SA 330 Responses to Risks
SA 330*
The Auditor’s Responses to
Assessed Risks
(Effective for audits of financial statements for periods
beginning on or after April 1, 2008)
Contents
Paragraph(s)
Introduction
Scope of this SA ........................................................................................ 1
Effective Date ............................................................................................ 2
Objective ................................................................................................... 3
Definitions ................................................................................................ 4
Requirements
Overall Responses .................................................................................... 5
Audit Procedures Responsive to the Assessed Risks of Material
Misstatement at the Assertion Level ....................................................6-23
Adequacy of Presentation and Disclosure .............................................. 24
Evaluating the Sufficiency and Appropriateness of Audit Evidence .....25-27
Documentation ...................................................................................28-30
Application and Other Explanatory Material
Overall Responses ............................................................................ A1-A3
Audit Procedures Responsive to the Assessed Risks of Material
Misstatement at the Assertion Level ............................................... A4-A58
Adequacy of Presentation and Disclosure ........................................... A59
Evaluating the Sufficiency and Appropriateness of Audit Evidence ...... A60-A62
Documentation ..................................................................................... A63
Material Modifications to ISA 330, “The Auditor’s Responses to
Assessed Risks”
* Published in February, 2008 issue of the Journal.
Standard on Auditing (SA) 330, “The Auditor’s Responses to Assessed
Risks” should be read in the context of the “Preface to the Standards on
Quality Control, Auditing, Review, Other Assurance and Related
Services”, which sets out the authority of SAs and SA 200, “Overall
Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”.
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Introduction
Scope of this SA
1. This Standard on Auditing (SA) deals with the auditor’s responsibility to
design and implement responses to the risks of material misstatement identified
and assessed by the auditor in accordance with SA 315, “Identifying and
Assessing Risks of Material Misstatement Through Understanding the Entity and
Its Environment” in a financial statement audit.
Effective Date
2. This SA is effective for audits of financial statements for periods beginning
on or after April 1, 2008.
Objective
3. The objective of the auditor is to obtain sufficient appropriate audit evidence
about the assessed risks of material misstatement, through designing and
implementing appropriate responses to those risks.
Definitions
4. For purposes of the SAs, the following terms have the meanings attributed
below:
(a) Substantive procedure – An audit procedure designed to detect material
misstatements at the assertion level. Substantive procedures comprise:
(i) Tests of details (of classes of transactions, account balances, and
disclosures), and
(ii) Substantive analytical procedures.
(b) Test of controls – An audit procedure designed to evaluate the operating
effectiveness of controls in preventing, or detecting and correcting, material
misstatements at the assertion level.
Requirements
Overall Responses
5. The auditor shall design and implement overall responses to address the
assessed risks of material misstatement at the financial statement level. (Ref:
Para. A1-A3)
Audit Procedures Responsive to the Assessed Risks of Material
Misstatement at the Assertion Level
6. The auditor shall design and perform further audit procedures whose
nature, timing and extent are based on and are responsive to the assessed risks
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of material misstatement at the assertion level. (Ref: Para. A4-A8)
7. In designing the further audit procedures to be performed, the auditor shall:
(a) Consider the reasons for the assessment given to the risk of material
misstatement at the assertion level for each class of transactions, account
balance, and disclosure, including:
(i) The likelihood of material misstatement due to the particular
characteristics of the relevant class of transactions, account balance,
or disclosure (i.e., the inherent risk); and
(ii) Whether the risk assessment takes into account the relevant controls
(i.e., the control risk), thereby requiring the auditor to obtain audit
evidence to determine whether the controls are operating effectively
(i.e., the auditor intends to rely on the operating effectiveness of
controls in determining the nature, timing and extent of substantive
procedures); and (Ref: Para. A9-A18)
(b) Obtain more persuasive audit evidence the higher the auditor’s assessment
of risk. (Ref: Para. A19)
Tests of Controls
8. The auditor shall design and perform tests of controls to obtain sufficient
appropriate audit evidence as to the operating effectiveness of relevant controls
when:
(a) The auditor’s assessment of risks of material misstatement at the assertion
level includes an expectation that the controls are operating effectively (i.e.,
the auditor intends to rely on the operating effectiveness of controls in
determining the nature, timing and extent of substantive procedures); or
(b) Substantive procedures alone cannot provide sufficient appropriate audit
evidence at the assertion level. (Ref: Para. A20-A24)
9. In designing and performing tests of controls, the auditor shall obtain more
persuasive audit evidence the greater the reliance the auditor places on the
effectiveness of a control. (Ref: Para. A25)
Nature and Extent of Tests of Controls
10. In designing and performing tests of controls, the auditor shall:
(a) Perform other audit procedures in combination with inquiry to obtain audit
evidence about the operating effectiveness of the controls, including:
(i) How the controls were applied at relevant times during the period
under audit.
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(ii) The consistency with which they were applied.
(iii) By whom or by what means they were applied. (Ref: Para. A26-A29)
(b) Determine whether the controls to be tested depend upon other controls
(indirect controls), and if so, whether it is necessary to obtain audit
evidence supporting the effective operation of those indirect controls. (Ref:
Para. A30-A31)
Timing of Tests of Controls
11. The auditor shall test controls for the particular time, or throughout the
period, for which the auditor intends to rely on those controls, subject to
paragraphs 12 and 15 below, in order to provide an appropriate basis for the
auditor’s intended reliance. (Ref: Para. A32)
Using audit evidence obtained during an interim period
12. When the auditor obtains audit evidence about the operating effectiveness
of controls during an interim period, the auditor shall:
(a) Obtain audit evidence about significant changes to those controls
subsequent to the interim period; and
(b) Determine the additional audit evidence to be obtained for the remaining
period. (Ref: Para. A33-A34)
Using audit evidence obtained in previous audits
13. In determining whether it is appropriate to use audit evidence about the
operating effectiveness of controls obtained in previous audits, and, if so, the
length of the time period that may elapse before retesting a control, the auditor
shall consider the following:
(a) The effectiveness of other elements of internal control, including the control
environment, the entity’s monitoring of controls, and the entity’s risk
assessment process;
(b) The risks arising from the characteristics of the control, including whether it
is manual or automated;
(c) The effectiveness of general IT-controls;
(d) The effectiveness of the control and its application by the entity, including
the nature and extent of deviations in the application of the control noted in
previous audits, and whether there have been personnel changes that
significantly affect the application of the control;
(e) Whether the lack of a change in a particular control poses a risk due to
changing circumstances; and
(f) The risks of material misstatement and the extent of reliance on the control.
(Ref: Para. A35)
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14. If the auditor plans to use audit evidence from a previous audit about the
operating effectiveness of specific controls, the auditor shall establish the
continuing relevance of that evidence by obtaining audit evidence about whether
significant changes in those controls have occurred subsequent to the previous
audit. The auditor shall obtain this evidence by performing inquiry combined with
observation or inspection, to confirm the understanding of those specific controls,
and:
(a) If there have been changes that affect the continuing relevance of the audit
evidence from the previous audit, the auditor shall test the controls in the
current audit. (Ref: Para. A36)
(b) If there have not been such changes, the auditor shall test the controls at
least once in every third audit, and shall test some controls each audit to
avoid the possibility of testing all the controls on which the auditor intends
to rely in a single audit period with no testing of controls in the subsequent
two audit periods. (Ref: Para. A37-A39)
Controls over significant risks
15. When the auditor plans to rely on controls over a risk the auditor has
determined to be a significant risk, the auditor shall test those controls in the
current period.
Evaluating the Operating Effectiveness of Controls
16. When evaluating the operating effectiveness of relevant controls, the
auditor shall evaluate whether misstatements that have been detected by
substantive procedures indicate that controls are not operating effectively. The
absence of misstatements detected by substantive procedures, however, does
not provide audit evidence that controls related to the assertion being tested are
effective. (Ref: Para. A40)
17. When deviations from controls upon which the auditor intends to rely are
detected, the auditor shall make specific inquiries to understand these matters
and their potential consequences, and shall determine whether:
(a) The tests of controls that have been performed provide an appropriate
basis for reliance on the controls;
(b) Additional tests of controls are necessary; or
(c) The potential risks of misstatement need to be addressed using substantive
procedures. (Ref: Para. A41)
Substantive Procedures
18. Irrespective of the assessed risks of material misstatement, the auditor
shall design and perform substantive procedures for each material class of
transactions, account balance, and disclosure. (Ref: Para. A42-A47)
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19. The auditor shall consider whether external confirmation procedures are to
be performed as substantive audit procedures. (Ref: Para. A48-A51)
Substantive Procedures Related to the Financial Statement Closing Process
20. The auditor’s substantive procedures shall include the following audit
procedures related to the financial statement closing process:
(a) Agreeing or reconciling the financial statements with the underlying
accounting records; and
(b) Examining material journal entries and other adjustments made during the
course of preparing the financial statements. (Ref: Para. A52)
Substantive Procedures Responsive to Significant Risks
21. When the auditor has determined that an assessed risk of material
misstatement at the assertion level is a significant risk, the auditor shall perform
substantive procedures that are specifically responsive to that risk. When the
approach to a significant risk consists only of substantive procedures, those
procedures shall include tests of details. (Ref: Para. A53)
Timing of Substantive Procedures (Ref: Para.A54)
22. When substantive procedures are performed at an interim date, the auditor
shall cover the remaining period by performing:
(a) substantive procedures, combined with tests of controls for the intervening
period; or
(b) if the auditor determines that it is sufficient, further substantive procedures
only;
that provide a reasonable basis for extending the audit conclusions from the
interim date to the period end. (Ref: Para. A55-A57)
23. If misstatements that the auditor did not expect when assessing the risks of
material misstatement are detected at an interim date, the auditor shall evaluate
whether the related assessment of risk and the planned nature, timing, or extent
of substantive procedures covering the remaining period need to be modified.
(Ref: Para. A58)
Adequacy of Presentation and Disclosure
24. The auditor shall perform audit procedures to evaluate whether the overall
presentation of the financial statements, including the related disclosures, is in
accordance with the applicable financial reporting framework. (Ref: Para. A59)
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Evaluating the Sufficiency and Appropriateness of Audit Evidence
25. Based on the audit procedures performed and the audit evidence obtained,
the auditor shall evaluate before the conclusion of the audit whether the
assessments of the risks of material misstatement at the assertion level remain
appropriate. (Ref: Para. A60-A61)
26. The auditor shall conclude whether sufficient appropriate audit evidence
has been obtained. In forming an opinion, the auditor shall consider all relevant
audit evidence, regardless of whether it appears to corroborate or to contradict
the assertions in the financial statements. (Ref: Para. A62)
27. If the auditor has not obtained sufficient appropriate audit evidence as to a
material financial statement assertion, the auditor shall attempt to obtain further
audit evidence. If the auditor is unable to obtain sufficient appropriate audit
evidence, the auditor shall express a qualified opinion or a disclaimer of opinion.
Documentation
28. The auditor shall document:
(a) The overall responses to address the assessed risks of material
misstatement at the financial statement level, and the nature, timing and
extent of the further audit procedures performed;
(b) The linkage of those procedures with the assessed risks at the assertion
level; and
(c) The results of the audit procedures, including the conclusions where these
are not otherwise clear. (Ref: Para. A63)
29. If the auditor plans to use audit evidences about the operating effectiveness
of controls obtained in previous audits, the auditor shall document the
conclusions reached about relying on such controls that were tested in a
previous audit.
30. The auditors’ documentation shall demonstrate that the financial statements
agree or reconcile with the underlying accounting records.
***
Application and Other Explanatory Material
Overall Responses (Ref: Para. 5)
A1. Overall responses to address the assessed risks of material misstatement
at the financial statement level may include:
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Emphasizing to the audit team the need to maintain professional
skepticism.
Assigning more experienced staff or those with special skills or using
experts.
Providing more supervision.
Incorporating additional elements of unpredictability in the selection of
further audit procedures to be performed.
Making general changes to the nature, timing or extent of audit procedures,
for example: performing substantive procedures at the period end instead
of at an interim date; or modifying the nature of audit procedures to obtain
more persuasive audit evidence.
A2. The assessment of the risks of material misstatement at the financial
statement level, and thereby the auditor’s overall responses, is affected by the
auditor’s understanding of the control environment. An effective control
environment may allow the auditor to have more confidence in internal control
and the reliability of audit evidence generated internally within the entity and
thus, for example, allow the auditor to conduct some audit procedures at an
interim date rather than at the period end. Deficiencies in the control
environment, however, have the opposite effect; for example, the auditor may
respond to an ineffective control environment by:
Conducting more audit procedures as of the period end rather than at an
interim date.
Obtaining more extensive audit evidence from substantive procedures.
Increasing the number of locations to be included in the audit scope.
A3. Such considerations, therefore, have a significant bearing on the auditor’s
general approach, for example, an emphasis on substantive procedures
(substantive approach), or an approach that uses tests of controls as well as
substantive procedures (combined approach).
Audit Procedures Responsive to the Assessed Risks of Material
Misstatement at the Assertion Level
The Nature, Timing and Extent of Further Audit Procedures (Ref: Para. 6)
A4. The auditor’s assessment of the identified risks at the assertion level
provides a basis for considering the appropriate audit approach for designing and
performing further audit procedures. For example, (as appropriate and
9 SA 330
notwithstanding the requirements of this SA)1, the auditor may determine that:
(a) Only by performing tests of controls may the auditor achieve an effective
response to the assessed risk of material misstatement for a particular
assertion;
(b) Performing only substantive procedures is appropriate for particular
assertions and, therefore, the auditor excludes the effect of controls from
the relevant risk assessment. This may be because the auditor’s risk
assessment procedures have not identified any effective controls relevant
to the assertion, or because testing controls would be inefficient and
therefore the auditor does not intend to rely on the operating effectiveness
of controls in determining the nature, timing and extent of substantive
procedures; or
(c) A combined approach using both tests of controls and substantive
procedures is an effective approach.
A5. The nature of an audit procedure refers to its purpose (i.e., test of controls
or substantive procedure) and its type (i.e., inspection, observation, inquiry,
confirmation, recalculation, reperformance, or analytical procedure). The nature
of the audit procedures is of most importance in responding to the assessed
risks.
A6. Timing of an audit procedure refers to when it is performed, or the period or
date to which the audit evidence applies.
A7. Extent of an audit procedure refers to the quantity to be performed, for
example, a sample size or the number of observations of a control activity.
A8. Designing and performing further audit procedures whose nature, timing
and extent are based on and are responsive to the assessed risks of material
misstatement at the assertion level provides a clear linkage between the
auditors’ further audit procedures and the risk assessment.
Responding to the Assessed Risks at the Assertion Level (Ref: Para. 7(a))
Nature
A9. The auditor’s assessed risks may affect both the types of audit procedures
to be performed and their combination. For example, when an assessed risk is
high, the auditor may confirm the completeness of the terms of a contract with
the counterparty, in addition to inspecting the document. Further, certain audit
procedures may be more appropriate for some assertions than others. For
1 For example, as required by paragraph 18, irrespective of the approach selected, the auditor
designs and performs substantive procedures for each significant class of transactions, account
balance, and disclosure.
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example, in relation to revenue, tests of controls may be most responsive to the
assessed risk of misstatement of the completeness assertion, whereas
substantive procedures may be most responsive to the assessed risk of
misstatement of the occurrence assertion.
A10. The reasons for the assessment given to a risk are relevant in determining
the nature of audit procedures. For example, if an assessed risk is lower
because of the particular characteristics of a class of transactions without
consideration of the related controls, then the auditor may determine that
substantive analytical procedures alone provide sufficient appropriate audit
evidence. On the other hand, if the assessed risk is lower because of internal
controls, and the auditor intends to base the substantive procedures on that low
assessment, then the auditor performs tests of those controls, as required by
paragraph 8(a). This may be the case, for example, for a class of transactions of
reasonably uniform, non-complex characteristics that are routinely processed
and controlled by the entity’s information system.
Timing
A11. The auditor may perform tests of controls or substantive procedures at
an interim date or at the period end. The higher the risk of material
misstatement, the more likely it is that the auditor may decide it is more
effective to perform substantive procedures nearer to, or at, the period end
rather than at an earlier date, or to perform audit procedures unannounced or
at unpredictable times (for example, performing audit procedures at selected
locations on an unannounced basis). This is particularly relevant when
considering the response to the risks of fraud. For example, the auditor may
conclude that, when the risks of intentional misstatement or manipulation
have been identified, audit procedures to extend audit conclusions from
interim date to the period end would not be effective.
A12. On the other hand, performing audit procedures before the period end may
assist the auditor in identifying significant matters at an early stage of the audit,
and consequently resolving them with the assistance of management or
developing an effective audit approach to address such matters.
A13. In addition, certain audit procedures can be performed only at or after the
period end, for example:
Agreeing the financial statements to the accounting records;
Examining adjustments made during the course of preparing the financial
statements; and
Procedures to respond to a risk that, at the period end, the entity may have
entered into improper sales contracts, or transactions may not have been
finalised.
11 SA 330
A14. Further relevant factors that influence the auditor’s consideration of when to
perform audit procedures include the following:
The control environment.
When relevant information is available (for example, electronic files may
subsequently be overwritten, or procedures to be observed may occur only
at certain times).
The nature of the risk (for example, if there is a risk of inflated revenues to
meet earnings expectations by subsequent creation of false sales
agreements, the auditor may wish to examine contracts available on the
date of the period end).
The period or date to which the audit evidence relates.
Extent
A15. The extent of an audit procedure judged necessary is determined after
considering the materiality, the assessed risk, and the degree of assurance the
auditor plans to obtain. When a single purpose is met by a combination of
procedures, the extent of each procedure is considered separately. In general,
the extent of audit procedures increases as the risk of material misstatement
increases. For example, in response to the assessed risk of material
misstatement due to fraud, increasing sample sizes or performing substantive
analytical procedures at a more detailed level may be appropriate. However,
increasing the extent of an audit procedure is effective only if the audit procedure
itself is relevant to the specific risk.
A16. The use of computer-assisted audit techniques (CAATs) may enable more
extensive testing of electronic transactions and account files, which may be
useful when the auditor decides to modify the extent of testing, for example, in
responding to the risks of material misstatement due to fraud. Such techniques
can be used to select sample transactions from key electronic files, to sort
transactions with specific characteristics, or to test an entire population instead of
a sample.
A17. In certain circumstances, the audit mandate and any other special auditing
requirements may affect the auditor’s consideration of the nature, timing and
extent of further audit procedures.
Considerations specific to smaller entities
A18. In the case of very small entities, there may not be many control activities
that could be identified by the auditor, or the extent to which their existence or
operation have been documented by the entity may be limited. In such cases, it
may be more efficient for the auditor to perform further audit procedures that are
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primarily substantive procedures. In some rare cases, however, the absence of
control activities or of other components of control may make it impossible to
obtain sufficient appropriate audit evidence.
Higher Assessments of Risk (Ref: Para 7(b))
A19. When obtaining more persuasive audit evidence because of a higher
assessment of risk, the auditor may increase the quantity of the evidence, or
obtain evidence that is more relevant or reliable, e.g., by placing more emphasis
on obtaining third party evidence or by obtaining corroborating evidence from a
number of independent sources.
Tests of Controls
Designing and Performing Tests of Controls (Ref: Para. 8)
A20. Tests of controls are performed only on those controls that the auditor has
determined are suitably designed to prevent, or detect and correct, a material
misstatement in an assertion. If substantially different controls were used at
different times during the period under audit, each is considered separately.
A21. Testing the operating effectiveness of controls is different from obtaining an
understanding of and evaluating the design and implementation of controls.
However, the same types of audit procedures are used. The auditor may,
therefore, decide it is efficient to test the operating effectiveness of controls at the
same time as evaluating their design and determining that they have been
implemented.
A22. Further, although some risk assessment procedures may not have been
specifically designed as tests of controls, they may nevertheless provide audit
evidence about the operating effectiveness of the controls and, consequently,
serve as tests of controls. For example, the auditor’s risk assessment
procedures may have included:
Inquiring about management’s use of budgets.
Observing management’s comparison of monthly budgeted and actual
expenses.
Inspecting reports pertaining to the investigation of variances between
budgeted and actual amounts.
These audit procedures provide knowledge about the design of the entity’s
budgeting policies and whether they have been implemented, but may also
provide audit evidence about the effectiveness of the operation of budgeting
policies in preventing or detecting material misstatements in the classification of
expenses.
13 SA 330
A23. In addition, the auditor may design a test of controls to be performed
concurrently with a test of details on the same transaction. Although the purpose
of a test of controls is different from the purpose of a test of details, both may be
accomplished concurrently by performing a test of controls and a test of details
on the same transaction, also known as a dual-purpose test. For example, the
auditor may design, and evaluate the results of, a test to examine an invoice to
determine whether it has been approved and to provide substantive audit
evidence of a transaction. A dual-purpose test is designed and evaluated by
considering each purpose of the test separately.
A24. In some cases, as discussed in SA 315, the auditor may find it impossible
to design effective substantive procedures that by themselves provide sufficient
appropriate audit evidence at the assertion level2. This may occur when an entity
conducts its business using IT and no documentation of transactions is produced
or maintained, other than through the IT system. In such cases, paragraph 8(b)
requires the auditor to perform tests of relevant controls.
Audit Evidence and Intended Reliance (Ref: Para. 9)
A25. A higher level of assurance may be sought about the operating
effectiveness of controls when the approach adopted consists primarily of tests
of controls, in particular where it is not possible or practicable to obtain sufficient
appropriate audit evidence only from substantive procedures.
Nature and Extent of Tests of Controls
Other audit procedures in combination with inquiry (Ref: Para. 10(a))
A26. Inquiry alone is not sufficient to test the operating effectiveness of controls.
Accordingly, other audit procedures are performed in combination with inquiry. In
this regard, inquiry combined with inspection or reperformance may provide more
assurance than inquiry and observation, since an observation is pertinent only at
the point in time at which it is made.
A27. The nature of the particular control influences the type of procedure required to
obtain audit evidence about whether the control was operating effectively. For
example, if operating effectiveness is evidenced by documentation, the auditor may
decide to inspect it to obtain audit evidence about operating effectiveness. For other
controls, however, documentation may not be available or relevant. For example,
documentation of operation may not exist for some factors in the control environment,
such as assignment of authority and responsibility, or for some types of control
2 SA 315, paragraph 30.
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activities, such as control activities performed by a computer. In such circumstances,
audit evidence about operating effectiveness may be obtained through inquiry in
combination with other audit procedures such as observation or the use of CAATs.
Extent of tests of controls
A28. When more persuasive audit evidence is needed regarding the
effectiveness of a control, it may be appropriate to increase the extent of testing
of the control. As well as the degree of reliance on controls, matters the auditor
may consider in determining the extent of tests of controls include the following:
The frequency of the performance of the control by the entity during the
period.
The length of time during the audit period that the auditor is relying on the
operating effectiveness of the control.
The expected rate of deviation from a control.
The relevance and reliability of the audit evidence to be obtained regarding
the operating effectiveness of the control at the assertion level.
The extent to which audit evidence is obtained from tests of other controls
related to the assertion.
SA 530, “Audit Sampling” contains further guidance on the extent of testing.
A29. Because of the inherent consistency of IT processing, it may not be
necessary to increase the extent of testing of an automated control. An
automated control can be expected to function consistently unless the program
(including the tables, files, or other permanent data used by the program) is
changed. Once the auditor determines that an automated control is functioning
as intended (which could be done at the time the control is initially implemented
or at some other date), the auditor may consider performing tests to determine
that the control continues to function effectively. Such tests might include
determining that:
Changes to the program are not made without being subject to the
appropriate program change controls;
The authorised version of the program is used for processing transactions;
and
Other relevant general controls are effective.
Such tests also might include determining that changes to the programs have not
been made, as may be the case when the entity uses packaged software
applications without modifying or maintaining them. For example, the auditor
may inspect the record of the administration of IT security to obtain audit
evidence that unauthorised access has not occurred during the period.
15 SA 330
Testing of indirect controls (Ref: Para. 10(b))
A30. In some circumstances, it may be necessary to obtain audit evidence
supporting the effective operation of indirect controls. For example, when the
auditor decides to test the effectiveness of a user review of exception reports
detailing sales in excess of authorized credit limits, the user review and related
follow up is the control that is directly of relevance to the auditor. Controls over
the accuracy of the information in the reports (for example, the general IT-
controls) are described as “indirect” controls.
A31. Because of the inherent consistency of IT processing, audit evidence about
the implementation of an automated application control, when considered in
combination with audit evidence about the operating effectiveness of the entity’s
general controls (in particular, change controls), may also provide substantial
audit evidence about its operating effectiveness.
Timing of Tests of Controls
Intended period of reliance (Ref: Para. 11)
A32. Audit evidence pertaining only to a point in time may be sufficient for the
auditor’s purpose, for example, when testing controls over the entity’s physical
inventory counting at the period end. If, on the other hand, the auditor intends to
rely on a control over a period, tests that are capable of providing audit evidence
that the control operated effectively at relevant times during that period are
appropriate. Such tests may include tests of the entity’s monitoring of controls.
Using audit evidence obtained during an interim period (Ref: Para. 12)
A33. Relevant factors in determining what additional audit evidence to obtain
about controls that were operating during the period remaining after an interim
period, include:
The significance of the assessed risks of material misstatement at the
assertion level.
The specific controls that were tested during the interim period, and
significant changes to them since they were tested, including changes in the
information system, processes, and personnel.
The degree to which audit evidence about the operating effectiveness of
those controls was obtained.
The length of the remaining period.
The extent to which the auditor intends to reduce further substantive
procedures based on the reliance of controls.
The control environment.
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A34. Additional audit evidence may be obtained, for example, by extending tests
of controls over the remaining period or testing the entity’s monitoring of controls.
Using audit evidence obtained in previous audits (Ref: Para.13)
A35. In certain circumstances, audit evidence obtained from previous audits may
provide audit evidence where the auditor performs audit procedures to establish
its continuing relevance. For example, in performing a previous audit, the auditor
may have determined that an automated control was functioning as intended.
The auditor may obtain audit evidence to determine whether changes to the
automated control have been made that affect its continued effective functioning
through, for example, inquiries of management and the inspection of logs to
indicate what controls have been changed. Consideration of audit evidence
about these changes may support either increasing or decreasing the expected
audit evidence to be obtained in the current period about the operating
effectiveness of the controls.
Controls that have changed from previous audits (Ref: Para. 14(a))
A36. Changes may affect the relevance of the audit evidence obtained in
previous audits such that there may no longer be a basis for continued reliance.
For example, changes in a system that enable an entity to receive a new report
from the system probably do not affect the relevance of audit evidence from a
previous audit; however, a change that causes data to be accumulated or
calculated differently does affect it.
Controls that have not changed from previous audits (Ref: Para. 14(b))
A37. The auditor’s decision on whether to rely on audit evidence obtained in
previous audits for controls that:
(a) Have not changed since they were last tested; and
(b) Are not controls that mitigate a significant risk;
is a matter of professional judgment. In addition, the length of time between
retesting such controls is also a matter of professional judgment, but is required
by paragraph 14 (b) to be at least once in every third year.
A38. In general, the higher the risk of material misstatement, or the greater the
reliance on controls, the shorter the time period elapsed, if any, is likely to be.
Factors that may decrease the period for retesting a control, or result in not
relying on audit evidence obtained in previous audits at all, include the following:
A deficient control environment.
Deficient monitoring of controls.
17 SA 330
A significant manual element to the relevant controls.
Personnel changes that significantly affect the application of the control.
Changing circumstances that indicate the need for changes in the control.
Deficient general IT-controls.
A39. When there are a number of controls for which the auditor intends to rely on
audit evidence obtained in previous audits, testing some of those controls in
each audit provides corroborating information about the continuing effectiveness
of the control environment. This contributes to the auditor’s decision about
whether it is appropriate to rely on audit evidence obtained in previous audits.
Evaluating the Operating Effectiveness of Controls (Ref: Para.16-17)
A40. A material misstatement detected by the auditor’s procedures is a strong
indicator of the existence of a significant deficiency in internal control.
A41. The concept of effectiveness of the operation of controls recognises that
some deviations in the way controls are applied by the entity may occur.
Deviations from prescribed controls may be caused by such factors as changes
in key personnel, significant seasonal fluctuations in volume of transactions and
human error. The detected rate of deviation, in particular in comparison with the
expected rate, may indicate that the control cannot be relied on to reduce risk at
the assertion level to that assessed by the auditor.
Substantive Procedures (Ref: Para. 18)
A42. Paragraph 18 requires the auditor to design and perform substantive
procedures for each material class of transactions, account balance, and
disclosure, irrespective of the assessed risks of material misstatement. This
requirement reflects the facts that: (i) the auditor’s assessment of risk is
judgmental and so may not identify all risks of material misstatement; and (ii)
there are inherent limitations to internal control, including management override.
Nature and Extent of Substantive Procedures
A43. Depending on the circumstances, the auditor may determine that:
Performing only substantive analytical procedures will be sufficient to reduce
audit risk to an acceptably low level. For example, where the auditor’s
assessment of risk is supported by audit evidence from tests of controls.
Only tests of details are appropriate.
A combination of substantive analytical procedures and tests of details are
most responsive to the assessed risks.
A44. Substantive analytical procedures are generally more applicable to large
volumes of transactions that tend to be predictable over time. SA 520, “Analytical
SA 330 18
Procedures” establishes requirements and provides guidance on the application
of analytical procedures during an audit.
A45. The nature of the risk and assertion is relevant to the design of tests of
details. For example, tests of details related to the existence or occurrence
assertion may involve selecting from items contained in a financial statement
amount and obtaining the relevant audit evidence. On the other hand, tests of
details related to the completeness assertion may involve selecting from items
that are expected to be included in the relevant financial statement amount and
investigating whether they are included.
A46. Because the assessment of the risk of material misstatement takes account
of internal control, the extent of substantive procedures may need to be
increased when the results from tests of controls are unsatisfactory. However,
increasing the extent of an audit procedure is appropriate only if the audit
procedure itself is relevant to the specific risk.
A47. In designing tests of details, the extent of testing is ordinarily thought of in
terms of the sample size. However, other matters are also relevant, including
whether it is more effective to use other selective means of testing. See SA 5003.
Considering Whether External Confirmation Procedures Are to Be Performed
(Ref: Para. 19)
A48. External confirmation procedures frequently are relevant when addressing
assertions associated with account balances and their elements, but need not be
restricted to these items. For example, the auditor may request external
confirmation of the terms of agreements, contracts, or transactions between an
entity and other parties. External confirmation procedures also may be performed
to obtain audit evidence about the absence of certain conditions. For example, a
request may specifically seek confirmation that no “side agreement” exists that
may be relevant to an entity’s revenue cut-off assertion. Other situations where
external confirmation procedures may provide relevant audit evidence in
responding to assessed risks of material misstatement include:
Bank balances and other information relevant to banking relationships.
Accounts receivable balances and terms.
Inventories held by third parties at bonded warehouses for processing or on
consignment.
Property title deeds held by lawyers or financiers for safe custody or as
security.
3 SA 500, “Audit Evidence”, paragraph 10.
19 SA 330
Investments held for safekeeping by third parties, or purchased from
stockbrokers but not delivered at the balance sheet date.
Amounts due to lenders, including relevant terms of repayment and
restrictive covenants.
Accounts payable balances and terms.
A49. Although external confirmations may provide relevant audit evidence
relating to certain assertions, there are some assertions for which external
confirmations provide less relevant audit evidence. For example, external
confirmations provide less relevant audit evidence relating to the recoverability of
accounts receivable balances, than they do of their existence.
A50. The auditor may determine that external confirmation procedures
performed for one purpose provide an opportunity to obtain audit evidence about
other matters. For example, confirmation requests for bank balances often
include requests for information relevant to other financial statement assertions.
Such considerations may influence the auditor’s decision about whether to
perform external confirmation procedures.
A51. Factors that may assist the auditor in determining whether external
confirmation procedures are to be performed as substantive audit procedures
include:
The confirming party’s knowledge of the subject matter – responses may be
more reliable if provided by a person at the confirming party who has the
requisite knowledge about the information being confirmed.
The ability or willingness of the intended confirming party to respond – for
example, the confirming party:
o May not accept responsibility for responding to a confirmation request;
o May consider responding too costly or time consuming;
o May have concerns about the potential legal liability resulting from
responding;
o May account for transactions in different currencies; or
o May operate in an environment where responding to confirmation
requests is not a significant aspect of day-to-day operations.
In such situations, confirming parties may not respond, may respond in a
casual manner or may attempt to restrict the reliance placed on the
response.
SA 330 20
The objectivity of the intended confirming party – if the confirming party is a
related party of the entity, responses to confirmation requests may be less
reliable.
Substantive Procedures Related to the Financial Statement Closing Process
(Ref: Para. 20(b))
A52. The nature, and also the extent, of the auditor’s examination of journal
entries and other adjustments depends on the nature and complexity of the
entity’s financial reporting process and the related risks of material misstatement.
Substantive Procedures Responsive to Significant Risks (Ref: Para. 21)
A53. Paragraph 21 of this SA requires the auditor to perform substantive
procedures that are specifically responsive to risks the auditor has determined to
be significant risks. Audit evidence in the form of external confirmations received
directly by the auditor from appropriate confirming parties may assist the auditor
in obtaining audit evidence with the high level of reliability that the auditor
requires to respond to significant risks of material misstatement, whether due to
fraud or error. For example, if the auditor identifies that management is under
pressure to meet earnings expectations, there may be a risk that management is
inflating sales by improperly recognising revenue related to sales agreements
with terms that preclude revenue recognition or by invoicing sales before
shipment. In these circumstances, the auditor may, for example, design external
confirmation procedures not only to confirm outstanding amounts, but also to
confirm the details of the sales agreements, including date, any rights of return
and delivery terms. In addition, the auditor may find it effective to supplement
such external confirmation procedures with inquiries of non-financial personnel in
the entity regarding any changes in sales agreements and delivery terms.
Timing of Substantive Procedures (Ref: Para. 22-23)
A54. In most cases, audit evidence from a previous audit’s substantive
procedures provides little or no audit evidence for the current period. There are,
however, exceptions, e.g., a legal opinion obtained in a previous audit related to
the structure of a securitisation to which no changes have occurred, may be
relevant in the current period. In such cases, it may be appropriate to use audit
evidence from a previous audit’s substantive procedures if that evidence and the
related subject matter have not fundamentally changed, and audit procedures
have been performed during the current period to establish its continuing
relevance.
Using audit evidence obtained during an interim period (Ref: Para. 22)
A55. In some circumstances, the auditor may determine that it is effective to
perform substantive procedures at an interim date, and to compare and reconcile
21 SA 330
information concerning the balance at the period end with the comparable
information at the interim date to:
(a) Identify amounts that appear unusual;
(b) Investigate any such amounts; and
(c) Perform substantive analytical procedures or tests of details to test the
intervening period.
A56. Performing substantive procedures at an interim date without undertaking
additional procedures at a later date increases the risk that the auditor will not
detect misstatements that may exist at the period end. This risk increases as the
remaining period is lengthened. Factors such as the following may influence
whether to perform substantive procedures at an interim date:
The control environment and other relevant controls.
The availability at a later date of information necessary for the auditor’s
procedures.
The purpose of the substantive procedure.
The assessed risk of material misstatement.
The nature of the class of transactions or account balance and related
assertions.
The ability of the auditor to perform appropriate substantive procedures or
substantive procedures combined with tests of controls to cover the
remaining period in order to reduce the risk that misstatements that may
exist at the period end will not be detected.
A57. Factors such as the following may influence whether to perform substantive
analytical procedures with respect to the period between the interim date and the
period end:
Whether the period end balances of the particular classes of transactions or
account balances are reasonably predictable with respect to amount,
relative significance, and composition.
Whether the entity’s procedures for analysing and adjusting such classes of
transactions or account balances at interim dates and for establishing proper
accounting cutoffs are appropriate.
Whether the information system relevant to financial reporting will provide
information concerning the balances at the period end and the transactions
in the remaining period that is sufficient to permit investigation of:
(a) Significant unusual transactions or entries (including those at or near
the period end);
(b) Other causes of significant fluctuations, or expected fluctuations that
did not occur; and
SA 330 22
(c) Changes in the composition of the classes of transactions or account
balances.
Misstatements detected at an interim date (Ref: Para. 23)
A58. When the auditor concludes that the planned nature, timing or extent of
substantive procedures covering the remaining period need to be modified as a
result of unexpected misstatements detected at an interim date, such
modification may include extending or repeating the procedures performed at the
interim date at the period end.
Adequacy of Presentation and Disclosure (Ref: Para. 24)
A59. Evaluating the overall presentation of the financial statements, including the
related disclosures, relates to whether the individual financial statements are
presented in a manner that reflects the appropriate classification and description
of financial information, and the form, arrangement, and content of the financial
statements and their appended notes. This includes, for example, the
terminology used, the amount of detail given, the classification of items in the
statements, and the bases of amounts set forth.
Evaluating the Sufficiency and Appropriateness of Audit Evidence
(Ref: Para. 25-27)
A60. An audit of financial statements is a cumulative and iterative process. As the
auditor performs planned audit procedures, the audit evidence obtained may cause
the auditor to modify the nature, timing or extent of other planned audit procedures.
Information may come to the auditor’s attention that differs significantly from the
information on which the risk assessment was based. For example,
The extent of misstatements that the auditor detects by performing
substantive procedures may alter the auditor’s judgment about the risk
assessments and may indicate a significant deficiency in internal control.
The auditor may become aware of discrepancies in accounting records, or
conflicting or missing evidence.
Analytical procedures performed at the overall review stage of the audit may
indicate a previously unrecognised risk of material misstatement.
In such circumstances, the auditor may need to re-evaluate the planned audit
procedures, based on the revised consideration of assessed risks for all or some of
the classes of transactions, account balances, or disclosures and related assertions.
SA 315 contains further guidance on revising the auditor’s risk assessment4.
A61. The auditor cannot assume that an instance of fraud or error is an isolated
4 SA 315, paragraph 31.
23 SA 330
occurrence. Therefore, the consideration of how the detection of a misstatement
affects the assessed risks of material misstatement is important in determining
whether the assessment remains appropriate.
A62. The auditor’s judgment as to what constitutes sufficient appropriate audit
evidence is influenced by such factors as the following:
Significance of the potential misstatement in the assertion and the likelihood
of its having a material effect, individually or aggregated with other potential
misstatements, on the financial statements.
Effectiveness of management’s responses and controls to address the risks.
Experience gained during previous audits with respect to similar potential
misstatements.
Results of audit procedures performed, including whether such audit
procedures identified specific instances of fraud or error.
Source and reliability of the available information.
Persuasiveness of the audit evidence.
Understanding of the entity and its environment, including the entity’s
internal control.
Documentation (Ref: Para. 28)
A63. The form and extent of audit documentation is a matter of professional
judgment, and is influenced by the nature, size and complexity of the entity and
its internal control, availability of information from the entity and the audit
methodology and technology used in the audit.
Material Modifications to ISA 330, The Auditor’s
Responses to Assessed Risks
Deletion
1. Paragraph A17 of the Application Section of ISA 330(A17 of SA 330) dealt
with the application of the requirements of ISA 330 to the audits of public sector
entities regarding the auditor’s consideration of the nature, timing and extent of
further audit procedures. Since as mentioned in the “Preface to the Standards
on Quality Control, Auditing, Review, Other Assurance and Related Services”,
the Standards issued by the Auditing and Assurance Standards Board, apply
equally to all entities, irrespective of their form, nature and size, a specific
reference to applicability of the Standard to public sector entities has been
deleted.
SA 330 24
Further, it is also possible that even in case of non-public sector entities the
auditor may be required to give special considerations regarding the nature,
timing and extent as a result of the terms of appointment of the auditor or any
other special reporting requirement under the statute or regulation under which
the entity operates. Accordingly, the spirit of Paragraph A17 in ISA, highlighting
the fact that in some cases, the auditor’s consideration of the nature, timing and
extent of further audit procedures may be affected by the audit mandate or any
other special auditing requirements, has been retained.
25 SA 330