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THE MINISTRY OF FINANCE
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SOCIALIST REPUBLIC OF VIET NAM
Independence - Freedom - Happiness
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No. 101/2005/QD-BTC
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Hanoi, December 29, 2005
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DECISION
ON THE ISSUANCE AND PUBLICATION OF FOUR VIETNAMESE STANDARDS
ON AUDITING (BATCH 7)
THE MINISTER OF FINANCE
- Pursuant to
Governmental Decree No. 77/2003/ND-CP dated July 1, 2003 on the functions,
jurisdictions and organization of the Ministry of Finance;
- Pursuant to Government Decree No. 105/2004/CP dated March 30, 2004 on
independent auditing;
Upon the proposal of the Director of the Accounting and Auditing Policy
Department and Chief of the Ministry Office,
DECIDES:
Article 1. To issue four (04) Vietnamese
Standards on Auditing (Batch 7) with the codes and titles specified:
1. Standard 260
- Communications of Audit Matters with Those Charged with Governance;
2. Standard 330
- The Auditor’s Procedures in Response to Assessed Risks;
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4. Standard 545
- Auditing fair values measurements and disclosures.
Article 2: The Vietnamese Standards on
Auditing issued following this decision shall be applicable to independent
audits of financial statements and final accounts of investment. The
independent audit of other financial information and related services rendered
by audit firms shall be performed in accordance with the provisions of
individual standards.
Article 3. This Decision shall come into
effect 15 days after it is published in the Gazette.
Article 4. Auditors and audit firms
licensed for audit practice in Vietnam are required to apply these Vietnamese
standards on auditing in their operations.
The Director of
the Accounting and Auditing Policy Department, the Ministry Office Chief, and
heads of relevant affiliate and subsidiary units of the Ministry of Finance
shall be responsible for guiding and overseeing the carrying out of this
Decision./.
FOR THE MINISTER OF FINANCE
DEPUTY MINISTER
Tran Van Ta
VIETNAMESE STANDARDS ON
AUDITING
STANDARD 260
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GENERAL
01.
The purpose of this Vietnamese Standard on Auditing (VSA) is to establish
standards and provide guidance on communication of audit matters arising from
the audit of financial statements between the auditor and the audit firm and
those charged with governance of an entity.
02. The auditor and the audit firm should communicate audit
matters of governance interest arising from the audit of financial statements
with those charged with governance of an entity.
03.
This VAS applies to communications of audit matters between the auditor and the
audit firm and those charged with governance.
This
VAS does not specify how the auditor communicates with those outside the
audited entity.
The auditor and the audit firm should comply with this VSA
in conducting an audit of financial statements and rendering related services.
It
is expected that the audited (client) entity and users of the audit report
should possess essential knowledge as to the objective and general principles
set out in this VSA in working with the auditor and the audit firm and dealing
with the relations maintained during the audit.
In this VSA, the following terms have the meaning
attributed below:
04. Management refers
to persons entrusted with the supervision, control and direction of an entity
and the decison making for its operation and development, consisting of members
of the Board of Management, Board of Directors and Control Committee and those
charged with managing business areas.
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Those
charged with governance ordinarily are accountable for ensuring that the entity
achieves its objectives, supervising the operations and reporting to interested
parties.
06. Audit matters of governance interest are those that arise from the audit of financial
statements and, in the opinion of the auditor and the audit firm, are both
important and relevant to those charged with governance in overseeing the
financial reporting and disclosure process.
The
auditor is not required to identify and report to management of the entity all
matters of governance interest.
CONTENTS OF THE VSA
07. The auditor
and the audit firm should determine the relevant persons who are charged with
governance and with whom significant matters, including audit matters of
governance interest, are communicated.
08. The auditor
should determine the structure and principles of governance of each entity,
such as the overseeing function (Control Committee) and executing function of
the Board of Directors and the Board of Management.
09. The auditor
should identify the persons who are charged with governance and whom the
auditor communicates audit matters of governance interest.
10. When the
entity’s governance structure is not well defined, or those charged with
governance are not clearly identified, the auditor comes to an agreement with
the entity about with whom audit matters of governance interest are to be
communicated.
11. To avoid
misunderstandings, an audit engagement letter may explain that the auditor will
communicate only those matters of governance interest that come to attention as
a result of the performance of an audit and that the auditor is not required to
design audit procedures for the specific purpose of identifying matters of
governance interest.
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- Identify the
relevant persons with whom such communications will be made; and
- Identify any
specific audit matters of governance interest to be communicated.
12. The
effectiveness of communications is enhanced by developing a constructive
working relationship between the auditor and those charged with governance.
This relationship is developed while maintaining an attitude of professional
independence and objectivity.
Audit Matters
of Governance Interest to be Communicated
13. The auditor should consider significant matters,
including audit matters of governance interest that arise from the audit of the
financial statements and communicate them with those charged with governance.
Ordinarily such matters include the following:
a) The general approach and overall scope of the audit,
including any expected limitations thereon, or any additional requirements;
b)
The selection of, or changes in, significant accounting policies and practices
that have, or could have, a material effect on the entity’s financial
statements;
c)The
potential effect on the financial statements of any material risks and
exposures, such as pending litigation, that are required to be disclosed in the
financial statements;
d)
Audit adjustments, whether or not recorded by the entity that have, or could
have, a material effect on the entity’s financial statements;
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f)
Disagreements with management about matters that, individually or in aggregate,
could be significant to the entity’s financial statements or the auditor’s
report;
g)
Expected modifications to the auditor’s report;
h)
Other matters warranting attention by those charged with governance, such as
material weaknesses in internal control, questions regarding management
integrity, and fraud involving management; and
i)
Any other matters agreed upon in the terms of the audit engagement.
14.
As part of the auditor’s communications, those charged with governance are
informed of the following signifcant matters:
a)
The auditor’s communications of the audit results; and
b)
The fact that an audit of financial statements is not designed to identify all
matters that may be relevant to those charged with governance. Accordingly, the
auditor and the audit firm do not ordinarily identify all such matters.
Timing of Communications
15. The auditor should communicate significant matters, including audit matters of
governance interest, on a timely
basis. This enables those charged with governance to take appropriate and
prompt action.
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Forms of Communications
17.
The auditor’s communications with those charged with governance may be made
orally or in writing. The auditor and the audit firm’s decision whether to
communicate orally or in writing is affected by factors such as the following:
a)
The size, operating structure, legal structure, and communications processes of
the entity being audited;
b)
The nature, sensitivity and significance of the audit matters of governance
interest to be communicated;
c)The
arrangements made with respect to periodic meetings or reporting of audit
matters of governance interest; and
d) The amount of on-going contact and dialogue the auditor
has with those charged with governance.
18.
When audit matters of governance interest are communicated orally, the auditor
documents in the working papers the matters communicated and any responses to
those matters. This documentation may take the form of a copy of the minutes of
the auditor’s discussion with those charged with governance. In certain
circumstances, depending on the nature, sensitivity, and significance of the
matter, it may be advisable for the auditor and the audit firm to confirm in
writing with those charged with governance any oral communications on audit
matters of governance interest.
19.
Ordinarily, the auditor initially discusses audit matters of governance
interest with management, except where those matters relate to questions of
management competence or integrity. These initial discussions with management
enable the auditor to gather further information from the audit. If management
agrees to communicate a matter of governance interest with those charged with
governance, the auditor may not need to repeat the communications, provided
that the auditor is satisfied that such communications have effectively and
appropriately been made.
When the
auditor is satisfied with information obtained after communicating with
management of the entity, the auditor is not required to discuss the
information with any others of those charged with governance.
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20.
If the auditor considers that a modification of the auditor’s report on the
financial statements is required, as described in VSA 700 The Auditor’s Report
on Financial Statements communications between the auditor and those charged
with governance cannot be regarded as a substitute.
21.
The auditor and the audit firm consider whether audit matters of governance
interest previously communicated may have an effect on the current year’s
financial statements. The auditor considers whether the point continues to be a
matter of governance interest and whether to communicate the matter again with
those charged with governance.
Confidentiality
22.
When legal documents provide regulations on confidentiality that restrict
communication of audit matters of governance interest arising from the audit of
financial statements, the auditor and the audit firm refer to such regulations
before communicating with those charged with governance. In some circumstances,
the potential conflicts with the auditor’s ethical and legal obligations, the
auditor may wish to consult with legal counsel.
Laws and
Regulations
23.
When the requirements of legal documents impose obligations on the auditor and
the audit firm to make communications on governance related matters that are
not covered by this VSA, the auditor and the audit firm should comply with
these requirements.
THE AUDITOR’S
PROCEDURES IN RESPONSE TO ASSESSED RISKS
(Issued in pursuance of the Minister of Finance Decision
No. 101/2005/QD-BTC dated 29 December 2005)
GENERAL
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02. The
auditor and the audit firm should obtain an understanding of the entity and its
environment, including its internal control, sufficient to identify and assess
the risks of material misstatement of the financial statements whether due to
fraud or error, and sufficient to design and perform further audit procedures.
03. This VAS
applies to audits of financial statements and also applies to audits of other
financial information, and related services rendered by the audit firm.
The auditor and
the audit firm should comply with this VSA in conducting an audit of financial
statements.
It is expected
that the audited (client) entity and users of the audit report should possess
essential knowledge as to the objective and general principles set out in this
VSA in working with the auditor and the audit firm and dealing with relations
relevant to audited information.
04. The
following is an overview of the requirements of this standard:
Overall
responses: This section requires the auditor and
the audit firm to determine overall responses to address risks of material
misstatement at the financial statement level and provides guidance on the
nature of those responses.
Audit
procedures responsive to risks of material misstatement at the assertion level:
This section requires the auditor to design and
perform further audit procedures, including tests of the operating
effectiveness of controls, when relevant or required, and substantive
procedures, whose nature, timing, and extent are responsive to the assessed
risks of material misstatement at the assertion level. In addition, this
section includes matters the auditor and the audit firm consider in determining
the nature, timing, and extent of such audit procedures.
Evaluating
the sufficiency and appropriateness of audit evidence obtained: This section requires the auditor to evaluate whether the risk
assessment remains appropriate and to conclude whether sufficient appropriate
audit evidence has been obtained.
Documentation: This section requires that the contents and documents in the audit
documentation contain information relevant to assessed risk.
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CONTENTS OF THE VSA
Overall
Responses
06 The
auditor should determine overall responses to address the risks of material
misstatement at the financial statement level. Such
responses may include emphasizing to the audit team the need to maintain
professional skepticism in gathering and evaluating audit evidence, assigning
more experienced staff or those with special skills or using experts, providing
more supervision, or incorporating additional elements of unpredictability in
the selection of further audit procedures to be performed. Additionally, the
auditor and the audit firm may make general changes to the nature, timing, or
extent of audit procedures as an overall response, for example, performing
substantive procedures at period end instead of at an interim date.
07. The
assessment of the risks of material misstatement at the financial statement
level 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 period end. If there are
weaknesses in the control environment, the auditor ordinarily conducts more audit
procedures as of the period end rather than at an interim date, seeks more
extensive audit evidence from substantive procedures, modifies the nature of
audit procedures to obtain more persuasive audit evidence, or increases the
number of locations to be included in the audit scope.
08. 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 Risks of Material Misstatement at the Assertion Level
09. The
auditor and the audit firm should design and perform further audit procedures
whose nature, timing, and extent are responsive to the assessed risks of
material misstatement at the assertion level. The
purpose is to provide a clear linkage between the nature, timing, and extent of
the auditor’s further audit procedures and the risk assessment. In designing
further audit procedures, the auditor and the audit firm consider such matters
as the following:
a) The
significance of the risk;
b) The
likelihood that a material misstatement will occur;
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d) The nature
of the specific controls used by the entity and in particular whether they are
manual or automated; and
e) Whether the
auditor expects to obtain audit evidence to determine if the entity’s controls
are effective in preventing, or detecting and correcting, material
misstatements.
10. 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. In some cases, the auditor may determine
that only by performing tests of controls may the auditor achieve an effective
response to the assessed risk of material misstatement for a particular
assertion. In other cases, the auditor may determine that performing only substantive
procedures is appropriate for specific 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 the operating
effectiveness of controls would be inefficient. However, the auditor needs to
be satisfied that performing only substantive procedures for the relevant
assertion would be effective in reducing the risk of material misstatement to
an acceptably low level. Often the auditor may determine that a combined
approach using both tests of the operating effectiveness of controls and
substantive procedures is an effective approach. Irrespective of the approach
selected, the auditor designs and performs substantive procedures for each
material class of transactions, account balance, and disclosure as required by
paragraph 51.
11. In the case
of very small entities, there may not be many control activities that could be
identified by the auditor. For this reason, the auditor’s further audit
procedures are likely to be primarily substantive procedures. In such cases, in
addition to the matters referred to in paragraph 10 above, the auditor and the
audit firm consider whether in the absence of controls it is possible to obtain
sufficient appropriate audit evidence.
Considering
the Nature, Timing, and Extent of Further Audit Procedures
Nature
12. The nature
of further audit procedures refers to their purpose (tests of controls or
substantive procedures) and their type, that is, inspection, observation,
inquiry, confirmation, recalculation, reperformance, or analytical procedures.
Certain audit procedures may be more appropriate for some assertions than
others. For 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.
13. The
auditor’s selection of audit procedures is based on the assessment of risk. The
higher the auditor’s assessment of risk, the more reliable and relevant is the
audit evidence sought by the auditor from substantive procedures. This may
affect both the types of audit procedures to be performed and their
combination. For example, the auditor may confirm the completeness of the terms
of a contract with a third party, in addition to inspecting the document.
14. In
determining the audit procedures to be performed, the auditor considers the
reasons for the assessment of the risk of material misstatement at the
assertion level for each class of transactions, account balance, and
disclosure. This includes considering both the particular characteristics of
each class of transactions, account balance, or disclosure (i.e., the inherent
risks) and whether the auditor’s risk assessment takes account of the entity’s
controls (i.e., the control risk). For example, if the auditor considers that
there is a lower risk that a material misstatement may occur because of the
particular characteristics of a class of transactions without consideration of
the related controls, the auditor may determine that substantive analytical
procedures alone may provide sufficient appropriate audit evidence. On the
other hand, if the auditor expects that there is a lower risk that a material
misstatement may arise because an entity has effective controls and the auditor
intends to design substantive procedures based on the effective operation of
those controls, then the auditor performs tests of controls to obtain audit
evidence about their operating effectiveness. 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.
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Timing
16. Timing
refers to when audit procedures are performed or the period or date to which
the audit evidence applies.
17. The auditor
may perform tests of controls or substantive procedures at an interim date or
at 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). 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. If the auditor performs
tests of controls or substantive procedures prior to period end, the auditor
considers the additional evidence required for the remaining period (see
paragraphs 39-40 and 58-63).
18. In considering when to perform audit procedures, the
auditor also considers such matters as the following:
a) The control environment;
b) When relevant information is available (for example,
procedures to be observed may occur only at certain times);
c) 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); and
d) The period or date to which the audit evidence relates.
19. Certain audit procedures can be performed only at or
after period end, for example, agreeing the financial statements to the
accounting records and examining adjustments made during the course of
preparing the financial statements. If there is a risk that the entity may have
entered into improper sales contracts or transactions may not have been
finalized at period end, the auditor performs procedures to respond to that
specific risk. For example, when transactions are individually material or an
error in cutoff may lead to a material misstatement, the auditor ordinarily
inspects transactions near the period end.
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20. Extent includes the quantity of a specific audit
procedure to be performed, for example, a sample size or the number of
observations of a control activity.
The extent of an audit procedure is determined by the
judgment of the auditor after considering the materiality, the assessed risk,
and the degree of assurance the auditor plans to obtain. In particular, the
auditor ordinarily increases the extent of audit procedures as the risk of
material misstatement increases. However, increasing the extent of an audit
procedure is effective only if the audit procedure itself is relevant to the
specific risk; therefore, the nature of the audit procedure is the most
important consideration.
21. The use of computer-assisted audit techniques (CAATs)
may enable more extensive testing of electronic transactions and account files.
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.
22. Valid conclusions may ordinarily be drawn using
sampling approaches. However, if the quantity of selections made from a
population is too small, the sampling approach selected is not appropriate to
achieve the specific audit objective, or if exceptions are not appropriately
followed up, there will be an unacceptable risk that the auditor’s conclusion
based on a sample may be different from the conclusion reached if the entire
population was subjected to the same audit procedure. VSA 530 Audit Sampling
and Other Selective Testing Procedures contains guidance on the use of
sampling.
23. This VSA regards the use of different audit procedures
in combination as an aspect of the nature of testing as discussed above.
However, the auditor considers whether the extent of testing is appropriate
when performing different audit procedures in combination.
Tests of Controls
24. The auditor is required to perform tests of controls
when the auditor’s risk assessment includes an expectation of the operating
effectiveness of controls or when substantive procedures alone do not provide
sufficient appropriate audit evidence at the assertion level.
25. The auditor’s assessment of risks of material
misstatement at the assertion level includes an expectation that controls are
operating effectively, the auditor and the audit firm should perform tests of
controls to obtain sufficient appropriate audit evidence that the controls were
operating effectively at relevant times during the period under audit. Paragraphs 41-46 below discuss the use of audit
evidence about the operating effectiveness of controls obtained in prior
audits.
26. Auditor’s assessment of risk of material misstatement
at the assertion level may include an expectation of the operating
effectiveness of controls, in which case the auditor performs tests of controls
to obtain audit evidence as to their operating effectiveness. Tests of the
operating effectiveness 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.
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28. Testing the operating effectiveness of controls is
different from obtaining audit evidence that controls have been implemented.
When obtaining audit evidence of implementation by performing risk assessment
procedures, the auditor determines that the relevant controls exist and that
the entity is using them. When performing tests of the operating effectiveness
of controls, the auditor obtains audit evidence that controls operate
effectively during the period. This includes obtaining audit evidence about how
controls were applied at relevant times during the period under audit, the
consistency with which they were applied, and by whom or by what means they
were applied. If substantially different controls were used at different times
during the period under audit, the auditor considers each separately. The
auditor may determine that testing the operating effectiveness of controls at
the same time as evaluating their design and obtaining audit evidence of their
implementation is efficient.
29. Although some risk assessment procedures that the
auditor performs to evaluate the design of controls and to determine that they
have been implemented 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 may have made inquiries about management’s use of
budgets, observed management’s comparison of monthly budgeted and actual
expenses, and inspected 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, and 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. In such circumstances, the auditor
considers whether the audit evidence provided by those audit procedures is
sufficient.
Nature
of Tests of Controls
30. The auditor
selects audit procedures to obtain assurance about the operating effectiveness
of controls. As the planned level of assurance increases, the auditor seeks
more reliable audit evidence. In circumstances when the auditor adopts an
approach consisting primarily of tests of controls, in particular related to
those risks where it is not possible or practicable to obtain sufficient
appropriate audit evidence only from substantive procedures, the auditor
ordinarily performs tests of controls to obtain a higher level of assurance
about their operating effectiveness.
31. The
auditor should perform other audit procedures in combination with inquiry to
test the operating effectiveness of controls. Although
different from obtaining an understanding of the design and implementation of
controls, tests of the operating effectiveness of controls ordinarily include
the same types of audit procedures used to evaluate the design and
implementation of controls, and may also include reperformance of the
application of the control by the auditor. Since inquiry alone is not
sufficient, the auditor uses a combination of audit procedures to obtain sufficient
appropriate audit evidence regarding the operating effectiveness of controls.
Those controls subject to testing by performing inquiry combined with
inspection or reperformance ordinarily provide more assurance than those
controls for which the audit evidence consists solely of inquiry and
observation. For example, an auditor may inquire about and observe the entity’s
procedures for opening the mail and processing cash receipts to test the
operating effectiveness of controls over cash receipts. Because an observation
is pertinent only at the point in time at which it is made, the auditor
ordinarily supplements the observation with inquiries of entity personnel, and
may also inspect documentation about the operation of such controls at other
times during the audit period in order to obtain sufficient appropriate audit
evidence.
32. The nature
of the particular control influences the type of audit procedure required to
obtain audit evidence about whether the control was operating effectively at
relevant times during the period under audit. For some controls, operating
effectiveness is evidenced by documentation. In such circumstances, the auditor
may decide to inspect the documentation to obtain audit evidence about
operating effectiveness. For other controls, however, documentation of control
effectiveness 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
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.
33. In
designing tests of controls, the auditor considers the need to obtain audit
evidence supporting the effective operation of controls directly related to the
assertions as well as other indirect controls on which these controls depend.
For example, the auditor may identify a user review of an exception report of
notes receivable over a customer’s authorized credit limit as a direct
control related to an assertion. In such cases, the auditor considers the
effectiveness of the user review of the report and also the controls related to
the accuracy of the information in the report.
34. In the case
of an automated application control, because of the inherent consistency of IT
processing, audit evidence about the implementation of the control at the time
of assessment, when considered in combination with audit evidence obtained
regarding the operating effectiveness of the entity’s general controls may
provide substantial audit evidence about its operating effectiveness during the
relevant period.
35. When
responding to the risk assessment, the auditor may design a test of controls to
be performed concurrently with a test of details on the same transaction. The
objective of tests of controls is to evaluate whether a control operated
effectively. The objective of tests of details is to detect material
misstatements at the assertion level. Although these objectives are different,
both may be accomplished concurrently through performance of 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 examine an invoice to determine whether it
has been approved and to provide substantive audit evidence of a transaction.
The auditor carefully considers the design and evaluation of such tests to
accomplish both objectives.
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Timing of
Tests of Controls
37. The timing
of tests of controls depends on the auditor’s objective and determines the
period of reliance on those controls. If the auditor tests controls at a
particular time, the auditor only obtains audit evidence that the controls
operated effectively at that time. However, if the auditor tests controls
throughout a period, the auditor obtains audit evidence of the effectiveness of
the operation of the controls during that period.
38. 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
requires audit evidence of the effectiveness of a control over a period, audit
evidence pertaining only to a point in time may be insufficient and the auditor
supplements those tests with other tests of controls that are capable of
providing audit evidence that the control operated effectively at relevant
times during the period under audit. Such other tests may consist of tests of
the entity’s monitoring of controls.
39. When the
auditor obtains audit evidence about the operating effectiveness of controls
during an interim period, the auditor should determine what additional audit
evidence should be obtained for the remaining period. In making that determination, the auditor considers the
significance of the assessed risks of material misstatement at the assertion
level, the specific controls that were tested during the interim period, 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, and the control environment. The auditor obtains audit
evidence about the nature and extent of any significant changes in internal
control, including changes in the information system, processes, and personnel
that occur subsequent to the interim period.
40. Additional
audit evidence may be obtained, for example, by extending the testing of the
operating effectiveness of controls over the remaining period or testing the
entity’s monitoring of controls.
41. If the
auditor plans to use audit evidence about the operating effectiveness of
controls obtained in prior audits, the auditor should obtain audit evidence
about whether changes in those specific controls have occurred subsequent to
the prior audit. The auditor should obtain audit evidence about whether such
changes have occurred by performing inquiry in combination with observation or
inspection to confirm the understanding of those specific controls. VSA 500 Audit Evidence states that the auditor performs audit
procedures to establish the continuing relevance of audit evidence obtained in
prior periods when the auditor plans to use the audit evidence in the current
period. For example, in performing the prior audit, the auditor may have
determined that an automated control was functioning as intended. The auditor
obtains audit evidence to determine whether changes to the automated control
have been made that affect its continued effective functioning, for example,
through 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.
42. If the
auditor plans to rely on controls that have changed since they were last
tested, the auditor should test the operating effectiveness of such controls in
the current audit. Changes may affect the relevance
of the audit evidence obtained in prior periods 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 prior period audit evidence; however, a change that causes data to
be accumulated or calculated differently does affect it.
43. If the
auditor plans to rely on controls that have not changed since they were last
tested, the auditor should test the operating effectiveness of such controls at
least once in every third audit. As indicated in
paragraphs 42 and 46, the auditor may not rely on audit evidence about the
operating effectiveness of controls obtained in prior audits for controls that
have changed since they were last tested or controls that mitigate a
significant risk. The auditor’s decision on whether to rely on audit evidence
obtained in prior audits for other controls is a matter of professional judgment.
In addition, the length of time period between retesting such controls is also
a matter of professional judgment, but cannot exceed two years.
44. In
considering whether it is appropriate to use audit evidence about the operating
effectiveness of controls obtained in prior audits, and, if so, the length of
the time period that may elapse before retesting a control, the auditor
considers the following:
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b) The risks
arising from the characteristics of the control, including whether controls are
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 from tests of
operating effectiveness in prior audits.
e) The risk of
material misstatement and the extent of reliance on the control. 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
ordinarily decrease the period for retesting a control, or result in not
relying on audit evidence obtained in prior audits at all, include the
following:
- A weak
control environment;
- Weak
monitoring of controls;
- 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; and Weak
general IT-controls.
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46. When the
auditor has determined that an assessed risk of material misstatement at the
assertion level is a significant risk and the auditor plans to rely on the
operating effectiveness of controls intended to mitigate that significant risk,
the auditor should obtain the audit evidence about the operating effectiveness
of those controls from tests of controls performed in the current period. The greater the risk of material misstatement, the more audit
evidence the auditor obtains that relevant controls are operating effectively.
Accordingly, although the auditor often considers information obtained in prior
audits in designing tests of controls to mitigate a significant risk, the
auditor does not rely on audit evidence obtained in a prior audit about the
operating effectiveness of controls over such risks, but instead obtains the
audit evidence about the operating effectiveness of controls over such risks in
the current period.
Extent of Tests of
Controls
47. The auditor
designs tests of controls to obtain sufficient appropriate audit evidence that
the controls operated effectively throughout the period of reliance. Matters
the auditor may consider in determining the extent of the auditor’s tests of
controls include the following:
a) The
frequency of the performance of the control by the entity during the period;
b) The length
of time during the audit period that the auditor is relying on the operating
effectiveness of the control;
c) The relevance
and reliability of the audit evidence to be obtained in supporting that the
control prevents, or detects and corrects, material misstatements at the
assertion level;
d) The extent
to which audit evidence is obtained from tests of other controls related to the
assertion;
e) The extent
to which the auditor plans to rely on the operating effectiveness of the
control in the assessment of risk (and thereby reduce substantive procedures
based on the reliance of such control); and
f) The expected
deviation from the control.
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49. Because of
the inherent consistency of IT processing, the auditor may not need to increase
the extent of testing of an automated control. An automated control should
function consistently unless 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 considers 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.
Substantive
Procedures
50. Substantive
procedures are performed in order to detect material misstatements at the
assertion level, and include tests of details of classes of transactions,
account balances, and disclosures and substantive analytical procedures. The
auditor plans and performs substantive procedures to be responsive to the
related assessment of the risk of material misstatement.
51. Irrespective
of the assessed risk of material misstatement, the auditor should design and
perform substantive procedures for each material class of transactions, account
balance, and disclosure. This requirement reflects the
fact that the auditor’s assessment of risk is judgmental and may not be
sufficiently precise to identify all risks of material misstatement. Further,
there are inherent limitations to internal control including management
override. Accordingly, while the auditor may determine that the risk of
material misstatement may be reduced to an acceptably low level by performing
only tests of controls for a particular assertion related to a class of
transactions, account balance or disclosure (see paragraph 10), the auditor
always performs substantive procedures for each material class of transactions,
account balance, and disclosure.
52. The
auditor’s substantive procedures should include the following audit procedures
related to the financial statement closing process:
a) Agreeing the
financial statements to the underlying accounting records; and
b) Examining
material journal entries and other adjustments made during the course of
preparing the financial statements.
The nature and
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 associated risks of material misstatement.
53. When the
auditor has determined that an assessed risk of material misstatement at the
assertion level is a significant risk, the auditor should perform substantive
procedures that are specifically responsive to that risk. 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 recognizing 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
confirmations 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 confirmations with inquiries of non-financial personnel in the entity
regarding any changes in sales agreements and delivery terms.
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Nature of Substantive
Procedures
55. Substantive
analytical procedures are generally more applicable to large volumes of
transactions that tend to be predictable over time. Tests of details are
ordinarily more appropriate to obtain audit evidence regarding certain
assertions about account balances, including existence and valuation. In some
situations, the auditor may determine that performing only substantive
analytical procedures may be sufficient to reduce the risk of material
misstatement to an acceptably low level. For example, the auditor may determine
that performing only substantive analytical procedures is responsive to the
assessed risk of material misstatement for a class of transactions where the
auditor’s assessment of risk is supported by obtaining audit evidence from
performance of tests of the operating effectiveness of controls. In other
situations, the auditor may determine that only tests of details are
appropriate, or that a combination of substantive analytical procedures and
tests of details are most responsive to the assessed risks.
56. The auditor
designs tests of details responsive to the assessed risk with the objective of
obtaining sufficient appropriate audit evidence to achieve the planned level of
assurance at the assertion level. In designing substantive procedures related
to the existence or occurrence assertion, the auditor selects from items
contained in a financial statement amount and obtains the relevant audit
evidence. On the other hand, in designing audit procedures related to the
completeness assertion, the auditor selects from audit evidence indicating that
an item should be included in the relevant financial statement amount and
investigates whether that item is so included. For example, the auditor might
inspect subsequent cash disbursements to determine whether any purchases had
been omitted from accounts payable.
57. In designing
substantive analytical procedures, the auditor considers such matters as the
following:
a) The
suitability of using substantive analytical procedures given the assertions;
b) The
reliability of the data, whether internal or external, from which the expectation
of recorded amounts or ratios is developed;
c) Whether the
expectation is sufficiently precise to identify a material misstatement at the
desired level of assurance; and
d) The amount
of any difference in recorded amounts from expected values that is acceptable.
The auditor
considers testing the controls, if any, over the entity’s preparation of
information used by the auditor in applying analytical procedures. When such
controls are effective, the auditor has greater confidence in the reliability of
the information and, therefore, in the results of analytical procedures.
Alternatively, the auditor may consider whether the information was subjected
to audit testing in the current or prior period. In determining the audit
procedures to apply to the information upon which the expectation for
substantive analytical procedures is based, the auditor considers the guidance
in VSA 500 Audit Evidence.
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58. When
substantive procedures are performed at an interim date, the auditor should
perform further substantive procedures or substantive procedures combined with
tests of controls to cover the remaining period that provide a reasonable basis
for extending the audit conclusions from the interim date to the period end.
59. In some
circumstances, substantive procedures may be performed at an interim date. This
increases the risk that misstatements that may exist at the period end are not
detected by the auditor. This risk increases as the remaining period is
lengthened. In considering whether to perform substantive procedures at an
interim date, the auditor considers such factors as the following:
a) The control
environment and other relevant controls;
b) The
availability of information at a later date that is necessary for the auditor’s
procedures;
c) The
objective of the substantive procedure;
d) The assessed
risk of material misstatement;
e) The nature
of the class of transactions or account balance and related assertions; and
f) 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 exist at period end are not
detected.
60. Although
the auditor is not required to obtain audit evidence about the operating
effectiveness of controls in order to have a reasonable basis for extending
audit conclusions from an interim date to the period end, the auditor considers
whether performing only substantive procedures to cover the remaining period is
sufficient. If the auditor concludes that substantive procedures alone would
not be sufficient, tests of the operating effectiveness of relevant controls
are performed or the substantive procedures are performed as of the period end.
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62. Ordinarily,
the auditor compares and reconciles information concerning the balance at the period
end with the comparable information at the interim date to identify amounts
that appear unusual, investigates any such amounts, and performs substantive
analytical procedures or tests of details to test the intervening period. When
the auditor plans to perform substantive analytical procedures with respect to
the intervening period, the auditor considers 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. The
auditor considers whether the entity’s procedures for analyzing and adjusting
such classes of transactions or account balances at interim dates and for
establishing proper accounting cutoffs are appropriate. In addition, the
auditor considers 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: significant unusual transactions or entries (including those
at or near period end); other causes of significant fluctuations, or expected
fluctuations that did not occur; and changes in the composition of the classes
of transactions or account balances. The substantive procedures related to the
remaining period depend on whether the auditor has performed tests of controls.
63. If
misstatements are detected in classes of transactions or account balances at an
interim date, the auditor ordinarily modifies the related assessment of risk
and the planned nature, timing, or extent of the substantive procedures
covering the remaining period that relate to such classes of transactions or
account balances, or extends or repeats such audit procedures at the period
end.
64. The use of
audit evidence from the performance of substantive procedures in a prior audit
is not sufficient to address a risk of material misstatement in the current
period. In most cases, audit evidence from the performance of substantive
procedures in a prior audit provides little or no audit evidence for the
current period. In order for audit evidence obtained in a prior audit to be
used in the current period as substantive audit evidence, the audit evidence
and the related subject matter must not fundamentally change. An example of
audit evidence obtained from the performance of substantive procedures in a
prior period that may be relevant in the current year is a legal opinion
related to the structure of a securitization to which no changes have occurred
during the current period. As required by VSA 500 Audit evidence, if the
auditor plans to use audit evidence obtained from the performance of
substantive procedures in a prior audit, the auditor performs audit procedures
during the current period to establish the continuing relevance of the audit
evidence.
Extent of
the Performance of Substantive Procedures
65. The greater the risk of material misstatement,
the greater the extent of substantive procedures. Because the risk of material
misstatement takes account of internal control, the extent of substantive
procedures may be increased as a result of unsatisfactory results from tests of
the operating effectiveness of controls. However, increasing the extent of an
audit procedure is appropriate only if the audit procedure itself is relevant
to the specific risk.
66. In
designing tests of details, the extent of testing is ordinarily thought of in
terms of the sample size, which is affected by the risk of material
misstatement. However, the auditor also considers other matters, including
whether it is more effective to use other selective means of testing, such as
selecting large or unusual items from a population as opposed to performing
representative sampling or stratifying the population into homogeneous subpopulations
for sampling. VSA 530 Audit Sampling and Other Selective Testing Procedures
contains guidance on the use of sampling and other means of selecting items for
testing. In designing substantive analytical procedures, the auditor considers
the amount of difference from the expectation that can be accepted without
further investigation. This consideration is influenced primarily by
materiality and the consistency with the desired level of assurance.
Determination of this amount involves considering the possibility that a
combination of misstatements in the specific account balance, class of
transactions, or disclosure could aggregate to an unacceptable amount. In
designing substantive analytical procedures, the auditor increases the desired
level of assurance as the risk of material misstatement increases.
Adequacy of Presentation and Disclosure
67. The auditor
should perform audit procedures to evaluate whether the overall presentation of
the financial statements, including the related disclosures, are in accordance
with the applicable financial reporting framework. The auditor considers
whether the individual financial statements are presented in a manner that
reflects the appropriate classification and description of financial
information. The presentation of financial statements in conformity with the
applicable financial reporting framework also includes adequate disclosure of
material matters. These matters relate to the form, arrangement, and content of
the financial statements and their appended notes, including, for example, the
terminology used, the amount of detail given, the classification of items in
the statements, and the bases of amounts set forth.
The auditor
considers whether management should have disclosed a particular matter in light
of the circumstances and facts of which the auditor is aware at the time. In
performing the evaluation of the overall presentation of the financial
statements, including the related disclosures, the auditor considers the
assessed risk of material misstatement at the assertion level in accordance
with VSA 500 Audit Evidence for a description of the assertions related to
presentation and disclosure.
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68. Based on
the audit procedures performed and the audit evidence obtained, the auditor
should evaluate whether the assessments of the risks of material misstatement
at the assertion level remain appropriate.
69. 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 material weakness in internal control. In
addition, analytical procedures performed at the overall review stage of the
audit may indicate a previously unrecognized risk of material misstatement. In
such circumstances, the auditor may need to reevaluate 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.
70. The concept
of effectiveness of the operation of controls recognizes 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. When such
deviations are detected during the performance of tests of controls, the
auditor makes specific inquiries to understand these matters and their
potential consequences, for example, by inquiring about the timing of personnel
changes in key internal control functions. The auditor determines whether the
tests of controls performed provide an appropriate basis for reliance on the
controls, whether additional tests of controls are necessary, or whether the
potential risks of misstatement need to be addressed using substantive
procedures.
71. The auditor
cannot assume that an instance of fraud or error is an isolated occurrence, and
therefore considers how the detection of a misstatement affects the assessed
risks of material misstatement. Before the conclusion of the audit, the auditor
evaluates whether audit risk has been reduced to an acceptably low level and
whether the nature, timing, and extent of the audit procedures may need to be
reconsidered. For example, the auditor reconsiders the following:
a) The nature,
timing, and extent of substantive procedures; and
b) The audit
evidence of the operating effectiveness of relevant controls, including the
entity’s risk assessment process.
72. The auditor
should conclude whether sufficient appropriate audit evidence has been obtained
to reduce to an acceptably low level the risk of material misstatement in the
financial statements. In developing an opinion, the auditor considers all
relevant audit evidence, regardless of whether it appears to corroborate or to
contradict the assertions in the financial statements.
73. The
sufficiency and appropriateness of audit evidence to support the auditor’s
conclusions throughout the audit are a matter of professional judgment. The
auditor’s judgment as to what constitutes sufficient appropriate audit evidence
is influenced by such factors as the following:
a) 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;
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c) Experience
gained during previous audits with respect to similar potential misstatements;
d) Results of
audit procedures performed, including whether such audit procedures identified
specific instances of fraud or error;
e) Source and reliability
of the available information;
f) Persuasiveness
of the audit evidence; and
g) Understanding
of the entity and its environment, including its internal control.
74. If the
auditor has not obtained sufficient appropriate audit evidence as to a material
financial statement assertion, the auditor should attempt to obtain further
audit evidence. If the auditor is unable to obtain sufficient appropriate audit
evidence, the auditor should express a qualified opinion or a disclaimer of
opinion to comply with VSA 700 The Auditor’s Report on Financial Statements.
Documentation
75. The auditor
should document 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, the linkage of those procedures with
the assessed risks at the assertion level, and the results of the audit
procedures. In addition, if the auditor plans to use audit evidence about the
operating effectiveness of controls obtained in prior audits, the auditor
should document the conclusions reached with regard to relying on such controls
that were tested in a prior audit. The manner in which these matters are
documented is based on the auditor’s professional judgment. VSA 230 Documentation
establishes standards and provides guidance regarding documentation in the
context of the audit of financial statements.
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GENERAL
01. The purpose
of this Vietnamese Standard on Auditing (VSA) is to establish standards and
provide guidance on the auditor’s use of external confirmation as a means of
obtaining audit evidence of the auditor and the audit firm.
02. The
auditor and the audit firm should determine whether the use of external
confirmations is necessary to obtain sufficient appropriate audit evidence at
the assertion. In making this determination, the auditor should consider the
assessed risk of material misstatement, inherent and control risks and how the
audit evidence from other planned audit procedures will reduce the risk of
material misstatement at the asserion level to an acceptably low level.
03. The auditor
and the audit firm should comply with this VSA in obtaining external
confirmations.
04. It is
expected that the audited (client) entity, related entities and persons should
possess essential knowledge as to the objective and general principles set out
in this VSA in working with the auditor and the audit firm and dealing with the
relations maintained during obtaining external confirmation.
05. VSA 500
Audit Evidence states that the reliability of audit evidence is influenced by
its source and by its nature, and is dependent on the individual circumstances
under which it is obtained. Under this VSA, audit evidence is more reliable
when it is obtained from independent sources outside the entity; and audit
evidence is more reliable when it exists in image or documentary form than in
oral form. Accordingly, audit evidence in the form of original written from
outside is more reliable as people outside the entity are not directly related
to the entity being audited. The auditor should determine whether to consider
audit evidence individually or cumulatively from other audit procedures which
were implemented or will be implemented to assist in reducing the risk of
material misstatement for the related assertions to an acceptably low level.
06. External
confirmation is the process of obtaining and evaluating audit evidence through
a representation of information or an existing condition directly from a third
party in response to a request for information about a particular item
affecting management’s assertions disclosed in the financial statements of the
entity being audited. In deciding to what extent to use external confirmations
the auditor and the audit firm consider the characteristics of the environment
in which the entity being audited operates and the collectability of such
information.
07. External
confirmations are frequently used in relation to account balances and their
components, but need not be restricted to these items. For example, the auditor
and the audit firm may request external confirmation of the terms of agreements
or transactions an entity has with third parties. Other examples of situations
where external confirmations may be used include the following:
a) Bank
balances and other information from bankers;
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c) Stocks held
by third parties at bonded warehouses for processing or on consignment;
d) Property
title deeds held by lawyers or financiers for safe custody or as security;
e) Investments
purchased from stockbrokers but not delivered at the balance sheet date;
f) Loans from
lenders; and
g) Accounts
payable balances.
08. The
reliability of the audit evidence obtained by external confirmations depends,
among other factors, upon the auditor applying appropriate audit procedures in
designing the external confirmation request, performing the external
confirmation procedures, and evaluating the results of the external
confirmation procedures. Factors affecting the reliability of confirmations
include the control the auditor exercises over confirmation requests and
responses, the characteristics of the respondents, and any restrictions
included in the response or imposed by management.
CONTENTS OF THE VSA
Relationship
of External Confirmation Procedures to the Auditor’s Assessments of the
Inherent Risk and Control Risk
09. VSA 400
Risk Assessments and Internal Control specifies audit risk and its components,
including inherent risk, control risk and detection risk. This VSA also
prescribles that the auditor’s control risk assessment, together with the
inherent risk assessment is to influence the nature, timing and extent of
substantive procedures to be performed to reduce detection risk, therefore
audit risk, to an acceptably low level.
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11. VSA 400
Risk Assessments and Internal Control requires that the higher the assessment
of inherent and control risk, the more audit evidence the auditor should obtain
from the performance of substantive procedures. Therefore, when the assessed
levels of inherent and control risk increase, the auditor should perform
substantive procedures to further collect appropriate audit evidence concerning
an assertion of the financial statements. In the circumstances, using external
confirmation procedures brings effect on adequately provision of appropriate
audit evidence.
12. The lower
the assessment of inherent and control risk, the less assurance the auditor
should obtain from the performance of substantive procedures in order to
express an opinion on an assertion of the financial statements.
13. Complex or
unusual transactions can result in a higher level of inherent and control risk
than that of normal ones. Where the entity being audited has unusual or complex
transactions and the assessed level of its inherent and control risk is high,
the auditor should check external confirmations kept by the entity concerning
contents relevant to these transactions with related parties.
Assertions
Addressed by External Confirmations
14. VSA 500
Audit evidence requires that assertions of the financial statements should
satisfy the creteria, including: existence, rights and obligations, occurrence,
completeness, valuation, accuracy, and disclosure. While external confirmations
may provide audit evidence regarding these assertions, the ability of an
external confirmation to provide audit evidence relevant to a particular
assertion varies.
15. External
confirmation of an account receivable provides reliable and relevant audit
evidence regarding the existence of the account as at a certain date.
Confirmation also provides audit evidence regarding the operation of cut-off
procedures. However, such confirmation does not ordinarily provide all the
necessary audit evidence relating to the valuation assertion, since it is not
practicable to ask the debtor to confirm detailed information relating to its
ability to pay the account.
16. Similarly,
in the case of goods held on consignment, external confirmation is likely to
provide reliable and relevant audit evidence to support the existence and the
rights and obligations assertions, but might not provide audit evidence that
supports the valuation assertion.
17. The
relevance of external confirmations to auditing a particular assertion is also
affected by the objective of the auditor in selecting information for
confirmation. For example, when auditing the completeness assertion for
accounts payable, the auditor and the audit firm need to obtain audit evidence
that there is no material unrecorded liability. Accordingly, sending
confirmation requests to an entity’s principal suppliers asking them to provide
copies of their statements of account directly to the auditor, even if the
records show no amount currently owing to them, will usually be more effective
in detecting unrecorded liabilities than selecting accounts for confirmation
based on the larger amounts recorded in the accounts payable subsidiary ledger.
18. When
obtaining audit evidence for assertions not adequately addressed by
confirmations, the auditor considers other audit procedures to complement
confirmation procedures or to be used instead of confirmation procedures.
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19. The
auditor and the audit firm should tailor external confirmation requests to the
specific audit objective. When designing the
request, the auditor considers the assertions being addressed and the factors
that are likely to affect the reliability of the confirmations. Factors such as
the form of the external confirmation request, prior experience on the audit or
similar engagements, the nature of the information being confirmed, and the
intended respondent, affect the design of the requests because these factors
have a direct effect on the reliability of the audit evidence obtained through
external confirmation procedures.
20. Also, in
designing the request, the auditor and the audit firm consider the type of
information respondents will be able to confirm readily since this may affect
the response rate and the nature of the audit evidence obtained. For example,
certain respondents’ information systems may facilitate the external
confirmation of single transactions rather than of entire account balances. In
addition, respondents may not always be able to confirm certain types of
information, such as the overall accounts receivable balance, but may be able
to confirm individual invoice amounts within the total balance.
21. Confirmation
requests ordinarily include management’s authorization to the respondent to
disclose the information to the auditor. Respondents may be more willing to
respond to a confirmation request containing management’s authorization, and in
some cases may be unable to respond unless the request contains management’s
authorization.
Use of Positive and Negative
Confirmations
22. The auditor
may use open or closed external confirmation requests or a combination of both.
23. An open
(positive) external confirmation request asks the respondent to reply to the
auditor in all cases either by indicating the respondent’s agreement with the
given information, or by asking the respondent to fill in information. A
response to an open confirmation request is ordinarily expected to provide
reliable audit evidence. There is a risk, however, that a respondent may reply
to the confirmation request without verifying that the information is correct.
The auditor is not ordinarily able to detect whether this has occurred. The
auditor may reduce this risk, however, by using open confirmation requests that
do not state the amount (or other information) on the confirmation request, but
ask the respondent to fill in the amount or furnish other information. On the
other hand, use of this type of open confirmation request may result in lower
response rates because additional effort is required of the respondents.
24. A closed
(negative) external confirmation request asks the respondent to reply only in
the event of disagreement with the information provided in the request.
However, when no response has been received to a closed confirmation request,
the auditor remains aware that there will be no explicit audit evidence that
intended third parties have received the confirmation requests and verified
that the information contained therein is correct. Accordingly, the use of
closed (negative) confirmation requests ordinarily provides less reliable audit
evidence than the use of open (positive) confirmation requests, and the auditor
considers performing other substantive procedures to supplement the use of
negative confirmations.
25. Closed
(negative) confirmation requests may be used to reduce the risk of material
misstatement to an acceptable level when:
a) The assessed
risk of material misstatement is lower;
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c) A
substantial number of errors is not expected; and
d) The auditor
has no reason to believe that respondents will disregard these requests.
26. A
combination of positive and negative external confirmations may be used. For
example, where the total accounts receivable balance comprises a small number
of large balances and a large number of small balances, the auditor may decide
that it is appropriate to confirm all or a sample of the large balances
with positive confirmation requests and a sample of the small balances using
negative confirmation requests.
Management
Requests
27. When the
auditor seeks to confirm certain balances or other information, and management
requests the auditor not to do so, the auditor and the audit firm should
consider whether there are valid grounds for such a request and obtain audit
evidence to support the validity of management’s requests. If the auditor
agrees to management’s request not to seek external confirmation regarding a
particular matter, the auditor and the audit firm should apply alternative
audit procedures to obtain sufficient appropriate audit evidence regarding that
matter.
28. If the auditor and the audit firm do not accept the
validity of management’s request and is prevented from carrying out
the confirmations, there has been a limitation on the scope of the auditor’s
work and the auditor and the audit firm should consider the possible impact on
the auditor’s report.
29. When
considering the reasons provided by management, the auditor and the audif firm
apply an attitude of professional skepticism and consider whether the request
has any implications regarding management’s integrity. The auditor considers
whether management’s request may indicate the possible existence of fraud or
error. If the auditor believes that fraud or error exists, the auditor applies
the guidance in VSA 240 Fraud and Error. The auditor also considers whether the
alternative audit procedures will provide sufficient appropriate audit evidence
regarding that matter.
Characteristics of Respondents
30. The
reliability of audit evidence provided by a confirmation is affected by the
respondent’s competence, independence, authority to respond, knowledge of the
matter being confirmed, and objectivity. For this reason, the auditor and the
audit firm attempt to ensure, where practicable, that the confirmation request
is directed to an appropriate individual. For example, when confirming that a
covenant related to an entity’s long-term debt has been waived, the auditor
directs the request to an official of the creditor who has knowledge about the
waiver and has the authority to provide the information.
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The External Confirmation Process
32. When
performing confirmation procedures, the auditor and the audit firm should
maintain control over the process of selecting those to whom a request will be
sent, the preparation and sending of confirmation requests, and the responses
to those requests. Control is maintained over communications between the
intended recipients and the auditor to minimize the possibility that the
results of the confirmation process will be biased because of the interception
and alteration of confirmation requests or responses. The auditor ensures that
it is the auditor who sends out the confirmation requests, that the requests
are properly addressed, and that it is requested that all replies are sent
directly to the auditor. The auditor considers whether replies have come from
the purported senders.
No Response to a Positive Confirmation Request
33. The auditor
and the audit firm should perform alternative audit procedures where no
response is received to a positive external confirmation request. The
alternative audit procedures should be such as to provide audit evidence about
the assertions that the confirmation request was intended to provide.
34. Where no
response is received, the auditor and the audit firm ordinarily contact the
recipient of the request to elicit a response. Where the auditor and the audit
firm are unable to obtain a response, the auditor uses alternative audit
procedures. The nature of alternative audit procedures varies according to the
account and assertion in question. In the examination of accounts receivable,
alternative audit procedures may include examination of subsequent cash
receipts, examination of shipping documentation or other client documentation
to provide audit evidence for the existence assertion, and examination of sales
near the period-end to provide audit evidence for the cutoff assertion. In the
examination of accounts payable, alternative audit procedures may include
examination of subsequent cash disbursements or correspondence from third
parties to provide audit evidence of the existence assertion, and examination
of other records, such as goods received notes, to provide audit evidence of
the completeness assertion.
Reliability of
Responses Received
35. The auditor
and the audit firm consider whether there is any indication that external
confirmations received may not be reliable. The auditor considers the
response’s authenticity and performs audit procedures to dispel any concern.
The auditor may choose to verify the source and contents of a response in a
telephone call to the purported sender. In addition, the auditor requests the
purported sender to mail the original confirmation directly to the auditor.
With ever-increasing use of technology, the auditor considers validating the
source of replies received in electronic format (for example, fax or electronic
mail). Oral confirmations are documented in the work papers. If the information
in the oral confirmations is significant, the auditor requests the parties
involved to submit written confirmation of the specific information directly to
the auditor.
Causes and
Frequency of Exceptions
36. When the
auditor and the audit firm form a conclusion that the confirmation process and
alternative audit procedures have not provided sufficient appropriate audit
evidence regarding an assertion, the auditor should perform additional audit
procedures to obtain sufficient appropriate audit evidence.
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a) Reliability
of the confirmations and alternative audit procedures;
b) Nature of any exceptions,
including the implications, both quantitative and qualitative of those
exceptions; and
c) Audit evidence provided by
other audit procedures.
Based on this
evaluation, the auditor determines whether additional audit procedures are
needed to obtain sufficient appropriate audit evidence.
37. The auditor
also considers the causes and frequency of exceptions reported by respondents.
An exception may indicate a misstatement in the entity’s records, in which
case, the auditor determines the reasons for the misstatement and assesses
whether it has a material effect on the financial statements. If an exception
indicates a misstatement, the auditor reconsiders the nature, timing and extent
of audit procedures necessary to provide the audit evidence required.
Evaluating the Results of the
Confirmation Process
38. The auditor
should evaluate whether the results of the external confirmation process
together with the results from any other audit procedures performed, provide
sufficient appropriate audit evidence regarding the assertion being audited. In
conducting this evaluation the auditor and the audit firm consider the guidance
provided by VSA 530 Audit Sampling and Other Means of Testing.
External Confirmations Prior
to the Year-End
39. When the
auditor uses confirmation as at a date prior to the year-end to obtain audit
evidence to support an assertion, the auditor obtains sufficient appropriate
audit evidence that transactions relevant to the assertion in the intervening
period have not been materially misstated. In fact, when inherent and control
risks are low and medium, the auditor may decide to confirm balances at a date
other than the period end, for example, when the audit is to be completed
within a short time after the balance sheet date. As with all types of
pre-year-end work, the auditor considers the need to obtain further audit
evidence relating to the remainder of the period.
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VIETNAMESE
STANDARDS ON AUDITING
STANDARD 545
AUDITING FAIR
VALUES MEASUREMENTS AND DISCLOSURES
(Issued in pursuance of the Minister of Finance Decision
No. 101/2005/QD-BTC dated 29 December 2005)
GENERAL
01. The purpose
of this Vietnamese Standard on Auditing (VSA) is to establish standards and
provide guidance on auditing fair value measurements and disclosures contained
in financial statements. This VSA assists the auditor and the audit firm with
addressing audit considerations relating to the measurement, presentation and
disclosure of material assets, liabilities and specific components of equity
presented or disclosed at fair value in financial statements. Fair value
measurements of assets, liabilities and components of equity may arise from
both the initial recording of transactions and later changes in value. Changes
in fair value measurements that occur over time may be treated in different
ways under the regulations of the applicable accounting systems and standards.
02. The
auditor and the audit firm should obtain sufficient appropriate audit evidence
that fair value measurements and disclosures are in accordance with the regulations of the applicable accounting systems and standards.
03. This VAS
applies to audits of financial statements and also applies to audits of other
financial information, and related services rendered by the audit firm.
The auditor and
the audit firm should comply with this VSA in conducting an audit of financial
statements and rendering related services.
It is expected
that the audited (client) entity and users of the audit report should possess
essential knowledge as to the objective and general principles set out in this
VSA in fulfilling its responsibility and in working with the auditor and the
audit firm to deal with relations mainttained during the audit.
04. Management
is responsible for making the fair value measurements and disclosures included
in the financial statements. As part of fulfilling its responsibility,
management needs to establish an accounting and financial reporting process for
determining the fair value measurements and disclosures, select appropriate
valuation methods, identify and adequately support any significant assumptions
used, prepare the valuation and ensure that the presentation and disclosure of
the fair value measurements are in accordance with the accounting system and
standards which the entity applies.
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06. Different
accounting systems and standards require or permit a variety of fair value
measurements and disclosures in financial statements. They also vary in the
level of guidance that they provide on the basis for measuring assets and
liabilities or the related disclosures. Some accounting systems and standards
give prescriptive guidance, others give general guidance, and some give no
guidance at all. In addition, certain industry-specific measurement and
disclosure practices for fair values also exist. While this VSA provides
guidance on auditing fair value measurements and disclosures, it does not
address specific types of assets or liabilities, transactions, or
industry-specific practices.
07. In VAS
Frameworks, underlying the concept of fair value measurements is a presumption
that the entity is a going concern in a foreseeable future, that is, it has no
intention or obligation to liquidate, curtail materially the scale of its
operations, or undertake a transaction on adverse terms. Therefore, in this
case, fair value would not be the amount that an entity would receive or pay in
a forced transaction, involuntary liquidation, or distress sale. An entity,
however, may need to take its current economic or operating situation into
account in determining the fair values of its assets and liabilities if
prescribed or permitted to do so by applicable accounting systems or standards
and such accounting framework may or may not specify how that is done. For
example, management’s plan to dispose of an asset on an accelerated basis to
meet specific business objectives may be relevant to the determination of the
fair value of that asset.
08. The
measurement of fair value may be relatively simple for certain assets or
liabilities, for example, assets that are bought and sold in active and open
markets that provide readily available and reliable information on the prices
at which actual exchanges occur. The measurement of fair value for other assets
or liabilities may be more complex. A specific asset may not have an active
market or may possess characteristics that make it necessary for management to
estimate its fair value (for example, an investment property or a derivative
financial instrument). The estimation of fair value may be achieved through the
use of a valuation model (for example, discounting of future cash flows) or
through the assistance of an expert, such as an independent valuer.
09. The
uncertainty associated with an item, or the lack of objective data may make it
incapable of reasonable estimation, in which case, the auditor considers
whether the auditor’s report needs modification to comply with VSA 700 The
Auditor’s Report on Financial Statements.
CONTENTS
OF THE VSA
Understanding
the Entity’s Process for Determining Fair Value Measurements and Disclosures
and Relevant Control Activities, and Assessing Risk
10. The auditor
and the audit firm should obtain an understanding of the entity’s process for
determining fair value measurements and disclosures and of the relevant control
activities to identify and assess assertion-level risk to design and perform
further audit procedures.
11. Management
is responsible for establishing an accounting and financial reporting process
for determining fair value measurements. In some cases, the measurement of fair
value and therefore the process set up by management to determine fair value
may be simple and reliable. For example, management may be able to refer to
published price quotations to determine fair value for marketable securities
held by the entity. Some fair value measurements, however, are inherently more
complex than others and involve uncertainty about the occurrence of future
events or their outcome, and therefore assumptions that may involve the use of
judgment need to be made as part of the measurement process. The auditor’s
understanding of the measurement process, including its complexity, helps
identify and assess the risks of material misstatement in order to determine
the nature, timing and extent of the audit procedures.
12. When
obtaining an understanding of the entity's process for determining fair value
measurements and disclosures, the auditor considers, for example:
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b) The
expertise and experience of those persons determining the fair value
measurements;
c) The role
that information technology has in the process;
d) The types of
accounts or transactions requiring fair value measurements or disclosures (for
example, whether the accounts arise from the recording of routine and recurring
transactions or whether they arise from non-routine or unusual transactions);
e) The extent
to which the entity uses service organizations to provide fair value
measurements or the data that supports the measurement. When an entity uses a
service organization, the auditor complies with the requirements of
VSA 402 Audit Considerations Relating to Entities Using Service
Organizations;
f) The extent
to which the entity uses the work of experts in determining fair value
measurements and disclosures (see paragraphs 29–32 of this VSA);
g) The
significant management assumptions used by management in determining fair
value;
h) The
documentation supporting management’s assumptions;
i) The methods
used to develop and apply management assumptions and controls to monitor
changes in those assumptions;
j) The
integrity of change controls and security procedures for valuation models and
relevant information systems, including approval processes; and
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13. VSA 400
requires the auditor to obtain an understanding of the components of the
accounting and internal control systems to plan the audit. It is required in
particular by this VSA the auditor and the audit firm obtain a sufficient
understanding of the entity’s fair value measurements and disclosures in order
to design the nature, timing and extent of the further audit procedures.
14. After
obtaining an understanding of the entity’s process for determining fair value
measurements and disclosures, the auditor and the audit firm should identify
and assess the significant assertion-level risks related to the fair value
measurements and disclosures in the financial statements to determine the
nature, timing and extent of the further audit procedures.
15. The degree
to which a fair value measurement is susceptible to misstatement is an inherent
risk. Consequently, the nature, timing and extent of the further audit
procedures will depend upon the susceptibility to misstatement of a fair value
measurement and whether the process for determining fair value measurements is
relatively simple or complex. Where the auditor has determined that the risk of
material misstatement related to a fair value measurement or disclosure is a
significant risk, the auditor follows the requirements of VSA 400 Risk
Assessments and Internal Control.
16 VSA 400
discusses the inherent limitations of internal controls. As fair value
determinations often involve subjective judgments by management, this may
affect the nature of control activities that are capable of being implemented.
The susceptibility to misstatement of fair value measurements also may
increase as the accounting and financial reporting requirements for fair value
measurements become more complex. The auditor considers the inherent
limitations of controls in such circumstances in assessing the risk of material
misstatement.
Evaluating
the Appropriateness of Fair Value Measurements and Disclosures
17. The auditor
and the audit firm should evaluate whether the fair value measurements and
disclosures in the financial statements are in accordance with the accounting
system and standards which the entity applies.
18. The
auditor’s understanding of the requirements of the applicable accounting system
and standards and knowledge of the business and industry, together with the
results of other audit procedures, are used to assess whether the accounting
for assets or liabilities requiring fair value measurements is appropriate, and
whether the disclosures about the fair value measurements and significant
uncertainties related thereto are appropriate under the accounting system and
standards.
19. The evaluation
of the appropriateness of the entity’s fair value measurements under the
applicable accounting system and standards and the evaluation of audit evidence
depends, in part, on the auditor’s knowledge of the nature of the business.
This is particularly true where the asset or liability or the valuation method
is highly complex. For example, derivative financial instruments may be highly
complex, with a risk that differing interpretations of how to determine fair
values will result in different conclusions. The measurement of the fair value
of some items, for example “in-process research and development” or intangible
assets acquired in a business combination, may involve special considerations
that are affected by the nature of the entity and its operations if such
considerations are appropriate under the accounting system and standards which
the entity applies. Also, the auditor’s knowledge of the business, together
with the results of other audit procedures, may help identify assets for which
management needs to recognize impairment by using a fair value measurement
pursuant to the accounting system and standards.
20. Where the
method for measuring fair value is specified by the applicable accounting
system and standards, for example, the requirement that the fair value of a
marketable security be measured using quoted market prices as opposed to using
a valuation model, the auditor considers whether the measurement of fair value
is consistent with that method.
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22. The auditor should obtain audit evidence about
management’s intent to carry out specific courses of action, and consider its
ability to do so, where relevant to the fair value measurements and disclosures
under the
applicable accounting system and standards.
23. In some
accounting systems and standards, management’s intentions with respect to an
asset or liability are criteria for determining measurement, presentation, and
disclosure requirements, and how changes in fair values are reported within
financial statements. In such accounting frameworks, management’s intent is important
in determining the appropriateness of the entity’s use of fair value.
Management often documents plans and intentions relevant to specific assets or
liabilities and the applicable accounting system and standards may require it
to do so. While the extent of audit evidence to be obtained about management’s
intent is a matter of professional judgment, the auditor’s procedures
ordinarily include inquiries of management, with appropriate corroboration of
responses, for example, by:
a) Considering
management’s past history of carrying out its stated intentions with respect to
assets or liabilities;
b) Reviewing
written plans and other documentation, including, where applicable, budgets,
minutes, etc;
c) Considering
management’s stated reasons for choosing a particular course of action;
d) Considering
management’s ability to carry out a particular course of action given the
entity’s economic circumstances, including the implications of its contractual
commitments. The auditor also considers management’s ability to pursue a
specific course of action if ability is relevant to the use, or exemption from
the use, of fair value measurement under the applicable accounting system and
standards.
24. Where
alternative methods for measuring fair value are available under the accounting
system and standards which the entity applies, or where the method of
measurement is not prescribed, the auditor and the audit firm should evaluate
whether the method of measurement is appropriate in the circumstances under the applicable accounting system and standards.
25. The auditor
should evaluate whether the method of measurement of fair value is appropriate
in the circumstances require the use of professional judgment. When management
selects one particular valuation method from alternative methods available
under the accounting system and standards which the entity applies, the auditor
obtains an understanding of management’s rationale for its selection by
discussing with management its reasons for selecting the valuation method. The
auditor considers whether:
a) Management
has sufficiently evaluated and appropriately applied the criteria, if any,
provided in the applicable accounting system and standards to support the
selected method;
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c) The
valuation method is appropriate in relation to the business, industry and
environment in which the entity operates.
26. Management
may have determined that different valuation methods result in a range of
significantly different fair value measurements. In such cases, the auditor
evaluates how the entity has investigated the reasons for these differences in
establishing its fair value measurements.
27. The
auditor and the audit firm should evaluate whether the entity’s method for its
fair value measurements is applied consistently.
28. Once
management has selected a specific valuation method, the auditor evaluates whether
the entity has consistently applied that basis in its fair value measurement,
and if so, whether the consistency is appropriate considering possible changes
in the environment or circumstances affecting the entity, or changes in the
requirements of the accounting system and standards which the entity applies.
If management has changed the valuation method, the auditor considers whether
management can adequately demonstrate that the valuation method to which it has
changed provides a more appropriate basis of measurement, or whether the change
is supported by a change in the requirements of the applicable accounting
system and standards or a change in circumstances. For example, the
introduction of an active market for a particular class of asset or liability
may indicate that the use of discounted cash flows to estimate the fair value
of such asset or liability is no longer appropriate.
Using the
Work of an Expert
29. The
auditor and the audit firm should determine the need to use the work of an
expert. The auditor may have the necessary skill
and knowledge to plan and perform audit procedures related to fair
values or may decide to use the work of an expert. In making such a
determination, the auditor considers the matters discussed in VSA 620
Using the Work of an Expert.
30. If the use
of such an expert is planned, the auditor obtains sufficient appropriate audit
evidence that such work is adequate for the purposes of the audit, and complies
with the requirements of VSA 620.
31. When
planning to use the work of an expert, the auditor considers whether the
expert’s understanding of the definition of fair value and the method that the
expert will use to determine fair value are consistent with that of management
and the requirements of the applicable accounting system and standards. For
example, the method used by an expert for estimating the fair value of real
estate or a complex derivative, or the actuarial methodologies developed for
making fair value estimates of insurance obligations, reinsurance receivables
and similar items, may not be consistent with the measurement principles of the
applicable accounting system and standards. Accordingly, the auditor considers
such matters, often by discussing, providing or reviewing instructions given to
the expert or when reading the report of the expert.
32. In
accordance with VSA 620, the auditor and the audit firm assesses the
appropriateness of the expert’s work as audit evidence. While the
reasonableness of assumptions and the appropriateness of the methods used and
their application are the responsibility of the expert, the auditor obtains an
understanding of the significant assumptions and methods used, and considers
whether they are appropriate, complete and reasonable, based on the auditor’s
knowledge of the business and the results of other audit procedures. The
auditor often considers these matters by discussing them with the expert.
Paragraphs 39 through 49 discuss the auditor’s evaluation of significant
assumptions used by management, including assumptions relied upon by management
based on the work of an expert.
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33. The
auditor and the audit firm should design and perform further audit procedures
in response to assessed risks of material misstatement of assertions relating
to the entity’s fair value measurements and disclosures.
34. Because of
the wide range of possible fair value measurements, from relatively simple to
complex, the auditor’s procedures can vary significantly in nature, timing and
extent. For example, substantive procedures relating to the fair value
measurements may involve (a) testing management’s significant
assumptions, the valuation model, and the underlying data (see paragraphs
39–49), (b) developing independent fair value estimates to corroborate
the appropriateness of the fair value measurement (see paragraph 52), or (c)
considering the effect of subsequent events on the fair value measurement and
disclosures (see paragraphs 53–55).
35. The
existence of published price quotations in an active market ordinarily is the
best audit evidence of fair value. Some fair value measurements,
however, are inherently more complex than others. This complexity arises either
because of the nature of the item being measured at fair value or because of
the valuation method required by the applicable accounting system and standards
or selected by management. For example, in the absence of quoted prices in an
active market, some accounting standards permit an estimate of fair value based
on an alternative basis such as a discounted cash flow analysis or a
comparative transaction model. Complex fair value measurements normally
are characterized by greater uncertainty regarding the reliability of the
measurement process. This greater uncertainty may be a result of:
- Length of the
forecast period;
- The number of
significant and complex assumptions associated with the process;
- A higher
degree of subjectivity associated with the assumptions and factors used in the
process;
- A higher
degree of uncertainty associated with the future occurrence or outcome of
events underlying the assumptions used; and
- Lack of
objective data when highly subjective factors are used.
36. The
auditor’s understanding of the measurement process, including its complexity,
helps guide the auditor’s determination of the nature, timing and extent of
audit procedures to be performed. The following are examples of considerations
in the development of audit procedures:
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b) When using
audit evidence provided by a third party, the auditor considers its
reliability. For example, when information is obtained through the use of
external confirmations, the auditor considers the respondent’s competence,
independence, authority to respond, knowledge of the matter being confirmed,
and objectivity in order to be satisfied with the reliability of the evidence.
c) Audit evidence supporting fair value
measurements, for example, a valuation by an independent valuer, may be
obtained at a date that does not coincide with the date at which the entity is
required to measure and report that information in its financial statements.
In such cases, the auditor obtains audit evidence that management has taken
into account the effect of events, transactions and changes in circumstances
occurring between the date of fair value measurement and the reporting date.
d) Collateral
often is assigned for certain types of investments in debt instruments that
either are required to be measured at fair value or are evaluated for possible
impairment. If the collateral is an important factor in measuring the fair
value of the investment or evaluating its carrying amount, the auditor obtains
sufficient appropriate audit evidence regarding the existence, value, rights
and access to or transferability of such collateral, including consideration
whether all appropriate liens have been filed, and considers whether
appropriate disclosures about the collateral have been made under the
accounting system and standards which the entity applies.
e) In some
situations, additional audit procedures, such as the inspection of an asset by
the auditor, may be necessary to obtain sufficient appropriate audit evidence
about the appropriateness of a fair value measurement. For example, inspection
of an investment property may be necessary to obtain information about the
current physical condition of the asset relevant to its fair value, or
inspection of a security may reveal a restriction on its marketability that may
affect its value.
Testing
Management’s Significant Assumptions, the Valuation Model, and the Underlying
Data
37. The auditor and the audit firm’s understanding
of the reliability of the process used by management to determine fair value is
an important element in support of the resulting amounts and therefore affects
the nature, timing, and extent of further audit procedures. A reliable process
for determining fair value is one that results in reasonably consistent
measurement and, where relevant, presentation and disclosure of fair value when
used in similar circumstances. When obtaining audit evidence about the entity’s
fair value measurements and disclosures, the auditor and the audit firm
evaluate whether:
a) The
assumptions used by management are reasonable;
b) The fair
value measurement was determined using an appropriate model, if applicable; and
c) Management
used relevant information that was reasonably available at the time.
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39. Where
the auditor and the audit firm determine there is a significant risk related to
fair values, or where otherwise applicable, the auditor should evaluate whether
the significant assumptions used by management in measuring fair values, taken
individually and as a whole, provide a reasonable basis for the fair value
measurements and disclosures in the entity’s financial statements.
40. It is
necessary for management to make assumptions, including assumptions relied upon
by management based upon the work of an expert, to develop fair value
measurements. Assumptions are integral components of more complex valuation
methods, for example valuation methods that employ a combination of estimates
of expected future cash flows together with estimates of the values of assets or
liabilities in the future, discounted to the present. The auditor and the audit
firm pay particular attention to the significant assumptions underlying a
valuation method and evaluate whether such assumptions are reasonable. To
provide a reasonable basis for the fair value measurements and disclosures,
assumptions need to be relevant, reliable, neutral, understandable and
complete.
41. Specific
assumptions will vary with the characteristics of the asset or liability being
valued and the valuation method used (for example, replacement cost, direct
comparison or income-based approach). For example, where discounted cash flows
(an income-based approach) are used as the valuation method, there will be
assumptions about the level of cash flows, the period of time used in the
analysis, and the discount rate.
42. Assumptions
ordinarily are supported by differing types of audit evidence from internal and
external sources that provide objective support for the assumptions used. The
auditor and the audit firm assess the source and reliability of audit evidence
supporting management’s assumptions, including consideration of the assumptions
in light of historical information and an evaluation of whether they are based
on plans that are within the entity’s capacity.
43. Audit
procedures dealing with management’s assumptions are performed in the context
of the audit of the entity’s financial statements. The objective of the audit
procedures is therefore not intended to obtain sufficient appropriate audit
evidence to provide an opinion on the assumptions themselves. Rather, the
auditor and the audit firm perform audit procedures to consider whether the
assumptions provide a reasonable basis in measuring fair values in the context
of an audit of the financial statements taken as a whole.
44. Identifying
those assumptions that appear to be significant to the fair value measurement
requires the exercise of judgment by management. The auditor and the audit firm
focus attention on significant assumptions. Generally, significant assumptions
cover matters that materially affect the fair value measurement and may include
those that are:
a) Sensitive to
variation or uncertainty in amount or nature. For example, assumptions about
short-term interest rates may be less susceptible to significant variation
compared to assumptions about long-term interest rates; and
b) Susceptible
to misapplication or bias.
45. The auditor
and the audit firm consider the sensitivity of the valuation to changes in
significant assumptions, including market conditions that may affect the value.
Where applicable, the auditor and the audit firm encourage management to use
such techniques as sensitivity analysis to help identify particularly sensitive
assumptions. In the absence of such management analysis, the auditor considers
whether to employ such techniques. The auditor and the audit firm also consider
whether the uncertainty associated with a fair value measurement, or the lack
of objective data may make it incapable of reasonable estimation under the
accounting system and standards the entity applies.
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47. The
assumptions on which the fair value measurements are based (for example, the
discount rate used in calculating the present value of future cash flows)
ordinarily will reflect what management expects will be the outcome of specific
objectives and strategies. To be reasonable, such assumptions, individually and
taken as a whole, also need to be realistic and consistent with:
a) The general
economic environment and the entity’s economic circumstances;
b) The plans of
the entity;
c) Assumptions
made in prior periods, if appropriate;
d) Past
experience of, or previous conditions experienced by, the entity to the extent
currently applicable;
e) Other
matters relating to the financial statements, for example, assumptions used by
management in accounting estimates for financial statement accounts other than
those relating to fair value measurements and disclosures; and
f) If
applicable, the risk associated with cash flows, including the potential
variability of the cash flows and the related effect on the discounted rate.
Where
assumptions are reflective of management’s intent and ability to carry out
specific courses of action, the auditor and the audit firm consider whether
they are consistent with the entity’s plans and past experience (see
paragraphs 22 and 23).
48. If management relies on historical financial
information in the development of assumptions, the auditor and the audit firm considers
the completeness and appropriateness of such information. However, historical
information might not be representative of future conditions or events, for
example, if management intends to engage in new activities or circumstances
change.
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50. The
auditor and the audit firm should perform audit procedures on the data used to
develop the fair value measurements and disclosures and evaluate whether the
fair value measurements have been properly determined from such data and
management’s assumptions.
51. The auditor
and the audit firm evaluate whether the data on which the fair value
measurements are based, including the data used in the work of an expert, are
accurate, complete and relevant; and whether the fair value measurements have
been properly determined using such data and management’s assumptions. Examples
may include audit procedures such as verifying the source of the data,
mathematical recalculation and reviewing of information for internal
consistency, including whether such information is consistent with management’s
intent to carry out specific courses of action discussed in paragraphs 22
and 23.
Developing
Independent Fair Value Estimates for Corroborative Purposes
52. The auditor
and the audit firm may make an independent estimate of fair value (for example,
by using an auditor-developed model) to corroborate the entity’s fair value
measurement. When developing an independent estimate using management’s
assumptions, the auditor and the audit firm evaluate those assumptions as
discussed in paragraphs 39-49. Instead of using management’s assumptions the
auditor and the audit firm may develop separate assumptions to make a
comparison with management’s fair value measurements. In that situation, the
auditor and the audit firm nevertheless understand management’s assumptions.
The auditor and the audit firm use that understanding to determine that the
auditor’s model considers the significant variables and to evaluate any
significant difference from management’s estimate. The auditor and the audit
firm also perform audit procedures on the data used to develop the fair value
measurements and disclosures as discussed in paragraphs 50 and 51. The auditor
and the audit firm consider the guidance contained in VSA 520 Analytical
Procedures when performing these procedures during an audit.
Subsequent
Events
53. The auditor
and the audit firm should consider the effect of subsequent events on the fair
value measurements and disclosures in the financial statements.
54. Transactions
and events that occur after period-end but prior to completion of the audit,
may provide appropriate audit evidence regarding the fair value measurements
made by management. For example, a sale of investment property shortly after
the period-end may provide audit evidence relating to the fair value
measurement.
55. In the
period after a financial statement period-end, however, circumstances may
change from those existing at the period-end. Fair value information after the
period -end may reflect events occurring after the period-end and not the
circumstances existing at the balance sheet date. For example, the prices of
actively traded marketable securities that change after the period-end
ordinarily do not constitute appropriate audit evidence of the values of the
securities that existed at the period-end. The auditor complies with
VSA 560 Subsequent Events when evaluating audit evidence relating to such
events.
Disclosures
about Fair Values
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57. Disclosure
of fair value information is an important aspect of financial statements in
many accounting standards. Often, fair value disclosure is required because of
the relevance to users in the evaluation of an entity’s performance and
financial position. In addition to the fair value information required by the
applicable accounting system and standards, some entities disclose voluntary
additional fair value information in the notes to the financial statements.
58. When
auditing fair value measurements and related disclosures included in the notes
to the financial statements, whether required by the applicable accounting
system and standards or disclosed voluntarily, the auditor and the audit firm
ordinarily perform essentially the same types of audit procedures as those
employed in auditing a fair value measurement recognized in the financial
statements. The auditor and the audit firm obtain sufficient appropriate audit
evidence that the valuation principles are appropriate under the accounting
system and standards which the entity applies, are being consistently applied,
and the method of estimation and significant assumptions used are properly
disclosed in accordance with the applicable accounting system and standards.
The auditor and the audit firm also consider whether voluntary information may
be inappropriate in the context of the financial statements. For example,
management may disclose a current sales value for an asset without mentioning
that significant restrictions under contractual arrangements preclude the sale
in the immediate future.
59. The auditor
and the audit firm evaluate whether the entity has made appropriate disclosures
about fair value information as called for by its accounting system. If an item
contains a high degree of measurement uncertainty, the auditor assesses
whet--her the disclosures are sufficient to inform users of such uncertainty.
For example, the auditor might evaluate whether disclosures about a range of
amounts, and the assumptions used in determining the range, within which the
fair value is reasonably believed to lie is appropriate under the accounting
system and standards which the entity applies, when management considers a
single amount presentation not appropriate. Where applicable, the auditor and
the audit firm also consider whether the entity has complied with the
accounting and disclosure requirements relating to changes in the valuation
method used to determine fair value measurements.
60. When
disclosure of fair value information under the applicable accounting system and
standards is omitted because it is not practicable to determine fair value with
sufficient reliability, the auditor evaluates the adequacy of disclosures
required in these circumstances. If the entity has not appropriately disclosed
fair value information required by the applicable accounting system and
standards, the auditor evaluates whether the financial statements are
materially misstated by the departure from the applicable accounting system and
standards.
Evaluating
the Results of Audit Procedures
61. In making a
final assessment of whether the fair value measurements and disclosures in the
financial statements are in accordance with the accounting system and standards
which the entity applies, the auditor and the audit firm should evaluate the
sufficiency and appropriateness of the audit evidence obtained as well as the
consistency of that evidence with other audit evidence obtained and evaluated
during the audit.
62. When
assessing whether the fair value measurements and disclosures in the financial
statements are in accordance with the applicable accounting system and
standards, the auditor and the audit firm evaluate the consistency of the
information and audit evidence obtained during the audit of fair value
measurements with other audit evidence obtained during the audit, in the
context of the financial statements taken as a whole. For example, the auditor
and the audit firm consider whether there is or should be a relationship or
correlation between the interest rates used to discount estimated future cash
flows in determining the fair value of an investment property and interest
rates on borrowings currently being incurred by the entity to acquire
investment property.
Management
Representations
63. The
auditor and the audit firm should obtain written representations from
management regarding the reasonableness of significant assumptions, including
whether they appropriately reflect management’s intent and ability to carry out
specific courses of action on behalf of the entity where relevant to the fair
value measurements or disclosures.
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a) The
appropriateness of the measurement methods, including related assumptions, used
by management in determining fair values within the applicable framework, and
the consistency in application of the methods;
b) The basis
used by management to overcome the presumption relating to the use of fair
value set forth under the accounting system and standards which the entity
applies;
c) The
completeness and appropriateness of disclosures related to fair values under
the accounting system and standards which the entity applies; and
d) Whether
subsequent events require adjustment to the fair value measurements and
disclosures included in the financial statements.
Communication
with Those Charged with Governance
65. The auditor
and the audit firm should communicate audit matters of governance interest with
those charged with governance. Because of the uncertainties often involved with
some fair value measurements, the potential effect on the financial statements
of any significant risks may be of governance interest. For example, the
auditor and the audit firm consider communicating the nature of significant
assumptions used in fair value measurements, the degree of subjectivity
involved in the development of the assumptions, and the relative materiality of
the items being measured at fair value to the financial statements as a whole.