Kế toán, kiểm toán - Chapter five: Audit planning and types of audit tests

Audit Planning and Types of Audit Tests Chapter FiveThe Phases of an Audit That Relate to Audit PlanningProspective Client AcceptanceObtain and review financial information.Inquire of third parties.Communicate with the predecessor auditor.Consider unusual business or audit risks.Determine if the firm is independent.Determine if the firm has the necessary skills and knowledge.Determine if acceptance violates any applicable regulatory or ethical requirements. Continuing Client RetentionEvaluate client retention periodicallyNear audit completion or after a significant eventConflicts over accounting & auditing issuesDispute over feesEstablish Terms of the EngagementThe terms of the engagement, which are documented in the engagement letter, should include the objectives of the engagement, management’s responsibilities, the auditor’s responsibilities, and the limitations of the engagement.In establishing the terms of the engagement, three topics must be discussed:The engagement letter.The internal auditors.Those charged with governance.The Engagement LetterThe engagement letter formalises the arrangement reached between the auditor and the client. In addition to the items mentioned in the sample engagement letter in Exhibit 5-1 in the textbook, the engagement letter may include: Arrangements for use of experts or  internal auditors. Any limitations of liability of the auditor  or client. Additional services to be provided.Arrangements regarding other services.Internal AuditorsThose Charged with GovernanceBoard of DirectorsAudit CommitteePreliminary Engagement ActivitiesDetermine the Audit Engagement Team RequirementsAssess Compliance with Ethical Requirements, including IndependencePlanning the AuditThe auditor will develop an overall audit strategy for conducting the audit. This will help the auditor to determine what resources are needed to perform the engagement. An audit plan is more detailed than the audit strategy. Basically, the audit plan should consider how to conduct the engagement in an effective and efficient manner.Planning the AuditWhen preparing the audit plan, the auditor should be guided by the results of the risk assessment procedures performed to gain an understanding of the entity.Additional steps:Assess business risks and establish materiality. Assess the need for experts.Consider the possibility of non-compliance (illegal) acts. Identify related parties.Conduct preliminary analytical  procedures.Consider additional value-added services.Let’s look at eachof these steps.Assess Risks and Establish MaterialityUse audit risk modelRestrict risk at account balance levelAchieve acceptable low level of audit riskYou may want to review the detailed discussion in Chapter 3 of the process used to assess the client’s business risks and to establish materiality.Assess RisksEstablish MaterialityExpertsA major consideration in planning the audit is the need for an auditor’s expert (ISA 620).The use of an IT expert is a significant aspect of most audit engagements.The presence of complex information technology may require the use of an IT expert.Non-Compliance (Illegal) ActsNon-Compliance ActsDirect & MaterialConsider laws and regulations as part of auditMaterial & IndirectBe aware may have occurred; investigate if brought to attentionNon-Compliance ActsRelated PartiesSome examples from IAS 24 Related Party DisclosureParents and subsidiaries.Significant influence. Joint control.Associate entity.Joint venture.Management.Close family of the  principal owners & management.Other parties that can have  significant influence.How to Identify Related PartiesReview minutes of meetings of boards and management.Review conflict of interest  statements. Review records of the entity’s investments. Review contracts and agreements with key management or those charged with governance.Review significant contracts and agreements not in the entity’s ordinary course of business.Preliminary Analytical ProceduresTo understand the client’s business and transactionsTo identify financial statement accounts likely to contain errorsBy understanding the client’s business and identifying where errors are likely to occur, the auditor can allocate more resources to investigate necessary accounts.Additional Value-Added ServicesTax PlanningTransaction SupportIT-consultancyInternal reportingBenchmarkingRisk AssessmentAuditors are limited in the types of consulting services that they can offer their audit clients. Document Overall Audit Strategy and Audit PlanAuditors ensure they have addressed the risks they identified by documenting the linkage from the client’s business, objectives, and strategy to the audit plan.The auditor’s preliminary decision concerning control risk determines the level of control testing, which in turn affects the auditor’s substantive tests of the account balances and transactions.Document overall audit strategy and audit plan, which involves documenting the decisions aboutThe auditor documents how the client is managing its risk (via internal control processes) and the effects of the risks and controls on the planned audit procedures. AUDITTES TSNatureTimingExtentDocument Overall Audit Strategy and Audit PlanTypes of Audit TestsRisk Assessment ProceduresUsed to obtain an understanding of the entity and its environment, including internal control.Tests of ControlsPerformed to obtain audit evidence about the operating effectiveness of controls in preventing, detecting and correcting material misstatements.Substantive ProceduresDetect material misstatements in a transaction class, account balance, and disclosure element of the financial statements.Tests of ControlsInquiryInspectionWalk ThroughReperformanceObservationTests of ControlsSubstantive ProceduresAnalytical ProceduresObtains evidence about particular assertions related to account balances or classes of transactionsTests of DetailsTests for errors or fraud in individual transactions, account balances, and disclosuresDual Purpose TestsSubstantive TestsTests of ControlsDual Purpose TestPurposes of Analytical ProceduresPreliminary Analytical ProceduresUsed to assist the auditor to better understand the business and to plan the nature, timing, and extent of audit procedures. Substantive Analytical ProceduresUsed to obtain evidence about particular assertions related to account balances or classes of transactions. Final Analytical ProceduresUsed as an overall review of the financial information in the final review stage of the audit.Purposes of Analytical Procedures (See Table 5-5)Trend AnalysisRatio AnalysisReasonableness AnalysisSubstantive Analytical Procedures Decision ProcessDevelop an Expectation Auditing standards require the auditor to have an expectation whenever analytical procedures are used. An expectation can be developed using a variety of information sources such as: Financial and operating data. Budgets and forecasts. Industry publications. Competitor information. Management’s analyses. Analyst’s reports.Define a Tolerable DifferenceThe size of the tolerable difference depends on: The significance of the account. The desired degree of reliance on the substantive  analytical procedures. The level of disaggregation in the amount being tested. The precision of the expectation.But the amount is always less than materiality!Compare and InvestigateCompare the expectation to the recorded amount and investigate any differences greater than the tolerable difference. The Investigation of Differences for Planning and Final Analytical ProceduresPreliminary Analytical Procedures DifferencesCorroborating evidence is not requiredFinal Analytical Procedures DifferencesCorroborating evidence is requiredAudit Testing HierarchyFilling the Assurance BucketExample of Filling the Assurance Buckets for Each Assertion (Accounts Payable)Short-Term Liquidity RatiosCurrent RatioQuick RatioOperating Cash Flow RatioActivity RatiosReceivables TurnoverDays Outstanding in Accounts ReceivableInventory TurnoverDays of Inventory on HandProfitability RatiosGross Profit PercentageProfit MarginReturn on AssetsReturn on EquityCoverage RatiosDebt to EquityTimes Interest EarnedAudit of Group Financial StatementsComponent of a GroupEntity or business activity in which financialinformation is included in the group financial statements. Component AuditorAn auditor who, at the request of the group engagement team, performs work on financial information related to acomponent for the group audit.Auditing standards require the group engagement team to identify components that are likely to be significant components. Audit of Group Financial StatementsEnd of Chapter 5