Auditing James

• Planning an audit


  Establishing the overall audit strategy for the engagement and developing an audit plan, in order to reduce audit risk to an acceptably low level
• Planning


  • Involves the engagement partner and other key members of the engagement team to benefit from their experience and insight and to enhance the effectiveness and efficiency of the planning process
• Adequate planning


  • Helps ensure that appropriate attention is devoted to important areas of the audit, potential problems are promptly identified, and the work is completed expeditiously
  • Assists in proper utilization of assistants and in coordination of work done by other auditors and experts
• Major Audit Planning Activities

  1. Obtaining an understanding of the client and its environment, including its internal control

  2. Determining the need for experts

  3. Establishing materiality and assessing risk

  4. Assessing the possibility of non-compliance

  5. Identifying related parties

  6. Performing preliminary analytical procedures

  7. Development of the overall audit strategy and detailed audit plan

  8. Preparation of preliminary audit programs
• Obtaining an understanding of the client and its environment, including its internal control


  • Enables the auditor to identify and understand the events, transactions and practices that may have a significant effect on the financial statements, the engagement, or the audit report
  • Assists the auditor in assessing risk and identifying problems and in planning and performing the audit effectively and efficiently
• Risk assessment procedures


  • Inquiries of management and others within the entity
  • Analytical procedures
  • Observation and inspection
• Determining the need for experts


  • Auditor is not expected to have the expertise of a person trained for or qualified to engage in the practice of another profession or occupation, such as an actuary or engineer
  • An expert may be contracted/employed by the entity or by the auditor
• Determining the need to use the work of an expert

  1. Consider the engagement team's knowledge and previous experience of the matter being considered

  2. Consider the risk of material misstatement based on the nature, complexity, and materiality of the matter being considered

  3. Consider the quantity and quality of other audit evidence expected to be obtained
• Evaluating the professional competence of an expert

  1. Consider the expert's professional certification or licensing by, or membership in, an appropriate professional body

  2. Consider the expert's experience and reputation in the field in which the auditor is seeking audit evidence
• Assessing risk


  1. Identify risks by considering the understanding of the entity and its environment, (including relevant controls), and by considering the classes of transactions, account balances, and disclosures in the financial statements

  2. Relate the identified risks to what can go wrong at the assertion level

  3. Consider whether the risks are of a magnitude that could result in a material misstatement of the financial statements
• Assessing risk


  • The amount of substantive test procedures and related audit work in an engagement often depends on the extent of reliance that the auditor places on the internal control system of the company
  • The assessment of inherent risk and control risk may be expressed quantitatively or qualitatively
• Noncompliance


  Acts of omission or commission by the entity being audited, either intentional or unintentional, which are contrary to the prevailing laws or regulations
• Identifying related parties


  1. The applicable financial reporting framework may require disclosure in the financial statements of certain related party relationships and transactions

  2. The existence of related parties or related party transactions may affect the financial statements

  3. The source of audit evidence affects the auditor's assessment of its reliability

  4. A related party transaction may be motivated by other than ordinary business considerations, for example, profit sharing or even fraud
• Performing preliminary analytical procedures

  1. Evaluations of financial information made by a study of plausible relationships among both financial and non-financial data

  2. Analytical procedures are required to be performed in the planning and in the final review stages of the audit, but not as substantive test procedures in gathering audit evidence

  3. The primary objective in performing analytical procedures in the planning stage of the audit, is to enhance the auditor's understanding of the client, its business and the industry in which the client operates and to identify areas of potential risk
• Analytical procedures at the planning stage

  • Study of the changes in a given account balance, item, or element over prior accounting periods with expectations for the current year
  • Comparison of financial information with anticipated results (for example, budgets and forecasts)
  • Study of the relationships between account balances over time or among firms in a given industry
  • Comparison of simple computations or series of computations that develop an estimate for a given account balance, item, or element (for example, proof-in-total or reasonableness tests)
  • Study of the relationship of financial information with non-financial information
• Analytical procedures


  • The basic premise is that relationships among data may reasonably be expected to exist and to continue to exist in the absence of known conditions to the contrary
  • Analytical procedures may be helpful in identifying the existence of unusual transactions or events, and amounts, ratios, and trends that might indicate matters that have financial statement and audit implications
• Development of the overall audit strategy and detailed audit plan

  1. Involves designing optimized audit approaches that seek to achieve the necessary audit assurance at the lowest cost within the constraints of the information available

  2. The overall audit strategy sets the scope, timing and direction of the audit, and guides the development of the more detailed audit plan

  3. The audit plan includes a description of the nature, timing and extent of risk assessment procedures, further audit procedures (tests of controls and substantive tests) and other audit procedures required to be carried out for the engagement in order to comply with PSAs
• Audit program


  • A list of procedures (tests of controls or substantive tests) used to gather sufficient appropriate audit evidence
  • This is the most important control mechanism in an audit
• Preparation of preliminary audit programs


  1. For initial engagements, preliminary audit programs are not usually prepared until the client's control structure has been reviewed and documented

  2. In continuing engagements, preliminary audit programs can be drafted in advance of fieldwork, based on the auditor's prior knowledge of the client's control structure and the results of previous assessments of control risk

  3. There are two types of audit programs: Tests of controls audit program and Substantive test audit program
• Other Planning Considerations


  • Arrangements for Company Assistance
  • Consider the Work of the Internal Auditors
  • Direction, Supervision and Review
• Schedules That the Company Can Provide

  • Lead schedules or trial balance
  • Bank reconciliation statements
  • Schedule of accounts receivable, with remarks as to collectibility
  • Inventory listings
  • Schedule of fixed assets and related accumulated depreciation
  • Analyses of prepaid and deferred charges
  • Schedule of accounts, notes and vouchers payable
  • List of stockholders with corresponding number of shares held
  • Insurance policies in force
  • Stock options granted, terminated, exercised and exercisable
• Consider the Work of the Internal Auditors

  The effect of the internal audit function on the nature, timing, and extent of the auditor's own audit procedures should be determined in due course by reviewing and evaluating the objectivity and competence of the internal auditors and the effectiveness of their procedures
• Appropriate audit


  • Appropriate attention is devoted to important areas
  • Potential problems are identified
  • Work is completed expeditiously
  • An unqualified opinion is expressed
• Outputs of audit planning

  • An overall audit strategy that sets out the direction, scope and focus of the audit team's efforts
  • A detailed audit plan containing the nature, extent, and timing of risk assessment procedures and planned further audit procedures at the assertion level
  • Audit programs, tailored as needed to reflect the particular engagement circumstances
• Risk assessment procedures


  Procedures used to obtain an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement at the financial statement and assertion levels
• Factors affecting the extent of audit planning

  • Size of the audit client
  • Auditor's experience with the entity and knowledge of the business
  • The nature and complexity of the audit engagement
• Requirements of PSA 315

  • Obtaining an understanding of the entity and its environment
  • Discussion among engagement team members about the risk of material misstatement in the financial statements
  • Identifying and assessing the risks of material misstatement
• Observation


  Physical examination of tangible assets, or the examination of records or documents, whether internal or external, in paper form, electronic form, or other media
• Aspects of understanding the entity and its environment

  • Industry, regulatory and other external factors, including the applicable financial reporting framework
  • Nature of the entity, including the entity's selection and application of accounting policies
  • Objectives and strategies and the related business risks that may result in a material misstatement of the financial statements
• Purpose of understanding the entity and its environment

  To understand the events and transactions that may have an effect on the client's financial statements
• Expert


  A person or firm possessing special skill, knowledge and experience in a particular field excluding accounting and auditing
• An expert would be least likely contracted by a CPA for application of accounting methods in computing inventory balances
• Materiality


  The importance of an error in any one account is greater for Religious Corp. than for Pilgrim Corp.
• Tolerable misstatement


  The materiality allocated to any given account balance
• When the audit is complete the auditor must be confident that the combined errors in all accounts are less than or equal to the preliminary judgment about materiality
• Relationship between materiality and audit risk

  Inverse
• When setting a preliminary judgment about materiality, less evidence is required for a low peso amount than for a high peso amount
• Fraud risk factors


  Events or conditions that provide an opportunity, a motive or a means to commit fraud, or indicate that fraud may already have occurred
• Characteristic heightening auditor's concern about risk of intentional manipulation of financial statements

  Management places substantial emphasis on meeting earnings projections
• Non-compliance


  Acts of omission or commission by the entity being audited which are contrary to prevailing laws or regulations