances from expectations and
inaccuracies in financial data.
117 SECTION
SECTION 322
Introduction
01. The independent auditor considers various factors in determining the nature,
timing and extent of audit procedures to be performed in the audit
examination of an entity's financial statements. One of the factors to consider
is the existence of an internal audit function. (1) This Section provides
guidance on the factors to be considered by the independent auditor about the
work of the internal auditors and the manner of utilizing the assistance of such
auditors in the audit examination performed by the independent auditor in
accordance with generally accepted auditing standards.
SECTION 118
Gain understanding of the internal audit function
accounting.
1
Paragraph 12 of the Annex defines initiation, recording, processing and reporting as
used throughout this section.
Moreover, manual controls may be independent of IT, use information produced by IT, or be
limited to monitoring that IT and automated controls are working effectively, and handling
exceptions. Within an entity, the mix of manual and automated controls varies with the nature
and complexity of that entity's use of IT.
1
See section 311, Planning and Supervision, paragraph 10.
1
These assertions are discussed in section 326.
1
For purposes of this section, a material misstatement in a financial statement assertion is a
misstatement caused by either error or fraud, as discussed in section 312, Risk and Materiality Inherent in
an Audit Examination, that individually or in conjunction with other misstatements in other assertions
would be material to the financial statements as a whole.
1
See note 3.
1
See note 4.
1
See section 326 for guidance on supporting evidence.
119 SECTION
c) Audit plan, including nature, timing and scope of audit work.
d) Access to records and whether there are limitations on the scope of their
activities.
In addition, the independent auditor may inquire with the company's senior
management about the structure of the internal audit function, its mission
or other similar instructions from management or the Board of Directors.
This inquiry will provide information regarding the goals and objectives
established for the internal audit function.
___________________________
3) Section 319 describes the procedures the auditor performs to obtain an understanding of
the internal control structure and indicates that the internal audit function is part of the control
environment.
06. Some internal audit activities may not be relevant to the examination of an
entity's financial statements. For example, internal audit procedures to
evaluate the efficiency of certain processes with respect to management
decision-making are generally not relevant to the audit of the financial
statements.
07. Relevant activities are those that provide evidence about the design and
effectiveness of the entity's internal control structure, policies, procedures and
ability to record, process, summarize and report financial data in a manner
consistent with the assertions contained in the financial statements or that
provide direct evidence of potential misstatements of such data. The
independent auditor may perform the following procedures to determine the
significance of internal audit activities:
08. If, after obtaining an understanding of the internal audit function, the
independent auditor concludes that the internal audit activities are not relevant
to the examination of the financial statements, then no further consideration
should be given to the internal audit function, unless the auditor seeks direct
SECTION 120
assistance from the internal auditors as referred to in paragraph 27. On the
other hand, even though some of the internal audit activities may be relevant
to the audit examination, the independent auditor may conclude that it would
not be efficient to consider internal audit work. If the independent auditor
decides that it would be efficient to consider how the internal audit work
might affect the nature, timing and extent of the audit procedures, then the
independent auditor should determine the competence and objectivity of the
internal audit function based on the expected effect of the internal audit work
on the audit examination.
Evaluation of the competence and objectivity of internal auditors
09. When assessing the competence of internal auditors, the independent auditor
should obtain or update information from prior years on factors such as:
d) Assignment policies.
g) Performance evaluation.
10. To assess the objectivity of the internal auditors the independent auditor
should obtain or update information from prior years with respect to factors
such as:
a) The position in the organization of the internal auditor responsible for the
audit function, including:
121 SECTION
- Whether the internal auditor reports to an executive at a level sufficient to
ensure comprehensive audit coverage and appropriate action on internal
auditors' findings and recommendations.
- Whether the internal auditor has direct access to and reports regularly to
the entity's Board of Directors, Audit Committee or Manager-Owner.
- Policies that prohibit internal auditors from auditing areas where there are
relatives who perform important or critical audit functions.
- Policies prohibiting internal auditors from auditing areas where they were
recently assigned or are scheduled for assignment once they complete
their internal audit duties.
12. The work of internal auditors may affect the nature, timing and scope of the
audit, including:
Where the work of the internal auditors is expected to affect the audit
examination, the instructions in paragraphs 18 to 26 may be followed to
consider the extent of such an effect, the coordination of audit work with the
internal auditors, and the evaluation and testing of the effectiveness of the
work of the internal auditors.
13. The independent auditor obtains sufficient understanding of the design of the
policies and procedures of the internal control structure to plan the audit and
determine whether those policies and procedures have been implemented.
Since one of the main functions of internal audit is to review, evaluate and
monitor compliance with the policies and procedures of the internal control
structure, the procedures performed by internal auditors in this area can
provide useful information to the independent auditor. For example, internal
auditors may develop a flow chart of a new computerized sales and current
accounts system. The independent auditor can review the flow chart for
information on the design of policies and procedures related to this area. In
addition, the independent auditor may consider the results of the review
procedures developed by the internal auditors and obtain information as to
whether the procedures have been put into operation.
Risk assessment
14. The independent auditor assesses the risk of material misstatement, both at the
level of the financial statements and at the level of account balances or
specific transactions.
15. At the financial statement level, the independent auditor performs an overall
assessment of the risk of material misstatement. In making this assessment,
the independent auditor must recognize that certain policies and procedures in
the internal control structure may have an effect on many of the assertions in
123 SECTION
the financial statements. The control environment and accounting system have
a significant effect on account balances and specific transactions, and
therefore can affect many assertions.
Substantive procedures
17. Some of the procedures performed by internal auditors may provide direct
evidence of significant deviations from assertions contained in account
balances or types of transactions. For example, internal audit, as part of its
work, may confirm certain accounts receivable and witness certain physical
inventories. The result of these procedures may provide evidence that the
independent auditor may consider to limit the level of detection risk in the
related assertions. Consequently, the independent auditor may change the
timing of the confirmation procedures, the number of receivables to be
SECTION 124
confirmed and the number of warehouses where physical inventories will be
observed.
18. Even though the work of the internal auditors may affect the independent
auditor's procedures, the latter must perform procedures to obtain sufficient
competent evidence to support his report. Evidence obtained directly by the
independent auditor, through personal knowledge including physical
examination, observation, calculation and inspection, is generally more
effective than information obtained indirectly.
19. The responsibility for issuing a report on the financial statements rests solely
with the independent auditor. Unlike the case where the independent auditor
uses the work of other independent auditors, the responsibility cannot be
shared with the internal auditors. As the independent auditor has the ultimate
responsibility for expressing an opinion on the financial statements, judgments
on determination of levels of inherent and control risks, materiality of
deviations, sufficiency of tests performed, evaluation of significant accounting
estimates and other matters that may affect the independent auditors' report
should always be the independent auditor's.
20. In determining the effect of the internal auditors' work on the independent
auditor's procedures, the independent auditor should consider the following:
a) The relative importance of the figures in the financial statements, i.e., the
balances of the accounts or classes of transactions.
b) The risk (inherent and control) that there are significant deviations from the
related assertions in the financial statements.
125 SECTION
c) The degree of subjectivity involved in evaluating audit evidence obtained
to support assertions (4).
21. For those assertions related to significant amounts in the financial statements,
where the risk of material misstatement or the degree of subjectivity involved
in evaluating the audit evidence is high, the auditor should perform sufficient
procedures to fulfill the responsibilities described in paragraphs 18 and 19. In
determining these procedures, the auditor should consider the results of the
work (tests of controls or substantive tests) performed by internal audit on
those specific assertions. However, for such assertions, consideration of
internal audit work alone cannot reduce audit risk to a level that would
eliminate the need for direct testing by the independent auditor. Statements
about the valuation of assets and liabilities involving significant accounting
estimates or about the existence and exposure of related party transactions,
contingencies, uncertainties and subsequent events are examples of statements
that may have a high risk of material misstatement or involve a high degree of
subjectivity in the evaluation of the evidence obtained.
22. On the other hand, for certain assertions related to minor amounts in the
financial statements, where the risk of material misstatement or the degree of
subjectivity involved in evaluating the audit evidence is low, the independent
auditor may decide, after
___________________________
4) For some assertions, such as existence and occurrence, the evaluation of audit evidence is
generally objective. More subjective assessments are often required for other assertions such as
valuation and fair presentation.
SECTION 126
considering the circumstances and the results of the work (either control or
substantive testing) performed by internal audit for those specific assertions,
that the risk has been reduced to an acceptable level and that direct testing by
the independent auditor is not necessary. Assertions about the existence of
cash balances, prepaid expenses and additions to fixed assets are examples of
assertions that may have a low risk of material misstatement or involve a low
level of subjectivity with respect to the evaluation of audit evidence obtained.
23. If the work of the internal auditors is expected to have an effect on the audit
procedures, it may be efficient for the independent auditor and the internal
auditors to coordinate their work as follows:
24. The independent auditor should perform procedures to evaluate the quality
and effectiveness of the work of the internal auditors, (as described in
paragraphs 12 to 17) that significantly affect the nature, timing and extent of
the independent auditor's procedures. The nature and extent of the procedures
that the independent auditor should apply when making such an assessment
are determined by his or her judgment, depending largely on the effect that the
internal audit work has on the procedures that the independent auditor applies
to significant balances or transactions.
127 SECTION
25. In developing evaluation procedures, the independent auditor should consider
the following factors with respect to internal auditors:
e) If your reports are consistent with the results of the work performed
26. In making its assessment, the independent auditor should test the work of the
internal auditors related to significant assertions in the financial statements.
These tests can be performed by means of:
The independent auditor should compare the results of his tests with the
results of the work of the internal auditors to reach conclusions about the work
of the internal auditor. The scope of these tests will vary depending on the
circumstances and should be sufficient to enable the independent auditor to
make an overall assessment of the quality and effectiveness of the internal
audit work to be considered by the independent auditor.
SECTION 128
Using the work of internal auditors to provide direct assistance to the
independent auditor
27. When conducting an audit review, the independent auditor may request direct
assistance from the internal auditors. This direct assistance relates to work that
the independent auditor specifically requests be performed by the internal
auditors to complete certain aspects of the audit examination. For example,
internal auditors may assist the independent auditor in obtaining an
understanding of the internal control structure or performing tests of controls
or substantive tests, but consistent with the guidance on the independent
auditor's responsibility in paragraphs 18 through 22. When direct assistance is
obtained, the independent auditor should determine the competence and
objectivity of the internal auditors (see paragraphs 09 to 11) as well as
supervise, review, evaluate and test the work performed by the internal
auditors, with a scope according to the circumstances. The independent
auditor should inform the internal auditors of their responsibilities, the
objectives of the procedures to be performed and matters that may affect the
nature, timing and extent of the audit procedures, such as possible accounting
or auditing problems. The independent auditor should also inform the internal
auditors that all accounting or auditing matters arising during their work
should be reported immediately to the independent auditor.
129 SECTION
SECTION 325
Introduction
01. This section provides guidelines for identifying conditions related to the
entity's internal control structure that arise during an audit of financial
statements. This Section also establishes that communication of such
conditions should be maintained primarily with the audit committee or, where
such a committee does not exist, with persons of higher authority and
responsibility or equivalent, such as the board of directors, the board of
directors, the owner of a company or those who have engaged the auditor.
For the purpose of this Section, the term "Audit Committee" shall be used to
refer to the appropriate recipient of such communication. It also provides
guidelines for establishing criteria for agreement between the auditor and the
client to identify and report matters in addition to those required by this
Section.
Conditions to be reported
02. Certain conditions related to the entity's internal control structure should be
communicated to the audit committee, the board of directors or another
authority. This Section 325 also provides guidelines for establishing a criteria
agreement between the auditor and the client to identify and report matters in
addition to those required. During the course of an audit, the auditor should
become aware of matters related to the internal control structure that may be
of interest to the audit committee. Matters required by this Section to be
reported to the audit committee are recognized as "reportable conditions".
Specifically, these conditions are matters that come to the auditor's attention
and, in the auditor's opinion, should be communicated to the audit committee
because they represent significant deficiencies in the design or operation of
the internal control structure that could adversely affect the organization's
ability to record, process, summarize and present financial information
consistent with management's assertions in the financial
statements.Specifically, these conditions are matters that come to the auditor's
attention and that, in the auditor's opinion, should be communicated to the
audit committee because they represent significant deficiencies in the design
or operation of the internal control structure that could adversely affect the
SECTION 130
organization's ability to record, process, summarize and present financial
information consistent with management's assertions in the financial
statements. Such deficiencies may include different aspects of the elements of
the internal control structure, such as: (a) control environment (b) accounting
system or (c) control procedures. (See "Appendix A, Section 325" for
examples of "reportable conditions").
03. The auditor should also identify matters that in the auditor's opinion are not
"reportable conditions" as defined in paragraph 01 of this Section 325;
however, the auditor will have to decide whether or not to communicate these
matters for the benefit of management (and other stakeholders, if they are
concerned).
05. In making the assessment of what are the "reportable conditions", the auditor
should consider several factors in relation to the entity, such as its size,
complexity, diversity of activities, organizational structure and the
characteristics of the owners.
06. The existence of "reportable conditions" in relation to the design and operation
of the internal control structure is, and in fact represents, a conscious decision
by management, of which the audit committee is aware, to accept the degree
of risk for cost or other considerations. It is management's responsibility to
make decisions regarding the costs to be incurred or related benefits.
Assuming that the audit committee acknowledges its awareness of such
deficiencies and the associated risks and takes into consideration the
131 SECTION
deficiencies and potential risks, the auditor should decide when a matter needs
to be reported. Periodically, the auditor should consider whether, because of
changes in management, in the audit committee or simply because of the
passage of time, it is appropriate and timely to communicate such matters.
Conditional Agreement
07. The auditor and his client should analyze the functioning of the internal
control structure in the performance of audit engagements. Clients should ask
the auditor to be alert to potential matters and "reportable conditions" in
addition to those noted in this Standard. The auditor should report matters
that he/she considers to be of importance to management, if required to do so.
08. Conditional agreements between the auditor and the client to communicate
certain conditions should include, for example, the reporting of matters of
lesser significance than those given in this Standard, the existence of
conditions specified by the client, or the results of additional investigations to
identify significant causes. Under these terms, the auditor may be asked to
visit certain client facilities and evaluate specific control procedures or to
apply other procedures that the auditor had not planned to use.
10. The report should state that the communication is solely for the information
and use of the audit committee, management or other responsible persons of
the organization. When there are requirements from governmental authorities
to provide such information, a specific reference to such regulatory authority
shall be made.
12. The following is an example of the sections of a report in which the above
requirements are considered:
In the study and evaluation carried out for the limited purpose described
above, we noted certain matters in relation to its operation, which we
consider should be included in this report in order to be in accordance
with generally accepted auditing standards.
The "reportable conditions" are those matters that came to our attention
that relate to significant deficiencies in the design and operation of the
internal control structure that, in our opinion, could adversely affect the
organization's ability to record, process, summarize and report financial
information consistent with management's assertions in the financial
statements.The "reportable conditions" are matters that were brought to
our attention that relate to significant deficiencies in the design and
operation of the internal control structure, which, in our opinion, could
adversely affect the organization's ability to record, process, summarize
and present financial information consistent with management's assertions
in the financial statements, are as follows:
133 SECTION
This report is solely for the knowledge and use of the audit committee
(the board of directors, board of management, or the owner of the
company), management and other persons within the organization (or
specify the regulatory agency or any other specific third party).
13. In some cases, the auditor may include additional statements in the auditor's
report with respect to limitations that depend on the structure of internal
control in general, as well as the extent and nature of the auditor's
consideration of them during the audit, or other matters related to the
comments made.
SECTION 134
The issues that caught our attention and that are related to the design and
operation of the internal control structure are the following:
17. Given the significance of misinterpretations with respect to the limited degree
of assurance, as it relates to the issuance of the auditor's written report stating
that no "reportable conditions" were identified during the audit, it is not
necessary for the auditor to include such a statement in his or her report.
19. The content of this Standard does not prevent the auditor from communicating
to a client different situations and suggestions regarding activities that go
beyond matters related to the internal control structure. Such issues may
relate to operational or administrative efficiencies, business strategies and
other items of potential utility to the client.
135 SECTION
APPENDIX A
* Evidence of failures in the execution of functions that are part of the internal
control structure, such as reconciliations not prepared or not prepared in a
timely manner.
137 SECTION
SECTION 138
OTHER
139 SECTION
SECTION 140
SECTION 326
SUPPORTING EVIDENCE
Introduction
01. The third standard relating to the execution of the work states the following:
02. A major part of the independent auditor's work in formulating an opinion on
the financial statements is to obtain and evaluate relevant audit evidence 1 on
the assertions contained in those financial statements. The degree of validity
of that evidence, for audit purposes, rests on the auditor's judgment; in this
respect, audit evidence differs from legal evidence, which is reduced to rigid
standards. The audit evidence varies substantially in its influence on the
auditor as the auditor develops an opinion on the financial statements being
examined. The competence of the evidence relates to its validity, objectivity,
timeliness and the existence of supporting evidence to corroborate the
auditor's conclusions.
Existence or occurrence
Integrity
Rights and obligations
Valuation or allocation
1
See Section 319 "Consideration of Internal Control in an Audit of Financial Statements"
for more information on audit evidence.
141 SECTION
Presentation and disclosure
06. Assertions about rights and obligations refer to whether assets constitute
rights of the entity and whether liabilities represent obligations of the entity at
a given date. For example, management asserts that the amounts capitalized
for leases on the balance sheet represent the cost of the entity's rights to the
leased assets and that the corresponding lease liability represents an obligation
of the entity.
09. To obtain the audit evidence supporting the assertions contained in the
financial statements, the auditor develops specific audit objectives in light of
those assertions. In developing the audit objectives for a particular
engagement, the auditor should take into consideration the specific
circumstances of the entity, including the nature of its business and industry-
specific accounting practices. For example, one audit objective regarding the
completeness assertion that an auditor might develop for inventory balances is
that they include all finished goods, materials and supplies.
12. The auditor's specific audit objectives do not change regardless of whether the
information is processed manually or electronically. However, the methods of
applying audit procedures to gather evidence may be influenced by the
method of processing. The auditor may employ either manual audit
143 SECTION
procedures, information technology-assisted audit techniques, or a
combination of both, to obtain sufficient competent audit evidence. Due to the
growth in the use of computers and other information technologies, many
entities process large volumes of information electronically. Consequently, it
may be difficult or impossible for the auditor to access certain information for
inspection, consultation or confirmation without the use of information
technology.
13. The nature, timing and extent of the procedures to be applied in a particular
engagement is a matter of professional judgment to be determined by the
auditor based on the circumstances of each case. However, the procedures
adopted must be adequate to achieve the auditor's specific objectives and
reduce the risk of detection to a level that is acceptable to the auditor. The
audit evidence obtained should be sufficient for the auditor to form
conclusions about the validity of the individual assertions contained in each
item of the financial statements. The audit evidence obtained by the auditor
by determining the combined risk between inherent risk and control risk and
by substantive testing would provide a reasonable basis for the auditor's
opinion (1).
15. The audit evidence supporting the financial statements consists of the inherent
accounting information (see paragraph 16) and all the audit evidence available
2
Normally the level of control risk determined may not be low enough to eliminate the
need to perform any substantive testing of significant account balances and types of transactions
and, consequently, the auditor should subject them to substantive testing regardless of the level of
control risk determined.
SECTION 144
to the auditor (see paragraph 17).
16. The journal, general ledger and subsidiary ledgers, the corresponding
accounting manuals and records such as worksheets and spreadsheets that
support cost allocations, calculations and reconciliations are evidence
supporting the financial statements. This accounting information is generally
in electronic form, and by itself, for the auditor, cannot be considered
sufficient support for the financial statements. On the other hand, without
adequate attention to the propriety and accuracy of such information, an
opinion on the financial statements could not be expressed.
17. Supporting information includes both written and electronic information, such
as checks, electronic fund transfer records, invoices, contracts, minutes of
meetings, confirmations and other written representations by qualified
persons, information obtained by the auditor through consultation,
observation, inspection and physical examinations, and all information
developed by or available to the auditor that enables the auditor to reach
conclusions by logical reasoning.Information obtained by the auditor by
inquiry, observation, inspection and physical examination, and all information
developed by or available to the auditor that enables the auditor to reach
conclusions by logical reasoning.
18. In some entities, some of the inherent accounting information and supporting
information is available only in electronic form. Source documents such as
purchase orders, bills of lading, invoices and checks are replaced by electronic
messages. For example, companies can use Electronic Data Interchange (EDI)
or image processing systems. In Electronic Data Interchange, the entity and its
customers or suppliers use communication links to transact business
electronically. Purchasing, shipping, invoicing, cash receipts, and cash
disbursements are often done entirely through the exchange of electronic
messages between the parties involved. In image processing systems,
documents are scanned and converted into electronic images for easy storage
and reference, and source documents are sometimes not maintained after
conversion. In addition, certain electronic evidence may only exist at a certain
point in time and may not be recoverable after a specific period if the files are
changed and backup files do not exist. As a consequence, the auditor should
consider the length of time during which the information exists or is available
145 SECTION
when determining the nature, timing, extent of substantive testing and, if
applicable, testing of controls.
19. The auditor tests the inherent accounting information by (a) analyzing and
reviewing, (b) tracing the procedures followed in the accounting process and
in the development of the relevant allocations, (c) recalculating and (d)
reconciling related applications of the same information. By performing such
procedures, the auditor can determine whether the accounting records are
internally consistent. Such internal consistency normally provides evidence of
the reasonableness of the presentation of the financial statements.
21. Evidence to be competent, regardless of its form, must be both valid and
relevant. The validity of probative evidence depends to such an extent on the
circumstances under which it is obtained that generalizations about the
reliability of various kinds of evidence are subject to important exceptions.
However, recognizing the possibility that important exceptions may exist, the
following assumptions about the validity of audit evidence, which are
mutually exclusive, may have some utility:
a) When audit evidence can be obtained from independent sources outside the
entity, such evidence provides greater assurance of reliability for the
purposes of an independent audit than if it had been obtained solely from
within the entity.
b) The more effective the internal control is, the more assurance it provides
on the reliability of accounting information and financial statements.
SECTION 146
c) The auditor's direct personal knowledge obtained by physical examination,
observation, calculation and inspection is more persuasive than information
obtained indirectly.
25. In evaluating the audit evidence, the auditor assesses whether the specific audit
objectives have been achieved. The independent auditor must be meticulous
in his search for supporting evidence and impartial in his evaluation. In
designing audit procedures to obtain competent audit evidence, you should
recognize the possibility that financial statements may not be fairly presented
in conformity with generally accepted accounting principles or with a
147 SECTION
comprehensive basis of accounting other than generally accepted accounting
principles. In forming his opinion, the auditor should consider relevant audit
evidence regardless of whether it appears to support or contradict the
assertions made in the financial statements. To the extent that the auditor has
substantial doubt about any of the relevant assertions, the auditor should
refrain from forming an opinion until the auditor has obtained sufficient
supporting evidence to dispel that substantial doubt, or should express a
qualified opinion or disclaim an opinion. 3
3
See Section 508 paragraphs 36 to 46 and 68 to 70, "Auditors' Report on Financial
Statements" for more information on expressing a qualified opinion or disclaimer of opinion.
SECTION 148
APPENDIX
This appendix exemplifies the use of assertions to develop audit objectives and design
substantive tests. The following examples of substantive tests are not the only ones, nor may it be
necessary to apply all of the procedures outlined here in an audit.
Integrity
The entity has legal dominion or similar Observe physical counts of stockpiles
ownership rights over the inventories. Obtain confirmation of stock at off-site
locations
Review paid vendor invoices,
consignment agreements and contracts
The main categories of inventories and their Review draft financial statements
valuation bases are adequately disclosed in Compare the information disclosed in
the financial statements. the financial statements with the
requirements of generally accepted
accounting principles.
Obtain confirmation of pledged stock
The pledge or stock guarantee is duly under loan agreements
disclosed.
SECTION 329
ANALYTICAL PROCEDURES
Introduction
01. This Section provides guidance for the use of analytical procedures and
requires their application in the planning and review of all audits.
02. Analytical procedures are an important part of the audit process and consist of
evaluations of financial information made through a study of normal
relationships between financial and non-financial data. Analytical procedures
range from simple comparisons to the use of complex models involving many
element and data relationships. A basic premise underpinning the application
of analytical procedures is that it is reasonable to expect a normal relationship
between data as long as conditions indicating otherwise are not known to
exist. Specific conditions that may cause variations in these relationships
include, for example, specific unusual transactions or events, accounting
changes, changes in business, chance fluctuations or errors.
a) Support the auditor in planning the nature, timing and extent of other
audit procedures.
b) As substantive tests to obtain supporting evidence about specific
assertions related to account balances or types of transactions.
Analytical procedures should be applied to some extent for purposes (a) and
(c) above in any audit of financial statements conducted in accordance with
generally accepted auditing standards. Additionally, in some cases, analytical
procedures may be more effective or efficient than detailed testing to achieve
certain specific substantive testing objectives.
d) Information about the industry in which the client operates; for example,
gross margin information.
e) Relation of financial information with relevant non-financial information.
b) Identify areas that may represent significant specific risks for the audit.
07. Analytical procedures used in audit planning generally use aggregate data. In
addition, the sophistication, scope and timeliness of the procedures, which are
based on the auditor's judgment, can vary widely depending on the size and
complexity of the client. For some entities, the procedures may consist of
reviewing changes in account balances from the prior year to the current year
using the general ledger or preliminary trial balance. In contrast, for other
entities, the procedures may involve extensive analysis of quarterly financial
statements. In both cases the analytical procedures, combined with the
auditor's knowledge of the business, serve as a basis for further investigation
and effective planning.
08. Although the analytical procedures used in audit planning often use only
financial information, sometimes relevant non-financial information is also
considered. For example, the number of employees, the square footage of a
sales area, the volume of production and similar information that can
contribute to fulfill the purpose of these procedures.
1
See paragraph 03. of Section 326.
auditor's judgment as to the expected efficiency and effectiveness of the
procedures available.
10. The auditor considers the levels of reliance, if any, that he/she wishes to
obtain from substantive testing for a specific audit objective and decides,
among other things, which procedure or combination of procedures can
provide that level of reliance. For some assertions, analytical procedures are
effective in providing the appropriate level of confidence; however, for other
assertions analytical procedures may not be as effective and efficient as
detailed testing in providing the desired level of confidence.
12. Analytical procedures can be effective and efficient tests for assertions in
which potential errors would not be apparent from examining detailed
evidence, or in which detailed evidence would not be readily available. For
example, comparisons of total reimbursements paid with the number of
personnel may indicate unauthorized payments that may not be apparent in
the testing of individual transactions. In other cases, deviations from expected
relationships may be an indicator of potential omissions when independent
evidence that an individual transaction should have been recorded is not
readily available.
13. It is important for the auditor to understand the reasons for normal
relationships because, in certain circumstances, data may appear to be related
when they are not, which may lead the auditor to erroneous conclusions. In
addition, the presence of an unexpected relationship can provide significant
evidence when it has been thoroughly examined.
15. For some statements data may or may not be readily available to develop
expectations. For example, tests to verify the completeness of a statement,
such as expected sales in some entities, can be developed based on production
statistics or the square footage of a sales area. For other entities, meaningful
data for the assertion of sales completeness may not be readily available,
therefore it would be more effective and efficient to use dispatch records for
the verification of such an assertion.
16. The auditor obtains assurance from analytical procedures based on the
consistency of the relationship between the amounts recorded and
expectations developed with data derived from other sources. The reliability
of the data used to develop expectations should be adequate to achieve the
desired level of confidence in the analytical procedures. The auditor should
assess the reliability of the data by considering the sources of the data and the
conditions under which they are obtained as well as the auditor's knowledge
of the data. The following factors influence the auditor's consideration of the
reliability of the data for purposes of meeting the audit objectives:
Whether the data were developed under a reliable system with adequate
controls.
EXPECTATION PRECISION
17. The expectation should be sufficiently precise to provide the desired level of
confidence that deviations that could be potential material misstatements,
either individually or aggregated with other misstatements, will be identified
by the auditor for investigation (see paragraph 20). As expectations become
more precise, the expected range of deviations will be smaller and,
consequently, the probability that significant deviations from expectations are
due to errors increases. The accuracy of the expectation depends, among
other things, on the auditor's identification and consideration of factors that
may materially affect the amount being audited and the level of detail of the
data used to develop the expectation.
18. Many factors can affect the financial relationship. For example, sales are
affected by prices, sales volume and product mix. Each of these in turn can
be affected by other factors, and compensating for them can mask errors.
Effective identification of factors that significantly affect the relationship is
needed as the desired confidence level of the data used to develop the
expectation increases.
19. Expectations developed at the level of detail are generally more likely to
detect errors than global comparisons. Monthly amounts will generally be
more effective than annual amounts and comparisons by zone or product line
will be more effective than entity-level comparisons. The appropriate level of
detail will be influenced by the nature of the client, its size and complexity.
In general, the risk that a material error may go undetected by the factor
compensation increases depending on the complexity and diversification of
the client's operations. Unbundling these would help reduce risk.
22. The objective of the application of analytical procedures in the overall review
at the final stage of the audit is to support the auditor in the evaluation of the
conclusions reached as well as in the evaluation of the presentation of the
financial statements. A wide variety of analytical procedures can be useful
for this purpose. The overall review normally includes reading the financial
statements and notes thereto, considering the following: (a) the adequacy of
evidence gathered in response to unusual and unexpected balances identified
in the planning of the audit or in the course of the audit and (b) unusual or
unexpected relationships or balances that were not previously identified. The
outcome of a global review may indicate that additional evidence is needed.
SECTION 330
01. This Section establishes guidelines for the confirmation process in audits
performed in accordance with generally accepted auditing standards. This
Section:
02. This Section does not cover the extent of the confirmation procedures, nor the
time at which they should be performed. "Sampling in Audit" (Section 350)
and "Risk and Materiality Inherent in an Audit Examination" (Section 312)
contain guidelines on the extent of audit procedures that should be applied
(i.e., considerations for determining the size of the sample that should be
confirmed).
03. Also, this Section does not cover the concepts described in Section 336 on
"Use of the Work of a Specialist" and Section 337 on "Requesting
Information from a Client's Attorneys Regarding Litigation, Claims and
Liens".
DEFINITION OF THE CONFIRMATION PROCESS
05. Section 312 deals with audit risk. It describes the concepts of assessing
inherent and control risks, determining the acceptable level of detection risk
and designing an audit program to achieve an acceptably low level of audit
risk. The auditor uses the audit risk assessment to determine the audit
procedures to be applied and whether or not they should include confirmation.
06. The purpose of the confirmation is to obtain evidence from third parties about
the statements made by management in the financial statements. Section 326
"Evidentiary Evidence" specifies that, in general, it is assumed that "where
evidential evidence can be obtained from independent sources external to an
entity, a greater degree of reliance is placed on it for the purposes of an
independent audit than when obtained from the entity itself".
07. The higher the combined level of inherent and control risk, the greater the
degree of assurance the auditor needs to obtain from substantive testing of a
concept contained in the financial statements. Therefore, as the combined
level of inherent and control risk increases, the auditor designs substantive
tests to obtain additional or different evidence in relation to a financial
statement assertion. In these cases, the auditor may use confirmatory
procedures instead of, or in combination with, tests directed at documents or
persons within the entity.
08. Unusual or complex transactions may incorporate high levels of inherent and
control risks. When the entity has had unusual or complex transactions and
the level of inherent and control risk is high, the auditor should consider
confirming the terms of the transaction with the other parties involved and
also examine the documentation held by the entity. For example, if the level
of inherent and control risk determined for the risk arising from a year-end
sale is high, the auditor should consider confirming the terms of the sale.
09. The auditor must decide whether the evidence resulting from the
confirmations reduces the audit risk of the financial statement assertions to an
acceptable low level. In making this decision the auditor should consider the
significance of the account balance, together with his assessment of inherent
and control risk. In the event that the auditor decides that the evidence from
the confirmations is insufficient, additional procedures should be performed.
For example, to achieve an acceptably low level of audit risk on assertions
related to the existence and amount of accounts receivable, the auditor may
perform sales cut-off tests in addition to confirming accounts receivable.
10. The lower the combined level of inherent and control risk determined, the less
assurance the auditor needs from substantive testing to form a conclusion on
the financial statement assertions. Therefore, to the extent that the combined
level of inherent and control risk determined for a particular assertion is
reduced, the auditor may modify the substantive tests, making them less
effective and therefore less costly. For example, if the combined level of
inherent risk and control over cash holdings is low, the auditor may limit
substantive procedures to inspecting bank statements provided by the client
rather than confirming cash balances.
a) Existence or occurrence
b) Integrity
d) Valuation or allocation
12. When confirmation requests have been properly designed by the auditor, they
may relate to one or more of these classifications. However, the
confirmations do not cover all classifications with the same degree of
effectiveness. A confirmation of consignment goods requested from the
consignee may be more effective for affirmation of existence and rights and
obligations than for valuation. Accounts receivable confirmations are likely
to be more effective for the concept of existence than for completeness and
valuation assertions. Therefore, in obtaining evidence for those assertions
that are not adequately covered by an assurance, the auditor should consider
other audit procedures either in addition to, or as a substitute for, assurance
procedures.
13. The confirmation request can be designed to obtain evidence for the integrity
assertion. That is, when properly formulated, the confirmations can provide
evidence to determine whether the financial statements contain all transactions
and accounts. Its effectiveness in covering the completeness assertion
depends partially on whether the auditor makes his selection using an
appropriate universe for his tests. For example, when using confirmations to
obtain evidence as to the completeness assertion for accounts receivable, the
appropriate universe might be a list of customers, rather than the amounts
recorded in the accounts receivable subsidiary.
14. Some confirmation requests are not elaborated to obtain evidence on the
completeness assertion. For example, to confirm accounts receivable balance
information, the confirmation request could be designed to verify the
information contained in the request and to ensure that accounts receivable
not indicated in the respective request are confirmed.
THE CONFIRMATION PROCESS
16. The confirmation request should be designed for the specific audit objectives
in question. In other words, when designing the text of the request, the auditor
should consider the assertion(s) to be addressed, as well as the factors that
may affect the reliability of the information. Factors such as the form of the
request, previous experience in auditing or similar assignments, the nature of
the information to be confirmed and the person who is to respond should be
taken into account in the design of the confirmation request, as these factors
have a direct effect on the reliability of the evidence obtained through this
procedure.
17. There are two types of confirmation request, positive and negative. Some
positive applications ask you to indicate whether you agree with the
information in the application. Other positive requests, known as open-ended,
do not indicate any amount or information in the confirmation request, but
instead request that the balance or other information be provided.
18. The positive request provides audit evidence only when a confirmation
response is received. Otherwise, there is no audit evidence regarding the
assertions in the financial statements in question.
19. Because there is a risk that a positive confirmation request containing facts
and figures will be signed and returned without verifying its accuracy, open
positive confirmation requests can be used to mitigate that risk. Therefore, the
positive open confirmation request can deliver a higher degree of accuracy in
terms of the data being confirmed. However, it is possible that fewer
responses may be received with the open request, as additional effort is
required to respond to them. This lower response rate means that the auditor
may have to resort to alternative procedures.
20. The negative confirmation request requires a response only when there is
disagreement with the information contained in the request. Negative requests
may be used to reduce audit risk to an acceptable level when a) the combined
level of inherent and control risk is low, b) a high number of small balances
are involved, and c) the auditor has no reason to assume that the requests will
not be considered. For example, in the review of current accounts at a bank, it
may be appropriate for the auditor to attach the negative confirmation request
to each customer's current account statement when the level of inherent and
control risk is low and the auditor has no reason to assume that the requests
will go unanswered. The auditor should consider performing other procedures
to supplement the negative confirmation.
PREVIOUS EXPERIENCE
1
See Section 350 "Sampling in the Audit".
23. In determining the effectiveness and efficiency of using confirmatory
procedures, the auditor may consider the audit history of previous years'
audits or audits of similar entities. This information includes response rates,
knowledge of incorrect information identified in prior years' audits and any
knowledge of inaccurate information contained in confirmations with
responses. For example, in cases where the auditor has received a low
percentage of responses to properly completed confirmation requests in
previous audits, then the auditor may consider obtaining audit evidence from
other sources.
24. When designing a confirmation request, the auditor should consider the type
of information that the recipient can easily confirm, as the nature of the
information being confirmed can directly affect the competency of the
evidence obtained, as well as the response rate. For example, the accounting
system of certain recipients may provide confirmation of individual
transactions, rather than the entire balance of an account. Additionally, the
recipient may not be able to confirm their credit balances, but may be able to
confirm whether their payments are current, the amount of the payment and
the terms of their credit.
TARGET
26. The auditor should send the confirmation request to a third party who in the
auditor's opinion has adequate knowledge of the information to be confirmed.
For example, to confirm a client's assurances with a financial institution, the
auditor should direct the request for confirmation to an officer of that
institution who is responsible for the institution's relationship with that client,
or has knowledge of the transactions or arrangements in question.
27. In the event that the auditor receives information about the recipient's
competence, knowledge, motivation, ability or willingness to respond or
about the recipient's objectivity with respect to the audited entity (2), the auditor
should consider the effects of such information in relation to the design of the
confirmation request, the evaluation of the results and the determination to
apply further procedures if necessary. consider the effects of such information
in relation to the design of the confirmation request, the evaluation of the
results and the determination to apply further procedures if necessary. In
addition, there may be circumstances (such as significant and unusual year-
end transactions that have a material effect on the financial statements or
cases in which the recipient has custody of a significant amount of the entity's
assets) in which the auditor should exercise a greater degree of skepticism
regarding the above factors in relation to the recipient. In such circumstances,
the auditor should decide whether there are sufficient grounds to assume that
the recipient would provide sufficient and competent evidence.
CONFIRMATION PROCEDURES
(3)
28. In developing confirmation procedures, the auditor should maintain control
over confirmation requests and responses.
29. Occasionally it happens that the recipient, due to time pressures and other
factors, responds to a request for confirmation, other than a written
(2)
In the case of related entities, see paragraphs 09 and 10 of Section 334 which provides
guidance for the examination of related party transactions that have been identified by the
auditor.
(3)
The need to maintain control does not preclude the use of internal auditors in the
confirmation process (see Section 322). "Independent Auditor's Consideration of the Internal
Audit Function in an Audit of Financial Statements").
confirmation sent by mail. When this type of response is received, additional
evidence may be needed to support its validity. For example, there is some
risk in fax responses, due to the difficulty in determining the person sending
the fax. In order to reduce the risks inherent in faxed responses and for the
responses to be considered valid audit evidence, the auditor should take
certain precautions, such as verifying the origin of the responses by making a
telephone call to the purported sender. Additionally, the auditor should
consider requesting that the purported sender mail the original directly to the
auditor. Verbal confirmations should be recorded as such in the working
papers. In cases where verbal confirmations are of importance, the auditor
should request that the persons concerned send written confirmation directly
to the auditor.
30. When using non-negative confirmation requests, the auditor should follow up
with a second and sometimes a third request when no responses are received.
ALTERNATIVE PROCEDURES
31. In cases where the auditor does not receive a response to one or more requests
for positive confirmation, the auditor should apply alternative procedures to
obtain the evidence needed to reduce the audit risk to an acceptable level.
However, the omission of alternative procedures may be acceptable: (a) where
the auditor does not observe, in relation to unanswered requests, any unusual
systematic qualitative factors (e.g., that all unanswered requests relate to year-
end transactions), and (b) in tests for overstated amounts, projecting to the
sample universe as 100% misstatements the amounts of unanswered requests
and adding them to the total of all other differences to be adjusted, would not
be affected by this situation.If the amounts of the unanswered requests were to
be projected to the sample universe as 100% misstatements and added to the
total of all other differences to be adjusted, the auditor's opinion as to the
fairness of the financial statement presentation would not be affected by this
situation.
32. The nature of the alternative procedures varies by account and assertion. For
example, in the review of accounts receivable, alternative procedures may
include a review of subsequent collections (including a comparison between
such collections and the items paid), shipping documents or other customer
documentation to verify the assertion. In the review of accounts payable, for
example, alternative procedures may include a review of subsequent
payments, correspondence with third parties or other background information
to verify the assertion of completeness.
33. The auditor should evaluate the combined evidence obtained from both
confirmations and alternative procedures, after performing any alternative
procedures, to ensure that he has obtained sufficient evidence as to all relevant
assertions regarding the financial statements. In making such an assessment,
the auditor should consider: a) the reliability of confirmations and alternative
procedures; b) the nature of any omissions, including their implications, both
quantitative and qualitative; c) the evidence obtained from other audit
procedures; and d) whether additional evidence is needed. In the event that
the combined evidence obtained from confirmations, alternative procedures
and other procedures is not sufficient, the auditor should request additional
confirmations or perform other tests, such as detailed tests or analytical
procedures.
a) The rights to collect from its customers for the sale of goods or services
in the normal course of business, and
if it is known or expected that the responses would be unreliable, the auditor may determine that
the use of confirmations would be ineffective.
SECTION 331
Introduction
02. The objective of this section is to provide guidance to the independent auditor
for the observation of physical inventories. This section relates only to the
observation of physical inventories and not to other significant audit
procedures that are generally required for the independent auditor to satisfy
himself with respect to other audit objectives relating to these assets.
(Example: valuation, presentation, etc.)
03. Where inventory quantities are determined solely by physical count and all
counts are taken as of the balance sheet date or at another date within a
reasonable time before or after the balance sheet date, it is commonly
necessary for the independent auditor to be present at the time of the count
and, by proper observation, tests and inquiries, satisfy himself as to the
effectiveness of the methods employed in taking the inventory and the degree
of reliance he can place on the client's representations as to the quantities and
physical condition of the inventories.
04. When perpetual inventory records are well maintained and are periodically
verified by the client through comparisons with physical counts, the auditor's
inventory observation procedures can be performed during the period under
review or after the closing date.
06. Where the independent auditor has not satisfied himself as to the inventories
held by the client through the procedures described in paragraphs 03 to 05,
evidence of the accounting records alone will not be sufficient to enable him
to satisfy himself as to the quantities of inventories; it will always be
necessary for the auditor to make, or observe, some physical counts of
inventories and to apply appropriate tests of transactions in the period
between the period of time between the date of the audit and the date of the
audit.It will always be necessary for the auditor to make, or observe, some
physical counts of inventories and to apply appropriate tests on transactions in
the period between the date of the physical count and the year end. This
should be accompanied by inspection of the client's records of certain counts
and the procedures relating to physical inventory on which the amount
presented in the balance sheet inventory is based.
08. If the inventories are stored in public or third-party warehouses, the auditor
should normally obtain written confirmation directly from these custodians.
If such inventories represent a significant proportion of current or total assets,
in order to obtain reasonable assurance regarding their existence, the auditor
should apply one or more of the following procedures, as he considers
necessary in the circumstances.
d) If the pledge vouchers have been pledged as collateral, confirm with the
relevant creditors the details thereof.
SECTION 333
Introduction
01. This section establishes the requirement for the independent auditor to
obtain certain written representations from management as part of an audit
of financial statements conducted in accordance with generally accepted
auditing standards in Chile and provides guidance on those
representations.
Information Integrity
c. Availability of all financial-accounting records and related information.
1
) Annex A "Illustrative Letter of Management Representations" contains an illustrative
letter of representations.
2
) Specific representations are also applicable to financial statements
presented in accordance with a comprehensive basis of accounting other than
generally accepted accounting principles. The specific representations to be obtained
should be based on the nature and basis of presentation of the financial statements
being audited.
d. Integrity and availability of all minutes of meetings and meetings of
shareholders, directors and committees of directors.
e. Communications from regulatory agencies regarding non-compliance or
deficiencies in reporting and specific standards.
f. Absence of unrecorded transactions.
_________________________________
4
) If the entity has not consulted an attorney regarding litigation, lawsuits and claims, the
auditor would normally rely on a review of information available internally and obtain
written representations from management as to the absence of litigation, lawsuits and
claims.
5
) See Auditing Standards, section 560 "Subsequent Events".
10. If the current management (Chief Financial Officer and Chief Executive
Officer) was not involved during all periods covered by the auditors'
report, the auditor should still obtain representations from the current
management for those periods. The specific written representations
obtained by the auditor will depend on the circumstances of the
engagement and the nature and basis of presentation of the financial
statements. As mentioned in paragraph 8, management's representations
may be limited to matters, individually or in the aggregate, that are
material to the financial statements.
14. If the auditor is prevented from performing procedures that the auditor
believes are necessary in the circumstances with respect to a matter that is
material to the financial statements, even though management has made
representations concerning the matter, there is a limitation on the scope of
the audit and the auditor should express a qualified opinion or disclaim an
opinion.
Annex A
4. Certain terms are used in the illustrative chart. To clarify the meaning of such
terms, the auditor may wish to provide such definitions to management and
request that they be included in the written representations.
5. The illustrative letter assumes that management and the auditors have reached
an understanding about the limits of materiality for purposes of the written
representations. However, it should be noted that a materiality limit would not
apply to certain representations, as explained in paragraph 8 of this Section.
6. Sample Letter of Representation.
[Date] [Date] [Date] [Date] [Date] [Date] [Date] [Date] [Date
To Gentlemen. Independent Auditor][Independent Auditor
We are furnishing this information in connection with our audit(s) of[identification
of financial statements] of[name of entity] as of[date] and for the[period] in order
to express an opinion on whether the [consolidated, if applicable] financial
statements present fairly, in all material respects, the financial position, results of
its operations and cash flows of [name of entity] in conformity with generally
accepted accounting principles.We express an opinion on whether
the[consolidated, if applicable] financial statements present fairly, in all material
respects, the financial position, results of operations and cash flows of[name of
entity] in conformity with accounting principles generally accepted in Chile. We
confirm that we are responsible for the fair presentation in the financial
statements[consolidated, if applicable] of the financial position, results of
operations and cash flows in conformity with accounting principles generally
accepted in Chile.
Certain representations in this letter are described as being limited to matters that
are significant. Items are considered material, regardless of their amount, if they
involve an omission or misstatement of accounting information that, in light of the
conditions, would likely cause the judgment of a reasonable person relying on the
information to be affected by the omission or misstatement.
We confirm that to the best of our knowledge and belief as of [(date of auditors'
report),] the following representations were made to you during the course of your
audit(s).
7. The Company has no plans or intentions that could significantly affect the
carrying value or classification of assets and liabilities.
10. The Company has satisfactory title to all assets owned and there are no
pledges or liens on such assets, nor have any of these assets been pledged as
collateral.
11. The Company has complied with all contractual aspects that would have a
material effect on the financial statements in the event of noncompliance.
[Add additional representations that are unique to the entity's business or industry.
See paragraph 7 and Appendix B, "Additional Illustrative Representations" of this
Section and consider incorporating paragraph 4 of Audit Circular No. 16].
To the best of our knowledge, no events have occurred subsequent to the balance
sheet date and up to the date of this letter that would require an adjustment or
disclosure in the aforementioned financial statements.
_________________________________________
[Name of the Administration and Finance Manager and position].
____________________________________________
Assets
Condition Illustrative Example
Available
Disclosure of compensating balances Agreements with financial
or other arrangements involving institutions involving
restrictions on available balances, compensating balances or other
line of credit or similar agreements is arrangements involving restrictions
required. on available balances, line of credit
or similar arrangements have been
appropriately discussed.
Financial Instruments
Management has the intention and Financial instruments that have
ability to hold to maturity financial been classified as held-to-maturity
instruments classified as such. have been so classified due to the
Entity's intention to hold them and
its ability to do so. All other
instruments have been classified as
available-for-sale or trading.
Condition Illustrative Example
3. Significant concentrations of
credit risk arising from all financial
instruments and information about the
collateral covering such financial
instruments.
Balances receivable
The balances receivable have been The balances receivable recorded in
recorded in the financial statements. the financial statements represent
valid claims against debtors for sales
or other charges arising on or before
the balance sheet date and sufficient
allowances have been made for
doubtful accounts.
Assets
Condition Illustrative Example
Stocks Provisions have been made for excess
There is excess or obsolete stock. or obsolete inventories to adjust them
to their estimated realizable value.
Investments
There are unusual considerations [For investments in shares or equity
involved in accounting for interests that are either non-
Proportionate Shareholder's Equity marketable or for which the entity has
(PPV). significant ownership influence, select
the appropriate proxy from the
following proxies:]]
Deferred Charges
Significant expenses have been deferred. We believe that in order to defer
significant expenses, appropriate
consideration has been given to the
future periods in which the benefits
will be received.
Assets
Condition Illustrative Example
(Continued)
Heritage
Condition Illustrative Example
Income Statement
Condition Illustrative Example
There may be a loss from sales Provisions have been made for
commitments. losses arising from the fulfillment
or inability to fulfill certain sales
commitments.
There may be losses from purchase Provisions have been made for
commitments. losses arising as a result of
purchase commitments for
inventory amounts exceeding
normal requirements or at prices
exceeding current market prices.
The nature of the project or industry We have fully disclosed to you all
indicates the possibility of terms and conditions of sale,
undisclosed sales conditions. including all rights of return or
price adjustments and all warranty
provisions granted for sales.
Annex C
1. The following chart is presented for illustrative purposes only. It can be used
in the cases described in paragraph 12 of this section. Management does not
need to repeat all the representations made in the previously issued letter of
representation.
2. If there are matters that should be disclosed to the auditors, they should be
indicated in paragraphs following the respective representation. For example,
if an event after the balance sheet date has been disclosed in the financial
statements, the final paragraph could be modified as follows: "to the best of
our knowledge and belief, except as discussed in Note X to the financial
statements, no events have occurred . . .”
3.
[Date
To[Auditors] Gentlemen
In connection with your audit(s) of [date] and for the [period], for the purpose of
expressing an opinion on whether the [consolidated] financial statements present
fairly, in all material respects, the financial position, results of operations and cash
flows of [entity name] in conformity with generally accepted accounting principles
in Chile, we have previously provided you with a representation letter dated [date
of previous representation letter].In order to express an opinion as to whether the
[consolidated] financial statements present fairly, in all material respects, the
financial position, results of operations and cash flows of [name of entity] in
conformity with accounting principles generally accepted in Chile, we have
previously provided you with a letter of representation dated[date of previous
letter of representation]. We are not aware of any information that causes us to
believe that any of the representations previously issued should be modified.
To the best of our knowledge, no events have occurred subsequent to[date of the
last balance sheet on which the auditor issued its report] and up to the date of this
letter that would require adjustments or disclosures in the aforementioned
financial statements.
____________________________________________
[Name of the Administration and Finance Manager and position].
____________________________________________
Name of General Manager and position][Name of General Manager and position]
[Name of General Manager and position
SECTION 334
RELATED PARTIES
Introduction
ACCOUNTING CONSIDERATIONS
02. Although generally accepted accounting principles do not require that related
party transactions be accounted for under a different concept than if the
parties were not related, Technical Bulletin No. 16 (Related Party
Transactions) provides the presentation and disclosure requirements for these
transactions. There are also other pronouncements and regulations that also
seek to inform and regulate this issue, for example, Law No. 18,045, Article
100°, which defines who are related to a company; Law No. 18,046, in its
Articles 86° and 87°, defines what is understood by subsidiaries and affiliated
companies.046, in its Articles 86° and 87°, defines what is understood by
subsidiaries and affiliated companies; the Circulars of the Superintendency of
Securities and Insurance N° 1460 of 1997 and other subsequent ones also
instructed on this subject.
The auditor should consider transactions with a related party within the
conceptual framework of existing pronouncements, with an emphasis on the
degree of disclosure being adequate. In addition, the auditor should be aware
that the substance (the substance) of a particular transaction may differ
significantly from its legal form, and that the financial statements should
recognize the substance of specific transactions rather than their form.
03. The following are examples of transactions that by their nature may be
indicative of the existence of related parties:
d) Granting loans without specifying when or how the funds involved will be
paid.
AUDIT PROCEDURES
b) The need to show earnings primarily for the purpose of supporting the
company's share price.
07. The auditor should place emphasis or care in testing significant transactions
that he knows are related to the entity he is auditing. Certain relationships
such as parent-subsidiary or investor-investment may be evident.
Determining the existence of other related parties requires the application of
specific audit procedures, which may include, among others, the following:
a) Evaluate that the company's procedures are adequate to identify and record
transactions with related parties.
b) Request from management the names and links with related parties and
inquire whether transactions were carried out with such parties during the
period.
e) Review the working papers of previous years and verify that the related
parties of those periods are still in force.
f) Inquire with the previous auditor and with the auditor of the parent
company and/or subsidiaries about their knowledge of existing
relationships and the degree of management influence or involvement in
significant transactions.
08. The following procedures are intended to provide guidance for identifying
significant transactions with parties known to be related and for identifying
significant transactions that may be indicative of previously undetermined
relationships.
a) Provide the audit team performing the work with the names of known
related parties, so that they can be forewarned about transactions with such
parties during their examination.
f) Consider whether there are transactions with related parties that are not
being recorded in the accounts, such as receiving or providing accounting,
managerial or other services at no cost or are being absorbed by the
principal owner.
i) Review invoices or bills from law firms that have provided regular or
special services to the company, looking for indications that there are
related parties or transactions with related parties.
09. After identifying transactions with related parties, the auditor should apply the
procedures he considers necessary to obtain satisfaction as to the purpose,
nature and extent of these transactions and their effects on the financial
statements. The procedures should be aimed at obtaining and evaluating the
material matter of competent evidence and should extend beyond questions to
management. Procedures that should be considered include the following:
a) Achieve an understanding of the purpose of the business or transaction.
a) Confirm the amount and terms of the transaction, including collateral and
other important information with the other party or parties to the
transaction.
DISCLOSURE
11. For each significant related party transaction (or accumulation of similar
transactions) or joint ownership or management control relationship for which
Technical Bulletin No. 16 requires disclosure, the auditor should consider
whether the auditor has obtained sufficient competent evidence to understand
the parties' relationship and, for related party transactions, the effects of the
transaction on the financial statements. 16 requires disclosure, the auditor
should consider whether sufficient competent evidence has been obtained to
understand the relationship of the parties and, for related party transactions,
the effects of the transaction on the financial statements. He should evaluate
all available information concerning the related party transaction or control
relationship and satisfy himself based on his professional judgment that such
information has been adequately disclosed in the financial statements.
12. Except for routine transactions, it will generally not be possible to determine
whether a particular transaction would have taken place if the parties had not
been related or, assuming it had taken place, what the terms and manner of
settlement would have been. Consequently, it is difficult to prove
representations that a transaction was made on terms equivalent to those
prevailing when the parties are independent. If such representation is
included in the financial statements and the auditor believes that it is
unsupported by management, the auditor should express a qualified or adverse
opinion due to a departure from generally accepted accounting principles,
depending on its materiality or materiality (See Section 508.36 and 37).
SECTION 336
Introduction
01. The purpose of this Section is to provide guidance to the auditor using the
work of a specialist in performing an audit of financial statements in
accordance with generally accepted auditing standards. For the purposes of
this Section, a specialist is a person (or entity) who possesses skills or
knowledge in a specific field other than accounting or auditing.
02. The specialists covered by this standard include, among others, actuaries,
appraisers, engineers, environmental consultants and geologists. This rule
also applies to specialist lawyers in situations other than providing services to
their clients in connection with litigation, trials or other matters for which
confirmation of counsel is usually required. For example, a lawyer may be
asked to interpret issues in a special contract.
__________________________
1) The auditor should consider the effect on independence of using the work of a specialist
employed by the auditing firm.
c) The auditor engages a specialist and uses his work as evidence in his
substantive tests in evaluating the assertions contained in the financial
statements.
04. The guidance provided in this section applies to audits of financial statements
prepared in accordance with generally accepted accounting principles and for
other special work related to accounting principles.
05. This Section does not apply to situations where the specialist employed by the
auditing firm participates in the audit.
07. Some examples of matters on which the auditor may decide on the possibility
of using the work of a specialist are:
a) Your professional degree, license to practice, or other evidence that you are
a specialist in that field.
09. The auditor must have a perfect understanding of the nature of the work to be
performed by the specialist. Such understanding shall cover the following:
b) Relationship of the specialist with the client (See paragraphs 10 and 11).
e) The specialist's perfect understanding of the use that the auditor will make
of the results of his work in relation to the financial statements. In some
cases, the auditor may decide to contact the specialist to determine whether
the specialist is aware that his or her work will be used to assess the
reasonableness of assertions contained in the financial statements.
f) The form and content of the specialist's report that will enable the auditor
to perform the assessment described in paragraph 12.
10. The auditor should evaluate the specialist's relationship with the client,
including circumstances that may impede the specialist's objectivity. Such
circumstances include situations where the client has the possibility - through
his or her employment relationship, ownership, contractual rights, family
relationships or otherwise - to significantly influence, directly or indirectly,
the specialist.
11. When the specialist has no relationship with the client, the work performed by
him will usually provide the auditor with greater reliability. However, the
work of a specialist who has a relationship with the client may be accepted
under certain circumstances. If the specialist has a relationship with the
client, the auditor must assess the risk that the specialist's objectivity may be
impaired. If the auditor believes that the relationship may impair the
specialist's objectivity, the auditor should perform additional procedures with
respect to some or all of the specialist's bases, methods, or findings to
determine the reasonableness of the specialist's conclusions or should have
another specialist perform this review.
12. The reasonableness and propriety of the methods or bases used and their
application are the responsibility of the specialist. The auditor shall:
Normally, the auditor will use the results of the work of a specialist unless his
procedures lead him to believe that the results of the specialist's work are not
reasonable in the circumstances. If the auditor considers that his findings are
not reasonable, he should consider carrying outadditional proceduresor
enlisting the help of another specialist for this purpose.
14. After performing other additional procedures, including possibly the opinion
of another specialist, the auditor may conclude that what is presented in the
financial statements is not in conformity with generally accepted accounting
principles. In such a case, a qualified or adverse opinion must be expressed.
(See Section 508 - paragraphs 47, 48 and 53).
15. Except as discussed in paragraph 16, the auditor should not make any
reference to the result of the specialist's work. Such a statement in an
unqualified opinion could be misinterpreted as a qualification of the opinion
or a division of responsibility, and no attempt is made to present either
possibility. In addition, it could be interpreted that the auditor making such a
reference carried out a more accurate audit than could have been done by
another auditor who did not mention the specialist.
16. The auditor may, as a result of the specialist's work report, decide to add an
explanatory paragraph describing his work or not to present an unqualified
opinion. It may make reference to and identify the specialist in its report, if
the auditor considers that such reference will assist in understanding the
reason for the explanatory paragraph or for not issuing an unqualified
opinion.
SECTION 337
Introduction
01. This Section provides guidance on the procedures that an independent auditor
should consider in identifying litigation, claims and encumbrances, and
satisfying himself as to the accounting records and disclosures about these
matters, when performing an examination of financial statements in
accordance with generally accepted auditing standards.
Audit Considerations
04. With respect to litigation, claims and liens, the independent auditor shall
obtain relevant evidence on the following:
Audit Procedures
05. Because the situations or conditions to be considered in accounting for and
reporting litigation, claims and liens are matters within the direct knowledge
and control of an entity's management, management is the most important
source of those matters. Therefore, audit procedures with respect to litigation,
claims and liens should include the following:
06. Accordingly, the auditor should ask the client's management to send a letter of
inquiry to those lawyers with whom he has consulted on litigation, claims and
liens, because that is the best way to corroborate management's representation.
07. The auditor's examination normally includes certain procedures performed for
various purposes that may also disclose litigation, claims and encumbrances.
Examples of such procedures are:
08. The letter of inquiry to legal counsel is the primary means by which the
auditor corroborates the information provided to him by management
regarding litigation, claims and liens. The auditor may obtain this evidence
from the company's legal department or in-house counsel. However, any
evidence obtained from in-house counsel is not a substitute for that which
outside counsel refuses to give.
09. The matters to be covered in an inquiry letter include the following, but are
not strictly limited to these items:
a) Identification of the company, including its subsidiaries and the date of the
examination.
(1) Description of the nature of the matter, development of the case to date
and action the Company contemplates taking (e.g., defending itself or
attempting a judicial or extrajudicial settlement).
It will not be necessary to inquire into matters that are not considered
significant, provided that the client and the auditor have reached an
understanding of the limits of significance for these purposes.
Alternatively, the administration may prepare the list with the items
indicated in point b). In such a case, it will be necessary to ask the lawyer
to comment on those matters on which his views differ from those
presented by management, and to indicate any significant omissions.
10. In certain circumstances, the auditor may request the client to meet with the
lawyers. This may allow for a more detailed explanation and analysis than
what appears in the attorney's letter.
11. When the auditor becomes aware that his client has changed lawyers or that
they have resigned, he should consider the need to inquire into the reasons for
their resignation.
12. The lawyer may limit his or her response to matters to which he or she has
given significant attention in the form of legal consultation or representation.
In addition, a lawyer may limit his or her responses to those matters that he or
she considers material because they individually or collectively affect the
financial statements, provided that both the lawyer and the auditor have
reached an understanding on the limits of materiality. Such restrictions do not
constitute limitations on the scope of the auditor's examination.
- Liens of any nature affecting our property assets (seizures, mortgages, pledges,
etc.).
- Due registration, in the company's name, of title deeds to its real estate.
- Any other matter in which, to the best of your knowledge, could result in a
possible obligation for this company.
The response to this request should refer to those matters that affect our
financial statements at __________, and on matters existing at the date of your
response. It is recommended that this date be as close as possible to the date of
completion of the field work by the auditor.
We thank you for your attention and cooperation with this letter and
send you our best regards.
SECTION 339
WORKING PAPERS
Introduction
01. The auditor should prepare and maintain working papers, the form and content
of which should be designed in accordance with the particular circumstances
of the audit being performed (1). The information contained in the working
papers constitutes the principal record of the work performed by the auditor
and the conclusions reached concerning significant events (2).
___________________________
1) This Section does not modify other auditing standards, including the following:
The letter of request for information to the client's attorney regarding the audit required by
Section 337, "Request for Information from a Client's Attorneys Regarding Litigation, Claims
and Claims," paragraphs 08 and 09, or the documentation required by paragraph 10 when a
response to the audit request letter is received at a meeting with the attorneys.The audit request
letter should be sent to the client's counsel regarding the audit required by Section 337, "Request
for Information from a Client's Counsel Regarding Litigation, Claims and Claims", paragraphs 08
and 09, or the documentation required by paragraph 10 when a response to the audit request letter
is received at a meeting with counsel.
The written representations from management required by Section 333, on safeguards and
representations obtained from the client's management.
The notation in the working papers required by Section 325, paragraph 08, if material weaknesses
in internal control are communicated orally to management or the board of directors.
The written audit program or set of written audit programs required by Section 311 "Planning and
Supervision", paragraph 2l.
2) However, it is not intended to imply that the auditor is prevented from supporting his report by
means other than working papers.
Functions and Nature of Work Papers
a) Provide the main support for the auditor's report, including the
observations, facts, arguments, etc., supporting compliance with the work
performance standard, which is implicit in the report's reference to
generally accepted auditing standards.
b) An aid to the auditor in executing and supervising the work.
03. The working papers are records kept by the auditor on the procedures applied,
the tests performed, the information obtained and the relevant conclusions
reached in his work. Examples of working papers are audit programs,
analyses, memoranda, confirmation and certification letters from the client,
extracts from company documents, and letters or comments prepared or
obtained by the auditor. Working papers may also consist of reports stored on
tape, film and other media.
04. Factors affecting the auditor's judgment as to the quantity, type, and content of
the working papers for each audit include:
05. The quantity, type and content of the working papers vary according to the
circumstances (see paragraph 04), but they should be sufficient to show that
the accounting records agree and reconcile with the financial statements or
other information on which the opinion is being rendered and that the auditing
standards applicable to the performance of the work have been complied with.
b) The internal control system has been studied and evaluated to the extent
necessary to determine whether, and to what extent, other auditing
procedures should be applied, indicating compliance with the second
auditing standard relating to the performance of the work.
c) The evidence obtained during the audit, the audit procedures performed
and the tests performed provided sufficient competent audit evidence to
express an opinion on a reasonable basis, indicating compliance with the
third auditing standard relating to the performance of work.
06. The working papers are the property of the auditor. However, the auditor's
right of ownership of the working papers is subject to those limitations
imposed by professional ethics established to prevent improper disclosure by
the auditor of confidential matters relating to the client's business.
07. Certain auditor's working papers may serve as a useful reference source for
your client, but should not be considered as part of, or a substitute for, the
client's accounting records.
08. The auditor should adopt reasonable procedures to maintain safe custody of
his working papers and should retain them for a period sufficient to meet the
needs of his professional practice and to satisfy any other retention
requirements.
SECTION 341
Introduction
__________________________
1) This Section should not be applied in an audit of financial statements prepared on the basis of
accounting principles of entities in liquidation (for example, when (a) an entity is in the process
of liquidation, (b) the owners have decided to commence with dissolution or liquidation, or (c)
there are legal proceedings, including bankruptcy, that have reached a point where dissolution or
liquidation is probable).(b) the owners have decided to commence dissolution or liquidation, or
(c) where there are legal proceedings, including bankruptcy, that have reached a point where
dissolution or liquidation is probable).
2) The guidelines provided in this Section may be applied in audits of basic financial statements
prepared either in conformity with generally accepted accounting principles or in audits of other
financial statements prepared in conformity with comprehensive basis of accounting other than
generally accepted accounting principles. References in this Section to generally accepted
accounting principles include comprehensive bases of accounting other than generally accepted
accounting principles (excluding settlement bases).
03. The auditor should assess whether there are significant doubts regarding the
entity's ability to continue as a going concern for a reasonable period of time
as follows:
a) The auditor should consider whether, in analyzing the results of his or her
procedures related to the various audit objectives, from planning, to
obtaining audit evidence, to concluding the audit, he or she identifies
conditions and events that, taken as a whole, indicate that there may be
significant doubt about the entity's ability to continue as a going concern
for a reasonable period of time. It may be necessary to obtain additional
information related to such conditions and events, as well as appropriate
supporting evidence, to support information that may clarify the auditor's
doubts.
b) If the auditor believes that there is significant doubt about the entity's
ability to continue as a going concern for a reasonable period of time, the
auditor should:
(2) assess the likelihood that such plans can be effectively developed.
c) After the auditor has evaluated management's plans, he/she will conclude
whether he/she has significant doubts regarding the entity's ability to
continue as a going concern for a reasonable period of time. If you
consider that there are substantial doubts, you should:
04. The auditor does not have to assume responsibility for forecasting future
conditions or events. The fact that an entity may cease operations as a going
concern, after receipt of the auditor's report, without the auditor having raised
substantial doubt, even within one year after the date of the financial
statements, does not indicate the application of inadequate procedures by the
auditor. Consequently, in the absence of references to such material doubts in
the auditor's report, it will not be considered to be providing assurance about
an entity's ability to continue as a going concern.
AUDIT PROCEDURES
a) Analytical procedures.
e) Inquire with the company's legal counsel regarding litigation, claims and
liens.
f) Confirm with third parties and related parties, details regarding agreements
to provide or retain their financial support.
06. In performing audit procedures, such as those referred to in paragraph 05, the
auditor may identify information related to certain conditions or events that,
when considered as a whole, indicate that there may be significant doubt about
the entity's ability to continue as a going concern for a reasonable period of
time. The significance of such conditions or events will depend on the
circumstances, and some may have significance when considered in
conjunction with others. The following are examples of such conditions and
events:
d) The presence of external matters such as: for example, pending lawsuits,
legislation or similar matters that may limit the entity's ability to operate;
loss of a franchise, license or key patent; the loss of a major customer or
supplier; the occurrence of catastrophic events, whether insured or
uninsured, such as drought, earthquake, or flood.
07. If, after considering the significant conditions and events, the auditor believes
that there is significant doubt about the entity's ability to continue as a going
concern for a reasonable period of time, the auditor should consider
management's plans for dealing with the adverse effects of the conditions and
events. The auditor should obtain information on these plans and consider
whether it is possible that the adverse effects can be mitigated for a reasonable
period of time and that such plans can be effectively developed. The auditor's
considerations in relation to management's plans may include the following:
08. In evaluating management's plans, the auditor should identify those elements
that are particularly significant in overcoming the adverse effects of the
aforementioned conditions or events and should plan and perform audit
procedures to obtain related audit evidence. For example, the auditor should
consider the adequacy of support in relation to the ability to obtain additional
financing or disposal plans for the sale of assets.
09. When budgeted financial information is particularly important to
management's plans, the auditor should ask management to provide such
information and should consider the adequacy of the support for the
significant assumptions underlying such information.
10. When, after considering management's plans, the auditor concludes that there
is significant doubt about the entity's ability to continue as a going concern for
a reasonable period of time, the auditor should consider the possible effects on
the financial statements and the appropriateness of disclosing them in
explanatory notes. Some of the information for which notes should be made
include:
a) Relevant conditions and events that give rise to significant doubt, requiring
evaluation, with respect to the entity's ability to continue as a going
concern for a reasonable period of time.
b) Possible effects of such conditions and events.
12. If, after considering the conditions and events identified and management's
plans, the auditor concludes that there is significant doubt about the entity's
ability to continue as a going concern for a reasonable period of time, he
should include in his report an explanatory paragraph (following the opinion
paragraph), to
___________________________
3) It is not intended that such budgeted financial information constitutes budgeted financial
statements, nor does the inclusion of such information require considerations other than those
customarily required by generally accepted auditing standards.
express such a conclusion. (4) The auditor's conclusion about the auditor's
ability to
an entity to continue as a going concern should be expressed with the phrase
"substantial doubt about its ability to continue as a going concern" (or similar
phrases including the terms "substantial doubt", "going concern" as illustrated
in paragraph 13).
13. The following is an example of an explanation paragraph (following the
opinion paragraph) in the auditor's report describing an uncertainty regarding
an entity's ability to continue as a going concern for a reasonable period of
time.
___________________________
4) The inclusion of an explanatory paragraph (following the opinion paragraph) in the
auditor's report contemplated in this Section should serve to adequately inform users of the
financial statements. However, this Section is not intended to preclude the auditor from
expressing an opinion in cases involving uncertainties. If the auditor expresses a disclaimer of
opinion, the uncertainties and their possible effects on the financial statements shall be disclosed
in an appropriate manner (see paragraph 10), and the auditor's report shall express all the
significant reasons that led him to disclaim an opinion (see Section 508 "Auditors' Report on
Financial Statements").
15. The fact that material doubts arise in the current period with respect to the
company's ability to continue as a going concern for a reasonable period of
time does not imply that indications of such doubts existed in the prior period
and, therefore, will not affect the auditor's report on the prior period financial
statements, which are presented on a comparative basis. When the financial
statements of one or more periods are presented on a comparative basis with
the financial statements of the current period, the report should be presented
based on the guidelines provided in Section 508.
16. If at the date of the prior period financial statements, which are presented on a
comparative basis, there were significant doubts about the entity's ability to
continue as a going concern for a reasonable time and those doubts have been
removed in the current period, the explanation paragraph included in the
auditor's report (following the opinion paragraph) in the prior period financial
statements should not be repeated.If such doubts have been removed in the
current period, the explanation paragraph included in the auditor's report
(following the opinion paragraph) in the prior period financial statements
should not be repeated.
SECTION 342
Introduction
02. Estimates in the financial statements are approximations that serve to measure
the effects of certain transactions or business events that have already
occurred or the present status of certain assets and/or liabilities. Examples of
estimates are: the net realizable value of inventories and accounts receivable,
technical reserves in insurance companies, and revenues from construction
contracts accounted for by the percentage-of-completion method. 1
1
Additional examples of estimates included in the financial statements are presented in
Appendix A.
04. It is the auditor's responsibility to evaluate the reasonableness of estimates
made by management in the context of the financial statements taken as a
whole. Since estimates are based on both subjective and objective factors, it
can be difficult for management to control them. Even when the estimation
process involves competent personnel using relevant and reliable information,
it is possible that they may be biased towards subjective factors.
Consequently, in planning and performing audit procedures to evaluate
estimates, the auditor should consider both subjective and objective factors
with an attitude of professional skepticism.
DEVELOPMENT OF ESTIMATES
EVALUATION OF ESTIMATES
07. The auditor's objective in evaluating estimates is to obtain sufficient competent
evidence to provide reasonable assurance about whether:
a) All estimates that could be material to the financial statements have been
made.
08. In assessing whether management has identified all estimates that could be
significant to the financial statements, the auditor should consider the state of
the industry or industries in which the entity operates, methods of conducting
business, new accounting pronouncements and other external factors. The
auditor should consider applying the following procedures:
2
Section 411 "The Meaning of Fairly Present in Accordance with Generally Accepted
Accounting Principles" in the independent auditor's report discusses the auditor's responsibility
for evaluating conformity with generally accepted accounting principles.
3
Section 431 "Adequate Disclosure in Financial Statements" discusses the auditor's
responsibility to consider whether the financial statements include adequate disclosures of
material matters in consideration of the circumstances and facts of which the auditor is aware.
2. Changes in the methods of collecting, using and archiving
information.
REASONABLENESS ASSESSMENT
The auditor should normally consider the experience that the entity has had in
making estimates, as well as the auditor's experience in the industry.
However, changes in facts, circumstances or in the entity's procedures may
cause results to differ from those considered in the past, which may be
significant to the estimate. In addition to audit evidence obtained in relation
to estimates in certain cases, the auditor may obtain written representations
from management regarding key factors and assumptions.
c) Review events or transactions occurring after the balance sheet date, but
prior to the date of the auditor's report.
11. Review and Testing of the Administration Process. In some cases, the auditor
assesses the reasonableness of an estimate by applying certain procedures to
test the process used by management in making the estimate. The following
procedures can be performed by the auditor when this option is chosen:
a) Identify whether there are controls over the preparation of estimates and
supporting information that may be useful in the evaluation.
c) Analyze whether there are other key factors or alternative assumptions not
considered in "b" above.
d) Check that the assumptions are consistent with each other and with
supporting historical and industry information.
The following are examples of estimates included in the financial statements. The
list is presented for informational purposes only and does not include all cases that
may exist.
Accounts Receivable
Inventories
Obsolete inventories
Net realizable value of inventories where sales prices and future costs
are involved
Losses on purchase commitments
Financial Instruments
Valuation of investments
Provisions for hedging contracts
Accrual Method
Revenues
Transportation revenues
Subscription revenues
Unbilled accrued income
Freight and cargo revenues
Quota income
Long-Term Contracts
Revenues to be accrued
Costs to be incurred
Degree of progress
Leasing
Litigation
Probability of losses
Determination of losses
Taxes
Others
SAMPLING IN AUDITING
Introduction
02. The auditor is often aware of those account balances and transactions that may
have the greatest potential for error (2). He considers this knowledge in
planning his procedures, including audit sampling. The auditor normally has
no special knowledge of other account balances and transactions that, in his
opinion, will require testing to meet his audit objectives. Sampling is
especially useful in these cases.
___________________________
1) There may be other reasons for an auditor to examine less than 100 percent of the items
comprising an account balance or type of transaction. For example, an auditor may examine only
a few transactions of an account balance or type of transaction to (a) understand the nature of the
entity's operations, or (b) enhance his or her understanding of the entity's system of internal
control. In both cases, this rule is not applicable.
2 ) For purposes of this section, the use of the term "error" may include both errors and
irregularities.
03. There are two general approaches to sampling: statistical and non-statistical.
Both approaches require the auditor to use professional judgment in planning,
developing and evaluating a sample and to relate the supporting evidence
produced by the sample to other supporting evidence to reach a conclusion
about the corresponding account balances or types of transactions. This
standard is applicable to both approaches.
04. The third standard relating to the performance of work states that "sufficient
and competent evidential material shall be obtained, by inspection,
observation, inquiry and confirmation, to provide a reasonable basis for
expressing an opinion on the financial statements under review".
05. The sufficiency of audit evidence is related, among other factors, to the design
and size of an audit sample. The sample size needed to provide sufficient
supporting evidence depends on both the objectives and the efficiency of the
sample. For a given objective, the sample design is related to how efficient the
sample is. A sample is more efficient than another if it can achieve the same
objectives with a smaller sample size. In general, careful design can produce
more efficient samples.
09. Audit risk includes both uncertainties due to sampling and those due to other
factors. These aspects of audit risk are, respectively, sampling risk and non-
sampling risk.
10. Sampling risk arises from the possibility that, when a substantive or
compliance test is limited to a sample, the auditor's conclusions may differ
from the conclusions that would be reached if the tests were applied in the
same way to all items in the transaction-type account balance. That is, a
particular sample may contain proportionally more or less monetary errors or
compliance deviations than those that exist in the balance or type of
transaction as a whole. For a sample of a specific design, sampling risk varies
inversely with sample size; the smaller the sample size, the greater the
sampling risk.
11. Non-sampling risk includes all aspects of audit risk that are not related to
sampling. An auditor may apply a procedure to all transactions or balances
and still not detect a material error. Non-sampling risk includes the possibility
of selecting audit procedures that are not appropriate to achieve the specific
objective. For example, confirming recorded accounts receivable cannot be
relied upon to disclose unrecorded accounts receivable. The risk not due to
sampling also arises because the auditor may not recognize errors included in
documents he examines, which would render the procedure useless, even if he
were to examine all items. Risk that is not due to sampling can be reduced to a
negligible level through proper planning and monitoring (see Section 311 -
"Planning and Monitoring").
Sampling Risk
12. The auditor should apply professional judgment in determining sampling risk.
When performing detailed substantive testing, the auditor should keep in mind
two aspects of sampling risk:
- The risk of incorrect acceptance is the risk that the sample supports the
conclusion that the recorded account balance does not contain material
errors, when it does contain material errors.
- The risk of incorrect rejection is the risk that the sample supports the
conclusion that the recorded account balance contains material errors when
it does not contain material errors.
The auditor should be aware of the following two aspects of sampling risk in
order to perform internal control compliance testing:
- The risk of underestimating control risk is the risk that the level of control
risk estimated on the basis of the sample is less than the true operating
effectiveness of the policy structure or internal control procedures.
- The risk of overestimating control risk with respect to internal control is
the risk that the level of control risk estimated on the basis of the sample is
greater than the true operating effectiveness of the internal control policy
structure or procedures.
13. The risk of incorrect rejection and the risk of overestimating control risk are
related to the efficiency of the audit. For example, if the auditor's evaluation
of an audit sample leads him to the initial erroneous conclusion that a balance
is materially misstated when it is not, the application of additional audit
procedures and consideration of other audit evidence would normally lead him
to the correct conclusion. Similarly, if the auditor's assessment of a sample
leads him to overestimate the control risk for an event, he would normally
increase the scope of substantive testing to compensate for the perceived
ineffectiveness of the policies or procedures of the internal control structure.
However, under these circumstances the audit may be less efficient, but it is
effective.
14. The risk of incorrect acceptance and the underestimation of control risk relate
to the effectiveness of an audit in detecting an existing material misstatement.
These risks are discussed in the following paragraphs.
Sample Planning
16. In planning a sample for substantive detail testing, the auditor should consider:
- The relationship of the sample to the related audit objective (see Section
326 "Audit Evidence").
17. When planning a sample, the auditor should consider the specific audit
objective to be achieved and determine that the audit procedure or
combination of procedures to be applied will achieve that objective. The
auditor should determine that the universe from which the sample is selected
is appropriate for the specific audit objective. For example, an auditor would
not be able to detect understatements of an account due to omitted items by
taking a sample of recorded items. An appropriate sampling methodology to
detect such undervaluations would involve selection from a source in which
the omitted items are included. As an example, a sample of subsequent cash
disbursements could be taken to test for understatement of accounts payable
recorded due to omitted purchases, or a sample of shipping documents could
be taken to determine understatement of sales due to shipments made but not
recorded as sales.
18. The assessment in monetary terms of the results of a sample for a substantive
test of detail contributes directly to the auditor's purpose, since such an
assessment can relate to the auditor's judgment as to the monetary amount of
errors that would be material. In planning a sample for a substantive test of
detail, the auditor should consider what monetary amount of errors may exist
in the relevant account balance or type of transaction without materially
distorting the financial statements. This maximum monetary amount of error
for the balance or type is known as the tolerable error for the sample.
Tolerable error is a planning concept and relates to the auditor's preliminary
estimates of materiality levels such that the tolerable error, combined for the
entire audit plan, does not exceed those estimates.
19. The second standard relating to the performance of the work states that "the
auditor should obtain a sufficient understanding of the internal control
structure to plan the audit and to determine the nature, timing and extent of the
tests to be performed". After evaluating and considering the levels of inherent
and control risk, the auditor performs substantive tests to reduce the risk of
detection to an acceptable level. As the assessed level of inherent, control and
detection risks in the other substantive tests directed toward the same audit
objective is reduced, the permissible risk of incorrect acceptance for the
substantive tests of detail increases and, therefore, the sample size required for
the substantive test of detail will be smaller. For example, if the auditor
assesses inherent and control risks to the maximum extent possible and does
not perform other substantive testing directed toward the same specific audit
objective, the auditor should allow a low risk of misstatement for substantive
tests of detail (3). In this way the auditor would select a larger sample for
detail testing which would allow for a higher risk of incorrect acceptance.
20. The Appendix (see Table 1) illustrates how the auditor can relate the risk of
incorrect acceptance for a specific substantive test of detail to his assessments
of inherent and control risk and the risk that analytical procedures and other
related substantive tests will not detect significant misstatements.
___________________________
3) Some auditors prefer to consider risk levels in quantitative terms. For example, in the
circumstances described, an auditor might think in terms of a 5 percent risk of incorrect
acceptance for the substantive test of detail. The risk levels used in sampling applications in
other fields are not necessarily relevant in determining the appropriate levels for audit
applications because an audit involves many interrelated tests and sources of evidence.
21. As mentioned in Section 326, the sufficiency of tests of detail for a specific
account balance or type of transactions is related to the significance of each
item examined as well as the possibility of material misstatement. When the
auditor plans a sample for a substantive test of detail, he uses his judgment to
determine which items, if any, in the account balance or type of transactions
should be examined individually and which items, if any, should be subject to
sampling. The auditor should examine those items for which, in the auditor's
judgment, the acceptance of a certain sampling risk is not justified. For
example, these may include items where potential errors could individually
equal or exceed the tolerable error. Any items that the auditor has decided to
examine 100 percent are not part of the items subject to sampling. Other items
that in the auditor's judgment need to be tested to meet the audit objective, but
do not require 100 percent examination, would be subject to sampling.
22. The auditor can reduce the required sample size by separating sampled items
into relatively homogeneous groups on the basis of some characteristic related
to the specific audit objective. For example, frequently used bases for such
groupings are: the recorded or book value of the items, the nature of the
policies or procedures of the internal control structure related to the processing
of the items, and special considerations related to certain items. Finally, an
appropriate number of items are selected from each group.
24. Sample items should be selected in such a way that the sample can be trusted
to represent the universe; therefore, all items in the universe should have the
opportunity to be selected. For example, random and randomized selection of
the batches represent reliable means to obtain such samples (4).
25. Audit procedures that are appropriate to the specific audit objective should be
applied to each item in the sample. In some circumstances, the auditor may
not be able to apply the planned audit procedures to certain items in the
sample because, for example, supporting documentation may be missing. The
auditor's treatment of unexamined items will depend on their effect on his
evaluation of the sample. If the auditor's assessment of the results of the
sample is maintained, assuming that the items not examined were incorrect, it
is not necessary to examine them. However, without considering that such
unexamined items are erroneous would lead to a conclusion that the balance or
type of transaction contains material misstatement, the auditor should consider
alternative procedures that would provide sufficient evidence to reach a
conclusion. The auditor should also consider whether the reasons that
prevented him from examining the items have implications in relation to the
level of control risk assessed in planning or his degree of reliance on
management representations.
___________________________
4) Random selection includes, for example, random sampling, stratified random sampling,
probability proportional to size sampling, and systematic sampling (e.g., every hundred games)
with one or more randomly selected starting points.
26. The auditor should project the errors detected in the sample to the items from
which the sample was selected (5). There are several accepted ways to project
errors from a sample. For example, an auditor may have selected a sample of
50 items from a universe containing 1,000 items.
games (one game every 20). If he discovers overvaluations of $3,000 in that
sample, the auditor could project an overvaluation of $60,000, using the ratio
of the number of items in the sample to the total number of items in the
universe. The auditor should add that projection to the errors discovered in
any item tested at 100 percent. This total projected error should be compared
to the tolerable error for the account balance or transaction type, and
appropriate consideration should be given to sampling risk. If the total
projected error is less than the tolerable error of the account balance or
transaction type, the auditor should consider the risk that such a result could
be obtained even if the true monetary error for the universe exceeds the
tolerable error. For example, if the tolerable error on a $1 million account
balance is $50,000 and the total projected error based on an appropriate
sample (see paragraph 23) is $10,000, you can be reasonably confident that
there is an acceptably low sampling risk that the true monetary error for the
universe does not exceed the tolerable error. On the other hand, if the total
projected error is close to the tolerable error, the auditor may conclude that
there is an unacceptably high risk that the actual errors in the universe exceed
the tolerable error. An auditor should use professional judgment in making
such evaluations.
27. In addition to the evaluation of the frequency and amounts of monetary errors,
the qualitative aspects of the errors should be considered. These include: (a)
the nature and cause of the errors, such as whether they are differences in
principle or application, errors or irregularities, or misinterpretations of
instructions or carelessness, and (b) the possible relationship of the errors to
other phases of the audit. The discovery of an irregularity normally requires a
broader consideration of the possible implications than the discovery of an
error.
___________________________
5) If the auditor has separated the items subject to sampling into relatively homogeneous
groups (see paragraph 22), he projects separately the errors detected in each group and the sum.
28. If the sample results suggest that the auditor's planning assumptions were
erroneous, appropriate action should be taken. For example, if monetary
errors are discovered when performing a substantive test of details in amounts
or frequencies greater than what is consistent with the assessment of inherent
and control risks, the auditor should modify his or her preliminary risk
assessment. The auditor should also consider whether to modify the audit tests
of other accounts that were designed based on the assessment of inherent and
control risks. For example, a large number of errors discovered during the
confirmation of accounts receivable could indicate the need to reconsider the
initial assessment of control risk related to the facts that were used for the
design of substantive tests of sales or cash receipts.
29. The auditor should relate the evaluation of the sample to other relevant audit
evidence in reaching a conclusion about the account balance or type of
transaction to which it relates.
30. The projected results of errors for all sample-based audit applications and all
known errors arising from non-sampling applications should be considered in
total along with other relevant audit evidence when the auditor assesses
whether the financial statements taken as a whole may contain material
misstatements.
Sample Planning
31. When planning a specific audit sample for a compliance test the auditor
should consider:
- The characteristics of the universe, i.e., the items comprising the account
balance or type of transactions of interest.
32. Sampling is not applicable to many control tests. The procedures performed to
obtain sufficient knowledge of the internal control structure to plan an audit
do not require sampling. Sampling is generally not applicable to tests of
internal control structure policies or procedures that rely primarily on proper
segregation of duties, or that otherwise do not provide documentary evidence
of their operation. In addition, sampling may not be applicable to tests of
certain documented policies or procedures of the internal control structure.
Sampling may not be applicable to tests aimed at obtaining evidence of the
design or operation of the control environment or accounting system. For
example, inquiries or observations of explanations of budget variances when
the auditor does not want to estimate the percentage of deviation from the
policies or procedures of the internal control structure.
33. When designing samples for compliance testing, the auditor should normally
plan to evaluate operational effectiveness in terms of deviations from defined
policies or internal control, the percentage of such deviations, or the monetary
amount of the related transactions (6). Within this context, the relevant
internal control structure policies or procedures are those that, had they not
been included in the design of the internal control structure, would have
adversely affected the auditor's preliminary assessment of the level of control
risk. The auditor's overall evaluation of controls for a particular purpose
includes: the combination of criteria about the prescribed policies or
procedures of the control structure, deviations from the defined policies or
procedures, and the degree of assurance provided by the sample and other
evidence of compliance.
___________________________
6) For practical purposes, in the remainder of this section, the following will be done
reference only to the percentage of deviations.
34. The auditor should determine the maximum percentage of deviations from a
prescribed control policy and procedure that he would be willing to accept
without altering his planned assessed level. This is the tolerable percentage. In
determining the tolerable percentage, the auditor should consider: (a) the
accounting records being tested, (b) the assessed level of control risk planning,
and (c) the desired degree of assurance of the supporting evidence in the
sample. For example, if the auditor plans to assess control risk at a low level,
and desires a high degree of assurance from the supporting evidence provided
by the sample for compliance testing (i.e., no further compliance testing for
the fact), the auditor might decide that a tolerable percentage of 5 percent or
possibly less would be reasonable; if the auditor plans to assess control risk at
a high level, or if the auditor desires assurance from other compliance
evidence in addition to that provided by the sample (such as inquiries of
appropriate entity personnel or observation of the application of the policy or
procedure), the auditor may decide that a tolerable percentage of 10 percent is
reasonable.
36. In some situations, the risk of material misstatement for an event could be
related to a combination of policies or just control structure procedures. If a
combination of two or more policies or procedures of the internal control
structure is necessary to affect the risk of material misstatement for an event,
policy or procedure only should be considered as procedures only deviations
from any policy or procedure in combination should be evaluated on that
basis.
37. Samples taken for compliance testing are intended to provide a basis for the
auditor to conclude whether policies or procedures are being applied as they
should be. When the desired degree of assurance of supporting evidence in a
sample is high, the auditor should allow for a low level of control risk (i.e. the
risk of assessing control risk too low) (7).
39. Sample items should be selected in such a way that the sample can be
expected to be representative of the universe.
Therefore, all items in the universe should have the possibility of being
selected. The random selection of batches represents a means of obtaining
such samples. The auditor should use a selection method that provides the
possibility of selecting items from the entire period covered by the audit.
___________________________
7) The auditor who prefers to consider risk levels in quantitative terms might consider, for
example, a risk of 5 to 10 percent, of assessing control risk too low.
40. Audit procedures that are appropriate to achieve the objective of the
compliance test should be applied to each item in the sample. If the auditor is
unable to apply planned audit procedures or appropriate alternative procedures
to selected items, the auditor should consider the reasons for this limitation,
and normally consider those selected items as deviations from established
policies or procedures for the purpose of evaluating the sample.
41. The percentage of deviation in the sample is the auditor's best estimate of the
percentage of deviation in the universe from which it was selected. If the
estimated percentage deviation is less than the tolerable percentage for the
universe, the auditor should consider the risk that such a result could be
obtained, even if the true percentage deviation for the universe exceeds the
tolerable percentage for the universe. For example, if the tolerable percentage
for a universe is 5 percent and no deviations are found in a sample of 60
items, the auditor could conclude that there is an acceptably low sampling risk
that the true percentage of deviation exceeds the tolerable percentage of 5
percent. On the other hand, if the sample includes, for example, two or more
deviations, the auditor could conclude that there is an unacceptably high
sampling risk that the percentage of deviations in the universe exceeds the
tolerable percentage of 5 percent. An auditor applies professional judgment in
making such an assessment.
42. In addition to the evaluation of the frequency of relevant procedural
deviations, consideration should be given to the qualitative aspects of the
deviations. These include (a) the nature and cause of the deviations, such as
whether they are errors or irregularities or due to misinterpretation of
instructions or carelessness, and (b) the possible relationship of the deviations
to other phases of the audit. The discovery of an irregularity normally requires
a broader consideration of the possible implications than the discovery of an
error.
43. If the auditor concludes that the sample results do not support the assessed
level of control risk planning for an event, the auditor should reassess the
nature, timing and extent of substantive testing based on a reassessment of the
assessed level of control risk for the relevant financial statement events.
44. In some circumstances the auditor may design a sample to be used for two
purposes: to test compliance with a control procedure and to test whether the
recorded monetary amount of transactions is correct. In general, an auditor
planning to use a dual-purpose sample will have made a preliminary
assessment that there is an acceptably low risk that the percentage of
noncompliance with a policy structure or prescribed control procedures in the
universe exceeds the tolerable percentage. For example, an auditor designing a
compliance test of a control procedure over journal entries in the voucher
register might plan a substantive test related to a level of risk that anticipates
assessing control risk to the maximum extent possible. The size of a sample
designed for a dual purpose should be the larger of the samples that would
otherwise have been designed for each purpose separately. In evaluating such
tests, deviations from the relevant procedures and monetary errors should be
evaluated separately using the risk levels applicable for the respective
purposes.
46. Statistical sampling helps the auditor to (a) design an efficient sample , (b)
measure the sufficiency of the supporting evidence obtained, and (c) evaluate
the results of the sample. Using statistical theory, the auditor can quantify the
sampling risk to help him limit it to a level he considers acceptable. However,
statistical sampling includes additional costs of training auditors, designing
individual samples to meet statistical requirements, and selecting the items it
examines, since both statistical and non-statistical sampling can provide
sufficient supporting evidence, the auditor selects one of the two after
considering their relative cost and effectiveness in the circumstances.
APPENDIX
2. An auditor assesses inherent and control risks and plans and performs
substantive testing (analytical review and detailed substantive testing) in any
combination to reduce audit risk to an appropriate level. However, the second
performance standard contemplates that the assessed level of control risk may
not be sufficiently low to eliminate the need for substantive testing to reduce
the risk of detection of all relevant assertions of significant account balances
or types of transactions.
RA = RI x RC x RP x PD
AR = Audit Risk
The allowable audit risk that monetary errors equal to the tolerable error could
remain undetected in the account balance or type of transaction and related
events after the auditor has completed all audit procedures deemed necessary9.
The auditor uses professional judgment in determining the allowable audit risk
after considering factors such as those discussed in paragraph 1 of this
appendix.
___________________________
8) For the purposes of the formula, risks must be expressed in decimal form, between 0 and 1
(for example, 0.2 equals 20%).
9) For the purpose of this appendix it is assumed that the audit risk aspect that is not due to audit
risk sampling is not significant based on the level of quality controls in place.
IR = Inherent Risk
CR = Control Risk
Control risk is the risk that a material error could occur in an event and not be
detected in a timely manner by the policies and procedures of the internal
control structure. The auditor may assess control risk at the maximum or
assess control risk less than the maximum based on the sufficiency of the audit
evidence obtained to support the effectiveness of policies or procedures of the
internal control structure. The quantification for this model relates to the
auditor's assessment of the overall effectiveness of those policies or
procedures in the internal control structure that would prevent or detect
material misstatements equal to the tolerable error in the related account
balance or type of transaction. For example, if the auditor believes that the
relevant policies or procedures of the control structure would prevent or detect
errors equal to the tolerable error about half the time, the auditor would
determine this risk to be about 50 percent (CR is not the same as the risk of
assessing control risk too low).
RP = Permissible Risk
The auditor's determination of the risk that the analytical review procedures
and other relevant substantive tests would not detect errors that could occur in
an event equivalent to the tolerable error, given that such errors occur and the
internal control structure does not detect them.
PD = Detail Test
Smaller Larger
a. Risk estimation Low inherent risk. High inherent risk. Permissible risk of
inherent incorrect acceptance
b. Risk estimation Low control risk. High control risk. Permissible risk of
control incorrect acceptance.
c. Risk estimation Low risk level High level of risk Permissible risk of
for other tests associated with other testsassociated with other tests incorrect acceptance.
related substantive relevant substantive relevant substantive matters.
with the same fact
(including
procedures of
analytical review and
other tests
relevant substantive provisions)
e. Expected size and Errors less Most important errors Determination of the
error frequency important or or higher frequency characteristics of the universe.
lower frequency
Auditor's subjective assessment of control risk. The auditor's subjective assessment of the risk that the
analytical review procedures and other tests
relevant substantive laws and regulations may not detect the
errors
which in the total are equal to the tolerable error.
RC PR
PS
10% * * * 50%
30% * 55% 33% 16%
50% * 33% 20% 10%
100% 50% 16% 10% 5%
(*) The allowable AR level of 5 percent exceeds the product of RI, RC and RP, and therefore,
planned substantive detail testing may not be required.
Note: The values in the table for PD are calculated on the basis of the model: PD
equals RA/(RI x RC x RP). For example, for RI = 1.0, RC = 0.50 and RP = 0.30,
PD = 0.05(1.0 x 0.50 x 0.30) or 0.33 (equals 33%).
SECTION 380
Introduction
01. This Section establishes requirements for the auditor to determine whether
certain matters regarding the conduct of an audit are communicated to those
responsible for overseeing the financial reporting process1. For purposes of
this standard, the recipient of such communications shall be referred to as the
audit committee. The communications set forth in this section apply to: (1)
entities that have an audit committee, a committee of directors or where a
group equivalent to an audit committee (such as a management committee or
a finance committee) has been formally designated to oversee the financial
reporting process; and (2) all audit work required by domestic or foreign
regulatory bodies, such as the Superintendency of Securities and Insurance.
02. This Section requires the auditor to ensure that the audit committee receives
additional information regarding the scope and results of the audit that may
assist it in its oversight of the financial reporting and disclosure process for
which management is responsible. Although this section does not require
communication with management, it does not preclude communications with
management or others within the entity who may, in the auditor's judgment,
benefit from such communications.
1
?
There are other sections that require the independent auditor to communicate with the audit
committee on certain specific matters when they arise in the course of an audit, among them:
Section 325, Communication of Conditions Relating to Internal Control of an Audit of
Financial Statements.
Section 722, Review of Interim Financial Information.
2
Subsequently, the auditor may wish to review the minutes (if any) prepared by the audit
committee regarding the auditor's understanding of the communications made.
other than the specified parties.
04. The communications specified in this Section are an inherent part of the audit.
However, they are not required to occur prior to the issuance of the auditor's
report on the entity's financial statements, provided that they occur on a
timely basis. However, there may be occasions when it is desirable, in the
auditor's judgment, to discuss certain matters (paragraphs .06 to .14) with the
audit committee before issuing its report.
Subjects to Communicate
07. The auditor should determine whether the audit committee is informed
regarding the initial selection of significant accounting policies or their
application and any changes that have occurred. The auditor should also
3
See Paragraph 01 of Section 110.
determine whether the audit committee is informed about the methods used to
account for significant unusual transactions and the effect of significant
accounting policies on controversial or emerging areas for which there are no
established guidelines or consensus. For example, there may be significant
accounting issues in areas such as revenue recognition, off-balance sheet
financing and accounting for permanent investments.
08. Accounting estimates are an integral part of the financial statements prepared
by management and are based on management's current judgments. Such
judgments are normally based on knowledge and experience regarding present
and past events, and on assumptions regarding future events. Certain
accounting estimates are particularly sensitive because of their significance to
the financial statements and the possibility of future events that may differ
materially from management's current judgments. The auditor should
determine whether the audit committee is informed about: a) the process used
by management in making particularly sensitive accounting estimates and b)
the basis on which the auditor concluded about the reasonableness of those
estimates.
Audit adjustments
10. The auditor should also report to the audit committee any uncorrected errors
determined by the auditor during the auditor's current work that pertain to the
prior period and that management determined to be immaterial, both
individually and cumulatively, in relation to the financial statements taken as
a whole.
Auditor's judgment regarding the qualification of the accounting principles
selected by the entity
11. The auditor's judgment regarding the qualification (not only the acceptability)
of the accounting principles applied by the entity in the preparation of its
financial reports may also be discussed with the audit committee. Since the
primary responsibility for establishing an entity's accounting principles rests
with management, these analyses should generally include management as an
active participant. The analyses should be open and frank and should
generally include matters such as the consistency of the entity's accounting
policies and their application and the clarity and adequacy of the entity's
financial statements, including the related notes. The analyses should also
include matters that have a significant impact on the fairness, verification and
neutrality in the presentation of the accounting information included in the
financial statements. The following are examples of issues that may have
such an impact:
Selection of accounting criteria or changes thereto.
Estimates, judgments and uncertainties.
Unusual transactions.
Accounting criteria with respect to significant items in the financial
statements, including the sequence of transactions and the period in
which they are recorded.
14. In some cases, management may decide to consult with other auditors on
auditing and accounting matters. When the auditor becomes aware of such
consultations, he should present his views to the audit committee on
significant matters that were the subject of such consultation.
Matters discussed with management prior to contracting
15. The auditor should discuss with the audit committee any divergent matters that
have been discussed with management in connection with its initial or
recurring engagement, including the application of accounting principles and
auditing standards.
16. The auditor should report to the audit committee any significant difficulties
encountered in dealing with management regarding the conduct of the audit.
This may include, among other things, unreasonable delays by management in
allowing the audit to commence or in providing the information needed, and
if the timetable set by management is unreasonable under the circumstances.
Other issues that the auditor may encounter are the unavailability of client
personnel and the failure of client personnel to complete the timely
preparation of account analyses and their backups within the deadlines agreed
with the client. If the auditor considers these delays to be material, he/she
should inform the audit committee.
SECTION 390
01. This Section provides guidance on the treatment and procedures to be applied
by an auditor who, after the date of the auditor's report on the audit of the
financial statements, concludes that one or more audit procedures considered
necessary at the date of the audit, in the circumstances then existing, have
been omitted. However, there is no indication that these financial statements
were not fairly presented in accordance with generally accepted accounting
principles or other sufficient basis of accounting (1). This should be
distinguished from Section 561, which applies where an auditor becomes
aware after the date of his report on that review that there may have been
events related to those financial statements at that date that could have
affected his report had he been aware of them at that date.
02. Once he has reported on the review of the audited financial statements, the
auditor has no responsibility to perform any retrospective review of his work.
However, reports and working papers related to an audit may be subject to
post-audit review in connection with a firm's quality control program, (2) or
other reviews, which may reveal the omission of a required audit procedure.
03. Different conditions may be encountered in which an audit procedure that was
considered necessary at the time of the examination, under the circumstances
existing at that date, has been omitted; therefore, the treatment and procedures
described herein are expressed only in general terms. The period of time
during which the auditor considers whether or not this Section is applicable to
the circumstances and then takes the actions, if any, that are required under
this Section may be important. Because of legal contingencies that may be
involved in taking the actions contemplated herein, it would be advisable for
(
The provisions of this Section do not apply to an audit in which the auditor's work is
before a possible legal process or in legal process or an investigation by a regulatory
body.
(
See Section 161, paragraph 02 "Relationship of Generally Accepted Auditing Standards
and Quality Control Standards".
the auditor to consult with counsel when faced with the circumstances
discussed in this Section and, with counsel's assistance and advice, determine
an appropriate course of action.
04. When the auditor subsequently concludes that an audit procedure that was
necessary at the date of his examination in the circumstances then existing
was omitted, he should evaluate the significance of the omitted procedure in
relation to his current position to support his previously expressed opinion on
those financial statements taken as a whole. A review of your work papers,
discussion of the circumstances with your staff and third parties, as well as an
analysis of the overall scope of your examination, can help you make this
assessment. For example, the results of other procedures that were applied
may tend to downplay the significance of their omission. In addition,
subsequent audits may provide evidence to support the opinion previously
expressed.
05. If the auditor concludes that the omission of a procedure that was necessary at
the date of the examination, in the circumstances then existing, prejudices his
present position to support his previous opinion relating to the financial
statements taken as a whole and considers that there are persons who currently
rely, or are likely to rely, on his report, he should promptly apply the omitted
or alternative procedures that would provide a satisfactory basis for the
opinion previously expressed.
07. If, in the circumstances described in paragraph 05, it is not possible for the
auditor to apply the previously omitted or alternative procedure, he should
consult with his attorney to determine an appropriate course of action with
respect to his responsibilities to his client, to regulatory bodies that are
responsible for the audit of his client and to third parties who rely on his
report or who are likely to rely on his report.
SECTION 410
"The report shall state whether the financial statements have been prepared
in accordance with generally accepted accounting principles."
02. The term "generally accepted accounting principles" as used in the standards
relating to the report is interpreted to include not only accounting principles
and practices, but also the methods of applying such principles and practices.
The first standard relating to the report should be interpreted not as an
assertion by the auditor regarding the information contained in the financial
statements, but as an opinion as to whether they are presented in conformity
with those principles 1. If limitations on the scope of the audit prevent the
auditor from forming an opinion as to such conformity, an appropriate
qualification or disclaimer is required in the auditor's report.
1
When an auditor reports on financial statements prepared on a basis of accounting other
than generally accepted accounting principles, the first reporting standard is met by disclosing in
the report that the financial statements have been prepared in accordance with a basis of
accounting other than generally accepted accounting principles and expressing an opinion (or
disclaimer of opinion) as to whether the financial statements are presented in conformity with the
basis of accounting used.
SECTION 411
"In our opinion, such financial statements present fairly, in all material
respects, the financial position of Company XYZ as of December 31,
XXXX, the results of its operations and its cash flows for the year then
ended in accordance with generally accepted accounting principles (in
Chile)."(1)
02. The first standard of preparation of the report requires the auditor who has
examined financial statements in accordance with generally accepted auditing
standards to indicate in the report whether the financial statements are
presented in accordance with generally accepted accounting principles. The
term "generally accepted accounting principles" is a technical accounting term
that includes the conventions, rules and procedures necessary to define
accepted accounting practice in a given period. It includes not only broad
guidelines for general application, but also detailed practices and procedures.
These conventions, rules and procedures provide a framework for the
presentation of financial statements.
03. The independent auditor's judgment as to the "reasonableness" of the financial
statement presentation should be applied within the conceptual framework of
generally accepted accounting principles. Without such a conceptual
framework, the auditor would not have a uniform frame of reference for
judging the presentation of the financial position, results of operations and
cash flows in the financial statements.
(
See application in Audit Circular No. 14.
04. La opinión del auditor que los estados financieros presentan razonablemente
la situación financiera, los resultados de sus operaciones y el flujo de efectivo
de acuerdo con principios de contabilidad generalmente aceptados debiera
basarse en su juicio sobre si (a) los principios de contabilidad seleccionados y
aplicados son de aceptación general, (b) los principios de contabilidad son
apropiados en las circunstancias, (c) los estados financieros, incluyendo las
correspondientes notas, informan apropiadamente sobre los aspectos que
pueden tener efecto en el uso, entendimiento e interpretació(d) the
information presented in the financial statements is classified and summarized
in a reasonable manner, that is, it is neither too detailed nor too summarized
(see Section 431), and (e) the information presented in the financial
statements is fairly stated (see Section 431), and (f) the information presented
in the financial statements is fairly stated (see Section 431).431) and (e) the
financial statements reflect the underlying transactions and events in a manner
that presents the financial position, results of operations and cash flows
expressed within a range of acceptable limits, i.e., reasonable and achievable
limits therein. (2)
05. The independent auditors agree on the existence of a set of generally accepted
accounting principles and have knowledge of such principles and of the
determination of their general acceptance. However, it can be difficult to
determine whether a particular accounting principle is generally accepted
because there is no single source of reference for all accounting principles.
The sources of accounting principles generally accepted in Chile correspond
to those defined in Technical Bulletin No. 56 issued by the Chilean
Association of Accountants. This Bulletin establishes that the sources of
accounting principles and standards generally accepted in Chile are:
(
The concept of materiality is inherent in the auditor's judgment. This concept involves
qualitative as well as quantitative judgments. (See sections 150.04, 312.06 and 508.48)
d) Practices or pronouncements fairly recognized as generally
accepted as representing outstanding practice, within a particular
industry, or the intelligent application in matters of knowledge to
specific circumstances of pronouncements that are generally
accepted.
08. The auditor should be aware that the accounting requirements adopted by
regulatory bodies for reports submitted to them may differ from generally
accepted accounting principles, being prepared on a basis other than generally
accepted accounting principles.
01. "A change in an accounting principle results from the adoption of a generally
accepted accounting principle different from that which was previously in use.
The term accounting principle comprises not only accounting principles and
practices but also the method of applying them"(1). A change in an
accounting principle includes, for example, a change from the straight-line to
the declining balance method of depreciation for all assets of a given type or
for all new acquisitions of a given type of asset, and a change in expensing
research and development costs and amortizing such costs over the estimated
period of benefit. The standard on consistency is applicable to this type of
change and requires recognition of the change in the auditor's opinion
regarding consistency.
02. Since a change in the reporting entity is a special type of change in accounting
principle, the standard on uniformity is applicable to it. Changes in reporting
entities that require recognition in the auditor's opinion include:
04. For purposes of applying the uniformity standard, a change in the reporting
entity does not result from the creation, cessation, purchase or other
disposition of a subsidiary or other entity.
05. A change from an accounting principle that is not generally accepted to one
that is generally accepted, including correction of an error in the application of
a principle, should be considered as a correction of an error. Although this
type of change in accounting principle should be treated as a correction of an
error, the change requires an explanatory paragraph in the auditor's report.
06. The effect of a change in an accounting principle may be inseparable from the
effect of a change in an estimate. Although the treatment of such a change is
the same as that applied to an estimate, the change in principle is implicit.
Consequently, this type of change requires an explanatory paragraph in the
auditor's report. (2)
___________________________
2) See paragraph 7 of Technical Bulletin No. 15 of the Chilean Association of Accountants.
CHANGES THAT DO NOT AFFECT UNIFORMITY
07. Accounting estimates (such as estimated useful lives and residual values of
depreciable assets and allowances for product warranty costs, uncollectible
accounts and inventory obsolescence) are necessary for the preparation of
financial statements. Accounting estimates change as new events occur and
more experience and information is acquired. This type of accounting change
is made necessary by the modification of conditions that affect comparability,
but are not related to the standard on uniformity.
10. The classifications in the current financial statements may differ from the
classifications in the prior year's financial statements. Although changes in
classifications are not normally so important as to require disclosure,
significant changes in classifications should be disclosed and explained in the
financial statements or in the related notes. These significant changes and
reclassifications made to previously issued financial statements to achieve
greater comparability with the current financial statements would not normally
require mention in the independent auditor's report.
11. Accounting principles are adopted when the effect of events and transactions
acquire the necessary significance. Such adoption, as well as the modification
or adoption of accounting principles required by events or transactions that are
clearly different in substance from those that occurred before, do not relate to
the standard on uniformity, although their disclosure in the notes to the
financial statements may be required.
12. If an accounting change has no material effect on the current year's financial
statements, but there is reasonable assurance that it will have a material effect
in subsequent years, it should be disclosed in the notes to the financial
statements whenever statements reflecting the period of the change are
presented, but the independent auditor need not acknowledge it in his report.
13. Although the matters discussed in paragraphs 07 and 12 of this Section do not
require recognition in the independent auditor's report regarding consistency,
the auditor would express a qualification in his report regarding the lack of
disclosure if the necessary disclosures are not included.
14. When the independent auditor reports only on the financial statements of the
current period, he should obtain sufficient audit evidence regarding the
uniformity in the application of accounting principles in relation to the
preceding period, regardless of the fact that the financial statements of the
preceding period are not presented. (The term "current period" means the
most recent year or the period of less than one year on which the independent
auditor is reporting). When the independent auditor issues a report on two or
more years, he/she shall evaluate the uniformity of the application of the
accounting principles between such years and also, on the uniformity of such
years in relation to the preceding year, if such preceding year is included in
the financial statements on which the report is being issued.
15. When the independent auditor has not examined an entity's prior period
financial statements, the independent auditor should perform procedures that
are practical and reasonable in the circumstances to ensure that the accounting
policies used in the current period are consistent with those of the prior year.
Where the client has maintained adequate records, it is generally practical and
reasonable to extend the audit procedures to gather sufficient competent
evidence about the consistent application of these principles.
16. Insufficient records or limitations imposed by the client may prevent the
independent auditor from obtaining competent and sufficient evidence about
the consistent application of accounting principles between the current and
prior periods, as well as the amounts of assets and liabilities at the beginning
of the current period. Where such amounts could materially affect the results
for the period, the independent auditor would also be unable to express an
opinion on the results and cash flows for the current period.
SECTION 431
01. The third reporting standard described in Section 150 states the following:
Introduction
01. The fourth standard relating to reporting, contained in Section 150.02 states:
03. An auditor is related to financial statements when he/she has consented to the
use of his/her name in the report, document or written communication
containing the financial statements. 1 Similarly, when an auditor presents to
his client or to third parties financial statements that he has prepared or
assisted in preparing, he is considered to be related to them, even if the
auditor does not add his name to those financial statements. Moreover, when
the auditor participates in the preparation of financial statements, these are
representations of management and presentation in accordance with generally
accepted accounting principles is the responsibility of management.
1
However, this Section does not apply to information, such as tax returns, prepared solely
for the fulfillment of tax obligations.
04. An auditor may relate to audited or unaudited financial statements. The
financial statements are audited when the auditor has applied sufficient audit
procedures to enable him to express an opinion on them. (See Section 508,
"Auditors' Report on Financial Statements"). The unaudited interim
unaudited financial information of an entity is considered reviewed when the
auditor has applied sufficient procedures to enable the auditor to issue a report
in accordance with Section 722, "Review of Interim Financial Information".
05. When an auditor is related to financial statements of an entity, but has not
audited or reviewed them, the form of the report to be issued is as follows:
This disclaimer of opinion is the auditor's way of complying with the fourth
reporting standard, as it relates to unaudited financial statements. The
disclaimer may accompany or be included in the financial statements. In
addition, each page of the financial statements should be clearly marked as
"unaudited". When an auditor issues this form of disclaimer of opinion,
he/she has no responsibility to apply any procedures other than to read the
financial statements and locate any material misstatements that are detected
with the naked eye. Any procedures that have been applied should not be
described. Describing procedures that have been applied may lead the reader
to believe that the financial statements have been audited or reviewed.
06. If the auditor learns that his name is to be included in a written
communication containing financial statements of an entity prepared by the
client that have not been audited or reviewed, he should request: a) That his
name not be included in the communication, or b) That the financial
statements be identified as unaudited and that an indication be included
stating that the auditor expresses no opinion on them. If the client does not
2
In considering what actions would be appropriate, the auditor may wish to consult his or
her lawyers.
accept either option, the auditor should communicate in writing to the client
that the client has not consented to the use of the client's name and should also
consider any other action that the auditor deems appropriate in the
circumstances. 2
08. The second general auditing standard states that "in all matters relating to the
engagement, the auditor(s) shall maintain an independent attitude of mind"
(Section 150.02). The independent auditor must be completely impartial with
the client or else he would not have the necessary objectivity to support his
comments. The auditor's attitude of independence is something he should
decide for himself as part of his professional judgment.
09. When an auditor is not independent, any procedures applied by the auditor
will not be in accordance with generally accepted auditing standards and the
auditor will be precluded from expressing an opinion. Consequently, it must
refrain from expressing an opinion on the financial statements and clearly
state that it is not independent.
10. In all circumstances, regardless of the extent of the procedures applied, the
auditor should follow paragraph 05 as a guide, except that the disclaimer of
opinion should be modified to state clearly that the auditor is not independent.
The reasons for the lack of independence and any procedures that have been
applied should not be described; including these aspects may confuse the
reader in terms of diluting the lack of independence. An example of this type
of report is presented below:
"We are not independent with respect to Company XYZ, and the balance
sheet as of December 31, XXXX and the related statements of income
and cash flows for the year then ended were not audited by us and,
accordingly, we cannot and do not express an opinion on those financial
statements."
11. If the auditor, due to situations of which he has become aware, concludes that
the unaudited financial statements on which he is expressing a disclaimer of
opinion are not prepared in accordance with generally accepted accounting
principles, including adequate disclosure, he should suggest that these be
corrected, in addition to mentioning in his disclaimer of opinion the points on
which he differs.If the auditor concludes that the unaudited financial
statements on which he is expressing a disclaimer of opinion are not prepared
in accordance with generally accepted accounting principles, including
adequate disclosure, he should suggest that they be corrected, in addition to
mentioning in his disclaimer of opinion the points on which he differs. The
description should specifically address the nature of the divergence and, to the
extent practical, determine the effect on the financial statements or include the
information necessary for adequate disclosure.
12. When the effects of the deviation on the financial statements cannot be
determined, the disclaimer of opinion should so state. When a departure from
generally accepted accounting principles results from inadequate disclosure, it
may not be practical for the auditor to include adequate disclosure in the
auditor's report. For example, when management has chosen to omit
substantially all disclosures, the auditor, in his report, should clearly mention
them, although he cannot be expected to include them.
13. If the client does not agree to amend the financial statements or does not
accept the auditor's disclaimer of opinion with the description of the deviation
from generally accepted accounting principles, the auditor should refuse to be
associated with the financial statements and, if necessary, resign from the
engagement.
15. When only the previous year's financial statements have been audited and the
report corresponding to the review of the current year is to contain a separate
paragraph, it should state: (a) that the previous year's financial statements
were previously audited; (b) the date of the previous report; (c) the type of
opinion that was expressed; (d) if the opinion was qualified, what were the
reasons; and (e) that no audit procedures were applied after the date of the
previous report. An example of such a paragraph is the following:
"The financial statements for the year ended December 31, XXX1 were
audited by us (or by other auditors) and we (or they) expressed an
unqualified opinion in our (or their) report dated March 1, XXX2.
However, we have not (or have not) carried out any audit procedures as
of that date."
16. When the financial statements for the prior period have not been audited and
only a review or other work or compilation, but in no case an audit, has been
performed and the report for the current period's audit is to contain a separate
paragraph, it should include: (a) a statement of the service rendered in the
prior period; (b) the date of the report on that service; (c) a description of any
material modifications made in that report; and (d) that the work performed
was less in scope than an audit and does not provide a basis for the expression
of an opinion on the financial statements taken as a whole. For example, a
separate paragraph describing a revision would be worded as follows:
"The financial statements for the year ended December 31, XXX1 were
audited by us (or by other auditors) and our (or their) report dated March
1, XXX2, stated that we were not (or they were not) aware of any
material modifications that should be made to such financial statements to
bring them into conformity with generally accepted accounting
principles. However, a review is substantially less in scope than an audit
performed in accordance with generally accepted auditing standards.
Accordingly, it does not provide a basis for the expression of an opinion
on the financial statements taken as a whole".
17. When the auditor, for whatever reason, abstains from expressing an opinion
on the financial statements, he/she shall not include expressions that
contradict his/her abstention.
SECTION 508
Introduction
01. This Section applies to reports issued by auditors in connection with audits (1)
of financial statements that are intended to present the financial position,
results of operations and cash flows in accordance with generally accepted
accounting principles.. Distinguishes the different types of reports, describes
the circumstances under which each type is appropriate and provides examples
of these..
02. This Section does not apply to unaudited financial statements, or to reports on
incomplete financial information or other special opinions.
03. The expression of the auditor's opinion is based on the concordence of its
audit with generally accepted auditing standards and on its results. The
generally accepted auditing standardsinclude four basic standards relating to
the report. This Section is mainly related to the fourth standard (Section 150
paragraph 02. "Standards Related to the Report").
___________________________
Generally accepted auditing standards include the basic standards defined in Section 150.
In addition, regulatory bodies may have additional requirements applicable to entities under their
jurisdiction, which should be considered by the auditors of such entities.
04. The fourth reporting standard states that "The report shall express an opinion
on the financial statements taken as a whole, or a statement that no opinion
can be expressed". When a qualified opinion, an adverse opinion or a
disclaimer of opinion is given, the reasons for this should be stated. In all
cases where an auditor's name is associated with financial statements, the
report should contain a precise and clear indication of the nature of the
auditor's examination, if any, and the degree of responsibility he/she is
assuming.
05. The objective of this standard is to prevent misinterpretations about the degree
of responsibility that the auditor assumes when his or her name is associated
with the financial statements of an entity. This applies equally to the set of
basic financial statements as to any of them individually (e.g., balance sheet
only) for one or more periods presented (from paragraph 72 onwards, the case
of comparative financial statements is discussed). The auditor may present an
unqualified opinion on one of the financial statements and a qualified opinion,
an adverse opinion or a disclaimer of opinion on another, if the circumstances
so require.
06. The auditor generally reports on the basic financial statements (balance sheet,
statement of income and statement of cash flows). Each audited financial
statementshould be specifically identified in the opening paragraph of the
auditor's report. If the basic financial statements include a separate statement
of changes in equity or statement of retained earnings, these should also be
identified in the opening paragraph of the report, but not in the opinion
paragraph, as such information is part of the presentation of the financial
position, results of operations and cash flows.If the basic financial statements
include a separate statement of changes in equity or statement of retained
earnings, these should also be identified in the opening paragraph of the
report, but not in the opinion paragraph, as such information is part of the
presentation of the financial position, results of operations and cash flows.
07. The standard auditor's report states that the financial statements present fairly,
in all material respects, the financial position of the entity, the results of its
operations and its cash flows, in accordance with generally accepted
accounting principles. This conclusion can be expressed only when the
auditor has formed an opinion on the basis of an audit conducted in
accordance with Generally Accepted Auditing Standards..
08. The standard auditor's report identifies the audited financial statements in an
opening paragraph (introductory paragraph), describes the nature of the audit
in a scope paragraph, and expresses the opinion in a separate opinion
paragraph. The basic elements of the report are as follows:
___________________________
2) A title is not required for the report when the auditor is not independent. In this case the
auditor should not express an opinion with respect to the financial statements and should
specifically state that he/she is not independent. An example of such a report is included below:
"We are not independent with respect to Company XYZ, and the balance sheet as of
December 31, and the related statements of income and cash flows for the year then ended have
not been audited by us. Accordingly, we cannot and do not express an opinion on the
aforementioned financial statements."
3) In some cases, the document containing the auditor's report may include a statement from
the entity's management about the entity's responsibility for the presentation of the financial
statements.
However, the auditor's report should state that the financial statements are the responsibility of
the entity's management.
g) A statement that the auditor believes that its audit provides a reasonable
basis for its opinion.
i) The name of the auditor's firm and, if applicable, the name of the audit firm
to which it belongs.
__________________________
4) Sections 411.03 and 411.04, the meaning of "present fairly in accordance with generally
accepted accounting principles" in the independent auditor's report, discusses the auditor's
assessment of the overall presentation of the financial statements.
09. The report may be addressed to the entity whose financial statements have
been audited, to the Board of Directors or to the shareholders. The report on
financial statements of companies other than corporations may be addressed,
depending on the circumstances, either to the partners or to the owner. If the
auditor is engaged to audit an entity that is not his client, the report is
generally addressed to the client and not to the company whose financial
statements were audited.
10. This section also discusses the circumstances that require the auditor to
deviate from the standard report and provides guidance to be followed in such
circumstances. This standard is classified according to the type of opinion
that the auditor expresses in each of the different circumstances that may arise
and describes the meaning of the various audit opinions, as follows:
___________________________
6) It is possible to present comparative income statements and cash flow statements for two or
more years and to present the balance sheet only at the end of the last year.
- Qualified opinion: A qualified opinion states that, except for the effects of
the matter to which the qualification relates, the financial statements
present fairly, in all material respects, the financial position of the entity-
entity, the results of its operations and its cash flows, in conformity with
generally accepted accounting principles.
- Disclaimer: A disclaimer of opinion states that the auditor does not express
an opinion on the financial statements.
The standard report was discussed in the preceding paragraphs. The
following paragraphs discuss the other types of reports.
11. There are circumstances in which, without this constituting the expression of a
qualification, it is necessary for the auditor to add one or more additional
paragraphs (7) to his report to explain such circumstances.. These cases may
occur, for example, when:
___________________________
7) Unless otherwise indicated, the explanatory paragraph may precede or follow the
opinion paragraph.
12. When the auditor decides to refer to another auditor's report as a basis, in part,
for formulating his opinion, he should point out this fact in the introductory
paragraph and in the opinion paragraph of his report. These references
indicate the division of responsibilitiesbilities in the performance of the audit.
13. The appropriate report format in this circumstance is presented in Model No.
3.
UNCERTAINTIES
___________________________
10) However, the auditor should consider whether the fact that management is unable to
make a reasonable estimate raises doubts about the appropriate use of accounting principles (see
paragraph 19).
- The extent to which the amount of reasonably possible loss exceeds the
auditor's judgment with respect to materiality.
- The likelihood that the significant loss will occur (i.e., whether that
likelihood is closer to remote or probable). The auditor should be inclined
to add an explanatory paragraph to his report, to the extent that the amount
of the reasonably possible loss is increasedor the possibility of a material
loss occurring is increased.
MATERIALITY CONSIDERATIONS
25. The auditor should consider materiality in planning its audit and assess
whether the financial statements taken as a whole are fairly presented in
accordance with generally accepted accounting principles. The auditor
assesses the relative significance of reasonably possible losses that may occur
from the resolution of uncertainties, both individually and in the aggregate..
The auditor makes this assessment without considering the materiality of the
likely misstatements in the financial statements.
27. Some uncertainties are unusual in nature or infrequent; therefore, they relate
more to the financial position than to normal recurring operations (e.g.,
litigation in connection with alleged violations of antitrust or securities laws).
In such cases, the auditor should consider the potential loss in relation to
equity and other important components of the balance sheet, such as total
assets, total liabilities, total current assets and total current liabilities.
28. In other circumstances, the nature of an uncertainty may relate more closely to
normal recurring operations (e.g., a dispute over a leeway contractregarding
whether leases are payable on certain revenues). In such cases, the auditor
should consider the possible loss in relation to the relevant components of the
income statement, such as operating income.
29. If, after applying the criteria in paragraphs 22 to 28, the auditor concludes that
an explanatory paragraph (after the opinion paragraph) (11) should be added
to his report, he should describe the matter giving rise to the uncertainty in
that explanatory paragraph and indicate that the final result cannot be
determined at this stage..
12) It is not necessary to place an explanatory paragraph following the opinion paragraph
when the auditor expresses a qualification in the auditor's opinion for departures from generally
accepted accounting principles in connection with the accounting for an uncertainty, provided
that the paragraph explaining the reason for the qualification includes information that would
otherwise be required in the explanatory paragraph following the opinion paragraph.It is not
necessary to place an explanatory paragraph after the opinion paragraph when the auditor
expresses a qualification in his opinion for deviations in the application of generally accepted
accounting principles in relation to the accounting for an uncertainty, provided that the paragraph
explaining the reason for the qualification includes the information that would otherwise be
required in the explanatory paragraph after the opinion paragraph.
31. The subsequent resolution of an uncertainty that prompted the auditor to add
an explanatory paragraph to the auditor's report generally involves either: (a)
recognition in the financial statements of a subsequent period, or (b) no
material monetary effect on the financial statements of any period. It is not
oftenthat the subsequent resolution of an uncertainty may give rise to an
adjustment to the financial statements that relate to the original report in
which the auditor included an explanatory paragraph. However, the paragraph
explaining the uncertainty in the auditor's report should be the same,
regardless of the accounting treatment expected to be given to the resolution
of the uncertaintydumbre.
LACK OF UNIFORMITY
32. The auditor's standard auditor's report implies that the auditor is satisfied that
the comparability of the financial statements between periods has not been
materially affected by changes in accounting principles and that such
principles have been applied consistently between periods, either because (a)
there was no change in accounting principles, or (b) there was a change in
accounting principles or in their method of application, but the effect of the
change on comparability was not materially affected by the change in
accounting principles.(a) there was no change in the accounting principles, or
(b) there was a change in the accounting principles or in their method of
application, but the effect of the change on the comparability of the financial
statements was not significant. In these cases, the auditor should not refer to
uniformity in his report. However, if there has been a change in accounting
principles or method of application that has a significant effect on the
comparability of the financial statements, the auditor should refer to the
change in an explanatory paragraph of his report. Such explanatory paragraph
(inserted after the opinion paragraph) should identify the nature of the change
and refer the reader to the note to the financial statements that describes the
change in detail. The auditor's acceptance of the change is implicit unless the
auditor includes a qualification about the change in expressing an opinion on
the fair presentation of the financial statements in accordance with GAAP.
33. Model No. 5 presents a report with an explanatory paragraph due to a change
in the application of generally accepted accounting principles.
34. The addition of this explanatory paragraph in the auditor's report is required in
reports on subsequent years' financial statements, provided that the year of the
change is presented and reported on (14).me. However, if the change is
accounted for by retrospectively restating the affected financial statement, the
additional paragraph is required only in the year of the change since, in
subsequent yearsres, all periods presented will be comparable.
EMPHASIS OF AN ISSUE
35. In some cases, the auditor wishes to emphasize a matter with respectto the
financial statements; however, his intention is to express an unqualified-
opinion. For example, it may consider it appropriate to: (a) to emphasize that
the entity is a component of a larger entity, (b) to highlight that there are
significant related party transactions, (c) to draw attention to an important
subsequent event, (d) to describe an accounting matter that affects the compa-
ration of the financial statements with those of the prior year, or (e) to draw
attention that the consolidated financial statements are presented separately
from the individual financial statements for which they are reporting
(Template No. 6).(e) to draw attention to the fact that the consolidated
financial statements are presented separately from the individual financial
statements for which they are reporting (Model No. 6). Such explanatory
information should be presented in a separate paragraph of the report.
Expressions such as "with the explanation in the following (previous)
paragraph" should not be used in the opinion paragraph, when such situations
are present.
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13) See Technical Bulletin Nos. 15 and 52 regarding the treatment of accounting changes.
14) An exception to this requirement occurs when a change in accounting principles occurs
at the beginning of the first year presented and does not require recognition of a cumulative effect
adjustment at that date.
QUALIFIED OPINIONS
b) When, on the basis of his audit, the auditor considers that the financial
statements contain a deviation in the application of generally accepted
accounting principles, the effect of which is material, but decides not to
express an adverse opinion (paragraphs 47 to 64).
37. When the auditor expresses a qualified opinion, he/she shall disclose all the
essential reasons in one or more explanatory paragraphs preceding the opinion
paragraph of his/her report.. It should include, in the paragraph of the
opinion, the language appropriate to the qualification and a reference to the
explanatory paragraph(s). A qualified opinion shall include the word "except"
or "exception" in expressions such as "except for" or "with exceptionof".
Expressions such as "subject to" or "with the above explanation" are not
sufficiently clear or effective and should not be used.
Since the notes are part of the financial statements, expressions such as "fairly
presented, in all material respects, read in conjunction with note X" are
confusing and should not be used.
SCOPE LIMITATIONS
38. The auditor may express an unqualified opinion only when he/she has
conducted his/her audit in accordance with generally accepted auditing
standards and, accordingly, has applied all procedures that he/she considered
appropriate in the circumstances. Limitations on the scope of your audit,
whether imposed by the client or by circumstances, such as time pressure on
your work, inability to obtain sufficient audit evidence, or inaccurate
accounting records, may require you to modify your report or to express a
qualified opinion or disclaimer of opinion. In such cases, the auditorshould
describe in his report the reasons for the qualification or disclaimer of opinion.
40. The most frequent restrictions to the scope of the audit include those related to
the observation of the taking of physical inventories and the confirmation of
accounts receivable in direct communication with the debtors (15). Another
common constraint relates to permanent investments which are
_________________________
15) Circumstances such as the timing of the work may prevent the auditor from performing
these procedures. In this case, if the auditor can achieve compliance with respect to inventories
or accounts receivable by applying alternative audit procedures, there will be no significant
limitation on the scope of his work, and his report need not refer to the omission of procedures or
the use of alternative procedures.
lized by the equity method when the auditor has not been able to obtain the
audited financial statements of the company in which the investment is held.
The restrictions on these and other audit procedures that should be applied to
significant items in the financial statements require the auditor to decide
whether he/she has reviewed sufficient evidence to enable him/her to express
an unqualified or qualified opinion, or to express a disclaimer of opinion.
When restrictions that significantly limit the scope of the audit are imposed by
the client, the auditor generally expresses a disclaimer of opinion on the
financial statements.
41. When a qualified opinion is expressed because of any limitation on the scope
of the audit or insufficient evidence comproved, this situation should be
specified in an explanatory paragraph preceding the paragraph of the opinion.
This situation should also be mentioned in the scope and opinion paragraphs.
It is not appropriate for the scope of the audit to be described in the notes to
the financial statements as such description is the responsibility of the auditor
and not the client.
42. When the auditor expresses a qualified opinion due to a scope limitation,
he/she should indicate in the paragraph of the opinion that the qualification is
a consequence of the possible effects on the financial statements and not of the
limitations themselves. Phrases such as "In our opinion, except for the
limitation on the scope of the audit referred to above" base the exceptionon
the restriction rather than on the possible effects on the financial statements
and are therefore not acceptable. Model No. 7 presents a qualified report due
to a limitation on the scope ofce, because the auditor did not witness the
physical inventory taking, assuming that the effects of the limitation are not
such that the auditor concludes that he should express a disclaimer of opinion.
44. However, if these statements are not necessary to create a fair presentation of
the financial position, results of operations and cash flows, on which the
auditor issues its report, such statements should be indicated as "unaudited" or
as "not covered by the auditor's report". For example, the pro forma effects of
a business combination or subsequent events may be identifiedas unaudited.
Therefore, while the transaction giving rise to the disclosure should be
audited, its pro forma effect need not be audited.
The auditor should consider, however, that Section 530 states that if the
auditor is aware of a significant subsequent event that occurred after the
completion of the audit, but before the issuance of the auditor's report and that
should have been disclosed, the auditor's only options are to assign two dates
to the report or to assign the date of the subsequent event to the report and
extend the auditor's audit procedures beyond that date.The auditor's only
options are to assign two dates to the report or to assign the date of the
subsequent event and extend his audit procedures for subsequent events to that
date. Titling the note as "unaudited" is not an acceptable alternative in these
cases.
46. An example of a report that is applicable when the auditor has been engaged
to report only on the balance sheet is presented in Model No. 8.
47. When the financial statements are materially affected by a departure from
generally accepted accountingbility principles and the auditor has conducted
the audit in accordance with generally accepted auditing standards, he/she
should express a qualified opinion (paragraphs 48 to 64) or an adverse opinion
(paragraphs 65 to 67). The basis for such an opinion should be stated in your
report.
49. When the auditor expresses a qualified opinion, he/she shall disclose, in one or
more explanatory paragraphs preceding the paragraphfo of opinion, all the
fundamental reasons that led him/her to conclude that there is a deviation in
the application of generally accepted accounting principles. In addition, in the
opinion paragraph of your report you should include the appropriate
qualification language, apart from referring to the respective explanatory
paragraphs.
50. Any explanatory paragraph should also disclose, if practical, the main effects
of the qualification on the financial position, results of operations and cash
flows(16).. If the effects are not reasonably determinablebles, this fact should
be mentioned in the report. If the situationscations that motivate the deviation
in the application of the principlesof
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16) It is understood to be "practical" if the information is reasonably obtained from
management's accounts and records and if the provision of such information in its report does not
lead the auditor to become a preparer of financial information. For example, if information can
be obtained from the accounts and records without the auditor having to materially expand the
effort that would normally be required to complete the audit, the auditor should present that
information in the auditor's report.
If the accounting policies and their effects are explained more fully in a note
to the financial statements, the explanatory paragraphmay be abbreviated by
referring to the respective note.
51. Model No. 9 presents a format for a qualified report due to a deviation in the
application of generally accepted accounting principles, assuming that the
effects are not such that the auditor concludes that an adverse opinion should
be expressed.
52. If the situations giving rise to the deviation in the application of generally
accepted accounting principles and its effects are explained more fully in a
note to the financial statements, the explanatory paragraph of the auditor's
report may be summarized in the form presented in Model No. 10.
54. In Model No. 11, a qualified report is presented because the financial
statements omit essential or relevant information.
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17) See Note (16).
58. If: (a) the new accounting principle being adopted is not a generally accepted
accounting principle; (b) the method of accounting for the effect of the change
is not in accordance with generally accepted accounting principles; or (c)
management has not provided reasonable justification for making the change
in accounting principle, the audi tor shall express a qualified opinion or, if the
effect of the change is sufficiently material, an adverse opinion on the
change.(b) the method of accounting for the effect of the change is not in
accordance with generally accepted accounting principles; or (c) management
has not provided a reasonable justification for the change in accounting
principle, the auditor should express a qualified opinion or, if the effect of the
change is sufficiently material, an adverse opinion on the financial statements.
59. The assumption that an entity should not change an accounting principle can
be modified only to the extent that the new accounting principle adopted is
preferable and management provides a reasonable justification for the
change.. If the management does not provide a reasonable justification, the
auditor should express a qualification for the change. Model No. 13
illustrates this situation (18).
61. If the financial statements for the year of such change are presented with those
of the following year, the auditor's report shall disclose his qualifications with
respect to the statements for the year of such change..
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18) Section 420.05 states that a change from an accounting principle that is not generally
accepted to one that is generally accepted constitutes the correction of an error and that such a
change is required to be acknowledged in the auditor's report for consistency. Therefore, the
auditor should add an explanatory paragraph to his report to explain the change.
However, since the sample paragraph of Model No. 13 contains all the information that
is referred to as uniformity in an explanatory paragraph, the separate explanatory paragraph
(following the opinion paragraph) required by paragraphs 32 to 34 of this Section is not necessary
in this case. A separate paragraph identifying the change in accounting principle would be
required if the key part of the disclosure does not meet the requirements outlined in these
paragraphs.
62. If an entity has adopted an accounting principle that is not a generally
accepted accounting principle, its continued usecould have a material effect on
the financial statementsof any subsequent year on which the auditor is
reporting. In this case, the auditor should express either a qualified opinion or
an adverse opinion, depending on the degree of significance of the deviation
in relation to the financial statements of that subsequent year.
63. If an entity treats the effect of a change in a manner that affects future periods
when generally accepted accounting principles require the restructuring of
prior years' financial statements or the inclusion of the cumulative effect of the
change in the year of the change, subsequent years' financial statements could
inappropriately include material charges or credits in relation to those
statements. This case also requires the auditor to express a qualified or
adverse opinion.
ADVERSE OPINION
65. An adverse opinion expresses that the financial statements do not present
fairly the financial position of the entity and the results of its operations and
cash flows, in accordance with generally accepted accounting principles.
Such an opinion should be expressed when, in the auditor's opinion, the
financial statements taken as a whole are not fairly presented in conformity
with generally accepted accounting principles.bility.
66. When the auditor expresses an adverse opinion, the auditor shall disclose, in
one or more explanatory paragraphs (preceding the opinion paragraph in his
report): (a) all the reasons that support his adverse opinion and (b) the
principal effects of the matter that is the subject of his opinion, on the
financial position, results of operations and cash flow, if
can be reasonably determined (19). If the effects cannot be reasonably
determined, the report shall so state (20).
67. When an adverse opinion is expressed, the paragraph of the opinion shall
include a direct reference to the additional paragraph disclosing the basis for
such adverse opinion. Models No. 14 and 15 present reports with adverse
opinions.
ABSTENTION OF OPINION
68. A disclaimer of opinion states that the auditor does not express an opinion on
the financial statements. It is used when the scope of the audit is insufficient
for the auditor to form an opinion on the financial statements (21). A
disclaimer of opinion should not be expressed when the auditor conclus, on
the basis of his audit, that there are significant deviations in the application of
generally accepted accounting principles(see paragraphs 47 to 64).
69. When expressing a disclaimer of opinion due to scope limitations, the auditor
should indicate in a separate paragraph (preceding the opinion paragraph) the
reasons why the scope of the audit did not comply with generally accepted
auditing standards.
___________________________
19) See Note (16).
20) When the auditor expresses an adverse opinion, the auditor should also consider whether it
is necessary to include an explanatory paragraph under the circumstances identified in paragraph
11, subsections (c), (d), (e) and (f) of this Section.
21) This Section does not apply if an auditor is engaged to perform an audit examination of an
entity's financial statements in accordance with generally accepted auditing standards, but is
subsequently requested to change the engagement for which the auditor was engaged to a review
or compilation of those financial statements.
The auditor should state that the scope of its audit was insufficient to support
the expression of an opinion. You should not identify the procedures applied,
nor should you include the paragraph describing the characteristics of an audit
(i.e., you should omit the scope paragraph in your report), as doing so could
undermine the disclaimer of opinion. In addition, it shall disclose any other
qualification that it considers material to the fair presentation of the financial
statements in accordance with generally accepted accounting principles.
PARTIAL OPINIONS
72. The fourth standard relating to auditors' report on financial statements (see
Section 150) requires that the auditor's report contain, either
_____________________________
22) In the case of a disclaimer of opinion due to scope limitations, the first part of the
opening paragraph of the auditor's standard report should be changed to read "We were engaged
to perform an audit" instead of "We have performed an audit" because the auditor was unable to
perform the audit in accordance with generally accepted auditing standards due to scope
limitations.We were engaged to perform an audit" instead of "We have performed an audit"
because the auditor was unable to perform the audit in accordance with generally accepted
auditing standards due to the limitation on the scope of the auditor's work. In addition, the last
sentence of the first paragraph of the standard report is deleted to eliminate the reference to the
auditor's responsibility to express an opinion on the financial statements.
an expression of an opinion regarding the financial statements taken as a
whole or, an assertion that no opinion can be expressed.
__________________________
23) Recurrent auditor is an auditor who has audited the financial statements of the current
period and of one or more consecutive periods immediately preceding the current period.
If a firm of independent accountants merges with another firm and the new entity becomes
the auditor of a former client of one of the predecessor firms, the new entity may accept
responsibility for and issue an opinion on the financial statements of the prior period(s), as well
as those of the current period. In such circumstances, the new entity should use the guidance
provided in paragraphs 72 to 76 and may explain in its report that a merger took place, naming
the merged firms. If the new entity chooses not to express an opinion on the prior period financial
statements, it should follow the guidance in paragraphs 77 to 8l.
24) A distinction should be made between an updated report on prior period financial
statements and the reissuance of a previous report, because in issuing an updated report the
reissuing auditor analyzes information that became known to him during his examination of the
current period financial statements (see paragraph 75) and because an updated report is issued in
conjunction with the auditor's report on the current period financial statements.A distinction
should be made between an updated report on financial statements of a prior period and the
reissuance of a previous report, because in issuing an updated report the reissuing auditor
analyzes information that became known to him during his examination of the current period's
financial statements (see paragraph 75) and because an updated report is issued in conjunction
with the auditor's report on the current period's financial statements.
25) A recurring auditor need not report on prior period financial statements if only
comparative information for the prior period(s) is presented in summary form. In some
circumstances the client may request that the auditor express an opinion on the prior period(s) as
well as on the current period. In these circumstances, the auditor should consider whether the
information for the prior period(s) included contains sufficient detail to constitute a fair
presentation in conformity with generally accepted accounting principles.
73. During his audit of the current period, the auditor should be alert to any
circumstances or events affecting the financial statements of prior periods
presented (see paragraph 75) or the adequacy of the disclosures in those
statements. When updating his report on the financial statements of prior
periods, the auditor should take into consideration the effects of any such
circumstances or events that come to his attention.
REPORT WITH DIFFERENT OPINIONS
74. Because the auditor's report on comparative financial statements applies to the
financial statements for each period presented, it may be necessary for the
auditor to express a qualified opinion, a disclaimer of opinion or an adverse
opinion on one or more financial statements for one or more periods, while
expressing a different opinion on other financial statements presented.
75. If during his current audit the auditor becomes aware of circumstances or
events that affect the financial statements of a prior period, he should take
such situations into account when updating his report on the prior period's
financial statements.
26) The models presented assume that an independent auditor has been satisfied as to the
uniformity with which generally accepted accounting principles have been applied.
accepted accounting principles, and the financial statements of the prior period
are restructured in the current period to comply with generally accepted
accounting principles, when updating his report the auditor should indicate
that the financial statements of the prior period have been restructured and
should express an unqualified opinion with respect to the restructured
financial statements.
76. If, in an updated report, an auditor expresses an opinion that differs from his
previous opinion on the financial statements for any prior period, he should
disclose, in one or more explanatory paragraphs (preceding the opinion
paragraph), all the significant reasons for the differing opinion (27). The
explanatory paragraph(s) should disclose: (a) the date of the previous report;
(b) the type of opinion previously expressed; (c) the circumstances or events
that caused the auditor to expressa different opinion; and (d) that the auditor's
updated opinion on the prior period's financial statements differs from the
opinion previously expressed on those statements. Model 20 presents an
example of an explanatory paragraph that may be appropriate when the
auditor issues an updated report on the financial statements of a prior period
that contains an opinion that differs from the opinion previously expressed
(28).
__________________________
27) With the elimination of the qualified opinion due to uncertainties and, therefore, of the
"subject to" (see note 11), a separate explanatory paragraph (as described above) discussing the
resolution of an uncertainty described in an explanatory paragraph in the previously issued report
is not necessary, as the previously issued report does not have a qualified opinion. above), which
discusses the resolution of an uncertainty described in an explanatory paragraph in the previously
issued report, is not necessary, as the previously issued report does not have a qualified opinion.
A separate explanatory paragraph is required when the updated opinion is different from the
opinion in the previous report.
78. Before reissuing, or before consenting to the reuse of, a report on financial
statements previously issued for a prior period, the predecessor auditor should
consider whether its prior report on those statements is still appropriate. It
may be the case that either the current form or manner of presentation of the
prior period's financial statements or one or more subsequent events make the
predecessor auditor's previous report now inappropriate. Accordingly, the
predecessor auditor should (a) read the financial statements for the current
period; (b) compare the financial statements for the prior period on which
he/she expressed an opinion with the current financial statements to be
presented; and (c) obtain a letter of assurance or representation from the
successor auditor. This letter should indicate whether the successor auditor's
audit brought to light any matters that, in the opinion of the successor auditor,
could have had a material effect on the financial statements reported by the
predecessor auditor or require disclosure in the latter. However, the
predecessor auditor shall not refer, in its reissued report, to the report or work
of the successor auditor.
79. The predecessor auditor who has agreed to reissue his report may become
aware of events and transactions that occurred after the date of his previous
report on the financial statements of a prior period that could affect his report
(for example, the successor auditor may point out in his response that certain
matters have had a material effect on the prior period financial statements on
which the predecessor auditor reported). In such circumstances, the
predecessor auditor should make such findings and carry out such other
procedures as he/she deems necessary (e.g., for example, by
______________________________
29) It is recognized that there may be reasons why a previous auditor's report may not be
reissued and this Section is not intended to address the various situations that may arise.
For example, to review the work papers of the successor auditor with respect
to matters affecting the financial statements of the previous period). It must
then decide, in light of the evidence obtained, whether to revise its report. If
the predecessor auditor concludes that his report should be revised, he should
be guided by paragraphs 75, 76 and 80 of this Section.
80. The predecessor auditor's knowledge of his former client's current affairs will
obviously be limited by the lack of an ongoing relationship. Accordingly,
when reissuing its report on financial statements of a prior period, the
predecessor auditor should use the date of its prior report to avoid any possible
interpretation that it has examined records, transactions or events occurring
after that date. If the predecessor auditor revises his report or if the financial
statements are restructured, he should assign two dates to his report. (See
section 530.05).
81. If the financial statements for a prior period have been auditedby other
auditors (predecessor auditor) whose report is not presented, the successor
auditor shall state in an introductory paragraph of its report (a) that the
financial statements for the prior period were audited by another auditor (30);
(b) the date of its report; (c) the type of report issued by the predecessor
auditor; and (d) whether the report was other than its report.(b) the date of its
report; (c) the type of report issued by the predecessor auditor; and (d) if the
report was other than a standard report, the reasons for this.
___________________________
30) The succeeding auditor should not name the predecessor auditor in his report; however,
the succeeding auditor may name his predecessor when the latter's portfolio was acquired by the
succeeding auditor or was merged with that of the succeeding auditor.
If the predecessor auditor did not issue a standard report, the successor
auditor should describe the nature of and reasons for the explanatory
paragraph or qualification when referring to it in his report. Model No. 22
illustrates an example for this case.
If the financial statements for the prior period have been restructured, it
should be stated in the introductory paragraph that the predecessor auditor's
opinion was given prior to the restructuring of the financial statements.. In
addition, if the successor auditor is satisfied that the restructuring is
adequate, it may add an additional paragraph (after the opinion paragraph)
to refer to the result of this review. Model No. 23 illustrates an example
for this case.
Model No. 1
(Recipient)
We have audited the balance sheet of Company XYZ as of December 31, XXXX and the
related statements of income and cash flows for the year (*) then ended. The preparation
of these financial statements (including the related notes) is the responsibility of
Company XYZ's management. Ourour responsibility is to express an opinion on these
financial statements based on our audit.
In our opinion, such financial statements present fairly, in all material respects, the
financial position of Company XYZ as of December 31, XXXX and the results of its
operations and its cash flows for the year (*) then ended, in conformity with accounting
principles generally accepted in Chile.
(*) It is replaced by "period of ... months", if it is a period of less than one year.
NOTE: In the following models the modifications to the standard report are presented in
highlighted form (in capital letters), in order to facilitate the reading and understanding of
this Section.
Model No. 2
(Recipient)
In our opinion, such financial statements present fairly, in all material respects, the
financial position of Company XYZ as of December 31, XXXX and XXX1 and
the results of its operations and its cash flows for the YEARS ENDED ON
THOSE DATES, in conformity with accounting principles generally accepted in
Chile..
(Recipient)
(Recipient)
We have audited the balance sheet of Company XYZ as of December 31, XXXX
and the related statements of income and cash flows for the year then ended. The
preparation of these financial statements (including the related notes) is the
responsibility of Company XYZ's management. Ourour responsibility is to
express an opinion on these financial statements based on our audit.
In our opinion, such financial statements present fairly, in all material respects, the
financial position of Company XYZ as of December 31, XXXX and the results of
its operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in Chile.
(Recipient)
We have audited the balance sheet of Company XYZ as of December 31, XXXX and the
related statements of income and cash flows for the year then ended. The preparation of
these financial statements (including the related notes) is the responsibility of Company
XYZ's management. Ourour responsibility is to express an opinion on these financial
statements based on our audit.
In our opinion, such financial statements present fairly, in all material respects, the
financial position of Company XYZ as of December 31, XXXX and the results of its
operations and its cash flows for the year then ended, in conformity with accounting
principles generally accepted in Chile.
(Recipient)
We have audited the balance sheet of Company XYZ as of December 31, XXXX
and the related statements of income and cash flows for the year then ended. The
preparation of these financial statements (including the related notes) is the
responsibility of Company XYZ's management. Ourour responsibility is to
express an opinion on these financial statements based on our audit.
(Recipient)
We have audited the balance sheet of Company XYZ as of December 31, XXXX
and the related statements of income and cash flows for the year then ended. The
preparation of these financial statements (including the related notes) is the
responsibility of Company XYZ's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
(a) General:
These individual financial statements have been prepared in accordance with
accounting principles generally accepted in Chile "and standards issued by the
Chilean Superintendency of Securities and Insurance" 1 except for investments in
subsidiaries, which are recorded on a single line of the balance sheet at their
proportional equity value and, therefore, have not been consolidated line by line.
This treatment does not modify the net income for the year or the shareholders'
equity.
These financial statements have been issued solely for the purpose of making an
individual analysis of the Company and, accordingly, should be read in
conjunction with the consolidated financial statements, which are required by
generally accepted accounting principles in Chile.
1
The phrase in quotation marks should be used in the case of publicly traded corporations.
Model No. 7
(Recipient)
We have audited the balance sheet of Company XYZ as of December 31, XXXX
and the related statements of income and cash flows for the year then ended. The
preparation of these financial statements (including the related notes) is the
responsibility of Company XYZ's management. Ourour responsibility is to
express an opinion on these financial statements based on our audit.
(Recipient)
We have audited the balance sheet of Company XYZ as of December 31, XXXX.
The preparation of THIS FINANCIAL STATEMENT (including the related
notes) is the responsibility of Company XYZ's management. Our responsibility is
to express an opinion on these financial statements based on our audit.
(Recipient)
We have audited the balance sheet of Company XYZ as of December 31, XXXX
and the related statements of income and cash flows for the year then ended. The
preparation of these financial statements (including the related notes) is the
responsibility of Company XYZ's management. Ourour responsibility is to
express an opinion on these financial statements based on our audit.
(Recipient)
We have audited the balance sheet of Company XYZ as of December 31, XXXX
and the related statements of income and cash flows for the year then ended. The
preparation of these financial statements (including the related notes) is the
responsibility of Company XYZ's management. Ourour responsibility is to
express an opinion on these financial statements based on our audit.
In our opinion, except for the effects of not capitalizing certain lease obligations,
as explained in the preceding paragraph, such financial statements present fairly,
in all material respects, the financial position of Company XYZ as of December
31, XXXX and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in Chile.The
aforementioned financial statements present fairly, in all material respects, the
financial position of Company XYZ as of December 31, XXXX and the results of
its operations and its cash flows for the year then ended, in accordance with
accounting principles generally accepted in Chile.
(Recipient)
We have audited the balance sheet of Company XYZ as of December 31, XXXX
and the related statements of income and cash flows for the year then ended. The
preparation of these financial statements (including the related notes) is the
responsibility of Company XYZ's management. Ourour responsibility is to
express an opinion on these financial statements based on our audit.
In our opinion, except for the omission of the information described in the
preceding paragraph, such financial statements present fairly, in all material
respects, the financial position of Company XYZ as of December 31, XXXX and
the results of its operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in Chile.
(Signature) (Place and date)
Model No. 12
(Recipient)
We have audited the balance sheet of Company XYZ as of December 31, XXXX
and the related statement of income for the year then ended. The preparation of
these financial statements (including the related notes) is the responsibility of the
managementof Company XYZ. Our responsibility is to express an opinion on
these financial statements based on our audit.
Our audit was conducted in accordance with generally accepted auditing standards
in Chile. Such standards require that we plan and perform our work to obtain
reasonable assurance about whether the financial statements are free from material
misstatement. An audit includes examining, on a test basis, evidence supportingthe
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
(Recipient)
We have audited the balance sheet of Company XYZ as of December 31, XXXX
and the related statements of income and cash flows for the year then ended. The
preparationof these financial statements (including the related notes) is the
responsibility of Company XYZ's management. Our responsibility is to express
an opinion on these financial statementsbased on our audit.
Our audit was conducted in accordance with generally accepted auditing standards
in Chile. Such standards require that we plan and perform our work to obtain
reasonable assurance about whether the financial statements are free from material
misstatement. An audit includes examining, on a test basis, evidence supportingthe
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
(Recipient)
We have audited the balance sheet of Company XYZ as of December 31, XXXX
and the related statements of income and cash flows for the year then ended. The
preparation of these financial statements (including the related notes) is the
responsibility of Company XYZ's management. Ourour responsibility is to
express an opinion on these financial statements based on our audit.
Our audit was conducted in accordance with generally accepted auditing standards
in Chile. Such standards require that we plan and perform our work to obtain
reasonable assurance about whether the financial statements are free from material
misstatement. An audit includes examining, on a test basis, evidence supportingthe
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, due to the effects of the matters mentioned in the preceding
paragraphs, the aforementioned financial statements DO NOT, in conformity with
generally accepted accounting principles in Chile, FAIRLY PRESENT THE
FINANCIAL POSITION OF COMPANY xyz as of December 31, xxxx and the
results of its operations and cash flows for the year then ended.IA XYZ AS OF
DECEMBER 31, XXXX AND THE RESULTS OF ITS OPERATIONS AND
CASH FLOWS FOR THE YEAR THEN ENDED.
(Recipient)
We have audited the balance sheet of Company XYZ as of December 31, XXXX
and the related statements of income and cash flows for the year then ended. The
preparation of these financial statements (including the related notes) is the
responsibility of Company XYZ's management. Ourour responsibility is to
express an opinion on these financial statements based on our audit.
Our audit was conducted in accordance with generally accepted auditing standards
in Chile. Such standards require that we plan and perform our work to obtain
reasonable assurance about whether the financial statements are free from material
misstatement. An audit includes examining, on a test basis, evidence supportingthe
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
Note - This model should not be applied when the consolidated financial
statements are presented separately from the Parent Company's individual
financial statements (See paragraph 35 of this Section and Model No. 6).
Model No. 16
(Recipient)
(Recipient)
We have audited the balance sheet of Company XYZ as of December 31, XXXX
and the related statements of income and cash flows for the year then ended. The
preparationof these financial statements (including the related notes) is the
responsibility of Company XYZ's management. Our responsibility is to express
an opinion on these financial statementsbased on our audit.
(Recipient)
(Recipient)
(Recipient)
In our opinion, such financial statements present fairly, in all material respects, the
financial position of Company XYZ as of December 31, XXX2 and XXX1 and
the results of its operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in Chile.
(Recipient)
We have audited the balance sheet of Company XYZ as of December 31, XXX2
and the related statements of income and cash flows for the year then ended. The
preparation of these financial statements (including the corresponding notes) is the
responsibility of Company XYZ's management. Our responsibility is to express
an opinion on these financial statements based on our audit. THE FINANCIAL
STATEMENTSOF COMPAÑIA XYZ FOR THE YEAR ENDED DECEMBER
31, XXX1 WERE AUDITED BY OTHER AUDITORS, WHO ISSUED AN
UNQUALIFIED OPINION ON THEM IN THEIR REPORT DATED MARCH 1,
XXX2.
Our audit was conducted in accordance with generally accepted auditing standards
in Chile. Such standards require that we plan and perform our work to obtain
reasonable assurance about whether the financial statements are free from material
misstatement. An audit includes examining, on a test basis, evidence supportingthe
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements as of December 31, XXX2 present fairly,
in all material respects, the financial position of Company XYZ as of December
31, XXX2 and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in Chile.
(Signature) (Place and date).
Model No. 22
(Recipient)
We have audited the balance sheet of Company XYZ as of December 31, XXX2
and the related statements of income and cash flows for the year then ended. The
preparation of these financial statements (including the related notes) is the
responsibility of Company XYZ's management. Ourour responsibility is to
express an opinion on these financial statements based on our audit. THE
FINANCIAL STATEMENTS OF COMPAÑIA XYZ FOR THE YEAR ENDED
DECEMBER 31, XXX1 WERE AUDITED BY OTHER AUDITORS, WHOSE
REPORT DATED MARCH 1, XXX2 CONTAINED AN EXPLANATORY
PARAGRAPH DESCRIBING THE LITIGATION WHICH IS EXPLAINED IN
NOTE X TO THE FINANCIAL STATEMENTS.
Our audit was conducted in accordance with generally accepted auditing standards
in Chile. Such standards require that we plan and perform our work to obtain
reasonable assurance about whether the financial statements are free from material
misstatement. An audit includes examining, on a test basis, evidence supporting-
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements as of December 31, XXX2 present fairly,
in all material respects, the financial position of Compa ñía XYZ as of December
31, XXX2 and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in Chile.
(Recipient)
We have audited the balance sheet of Company XYZ as of December 31, XXX2
and the related statements of income and cash flows for the year then ended. The
preparation of these financial statements (including the related notes) is the
responsibility of Company XYZ's management. Our responsibility is to express
an opinion on these financial statements based on our audit. THE FINANCIAL
STATEMENTS OF COMPANY XYZ FOR THE YEAR ENDED DECEMBER
31, XXX1, BEFORE BEING RESTRUCTURED, WERE AUDITED BY
OTHER AUDITORS, WHO IN THEIR REPORT DATED MARCH 1, XXX2
ISSUED AN ADVERSE OPINION, DUE TO THE DEVIATION FROM
ACCOUNTING PRINCIPLES EXPLAINED IN NOTE X TO THE FINANCIAL
STATEMENTS.
In our opinion, the financial statements as of December 31, XXX2 present fairly,
in all material respects, the financial position of Company XYZ as of December
31, XXX2 and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in Chile.
WE ALSO REVIEWED THE ADJUSTMENTS DESCRIBED IN NOTE X TO
THE FINANCIAL STATEMENTS, MADE TO RESTRUCTURE THE
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,
XXX1. IN OUR OPINION, SUCH ADJUSTMENTS ARE ADEQUATE AND
WERE APPLIED APPROPRIATELY.
AUDIT REPORTS
ON CONSOLIDATED FINANCIAL STATEMENTS
Introduction
01. The purpose of this section is to supplement the other sections relating to the
auditors' report on financial statements and to establish the basic rules for the
preparation of audit reports on consolidated financial statements.
02. Consolidated financial statements are those that present the assets, liabilities,
income and expenses and cash flows of a parent company and its subsidiaries
as if the whole were a single enterprise.
03. For the purposes of the application of this Section, the following definitions
shall apply:
04. When, with respect to the consolidated financial statements, separate reports
have been issued on the financial statements of the subsidiary(ies), the
problem arises as to what date the auditors' report on the consolidated
financial statements should be dated. In these circumstances it is
recommended that all reports be dated the same date. This, however, is not
always possible. In any case, the date of the report on the consolidated
financial statements must not be later than the date of the most recent report of
the companies forming the group. In those cases in which the reports of the
most important component bear very old dates, it is recommended that the
review of subsequent events be updated to the date adopted in the consolidated
financial statements.
05. In cases where reports are issued on consolidated financial statements that
include relatively important companies examined by other auditors, the
problem generally arises of defining the responsibility assumed by the auditors
who sign the reports on such consolidated statements.
06. The purpose of referring to other auditors in the audit report is to clearly
indicate that the report is based not only on the auditor's own examination but
also, in part, on the report of other auditors. In such cases, the principal
auditor is normally willing to use the report of another independent auditor for
the purpose of expressing his opinion on the consolidated financial statements;
however, he is not sufficiently willing to assume responsibility for the
outcome of the work (to the same extent as when he performs the work) and
which served as the basis for his report on the financial statements.
The use of the expression "except for" is advisable in the case under
discussion.
09. In some circumstances the lead auditor may assume responsibility for the
work of another auditor to the same extent that he/she assumes responsibility
when he/she has performed the work.
When the lead auditor assumes responsibility for the work of the other
auditor, he need not refer to the other auditor in the introductory paragraph or
in the opinion paragraph. If such a reference is made, he should make it clear
that he is assuming responsibility for such work.
Auditing Standards Related to Uniformity
10. It may occur that one or more consolidated companies apply different or
alternative generally accepted accounting principles. This fact does not affect
the independent auditor's report, provided that such principles have been
applied consistently and are clearly disclosed in the notes to the consolidated
financial statements.
11. It may happen that a consolidating company, in order to follow a uniform
method of application in all the companies of the group, changes an
accounting principle. In this case, the standard on uniformity has been
affected and the independent auditor should consider the corresponding
mention when issuing his report.
13. In the case indicated in the preceding paragraph, the auditor must satisfy
himself that the information on consolidation is adequately identified. For
example, where the consolidated financial statements contain columns of
information about the companies forming the group being consolidated, the
balance sheets might bear the heading, "Consolidated Balance Sheet as at
December 31, XXXX, with Consolidation Information", and the columns
containing consolidation information might bear the heading, "Consolidation
Information".Consolidated Balance Sheet as of December 31, XXXX, with
Consolidation Information", and the columns containing the consolidation
information could be headed "Consolidation Information". When this
information on consolidation is presented in separate schedules or statements,
those presenting information on the component companies of the consolidated
group could be entitled, for example, "Consolidation Table, Balance Sheet
Information as of December 31, XXXX.
14. When the auditor is engaged to express an opinion on both the consolidated
financial statements and the individual financial statements of the companies
forming the group whose financial statements are consolidated, the auditor's
responsibilities for reporting on the individual financial statements are the
same as his responsibilities for the consolidated financial statements.
Introduction
01. Generally, the date on which the work is completed at the client's offices (i.e.,
when the main phases of the audit have been concluded) should be used as the
date of the independent auditor's report. Paragraph 05 describes the procedure
to be followed when disclosing in the financial statements a subsequent event
that occurs after the work has been completed at the customer's offices ("in
the field").
02. The auditor has no responsibility to make any inquiry or perform any audit
procedures in connection with the period subsequent to the date of the
auditor's report.
03. In the event that a subsequent event that requires the financial statements to be
adjusted (as explained in Section 560.03) occurs after the date of the
independent auditor's report, but before the issuance of the report, and the
event comes to the auditor's attention, the financial statements should be
adjusted or the auditor should issue a qualified auditor's report. If the
adjustment is made without describing the fact in the financial statements,
generally the report should carry the date on which the field work is
completed. However, if the financial statements are adjusted and the fact is
described, or if the adjustment is not made and the auditor's report is
qualified, the procedures outlined in paragraph 05 should be followed.
04. In the event that a subsequent event, of the type requiring disclosure (as
explained in Section 560.05), occurs after the date of the auditor's report but
before the issuance of the auditor's report, and such event comes to the
auditor's attention, it should be disclosed in a note to the financial statements
or the auditor should issue a qualified auditor's report. If the fact is disclosed,
either in a note or in the report, the auditor shall date his report as indicated in
the following paragraph.
05. The independent auditor has two alternatives for dating his report when a
subsequent event disclosed in the financial statements occurs after the
completion of the field work, but before the issuance of the report. You can
use a "double date", e.g., "February 16, XXX1, except for the Note...... whose
date is March 2, XXX1", or you can date your report with the latest date. In
the first case, your liability for events that occurred after the completion of
your field work is limited to the specific event mentioned in the note (or
disclosed by other means). In the second case, the independent auditor's
responsibility for subsequent events extends to the date of his report and,
therefore, the audit procedures relating to subsequent events (see Section
560.12) should generally extend to that date.
07. In some cases, the independent auditor may find it inconvenient to issue
additional copies of his report in the manner described in paragraph 06
because he has become aware of events subsequent to the date of issuance of
his original report that require the financial statements to be adjusted and/or
the fact to be disclosed. In either case, the auditor should apply the provisions
of Section 560.08. The independent auditor should consider the effect of
these matters on his opinion and should date his report in accordance with the
procedures described in paragraph 05.
1
The original report should be understood to be the most recent version in circulation of
the corresponding independent auditor's report.
08. However, if an event of the type that requires disclosure only (as explained in
Section 560.05 and 560.08) occurs between the date of the original report and
the date of issuance of additional copies of its report, and such event comes to
the auditor's attention, it may be disclosed in a new note to the financial
statements entitled as follows:
09. An independent auditor may reissue its report on financial statements already
submitted to regulatory bodies, to its client or to third parties, in order to
include modifications or supplementary information in the financial
statements covered by such report. If the amendments or supplementary
information significantly change the financial statements to which his original
report refers, the auditor should apply paragraph 05, and the changes made
should be disclosed in an additional note to the financial statements. In
addition, the auditor should seek to ensure that the client makes its best efforts
to withdraw copies of the original report from circulation. If it is not feasible
to ensure that all such copies have been withdrawn from circulation or if it is
not clear that any potential users of such copies are fully aware that the
original report has been superseded, the auditor should evaluate the need to
request that the client directly inform the relevant regulatory bodies and other
potential users.
SECTION 532
Introduction
01. This Section provides guidance to auditors regarding the restriction on the use
of reports issued in accordance with generally accepted auditing standards in
Chile. This Section:
02. The term "general use" applies to auditors' reports that are not restricted to
specified users. Auditors' reports on financial statements, prepared in
accordance with generally accepted accounting principles or bases of
accounting other than generally accepted accounting principles, 1 are not
normally restricted. 2 3
03. The term "restricted use" applies to auditors' reports intended for specified
users only. The need to restrict the use of a report may result from various
circumstances, including, among others, the purpose of the report, the nature
of the procedures, bases or assumptions used in its preparation, the extent to
which the procedures applied are commonly known or understood, and the
1
Section 623 "Special Reports", paragraph 04 defines a basis of accounting other
than generally accepted accounting principles.
2
See also, paragraph 05. f) of Section 623, for restrictions on the use of financial statement
reports prepared in accordance with the financial reporting requirements of a regulatory
entity.
3
Nothing in this Section prevents an auditor from using its report.
risk that the report will be misinterpreted by being taken out of the context in
which it was intended to be used.
06. An auditor may issue certain reports on matters that come to his or her
attention during the course of an audit of financial statements. Such reports
include, but are not limited to, reports issued pursuant to the following:
07. The reports issued in accordance with the aforementioned auditing standards
are based on the results of procedures that were designed to enable the auditor
to express an opinion on the financial statements taken as a whole and not to
provide assurance on the specific subject matter of the report. These reports
are by-products of an audit of financial statements and will be referred to in
this section as secondary reports.
08. Since the issuance of the secondary report is not the primary objective of the
work, an audit generally includes only limited procedures directed toward the
primary subject matter of this secondary report. Therefore, due to the
possible misunderstanding or misinterpretation of the limited degree of
assurance provided by a secondary report, the use of such reports should be
restricted. For example, a report issued under Section 325 should be
restricted because the purpose of the work is to report on an entity's financial
statements and not to provide assurance on its internal control.
09. An auditor may issue a secondary report in conjunction with other work
performed in accordance with generally accepted auditing standards, such as
work to express an opinion on one or more specific items, accounts or line
items in a financial statement.
10. Considering the above, the use of secondary reporting should be restricted to
the audit committee, the board of directors and/or management of an entity,
others within the organization, specific regulatory bodies and, in the case of
reports on compliance with contractual agreements, the parties involved in the
agreement or contract.
11. If an auditor issues a single report that covers both (a) financial matters or
presentations that require restriction of its use to specified users and (b)
matters or presentations that do not ordinarily require such restriction, the use
of such single report should be restricted to the specified users.
13. During or after the performance of work that results in a restricted use report,
an auditor may be asked to consider adding other users to the previously
specified users.
14. As noted in paragraph 10 of this Section, the use of secondary reporting
should be restricted to the audit committee, board of directors and/or
management of an entity, others within the organization, specific regulatory
bodies, and in the case of reporting on compliance with contractual
arrangements, should be restricted to the parties involved in the contract or
arrangement. An auditor should not agree to add other users as specified
users of a secondary report.
15. If an auditor is reporting on a subject matter or presentation based on
measurement or disclosure criteria contained in contractual arrangements or
regulatory requirements as described in paragraph 05 of this Section, the
auditor may agree to add other users as specified users based on the auditor's
consideration of factors such as the identity of the other users and the intended
use of the report.If an auditor is reporting on a subject matter or presentation
based on measurement or disclosure criteria contained in contractual
arrangements or regulatory requirements as described in paragraph 05 of this
Section, the auditor may agree to add other users as specified users based on
the auditor's consideration of factors such as the identity of the other users and
the intended use of the report. If the auditor agrees to add other users as
specified users, the auditor should obtain written confirmation from the other
users of their understanding of the nature of the work, the measurement or
exposure criteria used in the work and the corresponding report. If the other
users are added after the auditor has issued his report, the report could be
reissued or the auditor could leave another written record that the other users
have been added as specified users. If the report is reissued, the date of the
report should not be changed. If the auditor leaves other written evidence that
the other users have been added as specified users, such written evidence
should state that no procedures have been performed after the date of the
report.
16. Because of the reasons presented in paragraph 03 of this Section, an auditor
should consider informing his client that restricted-use reports are not for
distribution to unspecified users, even if they are included in a document that
also contains a separate general-purpose report 4 5. However, it is not the
auditor's responsibility to control the client's distribution of restricted-use
4
In some cases, the law or regulations require that restricted use reports filed
with regulatory bodies be made available to the public as a matter of public record.
5
This Section does not preclude an auditor, in establishing the terms of the work to be
performed, from reaching an understanding with the client that the intended use of the
report will be restricted and from obtaining the client's agreement that the client and
specified users will not distribute the report to users other than those identified in the
report.
reports. Therefore, a restricted use report should alert readers to the restricted
use of the report.
17. A restricted auditor's report should contain a separate paragraph at the end of
the report that includes the following elements:
a) A statement indicating that the report is for the information and use of the
specified users only.
c) A statement that the report is not intended to be and should not be used
by any user other than a specified user.
This report is for the information and use of the specified users only.
specified users 6
6
The report could list the specified users or direct the reader's attention to a list
of specified users included elsewhere in the report.
SECTION 543
Introduction
01. This Section provides guidance on the professional judgment that the
independent auditor forms in deciding: (a) whether to act as principal auditor
and to use the work and reports of other independent auditors who have
audited the financial statements of one or more subsidiaries, affiliates,
divisions, branches, investments or other items included in the financial
statements presented, hereinafter "components", and (b) the form and content
of the principal auditor's report in these circumstances. The contents of this
Section should not be taken to require or imply that an auditor, in deciding
whether he may act as principal auditor without having audited certain
components, should make that decision on any basis other than his own
judgment with respect to the professional considerations discussed in
paragraphs 02 and 10, nor should an auditor state or imply that a report that
refers to another auditor is inferior in professional quality to a report that does
not contain such a reference.
02. The auditor to act as lead auditor should consider whether he/she has
performed all but a minor portion of the work, or whether significant portions
of the audit have been performed by other auditors. In the latter case, the
auditor decides whether its participation is sufficient to allow it to act as the
principal auditor and appear as such in the financial statements. In deciding
this matter, the auditor should consider, among other things, the materiality of
the portion of the financial statements he has audited compared with the
portion audited by other auditors, the extent of his knowledge of the overall
financial statements, and the materiality of the components he has audited in
relation to the enterprise as a whole.
03. If the auditor decides that it is appropriate for him to act as lead auditor, he
should then decide whether to refer in his report (1) to the audit performed by
another auditor.
If the principal auditor decides to assume responsibility for the work of
another auditor to the extent that such work affects the principal auditor's
expression of an opinion on the financial statements taken as a whole, no
reference should be made to the other auditor's work or report. Conversely, if
the principal auditor decides not to assume such responsibility, his report
should refer to the other auditor's audit and should clearly indicate the
delimitation of responsibility between him and the other auditor in expressing
his opinion on the financial statements. Regardless of the decision made by
the lead auditor, the other auditor remains responsible for the performance of
his own work and also for his own report.
04. If the principal auditor can satisfy himself as to the independence and
professional reputation of the other auditor (see paragraph 10) and takes such
steps as he considers appropriate to satisfy himself regarding the other
auditor's audit (see paragraph 12), he may express an opinion on the financial
statements taken as a whole without reference in his report to the other
auditor's audit.(See paragraph 12), he may express an opinion on the financial
statements taken as a whole without reference in his report to the other
auditor's audit. If the principal auditor decides to take this position, he should
not indicate in his report that a portion of the audit was performed by another
auditor because doing so could cause the reader to misinterpret the degree of
responsibility he is assuming.
05. Normally the lead auditor should be able to take this position when:
(1)
See paragraph 09 for an example of an appropriate report to refer to another auditor's
audit.
b) The other auditor reported to the principal auditor and the work was
performed under the guidance and control of the principal auditor; or
c) The principal auditor, whether or not he has selected the other auditor,
takes such steps as he considers necessary to satisfy himself in relation to
the audit performed by the other auditor and satisfies himself accordingly
that the accounts are reasonable for the purpose of inclusion in the
financial statements on which he is expressing his opinion; or
d) The portion of the financial statements audited by the other auditor is not
material to the financial statements covered by the principal auditor's
opinion.
06. Conversely, the principal auditor may decide to refer to the other auditor's
audit when expressing an opinion on the financial statements. In some
situations it may be practically impossible for the principal auditor to review
the other auditor's work or to use other procedures that, in the opinion of the
principal auditor, would be necessary to satisfy himself with respect to the
audit performed by the other auditor. In addition, if the financial statements
of a component audited by another auditor are material in relation to the total,
the principal auditor may decide, irrespective of any other considerations, to
refer in his report to the other auditor's audit.
07. When the principal auditor decides that he will refer to the other auditor's
audit, his report should clearly indicate in the introductory, scope and opinion
paragraphs the delimitation of responsibility between the portion of the
financial statements covered by his own audit and the portion covered by the
other auditor's audit. The report should disclose the extent of the portion of
the financial statements audited by the other auditor. This may be done by
stating the amounts or percentages of one or more of the following: Total
Assets, Total Revenues, or other appropriate criteria; of these whichever most
clearly discloses the portion of the financial statements audited by the other
auditor. The other auditor may be appointed, but only with his express
permission and subject to his report being submitted together with the report
of the principal auditor.
08. Reference in the report of the principal auditor to the fact that part of the audit
was performed by another auditor should not be understood as a qualified
opinion, but rather as an indication of the shared responsibility of the auditors
who performed the audits of different components of the financial statements.
10. Whether or not the principal auditor chooses to refer to the other auditor's
audit, he should obtain information regarding the other auditor's professional
reputation and independence. It should also take appropriate measures to
ensure coordination of its activities with those of the other auditor to achieve
an appropriate review of matters affecting the consolidation or combination of
accounts in the financial statements. These inquiries and other measures may
include procedures such as the following:
Consultations regarding matters under paragraphs "a", "c (ii)" and "c (iii)"
would normally be unnecessary if the principal auditor already knows the
reputation and professional image of the other auditor, and the other auditor
normally practices in Chile.
11. If the results of the lead auditor's inquiries and procedures performed with
respect to the matters discussed in paragraph 10 lead him to conclude that he
cannot assume responsibility for the other auditor's work, and to the extent
that such work affects the expression of the other auditor's opinion on the
financial statements taken as a whole, and he cannot report in the manner
required by paragraph 09, then he should either modify his opinion
appropriately or disclaim his opinion on the financial statements taken as a
whole.To the extent that such work affects the expression of the lead auditor's
opinion on the financial statements taken as a whole, nor can the lead auditor
report in the manner required by paragraph 09, then the lead auditor should
either modify its opinion appropriately or recuse itself from expressing an
opinion on the financial statements taken as a whole. The reasons for such a
decision should be stated and this caveat should be quantified.
12. When the principal auditor decides not to refer to the other auditor's audit, in
addition to satisfying himself with respect to the matters described in
paragraph 10, he should consider whether to perform one or more of the
following procedures:
a) Visit the other auditor and discuss the audit procedures applied and their
results.
LONG-TERM INVESTMENTS
14. With respect to investments accounted for under the equity method of
accounting, the auditor who uses the report of another auditor for the purpose
of reporting on the investor's share of the net assets and his proportion of the
profits or losses and other transactions of the investee is in the same
circumstances as the principal auditor who uses the work and reports of other
auditors. Under these conditions, the auditor may decide that it would be
appropriate to refer to the other auditor's examination in its report on the
investor's financial statements. (See paragraphs 06-11). Where the work and
reports of other auditors constitute a principal element of evidence in respect
of investments accounted for by the cost method (without V.P.P.), the auditor
may be in a situation similar to that of a principal auditor.
15. If the other auditor's report is qualified, the principal auditor should decide
whether the subject matter of the exception, in relation to the financial
statements on which he/she is expressing an opinion, is of such significance as
to require a qualification in his/her own report. If the subject matter of the
qualification is not material in relation to such financial statements and if the
other auditor's report is not presented, it is not necessary for the principal
auditor to refer in his report to such qualification; if the other auditor's report
is presented, the principal auditor may refer to such qualification, and explain
the reasons why this situation does not affect his opinion.
SECTION 550
Introduction
01. An entity may publish several documents containing information (here called
"other information") in addition to the audited financial statements and the
independent auditor's report. The purpose of this Section is to provide
guidance for the auditor's consideration of "other information" included in
such documents.
02. This Section applies only to "other information contained in: a) annual reports
to shareholders, annual reports of not-for-profit organizations with public
distribution and annual reports prepared for regulatory authorities, or b) other
documents to which the client requests the auditor's attention.
04. If, on reading the "other information" for the reasons described in paragraph
03, the auditor identifies that there is information that he considers to be
materially misstated that is not a material inconsistency as described in
paragraph 03, then he should discuss this situation with the client. In this
connection, the auditor should consider that he/she may not have sufficient
experience to determine the validity of the assertion, that there may be no
standards against which to evaluate its presentation, and that there may be
differences of judgment or valid opinions. If the auditor concludes that he has
a sound basis for concern, then he should suggest to his client that he consult
with another expert whose advice may be helpful, such as the client's legal
counsel.
05. If, after discussing the matters referred to in paragraph 04, the auditor
concludes that the misstatement persists, the action he takes in these particular
circumstances will depend on his own judgment. He should consider the
steps to be taken, such as notifying his client in writing of the points related to
the misinformation and consulting his legal counsel about the appropriate
action to be taken in the circumstances.
06. If any "other information" has been subjected to audit procedures performed
in the audit of the financial statements, the auditor may express an opinion on
whether such information is fairly presented, in all material respects, in
relation to those financial statements taken as a whole. In these
circumstances, the auditor's report in relation to this information should
clearly describe the nature of the work and the degree of responsibility the
auditor is taking. An example of the auditor's report in relation to the "other
information" included in conjunction with the financial statements is as
follows:
Our audit was conducted for the purpose of expressing an opinion on the
financial statements taken as a whole. The (identify the "other
information") is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has
been subjected to the auditing procedures applied in the audit of the
financial statements and, in our opinion, is fairly stated, in all material
respects, in relation to the basic financial statements taken as a whole.
07. The auditor should consider the effect of any modifications to its standard
report when reporting in relation to "other information". When the auditor
expresses a qualified opinion on the financial statements, he should clearly
state the effects on the accompanying "other information". When the auditor
expresses an adverse opinion or disclaims an opinion on the financial
statements, he should not express an opinion on the "other information"
accompanying the financial statements. An expression of an opinion in these
circumstances may be inappropriate because it tends to contradict the adverse
opinion or disclaimer of opinion on the financial statements.
SECTION 552
Introduction
01. This section provides guidance on the position to be adopted by the auditor
when the client issues summarized financial statements derived from audited
financial statements, and the type of report to be issued in this case.
02. Without limiting the foregoing, the summarized financial statements should
include at least the following:
- The summary of each of the basic financial statements and any other
statement required by a regulatory entity must be included.
REPORT
03. The summarized financial statements are presented in considerably less detail
than the audited financial statements from which they are derived, which are
intended to present the financial position, results of operations and cash flows
in accordance with generally accepted accounting principles. For this reason,
they should be read in conjunction with the audited financial statements from
which they are derived, which include all disclosures required by generally
accepted accounting principles.
06. An example of the wording that the auditor may use when issuing a report on
summarized financial statements, which have been derived from audited
financial statements and on which the auditor has expressed an unqualified
opinion, is as follows:
07. A client could mention in a document prepared by him the name of his
auditors and also indicate that these summarized financial statements are
derived from audited financial statements. In this case, the auditor is not
required to prepare a report on the summarized financial statements, provided
that the audited financial statements are also included in the document.
However, if such mention is made in a document that does not include the
audited financial statements, the auditor should request the client: a) not to
include the auditor's name in the document, or b) to include the report on the
summarized financial statements, as described in paragraph 05. If the client
does not accept either option, the auditor should inform the client that he does
not permit the use of or reference to his name, and should consider what other
actions might be appropriate 3.
09. The auditor must inform his client that he may not refer to his name in any
publication of summarized or simplified financial statements without his prior
consent. The reasonableness of the information disclosed, the errors it may
contain, its validity and veracity, are sufficient reason for the auditor to be
involved in all those publications in which his name is referred to or in which
he has participated in its preparation(3) .
SECTION 560
SUBSEQUENT EVENTS
Introduction
02. There are two types of subsequent events that require consideration by
management and evaluation by the independent auditor.
03. The first type are those subsequent events that provide additional evidence
regarding conditions that already existed at the balance sheet date and that
affect the estimates inherent in the process of preparing the financial
statements. All information available prior to the issuance of the financial
statements should be used by management in its assessment of the conditions
on which the estimates were based. The financial statements should be
adjusted for any changes in estimates resulting from the use of such evidence.
05. The second type consists of those facts that provide evidence regarding
conditions that did not exist at the date of the balance sheet on which the
auditor's report is issued, but occurred after that date. These facts should not
be the cause for the adjustment of the financial statements. Some of these
subsequent events, however, may be of such a nature that disclosure is
required to prevent the financial statements from being misleading.
Sometimes such events may be so significant that the best way to disclose
them is to supplement the financial statements with pro forma financial data
that reflect the effect of the subsequent event as if it had occurred at the
balance sheet date. It may be desirable to present pro forma financial
statements, usually only the balance sheet, in tabular form in the financial
statements.
06. Examples of subsequent events of the type referred to in paragraph 05, which
require disclosure in the financial statements (but do not give rise to
adjustments), are as follows:
b) Acquisition of a business.
c) Settlement of a legal dispute, when the event giving rise to the claim
occurred after the balance sheet date.
08. When additional copies of previously issued financial statements are issued,
certain events may have occurred between the date of original issuance and
the date of recent issuance that require disclosure in the latest financial
statements to avoid misleading statements. Events occurring between the date
of original issuance and the date of reissuance of the financial statements
should not give rise to adjustments to the financial statements unless the
adjustment qualifies as a "correction of error" or "prior year adjustment".
Also, financial statements that are reissued at a date subsequent to their
original issuance on a comparative basis with financial statements of
subsequent periods should not be adjusted for events occurring after the
original issuance, unless the adjustments meet the aforementioned
requirements.
09. Occasionally, a subsequent event of the second type noted in paragraph 05 has
such a material effect on the entity that the auditor may wish to include an
explanatory or emphasis of matter paragraph in the auditor's report that directs
the reader's attention to the event and its effects (See Section 508.35).
10. There is a period subsequent to the balance sheet date, which the auditor must
take into consideration when completing various phases of his examination.
This period is called the "subsequent period", which is considered to extend to
the date of the auditor's report. Its duration will depend on the conditions
under which the examination is performed and may vary from a relatively
short period of time to several months. In addition, not all audit procedures
are performed at the same time and some phases of the examination will be
performed during the subsequent period, while others will have been
substantially completed on or before the balance sheet date. As an audit nears
completion, the auditor will have to concentrate on outstanding issues relating
to the audit and report writing and cannot be expected to continue to review
matters for which he or she has already satisfied himself or herself through
the application of audit procedures.
11. Certain specific procedures apply to transactions occurring after the balance
sheet date, such as: (a) examination of data that support such transactions and
that ensure that the cut-off of transactions has been adequate and (b)
examination of data that provide information to assist the auditor in its
assessment of assets and liabilities existing at the balance sheet date.
12. In addition, the independent auditor should perform other audit procedures for
the period subsequent to the balance sheet date to obtain assurance about the
occurrence of subsequent events that may require adjustments or disclosures
for the presentation of the financial statements in conformity with generally
accepted accounting principles. Such procedures should be performed at or
near the date of completion of the work at the client's offices. Generally, the
auditor should:
b) Inquire and discuss with the executives responsible for the finance and
accounting areas regarding:
(iii) The current status of items included in the financial statements that
are the subject of the report, which were determined on a tentative,
preliminary or non-final basis.
(iv) Whether unusual adjustments have been made during the period
between the balance sheet date and the date of the inquiry.
c) Read available minutes of shareholders' meetings, board meetings, and
relevant committees. For those meetings where minutes are not
available, inquire about the matters discussed in the minutes.
d) Obtain from legal counsel the description and evaluation of any litigation
(current or imminent), claims or tax contingencies of which they are
aware as of the balance sheet date, as well as the description and
evaluation of those and other matters of the same nature of which they
were aware up to the date on which they provide the information.
e) Obtain from the client's executives (usually the general manager and
finance manager) a "Management Representation" letter dated the same
date as the auditor's report as to whether events have occurred subsequent
to the date of the financial statements that, in the opinion of the
undersigned, require adjustment or disclosure in the financial statements.
The auditor may decide to ask the client to include representations on
significant matters of which it has become aware in the course of
performing the procedures described in subparagraphs (a) through (d)
above and subparagraph (f) below:
Introduction
01. The procedures described in this Section should be used by the auditor when,
subsequent to the date of his report on the financial statements, he becomes
aware of facts that may have existed at that date and, if known, could have
affected his report.
03. After issuing his report, the auditor is not required to make further inquiries or
perform other audit procedures with respect to the financial statements to
which his report relates, unless he becomes aware of new information that
may affect his report. In addition, this Section does not apply to situations
arising from events or facts occurring after the date of the auditor's report, nor
does it apply to situations where, after the issuance of the auditor's report,
determinations or resolutions are made with respect to contingencies, or other
matters that have been disclosed in the financial statements or that have given
rise to qualifications in the auditor's report.
APPLICABLE AUDIT PROCEDURES
04. When the auditor becomes aware of information relating to financial
statements on which he has already issued his report, but which was not
known to him at the date of issue and which is of such a nature and from such
a source that the auditor would have investigated it had he known it during the
course of his audit, he should, as soon as possible, attempt to determine
whether the information is reliable and whether the facts existed at the date of
his report. In this regard, the auditor should discuss the situation with his
client at the management level he deems appropriate and request cooperation
for any investigation that may be necessary.
06. When the auditor concludes, after considering items (a) and (b) of paragraph
05, that steps should be taken to ensure that future reliance is not placed on
the auditor's report, the auditor should request the client to disclose, in the
most appropriate manner, the newly discovered facts and their impact on the
financial statements to persons who are known to place, or who are likely to
place, reliance on the auditor's report and the auditor's report.The client
should request the client to disclose, in the most appropriate manner, the
newly discovered facts and their impact on the financial statements to those
persons currently known to rely or likely to rely on the financial statements
and the auditor's report thereon. Where the customer agrees to appropriate
disclosure of such information, the method used and the content of the
disclosure will depend on the circumstances.
07. The auditor should take such steps as the auditor considers necessary to
satisfy himself that the client has made the disclosures specified in paragraph
06.
08. If the client refuses to make the disclosures specified in paragraph 06 the
auditor shall notify in writing each member of the Board of Directors or
1
If the client fails to make appropriate disclosures, the auditor should take the steps
described below to avoid further reliance on the auditor's report in the future.
Senior Management of such refusal and of the fact 1 of not making the
disclosures. The appropriate steps that can be taken will depend on: a) the
extent to which the auditor is aware that there are persons who currently rely
or may rely on the financial statements and the auditor's report, and who may
attach significance to the information; and b) the practical possibility for the
auditor to communicate with them. Unless the auditor's legal counsel
recommends another course of action, the auditor should take the following
steps, to the extent applicable:
09. The following guidelines should govern the content of any disclosures made
by the auditor under paragraph 08 to persons other than the auditor's client:
b) If, as a result of the failure to obtain the client's cooperation, the auditor
has been unable to make a satisfactory investigation of the information,
his disclosure need not give details of the specific information, but may
only indicate that he has become aware of certain information in relation
to which he has not obtained the client's cooperation in seeking to
corroborate it and that, if this information is true, the auditor considers
that his report should no longer be relied upon and should no longer
relate to it.If this information is true, the auditor believes that his report
should no longer be relied upon and should no longer be related to the
financial statements. This disclosure should not be made unless the
auditor believes that the financial statements are likely to be misleading
and the auditor's report cannot be relied upon.
10. The concepts incorporated in this Section are applicable to all cases where an
independent auditor has examined financial statements and issued a report on
them.
SECTION 623
SPECIAL REPORTS
Introduction
01. This Section applies to auditors' reports that relate to the following:
02. Generally accepted auditing standards are applicable when the auditor
performs an audit and reports on a financial statement, which may be, for
example, of a corporation, a consolidated group of corporations, a combined
group of corporations, a not-for-profit entity, a governmental entity, a
segment of any of these, or a natural person. The term financial statement
refers to the presentation of financial information, including the notes thereto,
derived from accounting records and intended to provide information about an
entity's resources or obligations at a given date or changes in a period, in
conformity with generally accepted accounting principles or on a basis of
accounting other than generally accepted accounting principles. For the
purposes of his report, the independent auditor should consider each of the
following types of financial presentations as a financial statement:
a) Balance sheet
b) Income statement
c) Statement of retained earnings
d) Statement of cash flow
e) Statement of changes in equity
f) Statement of assets and liabilities excluding shareholders' equity
g) Statement of income and expenses
h) Statement of operations by product line
i) Statement of income and expenses on cash basis
j) Statement of cash position
03. The independent auditor's judgment with respect to the overall presentation
of the financial statements should be applied on an identifiable basis 1.
Normally the basis is provided by generally accepted accounting principles
and the auditor's judgment in forming his opinion should be based on those
principles. In some circumstances, a basis of accounting other than generally
accepted accounting principles may be used.
04. For purposes of this Section a basis of accounting other than generally
accepted accounting principles is one of the following:
b) The basis of accounting for income and expenses on a cash basis and
modifications thereto that have substantial support, such as the recording
of depreciation of fixed assets or the provision for income tax.
1
See Section 411, "The meaning of 'presented fairly in accordance with generally
accepted accounting principles' in the independent auditor's report".
REPORT ON FINANCIAL STATEMENTS PREPARED IN
ACCORDANCE WITH ANOTHER BASIS OF ACCOUNTING
b) A paragraph that:
(1) Indicate that the financial statements identified in the report were
audited.
(2) State that the financial statements are the responsibility of the
entity's management and that the auditor is responsible for
expressing an opinion on them, based on the audit performed.
(2) Generally accepted auditing standards require that the auditor plan
and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
(1) Establish the basis of presentation and refer to the note to the
financial statements describing such basis (see paragraphs 09 and
10).
g) The name and signature of the auditor and, if applicable, the name of the
auditing firm to which the auditor belongs.
07. Terms such as balance sheet, income statement and statement of cash flows or
similar titles are generally understood to be applicable only to financial
statements whose objective is to present the financial position, results of
operations or cash flows in conformity with generally accepted accounting
principles. Consequently, the auditor should consider whether the financial
statements on which he is reporting are adequately disclosed. For example, a
financial statement on a cash basis could be named "statement of assets and
liabilities arising from cash operations" or "statement of revenues received
and expenses paid" and a financial statement prepared on a basis prescribed
by a regulatory body could be named "statements of income on a basis
prescribed by a regulatory body". If the auditor is of the opinion that the
financial statements are not properly named, he/she should disclose his/her
disagreement in an intervening paragraph in the report and express a qualified
opinion.
2
For the purpose of issuing reports on individual financial statements of entities
supervised by the Superintendency of Securities and Insurance or not supervised, see
Section 508, Model 6 and Model 6 supplement.
FINANCIAL STATEMENTS PREPARED ON A BASIS ESTABLISHED BY
A REGULATORY ENTITY SOLELY FOR SUBMISSION TO THAT
ENTITY
In our opinion, such financial statements present fairly, in all material respects, the
assets, liabilities and surplus of Company XYZ as of December 31, 20X1 and
20X2 and the results of its operations and its cash flows for the years then ended,
in conformity with the basis of accounting described in Note X.
This report is solely for the information and use of the Board of Directors and
management of Company XYZ and to comply with (name of regulatory body).
FINANCIAL STATEMENTS PREPARED ON A CASH BASIS
In our opinion, such financial statements present fairly, in all material respects, the
assets and liabilities resulting from cash operations of Company XYZ as of
December 31, 20X2 and 20X1 and its revenues collected and expenses paid during
the years then ended, in conformity with the basis of accounting described in Note
X.
12. When expressing an opinion on a specific item, account or line item in the
financial statements, the auditor should plan and perform the audit and
prepare the report considering the purpose of the work. With the exception of
the first standard relating to the report, the auditing standards generally
accepted in Chile are applicable to any work intended to express an opinion
on one or more specific elements, accounts or items of a financial statement.
The first reporting standard, which requires the auditor's report to state
whether the financial statements are presented in conformity with accounting
principles generally accepted in Chile, is applicable only when it is intended
to present specific elements, accounts or items of a financial statement in
conformity with accounting principles generally accepted in Chile.
(1) The specific items, accounts or items identified in the report were
audited. If the audit was carried out in conjunction with an audit of
the entity's financial statements, the date of the auditor's report on
these financial statements should be indicated. In addition, any
modifications to the standard report in respect of those financial
statements should also be disclosed, if considered relevant to the
presentation of the specific item, account or item.
(2) The specific items, accounts or items are the responsibility of the
entity's management and the auditor is responsible for expressing an
opinion on the specific items, accounts or items based on the audit
performed.
(2) Generally accepted auditing standards require that the auditor plan
and perform the audit to obtain reasonable assurance about whether
specific items, accounts or items are free from material
misstatement.
d) A paragraph that:
g) The name and signature of the auditor and, if applicable, the name of the
auditing firm to which the auditor belongs.
16. If a specific item, account or item is net income or equity or its equivalent or
is based on them, the auditor should have audited the financial statements as a
whole in order to express an opinion on a specific item, account or item.
17. The auditor should consider the effect that any modifications, including
additional explanation due to the circumstances mentioned in Section 508
paragraph 11, to the standard report on the audited financial statements may
have on his report on specific items, accounts or items.
18. The following are examples of reports that express an opinion on one or more
specific elements, accounts or items of a financial statement.
Accounts receivable report
Report of the amount of sales for the purpose of calculating the rent
We have audited the accompanying analysis of gross sales (as defined in the lease
agreement dated March 4, 20XX, between ABC Company, as lessor, and XYZ
Stores Corporation, as lessee) of XYZ Stores Corporation, at its store located in
(City), for the year ended December 31, 20X2. The preparation of this analysis is
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on this analysis based on our audit.
In our opinion, the aforementioned gross sales analysis presents fairly, in all
material respects, the gross sales of XYZ Stores Corporation, at its store located in
(City), for the year ended December 31, 20X2, as defined in the lease agreement
referred to in the first paragraph.
This report is solely for the information and use of the Boards and management of
XYZ Stores Corporation and ABC Company.
Report on royalties
In our opinion, the above royalty analysis presents fairly, in all material respects,
the number of engines produced by Division Q of XYZ Corporation during the
year ended December 31, 20X2 and the amount of royalties applicable under the
license agreement referred to in the first paragraph.
This report is solely for the information and use of the Boards and management of
XYZ Corporation and ABC Company.
19. For some entities it would be necessary, due to contractual agreements or the
requirement of regulatory entities, to submit compliance reports issued by
independent auditors. For example, a debt contract may contain obligations
for the debtor with respect to liquidity ratios or restrictions on dividend
payments. In addition, it may require a debtor to submit annual financial
statements that have been audited by an independent auditor and in some
cases, the creditor concerned will request the auditor's opinion as to whether
the debtor has complied with certain conditions of the signed agreement
relating to accounting matters. The independent auditor may satisfy such a
request by reporting that he/she has not found situations or facts that suggest
that the relevant terms of such an agreement have not been complied with
based on the audit of the financial statements. These compliance reports may
be communicated in a separate report or in one or more paragraphs in the
report on the audited financial statements. However, such a report should
only be given if the auditor has audited the financial statements to which the
contractual arrangements or regulatory requirements relate and should not
cover conditions related to matters that have not been subject to procedures
applied in the audit of the financial statements. In addition, such an opinion
should not be given if the auditor has expressed an adverse opinion or a
disclaimer of opinion on the financial statements to which these conditions
relate.
e) A separate paragraph at the end of the report that limits the use of the
report to stakeholders within the entity and those who entered into the
contract or agreement, or the regulatory body, given that the aspects on
which the auditor is reporting are developed only for the use of the
parties that entered into the agreement or the regulatory body.
f) The name and signature of the auditor and, if applicable, the name of the
auditing firm to which the auditor belongs.
In connection with our audit, we have not found any situations or facts that lead us
to believe that the Company has not complied with any of the terms, stipulations,
provisions or conditions related to accounting matters of sections XX to YY
inclusive, of the agreement dated July 21, 20X0, entered into with Banco ABC.
However, it should be noted that our audit did not have as its main objective to
obtain knowledge of the lack of compliance with said contract.
This report is solely for the information and use of the Boards of Directors and
management of Company XYZ and ABC Bank.
In connection with our audit, we have not found any situations or facts that lead us
to believe that the Company has not complied with the accounting provisions
established in sections (1), (2) and (3) of (name of regulatory entity). However, it
should be noted that the main objective of our audit was not to obtain knowledge
of the lack of compliance with this standard.
This report is solely for the information and use of the Board of Directors of
Company XYZ and the (name of regulatory body).
b) A paragraph that:
(1) Indicate that the financial presentation identified in the report was
audited.
(2) State that the financial presentation is the responsibility of the
entity's management and that the auditor is responsible for
expressing an opinion on the financial presentation based on the
audit 3.
(2) Generally accepted auditing standards require that the auditor plan
and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
d) A paragraph that:
(3) Refer to the note to the financial presentation describing the basis
used (see paragraphs 9 and 10).
3
In the event that the preparation of the financial statements is the responsibility of a third
party other than the management of the entities, this third party should be clearly identified.
(4) Indicate whether or not the basis of presentation is intended to be
in conformity with generally accepted accounting principles (See
paragraph 22 a and b) 4
f) A paragraph that limits the use of the report to stakeholders within the
entity and to the parties that entered into the contract or agreement, or to
the regulator, since the aspects on which the auditor is reporting are
developed only for the use of the parties that entered into the agreement
or the regulator. A restrictive paragraph may not be appropriate when the
financial report and presentation is for the public file of a regulatory body
or for inclusion in a document that is distributed to the general public.
However, if this presentation results in a presentation that is not in
conformity with generally accepted accounting principles or other basis
of accounting, the restrictive paragraph should be retained. (See
paragraph 22, letter b).
g) The name and signature of the auditor and, if applicable, the name of the
auditing firm to which the auditor belongs.
4
The following is an example of wording that could be used in the event that the
presentation does not purport to be in accordance with generally accepted accounting principles:
"The accompanying special financial presentation was prepared for purposes of complying with
Section X of the loan agreement between Bank Y and the Company, as explained in Note Z, and
is not intended to be a presentation in accordance with generally accepted accounting principles."
CIRCUMSTANCES REQUIRING AN ADDITIONAL PARAGRAPH IN A
SPECIAL AUDITOR'S REPORT
25. Formats or schedules designed or adopted by regulatory bodies and others with
which compliance is required generally describe the wording of the auditor's
report. Many of these formats are not acceptable to independent auditors
because the suggested wording of the auditor's report does not comply with
applicable professional standards. For example, the language of the report
may result in assertions by the auditor that are not in accordance with the
auditor's role or responsibility.
Introduction
02. For the purpose of this Section, "reporting auditor" is an auditor who prepares
a written report or orally advises management of an entity on the application
of accounting principles related to specific financial transactions and products,
which involve facts, factors and circumstances of a particular entity, or the
type of opinion that might be expressed on the financial statements of a
specific entity. For purposes of this Section, "incumbent auditor" refers to the
auditor who has been engaged to issue a report on the financial statements of
a particular entity.
04. Because of the nature of a transaction that does not involve facts, factors or
circumstances at a particular entity (hypothetical transaction), the reporting
auditor cannot know, for example, whether the incumbent auditor has reached
a different conclusion about the application of accounting principles for the
same or a similar transaction, or how the entity has accounted for these
transactions in the past. Therefore, in the case of a hypothetical transaction, a
reporting auditor should not undertake to provide a written report on the
application of accounting principles when, in the auditor's professional
judgment, there is not all the necessary background information to evaluate
the hypothetical transaction.
05. This Section does not apply to the incumbent auditor, in relation to:
a) the entity for whose financial statements it has been instructed to issue a
report,
b) engagements both to advise on litigation involving accounting matters
and to provide expert testimony in such litigation and,
c) as a professional advisor to another auditor in his or her professional
practice.
06. Also, this Section does not apply to communications, such as publications of
the position adopted by an auditor, for the purpose of presenting opinions on a
matter relating to the application of accounting principles or the type of
opinion that may be issued. Publications of the position taken by an auditor
include newsletters, articles, speeches, and texts, lectures and other forms of
public presentations and letters addressed to the public. However, if
communications of the type noted in this paragraph are intended to provide
guidance on the application of accounting principles to a specific transaction
or on the type of opinion that might be expressed in the financial statements
of a specific entity, the standards in this Section should be followed.
Labor standards
07. The auditor should maintain due professional care in the performance of the
engagement and adequate technical training and competence in the subject
matter. The auditor should also plan the engagement adequately, supervise the
work of his audit team members and, if necessary, accumulate sufficient
information to establish a reasonable basis for supporting the professional
judgment described in his report. The auditor should consider the
circumstances under which the written report or verbal recommendation was
requested, the purpose of the request and the ultimate use of the written report
or verbal recommendation.
08. To form his or her judgment, the reporting auditor should perform the
following procedures:
09. When evaluating the accounting principles that relate to a specific transaction
or determining the type of opinion that might be expressed on the financial
statements of a specific entity, the reporting auditor should consult with the
entity's statutory auditor to ascertain all relevant data to form a professional
judgment. The incumbent auditor may be able to provide information that the
reporting auditor would otherwise be unable to obtain with respect to, for
example:
a) the form and substance of the transaction;
b) how management has applied accounting principles in similar
transactions;
c) if the method of accounting recommended by the statutory auditor is
questioned by management;
d) or if the incumbent auditor has reached a different conclusion on the
application of accounting principles or the type of opinion that could be
issued on the entity's financial statements.
(1)
See Section 411, "The Meaning of "Fairly Present in Accordance with Generally
Accepted Accounting Principles" in the Independent Auditor's Report".
respond fully to the reporting auditor's requests. The responsibilities of an
incumbent auditor in responding to the reporting auditor's inquiries are the
same as the responsibilities of the predecessor auditor in responding to the
successor auditor's inquiries.
10. The auditor's written report should be addressed to the entity that made the
request (e.g., management or the entity's Board of Directors) and should
normally include the following:(2)
a) A brief description of the nature of the engagement and a statement that
the engagement was conducted in accordance with generally accepted
auditing standards.
b) Identification of the entity that is the subject of the request, description of
the transaction(s), a description of the relevant facts, circumstances,
assumptions and source of information.
c) A description of the appropriate accounting principle(s) (including
country of origin) to be applied or the type of opinion that may be
expressed on the entity's financial statements and, if appropriate, a
description of the basis for the reporting auditor's conclusion.
d) A statement that the proper accounting treatment in the financial
statements is the responsibility of management, who should consult with
their statutory auditor.
e) A statement that any differences in the facts, circumstances, or
assumptions presented could change the report.
f) A separate paragraph at the end of the report that includes the following
elements:
A statement that the report is intended solely for the information and
use of the parties indicated.
An identification of the indicated parts, so that their use is restricted,
and
A statement that the report is not intended to be and should not be used
by anyone other than the parties indicated.
(2)
Although these standards are applicable to written reports, they may also be useful in
verbal responses.
11. The following is an example of the report paragraphs described in paragraph
10:
Introduction
Accounting principles
(Arguments regarding the selection and application of one or the other generally
accepted accounting principle and the recommendation of which one to apply)
Restricted use
This report is intended solely for the knowledge and use of the Board of Directors,
Audit Committees and Management of ABC Company, and is not intended to be
and should not be used by anyone other than the parties previously identified.
SECTION 722
Introduction
01. This Section establishes the basic rules on the nature, timing and extent of the
procedures that should be applied by the independent auditor (hereinafter "the
auditor") in the performance of a review of interim financial information and
the reports to be issued thereon. It also establishes certain communication
requirements for the auditor when it has been engaged to perform services
related to interim financial reporting such as those described in paragraph 04.
02. The term "interim financial information" refers to information or reports that
consider periods of less than one year or twelve months, ending on a date
other than the end of the fiscal year.
Applicability
03. The requirement of this Section applies when the auditor has been engaged to:
CUSTOMER UNDERSTANDING
05. A clear understanding should be established with the client regarding the
nature of the procedures to be applied on the review of interim financial
information. Accordingly, the auditor may confirm the nature and scope of
its examination in an engagement letter or agreement to the client. The letter
should generally include:
08. The objectives of such a review differ significantly from the objectives of an
audit of financial statements in accordance with generally accepted auditing
standards. The objectives of an audit of financial statements are to provide a
reasonable basis for expressing an opinion on the financial statements taken as
a whole. A review of the interim financial information does not provide a
reasonable basis for expressing an opinion on the financial statements as a
whole, because this review does not contemplate:
09. A review of interim financial information may bring to the auditor's attention
significant matters affecting the interim financial information, but does not
provide assurance that the auditor will become aware of all significant matters
that would be disclosed in an audit conducted in accordance with generally
accepted auditing standards.
10. To perform the review of interim financial information, the auditor is required
to have sufficient knowledge of the client's internal control, policies and
procedures and how they relate to the preparation of the interim financial
statements to:
b) Select the inquiry and analytical review procedures that will provide
the auditor with a basis for reporting whether there are material
modifications that should be made to the interim financial information
to bring it into conformity with generally accepted accounting
principles.
11. If internal control has significant weaknesses that make it impracticable for
the auditor to relate the auditor's knowledge of accounting and reporting
practices to the interim financial information, the auditor should consider
whether this situation makes it impossible to complete the review.
12. The procedures that should be applied by the auditor in the development of an
interim financial information review are described in the following
paragraphs concerning:
(2) any significant changes in the internal control system that have
occurred since the last audit or review of interim financial
information, to evaluate their potential effect on the preparation of
the information subject to review;
d) Read the financial information for the period under review to consider
whether, on the basis of the information that has come to the auditor's
knowledge, it is in accordance with generally accepted accounting
principles;
e) Obtain the reports of other independent auditors, who have been engaged
to perform an examination of financial statements or review of interim
financial information of significant components of the reporting entity, its
subsidiaries or other investments, as appropriate; and
(2) whether there have been changes in the entity's business activities
or accounting practices;
(3) matters on which doubts have arisen in the course of the application
of the procedures developed; and
(4) events after the date of the information subject to review that could
have a significant effect on the presentation of such information.
g) Obtain written representations from the client regarding his responsibility
for the financial information, completeness of the minutes of the Board of
Directors, Shareholders' Meetings and others; subsequent events and
other matters in respect of which the auditor deems it necessary to obtain
written representations, appropriate to the circumstances (Section 333
"Management Representations").
TIMELINESS OF PROCEDURES
14. It is essential that the auditor adequately plan the review of interim financial
information in order to complete it in a timely manner. Advancing work in
interim periods may allow the review of interim financial information to be
performed more efficiently and completed at an earlier date. This also allows
for the prompt consideration of significant accounting matters affecting the
information subject to review.
SCOPE OF PROCEDURES
20. As a result of the services described in paragraph 04, the auditor may become
aware of matters that cause him to believe that the interim financial
information presented or to be presented is likely to be materially misstated as
a result of a departure from generally accepted accounting principles. In such
circumstances the auditor should discuss matters with the appropriate level of
management as soon as possible.
21. If, in the opinion of the auditor, management does not respond appropriately
to its communication within a reasonable period of time, the auditor should
inform the Audit Committee or, failing that, the Board of Directors or the
Board of Directors of the matters as soon as possible. This communication
may be oral or written. If the communication is oral, the auditor should
document it appropriately in a memorandum or by annotations in the auditor's
working papers.
22. If, in the auditor's judgment, the Audit Committee does not respond
appropriately to the auditor's communication within a reasonable period of
time, the auditor should evaluate:
23. When performing the procedures indicated in paragraphs 13 to 19, the auditor
may become aware of irregularities or illegal acts committed by the client.
The auditor must ensure that the Audit Committee is duly informed of:
a) Any irregularities of which the auditor has become aware during the
review, unless they are clearly immaterial; and
b) Any illegal acts of which the auditor has become aware during the
review, unless they are clearly inconsequential.
24. In performing the procedures in paragraphs 13 to 19, the auditor may become
aware of matters related to internal control that may be of interest to the Audit
Committee. The matters that must be reported to the Audit Committee are
recognized as reportable conditions and are defined in Section 325. The
auditor may also wish to make recommendations in relation to other matters
that have come to his or her attention.
25. In performing the procedures described in paragraphs 13 to 19, the auditor
should also consider whether any of the matters described in Section 380,
"Communication with Audit Committees," have been identified as they relate
to interim financial information. If such matters have been identified, the
auditor should communicate them to the audit committee or satisfy himself or
herself, by discussion with the audit committee, that management has
communicated such matters to the audit committee. For example, it should
ensure that the audit committee has been informed about the procedure used
by management in making relevant accounting estimates or about a change in
a significant accounting policy that affects interim financial reporting.
27. Where the auditor has conducted the review before the entity submits interim
financial information to a regulatory body (e.g., superintendencies) and has
identified matters to be communicated in accordance with paragraphs 25 and
26, he should endeavor to communicate them to the audit committee, or at
least its chairman, and a representative of financial management, before
making such a submission. If you are unable to communicate them before the
presentation, you should do so as soon as possible, depending on the
circumstances.
28. An auditor may permit the use of his name and the inclusion of his report in
the schedules to a written communication of interim financial information if
1
The term "quality" relates to the selection of the most appropriate accounting principle
in the circumstances, bearing in mind that there is more than one principle applicable to an
economic event, as defined in Section 411.
he has carried out a review of such information as specified in the preceding
paragraphs. If you had scope restrictions on the review of interim financial
information that prevented the completion of such review, the auditor shall
not permit the use of your name. Restrictions on the scope of a review of
interim financial information may be imposed by the client or caused by
circumstances, such as the timing of the auditor's work, inadequate accounting
records or significant weaknesses in internal control.
29. The report of the auditor who has performed a review of interim financial
information shall include:
b) The date of the report. Generally, the report should be dated the same
date as the date of completion of the interim financial information
review. In addition, each page of the financial information subject to
review shall be clearly marked as "unaudited";
f) Note that the review of interim financial information was carried out in
accordance with auditing standards established for these reviews;
We have reviewed the balance sheet of ABC Company as of June 30, XXX1
and the related statements of income and cash flows for the six months then
ended. These interim financial statements and the related notes are the
responsibility of the Company's management.
2
For the issuance of a report on the review of individual interim financial statements of an
entity that has investments in subsidiaries, the provisions of Section 508 "Auditors' Report on
Financial Statements", paragraph 35 and Sample Report No. 6 (Supplement) should be
considered.
Based on our review of the financial statements as of June 30, XXX1, we
are not aware of any material adjustments that should be made to the
financial statements to bring them into conformity with accounting
principles generally accepted in Chile.
31. The auditor may make use of and refer in its report to the report of other
independent auditors who have carried out an audit of financial statements or
a review of interim financial information of significant components disclosed
by the entity or its subsidiaries, if the information subject to review refers to
consolidated financial statements. The purpose of this reference is to delimit
the responsibilities for the development of the interim financial information
review. The following example illustrates this situation:
Independent Auditors' Report
Review of Interim Financial Statements
We have reviewed the consolidated balance sheet of ABC Company and its
subsidiaries as of June 30, XXX1 and the related consolidated and parent
company-only statements of income for the six-month period then ended.
These interim financial statements are the responsibility of ABC Company's
management. We have not reviewed the financial statements of Company
"Z" (a consolidated subsidiary), whose financial statements reflect assets and
revenues amounting to 10% and 12%, respectively, of the consolidated
totals. Those financial statements were reviewed by other independent
auditors, whose report has been furnished to us, and our report herein,
insofar as it relates to the figures included for Company "Z", is based solely
on the report of those independent auditors.
33. If the auditor becomes aware that the financial information subject to review
is significantly affected by a deviation from a generally accepted accounting
principle in Chile, he shall modify his standard report on review of interim
financial information. The modification should describe the nature of the
deviation and, if feasible, should show its effect on the financial information
subject to review. The following example illustrates this situation:
Based on our review, except for the effects of not accounting for certain
lease obligations, as explained in the preceding paragraph, we are not aware
of any other significant adjustments that should be made to the financial
statements as of June 30, 2001, to conform to accounting principles
generally accepted in Chile.
IMPROPER DISCLOSURE
34. The auditor's conclusion regarding the need for certain information to be
disclosed will be influenced by the form and context in which the interim
financial information is presented. If the auditor believes that the financial
statements subject to review of interim financial information omit certain
material information that should be disclosed in accordance with generally
accepted accounting principles, he shall modify his standard report on review
of interim financial information and, if practicable, include such information.
The following examples illustrate this situation:
a) Omission of information
Management has informed us that: (a) the Company has filed claims against
various income tax assessments made by the Chilean Internal Revenue
Service for tax years ........... amounting to $ ........, (b) that if necessary they
will appeal to the Supreme Court and c) that no provisions have been
established for these effects, because they are not determinable at this date.
We believe that the above information should have been disclosed in the
accompanying statements, as required by generally accepted accounting
principles in Chile.
Based on our review, except for the omission of the information described in
the preceding paragraph, we have no ..........
The Company decided not to present the Statement of Cash Flows, which is
required by Technical Bulletin No. 50 "Statement of Cash Flows" issued by
the Chilean Association of Accountants.
Fourth paragraph (conclusion):
Based on our review, except that the omission of the statement of cash flows
results in an incomplete presentation as explained in the preceding
paragraph, we do not have ..........
DOCUMENTS CONTAINING INFORMATION IN ADDITION TO THE
INTERIM FINANCIAL INFORMATION
35. An entity may publish several documents that contain additional information
to the interim information and to that considered in the auditor's report.
Under these circumstances, the auditor should consider that his responsibility
does not extend to information contained in a document not included in the
information identified in his report and, therefore, he is not required to
perform procedures to corroborate it. However, he should read that
information and consider whether such information, or its form of
presentation, is significantly inconsistent with the information, or the form of
presentation, shown in the interim financial information. If the auditor
concludes that there is a significant lack of uniformity, he should determine
whether the interim financial information, his report or both require revision.
If he concludes that they do not require review, he should ask the client to
review the additional information. If that information is not revised to
eliminate the inconsistency, the auditor should consider other actions, such as:
including in his report a paragraph to describe and explain the significant
inconsistency, denying the use of his report, or withdrawing from the
engagement. The decision he makes will depend on the particular
circumstances of the case and the relevance of the lack of uniformity with the
additional information.
36. As of a date subsequent to the date of the auditor's report, the auditor may
become aware of facts existing at the date of the auditor's report that, if
known to the auditor, would have affected the auditor's report. Due to the
variety of circumstances that may arise, the specific actions you should take in
each particular case will vary depending on the circumstances. However, due
to the significance and effects of such a situation, the auditor should discuss it
with his client as soon as he has confirmed its existence.
CLIENT'S ATTITUDE TOWARDS THE INTERIM FINANCIAL
INFORMATION REVIEW REPORT
38. If an entity presents interim financial information together with the audited
financial statements, the procedures specified in paragraphs 13 to 19 apply
unless the entity indicates that the interim financial information has not been
reviewed or the auditor indicates in its report on the audited financial
statements that the interim financial information has not been reviewed.
40. The auditor may perform the review procedures either at the date of the audit
of the annual financial statements or of interim periods prior to the issuance of
the information. Performing the procedures prior to issuance allows early
consideration of significant accounting matters affecting the interim financial
information and the adoption of accounting procedures that the auditor
believes should be implemented. If the review procedures are performed
prior to the issuance of the interim report, they need not be repeated at the
date of the audit of the financial statements.
41. Normally the auditor does not need to amend the financial statement report to
refer to his review of the interim financial information. Interim financial
information is not required for the presentation of financial position, results of
operations and cash flows to be in accordance with generally accepted
accounting principles, and may not be audited. Therefore, the auditor does
not need to report the review of the interim financial information in its audit
report on the financial statements.
The auditor need not include an additional paragraph in his report in cases b) and
c), if his review report, which refers to those situations, accompanies the
information.
WORKING PAPERS
43. It is not possible to specify the form or content of the working papers to be
prepared by the auditor in connection with a review of interim financial
information because the circumstances of each engagement differ. The
working papers should document the development and outcome of the
procedures indicated in paragraphs 13 to 19 of this Section.
ANNEX
AUDIT CIRCULARS
INDEX