ISA 200: Overall Objectives of the Independent Auditor

International Standard on Auditing (ISA) 200 is a foundational standard that establishes the independent auditor’s overall responsibilities. It applies when an auditor conducts an audit of financial statements under the ISAs framework. The purpose of ISA 200 is to set the context for all other standards, defining the core principles that guide the entire audit process. By outlining the auditor’s fundamental duties, it serves as the starting point from which all other, more specific, auditing standards are applied, clarifying that the overall goal is to enhance the confidence of users in the financial statements.

The Auditor’s Overall Objectives

The primary objectives of the auditor are clearly defined within ISA 200. The first objective is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. This allows the auditor to form a conclusion on the reliability of the financial information presented. A material misstatement is an error or omission in the financial statements that could influence the economic decisions of someone relying on them.

The second main objective is to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. This opinion is communicated through a formal audit report and enhances the degree of confidence that users can place in the financial statements.

Core Ethical and Professional Principles

An audit must be conducted in accordance with strict ethical principles. The auditor is required to comply with relevant ethical requirements, which include:

• Integrity, which requires auditors to be straightforward and honest in all professional and business relationships.
• Objectivity, which means that an auditor must not allow bias, conflict of interest, or undue influence of others to override professional or business judgments.
• Professional competence and due care, which is the principle that an auditor has a continuing duty to maintain professional knowledge and skill at the level required to ensure competent professional service.
• Confidentiality, which requires that an auditor respect the confidentiality of information acquired as a result of professional and business relationships.

A central tenet of the audit process is the application of professional skepticism. This is 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. It requires recognizing that circumstances may exist that cause the financial statements to be materially misstated.

Professional judgment is the application of relevant training, knowledge, and experience, within the context of auditing and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement. Auditors use professional judgment throughout the audit, especially when assessing risks and determining the nature and extent of audit procedures.

The Concept of Reasonable Assurance

Reasonable assurance is a high, but not absolute, level of assurance. It is the level of confidence that an auditor must obtain to conclude that the financial statements are not materially misstated. The audit opinion is based on reasonable assurance, which is a concept that acknowledges the existence of limitations in the audit process.

Absolute assurance is not attainable because of inherent limitations in an audit. These limitations arise from several factors, including the nature of financial reporting itself, which involves judgment by management. Another limitation is the nature of audit procedures, as auditors often rely on evidence that is persuasive rather than conclusive. The need for the audit to be conducted within a reasonable period and at a reasonable cost also imposes limitations, as it is impractical for an auditor to examine every single transaction.

These inherent limitations mean there is always a risk that some material misstatements may not be detected. This leads to the concept of audit risk, which is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Audit risk is a function of the risks of material misstatement and detection risk. The risks of material misstatement can be broken down into inherent risk and control risk. Detection risk is the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material.

Requirements for Conducting the Audit

To meet the objectives laid out in ISA 200, an auditor must comply with all ISAs that are relevant to the audit engagement. The ISAs contain objectives and requirements that are designed to support the auditor in obtaining reasonable assurance. This includes identifying and assessing the risks of material misstatement based on an understanding of the entity and its environment, including its internal controls.

A primary requirement is the need to obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level. Sufficient evidence relates to the quantity of evidence gathered, while appropriate evidence relates to its quality—its relevance and reliability. The auditor uses professional judgment to determine what constitutes sufficient appropriate evidence in the circumstances. This process culminates in the auditor forming an opinion on the financial statements, based on an evaluation of the conclusions drawn from the audit evidence obtained.