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Summary of Auditing Standards - SA 805

 

SA 805: Special Considerations – Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement

Introduction and Scope:

  • SA 805 applies to audits of:
    • Single financial statements (e.g., balance sheet, income statement).
    • Specific elements, accounts, or items (e.g., inventory, receivables).
  • The standard highlights that auditing a specific element differs from auditing a complete financial statement due to its narrow focus.
  • Does not apply to complete sets of financial statements under SA 700.
  1. SA Series (100-700):
    • These standards apply to audits of complete financial statements.
    • When applied to audits of other historical financial information (such as a single financial statement or specific elements), they must be adapted to the context.
  2. SA 805:
    • Focuses on special considerations when auditing a single financial statement or specific elements of a financial statement.
  3. Frameworks:
    • The single financial statement or element may be prepared in accordance with either a general or special purpose framework.
    • When a special purpose framework is used, SA 800 also applies.
  4. Exclusions:
    • SA 805 does not apply to reports issued by a component auditor as part of a group audit.
  5. Auditor's Objective:
    • The auditor, while applying SAs, must address special considerations relevant to:
      • Acceptance of the Engagement
      • Planning and Performance of the Engagement
      • Forming an Opinion and Reporting
      • Note: Not intended for expressing an opinion on the effectiveness of the entity’s internal control.

SINGLE FINANCIAL STATEMENT AND ELEMENT OF A FINANCIAL STATEMENT

  1. Single Financial Statement (SFSE):
    • Different from a complete set of financial statements.
    • Includes related notes, significant accounting policies, and explanatory information relevant to that statement.
    • Example: A cash flow statement is a single financial statement.
  2. Element of a Financial Statement:
    • Refers to an element, account, or item within the financial statements.
    • Includes related notes, summary of significant accounting policies, and other explanatory information.
    • Example: Trade receivables or cash and bank balances.

THE CONSIDERATIONS WHEN ACCEPTING AN AUDIT OF A SINGLE FINANCIAL STATEMENT OR ELEMENT THEREOF

  1. SA 200 Compliance:
    • The auditor must comply with all relevant SAs, even if auditing just a single financial statement or element.
    • This holds even if the complete set of financial statements is not audited by the same auditor.
  2. Practicability:
    • Auditor must evaluate if it is practicable to audit the single financial statement or element in compliance with SAs.
  3. SA 200 Ethical Compliance:
    • Must follow ethical requirements, including independence.
    • Auditor must comply with all relevant SAs, unless the specific requirements or conditions do not apply.
  4. Exceptional Circumstances:
    • Auditor may depart from a relevant requirement in an SA if justified, using alternative procedures to achieve the same aim.
  5. Challenges in Auditing Only an Element:
    • Auditors may face difficulty in understanding the entity’s internal control and the overall quality of accounting records if not auditing the entire set of financial statements.
    • Lack of a full set audit means the auditor may need additional evidence to support audit conclusions.
  6. Disproportionate Work for Specific Elements:
    • Some SAs may require extensive audit work that is disproportionate to the element being audited (e.g., SA 570 on going concern when auditing accounts receivable).
    • In such cases, the auditor should discuss with management whether an alternative engagement would be more appropriate.

ACCEPTABILITY OF THE FINANCIAL REPORTING FRAMEWORK

  1. SA 210 Compliance:
    • The auditor must assess whether the financial reporting framework used to prepare the financial statement or element is acceptable.
  2. Adequate Disclosure:
    • The auditor must verify if the framework provides adequate disclosures for the users to understand the financial statement or element and its significant transactions.
  3. Single Financial Statement Framework:
    • The financial statement or element may be prepared based on a recognized financial reporting framework for full financial statements.
    • The auditor must assess if the framework includes all relevant requirements for presenting the single financial statement or specific element.

CONSIDERATIONS WHEN PLANNING AND PERFORMING THE AUDIT OF A SINGLE FINANCIAL STATEMENT OR ELEMENT

  1. Compliance with All Relevant SAs:
    • The auditor must adapt and apply all relevant Standards on Auditing (SAs) to the audit of a single financial statement or specific element.
  2. Use of Evidence Obtained Earlier:
    • If auditing a single financial statement or element in conjunction with a complete set of financial statements, the auditor may use the evidence already gathered in the complete set’s audit.
  3. Obtain Sufficient & Appropriate Evidence:
    • The auditor must gather sufficient appropriate audit evidence to base an opinion on the single financial statement or element being audited.
  4. Consider Interrelated Items:
    • Many elements of financial statements are interrelated, so the auditor must consider these relationships during the audit (e.g., inventory impacts both cost of goods sold and payables).
  5. Materiality and Evaluation:
    • Materiality for the single financial statement or element will likely be lower than for the complete set of financial statements, impacting the nature, timing, and extent of audit procedures.

FORM OF OPINION IN CASE OF AUDIT OF A SINGLE ELEMENT OR SINGLE FINANCIAL STATEMENT

  1. Incorporate Opinion in Terms of Engagement:
    • As per SA 210, agreed terms of engagement must include the expected form of any reports the auditor will issue.
  2. Depends on Applicable Financial Reporting Framework (AFRFW):
    • The form of opinion depends on the AFRFW and any relevant laws/regulations. Based on Revised SA 700:
      • Fair Presentation Framework: Opinion states that financial statements present fairly in all material respects or give a true and fair view.
      • Compliance Framework: Opinion states that financial statements are prepared in all material respects according to the framework.
  3. No Explicit AFRFW for SFSE:
    • The AFRFW may not explicitly address the presentation of the single financial statement or element. The auditor must judge whether the form of opinion is appropriate based on this.
  4. Factors for Wording of Fair Presentation:
    • Consider whether the AFRFW is limited to complete financial statements and whether the single financial statement or element will:
      • Comply with the framework’s relevant requirements.
      • Provide disclosures beyond what the framework requires (if needed for fair presentation).
  5. Professional Judgment in Forming Opinion:
    • The form of the opinion, including phrases like “presents fairly” or “gives a true and fair view,” involves professional judgment and varies by jurisdiction.

FORMING AN OPINION AND REPORTING CONSIDERATIONS FOR AUDIT OF A SINGLE SET OF FINANCIAL STATEMENT OR ELEMENT

  1. Apply SA 700:
    • The auditor applies Revised SA 700 to form an opinion and report on the single financial statement or element, adapting it to the specific circumstances.
  2. Same Auditor for Complete Set:
    • If the auditor also audits the complete set of financial statements, separate opinions must be issued for the complete set and the single financial statement or element.
  3. If SFSE and Complete Set Are Published Together:
    • If the single financial statement or element is published alongside the complete set:
      • Ensure sufficient differentiation between the two.
      • Request management to rectify any lack of distinction.
      • Do not issue the auditor’s report until satisfied with the differentiation.
  4. Modified Opinion, EOM, or OMP in Audit Report on Complete Set:
    • Modified Opinion on Complete Set: If the auditor’s report on the complete set includes a modification, this may impact the opinion on the single financial statement or element. The opinion on the single statement may also need modification or inclusion of an Emphasis of Matter (EOM) or Other Matter Paragraph (OMP).
  5. Adverse or Disclaimer Opinion:
    • If the complete set receives an adverse opinion or disclaimer, an unmodified opinion cannot be issued on the single financial statement or element because it would conflict with the complete set’s opinion.
  6. SFSE is a Major Item of the Complete Set:
    • No unmodified opinion can be given on a single financial statement if it represents a major portion of the complete set that received an adverse opinion or disclaimer.
  7. Check Adequacy of Presentation & Disclosures:
    • The auditor must ensure the single financial statement or element provides sufficient disclosures for users to understand the material effects of transactions and events.
  8. Reference in Other Matter Paragraph (OMP):
    • Even if the modification on the complete set is unrelated to the single financial statement, the auditor may still reference it in an OMP to ensure users’ understanding.

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