Planning Flashcards
What are the objectives of the auditor?
“The objective of the auditor is to plan the audit so that it will be performed in an effective manner.” (ISA 300 Planning and Audit of Financial Statements).
Audits are potentially complex, risky and expensive processes. Vital that planned to ensure that the auditor:
Devotes appropriate attention to important parts of the audit
Identifies and resolves potential problems on a timely basis
Organises and manages the audit so it is performed in an effective and efficient manner
Selects team members with appropriate capabilities and competencies
Directs and supervises the team and reviews their work
Effectively coordinates others work, such as experts and IA
What is the planning process?
Preliminary engagement activities:
- evaluating compliance with ethical requirements
- establishing the terms of the engagement
Planning activities:
- developing the audit strategy
- developing an audit plan
What is an audit strategy?
Sets the scope, timing and direction of the audit
Allows the auditor to determine:
- the resources to deploy for specific audit areas
- the amount of resources to allocate
- when the resources are to be deployed
- how the resources are managed, directed and supervised, including the timings of meetings, debriefs and reviews
Considerations in establishing overall strategy:
- identify the characteristics of the engagement
- ascertain the reporting objectives to plan the timing of the audit and the nature of communications
- consider the significant factors that will direct the team’s efforts
- consider the results of preliminary engagement activities
- ascertain the nature, timing and extent of resources necessary to perform the engagement
What is the audit plan following the risk assessment?
Strategy (overall approach)
Plan (operational detail)
Procedures
What is the audit plan?
Includes specific descriptions of:
Nature, timing and extent of risk assessment procedures
Nature, timing and extent of further audit procedures, including;
- What?
- Who?
- How much?
- When?
Any other procedures to conform to ISA’s
Differences between interim and final audit?
Interim audits completed part way through client’s accounting year (ie before the year end)
Normally focuses on documenting systems and evaluating controls
May be possible to test specific material transactions, attend interim inventory counts and carry out interim receivables circularisation
Costs and timing
Final audit (takes place after the year-end) focuses on the remaining tests and areas that pose significant risk of material misstatement
What is materiality?
“ Misstatement, including omissions, are considered to be material if they, individually or in aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements” (ISA 320 Materiality in Planning and Performing an Audit)
Determination of materiality is a matter of professional judgement and auditor must consider:
- Circumstances surrounding the entity
- Size and nature of misstatements
- Information needs of the users as a group
What are the traditional benchmarks of materiality?
Subjective and complex process
Vital that considered in light of client’s needs, instead of arbitrary calculation
Standard benchmarks as a starting point
Traditional benchmarks:
½ - 1% of turnover
5-10% of profit before tax
1- 2% of gross assets
What is fraud?
ISA 240 the Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements recognises that misstatement in FSs can arise from fraud or error.
Intentional or unintentional?
Fraudulent financial reporting
Misappropriation of assets
External auditor’s responsibility
ISA 315 Identifying and Assessing the Risks
of Material Misstatement Through
Understanding the Entity and its Environment
Reporting of fraud
Directors’ responsibilities
Internal auditors
As well as adopting professional scepticism, auditor is required to perform procedures in light of the risk of fraud…..
What are the laws and regulations of audit?
Responsibilities of management
- Ensuring the entity complies with relevant laws and regulations.
- Requires the monitoring of legal requirements, the development of systems of internal control to ensure compliance and an effective system of assessing the effectiveness of controls
Responsibilities of the auditor
- Obtaining reasonable assurance that financial statements are free from material misstatement
- Non-compliance with laws and regulations can impact this
Procedures – ISA 250 Consideration of Laws and Regulations in an Audit of Financial Services
What is audit documentation?
As per ISA 230 Audit Documentation, auditors are required to prepare written documentation that provides: a sufficient appropriate record of the basis for the audit report; and evidence that the audit was performed in accordance with ISA’s and other regulatory requirements
Sufficient to enable an experienced auditor with no previous connection to the audit to understand:
The nature, timing and extent of audit procedures performed
The results of the procedures performed and the evidence obtained
Significant matters arising and the conclusions reached
Documentation of all discussion of significant matters
What are the audit files?
Planning
Audit Planning Memorandum (refer to handout)
Performance
Working papers – lead schedule, back-up schedules, audit work programme
Completion
