TEST 2

• Benefits of audit planning

  • Avoid misunderstanding with client
  • Help keep audit cost reasonable
  • Enable the auditor to obtain sufficient competent evidence for circumstances
• Steps an auditor takes when performing audit planning

  1. Client acceptance and initial planning (should prepare engagement letter to clarify the responsibilities and expectations of each party)

  2. Understanding client business and accounting system (the risk of fraud and error)

  3. Developing audit strategy and plan
• Actions an auditor has to perform to gain an understanding of client's business and internal control system

  1. Reviewing financial statement and past audit report

  2. Assessing risk and establishing materiality level

  3. Developing audit strategy and plan
• Common statistical sampling methods

  • Random sampling
  • Systematic sampling
• Trend analysis


  Examining data over time to identify pattern or changes
• Ratio analysis


  Involves calculating and analyzing financial ratio to evaluate the relationship between different financial statements item
• Factors an audit should consider when determining the sample size for substantive test

  • Risk of material misstatement
  • Tolerable misstatement
  • Expected error rate
• Preliminary sample


  An initial sample used to gather preliminary information about the population
• Materiality


  Significance or important of an item or event in financial reporting
• Inherent risk


  The susceptibility of an assertion to a material misstatement, assuming there are no related controls
• Control risk


  The risk that material misstatement will not be presented or detected by internal control
• Factors to be considered in determining the materiality level

  • The size and nature of the item & error
  • The context within the financial statements
• Reliability


  The evidence that must be trustworthy and believable
• Factors to determine reliability


  • Sources of evidence: Evidence obtained directly from the auditor is more reliable than evidence obtained indirectly
  • Other factor
• Types of audit procedures in audit evidence

  • Inspection
  • Observation
  • Inquiry
  • Confirmation
  • Recalculation
• Methods an auditor can reduce the level of detection risk

  • Increase the sample size
  • Enhancing the quantity dept of audit procedure
• Permanent file


  Contains information relevant to the ongoing client relationship, such as organizational charts, long-term contracts, and historical data
• Current file


  Contains information relevant to the current audit period, including audit programs, working papers, and evidence collected during the audit
• Objectives of audit documentation in the context of systematic and accountability

  • Ensure the audit work systematically planned and executed to get an overview of a company's financial statement
  • Provide a basis of reviewing the audit work and ensuring accountability
  • Support the auditor's conclusion and the audit report
• Determinants of audit evidence persuasiveness

  • Relevance
  • Reliability
  • Sufficiency
• Types of audit sampling

  • Statistical audit sampling
  • Non-statistical audit
• Test of controls


  Evaluates the operating effectiveness of internal controls in preventing or detecting and correcting material misstatements
• Substantive test


  Directly tests the financial statements and underlying records for material misstatements through detailed testing of transactions and balances
• Sources of audit evidence


  • Internal evidence
  • External evidence
• Sampling risk


  The risk that the auditor's conclusion based on a sample may differ from the conclusion if the entire population were tested
• Sample size


  The number of items selected from the population to be tested to draw a conclusion about the entire population
• Information documented in audit planning phase

  • Audit program
  • Audit documentation
  • Audit strategy
  • Correspondence
  • Planning documentation