Auditing checklist refresher

Posted by

The tax and audit season is now upon us with many of you preparing for the January madness for self-assessment tax returns and many gearing up for the December year-ends.    With the planning about to start for December year-ends, it seems sensible to offer some quick recaps relating to the current clarified International Standards on Auditing (ISAs) to ensure that practitioners are complying with the new requirements.  This article will not go into every single ‘new’ aspect of the clarified ISAs but aims to offer some guidance to practitioners on the more critical parts which might affect an SME audit particularly as some practitioners dealing with SME clients may only have one or two audit clients.

Engagement letters

All engagement letters should be up to date and comply with the provisions in ISA (UK & Ireland) 210 Agreeing the Terms of Audit Engagement.  In terms of the audit engagement letter the preconditions for an audit must be present and in this respect the auditor must also assess whether the financial reporting framework to be applied is acceptable. In the UK this the framework will either be UK GAAP or EU-adopted IFRS.

The preconditions of an audit (all of which must be present) are as follows:

  • the use of an acceptable financial reporting framework (UK GAAP or IFRS);
  • obtaining confirmation from the client’s management that they acknowledge their responsibilities for the preparation of the financial statements; and
  • ensuring management acknowledge their responsibilities for internal controls insofar as ensuring that such controls will enable the financial statements to be free from material misstatement, whether due to fraud or error.

The letter of engagement must also confirm that management will provide the auditor with:

  • access to all information that management is aware of and which is relevant to the preparation of the financial statements;
  • any other information which the auditor may request for the purposes of the audit; and
  • unrestricted access to persons within the entity who will provide the auditor with relevant audit evidence.

Analytical procedures

As part of the normal audit planning routine, auditors are required to adopt the use of analytical procedures at the planning stage as well as during the course of the audit fieldwork and at the completion stage of the audit.  Analytical procedures will help to identify those ‘key’ areas of the financial statements to which the auditor should focus their attention.  For example, if gross profit margins have reduced disproportionately from one year to the next the auditor must devise procedures to substantiate the reasons for such a reduction and ask questions such as ‘has stock been valued correctly?’ ‘are cut-offs correct?’ ‘is turnover complete?’

Regulators have criticised firms recently for failing to use analytical procedures correctly.  In particular failing to properly adopt analytical procedures at the required stages.  Analytical procedures applied at, or near the end, of the audit are done so in order to form an opinion as to whether the financial statements as a whole are consistent with the auditor’s expectations.  The intention is to allow the auditor to consider whether their conclusions, which have been drawn as a result of the procedures applied during the audit, corroborate those conclusions in relation to the individual components or elements of the financial statements.  Typical techniques which can be used as analytical procedures include:

  • Ratio analysis.
  • Review of prior period financial information.
  • Reasonableness tests.
  • Profit and loss account expenditure review.


Don’t forget that ISA (UK & Ireland) 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements requires the audit team to discuss the susceptibility of the financial statements to material misstatement due to fraud.  Auditors are also required to justify their reasons if they consider fraud in relation to revenue recognition to be not applicable to the client.

In addition, the audit team are also required under ISA (UK & Ireland) 550 Related Parties to discuss the susceptibility of the financial statements to misstatement due to fraud and error with related parties.  Don’t forget this important change brought about by the Clarity Project and make sure you document the team discussion.

Accounting estimates

Financial statements always contain some degree of estimate – for example depreciation.  The auditor is required under ISA (UK & Ireland) 540 Auditing Accounting Estimates  to adopt a more risk-based approach.  The auditor has to gain an understanding as to how the entity arrives at estimates for the financial statements as well as considering any potential management bias relating to individual accounting estimates.  For those of you dealing with smaller audits, ISA (UK & Ireland) 540 does acknowledge that the process to arrive at accounting estimates is likely to be fairly simplistic and under the control of the owner of the business, but you do still need to demonstrate compliance with ISA (UK & Ireland) 540.


A new concept of ‘performance materiality’ was introduced into ISA (UK & Ireland) 320 Materiality in Planning and Performing an Audit’ which I have written about previously.  The standard itself does not prescribe how performance materiality is to be calculated.  Materiality must be determined at the planning stage of the audit and performance materiality is set to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements in the financial statements exceeds materiality for the financial statements as a whole.  Similarly, performance materiality relating to a materiality level determined for a particular class of transactions, account balance or disclosure is set to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements in that particular class of transactions, account balance or disclosure exceeds the materiality level for that particular class of transactions, account balance or disclosure (ISA (UK & Ireland) 320 para A12).

Evaluation of misstatements

Auditors are now required to apply the provisions in ISA (UK & Ireland) 450 Evaluation of Misstatements Identified During the Audit.  In a nutshell all misstatements have to be communicated to management on a timely basis unless they are ‘clearly trivial’.  This means that auditors will have to use their judgement and determine a level for ‘clearly trivial’ items at the planning stage of the audit.

The auditor has to evaluate the misstatements identified during the audit in order to determine whether (or not) the audit strategy needs to be changed depending on the nature and circumstances of the misstatements identified.  In addition, the auditor also has to reassess materiality (both financial statement and performance materiality) to ensure that it remains appropriate.  Sometimes materiality is often calculated at the planning stage but later forgotten about.

Management would also be requested to correct all misstatements identified during the audit and if they refuse, the auditor must obtain an understanding of their reasons for refusing to adjust any misstatements.  If management don’t want to correct the misstatements on the basis that they are immaterial, don’t forget to obtain a written representation from management and those charged with governance that they believe the effect of uncorrected misstatements is immaterial both individually and in totality (to which, of course, the auditor must also concur).

Going concern

It is not up to the auditor to determine whether the going concern presumption is appropriate (or not).  This responsibility rests with management regardless of what the client might think.  The auditor’s responsibility is to consider the appropriateness of management’s use of the going concern presumption in the preparation of the financial statements and the adequacy of any related disclosures when there may be doubts about the applicability of the going concern presumption.

Given the fact that some clients may have experienced a disastrous year the auditor has to determine if a material uncertainty exists in relation to the client’s ability to continue as a going concern.  Reporting tends to cause some confusion with often an inappropriate opinion being expressed in the auditor’s report.  If the going concern presumption is appropriate, but a material uncertainty exists which has been adequately disclosed in the financial statements, then the auditor’s report will be unqualified but modified to add an emphasis of matter paragraph highlighting the existence of a material uncertainty (which will also be cross-referenced to the relevant disclosure note in the financial statements).  This emphasis of matter paragraph must also emphasise that the auditor’s report is not qualified in this respect.

If, in the auditor’s opinion, the going concern basis is not appropriate, but management have prepared the financial statements on a going concern basis, then the auditor must express an adverse opinion.

Also, don’t forget that management have to assess going concern for a period of one year from the (expected) date of approval of the financial statements.

Category: Audit

About the Author ()

Steve Collings is the audit and technical director at Leavitt Walmsley Associates Ltd and the author of 'Interpretation and Application of International Standards on Auditing'. He is also the author of 'IFRS For Dummies' and 'The AccountingWEB Guide to IFRS'. More about Steve's publications can be found by clicking on the 'Published Work' tab on the homepage. Steve is also a regular contributor of articles to, the UK's largest resource for professional accountants on a free subscription basis and is a member of the Society of Authors. Steve is an Editorial Board member for Wiley Insight IFRS and sits on the AAT's Financial Reporting Technical Panel. In 2011 Steve was named 'Accounting Technician of the Year' at the British Accountancy Awards and won 'Outstanding Contribution to the Accountancy Profession' by the Association of International Accountants in 2013. Follow Steve on Twitter - @stecollings

Comments are closed.