Chapter 9 Flashcards
Define Planning Activities.
Planning an audit involves:
- establishing the overall audit strategy.( that set the scope, timing, and direction for engagement).
- development of audit plan (which include nature, timing, extent of audit procedures to be performed by engagement team for each area of F/S)
Who is involved in Planning of audit.
Engagement Partner and other key members of team.
Importance/Benefits/Objectives of Planning.
- Complete the engagement efficiently and effectively.
- Identify and resolve potential problems.
- Pay attention to important areas of audit.
- Assist in selection of appropriate team and proper assignment of work to them.
- Perform direction, supervision, and review of engagement team.
- Coordinate on timely basis with component auditor and expert, if any.
Documentation relating to planning of audit.
- Overall audit strategy.
- Audit plan.
- Significant changes in audit strategy or audit plan along with the reasons.
Define Audit Strategy and list down its main contents..
Audit strategy sets the scope, timing, and direction of audit, and guides the development of audit plan.
Contents of Strategy:
- Characteristics of the engagement that determine its scope.
- Reporting objectives of the engagement.
- Factors that are significant in directing the engagement team’s effort.
- Resources necessary to perform the engagement.
- Result of preliminary engagement activities and knowledge gained on other engagement performed for entity.
Define Audit Plan and its content.
The audit plan is more detailed than the overall audit strategy and includes the nature, timing and extent of audit procedures to be performed by engagement team on each area of F/S.
Contents of Audit Plan:
1. Nature, timing and extent of planned risk assessment procedures.
2. Nature, timing and extent of other audit procedures at assertion level for each area of F/S. These include:
i. Test of controls.
ii. Test of details.
Additional planning consideration for Initial Audit.
To reduce the risk of initial audit, auditor shall perform following activities prior to audit:
- Perform procedures regarding acceptance of client and audit engagement considering the integrity of MGT.
- Discuss with MGT major issues affecting the acceptance decisions and communicate them to TCWG and their effect on audit strategy, audit plan and audit report.
- Communicate with predecessor auditor and make arrangement. ( arrangement to review the working papers).
- Procedures to obtain sufficient and appropriate evidence regarding opening balances.
- Other procedures in accordance with firms’ quality control policy.
Differentiate b/w Interim audit and Final Audit.
Interim Audit is that part of audit which takes place before the year end.
Final audit takes place on/after year end and concludes with auditor forming and expressing an opinion on F/S for whole year.
Typical Procedures that are performed in Interim Audit.
- Obtaining understanding of entity and assessing inherent risk.
- Obtaining understanding of internal controls and assessing control risk.
- Documentation and testing of internal controls.
- Preliminary analytical procedures.
- Testing of P/L transactions (till interim date).
- Identification of potential problems which may effect the final audit work.
Advantages of Interim Audit.
- Earlier information of significant matters.
- Flexible planning of human resources.
- Burden of audit team is spread, therefore efficiency and effectiveness of audit team is increased.
- Stakeholders receive timely audit report.
Typical audit procedures that are performed in Final Audit.
- Agreeing financial statements to records.
- Examining adjustments made during preparation of F/S.
- Ensure proper cut off test on sales and purchases.
- Substantive procedures for transactions b/w interim date and final date.
- Sending confirmation letters at final date.
- Obtaining representations letter from MGT.
- Inventory count.
- Review of subsequent events.
- Final analytical procedures.
- Going concern review.
Define materiality.
Items are considered material if they, individually or in aggregate, could reasonably be expected to influence the economic decisions of users taken on basis of F/S.
Materiality depends on size as well as nature.
Auditor determines materiality by applying judgments considering users of F/S.
Use/Purpose of Materiality.
- At planning stage:
_ To identify and assess risk of material misstatement.
_ To determine nature, timing, extent of risk assessment procedures. - At performance Stage:
_ To determine nature, timing and extent of substantive procedures. - At reporting stage:
_ To evaluate effect of misstatement or scope limitation.
_ To form an opinion on audit report.
Who are the users of F/S.
- For Profit-oriented entity —-> Shareholders.
- For entity having excessive borrowings —-> Debt-holders/bankers.
- For NPO —–> Trustee/Members.
What documentation is required for Materiality Level.
- Materiality for F/S as whole.
- Performance materiality.
- Basis for computing materiality.
- Any revision in materiality or performance materiality.
Define Qualitative Materiality
Qualitative materiality means ignoring the amounts of misstatements and considering its qualitative characteristics to determine whether it is material or not.
It is a separate materiality calculated for certain area of F/S.
Examples of areas where qualitative materiality is determined.
- Key disclosure required by law or AFRF.
- Key disclosures focused by users of F/S.
- Non-compliance with legal requirements.
- Fraud.
- A misstatement which is small but:
_ Convert a profit into loss and vice versa.
_ Affect key financial ratios.
_ Takes financial figures below or certain threshold.
_ Affect share capital.
When a materiality is revised
- Revision in risk.
- Change in auditor’s understanding of entity and its operations.
- Change in circumstances during audit ( decision to dispose of a major part of business.
- Actual F/S are different from draft F/S.
Explain the effect of revision in materiality.
It will have effect on following aspects of audit:
- Performance materiality.
- Risk of material misstatement.
- Nature, timing, and extent of audit procedures.
Define Performance Materiality.
Performance materiality is the amount set by auditor, less than materiality for F/S as a whole, to reduce the risk that aggregate of uncorrected misstatements exceeds materiality for the F/S as a whole.
If applicable, performance materiality also refers to the amount or amounts set by auditor at less than materiality levels for particular classes of transactions, account balance or dislcousre.
How the performance materiality is determined.
It is not a mathematical calculation but is determined by professional judgment. and is affected by:
- misstatement identified in previous periods, and
- expected misstatement in current period
- auditor understanding of entity.
- increased engagement risk.
- change in business.
