Chapter 5 - Planning

Question 1

Planning

Answer 1

Planning ensures the risk of performing a poor quality audit is reduced to an acceptable level.

Auditors are required to perform audits with professional scepticism and professional judgement.

Risks can be uncovered at any stage of the audit and procedures must be adapted in light of revelations that indicate further risks of material misstatement.
The most senior reviewer usually confirms the risk of material misstatement has been reduced to an acceptable level.

Question 2

The audit strategy

Answer 2

In determine the audit strategy the auditor should:

1. Identify the characteristics of the engagement.
2. Ascertain the reporting objectives to plan the timing of the audit and the nature of communications.
3. Consider the significant factors and results of preliminary engagement activities that will direct the team’s efforts.
4. Ascertain the nature, timing and extent of resources necessary to perform the engagement.

Question 3

The audit plan

Answer 3

After the audit strategy has been established, he next step is to develop an audit plan.

The audit plan is much more detailed than the overall strategy because it includes details of the nature, timing and extent of the specific audit procedures to be performed.

The audit plan should include:

1. The nature, timing and extent of further audit procedures.
2. The nature, timing and extent of further audit procedures, including what audit procedures, who should do them, how much work and when the work should be done.
3. Any necessary procedures to conform to ISA’s.

Question 4

Interim audits

Answer 4

Interim audits can be completed part way through a client’s accounting year (before year end). This allows the auditor to spread out their procedures and enables more effective planning for the final stage of the audit.

Interim audits focus on documenting systems and evaluating controls.

The interim audit can be used to:

• test specific and complete material transactions.
• test transactions such as sales, purchases and payroll for YTD.
• assess risks that will impact work conducted at the final audit.
• attend perpetual inventory counts.

For an interim audit, the client needs to be of sufficient size because this may increase costs. An interim audit should improve risk assessment and make final procedures more efficient.

The timing has to be:

Early enough not to interfere with year end procedures and to give adequate warning of specific problems that need to be addressed in planning the final audit.

Late enough to enable sufficient work to be done to ease the pressure on the final audit.

Question 5

Final audit

Answer 5

The final audit takes place after the year end and focuses on the remaining tests and areas that pose significant risk of material misstatement.

• statement of financial position which will only be known at year end.
• transaction testing for transactions that have occurred since the interim audit took place.
• year end journals which may include adjustments to the transactions tested at the interim audit.
• Obtaining evidence that the controls tested at the interim audit have continued to operate during the period since the interim audit took place.

Question 6

Impact of interim audit work on the final audit

Answer 6

1. The controls tested provide evidence that control risk is low, fewer substantive procedures can be performed.
2. If substantive procedures were performed at the interim stage, fewer procedures will be required at the final audit in general.
3. The final audit requires less time to perform.
4. The audit report can be signed closer to the year end resulting in more timely reporting to shareholders.
5. If the interim audit identifies areas of increased risk, e.g. Controls not found to be working effectively, increased substantive procedures will be required at the final audit.

Question 7

Fraud

Answer 7

An intentional act by one or more individuals among management, those charged with governance, employees or third parties involving the use of deception to obtain an unjust or illegal advantage.

Fraudulent financial reporting - deliberately misstating the accounts to make the company look better/ worse than it actually is.

Misappropriation - the theft of the company’s assets such as cash or inventory.

Question 8

The external auditor’s responsibilities

Answer 8

Responsible for obtaining reasonable assurance that the FS taken as a whole are free from material misstatement whether caused by fraud or error.

The auditor must:

1. Maintain an attitude of professional scepticism.
2. Consider any incentives to commit fraud.
3. Discuss among engagement team the clients susceptibility to fraud.
4. Identify and assess the risks of material misstatement due to fraud.
5. Identify through enquiry how management assesses and responds to the risk of fraud.
6. Enquiry of management, internal auditors and those charged with governance if they are aware of any actual or suspected fraudulent activity.
7. Obtain sufficient evidence by designing and performing audit procedures that respond to the assessed risks.

Responses:

1. Obtain written representation from management they have informed the auditor of all known or suspected frauds.
2. Test year end journals and adjustments.
3. Test accounting estimates and areas of management judgement for reasonableness.
4. Make audit procedures unpredictable.
5. Use suitably experienced staff.

Question 9

The director’s responsibilities

Answer 9

The prevention and detection of fraud rests with those charged with governance and the management of an entity.

• implementing an effective system of internal control
• creating a culture of honesty, ethical behaviour, and active oversight by those charged with governance.

Question 10

Laws and regulations

Answer 10

Responsibilities of management:
Management monitor legal requirements, develop systems of internal control to ensure compliance with those legal requirements and effectiveness of those control systems.

Responsibilities of the auditor:
The auditor must obtain sufficient, appropriate evidence of compliance with those laws and regulations to have a direct effect on the determination of material amounts and disclosures in the FS.

The auditor must also perform specified audit procedures to help identify instances of non-compliance with other laws and regulations that have a material impact on the FS.

Question 11

Audit documentation

Answer 11

1. Provides a sufficient appropriate record of the auditor’s basis for the audit report.
2. Provides evidence the audit was planned and performed in accordance with ISAs.
3. Assist the engagement team to plan and perform the audit.
4. Assists members of the engagement team responsible for supervision to direct, supervise and review audit work.
5. Enables the engagement team to be accountable for its work.
6. Retains a record of matters of continuing significance to future audits.