AUDIT PLANNING & FIELDWORK 2

Perform preliminary analytical procedures.

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Perform preliminary analytical procedures.

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Comparison of client ratios to industry or competitor benchmarks provides an indication of the company’s performance.

Preliminary tests can reveal unusual changes in ratios.

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Examples of Planning Analytical Procedures

Materiality

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Definition

• ISA 320: The magnitude (level) of an omission or misstatement of accounting information that, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.

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The concept

• It is a major consideration in determining the appropriate audit report to issue.
• The auditor’s responsibility is to determine whether financial statements are materially misstated.
• If there is a material misstatement, the auditor will bring it to the client’s attention so that a correction can be made.

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Set Preliminary Judgment �About Materiality

• Auditors decide early in the audit the combined amount of misstatements of the financial statements that would be considered material.
• This preliminary judgment is the maximum amount by which the auditor believes the statements could be misstated and still not affect the decisions of reasonable users.

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Materiality is a relative rather than an absolute concept.

Bases are needed for evaluating materiality.

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Qualitative factors also affect materiality.

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Guidelines

• Accounting and auditing standards do not provide specific materiality guidelines to practitioners.
• Professional judgment is to be used at all times in setting and applying materiality guidelines.

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Quantitative & Qualitative in Materiality

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Quantitative consideration is simply about the relative size of the items in the financial statements.

On the other hand, qualitative factors usually include the nature of information, the circumstance and possible cumulative effects of error or omission of such information.

Assessment of Risk

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RISK

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Types of risks

• Client business risk – the risk that the client will fail to meet its objectives
• Engagement risk – the risk that the auditor or audit firm will suffer harm after the audit is completed, even though the audit report was correct
• Audit risk – the risk that auditor will conclude after conducting an adequate audit that the FS are fairly stated and unqualified opinion is issued when, in fact, they are materially misstated

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Audit Risk Model for Planning

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Assessing Acceptable Audit Risk

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Impact of Engagement Risk �on Acceptable Audit Risk

• Auditors decide engagement risk and use that risk to modify acceptable audit risk.
• Engagement risk closely relates to client business risk.

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Factors Affecting �Acceptable Audit Risk

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The degree to which external users rely on the statements

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The likelihood that a client will have

financial difficulties after the audit report is issued

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The auditor’s evaluation of

management’s integrity

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The impact of several�factors on the assessment�of inherent risk

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Factors Affecting Inherent Risk

• Nature of the client’s business
• Results of previous audits
• Initial versus repeat engagement
• Related parties
• Nonroutine transactions
• Judgment required to correctly record account balances and transactions
• Makeup of the population
• Factors related to fraudulent financial reporting
• Factors related to misappropriation of assets

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The relationship of�risks to audit evidence

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Relationship of risks to evidence �and factors influencing risks

• Auditors can change the extent of testing & types of audit procedures
• The engagement may require more experienced staff – assign someone with experience in auditing high risk area
• The engagement will be reviewed more carefully than usual – CA firms need to ensure adequate review of the audit files, evidence accumulation and conclusions, and other matters in audit.

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Sampling

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Criteria – representative sample

• Is one in which the characteristics in the sample are approximately the same as those of the population
• Non-sampling risk – the risk that auditors make an incorrect conclusion for any reason that is not related to sampling risk
• Sampling risk – the risk that an auditor reaches an incorrect conclusion because the sample is not representative of the population (items selected in a sample are not truly representative of the population being tested – inherent part of audit sampling).

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POPULATION

SAMPLE

AUDIT CONCLUSION

AUDIT CONCLUSION

DIFFERENCE

(SAMPLING RISK)

Sampling (cont.)

Statistical

Applying mathematical rules. Auditor measure sampling risk in planning the sample and in evaluating the results

Non statistical

Auditors do not quantify sampling risk. Instead, auditors select sample items they believe will provide the most useful information on a judgmental basis

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Types of Sampling

• Non-probabilistic sample selection methods: directed sample selection, block sample selection& haphazard sample selection
• Probabilistic sample selection methods: simple random sample selection, systematic sample selection, probability proportional to size sample selection & stratified sample selection

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Thanks!

Any questions?

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