CHAPTER 3: Process of assurance: planning the assignment Flashcards
(36 cards)
Audit strategy:
The formulation of the general strategy for the audit, which sets the scope, timing and direction of the audit and guides the development of the audit plan.
Audit plan:
An audit plan is more detailed than the strategy and sets out the nature, timing and extent of audit procedures (including risk assessment procedures) to be performed by engagement team members in order to obtain sufficient appropriate audit evidence.
Audits are planned to:
- ensure appropriate attention is devoted to important areas of the audit
- identify potential problems and resolve them on a timely basis
- ensure that the audit is properly organised and managed
- assign work to engagement team members properly
- facilitate direction and supervision of engagement team members
- facilitate review of work
A structured approach to planning will include:
Step 1: Ensuring that ethical requirements continue to be met
Step 2: Ensuring the terms of the engagement are understood
Step 3: Establishing the overall audit strategy
- identifying the relevant characteristics of the engagement, such as the reporting framework used as this will set the scope for the engagement
- discovering key dates for reporting and other communications
- determining materiality, preliminary risk assessment, whether internal controls are to be tested
- consideration of when work is to be carried out, for example before or after the year end
- consideration of ‘team members’ available, their skills and how and when they are to be used, for example particular skills for high risk areas. In addition, appropriate levels of staff are required to facilitate direction, supervision and review of more junior team members’ work
Step 4:
The audit plan and any significant changes to it during the audit must be documented.
Understanding the entity’s environment
General economic factors and industry conditions
Important characteristics of the client:
(a) business
(b) principal business strategies
(c) financial performance
(d) reporting requirements, including changes since the previous audit
The general level of competence of management
Understanding the accounting and internal control systems
- The accounting policies adopted by the entity and changes in those policies
- The effect of new accounting or auditing pronouncements
- The auditors’ cumulative knowledge of the accounting and internal control systems, and the relative emphasis expected to be placed on different types of test
Risk and materiality
- The expected assessments of risks of fraud or error and identification of significant audit areas
- The setting of materiality for audit planning purposes
- The possibility of material misstatements, including the experience of past periods, or fraud
- The identification of complex accounting areas including those involving estimates
Consequent nature, timing and extent of resources
Possible change of emphasis on specific audit areas
The effect of information technology on the audit
Coordination, direction, supervision and review
The number of locations
Staffing requirements
Need to attend client premises for inventory count or other year-end procedures
Other matters
The possibility that the going concern basis may be subject to question
Conditions requiring special attention
The terms of the engagement and any statutory responsibilities
The nature and timing of reports or other communication with the entity that are expected under the engagement
Understanding the entity and its environment
the objective of the auditor is to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels, through understanding the entity and its environment, including the entity’s internal control, thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement
Obtaining an understanding of the entity and its environment. WHY?
- To identify and assess the risks of material misstatement in the financial statements
- To enable the auditor to design and perform further audit procedures
- To provide a frame of reference for exercising audit judgement, for example, when setting audit materiality
Obtaining an understanding of the entity and its environment. WHAT?
- Industry, regulatory and other external factors, including the reporting framework
- Nature of the entity, including selection and application of accounting policies
- Objectives and strategies and relating business risks that might cause material misstatement in the financial statements
- Measurement and review of the entity’s financial performance
- Internal control
Obtaining an understanding of the entity and its environment. HOW?
- Inquiries of management and others within the entity
- Analytical procedures
- Observation and inspection
- Prior period knowledge
- Discussion of the susceptibility of the financial statements to material misstatement among the engagement team
• Inquiries of management and others within the entity. (The auditors will usually obtain most of the information they require from staff in the accounts department, but may also need to make enquiries of other personnel, for example, internal audit, production staff or directors.)
Analytical procedures:
Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. Analytical procedures also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.
the consideration of comparisons with:
- comparable information for prior periods
- anticipated results of the entity, from budgets or forecasts or expectations of the auditor
- similar industry information, such as a comparison of the client’s ratio of sales to trade receivables with industry averages, or with the ratios relating to other entities of comparable size in the same industry
consideration of relationships between:
- elements of financial information that are expected to conform to a predicted pattern based on the entity’s experience, such as the relationship of gross profit to sales
- financial information and relevant non-financial information, such as the relationship of payroll costs to number of employees
analytical procedures should be used at the risk assessment stage. Possible sources of information about the client include:
• interim financial information budgets • management accounts • non-financial information • bank and cash records • VAT returns • board minutes • discussions or correspondence with the client at the year end
key ratios used
page 62
Materiality:
An expression of the relative significance or importance of a particular matter in the context of financial statements as a whole. The IFRS Conceptual Framework for Financial Reporting states that a matter is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.
Performance materiality:
The amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.
materiality and audit risk are considered throughout the audit, in particular, when:
- identifying and assessing the risks of material misstatement;
- determining the nature, timing and extent of further audit procedures; and
- evaluating the effect of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor’s report’.
