Kế toán, kiểm toán - Chapter 6: Planning, knowledge of the business and evaluating strategic business risk

CHAPTER 6PLANNING, KNOWLEDGE OF THE BUSINESS AND EVALUATING STRATEGIC BUSINESS RISK1Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettSTEPS IN ACCEPTING AN AUDIT2Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettQUALITY CONTROL POLICIES AND CLIENT EVALUATION PROCEDURESProcedures carried out before accepting anew client or continuing with an existingclient include:Reviewing financial information regarding the clientMaking inquiries of third parties such as solicitors and bankersCommunicating with previous auditorEnsuring firm has technical expertise to carry out auditEnsuring accepting engagement will not conflict with the profession’s code of professional conduct3Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettCOMMUNICATION WITH PREVIOUS AUDITOREnsures interests of shareholders, incoming auditor and existing auditor are protected. Allows existing auditor to advise prospective auditor of any professional matters they should be aware of before accepting the engagement.Nominated auditor should request client’s permission to communicate with previous auditor.If client refuses permission, normally decline nomination.If permission granted, ask previous auditor for all information necessary to decide whether nomination should be accepted.4Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettENGAGEMENT LETTERA letter from auditor to client that documents and confirms auditor’s acceptance of the appointment. Should include:Objective and scope of auditResponsibility of management for financial reportForm of any reportsAn explanation of extent to which an audit can be relied upon to detect material misstatementAuditor’s right to unrestricted access to records, documents and other information necessary to complete audit5Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettAUDIT PLANNINGPlanning stage a very important stage of the auditTwo aspects:Audit plan - outlines the expected scope and conduct of auditAudit program - directs the nature, timing and extent of audit procedures6Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettMAJOR STEPS IN THE AUDITPROCESSIn every audit of a financial report there arefive identifiable stages. These stages are:Obtaining knowledge of the client’s businessUnderstanding the internal control structurePerforming tests of transactionsPerforming tests of balancesCompletion and review7Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettDEVELOPING AN OVERALL AUDIT STRATEGYOverall audit strategy details the general evidence requirements for forming an opinion and initial choice as to nature, timing and extent of audit procedures.Interrelationship between materiality, audit risk and what constitutes sufficient appropriate audit evidence impacts on auditor’s strategy.Audit strategies can range from a lower assessed level of control risk approach to a predominantly substantive approach.8Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettLower assessed level of control riskPredominantly substantive approachAudit strategy may be anywhere along this continuumRANGE OF AUDIT STRATEGIES9Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettLOWER ASSESSED LEVEL OFCONTROL RISK APPROACHIf the internal control structure is welldesigned and expected to be highly effective,audit strategy will be:Assessed level of control risk of low or mediumExtensive understanding of relevant parts of the internal control structure Plan extensive tests of controlPlan reduced level of substantive audit procedures10Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettPREDOMINANTLY SUBSTANTIVEAPPROACHIf auditor believes adequate controls do not exist or might be ineffective or testing controls are not cost effective, audit strategy will be:Use a planned assessed level of control risk of highPlan to obtain a minimum understanding of internal control structurePlan no tests of controlPlan extensive substantive audit procedures11Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettIMPACT OF STRATEGIC BUSINESS RISK ASSESSMENT ON AUDIT STRATEGYMore time is spent on planning stage and ondeveloping an expectation of what the entity’sfinancial report should look like. Audit strategymight include:Increased use of sophisticated analytical proceduresUndertaking tests of controls for routine transactionsIncreased substantive testing for non-routine transactionsReduced detailed substantive testing if financial report in accordance with auditor’s expectations12Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettPREPARING DETAILED AUDIT PROGRAMSAudit program is a detailed list of audit procedures that need to be applied to a particular balance or class of transactions to implement the audit strategy.13Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettPURPOSE OF DETAILED AUDIT PROGRAMSPrograms should provide:Evidence of proper planning of workGuidance for inexperienced staffEvidence of work performedA means of controlling time spent on the engagementEvidence of consideration of internal control structure in relation to proposed audit procedures14Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettCONTENTS OF AUDIT PROGRAMNature - particular audit procedures to use and particular items to which a procedure will be appliedExtent - number of items to which procedures will be applied, and number of different tests to be performedTiming - appropriate time to perform the procedureAudit program will outline following characteristics of audit procedures:15Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettASSIGNING AND SCHEDULING AUDIT STAFFActivities entailed include:Coordinating assistance of client entity personnelDetermining extent of involvement of consultants, specialists and internal auditorsEstablishing and coordinating staffing requirements16Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettKNOWLEDGE OF THE CLIENT’S BUSINESSPurpose — assist the auditor to identify events, transactions, practices and risks that might have a significant effect on financial report, particularly on appropriateness of accounting policies adopted and reasonableness of assumptions and estimates incorporated in client’s financial report.17Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettKNOWLEDGE OBTAINED BY THE AUDITORAuditor should obtain an understanding of:Client’s organisational structureOperations and legal structureRelevant industry and economic conditions18Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettPROCEDURES FOR OBTAINING ANUNDERSTANDING OF THE CLIENT’S BUSINESSThese include:Reviewing auditor’s previous experience with client and industryDiscussion with client personnel, other advisers or previous auditors of entityReviewing industry or government publications and legislationVisiting client’s premisesReviewing documentation produced by client19Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettSTRATEGIC BUSINESS RISKDefined: Risk that an entity’s business objectives will not be attained as a result of external and internal forces brought to bear on an entity and, ultimately, the risk associated with the entity’s profitability and survival.20Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettTHE RELATIONSHIP BETWEEN STRATEGIC BUSINESS RISK AND THE GLOBAL, LOCAL AND INTERNAL ENVIRONMENTSFig. 6.3 The relationship between client business risk and the global, local and internal environments (p. 248)21Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettASSESSING CLIENT STRATEGIC BUSINESS RISK IProfitability and structure of the industryRelationship between the industry and the broad economic and business environmentCritical issues facing the industrySignificant industry business risksThe auditor must obtain a thorough understanding of the industry, including:22Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettASSESSING CLIENT STRATEGIC BUSINESS RISK IIThe auditor must understand how entityfits within industry, including:Entity’s position within industry in terms of profitability and market shareOpportunities and plans entity has for increasing or maintaining profitability and market shareThreats to entity’s position in the industryWays entity deals with customers and competitorsMethods entity uses to measure and monitor its performance23Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettTECHNIQUES FOR ASSESSING CLIENT STRATEGIC BUSINESS RISK - SWOT ANALYSIS S trengths - internal aspects that can improve competitive situationWeaknesses - internal aspects, vulnerability to competitors’ strategic movesO pportunities - environmental aspects that can improve entity’s situation relative to competitors T hreats - environmental aspects that can undermine entity’s competitive situation24Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettTECHNIQUES FOR ASSESSING CLIENT STRATEGIC BUSINESS RISK II - PEST ANALYSISIdentifies: P olitical E conomic S ocial T echnological influences on entity.25Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettTECHNIQUES FOR ASSESSING CLIENT STRATEGIC BUSINESS RISK IIIValue-chain approach:Disaggregates entity into strategically important activities in order to:Understand client’s strategic advantagesUnderstand risks that threaten attainment of business objectivesUnderstand key processes and related competencies needed to realise strategic advantagesMeasure and benchmark process performanceDocument understanding of the client’s ability to create value and generate future cash flows by using a client business model, process analyses, key performance indicators and a business risk profile26Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettANALYTICAL PROCEDURESAnalytical procedures involve the use of ratios, trend analysis and operating statistics for comparison with internal and external data.Can be used at all stages of the audit (planning, as a form of evidence, as a final review). At this stage we concentrate on their use in planning.27Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettANALYTICAL PROCEDURES AT THE PLANNING STAGERisk analysis approach requires analytical procedures to be used during the planning stage of the audit.Allows the auditor to understand the business and identify areas of potential risk, thereby assisting in the determination of the nature, timing and extent of audit procedures.28Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettANALYTICAL PROCEDURES USED IN PLANNING THE AUDITSimple procedures:Simple comparisonsRatio analysisCommon-size statementsTrend statementsTime series analysisMore complex procedures:Time series modellingRegression analysisFinancial modelling29Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettAPs MOST COMMONLY USED IN PLANNINGComparison of current balances in the financial report with balances of prior periods, and budgeted amounts (simple comparisons)Computation of ratios and percentage relationships for comparison with prior years, budgets and industry averages (ratio analysis)Common-size statements and trend statements30Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettRATIOS COMMONLY USED AT THE PLANNING STAGE1. Short-term liquidityCurrent ratio (current assets to current liabilities)Quick asset ratio (liquid assets to current liabilities)Operating cash flow ratio (cash from operations to current liabilities)2. ActivityInventory turnover (cost of goods sold to average inventory)Receivables turnover (net sales to average accounts receivable)3. ProfitabilityGross profit and net profit ratio (gross profit or net profit to sales)Return on total assets (net profit/total assets)Return on shareholders’ equity (operating profit to ordinary shareholders’ equity)4. SolvencyDebt equity ratio (long-term liabilities to equity)Number of times interest earned (operating profit to annual interest expense)31Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettCOMMON-SIZE STATEMENTSExpress statement of financial position as a percentage of total assets and statement of financial performance as a percentage of total revenue.32Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettTREND STATEMENTSEach item is expressed as a percentage of its own level from a base year, thus allowing focus on trend rather than absolute magnitude of dollar charge.33Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettPLAUSIBILITY, PREDICTABILITY AND PRECISION OF ANALYTICAL RELATIONSHIPS IRelationships in a stable environment are more predictable than relationships in a dynamic, changing environment.Relationships involving statement of financial performance amounts (transactions over a period of time) tend to be more predictable than relationships involving only statement of financial position accounts (amounts at a point in time).34Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettPLAUSIBILITY, PREDICTABILITY AND PRECISION OF ANALYTICAL RELATIONSHIPS IIDirect relationships are more predictable than indirect relationships.Disaggregated relationships are more precise and show clearer relationships than combined or aggregated relationships.Relationships involving transactions subject to management discretion are less predictable than those not subject to such discretion.35Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettEXAMINATION OF SIGNIFICANT FLUCTUATIONS OF APsEach significant fluctuation (deviation from expected amount) must be investigated.Auditor must also be alert to possibility that absence of expected fluctuation might require investigation.Deviations from expected amount should be discussed with management.Reasonableness of explanations provided by management should be considered.Auditor might have to consider impact of fluctuations on audit program and other audit tests.36Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger Simnett