ISAs, ISAEs and Nigerian standards on auditing

Two auditors in different countries audit two companies. If each uses its own rules, a reader who compares the two sets of accounts cannot tell whether the audits were done to the same quality. For that reason the profession uses shared standards: written requirements that say what an auditor must do and how the work must be reported.

In Nigeria the standards are the International Standards on Auditing, which apply to every statutory audit.

This topic covers why standards exist, who writes them, the families of international standards, how a single standard is laid out, the objectives and scope of an audit under International Standard on Auditing (ISA) 200, the interim and final audit, and the history of the Nigerian Standards on Auditing. It follows the topic on the legal framework and leads into the ethics topics.

Key terms in plain English

Syllabus check

This topic is in syllabus area A, legal and regulatory frameworks (20% of marks). It covers:

• the International Standards on Auditing (ISAs) and the International Standards on Assurance Engagements (ISAEs)
• ISA 200 and the basic steps of an audit
• the history of the Nigerian Standards on Auditing

CAMA 2020 and auditing standards

The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.

The rules in more depth

The role of auditing standards

An audit gives users a high level of assurance. That assurance is worth more if users know the audit followed established standards, and it lets users compare companies knowing that the same standards were applied to each. International Standards on Auditing apply mainly to the external audit, but much of their content is good practice for internal audit too.

Who sets the standards: IFAC and the IAASB

The International Federation of Accountants (IFAC) is the global organisation of the accountancy profession. It serves the public interest by strengthening the profession and supports international standards in auditing, assurance, quality control, public sector accounting, education and ethics. The Institute of Chartered Accountants of Nigeria (ICAN) is a member. IFAC supports four boards:

• the International Auditing and Assurance Standards Board (IAASB), which sets auditing, assurance and related standards;
• the International Accounting Education Standards Board (IAESB);
• the International Ethics Standards Board for Accountants (IESBA), which writes the Code of Ethics; and
• the International Public Sector Accounting Standards Board (IPSASB).

The IAASB is an independent body that serves the public interest by setting high-quality standards and by encouraging national standards to converge with them. ISAs come from the IAASB.

How a new ISA is produced

1. A subject is chosen for detailed study.
2. After study and research, if there is agreement to go ahead, an exposure draft is produced, approved by the IAASB and circulated widely for comment.
3. The IAASB considers the comments, changes the draft and approves it.
4. The new ISA is published.

The families of IAASB standards

ISQM 1 deals with the firm's system of quality management and ISQM 2 with engagement quality reviews. The engagement-level duties of the audit partner are in ISA 220 (Revised), Quality Management for an Audit of Financial Statements.

How an ISA is laid out

Each ISA has an introduction, objectives, definitions where needed, requirements and application and other explanatory material. Requirements use the word "shall" and must be applied wherever they are relevant to the audit. The application material is guidance only. The other standards (ISREs, ISAEs and ISRSs) contain basic principles and essential procedures, shown in bold with the word "should", plus guidance.

The basic principles must be followed. Only in exceptional cases may an accountant decide not to follow an essential procedure, and then the accountant must be able to justify the departure. Every standard needs professional judgement in its application.

The IAASB's pronouncements do not override local laws. If a local law conflicts with a standard, the accountant may say the standard was followed only if every relevant requirement was met in full.

The ISAs a Skills candidate must know

ISA 200: the objectives of the auditor

ISA 200 sets the objectives of the auditor: (a) to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, so as to express an opinion on whether they are prepared, in all material respects, in accordance with the applicable financial reporting framework; and (b) to report on the financial statements and communicate as the ISAs require, in line with the findings.

If the auditor cannot get reasonable assurance and a qualified opinion is not enough, the auditor must disclaim an opinion or resign. ISA 200 requires the auditor to:

1. comply with all ISAs relevant to the audit;
2. comply with relevant ethical requirements;
3. plan and perform the audit with professional scepticism, meaning a questioning mind and a critical look at evidence;
4. use professional judgement; and
5. obtain sufficient and appropriate audit evidence to reach reasonable assurance.

The scope of an audit

The scope described in the auditor's report is this. An audit involves procedures to obtain evidence about the amounts and disclosures in the financial statements. The procedures chosen depend on the auditor's judgement, including the assessed risk of material misstatement, whether from fraud or error.

In making those assessments the auditor considers the internal control relevant to the preparation and fair presentation of the statements, to design suitable procedures, but not to express an opinion on how effective the controls are. An audit also includes evaluating the accounting policies used, the reasonableness of accounting estimates made by management, and the overall presentation of the statements.

Interim and final audit

Audit fieldwork is usually done in two phases. The interim audit takes place before the end of the accounting period. It includes discussions with staff and management to understand the entity and its environment, recording the controls relevant to the audit, and some early tests of controls or substantive procedures. The final audit takes place after the year end, when draft financial statements with full-year balances are available.

Interim work is normally done by fewer, more senior staff. The final audit is much longer and uses the whole team.

The Nigerian Standards on Auditing

Nigerian Standards on Auditing (NSAs) were based on the ISAs, with small changes for local terms and law. They are no longer used because Nigeria now applies the ISAs themselves. The approach to a risk-based audit was the same under both.

Worked examples

1. (a) ISAs.
2. (b) ISAEs, because it is assurance other than an audit or review of historical financial information.
3. (c) ISREs.
4. (d) ISRSs.

1. The standards do not override local law, so the auditor follows the law.
2. The auditor may not state that the audit complied with ISAs unless every relevant requirement was met.

1. The work is before the year end and records controls, with some early testing: interim audit.
2. Year-end inventory and receivable balances are tested in the final audit.

1. Only in exceptional cases may an essential procedure be omitted.
2. The auditor must be able to justify the departure.

How to score full marks

• Spell out each standard family and say what it covers.
• Quote the ISA 200 objectives in two parts: assurance and reporting.
• Distinguish requirements ("shall") from guidance.
• Add that standards do not override local law.

Common mistakes in the exam

• Saying the IAASB is part of the International Accounting Standards Board.
• Writing that ISAs apply to every kind of assurance engagement.
• Forgetting scepticism and judgement in ISA 200 answers.
• Saying Nigeria still uses the Nigerian Standards on Auditing.

Quick revision

• IFAC has four boards; the IAASB writes ISAs and ISAEs.
• ISA, ISRE, ISAE, ISRS, ISQM.
• "Shall" is a requirement.
• ISA 200: reasonable assurance and report.
• Interim audit before the year end; final audit after.

Practice questions

Questions 1 to 10 are multiple choice. Questions 11 to 13 are written. Try each before opening the answer.

Model answers

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