Audit Methodology and International Standards on Auditing
Core framework
Audit methodology follows the ISA framework: engagement acceptance, planning and risk assessment, evidence gathering, evaluation of misstatements, and reporting. Candidates must know ISA 200 (objectives), ISA 315 (risk), ISA 320 (materiality), ISA 330 (responses), ISA 500 (evidence), ISA 700/705/706 (opinions), and ISA 570 (going concern).
Concepts to master
- Risk model: inherent risk × control risk = risk of material misstatement; detection risk is managed by the auditor.
- Materiality: overall and performance materiality, and the threshold for accumulating misstatements.
- Audit procedures: inspection, observation, inquiry, confirmation, recalculation, re-performance, analytical procedures.
- Opinion types: unmodified, qualified, adverse, disclaimer - driven by the nature and pervasiveness of the issue.
Traps
Questions confuse sufficiency (quantity) with appropriateness (relevance and reliability) of evidence. Another trap is treating higher assessed risk as a reason to do less work - it requires more substantive testing. Opinion selection is often misapplied: a pervasive misstatement yields an adverse opinion, not a qualified one; a pervasive scope limitation yields a disclaimer.
Rule of thumb
Map the issue on two axes - material vs. not, pervasive vs. not - to select the opinion deterministically.
Worked example
An auditor cannot obtain evidence on a single material receivable (not pervasive): issue a qualified opinion. If the inability to obtain evidence affects the financial statements as a whole (pervasive), issue a disclaimer.