INTERNATIONAL AUDITING PRACTICE NOTE 1000
ISA 315 + ISA 500 + ISA 540 = IAPN 1000
This IAPN does not deal with simple Financial Instrument such
as cash, account receivable and account payable, investment
in unlisted securities, insurance contracts also does not
deal with specific accounting issue relevant to
Financial instrument such as hedge accounting
Planning Performance
AUDIT CONSIDERATION RELATING TO FINANCIAL INSTRUMENT
REQUIREMENT:
Maintaining professional skepticism
Planning Consideration
Understanding accounting and disclosure requirement
Understanding Financial instrument
Determine whether specialized skills and knowledge are needed
Understand and evaluate system of Internal control
Internal audit function
Management process
Using auditor expert
Procedures related to valuation
Financial reporting requirement:
In a/c with ISA 540 the auditor consider the entity's valuation policy,
methodology, data and assumptions. Matters that may be relevant for us include:
Formal valuation policy Models used Third party pricing source
Those made models have
appropriate skills and expertise Indicators of management biasness
INTERNATIONAL AUDITING PRACTICE NOTE 1000
Procedures related to Completeness, Accuracy, Existence and Rights & Obligation
External confirmation
Review reconciliation
Review Journal Entry
Reading individual contract
Testing controls
Audit Consideration when management estimates fair value using a model
Testing a model involve two approach
Auditor can test management’s model, by considering the appropriateness of
the model used, reasonabless of the assumption and data used and arithmetical
accuracy
Can develop their own estimates
INTERNATIONAL AUDITING PRACTICE NOTE 1000
Audit consideration when management uses a
third party pricing source
Type of third party pricing source - whether information available
about their process
Nature of input used and complexity of valuation technique
Reputation and experience of third party pricing source
Objectivity of third party pricing source
Entity's control over the use of third party pricing source
Third party pricing source control
INTERNATIONAL AUDITING PRACTICE NOTE 1000
Possible approaches to gathering evidence regarding information from third-party
pricing sources may include the following:
For level 01 – compare with observable market price
Review disclosure provided by third party pricing source including assumption, techniques,
controls and process
Testing management controls
Perform procedure at third party to understand and test controls and process, techniques,
input and assumptions
Test whether third party price reasonable
Develop range
Obtain service auditors report
Data
The auditor’s further audit procedures shall address:
ISA a. Whether the data is appropriate in the context of the applicable
ACCOUNTING ESTIMATES
540 financial reporting framework, and, if applicable, changes from prior
periods are appropriate
Methods Significant Assumptions b.
Whether judgments made in selecting the data give rise to indicators
of possible management bias;
The auditor’s further audit procedures The auditor’s further audit procedures shall
shall address: address:
c.
Whether the data is relevant and reliable in the circumstances; and
a. Whether the method selected is appropriate in a. Whether the significant assumptions are
the context of the applicable financial reporting appropriate in the context of the applicable financial
framework, and, if applicable, changes from the reporting framework, and, if applicable, changes d.
Whether the data has been appropriately understood or interpreted
method used in prior periods are appropriate; from prior periods are appropriate; by management, including with respect to contractual terms.
b. Whether judgments made in selecting the method b. Whether judgments made in selecting the
give rise to indicators of possible management bias; significant assumptions give rise to indicators of
possible management bias;
c. Whether the calculations are applied in accordance
with the method and are mathematically accurate; c. Whether the significant assumptions are consistent
d. When management’s application of the method with each other and with those used in other
involves complex modeling, whether judgments accounting estimates, or with related assumptions
have been applied consistently and whether, when used in other areas of the entity’s business activities,
applicable: based on the auditor’s knowledge obtained in the
audit; and
The design of the model meets the measurement
c. When applicable, whether management has the
objective of the applicable financial reporting
i. framework, is appropriate in the circumstances, intent to carry out specific courses of action and has
and, if applicable, changes from the prior period’s the ability to do so.
model are appropriate in the circumstances; and
Adjustments to the output of the model are
consistent with the measurement objective of
ii. the applicable financial reporting framework &
are appropriate in the circumstances; and
INTERNATIONAL AUDITING PRACTICE NOTE 1000
Where valuation of financial instruments is based on unobservable inputs (that is,
level 3 inputs), matters that the auditor may consider include, for example,
how management supports the following:
Identification and characteristics market place participants
How unobservable input are determined on initial recognition
Modification in its own assumption
Whether best input information used
Sensitivity analysis
TECHNIQUES FOR AUDIT PROCEDURES
PROCEDURES
Evaluate the competence, capabilities and
TECHNIQUES objectivity of management expert
ISA 500
MANAGEMENT Obtain an understanding of the work of that
EXPERT expert
Evaluate the adequacy of the expert work by
ensuring that:
Finding and conclusion Assumptions are Source of data is
are relevant and reasonable complete and
reasonable accurate
