Reasonable assurance FS are free from material misstatement (fraud or error)

High but not absolute - audit risk cannot be zero

Predicting future; every transaction; directors' report; all internal controls

Integrity · Objectivity · Competence · Confidentiality · Professional behaviour

Mind (unaffected judgment) + Appearance (no facts a third party would question)

Questioning mind; alert to fraud signals; critical evaluation of evidence

Misstatement is material if it could influence economic decisions of users

PBT typical (3-5%); also Revenue, Total Assets as supporting benchmarks

Main threshold; ~5% of PBT for listed, profitable entities

50-75% of Overall M (lower = higher risk / weak controls)

3-5% of Overall M; errors below this are ignored

PM = Overall M × 50-75% · Trivial = OM × 3-5%

Misstatements above OM -> individually material. Aggregate items above PM but below OM.

= Inherent Risk × Control Risk (risk FS are misstated before audit)

Complex estimates, unusual transactions, technology risk

Internal controls fail to prevent/detect misstatement; human error, mgmt override

Auditor's procedures miss existing misstatement

More substantive procedures; lower acceptable detection risk

Test controls; possibly reduce substantive procedures

Audit Risk = RMM × Detection Risk

Balances & disclosures (period end)

Assets/liabilities actually exist

Entity controls/owns the assets; liabilities are its obligations

All that should be recorded IS recorded

Recorded at appropriate amounts

Recorded in proper accounts

Properly aggregated and described

Transactions & events (period)

Test Design -> Implementation -> Operating effectiveness

Inquiry, Observation, Inspection, Re-performance, Recalculation

Prevent errors (e.g. authorisation limits)

Detect & correct errors (e.g. bank reconciliation)

Best for large predictable transaction volumes; develop expectation -> compare to actual

Individual transactions/balances; sample or 100%; responds to high-risk assertions

Regardless of controls, substantive procedures required for every material item (ISA 330.18)

External, independent sources (e.g. bank confirmations, external debtor letters)

Directly obtained by auditor (observation, inspection)

Paper/electronic more reliable than oral

ISA 500 (evidence) · ISA 505 (confirmations) · ISA 540 (estimates) · ISA 560 (subsequent events) · ISA 570 (going concern) · ISA 580 (written reps)

Less than 100%; all units have a chance of selection; statistical = random + probability theory

Conclusion from sample != conclusion from entire population

Material but not pervasive misstatement or scope limitation. Phrase: "except for..."

Material and pervasive misstatement (disagreement). Phrase: "do not present fairly..."

Material and pervasive scope limitation; unable to obtain sufficient evidence. Phrase: "we do not express..."

Listed entities only; matters of most significance to audit

Draws attention to properly disclosed matter; opinion not modified

Relevant to users' understanding but not in FS (e.g. prior year audited by another firm)

Material Uncertainty Related to Going Concern - disclosed by mgmt, auditor agrees

Not confined to specific elements OR could represent a substantial proportion of FS OR affects disclosures fundamental to understanding FS

Disclosed by mgmt -> MURGC paragraph (unmodified opinion)
NOT disclosed -> Qualified or Adverse opinion

Intentional act by mgmt/employees/3rd parties using deception for unjust advantage

Fraud = intentional; Error = unintentional

Reasonable assurance FS free from material misstatement (fraud or error); maintain skepticism; consider mgmt override; note fraud procedures differ from error procedures

Incentive/Pressure · Opportunity · Rationalisation

Revenue recognition; mgmt override of controls; journal entry testing

Assess ability to continue as going concern; disclose material uncertainties

Obtain sufficient evidence on appropriateness of GC basis; conclude if material uncertainty exists

Warning signs

Inspect books & records (incl. bank statements); read budgets/cash flows; inquire legal counsel on litigation; consider written representations

Conditions existing at balance sheet date -> adjust FS

Conditions arising after balance sheet date -> disclose only (if material)

No doubt - clearly wrong amount or presentation

Auditor disagrees with mgmt's accounting estimate or choice

Extrapolated from sample to population

Each item vs OM (individually material?); aggregate items below OM -> material in aggregate?; qualitative factors (e.g. covenant breach at 101M sales)

Assess impact on FS as a whole vs Overall M (not vs PM)

Substantially less scope than reasonable assurance; conclusion worded negatively ("nothing came to our attention...")

Same high standard as financial statement audit

Company chooses its own reporting criteria (e.g. GRI, ESRS); less standardised than IFRS

No established practice; measurement differences; comparability issues across entities

10 questions - watch for "pervasive", opinion wording, MURGC vs Emphasis

5-7 questions - show steps; define terms; name ISA; give examples

Critical comment on a statement - argue both sides; conclude; cite ISA standards

"except for" = qualified · "do not present" = adverse · "we do not express" = disclaimer · "we draw attention" = emphasis

Mgmt discloses + auditor agrees -> MURGC paragraph (NOT qualified) · Mgmt doesn't disclose -> qualified/adverse