7073.10 Step 10: Perform Overall Evaluation

Sep-2020

OAG Guidance

CAS 330.25-26 requires us to evaluate whether risk assessment at the assertion level remains appropriate, to conclude whether sufficient appropriate audit evidence has been obtained and to consider both contradictory and corroborating evidence when forming an opinion. This is an iterative process performed throughout the audit cycle.

Overall evaluation procedures in CAS 540.33-34 build on the requirements of CAS 330 and are to be conducted at the individual estimate level after we have performed our execution procedures. We also consider, in forming an opinion, whether our overall assessment of risk at the financial statements level remains appropriate, and whether we have obtained sufficient appropriate audit evidence over accounting estimates and related disclosures as a whole.

Assessment of the risk of material misstatement

In performing our overall evaluation, we consider whether any evidence has come to our attention that leads us to reassess the degree to which the estimate is subject to estimation uncertainty, and affected by complexity, subjectivity and other inherent risk factors. If the impact of these factors is determined to differ from the initial assessment conducted in Step 3 (see guidance in the section Assess Level of Inherent Risk in OAG Audit 7073.3), the level of assessed inherent risk may change, which may in turn lead to a need to perform additional or more extensive audit procedures or obtain more persuasive audit evidence.

Where the impact of estimation uncertainty or other inherent risk factors is higher, we may consider performing more granular or extensive overall evaluation procedures. For example, where performing an overall evaluation of our audit of management’s estimate of expected credit loss provisions, we might consider performing disaggregated analytical procedures, potentially using peer KPIs (Key Performance Indicators) , as a means of assessing the overall reasonableness of the estimate and whether our initial risk assessment remains appropriate. An analytic used to support our overall evaluation of an estimate would typically not be designed to provide substantive audit evidence and therefore would not need to follow the 4-step process of a substantive analytical procedure.

In some circumstances, our overall evaluation procedures may identify evidence that leads us to refocus our audit procedures in different areas of the estimation process. For example, during our initial risk assessment of management’s goodwill impairment model, we may have identified increased levels of subjectivity in the selection of an appropriate discount rate in the cash flow forecast and therefore may have given this assumption particular focus in planning and executing further audit procedures.

However, during the course of our audit we may have identified that the selection of an appropriate discount rate is less subjective than anticipated, and in fact owing to the unpredictable nature of the entity’s revenue, there is in fact a higher level of subjectivity than initially assessed in the revenue growth projection management has used in its model. We would then need to consider whether this changes our assessment of the overall level of inherent risk for the estimate, and consider whether more extensive audit procedures are necessary over the revenue growth assumption, so as to be responsive to the change in our risk assessment.

In some circumstances, changes in our assessment of the level of inherent risk factors may indicate the need for the engagement team to have specialized skills or knowledge, for example if we identify during the course of the audit that elements of management’s estimation technique have a higher level of complexity that initially assessed. In such instances, we consider the need to involve specialists or experts in accordance with Step 2 (section Determine Need for Specialized Skills or Knowledge in OAG Audit 7073.2).

Identification of indicators of management bias may also lead us to revise our assessment of inherent risk, for instance if we determine that identified bias is fraudulent in nature and there is therefore a significant risk of material misstatement. Further guidance on considering the impact of indicators of management bias is included in OAG Audit 7073.9.

OAG Audit 4051 includes further examples of why our risk assessment may change based on information that comes to light during the course of the audit.

Professional skepticism and contradictory audit evidence

In performing our overall evaluation we maintain an attitude of professional skepticism, recognizing that audit evidence includes not only evidence that corroborates the explanations and assertions made by management, but also evidence that contradicts it. Contradictory evidence includes both evidence that contradicts management’s development and selection of a point estimate and related disclosures, and evidence that calls into question the reliability or integrity of other corroborating evidence received.

Such evidence may be identified when (as set out in CAS 500.A57) evidence is obtained from different sources, for example when explanations obtained from management and internal audit appear to contradict each other.

Where evidence contradicts management’s estimates or disclosures (for example, where an auditor’s expert determines an acceptable range that is different from that used by management’s expert), we understand the reasons for the discrepancy, challenge management to justify their selections and consider whether misstatements arise as a result.

Where evidence obtained from one source contradicts evidence obtained from another, we consider whether this gives rise to doubts over the reliability of information to be used as audit evidence and perform appropriate procedures to address these concerns, considering the impact on other aspects of the audit, including the auditor’s report. Where we have reason to believe that information provided to us by management has been falsified or presented in such a way as to intentionally mislead us, we consider whether this is indicative of fraud, evaluate the impact on our assessment of the risk of material misstatement due to fraud and consider what procedures are necessary to respond to this (as set out in OAG Audit 5510).

OAG Guidance

Evaluating audit evidence about accounting estimates may require considerable judgment because the assertions, especially those about valuation, may be based on highly subjective assumptions or be particularly sensitive to changes in the underlying assumptions. For example, valuation assertions may be based on assumptions about the occurrence of future events for which expectations are difficult to develop or about conditions expected to exist over a long period of time. Accordingly, different parties could reasonably reach different conclusions about valuation estimates or estimates of valuation ranges.

Where we develop an auditor’s point estimate and identify a difference between this and management’s estimate, CAS 540.A139 requires us to treat this difference as a misstatement. If after discussion with management and investigation of the cause of the difference, we conclude that our point estimate is appropriate, we accumulate the difference between our estimated amount and management’s estimate as a judgmental misstatement to be included on the Summary of Uncorrected Misstatements and/or request that management adjust their estimated amount.

Where we have developed an auditor’s range and management’s point estimate sits outside this range, CAS 540.A139 requires us to treat the difference between management’s point and the closest end of our range as a misstatement. This is because, implicitly, such amounts are not reasonable within the context of the financial reporting framework. If after discussion with management and investigation of the cause of the difference, we conclude that our range is appropriate, we accumulate the difference between the relevant end of our range and management’s estimate as a judgmental misstatement to be included on the Summary of Uncorrected Misstatements and/or request that management adjust their estimated amount.

We also consider whether cumulative differences identified between management’s estimates and our own point estimates or ranges are collectively indicative of management bias, even if the estimates appear reasonable individually.

For example, if each accounting estimate included in the financial statements was individually reasonable, but the collective effect of identified differences had an impact on the financial statements that was favourable to management (e.g., the aggregate impact of one or more account balances and/or classes of transactions has a significant favorable impact on profit or net assets) we would reconsider the estimates individually to establish whether management has indeed been biased in determining the estimated amounts, and whether differences identified are in fact misstatements.