Lesson 4: Audit planning

Question 1

What are the Three main reasons that the auditor should properly plan the audit engagement

Answer 1

Enable the auditor to obtain sufficient appropriate evidence for the circumstances.
Help keep audit costs reasonable.
Avoid misunderstandings with the client.

Question 2

What are the The Phases of an Audit That Relate to Audit Planning

Answer 2

1. Accept the client and perform initial audit planning
2. Understand the client’s business and industry
3. Perform preliminary analytical procedures
4. Set preliminary judgment of materiality

Question 3

What happens during the stage where you Accept client and perform initial audit planning

Answer 3

Initial audit planning involves four things:
The auditor decides whether to accept a new client or continue serving an existing client.
The auditor identifies why the client wants or needs an audit.
To avoid misunderstandings, the auditor obtains an understanding with the client about the terms of the engagement.
The auditor develops the overall strategy for the audit, including engagement staffing and any required audit specialists

Question 4

difference between new clients and continuing clients

Answer 4

New Client Investigation: Audit firms must take care in accepting new clients. The new (successor) auditor is required by auditing standards to communicate with the predecessor auditor.
Due to confidentiality requirements, the client must consent to this communication.
The purpose is to determine if the client lacks integrity or if there were disputes about accounting principles.

Continuing Clients: Audit firms evaluate existing clients to determine whether a continuing client presents risks due to lack of integrity.

Question 5

Why do companies Identify Client’s Reasons for Audit

Answer 5

Risk factors associated with the client’s reasons for an audit include the likely statement users and the intended uses of the statements.

Question 6

Why do companies Obtain an Understanding with the Client

Answer 6

A clear understanding of the terms of the engagement should exist between the auditor and the client. Auditing standards require that there be an engagement letter which includes the engagement’s objectives

Question 7

The contents of the engagement letter

Answer 7

The main contents should include:
the objective and scope of the audit.
the responsibilities of the auditor.
the responsibilities of management.
the identification of an applicable financial reporting framework.
reference to the expected form and content of any reports to be issued.
In addition the following items will be included:
Reference to professional standards, regulations and legislation
applicable to the audit.
Limitations of an audit.
Expectation that management will provide written representations.
Basis on which the fees are calculated.
Agreement of management to notify the auditor of subsequent events
after the audit report is signed.
Agreement of management to provide draft financial statements in time to allow the audit to be completed by the deadline.
Other matters that the engagement letter may cover include:
Form (and timing) of any other communication during the audit.
Arrangements concerning the involvement of internal auditors and other
staff of the entity.
Limitations to the auditor’s liability.

Question 8

What does Developing Overall Audit Strategy include

Answer 8

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

Question 9

what are the considerations of the audit strategy

Answer 9

The scope of the engagement
The characteristics of the engagement
Reporting objectives
Timing of the audit
Nature of communications
Significant factors in directing engagement team efforts
The results of preliminary engagement activities
The knowledge gained on other engagements
The nature, timing, and extent of resources available for the engagement

Question 10

Why do auditors make an effort toto obtain an understanding of the client’s business and its environment to assess risk of material misstatements.

Answer 10

There are three primary reasons for obtaining a good understanding of the client’s industry and external environment:

Risks associated with specific industries may affect the auditor’s assessment of client business risk.

Many risks are common to all clients in certain industries.

Many industries have unique accounting requirements that the auditor must understand to evaluate whether the financial statements are in accordance with accounting standards.

Question 11

Explain the need for Business Operations and Processes

Answer 11

Business Operations and Processes—The auditor should understand factors such as major sources of revenue, key customers and suppliers, sources of financing, and information about related parties that may increase client business risk.

Question 12

Explain the need for Tour Client Facilities and Operations—Touring

Answer 12

Tour Client Facilities and Operations—Touring facilities is helpful in obtaining an understanding of the client’s operations.

Question 13

Explain the need for Management and Governance

Answer 13

Management and Governance—The auditor needs to assess management’s philosophy and operating style and its ability to identify and respond to risk. Governance includes the organizational structure as well as operations of the board of directors and the audit committee.

Question 14

Explain the need for Code of Ethics

Answer 14

Code of Ethics—Public companies must disclose whether they have adopted a code of ethics that applies to senior management. Auditors should have an understanding of the code of conduct and investigate any changes.

Question 15

Explain the need for Minutes of Meetings

Answer 15

Minutes of Meetings—Corporate minutes are the official record of the meetings of the board of directors. They include key authorizations and summaries of important topics discussed. The auditor should read the minutes to identify matters relevant to the audit.

Question 16

what are auditors required to do as part of risk assessment

Answer 16

Perform preliminary analytical procedures-Key financial ratios, along with industry standards
Common-size financial statements are also often used for one or more years for comparison as a preliminary analytical procedure.

Question 17

what is the 4th step in audit planning

Answer 17

The fourth step in audit planning is to make a preliminary judgment about materiality for the audit

Materiality is not an absolute and it is not a black or white issue! The determination of materiality requires professional judgment

Question 18

Steps in Applying Materiality on an Audit

Answer 18

Step 1:
Determine overall materiality (planning materiality)
Step 2:
Determine tolerable misstatement (allocation of materiality at individual account/class of transactions level)
Step 3:
Evaluate audit findings (near the end of the audit)

Question 19

Audit documentation

Answer 19

Audit documentation is the record of audit procedures performed, relevant audit evidence obtained and conclusions reached.
The term ‘working papers’ or ‘work papers’ are also sometimes used.

Question 20

Purposes of audit documentatioN

Answer 20

Audit documentation is necessary for the following reasons:
It provides evidence of the auditor’s basis for a conclusion about the achievement of the overall objective.
It provides evidence that the audit was planned and performed in accordance with ISAs and other
legal and regulatory requirements.
It assists the engagement team to plan and perform the audit.
It assists team members responsible for supervision to direct, supervise and review audit work.
It enables the team to be accountable for its work.
It allows a record of matters of continuing significance to be retained.
It enables the conduct of quality control reviews and inspections (both internal and external).

Question 21

Types of audit documentation

Answer 21

Types of audit documentation

Audit documentation includes:
 Planning documentation:
– overall audit strategy
– audit plan
– risk analysis
Audit programmes
 Summary of significant matters
 Written representation from management
Checklists
 Correspondence
 Copies of client records.