Chapter 6 - Planning Flashcards
What are the benefits of planning?
- more efficient
- better understanding of where things might go wrong
- audit team can be selected with the right skills and experience
- quality management procedures can be built
Why must an auditor follow the auditing standards?
- provides a checklist of what the auditor must do
- confidence in the opinion of the auditor
- consistency
- better quality to check against
What are the 2 key planning documents an auditor will create?
- the audit strategy
- the audit plan
What is the audit strategy?
- provides overall framework for the audit
What are the 4 main areas of the audit strategy?
- reporting objectives, timing and communication
- significant factors and preliminary engagement activities
- Nature, timing and extent of resources
- characteristics of the engagement
What are the key elements of reporting, objectives, timing and communication?
- timetable for reporting
- communication with client, team and 3rd party
What will reporting objectives, timing and communication cover?
the practicalities of the audit in order to make sure it is completed on time. Involve setting deadlines.
What are the key elements of significant factors and preliminary engagement activities?
- materiality
- risk assessment
- internal controls
- need for scepticism
- changes in laws and regulations
- significant developments
Significant factors and preliminary engagement activities will include what?
- planning activities, which will shape the rest of the audit, are documented.
- the results of the risk assessment and document
- preliminary materiality assessment
- auditor’s views of the client’s internal controls
What are the key elements of nature, timing and extent of resources?
- selection of audit team
- budget
What are the key elements of characteristics of the engagement?
- FR framework
- Industry reporting
- knowledge of business
- internal audit
- service organisation]
- use of ATTs
- Availability of client staff
The strategy document sets the overall approach for the audit. This will vary from client to client depending on what?
- which accounting standards they are using
- whether there are any additional reporting responsibilities
- whether they have an internal audit function or use a service organisation which influences how the auditor can obtain some of the audit evidence
What is the job of the audit plan?
to take the audit strategy which ends with an overall general approach to the audit and to turn it into a detailed schedule of the work to be done
When is the audit plan produced?
at the end of the planning process
What is some common content between the audit strategy and the audit plan?
- results of risk assessment
- determination of materiality
- special audit considerations
- deadlines
The audit plan includes what?
- what specific work should be done on each area
- who on the team should do each test
- how much work should be done on each area - how big a sample
- when should each part of the work be done - at which visit
How many stages will an audit be performed?
one or two stages
If an audit is performed all in one go, the audit work will be performed when?
at the final audit stage
If an audit is performed in 2 stages, when will the audit work be performed?
some work at the interim audit stage and some work will be performed at the final audit stage
What occurs before the year end?
- interim audit.
- No full year FS so limit to what testing can be performed
- auditor will document client systems and make decision on whether reliance can be placed on the internal controls
- significant purchases can be tested
- inventory system can be reviewed
What will occur at the year end?
- client may perform a full inventory count and auditor is required to attend
- Auditor may visit the client shortly after year end to organise a receivables circularisation (sample of the clients customers asked to confirm what they owe at YE)
What will occur after the year end?
- every audit will have a final audit
- majority of the audit work will be done
- focus on detailed testing of the year end balances
Fraud and error is one of the examples of what?
the expectation gap
What is fraud?
an intentional act by one or more individuals among management, those charged with governance employees or third parties involving the use of deception to obtain an unjust illegal advantage
When would we inform shareholders if fraud has occurred?
only if it has led us to modify our audit opinion
What are the 2 types of fraud?
fraudulent financial reporting
missappropriation
what is fraudulent financial reporting?
deliberately misstating the financial statements to make the company’s performance or position look better/worse than it actually is
what is misappropriation?
the theft of a company’s assets such as cash or inventory
what is error?
an unintentional misstatement
when would we identify fraud to managemenet?
communicate the fraud on a timely basis
When would we identify fraud to those charged with governance?
if the suspected fraud involves management
when would we identify fraud to 3rd parties?
if there is a duty to report
If the auditor finds that the client has not complied with the relevant laws and regulations what must the auditor do?
- understand the nature and circumstances
- obtain further information
How does the auditor understand the nature and circumstances?
Auditor must obtain an understanding of what has happened:
- was it deliberate?
- is it a serious breach?
- has anybody suffered harm?
- does the regulatory authority need to be made aware?
How does the auditor assess whether the non-compliance will have a material impact on the FS?
- discussing the issue with management and company’s legal department
- reading correspondence from the regulatory authority
- reading minutes of board and/or management meetings
- reviewing bank statements
What is non-compliance?
acts of omission or commission by the entity, either intentional or unintentional, which are contrary to the prevailing laws or regulations
When would an auditor report non-compliance to management?
communicate the non-compliance on a timely basis
When would an auditor report non-compliance to those charged with governance?
if the non-compliance is a deliberate act by management
When would an auditor report non-compliance to 3rd parties?
if there is a duty to report e.g., to a regulator
When would an auditor report non-compliance to shareholders?
by modifying the auditor’s opinion
When might the auditor decide that they need to withdraw from the engagement?
- the non-compliance laws and regulations is so serious they can no longer maintain a relationship
- breakdown of trust
- auditor has doubts about the competence of management
What are the 3 most important quality management standards?
- engagement resources
- engagement performance
- monitoring and remediation
What does engagement resources comprise of?
-human resources
- technological resources
- intellectual resources
What are human resources?
refers to the audit team which must have appropriate experience and expertise to perform a high-quality audit
what are technological resources?
use technology, such as automated tools and techniques, computerised audit files, video calls to facilitate meetings etc
What are intellectual resources?
allow for consistency in approach, such as the audit firm’s templates and checklists, which ensure auditing standards have been followed
What is engagement performance?
looks at the quality measures that should be in place for each individual engagement
What is the composition of the audit team?
- audit engagement partner
- audit seniors
- audit juniors
What are the key elements to engagement performance?
- direction and supervision of audit
- review of the work
What is an engagement quality review?
additional quality measures that will be used for listed and other high-risk clients
What is the purpose of working papers?
- to allow the audit partner to form an appropriate opinion
- to be our defence in a negligence case that the qudit was carried out correctly and completely
how long should the working papers be kept for?
5 years after the auditor’s report is signed
What are the 2 files the working papers are kept?
- permanent file (all items to use to future audits)
- current file (all working papers relevant to work done on this years audit)
What are the qualities of a good working paper?
- client name and y/e
- prepared by and date prepared
- reviewer name and date reviewed
- work performed, results and conclusion
