Auditing standards you will meet in these procedures

Where an audit starts

The overall objectives of the auditor are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and then to report in accordance with the auditor's findings ISA (NZ) 200.11.

Everything below is machinery in service of that sentence. Notice what it promises and what it does not: reasonable assurance, not certainty, and about matters that are material, not about everything.

Planning and risk

ISA (NZ) 300 — Planning. In establishing the overall audit strategy, the auditor considers the characteristics of the engagement that define its scope and the reporting objectives, among other things ISA (NZ) 300.8.

ISA (NZ) 315 — Risk assessment. The auditor has to understand the entity's information system relevant to the preparation of the financial statements ISA (NZ) 315.25, and then identify the risks of material misstatement and determine whether they exist at the financial statement level or at the assertion level for classes of transactions, account balances and disclosures ISA (NZ) 315.28.

That last distinction is the one to carry away. "The receivables balance may be overstated" is an assertion-level risk. "The finance team is new and the systems changed" is a risk at the financial statement level.

ISA (NZ) 320 — Materiality. The auditor determines materiality for the financial statements as a whole ISA (NZ) 320.10, and performance materiality — a lower figure, set to reduce to an acceptably low level the probability that uncorrected and undetected misstatements exceed materiality ISA (NZ) 320.11.

ISA (NZ) 540 — Estimates and ISA (NZ) 550 — Related parties each need their own thinking. For related parties, the auditor inquires of management about the identity of the entity's related parties, including changes from the prior period, and about the nature of the relationships and transactions ISA (NZ) 550.13.

Gathering evidence

ISA (NZ) 500 — Audit evidence. The auditor designs and performs audit procedures that are appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence ISA (NZ) 500.6, and considers the relevance and reliability of the information to be used as evidence ISA (NZ) 500.7. Sufficient is about quantity; appropriate is about relevance and reliability.

ISA (NZ) 505 — External confirmations. Where the auditor identifies factors giving rise to doubts about the reliability of a response to a confirmation request, the auditor obtains further audit evidence to resolve those doubts ISA (NZ) 505.10.

ISA (NZ) 520 — Analytical procedures. Where substantive analytical procedures are used, the standard sets out what that involves, including determining the suitability of the data and evaluating whether the expectation is precise enough ISA (NZ) 520.5.

ISA (NZ) 330 — Responding to assessed risks. Further audit procedures are designed and performed so that their nature, timing and extent are responsive to the assessed risks at the assertion level ISA (NZ) 330.6, and irrespective of those risks, substantive procedures are performed for each material class of transactions, account balance and disclosure ISA (NZ) 330.18.

ISA (NZ) 450 — Misstatements. The auditor communicates, on a timely basis, all misstatements accumulated during the audit to the appropriate level of management, and requests that they be corrected ISA (NZ) 450.8.

Documenting the work

ISA (NZ) 230 — Audit documentation. Documentation is prepared on a timely basis ISA (NZ) 230.7 and must be sufficient to enable an experienced auditor with no previous connection to the audit to understand the procedures performed and their results, the evidence obtained, and the significant matters, conclusions and judgements ISA (NZ) 230.8. The final audit file is assembled on a timely basis after the date of the auditor's report ISA (NZ) 230.14.

This is the standard behind ByteBook's working papers and sealed packs. If you remember one auditing standard from this handbook, remember this one: it is the standard that makes every other procedure checkable.

Communicating

ISA (NZ) 260 — Those charged with governance. The auditor communicates with the people responsible for overseeing the entity, which in a small company usually means the board or the owners.

ISA (NZ) 265 — Deficiencies in internal control. Where deficiencies have been identified, the auditor determines whether, individually or in combination, they constitute significant deficiencies ISA (NZ) 265.8. Notice the framing: the deficiency is reported, and the determination of significance is a judgement to be made and recorded.

Fraud and subsequent events

ISA (NZ) 240 — Fraud. There is a presumption that there are risks of fraud in revenue recognition, and the auditor evaluates which types of revenue, revenue transactions or assertions give rise to those risks ISA (NZ) 240.27. Management is in a unique position to perpetrate fraud because of the ability to manipulate accounting records and override controls that otherwise appear to be operating effectively ISA (NZ) 240.32.

ISA (NZ) 560 — Subsequent events. The auditor performs procedures designed to obtain sufficient appropriate audit evidence that all events occurring between the date of the financial statements and the date of the auditor's report that require adjustment or disclosure have been identified ISA (NZ) 560.6.

Going concern, representations and the opinion

ISA (NZ) 570 — Going concern. The objectives include obtaining sufficient appropriate audit evidence about, and concluding on, the appropriateness of management's use of the going concern basis of accounting ISA (NZ) 570.9. Where management has not yet performed an assessment, the auditor requests that they make one ISA (NZ) 570.16.

ISA (NZ) 580 — Written representations. The auditor requests a written representation that management has fulfilled its responsibility for the preparation of the financial statements in accordance with the applicable financial reporting framework ISA (NZ) 580.10. A representation letter does not replace procedures; it is a formal record of who is responsible for what.

ISA (NZ) 700 — The opinion. The auditor expresses an unmodified opinion when concluding that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework ISA (NZ) 700 (Revised).16. Under a fair presentation framework, the opinion uses one of the phrases the standard specifies ISA (NZ) 700 (Revised).25.

ISA (NZ) 701 — Key audit matters. Where key audit matters are communicated, the description of each one includes a reference to the related disclosures and addresses why the matter required significant auditor attention ISA (NZ) 701.13.

ISA (NZ) 705 — Modifications. The shape of the report follows the nature of the problem:

Situation	Opinion
Misstatements are material but not pervasive	Qualified ISA (NZ) 705.7
Misstatements are material and pervasive	Adverse ISA (NZ) 705.8
Unable to obtain sufficient appropriate evidence, and the possible effects are material and pervasive	Disclaimer ISA (NZ) 705.9

Read those three together and the logic becomes clear. A qualified opinion says the statements are broadly right with a specific exception. An adverse opinion says they are not right. A disclaimer says the auditor could not find out. They are different statements about different problems, and choosing the wrong one is a serious error.

Ethics and quality

PES 1 — International Code of Ethics for Assurance Practitioners (including International Independence Standards) (New Zealand). The five fundamental principles, and the framework for applying them:

Principle	Requirement
Integrity	Be straightforward and honest in all professional and business relationships PES 1 R111.1
Objectivity	Exercise professional or business judgement without being compromised by bias, conflict of interest or undue influence PES 1 R112.1
Professional competence and due care	Attain and maintain professional knowledge and skill at the level required for a competent service PES 1 R113.1
Confidentiality	Respect the confidentiality of information acquired in professional and business relationships PES 1 R114.1
Professional behaviour	Comply with relevant laws and regulations, and behave consistently with the profession's responsibility to act in the public interest PES 1 R115.1

The conceptual framework requires an enquiring mind, professional judgement, and the reasonable and informed third party test PES 1 R120.5.

PES 3 — Quality management. New Zealand's quality management standard carries the IAASB's ISQM 1 with New Zealand additions, and it is the one a New Zealand firm applies. The objective of the firm's system of quality management is to provide reasonable assurance that the firm and its personnel fulfil their responsibilities in accordance with professional standards and applicable legal and regulatory requirements, and conduct engagements accordingly PES 3.14.

How to use this chapter

Do not memorise it. Use it the way a working paper uses it: when a procedure raises a question, find the standard that answers the question, read the paragraph, and write down what you concluded and why.