PLANNING AN AUDIT
PLANNING AN AUDIT OF FINANCIAL STATEMENTS
The Role and Timing of Planning Objective of the auditor : To plan the audit
Adequate planning helps the auditor : so that it will be performed in an effective
* Devote appropriate attention to important areas of the audit manner.
*Identify & resolve potential problems on a timely basis Who is involved:
*Organize and manage the audit eng. so that it is effective & efficient. The engagement partner
*Coordinate work done by auditors of components and experts. Other key members of the engagement team
*Select the eng. team with appropriate competence to respond to anticipated risks and the proper amount of work.
*Facilitate the direction & supervision of eng. team members & the review of their work.
UNDERSTANDING THE ENTITY AND IT'S ENVIRONMENT
Aspects of an entity's org. structure and ownership to consider :
* Does the entity have subsidiaries, divisions, joint ventures or components in multiple locations?
*Who are the owners of the entity and are they management?
*Do related party relationships exist between owners and others ?
*Is the IT environment complex or outsourced?
IDENTIFICATION AND ASSESMENT OF RISK
Risk of material misstatement - Risk that the AFS are materially misstated prior to the audit
& consists of two components at the assertion level, inherent & control risk.
Inherent risk - susceptibility of an assertion about a class of transaction, account balance or disclosure to a
misstatement that could be material, either individually or when aggregated with other misstatements,
before any related controls are considered.
Control risk - involves the risk that a misstatement that could occur in an assertion about a class of transaction,
account balance or disclosure that could be material, either individually or when aggregated with other
misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s controls.
Detection risk - Risk that procedures that the auditor performs to reduce audit risk to an acceptably low level will
not detect a misstatement that could be material, either individually or when aggregated with other misstatements.
Audit risk Risk that the auditor can express an inappropriate audit opinion when the AFS are misstated.
Can be expressed as a function of the RMM , consisting of inherent, control & detection risk.
Significant risk - an identified risk of material misstatement for which the assessment of inherent risk is close to
the upper end of the spectrum of inherent risk due to the degree to which inherent risk factors affect the combination
of the likelihood of a misstatement occurring and the magnitude of the potential misstatement should it occur; or
That is to be treated as a significant risk in accordance with the requirements of other ISAs.
Inherent risk indicators :
* Transactions with multiple acceptable accounting treatments where subjectivity is involved
* Accounting estimates with high uncertainty and complexity
* Complex calculation for account balances and quantitative disclosures
* Accounting principles subject to different interpretation
*Changes in the business environment that involve changes in accounting for examples mergers and acquisitions
Example : Identify, describe and assess the risks of material misstatement at the financial statement level
STEP 1: Inherent risk factors STEP 2: Effect of inherent risk factors on risk
Inherent risk factors Event or condition from scenario
Complexity Complex transactions - import of goods Increase in IR as misstatement may be likely.
Susceptibility to Use of financial statements to obtain finance Increase in IR as misstatement may be likely.
misstatement
Change Liquidity problems Increase in IR as misstatement may be likely.
Other *Refer to risk indicator summary Increase in IR as misstatement may be likely.
Change Positive change in the IT system Decrease in IR as mistatement is unlikely as
management is adamant about the
implementation of controls.
STEP 3 : Expanding each inherent & control risk factor '- IDENTIFICATION: Decrease in CR as mistatement is unlikely
The AFS may be / is not likely materially misstated due to fraud / error as the system is a well-developed, off-the
(choose one) because… - ASSESMENT: This will increase/decrease inherent shelf system.
risk and should be placed on the higher/lower end of the spectrum of
inherent risk as it is likely that a misstatement may occur. (significant if
fraud is detected)
PLANNING AN AUDIT OF FINANCIAL STATEMENTS
The Role and Timing of Planning Objective of the auditor : To plan the audit
Adequate planning helps the auditor : so that it will be performed in an effective
* Devote appropriate attention to important areas of the audit manner.
*Identify & resolve potential problems on a timely basis Who is involved:
*Organize and manage the audit eng. so that it is effective & efficient. The engagement partner
*Coordinate work done by auditors of components and experts. Other key members of the engagement team
*Select the eng. team with appropriate competence to respond to anticipated risks and the proper amount of work.
*Facilitate the direction & supervision of eng. team members & the review of their work.
UNDERSTANDING THE ENTITY AND IT'S ENVIRONMENT
Aspects of an entity's org. structure and ownership to consider :
* Does the entity have subsidiaries, divisions, joint ventures or components in multiple locations?
*Who are the owners of the entity and are they management?
*Do related party relationships exist between owners and others ?
*Is the IT environment complex or outsourced?
IDENTIFICATION AND ASSESMENT OF RISK
Risk of material misstatement - Risk that the AFS are materially misstated prior to the audit
& consists of two components at the assertion level, inherent & control risk.
Inherent risk - susceptibility of an assertion about a class of transaction, account balance or disclosure to a
misstatement that could be material, either individually or when aggregated with other misstatements,
before any related controls are considered.
Control risk - involves the risk that a misstatement that could occur in an assertion about a class of transaction,
account balance or disclosure that could be material, either individually or when aggregated with other
misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s controls.
Detection risk - Risk that procedures that the auditor performs to reduce audit risk to an acceptably low level will
not detect a misstatement that could be material, either individually or when aggregated with other misstatements.
Audit risk Risk that the auditor can express an inappropriate audit opinion when the AFS are misstated.
Can be expressed as a function of the RMM , consisting of inherent, control & detection risk.
Significant risk - an identified risk of material misstatement for which the assessment of inherent risk is close to
the upper end of the spectrum of inherent risk due to the degree to which inherent risk factors affect the combination
of the likelihood of a misstatement occurring and the magnitude of the potential misstatement should it occur; or
That is to be treated as a significant risk in accordance with the requirements of other ISAs.
Inherent risk indicators :
* Transactions with multiple acceptable accounting treatments where subjectivity is involved
* Accounting estimates with high uncertainty and complexity
* Complex calculation for account balances and quantitative disclosures
* Accounting principles subject to different interpretation
*Changes in the business environment that involve changes in accounting for examples mergers and acquisitions
Example : Identify, describe and assess the risks of material misstatement at the financial statement level
STEP 1: Inherent risk factors STEP 2: Effect of inherent risk factors on risk
Inherent risk factors Event or condition from scenario
Complexity Complex transactions - import of goods Increase in IR as misstatement may be likely.
Susceptibility to Use of financial statements to obtain finance Increase in IR as misstatement may be likely.
misstatement
Change Liquidity problems Increase in IR as misstatement may be likely.
Other *Refer to risk indicator summary Increase in IR as misstatement may be likely.
Change Positive change in the IT system Decrease in IR as mistatement is unlikely as
management is adamant about the
implementation of controls.
STEP 3 : Expanding each inherent & control risk factor '- IDENTIFICATION: Decrease in CR as mistatement is unlikely
The AFS may be / is not likely materially misstated due to fraud / error as the system is a well-developed, off-the
(choose one) because… - ASSESMENT: This will increase/decrease inherent shelf system.
risk and should be placed on the higher/lower end of the spectrum of
inherent risk as it is likely that a misstatement may occur. (significant if
fraud is detected)
