AUDIT PLANNING Flashcards
(21 cards)
AUDIT PLANNING
THE PROCESS WHERE THE AUDITOR DEVELOPS A STRATEGY PLAN ON TO CONDUCT THE AUDIT EFFICIENTLY AND EFFECTIVELY, FOCUS ON HIGH-RISK AREAS, ALLOCATE RESOURCES AND ENSURE COMPLIANCE WITH ISAs
THE BENEFITS OF PLANNING
- APPROPRIATE ATTENTION IS DEVOTED TO IMPORTANT AREAS OF THE AUDIT
- POTENTIAL PROBLEMS ARE IDENTIFIED AND RESOLVED ON TIME
- THE ENGAGEMENT TEAM MEMBERS WITH THE APPROPRIATE EXPERIENCE AND EXPERTISE ARE ALLOCATED TO THE AUDIT
- OBTAINING AN UNDERSTANDING OF THE ENTITY AND ITS ENVIRONMENT
Ask management and staff questions.
Observe, inspect, and run analytics.
This gives a base to spot risks and plan further audit steps.
OBJECTIVE OF OBTAINING KNOWLEDGE OF THE ENTITY AND ITS ENVIRONMENT
Help plan the audit, exercise professional judgement when evaluating and assessing the risk of material misstatements, identify significant classes of transactions, account balances and disclosures which will be tested individually in detail and respond to identified risks for example when:
setting materiality
formulating an overall audit strategy
assigning staff of the right experience, skills and competence to the audit and co-ordinating the overall audit.
THE PROCEDURES TO OBTAIN KNOWLEDGE OF THE ENTITY, THAT IS THE RISK ASSESSMENT PROCEDURES
(1) ENQUIRES OF MANAGEMENT AND OTHERS WITHIN THE ENTITY
(2) ANALYTICAL PROCEDURES - Help to identify the existence of unusual transactions or events, amounts, ratios and trends and to determine the financial position
(3)OBSERVATION AND INSPECTION - Reading reports prepared by management, tracking transactions through system, previous financial reports
- UNDERSTAND THE ENTITY INTERNAL CONTROLS AND FINANCIAL INFORMATION
LOOK AT HOW WELL CONTROLS ARE DESIGNED TO PREVENT OR DETECT MISTAKES
(1) CONTROL ENVIRONMENT
Sets the entity’s tone and creates the working environment for employees to perform their duties, this is the ethics.
- code of conduct
- Competence
- Human Resources policies and practices
(2) RISK ASSESSMENT PROCESS
the company’s process for identifying and analysing risks that may mess up financial reporting and how they address them.
(3) INFORMATION SYSTEMS AND RELATED BUSINESS PROCESSES
This consists of the functions (computerised and manual
procedures) through which the entity’s business processes are controlled and financial information is assembled, processed and recorded.
(4) CONTROL ACTIVITIES
the things the company does on a day-to-day basis to prevent or catch errors and fraud.
- Supervision
- Comparisons
- Reconciliation and review
- Authorisation
- Management control
(5) MONITORING OF CONTROLS
This is how the company keeps track of whether its internal controls are actually working and being followed.
IT RISKS AND INTERNAL CONTROLS
IT ALSO POSES RISKS TO AN ENTITY’S INTERNAL CONTROLS, PROCESSES AND SYSTEMS:
Reliance on systems or programs that are inaccurately processing data.
Unauthorised access to data that may result in the destruction of data including the recording of transactions.
IT personnel gaining access privileges beyond those necessary to perform their assigned duties.
unauthorised changes to systems or programs.
* Potential loss of data or inability to access data as required.
- IDENTIFY AND ASSESS THE RISKS OF MATERIAL MISSTATEMENT
DETERMINE WHETHER THEY EXIST AT:
- FS LEVEL OR
- THE ASSERTION LEVEL FOR CLASSES OF TRANSACTIONS, ACCOUNT BALANCES AND DISCLOSURES
SIGNIFICANT RISK
This is the identified and assessed risk of material misstatement that, in the auditor’s opinion, requires special audit consideration.
INHERENT RISK
The natural chance that an area is prone to error even before any controls.
Example: Revenue is usually high risk because companies often want to overstate it.
CONTROL RISK
he possibility that internal controls within an organization will fail to prevent or detect material misstatements - AVOIDABLE
DETECTION RISK
the risk that the auditor’s procedures will fail to find a material misstatement
THE AUDITOR CONTROLS THIS BY HOW MUCH AUDIT WORK IS DONE AND WHAT TYPE OF TESTING IS DONE
ROMM
= IR X CR
AUDIT RISK
THE RISK OF MATERIAL MISSTATEMENTS AND THE RISK THAT THE AUDITOR WILL NOT DETECT SUCH MISSTATEMENTS
AR = IR x CR x DR
RISK ASSESSMENT AND RESPONSE THERETO
After the auditor has identified the significant ROMM at the overall financial statement level, they will then assess the risk (normally high, medium or low).
This will then affect:
The setting of the planning materiality
The overall audit strategy/response to the audit
THE ASCERTAIN LEVEL
THE AUDITOR ASSESS THE ROMM FOR EACH SIGNIFICANT CLASS OF TRANSACTIONS AND THEN DESIGN PROCEDURES TO REDUCE THE RISK AND LIMIT AUDIT RISK THROUGH:
- TESTS OF CONTROL
- SUBSTANTIVE PROCEDURES
The auditor’s assessment of risk may change during the audit as additional audit evidence is obtained.
