Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Topic 7 audit planning (1)

3,628 views

Published on

Topic 7 audit planning (1)

Published in: Education
  • Be the first to comment

Topic 7 audit planning (1)

  1. 1. TOPIC 7: AUDIT PLANNING References: Chapter 5,6,7 & 11 AUD390 2011
  2. 2.  Engagement letter  Planning activities  Understanding the client’s business & industry  Fundamental concepts of materiality & audit risk  Relationship between materiality value & evidence  Preparation of audit programme  Determination of audit objectives  Analytical procedures - planning, fieldwork & completion stage AUD390 2011
  3. 3.  Procedures carried out before accepting a new client or continuing with an existing client include: obtaining and reviewing available financial information regarding the client making inquiries of third parties such as solicitors and bankers communicating with previous auditor evaluating the firm’s independence and ability to serve the client, including technical skills and knowledge of industry and personnel ensuring accepting engagement will not violate the Code of Ethics.
  4. 4. 6-5  To ensure the interests of shareholders, the incoming auditor and existing auditor are protected. It allows the existing auditor to advise the prospective auditor of any professional matters they should be aware of before accepting the engagement.
  5. 5.  After accepting the appointment, it requires that the auditor and entity to agrees on terms of engagement.  The agreed terms of the engagement shall be recorded in an engagement letter.
  6. 6.  EL is from the auditor to the client, document the arrangements made with the client and clarify matters that may be misunderstood.  Contents: the objectives and scope of the audit the responsibilities of the auditor the responsibilities of management identification of the applicable financial reporting framework the form and contents of any reports, and a statement that there may be circumstances in which a report may differ from its expected form and content.  Refer Exhibit 6.1(pp.236)
  7. 7.  Definition: involves general strategy and detail approach for the expected nature, timing and extent of an audit  Reasons for Audit Planning To enable the auditor to obtain sufficient competent evidence for the circumstances To help keep audit costs reasonable To avoid misunderstandings with the client AUD390 AUDITING DIA
  8. 8. 1. Understanding the entity and its environment 2. Understanding internal controls 3. Assessing risks of material misstatement 4. Developing responses to assessed risks 5. Performing tests of controls 6. Performing substantive procedures 7. Completion and review. Source: Gay & Simnet (2012, pp. 241-243)
  9. 9. The three phases of the audit—planning, interim and final—are normally related to the major stages. The first four stages: the planning phase of the audit. The evidence gathering phase, performing tests of controls and substantive procedures: the interim phase (before year end) or final phase (after year end). Some substantive tests (e.g. counting inventory) are usually best done at balance date others: engagement completion
  10. 10.  Audit Risk : Risk that the auditor gives an inappropriate opinion when the FS are materially misstated Risk that the auditor delivers an incorrect audit opinion – an opinion which states that the account presents a true & fair view while in reality they do not
  11. 11. AUD390 AUDITING DIA INHERENT RISK Risk that the accounts may contain misstatements DETECTION RISKCONTROL RISK Derived from the characteristics of the enterprise & of its components Risk that internal controls will not prevent or detect material errors Risk that the auditor may fail to detect misstatements
  12. 12.  INHERENT RISK (IR) Risk related to the characteristics of the business that may cause material FS Factors used in assessing inherent risks  Nature of client’s business  Integrity of management  Client motivation  Client’s knowledge of accounting standards  Results of previous audit AUD390 AUDITING DIA
  13. 13.  Susceptibility of defalcation  Nature of client’s inventory & technological development E.g.  External factors such as technological development might make a particular product obsolete IR is high if no internal control system & IR is low if internal control exist AUD390 AUDITING DIA
  14. 14.  CONTROL RISK (CR) › Risk that the client’s internal control will not prevent or detect material errors or misstatements in the account balance › Control risk exist due to the inherent limitation of internal control system & inadequacy of the segregation of duties such as human error, faulty judgment › CR high if internal control system is not effective & CR low if internal controls system is effective AUD390 AUDITING DIA
  15. 15.  DETECTION RISK (DR) Risk that any remaining material misstatements after assessing IR & CR will not be detected by auditor Risk that the auditor’s substantive procedures & review FS will not detect material errors misstatements DR high if the auditors are not competent & due care & DR low if the auditors are competent & exercise due care AUD390 AUDITING DIA
  16. 16.  Definition: a study of relationship between elements of financial information expected to conform to a predictable pattern based on the auditor’s knowledge of the business relationship between financial and non financial information AUD390 AUDITING DIA Types of data, ratios, etc Comparison with Financial Data (Account balances, budgets, etc) Corresponding period, budget & forecasts Non Financial Data (Production, employment statistics) Entries in accounting records, other financial data Ratios & Percentage Preceding period, budget & forecast, industry statistics
  17. 17.  Types of analytical procedures: 1. Compare client data & industry data 2. Compare client data with similar prior-period data 3. Compare client data client-determined expected results 4. Compare client data & auditor-determined expected results 5. Compare client data with expected results, using non financial data AUD390 AUDITING DIA
  18. 18.  Common financial ratios 1. Short-term Debt-Paying Ability  E.g. Cash ratio, quick ratio & current ratio 1. Liquidity Activity Ratios  E.g. Accounts receivable turnover, Days to collect receivables, Inventory turnover, Days to sell inventory 1. Ability to meet Long-term Debt Obligations  E.g. Debt to equity, Times interest earned 1. Profitability Ratios  E.g. Earnings per share, Gross profit margin, Profit margin, Return on assets, Return on common equity AUD390 AUDITING DIA
  19. 19. AUD390 AUDITING DIA STAGES PLANNING DETAILED TEST REVIEW FS TIMING Before the FS are available Start after client had submitted FS with supporting schedules Carry out overall review of FS when most of audit testing are completed PURPOSES 1.To understand the client’s industry & business 2.To assess going concern 3.To indicate possible misstatement 4.To reduced detailed tests 1. To ensure completeness, accuracy & validity of information contain in the FS 2.To obtain sufficient audit evidence by reducing the work done through substantive tests 1.To update auditor’s knowledge of client’s business 2.To ensure the FS are not materially misstated 3.To corroborate conclusions form during the audit SOURCES OF INFORMATIONS Interim FS, Management reports, Budget & forecasts, Internal audit report Annual FS, Accounting & other records, Management reports, Internal audit reports Drafted audited FS EXAMPLES Calculate key ratios for client and compare against industry’s ratios Reasonable test on EPF contribution account Gearing ratio

×