AC2104: Seminar 5

Mini Presentation 2
Seminar Group 1 Group 6
Christopher See, Joanne Ong,
Rachel Chee, Tan Si Ying,
Nai Yan An
(a) What aspects should an auditor consider to establish
whether the preconditions for an audit are present?

Preconditions for an audit: The use by management of an acceptable financial reporting

framework in the preparation of the financial statements and the agreement of management
and, where appropriate, those charged with governance to the premise on which an audit is
conducted.

Determine whether the

Obtain the agreement
financial reporting
of management that it
framework to be applied in
acknowledges and
the preparation of the
understands its
financial statements is
responsibility
acceptable
(a) What aspects should an auditor consider to establish
whether the preconditions for an audit are present?

Preconditions for an audit: The use by management of an acceptable financial reporting

framework in the preparation of the financial statements and the agreement of management
and, where appropriate, those charged with governance to the premise on which an audit is
conducted.

Determine whether the

Obtain the agreement
financial reporting
of management that it
framework to be applied in
acknowledges and
the preparation of the
understands its
financial statements is
responsibility
acceptable
(a) What aspects should an auditor consider to establish
whether the preconditions for an audit are present?
SSA 210 Para 6 A4

Factors that are relevant to the auditor’s determination of the acceptability of the financial
reporting framework to be applied in the preparation of the financial statements include:

Nature of Nature of Whether Purpose of

Entity Financial the Law Financial
Statements Prescribes Statement
(a) What aspects should an auditor consider to establish
whether the preconditions for an audit are present?
SSA 210 Para 6 A8

Determining the acceptability of the Financial Reporting Framework:

At present, there is no objective and authoritative basis that has been generally
recognized globally for judging the acceptability of general purpose frameworks. In the
absence of such a basis, financial reporting standards established by organizations that are
authorized or recognized to promulgate standards to be used by certain types of entities
are presumed to be acceptable for general purpose financial statements prepared by such
entities, provided the organizations follow an established and transparent process
involving deliberation and consideration of the views of a wide range of stakeholders.
(a) What aspects should an auditor consider to establish
whether the preconditions for an audit are present?

Examples of such financial reporting standards include:

1. Singapore Financial Reporting Standards (FRSs) promulgated by the Accounting
Standards Council;
2. International Public Sector Accounting Standards (IPSASs) promulgated by the
International Public Sector Accounting Standards Board or national public sector
accounting standards; and
3. Accounting principles promulgated by an authorized or recognized standards setting
organization in a particular jurisdiction, provided the organization follows an
established and transparent process involving deliberation and consideration of the
views of a wide range of stakeholders.
(a) What aspects should an auditor consider to establish
whether the preconditions for an audit are present?

Preconditions for an audit: The use by management of an acceptable financial reporting

framework in the preparation of the financial statements and the agreement of management
and, where appropriate, those charged with governance to the premise on which an audit is
conducted.

Determine whether the Obtain the agreement

Obtain the agreement
financial reporting of management that it
of management that it
framework to be applied in acknowledges and
acknowledges and
the preparation of the understands its
understands its
financial statements is responsibility
responsibility
acceptable
(a) What aspects should an auditor consider to establish
whether the preconditions for an audit are present?

Obtain the agreement of management that it acknowledges and understands its

responsibility:

(i) For the preparation of the financial statements in accordance with the applicable
financial reporting framework, including where relevant their fair presentation; (Ref: Para.
A15)
(ii) For such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due
to fraud or error; and (Ref: Para.12, A16-A19)
(a) What aspects should an auditor consider to establish
whether the preconditions for an audit are present?
Obtain the agreement of management that it acknowledges and understands its
responsibility:
(iii) To provide the auditor with:
(a) Access to all information of which management is aware that is relevant to the
preparation of the financial statements such as records, documentation and other
matters;
(b) Additional information that the auditor may request from management for the
purpose of the audit; and
(c) Unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence.
(b) Why should the auditor assess client’s business risk?

[DEFINITIONS]

SSA 315 Para 4(b)

Business risk: A risk resulting from significant conditions, events, circumstances, actions
or inactions that could adversely affect an entity’s ability to achieve its objectives and
execute its strategies, or from the setting of inappropriate objectives and strategies.

Strategies: approaches by
Objectives: overall plans
which management intends to
for the entity
achieve its objectives
(b) Why should the auditor assess client’s business risk?

SSA 315 Para A38

Business risk may arise, for example, from:

1. The development of new products or services that may fail;

2. A market which, even if successfully developed, is inadequate to support a product or
service; or
3. Flaws in a product or service that may result in liabilities and reputational risk.
(b) Why should the auditor assess client’s business risk?

SSA 315 Para A39

Most business risks will eventually have financial consequences and, therefore, an effect
on the financial statements.

An understanding of
business risks

Increase in likelihood of
identifying risks of material
misstatement
(b) Why should the auditor assess client’s business risk?

SSA 315 Para A38

Business risk is broader than the risk of material

misstatement of the financial statements because not
all business risks results in risks of material
misstatement
(b) Why should the auditor assess client’s business risk?

The auditor assesses the specific business risks that the entity faces in order to determine
whether they might result in errors, fraud or other irregularities, and ultimately in a
materially misstated financial report.

The focus on client’s business risks leads to:

1. A more strategic and systematic approach to the audit

2. A more efficient and effective audit
a. Less emphasis on routine transactions that are likely to be well controlled through the client’s internal
control
b. Greater focus on identifying non-routine transactions, accounting estimates and valuation issues that are
much more likely to lead to misstatements in the financial report
3. Lower audit risk
(c) How do inherent risk and control risk differ from detection
risk? [DEFINITIONS]

● The risk that misstatements likely to

Inherent Risk
01 occur before consideration of any
SSA 200 Para 13(n)
related controls

● The risk that misstatements will not be

Control Risk
02 prevented, detected or corrected by the
SSA 200 Para 13(n)
entity’s internal control

● The risk that the procedures performed

Detection Risk
03 to reduce audit risk will not detect a
SSA 200 Para 13(e)
misstatement that exists
(c) How do inherent risk and control risk differ from detection
risk?
[DIFFERENCES]

1. Auditor’s Control
IR and CR exist independently of the audit, DR relates to the auditor's procedures
∴ The auditor cannot control the former but can control the latter through the
nature, timing, and extent of the audit procedures

2. Inverse Relationship
DR has an inverse relationship with IR and CR
(c) How do inherent risk and control risk differ from detection
risk?
(c) What are some limitations of the audit risk model?

Audit Risk Model

(c) What are some limitations of the audit risk model?

#1 #2 #3
Treats each risk
#4
Components can’t
Inherent risk is Audit risk is component as be accurately
separate and assessed due to
difficult to judgmentally independent when Audit Technology
formally assess determined in fact they are not
independent

● Some transactions ● Is RMM high or ● Difficult to separate ● Audit technology is not

are more low? internal controls so precisely developed
susceptible to error ● If RMM is judged and inherent risk ● Auditing is based on
● Hard to wrongly, will ● SSA refers both IR testing
quantity/assess the affect Detection and CR as “risks of ● Have to make
level of risk material subjective assessment
Risk
misstatement”
● Auditor Errors
 Thank You!
Any Questions?