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THE MINISTRY
OF FINANCE
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SOCIALIST
REPUBLIC OF VIETNAM
Independence - Freedom - Happiness
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No.
214/2012/TT-BTC
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Hanoi,
December 06, 2012
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CIRCULAR
PROMULGATING
THE SYSTEM OF VIETNAM AUDIT STANDARDS
Pursuant to the Law on
Independent Audit No. 67/2011/QH12 of March 29,
2011;
Pursuant to the Government’s Decree
No. 17/2012/ND-CP of March 13, 2012 detailing and guiding the implementation of
a number of articles of the Law on Independent Audit;
Pursuant to the Government’s
Decree No. 118/2008/ND-CP, of November 27, 2008 defining the functions, tasks,
powers and organizational structure of the Ministry of Finance;
At the proposal of Chairman of Vietnam Association of Certified Public Accountants(VACPA)
and Director of the Accounting and Auditing Regulation Department;
The Minister of Finance promulgates
the Circular on the system of Vietnam audit standards.
Article 1. To promulgate
together with this Circular thirty seven (37) audit standards of Vietnam with
the code numbers and names as follows:
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2. The Vietnamese standard No. 200 – The overall objective of auditors and audit
enterprises upon conducting audit according to the Vietnam audit standards.
3. The Vietnamese standard No. 210 – Audit contract.
4. The Vietnamese standard No. 220 – Quality control of financial statement audit
activities.
5. The Vietnamese standard No. 230 – Audit documents and records.
6. The Vietnamese standard No. 240
– Responsibilities of auditors involving fraudulent acts in the course of
auditing the financial statements.
7. The Vietnamese standard No. 250
– To consider the compliance with law and regulations in auditing the financial
statements.
8. The Vietnamese standard No. 260
– To discuss matters with the management board of units subject to audit.
9. The Vietnamese standard No. 265
– To discuss shortcomings in internal audit with the management board and the
Board of directors of units subject to audit.
10. The Vietnamese standard No.
300 – To make plan on auditing the financial statements.
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12. The Vietnamese standard No.
320 – The key in making plan and auditing.
13. The Vietnamese standard No.
330 - Handling measures of auditors for the assessed risks.
14. The Vietnamese standard No. 402
– Elements should be considered when auditing units using external services.
15. The Vietnamese standard No.
480 - To assess mistakes detected in the course of audit.
16. The Vietnamese standard No. 500 – Audit evidences.
17. The Vietnamese standard No. 501 – Audit evidences for items and special events.
18. The Vietnamese standard No. 505 - Information confirmed from the outside.
19. The Vietnamese standard No. 510 – Audit in the first year – The balance at beginning
of period.
20. The Vietnamese standard No.
520 – Procedures for analysis
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22. The Vietnamese standard No.
540 – To audit the accounting estimates (including the accounting estimates of
reasonable values and relevant illustrations).
23. The Vietnamese standard No.
550 – Relevant parties
24. The Vietnamese standard No.
560 – Events arising after the day ending the accounting period.
25. The Vietnamese standard No.
570 - Continuous operation.
26. The Vietnamese standard No.
580 – To provide explanations in writing.
27. The Vietnamese standard No.
600 – Notes when auditing the incorporation financial statement (including
affairs of auditors of member units).
28. The Vietnamese standard No. 610 – To use affairs of internal auditors.
29. The Vietnamese standard No.
620 – To use affairs of experts.
30. The Vietnamese standard No.
700 – To form the audit opinions and audit reports about financial statements.
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32. The Vietnamese standard No.
706 – Paragraph of “matters should be emphasized” and "Other matters"
in audit reports about financial statements.
33. The Vietnamese standard No.
710 - Comparison information – Corresponding data and comparison financial
statement.
34. The Vietnamese standard No.
720 – Other information in documents with the audited financial statements.
35. The Vietnamese standard No.
800 – Note when auditing, financial statements are made according to the
framework on making and presenting Financial statement for special purpose.
36. The Vietnamese standard No.
805 – Note when auditing the separate financial statements and when auditing
the elements, accounts or specific indexes of financial statement.
37. The Vietnamese standard No.
810 – The report service regarding the summary financial statement.
Article 2. Scope and subjects
of application
This Circular promulgates the
system of Vietnamese audit standards applied to audit enterprises, branches of
foreign audit enterprises in Vietnam, the auditors practicing and the concerned
organizations and individuals in the course of supplying the independent audit
service.
Article 3. Effect and
transitional provisions
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2. For audits
of financial statements and other audit affairs which have been performed
before January 01, 2014 but from and after the January 01, 2014, audit reports
are issued, the system of Vietnamese audit standards promulgated together with
this Circular must be applied.
3. The
system of Vietnamese audit standards promulgated together with the Decision No.
120/1999/QD-BTC dated 27/9/1999, Decision No. 219/2000/QD-BTC dated 29/12/2000,
Decision No. 143/2001/QD-BTC dated 21/12/2001, Decision No. 28/2003/QD-BTC dated
14/3/2003, Decision No. 195/2003/QD-BTC dated 28/11/2003, Decision No.
03/2005/QD-BTC dated 18/01/2005 and Decision No. 101/2005/QD-BTC dated
29/12/2005 of the Minister of Finance shall cease to be effective on January
01, 2014, except standards specified in clause 4 of this Article.
4. The
Vietnamese audit standards No. 1000 “Audit of finalization statement of
finished investment capital”, Vietnamese audit standards No. 930 “Service of
summing up financial information” promulgated together with the Decision No.
03/2005/QD-BTC dated 18/01/2005 of the Minister of Finance, Vietnamese audit
standards No. 910 “Control and review of Financial statement”, Vietnamese audit
standards No. 920 “To check financial information on the basis of procedures
having been agreed before” promulgated together with the Decision No.
195/2003/QD-BTC dated 28/11/2003 of the Minister of Finance shall continue
taking effect until there are new Vietnamese standards replacing them.
Article 4. Implementation
organization
1. VACPA
shall popularize, carry out and guide implementation of the Vietnamese audit
standards promulgated at this Circular.
2. Director
of the Accounting and Auditing Regulation Department, The Chief of Ministerial
office and heads of relevant units shall guide, examine and execute this
Circular.
FOR THE
MINISTER OF FINANCE
DEPUTY MINISTER
Tran Xuan Ha
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VIETNAM
SYSTEM OF STANDARDS ON AUDITING
Standard
on auditing 210: Audit engagements
(Issued
together with the Circular No. 214/2012/TT-BTC of the Ministry of Finance dated
December 6, 2012)
I/ GENERAL PROVISIONS
Scope of application
01. This
auditing standard deals with and provides guidance on responsibilities of
auditors and auditing enterprises (hereinafter referred to as “auditor”) in
agreeing the terms of the audit engagement with the Board of Directors and the
Management Board of the entity (where appropriate). This includes
mandatory requirements and provides explanatory guidance on certain
preconditions for an audit, responsibility of the auditor, and responsibility
for which rests with the Board of Directors and the Management Board of the
entity, in relation to the audit engagement. The Vietnam standard on
auditing 220 additionally deals with and provides guidance on certain aspects
pertaining to responsibilities of the auditor with respect to engagement
acceptance that are within the control of the auditor (refer to Paragraph A1
included in this Standard).
02. The
auditor must comply with provisions and instructions set forth in this Standard
in agreeing on, effecting and carrying out the audit engagement.
The
entity (client) must, to certain extent, gain awareness of provisions and
instructions laid down in this Standard to be able to collaborate in performing
engagement activities and dealing with relations to the process of agreeing on,
effecting and carrying out the audit engagement.
Objective
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(a)
Establishing whether the preconditions for an audit are present;
(b)
Confirming that the auditor and the Board of Directors or Management Board
(where appropriate) have already agreed terms of the audit engagement.
Definitions
04. For
purposes of the Vietnam Standards on Auditing, the following term shall be
construed as follows:
Preconditions
for an audit refers to the use, by the Board of Directors of the entity, of an acceptable
financial reporting framework in the preparation of the financial statements
and the agreement of the Board of Directors or the Management Board of the
entity (where appropriate) to the premise on which an audit is conducted (refer
to Paragraph 13 included in the Vietnam Standard on Auditing 200).
05. For the
purposes of this auditing standard, references to “Board of Directors” should
be read hereafter as “the Board of Directors and the Management Board of the
entity (where appropriate)”.
II/ CONTENTS OF THIS AUDITING
STANDARD
Requirements
Preconditions
for an audit
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(a)
Determine whether the financial reporting framework to be applied in the preparation
of the financial statements is acceptable (refer to instructions laid down in
the paragraph A2–A10 included in this Standard);
(b) Obtain
the agreement of the Board of Directors of the entity that it acknowledges and
understands its responsibility (refer to the paragraph A11–A14 and A20 included
in this Standard):
For the
preparation of the financial statements in accordance with the applicable
financial reporting framework, including where relevant their fair presentation
(refer to the paragraph A15 included in this Standard);
(ii) For
such internal control as the Board of Directors determines is necessary to
enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error (refer to the paragraph A16–A19
included in this Standard);
(iii) To
provide the auditor with:
a. Access to
all materials or information of which the Board of Directors is aware that is
relevant to the preparation and presentation of the financial statements such
as accounting records, documentation and other matters;
b.
Additional materials and information that the auditor may request the Board of
Directors to provide or clarify for the purpose of the audit;
c.
Unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence.
Limitation
on the scope of the audit engagement prior to acceptance thereof
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Other
factors affecting audit engagement acceptance
08. If the
preconditions for an audit are not present, the auditor shall discuss the
matter with the Board of Directors of the entity. Unless required by law or regulation
to do so, the auditor shall not accept the proposed audit engagement:
(a) If the
auditor has determined that the financial reporting framework to be applied in
the preparation and presentation of the financial statements is unacceptable,
except as provided in paragraph 19 included in this Standard; or
(b) If the
agreement between the auditor and the Board of Directors, as referred to in
paragraph 06(b) hereof, has not been obtained.
Agreement
on audit engagement terms
09. The
auditor shall agree the terms of the audit engagement with the Board of
Directors or the Management Board of the entity (where appropriate) (refer to
the paragraph A21 included in this Standard).
10. Subject
to paragraph 11 in this Standard, the agreed terms of the audit engagement
shall be recorded in an audit engagement letter or other suitable form of
written agreement (for instance, the letter of appointment for audit) and shall
include (refer to the paragraph A22–A25 included in this Standard):
(a) The
objective and scope of the audit of the financial statements;
(b) The
responsibilities of the auditor;
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(d)
Identification of the applicable financial reporting framework for the
preparation and presentation of the financial statements;
(e) The
expected form and content of any reports to be issued by the auditor.
11. If law
or regulation prescribes in sufficient detail the terms of the audit
engagement, including those referred to in paragraph 10 hereof, the auditor
need not record them in a written agreement, except for the fact that such law
or regulation applies and that Board of Directors acknowledges and understands
its responsibilities as set out in the paragraph 06(b) in this Standard (refer
to the paragraph A22 and A26–A27 included in this Standard).
12. If law
or regulation prescribes responsibilities of the Board of Directors similar to
those described in paragraph 6(b), the auditor may determine that the law or
regulation includes responsibilities that, in the auditor’s judgment, are
equivalent in effect to those set out in that paragraph. For such
responsibilities that are equivalent, the auditor may use the wording of the
law or regulation to describe them in the audit engagement. For those
responsibilities that are not prescribed by law or regulation such that their
effect is equivalent, the written agreement shall use the description in
paragraph 06(b). (refer to the paragraph A26 included in this Standard).
Recurring
audits
13. The
auditing enterprise and the entity can enter into a written agreement that
repeats in multiple successive financial years. On recurring audits,
the auditor shall, on an annual basis, assess whether circumstances require the
terms of the audit engagement to be revised and whether there is a need to
remind the entity of the existing terms of the audit engagement. Any terms that
need to be revised (if any) must be documented and attached as an appendix to
the signed written agreement (refer to the paragraph A28 included in
this Standard).
Acceptance
of a change in the terms of the audit engagement
14. The
auditor shall not agree to a change in the terms of the audit engagement where
there is no reasonable justification for doing so. (refer to the paragraph
A29–A31).
15. If, prior
to completing an audit, the auditor is requested to change the audit engagement
to an engagement that conveys a lower level of assurance, the auditor shall
determine whether there is reasonable justification for doing so. (refer to the
paragraph A32–A33).
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17. If the
auditor is unable to agree to a change of the terms of the audit engagement and
is not permitted by the Board of Directors to continue the original audit
engagement, the auditor shall:
(a) Withdraw
from the audit and terminate the audit engagement where possible under
applicable law or regulation;
(b)
Determine whether there is any obligation, either contractual or otherwise, to
report the circumstances to other parties, such as the Management Board, owners
or regulators.
Additional
considerations in audit engagement acceptance
Standards
for preparation and presentation of financial statements supplemented by law or
regulation
18. If
standards for preparation and presentation of financial statements established
by an authorized or recognized standards setting organization are supplemented
by law or regulation, the auditor shall determine whether there are any
conflicts between these standards and the additional requirements. If such
conflicts exist, the auditor shall discuss with the Board of Directors of the
entity the nature of the additional requirements and shall agree whether:
(a) The
additional requirements can be met through additional disclosures to the
financial statements; or
(b) The
description of the applicable financial reporting framework in the financial
statements can be amended accordingly.
If neither
of the above actions is possible, the auditor shall determine whether it will
be necessary to modify the auditor’s opinion in accordance with the Vietnam
Standard on Auditing 705 (refer to the paragraph A34).
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19. If the
auditor has determined that the financial reporting framework prescribed by law
or regulation would be unacceptable and the entity is bound to apply it
for the fact that it is prescribed by law or regulation, the auditor shall
accept the audit engagement only if the following conditions are present (refer
to the paragraph A35):
(a) The
Board of Directors agrees to provide additional disclosures in the financial
statements required to avoid the financial statements being misleading;
(b) It is
explicitly recognized in the terms of the audit engagement that:
(i) The
auditor’s report on the financial statements will incorporate an “emphasis of
matter” paragraph, drawing users’ attention to the additional disclosures, in
accordance with the Vietnam Standard on Auditing 706;
(ii) Unless
the auditor is required by law or regulation to express the auditor’s opinion
on the financial statements by using the written statement “financial
statements have given a true and fair view, in all material respects, in
accordance with the applicable financial reporting framework”, the auditor’s
opinion on the financial statements will not include such written statement.
20. If the
conditions outlined in paragraph 19 in this Standard are not present and the
auditor is required by law or regulation to undertake the audit engagement, the
auditor shall:
(a) Evaluate
the effect of the misleading nature of the financial statements on the
auditor’s report;
(b) Include
appropriate reference to this matter in the terms of the audit engagement.
Auditor’s
report prescribed by law or regulation
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(a) Whether
users might misunderstand the level of assurance obtained from the audit of the
financial statements;
(b) Whether
additional explanation in the auditor’s report given in accordance with the
Vietnam Standards on Auditing 706 can mitigate possible misunderstanding.
If the
auditor concludes that additional explanation in the auditor’s report cannot
mitigate possible misunderstanding, the auditor shall not accept the audit
engagement, unless required by law or regulation to do so. An audit conducted
in accordance with such law or regulation does not comply with the Vietnam
Standards on Auditing. Accordingly, subject to the paragraph 43 in the Vietnam
Standard on Auditing 700, the auditor shall not include any reference within
the auditor’s report to the audit having been conducted in accordance with the
Vietnam Standard on Auditing (refer to the paragraph A36–A37).
III/ GUIDE TO APPLICATION
When applying this Standard, it is necessary to consult the
Vietnam Standard on Auditing 200
Scope of
application (refer to the paragraph 01 in this Standard)
A1. Assurance
engagements, which include audit engagements, may be accepted only when the
practitioner considers that relevant ethical standards and requirements such as
independence and professional competence will be satisfied, and when the
engagement meets other certain requirements (refer to the paragraph 17
“Framework for assurance engagements”) (*). The auditor’s
responsibilities in respect of ethical standards and requirements in the
context of the acceptance of an audit engagement and in so far as they are
within the control of the auditor are dealt with in the paragraph 09 – 11 of
the Vietnam Standard on Auditing 220. This Vietnam Standard on Auditing deals
with those matters (or preconditions) that are within the responsibilities and
control of the entity and upon which it is necessary for the auditor and the
entity’s Board of Directors to agree. ((*): Refer to the footnote of this
Standard).
Preconditions
for an audit
The
financial reporting framework (refer to the paragraph 06(a))
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A3. In the
absence of an acceptable financial reporting framework, the entity’s Board of
Directors does not have an appropriate basis for the preparation and
presentation of the financial statements and the auditor does not have suitable
criteria for auditing the financial statements. In certain cases
the auditor may presume that the applicable financial reporting framework is
acceptable, as described in paragraphs A8–A9 of this Standard.
Determining
the acceptability of the financial reporting framework
A4. Factors
that are relevant to the auditor’s determination of the acceptability of the
financial reporting framework to be applied in the preparation and presentation
of the financial statements include:
(1) The
nature of the entity (for example, whether it is a state enterprise, limited
liability company, a public company or a not-for-profit organization);
(2) The
purpose of the financial statements (for example, whether they are prepared to
meet the common financial information needs of a wide range of users or the
financial information needs of specific users);
(3) The
nature of the financial statements (for example, whether the financial
statements are a complete set of financial statements or a single financial
statement);
(4) Whether
law or regulation prescribes the applicable financial reporting framework.
A5. Many
users of financial statements are not in a position to demand financial
statements tailored to meet their specific information needs. While all
the information needs of specific users cannot be met, there are financial
information needs that are common to a wide range of users. Financial
statements prepared in accordance with a financial reporting framework designed
to meet the common financial information needs of a wide range of users are
referred to as general purpose financial statements.
A6. The
financial statements prepared in accordance with a financial reporting
framework designed to meet the financial information needs of specific users
are referred to as special purpose financial statements. The financial
information needs of the intended users will determine the applicable financial
reporting framework in these circumstances. The paragraph 08 in the Vietnam
Standard on Auditing 800 discusses the acceptability of financial reporting
frameworks designed to meet the financial information needs of specific users.
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General
purpose financial reporting frameworks
A8. At
present, there is no objective and authoritative basis that has been generally
recognized for judging the acceptability of general purpose financial reporting
frameworks. 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 users. Examples of such financial reporting standards include:
(1)
International Financial Reporting Standards (IFRSs) promulgated by the
International Accounting Standards Board (IASB);
(2)
International Public Sector Accounting Standards (IPSAS) promulgated by the
International Public Sector Accounting Standards Board (IPSASB);
(3) National
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 users. In Vietnam, the
Ministry of Finance shall be the body setting the Vietnam Standards on Auditing
(VAS) by adopting and modifying the International Standards on Auditing (IAS)
and International Financial Reporting Standards (IFRS) where relevant in the
context of Vietnam which are considered the framework for preparation and
presentation of general purpose financial statements.
These
financial reporting standards are often identified as the applicable financial
reporting framework in law or regulation governing the preparation and
presentation of general purpose financial statements.
Financial
reporting frameworks prescribed by law or regulation
A9. In
accordance with paragraph 06(a), the auditor is required to determine whether
the financial reporting framework, which has been applied in the preparation
and presentation of the financial statements by the entity, is
acceptable. Law or regulation may prescribe the
financial reporting framework to be used in the preparation and presentation of
general purpose financial statements for certain types of entities. In the
absence of indications to the contrary, such a financial reporting framework is
presumed to be acceptable for general purpose financial statements prepared by
such entities. In the event that the framework is not considered to be
acceptable, paragraphs 19–20 apply.
Jurisdictions
that do not have accounting standards setting organizations or prescribed
financial reporting frameworks.
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Agreement
of the responsibilities of the Board of Directors (refer to the paragraph
06(b))
A11. An
audit in accordance with the Vietnam Standard on Auditing is conducted on the
premise that the Board of Directors has acknowledged and understands that it
has the responsibilities set out in paragraph 06(b) (refer to the paragraph A2
in the Vietnam Standard on Auditing 200). Such responsibilities may be
specified in other relevant laws or regulations. The Vietnam Standards on
Auditing do not override relevant laws or regulations concerning
responsibilities of the entity’s Board of Directors. However, the
concept of an independent audit requires that the auditor’s role does not
involve taking responsibility for the preparation and presentation of the
financial statements or for the entity’s related internal control, and that the
auditor has a reasonable expectation of collecting the materials and
information necessary for the audit in so far as the entity’s Board of
Directors is able to provide or procure it. To avoid misunderstanding,
agreement between the auditor and the Board of Directors is reached that the
Board acknowledges and understands that it has such responsibilities as part of
agreeing and recording the terms of the audit engagement in paragraphs 9–12.
A12. The way
in which the responsibilities for preparing and presenting the financial
statements are divided between the Board of Directors and the Management Board
will vary according to the resources and structure of the entity and any
relevant law or regulation, and the respective roles of the Board of Directors
and the Management Board within the entity. In most cases, the Board of
Directors is responsible for execution while the Management Board have
oversight of such execution. In some cases, the Management Board will have, or
will assume, responsibility for approving the financial statements or
monitoring the entity’s internal control related to preparation and
presentation of the financial statements. In larger or public entities, a
subgroup of the Management Board, such as an audit committee/internal audit
committee, may be charged with certain oversight responsibilities.
A13.
Paragraphs 10 – 11 of the Vietnam Standard on Auditing 580 require the auditor
to request the entity’s Board of Directors to provide written representations
that it has fulfilled certain of its responsibilities. It may therefore be
appropriate for the auditor to make the Board of Directors aware in the audit
engagement that it is obliged to give its written representations required by
the auditor, together with written representations concerning the Board of
Directors or issues required by other auditing standards, or written
representations to support other audit evidence relevant to the financial
statements or one or more specific assertions in the financial statements.
A14. Subject
to the paragraph A26 in the Vietnam Standard on Auditing 580, where the Board
of Directors, will not acknowledge its responsibilities, or agree to provide
the written representations, the auditor will be unable to obtain sufficient
appropriate audit evidence. In such circumstances, it would not be appropriate
for the auditor to accept the audit engagement, unless law or regulation
requires the auditor to do so. In cases where the auditor is required to accept
the audit engagement, the auditor may need to explain to the Board of Directors
the importance of these matters, and the implications for the auditor’s report.
Preparation
and presentation of the financial statements (refer to the paragraph 06(b)(i))
A15. Most
financial reporting frameworks include requirements relating to the preparation
and presentation of the financial statements. In the case of a fair
presentation framework the importance of the reporting objective of fair
presentation is such that the premise agreed with the Board of Directors
includes specific reference to fair presentation, or to the responsibility to
ensure that the financial statements will “give a true and fair view” in
accordance with the financial reporting framework.
Internal
Control (refer to the paragraph 06(b)(ii))
A16. The
entity’s Board of Directors must maintain such internal control as it
determines is necessary to enable the preparation and presentation of financial
statements that are free from material misstatement, whether due to fraud or
error. Subject to the paragraph A46 in the Vietnam Standard on Auditing 315,
internal control, no matter how effective, can provide an entity with only
reasonable assurance about achieving the entity’s financial reporting objectives
due to the inherent limitations of internal control.
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A18. It is
for the Board of Directors to determine what internal control is necessary to
enable the preparation and presentation of the financial statements. Subject to
the paragraph A51 and the Appendix 01 in the Vietnam Standard on Auditing 315,
the term “internal control” encompasses a wide range of activities within 5 components
that may be described as (1) the control environment; (2) the entity’s risk
assessment process; (3) the information system, including the related business
processes relevant to financial reporting, and communication; (4) control
activities; and (5) monitoring of controls. This division, however, does not
necessarily reflect how a particular entity may design, implement and maintain
its internal control, or how it may classify any particular component. An
entity’s internal control (in particular, its accounting books and records, or
accounting policies) will reflect the needs of the Board of Directors, the
complexity of the business, the nature of the risks to which the entity is
subject, and relevant laws or regulations.
A19. In the
context of Vietnam, law or regulation may refer to the responsibility of the
Board of Directors for the adequacy of accounting books and records, or
accounting policies. In some cases, general practice may assume a distinction
between accounting books and records or accounting policies on the one hand,
and internal controls on the other hand. As accounting books and records, or
accounting policies, are an integral part of internal control as referred to in
paragraph A18, no specific reference is made to them in paragraph 06(b)(ii) for
the description of the responsibility of the Board of Directors for the
adequacy of accounting records, books or accounting policies. To avoid
misunderstanding, it may be appropriate for the auditor to explain to the Board
of Directors the scope of this responsibility.
Considerations
relevant to smaller entities (referring to the paragraph 06(b))
A20. One of
the purposes of agreeing the terms of the audit engagement is to avoid
misunderstanding about the respective responsibilities of the Board of
Directors and the auditor. For example, when a third party has assisted with
the preparation and presentation of the financial statements, it may be useful
to remind the entity’s Board of Directors that the preparation and presentation
of the financial statements in accordance with the applicable financial
reporting framework remains its responsibility.
Agreement
on audit engagement terms
Agreeing the
terms of the audit engagement (refer to the paragraph 09)
A21. The
roles of the Board of Directors or the Management Board in agreeing the terms
of the audit engagement for the entity depend on the governance structure of
the entity and relevant law or regulation.
Audit
Engagement Letter or Other Form of Written Agreement (hereinafter
referred to as audit engagement letter) (refer to the paragraph 10–11)
A22. It is
in the interests of both the entity and the auditor that the auditor sends an
audit engagement letter before the commencement of the audit to help avoid
misunderstandings with respect to the audit. The objective and scope of an
audit and the responsibilities of management and of the auditor may be
sufficiently established by law, that is, they prescribe the matters described
in paragraph 10. Although in these circumstances paragraph 11 permits the auditor
to include in the engagement letter only reference to the fact that relevant
law or regulation applies and that the Board of Director acknowledges and
understands its responsibilities as set out in paragraph 06(b), the auditor may
nevertheless consider it appropriate to include the matters described in
paragraph 10 in an engagement letter for the information of the Board of
Directors.
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A23. The
form and content of the audit engagement letter may vary for each entity.
Information included in the audit engagement letter on the auditor’s
responsibilities may be based on requirements set out in paragraphs 03 – 09 in
the Vietnam Standard on Auditing 200; Paragraphs 06(b) and 12 of this Standard
deal with the description of the responsibilities of the Board of Directors. In
addition to including the matters required by paragraph 10, an audit engagement
letter may make reference to the followings:
(1)
Elaboration of the scope of the audit, including reference to applicable
legislation, regulations, auditing standards, and ethical and other
pronouncements of professional bodies to which the auditor adheres;
(2) The form
of any other communication of results of the audit engagement;
(3) The fact
that because of the inherent limitations of an audit, together with the
inherent limitations of internal control, there is an unavoidable risk that
some material misstatements may not be detected, even though the audit is
properly planned and performed in accordance with the Vietnam Standards on
Auditing;
(4)
Arrangements regarding the planning and performance of the audit, including the
composition of the audit team;
(5) The
expectation that the Board of Directors will provide written representations
(see also paragraph A13);
(6) The
agreement of the Board of Directors to make available to the auditor financial
statements and any relevant materials in time to allow the auditor to complete
the audit in accordance with the proposed timetable;
(7) The
agreement of the Board of Directors to inform the auditor of facts that may
affect the financial statements, of which the Board of Directors may become
aware during the period from the date of the auditor’s report to the date the
financial statements are issued;
(8) The
basis on which fees are computed and any billing arrangements;
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A24. In
addition to the contents referred to in the paragraph A23, the following points
could also be made in the audit engagement letter:
(1)
Arrangements concerning the involvement of other auditors and experts in some
aspects of the audit;
(2) Arrangements
concerning the involvement of internal auditors and other staff of the entity;
(3)
Arrangements to be made with the predecessor auditor, if any, in the case of an
initial audit;
(4) Any
restriction of the auditor’s liability when such possibility exists;
(5) A
reference to any further agreements between the auditor and the entity;
(6) Any
obligations to provide audit working papers to other parties.
An example
of an audit engagement letter is set out in Appendix 01.
Audits of
components
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(1) Who
appoints the component auditor;
(2) Whether
a separate auditor’s report is to be issued on the component;
(3) Legal
requirements in relation to audit appointments;
(4) Degree
of ownership by parent;
(5) Degree
of independence of the component’s Board of Directors from the parent entity.
Responsibilities
of the Board of Directors prescribed by law or regulation (refer to paragraphs
11–12)
A26. If, in
the circumstances described in paragraphs A22 and A27, the auditor concludes
that it is not necessary to record certain terms of the audit engagement in an
audit engagement letter, the auditor is still required by paragraph 11 to seek
the written agreement from the entity's Board of Directors that it acknowledges
and understands that it has the responsibilities set out in paragraph 06(b). In
accordance with paragraph 12, such written agreement may use the wording of the
law or regulation if such law or regulation establishes responsibilities for
the Board of Directors that are equivalent in effect to those described in
paragraph 06(b).
Considerations
specific to public sector entities
A27. Law or
regulation governing the operations of public sector audits generally mandate
the appointment of a public sector auditor and commonly set out the public
sector auditor’s responsibilities and powers, including the power to access an
entity’s accounting records, books and other information. When law or
regulation prescribes in sufficient detail the terms of the audit engagement,
the public sector auditor may nonetheless consider that there are benefits in
issuing a fuller audit engagement letter than permitted by paragraph 11.
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A28. Where
an audit engagement letter is signed to be valid in multiple periods, the
auditor may decide not to send a new audit engagement letter or other written
agreement each period. However, the auditor may need to either revise
terms of the audit engagement or establish appendices for the current year when
the following events occur:
(1) Any
indication that the entity misunderstands the objective and scope of the audit;
(2) Any
revised or special terms of the audit engagement;
(3) Any
change of the Board of Directors or the Management Board of the entity;
(4) A
significant change in the owner’s equity of the entity;
(5) A
significant change in nature or size of the entity’s business;
(6) A change
in legal or regulatory requirements;
(7) A change
in the financial reporting framework adopted in the preparation of the
financial statements;
(8) A change
in requirements regarding the financial statements or the auditor’s reports.
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Request
to change the terms of the audit engagement (refer to the paragraph 14)
A29. A
request from the entity for the auditing enterprise to change the terms of the audit
engagement may result from a change in circumstances affecting the need for the
audit service, a misunderstanding as to the nature of an audit as originally
requested by the entity, or a restriction on the scope of the audit engagement.
The auditing enterprise, as required by paragraph 14, thoroughly considers the
justification given for the request, particularly the implications of a
restriction on the scope of the audit engagement.
A30. A
change in circumstances that affects the entity’s requirements concerning the
audit service or a misunderstanding concerning the nature of the service
originally requested may be considered a reasonable basis for requesting a
change in the terms of the audit engagement.
A31. In
contrast, a change may not be considered reasonable if it appears that the
change relates to information that is incorrect, incomplete or otherwise
unsatisfactory. An example might be where the auditor is unable to obtain
sufficient appropriate audit evidence regarding receivables and the entity asks
for the audit engagement to be changed to a review engagement to avoid a
qualified opinion or a disclaimer of opinion.
Request to
change from an audit service to a review or a related service (refer to the
paragraph 15)
A32. Before
agreeing to change an audit engagement to a review or a related service, an
auditor shall be engaged to conform to requirements set out in paragraphs A29 -
A31 in this Standard and assess any legal or contractual implications of the
change.
A33. If the
auditor concludes that there is reasonable justification to change the audit
engagement to a review or a related service, the audit work performed to the
date of change may be relevant to the changed engagement; however, the work
required to be performed and the report to be issued would be those appropriate
to the revised engagement. In order to avoid confusing the users, the report on
the related service would not include reference to:
(a) The
original audit engagement; or
(b) Any
procedures that may have been performed in the original audit engagement,
except where the audit engagement is changed to an engagement to undertake
agreed-upon procedures and thus reference to the procedures performed is a
normal part of the report.
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Financial
reporting standards supplemented by law or regulation (refer to the
paragraph 18)
A34.
Together with accounting standards and policies prescribed by the Ministry of
Finance, law or regulation may supplement the financial reporting standards
with additional requirements relating to the preparation of financial
statements. In such case, the applicable financial reporting framework for the
purposes of applying the Vietnam Standards on Auditing encompasses both the
identified financial reporting framework and such additional requirements
provided they do not conflict with the identified financial reporting
framework. This may, for example, be the case when law or regulation prescribes
disclosures in addition to those required by the financial reporting standards
or when they narrow the range of acceptable choices that can be made within the
financial reporting standards. The Vietnam Standard on Auditing 700, paragraph
15, includes a requirement regarding the evaluation of whether the financial statements
adequately refer to or describe the applicable financial reporting framework.
Financial
reporting framework prescribed by law or regulation - Other matters affecting
acceptance (refer to the paragraph 19)
A35. Law or
regulation may prescribe that the wording of the auditor’s opinion use the
mandatory phrases “present fairly, in all material respects” or “give a true
and fair view” in a case where the auditor concludes that the applicable
financial reporting framework prescribed by law or regulation would otherwise
have been unacceptable. In this case, the terms of the prescribed wording of
the auditor’s report are significantly different from the requirements of the
Vietnam Standards on Auditing (see paragraph 21).
Auditor’s
report prescribed by law or regulation (refer to the paragraph 21)
A36. The
Vietnam Standard on Auditing 200, paragraph 20, requires that the auditor shall
not represent compliance with the Vietnam Standard on Auditing unless the
auditor has complied with all of the Standards relevant to the audit. When law
or regulation prescribes the layout or wording of the auditor’s report in a
form or in terms that are significantly different from the requirements of the
Vietnam Standards on Auditing and the auditor concludes that additional
explanation in the auditor’s report cannot mitigate possible misunderstanding,
the auditor may consider including a statement in the auditor’s report that the
audit is not conducted in accordance with the Vietnam Standards on Auditing.
The auditor is, however, encouraged to apply the Vietnam Standards on Auditing,
including the Vietnam Standards on Auditing that address the auditor’s report,
to the extent practicable, notwithstanding that the auditor is not permitted to
refer to the audit being conducted in accordance with the Vietnam Standards on
Auditing.
Considerations
specific to public sector entities
A37. In the
public sector, specific requirements may exist within the legislation governing
the audit mandate; for example, the auditor may be required to report directly
to a minister, the legislature or the public if the entity attempts to limit
the scope of the audit.
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Appendix 01
(refer to paragraphs A23 - A24)
EXAMPLE OF AN AUDIT ENGAGEMENT LETTER
The
following is an example of an audit engagement letter for an audit of general
purpose financial statements prepared in accordance with Vietnam (corporate)
accounting standards and policies. This letter will need to be varied
according to individual requirements of an audit. It is drafted to refer to the
audit of financial statements for a single reporting period and would require
adaptation if intended or expected to apply to recurring audits (see the
paragraph 13). The auditing enterprise may need to seek legal advice when
drafting the audit engagements.
THE
SOCIALIST REPUBLIC OF VIETNAM
Independence - Freedom - Happiness
---------o0o---------
No.
/ HDKT
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of
……………)
Pursuant to the Civil Code No.
33/2005/QH11 dated June 14, 2005;
Pursuant to the Law on Commerce No.
36/2005/QH11 dated June 14, 2005;
Pursuant to the Law on
Independent Audit No. 67/2011/QH12 dated March 29, 2011;
Pursuant to the Government’s
Decree No. 17/2012/ND – CP dated March 13, 2012 on specifying and providing
guidance on implementation of certain articles of the Law on Independent Audit;
Pursuant to the Vietnam
Standards on Auditing 210 regarding audit engagements;
This engagement is made by and
between the following parties:
PARTY A: …………………………………..
Represented by:……………………………..
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(According to the Letter of
Authorization No. ……………..dated………..) (applicable to Deputy Director)
Address:……………………………
Email:…………………..;
Tel:....................…...; Fax:………………………
Tax identification
number:………………………………………
Account No.:……………………………………..
Opened at the bank:……………………………
PARTY B: ABC AUDITING COMPANY
Represented by:
……………………………………….
Title:………………………………………..
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Address:…………………………………….
Email : …………………; Tel ………………;
Fax: …………
Tax identification number:
……………………………………….
Account No.: ……………………………………….
Opened at the bank:
……………………………………….
ARTICLE 1: ENGAGEMENT
CONTENTS
Party B shall agree to provide
Party A with an audit of its financial statements made in the financial year
ending on............, including the balance sheet prepared on..............,
income statement, statement of changes in equity (if any), cash flow statement
and disclosure of the financial statement prepared in the financial year ending
in the same day. The audit undertaken by Party B is aimed at giving the
auditor’s opinions on the financial statements of Party A.
ARTICLE 2: RESPONSIBILITIES
OF CONTRACTING PARTIES
Responsibilities of Party A:
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(a) For
preparation and fair presentation of the financial statements in accordance
with Vietnam (corporate) accounting standards and policies, and other
applicable regulations and laws on preparation and presentation of financial
statements;
(b) For such
internal control as the Board of Directors determines is necessary to enable
the preparation of financial statements that are free from material
misstatement, whether due to fraud or error;
(c) in a
timely manner, to provide Party B with:
(i) access
to all materials and information that the Board of Directors is aware that is
relevant to the preparation and presentation of the financial statements such
as accounting records, books, documentation and other matters;
(ii)
additional information that the auditor may request the Board of Directors to
provide or clarify for the purpose of the audit;
(iii)
unrestricted access to persons within Party A from whom the auditor determines
it necessary to obtain audit evidence. Party A must assign its staff to work
with Party B during the engagement.
As part of the audit process, Party A’s Board of
Directors and Management Board, where appropriate, shall be required to provide
and give written confirmation concerning representations made in connection
with the audit in the representation letter of the Board of Directors and
Management Board, considered one of the requirements set out in Vietnam
standards on Auditing, which explicitly determines responsibilities of Party
A's Board of Directors for preparation and presentation of financial
statements, and states that the effects of any uncorrected misstatements,
both individually or in the aggregate, discovered and aggregated by Party B
during the current engagement and pertaining to the latest period presented are
immature to the financial misstatements taken as a whole.
To facilitate audit work
undertaken by Party B’s persons at Party A's office.
To pay all audit and other fees
(if any) to Party B as prescribed in Article 4 of this audit engagement letter.
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Party B shall perform audit work
in accordance with Vietnam Standards on Auditing, and other relevant laws and
regulations. These auditing standards prescribe that Party B has to comply with
ethical standards and requirements, outline the plan and perform the audit to
obtain reasonable assurance about whether the financial statements, taken as a
whole, are free of material misstatements. In an audit, Party B shall
apply auditing procedures specifically designed to obtain audit evidence about
the amounts and disclosures in the financial statements. The procedures
selected depend on the auditor’s judgment, including the assessment of the
risks of material misstatement of the financial statements, whether due to
fraud or error. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates made by
the Board of Directors, as well as evaluating the overall presentation of the
financial statements.
Party B is required to inform
Party A of arrangements regarding the planning and performance of the audit,
and designate an individual with suitable skill, knowledge or experience to
perform the audit.
Party B must conduct the audit
according to the independence, objectivity and confidentiality principles. This
means that Party B is not authorized to provide information to any third party
without Party A’s written consent, except as required by relevant legislation
and regulation to do so, or except when the said information has been widely
disseminated by regulatory authorities or publicly disclosed by Party A.
Party B is responsible for
requiring Party A to give its confirmation on representations provided to Party
B during the audit.
Subject to
the Vietnam Standards on Auditing, compliance with this requirement and the
representation letter issued by the Board of Directors and the Management Board
of Party A concerning relevant issues are one of the bases on which Party B
gives its opinions on the financial statements of Party A.
Because of
the inherent limitations of an audit, together with the inherent limitations of
internal control, there is an unavoidable risk that some material misstatements
may not be detected, even though the audit is properly planned and performed in
accordance with the Vietnam Standards on Auditing.
In making its risk assessments,
Party B considers internal control relevant to Party A's preparation of the
financial statements in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of Party A’s internal control. However, we will communicate to
you in writing concerning any significant deficiencies in internal control
relevant to the audit of the financial statements that Party B have identified
during the audit.
ARTICLE 3: AUDIT REPORT
After an audit is completed, Party
B shall provide Party A with...copies of audit report along with attached
financial statements already audited which is made in Vietnamese language, ...
copy thereof written in a specified language (English, for instance); ...copy
of the management letter written in Vietnamese (if any) and ....copy of the
management letter written in a specified language (English, where possible),
which addresses deficiencies to be remedied and the auditor's recommendations
that help improve the accounting and internal control system of Party A.
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Where Party A intends to release
the audit report of Party B in any written form, or a set of materials
containing information about the audited financial statements, Party A’s Board
of Directors agrees that it will provide Party B one copy of this set of
materials and make it known to the public only after receiving Party B’s
written consent.
ARTICLE 4: AUDIT SERVICE FEE
AND PAYMENT METHOD
Audit service fee
Total audit service fee for this
engagement referred to in Article 1 is VND ...... (in words:.......).
This fee must include (or
exclude) travel, meal, accommodation expenses and other surcharges, and is
exclusive of VAT at the rate of 10%.
Payment terms (as agreed):
Audit fee shall be directly
transferred to Party B’s account.
Party B shall issue a VAT
invoice to Party A upon completed provision of audit service in accordance with
applicable tax laws.
ARTICLE 5: COMMITMENTS
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Proposed time limit for completion of an audit is.....days
from the date of this audit engagement in effect (or the date of commencement
of the audit).
Any dispute, claim or difference arising out of or in
connection with this engagement letter shall be resolved through negotiations
or subject to the Civil Code of the Socialist Republic of Vietnam and submitted
to the economic tribunal selected by agreement of both parties.
ARTICLE 6: EFFECT, LANGUAGE
AND TERM OF THE AUDIT ENGAGEMENT
This engagement letter is made into .....copies
(including....Vietnamese copy and ....copy written in other language (English,
for instance)). Each party keeps ...Vietnamese copy and...copy written in other
language (English, for instance) with similar legal value and takes effect from
the date when all required signatures or stamps of both parties are provided.
This engagement letter shall automatically be
terminated if all agreed responsibilities of Party A and Party B are fulfilled.
On
behalf of Party A
On
behalf of Party B
COMPANY…………
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Director
Director
(Sign,
write full name and stamp)
(Sign,
write full name and stamp)
Appendix
02
(refer to the paragraph A10)
DETERMINING
THE ACCEPTABILITY OF FRAMEWORKS FOR PREPARATION AND PRESENTATION OF GENERAL
PURPOSE FINANCIAL STATEMENTS
Jurisdictions that do not have
authorized or recognized accounting standards setting organizations or financial
reporting frameworks prescribed by law or regulation
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2.
Alternatively, there may be established accounting conventions in a particular
jurisdiction that are generally recognized as the financial reporting framework
for general purpose financial statements prepared by certain specified entities
operating in that jurisdiction. When such a financial reporting framework is
adopted, the auditor is required by paragraph 06(a) of this Standard to
determine whether the accounting conventions collectively can be considered to
constitute an acceptable financial reporting framework for general purpose
financial statements. When the accounting conventions are widely used in a
particular jurisdiction, the accounting profession in that jurisdiction may
have considered the acceptability of the financial reporting framework on
behalf of the auditors. Alternatively, the auditor may make this determination
by considering whether the accounting conventions exhibit attributes normally exhibited
by acceptable financial reporting frameworks (see paragraph 3 below), or by
comparing the accounting conventions to the requirements of an existing
financial reporting framework considered to be acceptable (see paragraph 4
below).
3.
Acceptable financial reporting frameworks normally exhibit the following
attributes that result in information provided in financial statements that is
useful to the intended users:
(a) Relevance, in that the
information provided in the financial statements is relevant to the nature of
the entity and the purpose of the financial statements. For example, in the
case of a business enterprise that prepares general purpose financial
statements, relevance is assessed in terms of the information necessary to meet
the common financial information needs of a wide range of users in making
economic decisions. These needs are ordinarily met by presenting the financial
position, financial performance and cash flows of the business enterprise.
(b) Completeness, in that
transactions and events, account balances and disclosures that could affect
conclusions based on the financial statements are not omitted.
(c) Reliability, in that the
information provided in the financial statements:
(i) Where applicable, reflects the
economic substance of events and transactions and not merely their legal form;
and
(ii) Results in reasonably
consistent evaluation, measurement, presentation and disclosure, when used in
similar circumstances.
(d) Objectivity, in that it
contributes to information in the financial statements that is free from bias.
(e) Understandability, in that the
information in the financial statements is clear and comprehensive and not
subject to significantly different interpretation.
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5. A conglomeration of accounting
conventions devised to suit individual preferences is not an acceptable
financial reporting framework for general purpose financial statements.
Similarly, a compliance framework will not be an acceptable financial reporting
framework, unless it is generally accepted in the particular jurisdictions by
preparers and users./.
VIETNAM’S
AUDITING STANDARD
Section
320: Materiality in Planning and Performing an Audit
(Issued
together with Circular No. 214/2012/TT-BTC
dated December 6, 2012 of the Ministry of Finance)
Scope
01. This section
addresses the auditor’s and audit firm’s responsibility (hereinafter referred
to as “auditor") to apply the concept of “materiality” in planning and
performing an audit of financial statements. Section 450 explains how
materiality is applied in evaluating the effect of identified misstatements on
the audit and the effect of uncorrected misstatements, if any, on the financial
statements.
Materiality
in the Context of any Audit
02. Financial
reporting frameworks often discuss the concept of materiality in the context of
the preparation and fair presentation of financial statements. Although
financial reporting frameworks may discuss materiality in different terms, they
generally explain that:
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- judgments about materiality are made in light of surrounding
circumstances and are affected by the size or nature of a misstatement, or a
combination of both;
- judgments about matters that are material to users of
financial statements are based on a consideration of the common financial
information needs of users as a group, such as investors, banks, creditors,
etc. the possible effect of misstatements on specific individual users, whose
needs may vary widely, is not considered.
03. Such a discussion
about materiality provides a frame of reference to the auditor in determining
materiality for the audit. If the applicable financial reporting framework does
not include a discussion of the concept of materiality, the characteristics
referred to in paragraph 02 provides the auditor with such a frame of
reference.
04. The auditor's
determination of materiality is a matter of professional judgment and is
affected by the auditor’s perception of the financial information needs of
users of the financial statements. In this context, it is reasonable for the
auditor to assume that users:
(a) have a reasonable knowledge of
business and economic activities and accounting and a willingness to study the
information in the financial statements with reasonable diligence;
(b) understand that financial
statements are prepared, presented, and audited to levels of materiality;
(c) recognize the uncertainties
inherent in the measurement of amounts based on the use of estimates, judgment,
and the consideration of future events; and
(d) make reasonable economic
decisions on the basis of the information in the financial statements.
05. The concept of
materiality is applied by the auditor both in planning and performing an audit;
evaluating the effect of identified misstatements on the audit and the effect
of uncorrected misstatements, if any, on the financial statements; and in
forming the opinion in the auditor’s report. (Ref: paragraph A1).
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(a) determining the
nature, timing and extent of risk assessment procedures;
(b) Identifying and assessing the
risks of material misstatement; and
(c) determining the nature, timing,
and extent of further audit procedures.
The materiality determined when
planning the audit does not necessarily establish an amount below which
uncorrected misstatements, individually or in the aggregate, will always be
evaluated as immaterial. The circumstance related to some misstatements may
cause the auditor to evaluate them as material even if they are below
materiality. Although it is not practicable to design audit procedures to
detect misstatements that could be material solely because of their nature
(that is, qualitative considerations), the auditor considers not only the size
but also the nature of uncorrected misstatements, and the particular
circumstances of their occurrence, when evaluating their effect on the
financial statements (Ref: paragraph A16 of Section 450).
07. Auditors are
required to comply with this Section in the course of financial audit.
Entities (clients) must have
proper understanding of this Section for coordination and dealing relationships
with regard to determining materiality of audited information.
Objectives
08. The objective of the
auditor is to apply the concept of materiality appropriately in planning and
performing the audit.
09. For the purposes of Vietnam’s Audit Standard, the following
term has the meaning attributed as follows:
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(b) Materiality: refers to an amount that the auditor
determines depending on the size and nature of the item or error, judged in
particular circumstances of its misstatement. Materiality provides a threshold
or cut-off point rather than being a primary qualitative characteristic which
the information must have. Materiality shall be taken into account both in
qualitative and quantitative aspects;
(c) Performance materiality: The amount or amounts set by the
auditor at less than materiality for the financial statements as a whole to
reduce to an appropriate 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. If applicable,
“performance materiality” also refers to the amount or amounts set by the
auditor at less than the materiality level or levels for particular classes of
transactions, account balances or disclosures.
Determining
Materiality and Performance Materiality When Planning the Audit
10. When establishing
the overall audit strategy, the auditor should determine materiality for the
financial statements as a whole. If, in the specific circumstances of the
entity, one or more particular classes of transactions, account balances, or
disclosures exist for which misstatements of lesser amounts than materiality
for the financial statements as a whole could reasonably be expected to influence
the economic decisions of users, then, taken on the basis of the financial
statements; the auditor also should determine the materiality level or levels
to be applied to those particular classes of transactions, account balances, or
disclosures. (Ref: paragraph A2 – A11).
11. The auditor should
determine performance materiality for purposes of assessing the risks of
material misstatements and determining the nature, timing, and extent of
further audit procedures. (Ref: paragraph A12).
12. The auditor should
revise is materiality for the financial statements as a whole (and, if
applicable, materiality level or levels for particular classes of transactions,
account balances, or disclosure) in the event of becoming aware of information
during the audit that would have caused the auditor to have determined a
different amount (or amounts) initially. (Ref: paragraph A13).
13. If the auditor
concludes that a lower materiality that that initially determined for the
financial statements as a whole (and, if applicable, materiality level or
levels for particular classes of transactions, account balances, or
disclosures) is appropriate, the auditor determine whether it is necessary to
revise performance materiality and whether the nature, timing, and extent of
the further audit procedures remain appropriate.
14. The auditor should
include in the audit documentation the following amounts and the factors
considered in their determination (Ref: paragraph 08-11 and paragraph A6 of
Section 230):
(a) Materiality for financial
statements as a whole (see paragraph 10);
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(c) Performance materiality (see
paragraph 11);
(d) Any revision of (a) – (c) as the
audit progressed (see paragraphs 12 – 13).
III/ APPLICATION
Reference: Section 200.
A1. In conducting an
audit of financial statements, the overall objectives of the auditor are to (1)
obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error, thereby
enabling the auditor to expressing the opinion on whether the financial
statements are prepared, in all material respects, in accordance with an
applicable financial reporting framework and (2) report on financial statements
and communicate, as required by auditing standard, in accordance with auditor’s
findings (see paragraph 11 of Section 200). The auditor obtains reasonable
assurance by obtaining sufficient appropriate audit evidence to reduce audit
risk to an acceptably low level (see paragraph 17 of Section 200). Audit risk
is the risk that the auditor expresses an inappropriate audit opinion when the
financial statements are materially misstated. Audit risk is a function of the
risks of material misstatement and detection risk (see paragraph 13(c) of
Section 200). Materiality and audit risk are considered throughout the audit,
in particular, when:
(a) identifying and assessing the risks of material misstatement
(see Section 315);
(b) determining the nature, timing,
and extent of further audit procedures (see Section 330); and
(c) evaluating the effect of
uncorrected misstatements, if any, on the financial statements (see Section
450) and in forming the opinion in the auditor’s report (see Section 700).
A2. In the case of a
government entity, legislators and regulators are often the primary users of
its financial statements. Furthermore, the financial statements may be used to
make decisions other than economic decisions. The determination of materiality
for financial statements as a whole (and, if applicable, materiality level or
levels for particular classes of transactions, account balances and
disclosures) in an audit of financial statements of a government entity,
therefore, may be influenced by law or regulation.
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(1) The elements of the financial statements (for example, assets,
liabilities, equity, revenue, or expenses);
(2) Whether items exist on which the attention of the users of the
particular entity’s financial statements tends to be focused (for example, for
the purpose of evaluating financial performance, users may tend to focus on
profit, revenue, or net assets);
(3) The nature of the entity, and the industry and economic environment in
which the entity operates;
(4) The entity’s ownership structure and the way it is financed (for
example, if an entity is financed solely by debt rather than equity, users may
put more emphasis on assets, and claims on them, than on the entity’s
earnings);
(5) The relative volatility of the benchmark.
A4. Examples of
benchmarks that may be appropriate, depending on the circumstances of the
entity, include categories of reported income, such as profit before tax, total
revenue, gross profit, and total expenses, total equity and net asset value.
Profit before tax from continuing operations is often used for profit-oriented
entities. When profit before tax from continuing operations is volatile, other
benchmarks may be more appropriate, such as gross profit or total revenues.
A5. With regard to the
chosen benchmark, relevant financial data ordinarily includes prior periods’
financial results and financial positions; the period-to-date financial results
and financial position, budgets, or forecasts for the current period, adjusted
or significant changes in the circumstances of the entity (for example, a
significant business acquisition); and relevant changes of conditions in the
industry or economic environment in which the entity operates. For example,
when, as a starting point, materiality for the financial statements as a whole
is determined for a particular entity based on a percentage of profit before
tax from continuing operations. Circumstances that give rise to an exceptional
decrease or increase in such profit may lead the auditor to conclude the
materiality for the financial statements as whole in more appropriately
determined using a normalized profit before tax from continuing operations
figure based on past results.
A6. Materiality
relates to the financial statement that is being audited. When the financial
statements are prepared for a financial reporting period of more or less than
12 months, such as may be the case for a new entity or a change in the
financial reporting period, materiality relates to the financial statements prepared
for that financial reporting period.
A7. Determining a
percentage to be applied to a chosen benchmark involves the exercise of
professional judgment. A relationship exists between the percentage and the
chosen benchmark, such that a percentage applied to profit before tax from
continuing operations will normally be higher than a percentage applied to
total revenue. For example, the auditor may consider a percentage of profit
before tax from continuing operations to be appropriate for a profit-oriented
entity in a manufacturing industry. However, higher or lower percentage could
be deemed appropriate depending on a case-by-case basis.
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A9. In an audit of a
governmental entity, total cost or net cost (expenses less revenues) may be
appropriate benchmarks for program activities. When a governmental entity has
custody of public assets, assets may be an appropriate benchmark.
A10. Factors that may
indicate to existence of one or more particular classes of transactions,
account balances, or disclosures for which misstatements of lesser amounts that
materiality for the financial statements as a whole could reasonably be
expected to influence the economic decisions of users taken on the basis of the
financial statements include the following:
(1) Whether law, regulation, or the applicable financial reporting framework
affect users’ expectations regarding the measurement or disclosures of certain
items (for example, related party transactions and the remuneration of
management and those charged with governance);
(2) The key disclosures with regard to the industry in which the entity
operates (for example, research and development costs for a pharmaceutical
company);
(3) Whether attention is focused on a particular aspect of the entity’s
business that is separately disclosed in the financial statements (for example,
a newly acquired business).
A11. In considering
whether, in the specific circumstances of the entity, such classes of
transactions, account balances, or disclosures exist, the auditor may find it
useful to obtain an understanding of the views and expectations of those
charged with governance and management.
A12. Planning the
audit solely to detect individual material misstatements overlooks the fact
that the aggregate of individually immaterial misstatements may cause the
financial statements to be materially misstated and leaves no margin for
possible undetected misstatements. Performance materiality (which, as defined,
is one or more amounts) is set to reduce to an appropriate 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 balances or
disclosures is set to reduce to an appropriately low level the probability that
the aggregate of uncorrected and undetected misstatements in that particular
classes of transactions, account balances, or disclosures exceeds the
materiality level for that particular classes of transactions, account
balances, or disclosures. The determination of performance materiality is not a
simple mechanical calculation and involves the exercise of professional
judgment. It is affected by the auditor’s understanding of the entity, updated
during the performance of risk assessment procedures, and the nature and extent
of misstatements identified in previous audits and, thereby, the auditor's
expectations regarding misstatements in the current period.
A13. Materiality for
the financial statements as a whole (and, if applicable, the materiality level
or levels for particular classes of transactions, account balances, or
disclosures) may need to be revised as a result of a change in circumstances
that occurred during the audit (for example, a decision to dispose of a major
part of the entity’s business), new information, or a change in the auditor’s
understanding of the entity and its operations as a result of performing
further audit procedures. For example, if, during the audit, it appears as
though actual financial results are likely to be substantially different from
the anticipated period-end financial results that were used initially to
determine materiality for the financial statements as a whole, the auditor may
be required, in accordance with paragraph 12, to revise materiality./.