AUDIT PLANNING & FIELDWORK 1

Discuss why adequate audit�planning is essential.

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Three Main Reasons �for Planning

1. To obtain sufficient competent evidence for the circumstances
2. To help keep audit costs reasonable
3. To avoid misunderstanding with the client

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Risk Terms

• Acceptable audit risk – a measure how willing the auditor to accept that the FS may be materially misstated after the audit is completed and unqualified opinion is issued
• Inherent risk – a measure of the auditor’s assessment of the likelihood that there are material misstatements in an account balance before considering the effectiveness of internal control

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Planning an Audit and Designing an Audit Approach

• Accept client and perform initial audit planning.
• Understand the client’s business and industry.
• Assess client business risk.
• Perform preliminary analytical procedures.

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• Set materiality and assess acceptable audit risk and inherent risk.
• Understand internal control and assess control risk.
• Gather information to assess fraud risks.
• Develop overall audit plan and audit program.

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Make client acceptance decisions�and perform initial audit planning.

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Initial Audit Planning

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Client acceptance and continuance

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Identify client’s reasons for audit

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Obtain an understanding with the client

Develop overall audit strategy

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Client Acceptance and Continuance

• New client investigation – to determine its acceptability (client’s financial stability, CA firm’s competency to audit) by obtaining information from previous auditor or other sources
• Continuing client – evaluate existing client annually to determine whether there are reasons for not continuing to do the audit (conflict over audit fees, opinion to issue, scope of audit)

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Identify Client’s Reasons for Audit

• A clear understanding of the terms of the engagement should be documented in an engagement letter (ISA 210)
• Auditor sends an engagement letter before the commencement of the audit to avoid misunderstandings

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Obtain an Understanding with the Client

• Develop a preliminary audit strategy (considers the nature of the client’s business and industry including areas where there is greater risk of significant misstatements)

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Develop Overall Audit Strategy

• Select appropriate staff for engagement to meet generally accepted auditing standards and to promote audit efficiency
• Must be knowledgeable about the client’s industry
• Evaluate the need for outside specialists; to assist auditor in obtaining sufficient appropriate audit evidence
• However, need to consider the specialist’s qualifications, understand the objectives and scope of his work, and his relationship to the client.

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Setting Audit Objectives

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The objective of the ordinary audit of financial statements is the expression of an opinion of the fairness with which they present fairly, in all respects, financial position, result of operations, and its cash flows in conformity with GAAP.

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Steps to Develop Audit Objectives

1. Understand objectives and responsibilities for the audit.
2. Divide financial statements into cycles.
3. Know management assertions about accounts.
4. Know general audit objectives for classes of transactions and accounts.
5. Know specific audit objectives for classes of transactions and accounts.

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Management’s Responsibilities

• Responsibility for adopting sound accounting policies, maintaining adequate internal control, and making fair representations in the FS
• Responsibility for the fairness (assertions) – determining which disclosures it consider necessary

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Auditor’s Responsibilities

• ISA 200: an audit in accordance with ISAs is designed to provide reasonable assurance that the FS taken as a whole are free from material misstatement
• Auditor also reports on the effectiveness of internal control over financial reporting, and identify weaknesses in internal control

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Important terms and phrases

• Material vs Immaterial Misstatement (p.134)
• Reasonable Assurance – three reasons:
• Testing a sample, may include some risk of not uncovering a material misstatement
• FS contain complex estimates, involve uncertainty
• Fraudulently prepared FS are often extremely difficult to detect

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Important terms and phrases (cont.)

• Errors vs Fraud
• Unintentional misstatement
• Intentional misstatement
• Professional Skepticism
• An attitude that includes a questioning mind and a critical assessment of audit evidence but not to the extent to assume that the management is dishonest

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Financial Statements Cycles - Audits are performed by dividing the financial statements into smaller segments or components.

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Transaction Flow from Journals to Financial Statements Financials

Management Assertions

• Implied or expressed representations by management about classes of transactions and the related accounts in the FS
• Directly related to approved accounting standards (part of criteria that management uses to record and disclose accounting information in the FS)

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Seven categories of assertions

Existence

Occurrence

Rights & obligations

Completeness

Valuation or allocation

Measurement

Presentation & disclosure

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Transaction-Related Audit Objectives

• Intended to provide a framework to help the auditor to accumulate sufficient competent evidence as required
• General TRAO – applicable to every class of transactions
• Specific TRAO – tailored to a class of transactions such as sales transactions

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Balance-Related Audit Objectives

• Applied to account balances
• There are nine BRAO
• Auditor accumulates evidence to verify detail that supports the account balances rather than verifying the account balance itself (Example: in auditing account receivables, the auditor obtains a listing of the accounts receivable master file from the client that agrees to the general ledger balance)

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Gain an understanding of the�client’s business and industry.

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Understanding of the Client’s Business and Industry

• Factors that have increased the importance of understanding the client’s business and industry:

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• Information technology
• Global operations
• Human capital

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Understanding of the Client’s Business and Industry

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Industry and External Environment

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Business Operations�and Processes

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Tour the Plant and Offices

• By viewing the physical facilities, the auditor can assess physical safeguards over assets and interpret accounting data related to assets.

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Identify Related Parties

- A related party is defined as an affiliated company, a principal owner of the client company, or any other party with which

the client deals, where one of the parties can influence the management or policies of the other.

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Management and Governance

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• Corporate charter and bylaws
• Code of ethics
• Meeting minutes

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Management establishes the strategies and

processes followed by the client’s business.

Governance includes the client’s organizational

structure, as well as the activities of the board

of directors and the audit committee.

Client Objectives and Strategies

• Auditors should understand client objectives related to:

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• Reliability of financial reporting
• Effectiveness and efficiency of operations
• Compliance with laws and regulations

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Measurement and Performance

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The client’s performance measurement system

includes key performance indicators. Examples:

• market share
• sales per employee
• unit sales growth

• Web site visitors
• same-store sales
• sales/square foot

Performance measurement includes ratio analysis and benchmarking against key competitors.

Assess client business risk.

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Assess client business risk

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• What is the auditor’s primary concern?
• Material misstatements in the financial statements due to client business risk

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Client business risk is the risk that the client will fail to achieve its objectives.

Client’s Business, Risk, and�Risk of Material Misstatement

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Thanks!

Any questions?

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