The importance of achieving the objectives in an ISA (UK) audit

Why is it important?

ISA 200 clearly sets out the overall objectives of the independent auditor, explains the nature and scope of an audit designed to meet those objectives and requires that, in order to achieve the overall objectives, the auditor must achieve the objectives in relevant ISAs. The objectives of ISAs should be considered throughout the audit, but there are specific requirements to consider the objectives of the audit both at the planning stage and at finalisation. This articulation of the overall objectives of the auditor and the objectives to be achieved in each ISA make it much easier for the auditor to link the planning and performance of audit work to the achievement of objectives. This should also result in audits that clearly support the opinion expressed.

The importance of achieving objectives is recognised by regulators. Auditors are judged on whether they have achieved the overall objectives in ISA 200 and the objectives in the individual ISAs. They are not just judged on whether they have complied with the requirements of individual ISAs.

Requirements and challenges

How do auditors achieve the overall objectives?

ISA 200 states that the overall objectives of the auditor are:

1. to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and
2. to report on the financial statements, and communicate as required by the ISAs, in accordance with the auditor’s findings [ISA 200.11].

Paragraph 21 states that, in order to achieve the overall objectives, the auditor is required to meet the objectives of the underlying ISAs. Individual ISAs contain one or more objectives which provide a link between the requirements of an ISA and the overall objectives in ISA 200. The auditor needs to understand the specific objectives of the individual ISAs and use them in planning and performing the audit to determine whether any additional audit procedures are necessary and in evaluating whether sufficient appropriate audit evidence has been obtained [ISA 200.21].

What if an individual ISA objective cannot be achieved?

Failure to achieve an objective in an individual ISA is important. ISA 200 makes it clear that if an objective in a relevant ISA cannot be achieved, the auditor has to evaluate whether this prevents the achievement of the auditor’s overall objectives. If it does, the auditor is required to either modify the audit opinion or, where permitted, withdraw from the engagement [ISA 200.24]. The importance attached to achieving the individual ISA objectives makes it essential for the auditor to identify upfront whether the requirements of an ISA are relevant to the audit being performed.

The auditor is not required to document separately that the individual objectives of the ISAs have been met. However, failure to achieve an objective of an ISA is a significant matter and requires documentation because it could assist in the evaluation of whether the failure has prevented the achievement of the overall ISA 200 objectives [ISA 200.A78]. ISA 200 acknowledges that there may be circumstances that give rise to a failure to achieve an objective. For example, this may be where the auditor is prevented from complying with the requirements of an ISA or where there is a limitation in the available evidence, and it is not possible or practicable for the auditor to carry out the additional audit work required to achieve the objective.

How do the requirements fit in?

Although ISA 200 emphasises the importance of achieving objectives, the auditor still has to comply with all the requirements of an ISA. This does not, however, apply if the entire ISA is not relevant or the individual requirement is not relevant because it is conditional and the condition does not exist [ISA 200.22]. The auditor uses professional judgement in determining whether either the whole ISA or an individual requirement within an ISA is relevant to the audit. This may be particularly pertinent in the audit of smaller entities and each ISA includes guidance on how the requirements can be applied to smaller entity audits.

ISA 200 makes it clear that the objectives in the individual ISAs provide a link between the requirements of the ISA and the overall objectives of the auditor. The requirements exist to enable the auditor to achieve the objectives. In most cases it is expected that the auditor will meet the objectives of an ISA by complying with its requirements. However, the auditor still needs to consider whether special circumstances and procedures are necessary to meet specific objectives and to express an audit opinion.

Failure to comply with a requirement calls into question the achievement of the objectives of individual ISAs and ultimately the overall objective of the auditor. ISA 200 states that the auditor shall not represent compliance with ISAs in the auditor’s report unless the auditor has complied with the requirements of ISA 200 and all other ISAs relevant to the audit [ISA 200.20].

The ISA does allow for exceptional circumstances in which the auditor may judge it necessary to depart from a relevant requirement in an ISA. These will be rare, but in such circumstances the auditor does not just ignore the requirement, but is required to perform alternative audit procedures to achieve the aim of the requirement. ISA 200 envisages that departure from a relevant requirement in an ISA is expected to arise only where the requirement is for a specific procedure to be performed and, in the specific circumstances of the audit, that procedure would be ineffective in achieving the aim of the requirement [ISA 200.23]. Where this happens, the auditor is required to document the reason for the departure and how the performance of the alternative audit procedures has helped achieve the aim of the requirement [ISA 230 Audit documentation (ISA 230.12)].

What about the other material in the ISAs: can it be ignored?

ISA 200 makes it clear that the auditor is required to have an understanding of the entire text of the ISA, including its application and other explanatory material in order to understand the objectives and apply the requirements properly [ISA 200.19].

All of the ISAs are structured such that each ISA contains four distinct sections: 

• an introduction; 
• objectives;
• requirements; and 
• application and other explanatory material.

This helps to focus the auditor’s attention on the objectives and requirements of the ISA. It makes it clear that, in order to understand and achieve the overall objectives and comply with the requirements of the ISA, the auditor must have a good understanding of the explanatory and other material which is integral to the ISA.

Another reason for not ignoring the other material is that it contains guidance specific to the audit of smaller entities (SMEs). The ISAs maintain that an SME audit is performed to the same standard and is based on the same requirements as the audit of a larger entity but recognise that the standards should be applied proportionately according to the size and/or complexity of the entity.

Is there still room for professional judgement?

ISA 200 highlights professional judgement and makes it clear that it is essential to the proper conduct of an audit. ISA 200 requires the auditor to exercise professional judgement in planning and performing an audit of financial statements [ISA 200.16]. The exercise of professional judgement is an explicit requirement and, because it will be used in all of the key decisions made during an audit, it is more important than ever.

ISA 200 defines professional judgement as the application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement [ISA 200.13(k)]. ISA 200 underlines the auditor’s responsibility for the exercise of professional judgement in a sound, consistent and justifiable manner. It makes it clear that professional judgement is not to be used as a justification for decisions that are not otherwise supported by the facts and circumstances of the engagement or sufficient appropriate audit evidence [ISA 200.A29].

ISA 200 emphasises the importance of consultation where professional judgement is exercised. It notes that consultation on difficult or contentious matters during the audit, both within the engagement team and between the engagement team and others at an appropriate level within or outside the firm, assists the auditor in making informed and reasonable judgements [ISA 200.A27]. It is important that consultation and decisions taken on matters of professional judgement are clearly documented. The auditor has to be able to support decisions and judgements based on the facts and circumstances that they knew about up to the date of the auditor’s report.

Regulators and lawyers reviewing audit files will seek to understand how professional judgement has been exercised. Thorough documentation of the thought processes involved is vital. The application material sets a high standard stating that the audit documentation should be sufficient to enable an experienced auditor, having no previous connection with the audit, to understand the significant professional judgements made in reaching conclusions on significant matters arising during the audit [ISA 200.A29].

How much emphasis is there on professional scepticism?

The need for professional scepticism under ISAs is more important than ever. ISA 200 defines professional scepticism as an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence [ISA 200.13(l)].

ISA 200 includes an explicit requirement for the auditor to plan and perform an audit with professional scepticism, recognising that circumstances may exist that cause the financial statements to be materially misstated [ISA 200.15]. The additional guidance in the ISA makes it clear that when performing an audit, professional scepticism is necessary when undertaking the critical assessment of audit evidence. The exercise of professional scepticism involves questioning contradictory audit evidence. It also means challenging the reliability of responses to inquiries and other information obtained from management and those charged with governance. It further includes consideration of the sufficiency and appropriateness of audit evidence obtained, for example, in circumstances where fraud risk factors exist and a single document is the sole supporting evidence for a material financial statement amount [ISA 200.A22].

The ISA adds that in the UK, the auditor needs to maintain professional scepticism throughout the audit recognising the possibility of a material misstatement due to facts or behaviour indicating irregularities despite the auditor’s past experience of the honesty and integrity of the entity’s management and those charged with governance.