4013 Required discussions

Dec-2023

CAS Guidance

The discussion among the engagement team about the application of the applicable financial reporting framework and the susceptibility of the entity’s financial statements to material misstatement (CAS 315.A42):

• Provides an opportunity for more experienced engagement team members, including the engagement partner, to share their insights based on their knowledge of the entity. Sharing information contributes to an enhanced understanding by all engagement team members.

• Allows the engagement team members to exchange information about the business risks to which the entity is subject, how inherent risk factors may affect the susceptibility to misstatement of classes of transactions, account balances and disclosures, and about how and where the financial statements might be susceptible to material misstatement due to fraud or error.

• Assists the engagement team members to gain a better understanding of the potential for material misstatement of the financial statements in the specific areas assigned to them, and to understand how the results of the audit procedures that they perform may affect other aspects of the audit, including the decisions about the nature, timing, and extent of further audit procedures. In particular, the discussion assists engagement team members in further considering contradictory information based on each member’s own understanding of the nature and circumstances of the entity.

• Provides a basis upon which engagement team members communicate and share new information obtained throughout the audit that may affect the assessment of risks of material misstatement or the audit procedures performed to address these risks.

CAS 240 requires the engagement team discussion to place particular emphasis on how and where the entity's financial statements may be susceptible to material misstatement due to fraud, including how fraud may occur.

As part of the discussion among the engagement team, consideration of the disclosure requirements of the applicable financial reporting framework assists in identifying early in the audit where there may be risks of material misstatement in relation to disclosures, even in circumstances where the applicable financial reporting framework only requires simplified disclosures. Matters the engagement team may discuss include (CAS 315.A46):

• Changes in financial reporting requirements that may result in significant new or revised disclosures;

• Changes in the entity's environment, financial condition or activities that may result in significant new or revised disclosures, for example, a significant business combination in the period under audit;

• Disclosures for which obtaining sufficient appropriate audit evidence may have been difficult in the past; and

• Disclosures about complex matters, including those involving significant management judgment as to what information to disclose.

Considerations Specific to Public Sector Entities

As part of the discussion among the engagement team by auditors of public sector entities, consideration may also be given to any additional broader objectives, and related risks, arising from the audit mandate or obligations for public sector entities (CAS 315.A47).

CAS Guidance

Discussing the susceptibility of the entity’s financial statements to material misstatement due to fraud with the engagement team (CAS 240.A11):

• Provides an opportunity for more experienced engagement team members to share their insights about how and where the financial statements may be susceptible to material misstatement due to fraud.

• Enables the auditor to consider an appropriate response to such susceptibility and to determine which members of the engagement team will conduct certain audit procedures.

• Permits the auditor to determine how the results of audit procedures will be shared among the engagement team and how to deal with any allegations of fraud that may come to the auditor’s attention.

The discussion may include such matters as (CAS 240.A12):

• An exchange of ideas among engagement team members about how and where they believe the entity’s financial statements (including the individual statements and the disclosures) may be susceptible to material misstatement due to fraud, how management could perpetrate and conceal fraudulent financial reporting, and how assets of the entity could be misappropriated.

• A consideration of circumstances that might be indicative of earnings management and the practices that might be followed by management to manage earnings that could lead to fraudulent financial reporting.

• A consideration of the risk that management may attempt to present disclosures in a manner that may obscure a proper understanding of the matters disclosed (for example, by including too much immaterial information or by using unclear or ambiguous language).

• A consideration of the known external and internal factors affecting the entity that may create an incentive or pressure for management or others to commit fraud, provide the opportunity for fraud to be perpetrated, and indicate a culture or environment that enables management or others to rationalize committing fraud.

• A consideration of management’s involvement in overseeing employees with access to cash or other assets susceptible to misappropriation.

• A consideration of any unusual or unexplained changes in behavior or lifestyle of management or employees which have come to the attention of the engagement team.

• An emphasis on the importance of maintaining a proper state of mind throughout the audit regarding the potential for material misstatement due to fraud.

• A consideration of the types of circumstances that, if encountered, might indicate the possibility of fraud.

• A consideration of how an element of unpredictability will be incorporated into the nature, timing and extent of the audit procedures to be performed.

• A consideration of the audit procedures that might be selected to respond to the susceptibility of the entity’s financial statement to material misstatement due to fraud and whether certain types of audit procedures are more effective than others.

• A consideration of any allegations of fraud that have come to the auditor’s attention.

• A consideration of the risk of management override of controls.

CAS Guidance

Matters that may be addressed in the discussion among the engagement team include (CAS 550.A9):

• The nature and extent of the entity’s relationships and transactions with related parties (using, for example, the auditor’s record of identified related parties updated after each audit).

• An emphasis on the importance of maintaining professional skepticism throughout the audit regarding the potential for material misstatement associated with related party relationships and transactions.

• The circumstances or conditions of the entity that may indicate the existence of related party relationships or transactions that management has not identified or disclosed to the auditor (for example, a complex organizational structure, use of special–purpose entities for off-balance sheet transactions, or an inadequate information system).

• The records or documents that may indicate the existence of related party relationships or transactions.

• The importance that management and those charged with governance attach to the identification, appropriate accounting for, and disclosure of related party relationships and transactions (if the applicable financial reporting framework establishes related party requirements), and the related risk of management override of controls.

In addition, the discussion in the context of fraud may include specific consideration of how related parties may be involved in fraud. For example (CAS 550.A10):

• How special–purpose entities controlled by management might be used to facilitate earnings management.

• How transactions between the entity and a known business partner of a key member of management could be arranged to facilitate misappropriation of the entity’s assets.

CAS Guidance

Relevant related party information that may be shared among the engagement team members includes, for example (CAS 550.A28):

• The identity of the entity’s related parties.

• The nature of the related party relationships and transactions.

• Significant or complex related party relationships or transactions that may be determined to be significant risks, in particular transactions in which management or those charged with governance are financially involved.

OAG Guidance

The engagement leader uses the team planning meeting(s) to emphasize a commitment to managing and achieving quality to the engagement team. Communication at the team planning meeting(s) include:

• The role each engagement team member plays and contributes to the management and achievement of quality at the engagement level through their personal conduct, communication and actions;

• The importance of engagement team members' understanding of the objectives of the work they perform, and encouraging engagement team members to think, analyze, question and be rigorous in their approach, while seeking supervision/coaching from more experienced team members as necessary;

• Quality messages communicated by the Office (e.g., whether matters relating to recent results of the Office’s monitoring and remediation process are relevant to the engagement and how those matters may impact the engagement);

• The importance of asking questions and raising concerns or possible threats to the achievement of quality to the engagement leader and/or team manager without fear of reprisal, and actions the engagement team can take to address such threats;

• The importance of complying with ethical requirements (see OAG Audit 1031);

The engagement leader uses the team planning meeting(s) to emphasize the importance of each engagement team member exercising professional skepticism throughout the engagement. Communication at the team planning meeting(s) include:

• Maintaining a questioning mind and being aware of unconscious or conscious biases in exercising professional skepticism when gathering and evaluating audit evidence.

• Any potential impediments to the exercise of professional skepticism (e.g., budget or resourcing constraints, lack of cooperation from management, difficulties in obtaining access to records, facilities or people) and actions to take should these arise.

See OAG Audit 1041 for further guidance on applying professional skepticism.