A3-Planning and Supervision

Question 1

PLANNING AND SUPERVISION

During Planning the Auditor is required to (four things):

Answer 1

1. Obtain knowledge of the client’s business and industry
2. Develop Audit Strategy
3. Develop Audit plan
4. Perform Risk Assessment procedures to obtain an understanding of the entity and its environment, including its internal control, sufficient to assess the risks of material misstatement and design further audit procedures

Question 2

PLANNING AND SUPERVISION

What is the Audit Strategy?

Answer 2

The audit strategy outlines teh scope of the audit engagement, the reporting objectives, timing of the audit, required communicaitons, and the factors that determine the focus of the audit. The audit strategy also includes a preliminary asssessment of materiality and tolerable misstatement.

Question 3

PLANNING AND SUPERVISION

Factors that determine the focus of the audit team’s efforts include:

Answer 3

1. Preliminary evaluations of materiality, audit risk, and internal control
2. material locations and account balances
3. areas where there is a higher risk of material misstatement
4. sig business and industry developments nad accounting changes
5. management’s committment to the design and operation of internal controls

Question 4

PLANNING AND SUPERVISION

PCAOB standards when establishing audit strategy

Answer 4

1. knowledge of company’s internal control
2. matters affecting the industry
3. extent of recent changes in the company
4. auditor’s preliminary judgements about materiality, risk
5. control deficiencies previously communicated
6. legal or regulatory matters
7. complexity of the company’s operations

Question 5

PLANNING AND SUPERVISION

Audit Procedures Categories

Answer 5

1. Risk Assessment Procedures(required in all audits)-used to obtain an understanding of the entity and its environment, including internal control, in order to assess the risks of material misstatement and determine the NET of further audit procedures
2. Further Audit Procedures-include tests of operating effectiveness of internal controls and substantive procedures
   
   • Test of Controls(Audit tests internal controls)-used to evaluate operating effectiveness of internal controls in preventing or detecting material misstatements
     
     • used when risk assessment based on some extent of operating effectiveness of internal control
     • substantive procedures alone are deemed to be insufficient
   • Substantive Procedures(substantive testing)-used to detect material misstatements. They included test of details (as applied to transaction classes, account balances, and disclosures and substantive analytical procedures(done at the end of audit)
     
     • performed in response to the planned level of detection risk, which in turn maybe based (to some extent) on the results of tests of controls
     • due to the inherent limitations and judgment of risk assessment, substantive procedures are required for all relevant assertions to each material transaction class, account balance, and disclosure item.
3. Other Audit Procedures-
   
   • Testing at an interim date
   • Effect of IT

Question 6

PLANNING AND SUPERVISION

Financial Statement Assertions (COVERU)

Answer 6

1. Completeness-all account balances, transactions, and disclosures that should have been recorded have been recorded and included in the f/s
2. Cutoff-Transactions have been recorded in the correct (proper) accounting period.
3. Valuation, Allocation, and Accuracy-account balances, transactions, and disclosures are recorded fairly and at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded.
4. Existence and Occurrence-Account balances exist and transactions that have been recorded and disclosed have occurred and pertain to the entity.
5. Rights and Obligations-the entity holds or controls the rights to assets and liabilities are the obligations of the entity.
6. Understandability and Classification-transactions have been recorded in the proper accounts. Financial informationis appropriately presented and described and disclosures are clearly expressed.

Question 7

PLANNING AND SUPERVISION

PCAOB Assertions

Answer 7

1. Completeness
2. Existence
3. Occurrence
4. Allocation
5. Presentation
6. Rights
7. Obligations
8. Valuations
9. E
10. Disclosure

Question 8

Audit Strategy components

Answer 8

1. Overall audit strategy
2. Scope of audit-Extent
3. Reporting objectives, audit timing, and required communications-Timing
4. Factors that determine the focus of the audit
5. Materiality and tolerable misstatement

Question 9

Audit Plan Components

Answer 9

1. Audit Procedures
   
   • Risk Assessment Procedures
   • Further Audit Procedures
     
     • test of controls and substantive
   • Other Audit Procedures
   • Timing of Audit Procedures
     
     • testing at interim
     • effect of IT
2. Financial Statement Assertions
3. Use of Assertions-auditor uses relevant assertions to form a basis for assessing risk and for the design and performance of further audit procedures.
4. Drafting the Audit Plan- after sufficient planning info has been gathered, an audit plan should be drafted. A written audit plan is required for every audit.