7 Audit planning and docs

Question 1

Audits are planned to:

Answer 1

• Help the auditor devote appropriate attention to important areas of the audit • Help the auditor identify and resolve potential problems on a timely basis • Help the auditor properly organise and manage the audit so it is performed in an effective manner • Assist in the selection of appropriate team members and assignment of work to them • Facilitate the direction, supervision and review of work • Assist in co-ordination of work done by auditors of components and experts

Question 2

A structured approach to planning will include:

Step 1

Answer 2

Ensuring that ethical requirements are met, including independence

Question 3

A structured approach to planning will include:

Step 2

Answer 3

Ensuring the terms of the engagement are understood

Question 4

A structured approach to planning will include:

Step 3

Answer 4

Establishing the overall audit strategy that sets the scope, timing and direction of the audit and guides the development of the audit plan • Identify the characteristics of the engagement that define its scope. • Ascertain the reporting objectives to plan the timing of the audit and nature of communications required. • Consider significant factors in directing the team’s efforts. • Consider results of preliminary engagement activities. • Ascertain nature, timing and extent of resources necessary to perform the engagement.

Question 5

A structured approach to planning will include:

Step 4

Answer 5

Developing an audit plan that includes the nature, timing and extent of planned risk assessment procedures and further audit procedures

Question 6

What is an overall audit strategy?

Answer 6

The overall audit strategy sets the scope, timing and direction of the audit, and guides the development of the more detailed audit plan

Question 7

THE OVERALL AUDIT STRATEGY: MATTERS TO CONSIDER :

Characteristics of the engagement

Answer 7

engagement
• Financial reporting framework • Industry-specific reporting requirements • Expected audit coverage • Nature of business segments • Availability of internal audit work • Use of service organisations • Effect of information technology on audit procedures • Availability of client personnel and data

Question 8

THE OVERALL AUDIT STRATEGY: MATTERS TO CONSIDER : Reporting objectives, timing of the audit and nature of communications

Answer 8

• Entity’s timetable for reporting • Organisation of meetings with management and those charged with governance • Discussions with management and those charged with governance • Expected communications with third parties

Question 9

THE OVERALL AUDIT STRATEGY: MATTERS TO CONSIDER : Significant factors, preliminary engagement activities, and knowledge gained on other engagements

Answer 9

• Determination of materiality • Areas identified with higher risk of material misstatement • Results of previous audits • Need to maintain professional scepticism • Evidence of management’s commitment to design, implementation and maintenance of sound internal control • Volume of transactions • Significant business developments • Significant industry developments • Significant changes in financial reporting framework • Other significant recent developments

Question 10

THE OVERALL AUDIT STRATEGY: MATTERS TO CONSIDER: Nature, timing and extent of resources

Answer 10

• Selection of engagement team • Assignment of work to team members • Engagement budgeting

Question 11

Examples of items to include in the overall audit strategy could be:

Answer 11

• Industry-specific financial reporting requirements • Number of locations to be visited • Audit client’s timetable for reporting to its members • Communication between the audit team and the client

Question 12

What is an audit plan?

Answer 12

The audit plan converts the audit strategy into a more detailed plan and includes the nature, timing and extent of audit procedures to be performed by engagement team members in order to obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.

Question 13

The audit plan shall include the following:

Answer 13

• A description of the nature, timing and extent of planned risk assessment procedures • A description of the nature, timing and extent of planned further audit procedures at the assertion level • Other planned audit procedures required to be carried out for the engagement to comply with ISAs

Question 14

Examples of items included in the audit plan could be:

Answer 14

• Timetable of planned audit work • Allocation of work to audit team members • Audit procedures for each major account area (eg inventory, receivables, cash) • Materiality for the financial statements as a whole and performance materiality

Question 15

Further application guidance was added to ISA 300 in 2015, to highlight the need for auditors to consider financial statement disclosures at the planning stage. Considering disclosures early in the audit helps auditors to identify:

Answer 15

• Changes in the entity’s environment, financial condition or activities • Changes in the applicable financial reporting framework • The need to involve an auditor’s expert (eg for disclosures related to pension) • The need to discuss matters with those charged with management (eg changes in the entity’s environment or issues regarding the quality of the disclosures, as covered under ISA 260).

Question 16

Auditors usually carry out their audit work for a financial year in one or more sittings. These are called

Answer 16

interim audit(s) and the final audit.

Question 17

Define Tests of controls

Answer 17

Tests of controls are designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level

Question 18

Define Substantive procedures and what are the two types

Answer 18

Substantive procedures are designed to detect material misstatements at the assertion level. Substantive procedures comprise: • Tests of details (of classes of transactions, account balances, and disclosures); • Substantive analytical procedures

Question 19

What is the purpose of the interim audit?

Answer 19

The purpose of the interim audit is to carry out procedures that would be difficult to perform at the year end because of time constraints. Work at this visit tends to focus on risk assessment and on documenting and testing internal controls. Some substantive procedures can also be carried out but these are limited because statement of financial position figures will not be the ones to be reported on

Question 20

What is the purpose of the final audit?

Answer 20

The final audit will focus on the audit of the financial statements. It concludes with the auditor issuing a report which contains the opinion expressed on the financial statements covering the entire year being audited. The final audit opinion will take account of conclusions reached at both (or all) audit visits.

Question 21

Interim audit procedures may include:

Answer 21

• Inherent risk assessment and gaining an understanding of the entity • Recording the entity’s system of internal control • Evaluating the design of internal controls • Carrying out tests of control on the company’s internal controls to ensure they are operating as expected • Performing substantive testing of transactions/balances to gain evidence that the books and records are a reliable basis for the preparation of financial statements • Identification of issues that may have an impact on work to take place at the final audit

Question 22

Final audit procedures include:

Answer 22

Substantive procedure involving verification of statement of financial position balances and amounts in the statement of profit or loss
• Obtaining third-party confirmations • Analytical procedures relating to figures in the financial statements • Subsequent events review • Agreeing the financial statements to the accounting records • Examining adjustments made during the process of preparing the financial statements • Consideration of the going concern status of the entity • Performing tests to ensure that the conclusions formed at the interim audit are still valid • Obtaining written representations

Question 23

Performing audit procedures before the period end can assist in identifying significant matters at an early stage of the audit and help resolve them with management’s assistance or develop an effective audit approach to address them. This reduces the time taken at the final audit to gain the remaining sufficient appropriate audit evidence needed. T/F

Answer 23

True

Question 24

If the auditor obtains audit evidence about the operating effectiveness of controls at the interim audit, when it comes to the final audit, instead of having to gain evidence over controls covering the whole year the auditor can focus on:

Answer 24

• Obtaining audit evidence about significant changes to those controls subsequent to the interim period • Determining the additional audit evidence to be obtained for the remaining period

Question 25

While at the final audit, the amount of work needed to gain additional audit evidence about controls that were operating during the period between the interim audit and the year end will depend on:

Answer 25

• The significance of the assessed risks of material misstatement at the assertion level • The specific controls that were tested during the interim period, and significant changes to them since they were tested, including changes in the information system, processes and personnel • The degree to which audit evidence about the operating effectiveness of those controls was obtained • The length of the remaining period • The extent to which the auditor intends to reduce further substantive procedures based on the reliance of controls • The control environment

Question 26

It is important to document audit work performed in working papers to:

Answer 26

• Enable reporting partner to ensure all planned work has been completed adequately • Provide details of work done for future reference • Assist in planning and control of future audits • Encourage a methodical approach

Question 27

What is audit documentation?

Answer 27

Audit documentation is the record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached (terms such as ‘working papers’ or ‘work papers’ are also sometimes used).

Question 28

Audit documentation is necessary for the following reasons:

Answer 28

(a) It provides evidence of the auditor’s basis for a conclusion about the achievement of the overall objective. (b) It provides evidence that the audit was planned and performed in accordance with ISAs and other legal and regulatory requirements. (c) It assists the engagement team to plan and perform the audit. (d) It assists team members responsible for supervision to direct, supervise and review audit work

Question 29

Audit documentation is necessary for the following reasons (Part 2):

Answer 29

(e) It enables the team to be accountable for its work. (f) It allows a record of matters of continuing significance to be retained. (g) It enables the conduct of quality control reviews and inspections (both internal and external).

Question 30

The form and content of working papers are affected by matters such as:

Answer 30

• The size and complexity of the entity • The nature of the audit procedures to be performed • The identified risks of material misstatement • The significance of the audit evidence obtained • The nature and extent of exceptions identified

Question 31

Audit files For recurring audits, working papers may be split between: Permanent audit files (containing information of continuing importance to the audit). These contain:

Answer 31

• Engagement letters • New client questionnaire • The memorandum and articles • Other legal documents such as prospectuses, leases, sales agreement • Details of the history of the client’s business • Board minutes of continuing relevance • Previous years’ signed accounts, analytical review and reports to management • Accounting systems notes, previous years’ control questionnaires

Question 32

Current audit files (containing information of relevance to the current year’s audit). These should be compiled on a timely basis after the completion of the audit and should contain:

Answer 32

• Financial statements • Accounts checklists • Management accounts details • Reconciliations of management and financial accounts • A summary of unadjusted errors • Report to partner including details of significant events and errors • Review notes • Audit planning memorandum • Time budgets and summaries • Written representations • Report to management • Notes of board minutes • Communications with third parties such as experts or other auditors

Question 33

They also contain working papers covering each audit area. These should include the following:

Answer 33

• A lead schedule including details of the figures to be included in the accounts • Problems encountered and conclusions drawn • Audit programmes • Risk assessments • Sampling plans • Analytical review • Details of substantive tests and tests of contro

Question 34

If it is necessary to modify/add new audit documentation to a file after it has been assembled, the auditor should document:

Answer 34

• Who made the changes, and when, and by whom they were reviewed • The reasons for making changes • The effect of changes on the auditors’ conclusions

Question 35

If, in exceptional circumstances, changes are made to an audit file after the audit report has been signed, the auditor should document

Answer 35

• The circumstances • The audit procedures performed, evidence obtained, conclusions drawn • When and by whom changes to audit documents were made and reviewed

Question 36

What are automated working papers?

Answer 36

Automated working paper packages have been developed which can make the documentation of audit work much easier. Such programs aid preparation of working papers, lead schedules, the trial balance and the financial statements themselves. These are automatically cross-referenced, adjusted and balanced by the computer.

Question 37

What are the advantages of automated working papers?

Answer 37

• The risk of errors is reduced. • The working papers will be neater and easier to review. • The time saved will be substantial, as adjustments can easily be made to all working papers, including those summarising the key analytical information. • Standard forms do not have to be carried to audit locations. • Audit working papers can be transmitted for review via a modem or fax facilities

Question 38

Judgement may have to be used in deciding the length of holding working papers, and further consideration should be given to the matter before their destruction. The ACCA recommends ___ years as a minimum period

Answer 38

7

Question 39

Working papers are the property of the the firm. They are not a substitute for, nor part of, the entity’s accounting records.

Answer 39

Working papers are the property of the auditors. They are not a substitute for, nor part of, the entity’s accounting records.