i. Objective of the IAASB Clarity Project (1 Mark)

The objective of the IAASB Clarity Project was to improve the clarity and consistency of International Standards on Auditing (ISAs). The project aimed to make the ISAs easier to understand, more effective in practice, and more consistent with each other. The goal was to enhance the quality of audits globally by simplifying and clarifying the language, structure, and overall presentation of the standards while maintaining the fundamental principles of auditing.

ii. Two New Requirements in Each of the Revised ISAs (14 Marks)

1. ISA 260 – Communicating with Those Charged with Governance:
   • Requirement 1: Auditors must now communicate key audit matters with those charged with governance, including matters that are most significant in the audit.
   • Requirement 2: Clearer communication of the auditor’s responsibilities, including the ability to express an opinion on the financial statements and their role in communicating audit matters that impact governance.
2. ISA 320 – Materiality in Planning and Performing an Audit:
   • Requirement 1: The revised ISA requires evaluation of materiality to be done on an overall basis and also in relation to specific financial statement assertions (e.g., transactions, account balances).
   • Requirement 2: Auditors must now document the basis of materiality and explain how it was determined, considering factors like qualitative and quantitative aspects relevant to users of the financial statements.
3. ISA 402 – Audit Considerations Relating to an Entity Using a Service Organisation:
   • Requirement 1: The auditor must now evaluate the control environment of the service organization and consider whether these controls are relevant to the financial statement assertions.
   • Requirement 2: Auditors must request external confirmations from the service organization to provide assurance over the controls that affect the financial statements of the client entity.
4. ISA 450 – Evaluation of Misstatements Identified During an Audit:
   • Requirement 1: Auditors are now required to accumulate all misstatements identified during the audit, whether they are corrected or not, and assess their impact on the financial statements.
   • Requirement 2: The revised ISA introduces the requirement to evaluate the aggregate effect of misstatements, considering both qualitative and quantitative factors in assessing whether the financial statements as a whole are free of material misstatement.
5. ISA 505 – External Confirmation:
   • Requirement 1: The revised ISA emphasizes the need to determine the reliability of external confirmations, particularly when dealing with third parties that may be less reliable.
   • Requirement 2: Auditors must now follow up on non-responses from external confirmation requests and evaluate the implications of non-responses on the audit conclusions.
6. ISA 540 – Auditing Accounting Estimates, Including Fair Value, Accounting Estimates, and Related Disclosures:
   • Requirement 1: Auditors are required to evaluate the reasonableness of assumptions used in the preparation of accounting estimates, especially those related to fair value measurements.
   • Requirement 2: The revised ISA requires auditors to consider whether the disclosures related to estimates are sufficient and appropriate to allow users of financial statements to understand the estimates and the risks associated with them.
7. ISA 550 – Related Parties:
   • Requirement 1: Auditors must now obtain written representations from management about the completeness of the list of related parties and related party transactions.
   • Requirement 2: The revised ISA emphasizes that auditors should evaluate the financial effects of related party transactions on the financial statements, including whether they are properly disclosed and not misrepresented.

Conclusion:

The IAASB Clarity Project introduced significant changes aimed at improving audit quality and consistency across the ISAs. These new requirements ensure that auditors perform more comprehensive assessments, communicate more clearly with governance, and provide enhanced assurance over various aspects of financial reporting.