Planning & Risk Assessment (2) Flashcards
- Four Phases Of An Audit
The four phases of an audit:
- Knowing the audit client - Accepting the audit engagement
- Planning the audit
- Performing audit procedures
- Reporting the findings
- Planning An Audit – Why?
What is one of the most important steps?
Auditors plan an audit engagement to: (4)
Planning An Audit: Pre-planning (2 stages, 2/2)
One of the most important steps in audit planning is gaining an understanding of the client’s business and industry.
Auditors plan an audit engagement to:
- Obtain sufficient & appropriate evidence
- Keep audit costs reasonable
- Avoid misunderstanding with the client
In other words, the aim is to run an effective & efficient audit
Pre-Planning:
- Conducted when evaluating the client for engagement.
- Applies to both existing and new clients.
Detailed Planning:
- Establishing the overall audit strategy.
- Developing an audit plan.
Audit Strategy
Definition?
Components (3)
Purpose?
Importance?
Objectives (2)
Definition:
- The initial planning phase that sets out in general terms how the audit is to be conducted.
Components:
- Scope - Defines the areas, processes, and accounts to be examined, setting the boundaries of the audit.
- Timing - Involves scheduling audit activities, including key dates and deadlines, to ensure timely completion.
- Direction - Guides the overall approach and methodology, including audit objectives, risk assessment, and audit procedures.
Purpose:
- Aligns the audit with identified risks.
Importance:
- Understanding the client’s internal control system is crucial.
Objectives:
- Reliable reporting
- Compliance
Risk Assessment Procedures
Substantive Tests (3)
Test of control?
Substantive Tests:
-
Analytical procedures
- Evaluate financial info by analyzing relationships in data. - Identify unusual trends or variances. - Example: Compare current year revenue to prior year.
-
Tests of details of transactions
- Examine individual transactions for accuracy. - Verify supporting documentation. - Example: Check sales transactions with sales invoices.
-
Tests of details of balances
- Verify accuracy of account balances. - Confirm balances with third parties or review documents. - Example: Confirm accounts receivable with customers.
Tests of Control:
- Assess if controls are effectively designed and operated.
- Evaluate design and effectiveness of internal controls. - Test control procedures like authorizations and reconciliations. - Example: Verify purchase orders are properly authorized.
Interim Audits
Definition?
Reasons (2/3,3)
Advantages (4)
Considerations (3)
Interim & Final Audits (2 points)
Definition:
- Conducted before the financial year-end, focusing on tests of control. These audits help identify and address issues early.
Reasons:
-
Effective Controls in Prior Years:
- Ensures continuity of effective controls. - Detects and addresses weaknesses early. - Sets a baseline for the year-end audit.
-
Efficiency in testing at that time
- Spreads the audit workload. - Allows timely communication and corrective actions. - Allocates resources better for the year-end audit.
Advantages:
- Client staff may be less busy.
- Allows modification of the audit plan if controls are inadequate.
- Alerts management to issues early.
- Reduces need for audit staff overtime at year-end.
Considerations:
- Effectiveness of controls nearer year-end = important to reassess the effectiveness of internal controls
- Need for additional detailed tests = , more substantive procedures may be necessary to gather sufficient and appropriate audit evidence
- Changes in the risk environment (people, policies, procedures).
Final Audit:
- Work from interim audit may need to be ‘rolled forward’.
- Focuses on tests of detail within the year-end financial statements.
The Audit Plan
What happens when planning the audit?
… depends on three things, what are they? (3)
What is the purpose of an audit plan?
What are the main components of an audit plan? (3)
What additional information does an audit plan contain? (4)
In planning the audit, auditors obtain and document an understanding of the accounting system and control systems to determine their audit approach.
The nature and extent of planning depends on three other things. These are:
- Size & complexity
- Previous experience of audit team
- Changes during the audit period
The audit plan aims to build up sufficient confidence in the audit opinion by assessing audit risks and specifying how they will be reduced to an acceptable level.
The main components of the audit plan are:
- Tests of controls
- Tests of details of transactions & balances
- Analytical procedures
Additional information that audit plans contain:
- Materiality levels,
- the audit team (management, direction, supervision),
- budgets and deadlines, and
- how to use the work of other experts.
Why might an auditor need to use the work of other experts? (3, 2 with examples)
An auditor might need other experts to:
- value assets (e.g., land, buildings, jewellery),
- determine quantities of assets (e.g., oil underground), or
- provide legal opinions
What should an auditor assess of the expert when using their work? (6)
The auditor should assess the expert’s:
- professional qualifications,
- experience,
- resources,
- objectivity,
- the adequacy of the expert’s work for audit purposes
- reliability of processes and methodologies
Experts & Audit Report
When to refer to use of expert and when not to and how?
- If the audit report is unmodified =there is no need to refer to the use of the expert.
- If the report is modified as a result of the work of the expert, the auditor may need to refer to such work.
- The expert’s permission, and possibly legal advice,will need to be sought before this can be done.
Internal Auditors
What is the role of internal auditors?
What do they commonly work on? (3)
The external auditors must assess the internal auditors for competence: (6)
Internal auditors are employed by the organization to assess and monitor internal control systems, and their work may be useful to external auditors.
Internal auditors commonly work on assessing the systems of internal control of an organisation:
- Examine, assess & monitor controls
- Tests of controls – adequacy & effectiveness
- Remaining independent and maintaining objectivity
The external auditors must assess the internal auditors for competence: (6)
- Professional qualifications and experience
- Policies, procedures and checklists
- Quality, supervision and evaluation of work.
- Objectivity
- Sufficient status within the organisation
- Policies regarding employment
What must external auditors do if they use the work of internal auditors? (4)
If the external auditors do decide to use the work of internal audit, they must perform audit procedures on it to ensure it is adequate to address their needs:
- Specific acts performed as auditor gathers evidence
- Check specific assertions are met
If the internal audit team help directly in carrying out external audit procedures, the external auditor must supervise, review, evaluate and test their work.
- Evaluate control systems
- Will influence external auditor’s audit procedures
Service Organisations
What is the most common one?
What if they are material to the audit?
Service Organisations often…? (2)
What does the external auditor do in different circumstances (2)
- Many companies use separate organisations to supply all or part of their accounting function; payroll services are probably the most common.
- If such services are material to the audit, the auditor will need to consider the controls in place at the service organisation. The controls the client uses over the service organisation will also need to be assessed.
Service organisations often employ an auditor to issue a report to their clients about their controls.
- The report may describe the controls and assess whether they are suitable
- Or it may go further by testing the controls.
An external auditor can only rely on the second, more detailed, kind of report.
If the external auditor is satisfied with the other auditors, no reference need be made.
If the other auditors report is modified, the external auditor will consider how material this is to the audit and may also modify their own report.
