Week 2

• What is the stages of an audit?

  1. Obtaining the engagement
  2. Planning
  3. Performing procedures
  4. Review and completion
  5. Reporting
• ISA 300: ‘The objective of the auditor is to plan that audit so that itwill be performed in an effective manner
• What is the need to plan an audit?

  1. To obtain sufficient appropriate evidence for the circumstances
  2. To help keep audit costs reasonable
  3. To avoid misunderstanding with the client
• What are the overall components for planning the assignment?

  • Planning process
  • Materiality
  • Analytical procedures
  • Risk assessment
  • Understanding the entity
• What are the two key documents in audit planning?

  • Audit strategy
  • Audit plan
• Audit Strategy: The formulation of the general strategy for the audit,which sets the scope, timing and direction of the audit and guidesthe development of the audit plan
• Audit Plan: More detailed than the strategy and sets out the nature,timing and extent of audit procedures (including risk assessment) tobe performed by the engagement team members in order to obtainsufficient appropriate audit evidence
• What are the key components of the audit strategy?

  • Risk Materiality
  • Understanding the entity's environment
  • Coordination ,direction, supervision and review
  • Understanding the entity's accounting system and internal controls
  • Nature, extent and timing of audit procedures
• What are the key components of the audit plan?

  • Attention to the most important areas
  • Proper collection of evidence
  • Appropriate review of work
  • Identification of potential problems
  • Proper organisation and management
• Materiality is vital concept when auditors seek to determine company’s financial statements give a true and fair view.
• Without an idea of what level of misstatement in financial statementswould be misleading, auditors would not be able to evaluate theimportance of misstatements discovered during audit testing
• Financial statements do not give a true and fair view when misstatements are significant or material
• Auditors have to determine extent to which financial statements can be misstated before t hey would alter decision of shareholders –primary user group
• At outset of audit – particularly during planning,auditors have to decide what level of error or misstatement could occur in the financial statements before an investor’s decision would be influenced
• ISA 320 states that ‘materiality and audit risk are consideredthroughout the audit, in particular, when:

  • Identifying and assessing the risks of material misstatement;
  • Determining the nature, timing and extent of further audit procedures;
  • Evaluating the effect of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor’s report’
• Auditors assess general risks and component risk, assigningmateriality, depending on:

  • Importance–
  • Nature
  • Auditors’ past experience
  • Trend in a/c balance
• Audit firm may decrease materiality if inherent or control risk high,thereby influencing nature and scope of work
• Auditors should record decisions on materiality in audit files – atplanning stage in audit planning memorandum
• What are the Common accounting ratios used asanalytical procedures?

  • Short-term debt-paying ability
  • Liquidity ratios
  • Ability to meet long-term debtobligations
  • Profitability ratios
• Items might be material due to their:

  • Amount/value/quantity
  • Nature/Quality