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PowerPoint Presentation Audit Planning Audit Planning Planning an audit involves establishing the overall audit strategy for the engagement, and developing an audit plan. (ASA 300, para 2) Role and timing of planning The nature and extent of planning depends on: the size and complexity of the entity; the key team members’ previous experience with the entity; and the changes in circumstances that occur during the audit engagement (ASA 300 para A1). Planning is a continuous and iterative process starting just after (or in connection with) the previous audit and continues until the completion of current audit engagement (ASA 300 para A2); Audit Planning Role and timing of planning (cont…) Planning includes the need to consider, prior to the auditor’s identification and assessment of the risks of material misstatement, such matters as: The analytical procedures to be applied as risk assessment procedures; Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework; The determination of materiality; The involvement of experts; The performance of other risk assessment procedures (ASA 300, para A2). Audit Planning Role and timing of planning (cont…) The auditor may decide to discuss the elements of planning with the management or Board of Directors to facilitate the conduct and management of the audit engagement. However, the overall audit strategy and audit plan remain the auditor’s responsibility and they should not compromise the effectiveness of audit while discussing these mattes with the management (ASA 300, para A3). Benefit of audit planning (ASA 300, para 2) Devoting appropriate attention to important areas; Identifying and resolving potential problems on a timely basis; Organizing and managing audit engagement so that it can be performed in an effective (opinion is right) and efficient (results in profit) manner; Audit Planning Benefits of audit planning (cont…) Selecting appropriate audit team members –Planning helps to determine the audit team capable of completing the assignment (quality control, ASA 220) An audit team comprises with partners and staff; The engagement partner leads the team and is responsible for the overall quality on each engagement; Staff may include junior auditors/graduates, senior auditors, managers, senior managers, and directors; The engagement partner needs to be satisfied that the team members collectively have the appropriate level of knowledge, experience, competence, and capabilities in order to perform the audit engagement in accordance with applicable auditing standards, relevant ethical requirements , and and applicable legal and regulatory requirements Tutorial session – 1 (week 1) Book Chapter – 1 covers the various types of assurance, audit opinions, and Week 2 Book Chapter – 2 cover the relevant ethical requirements of accounting professionals including auditors enable an appropriate audit’s report Audit Planning Benefit of audit planning (cont…) Ensuring that there is an appropriate level of supervisions and directions; and Assisting to coordinate the works of experts or other group of auditors (if required). Audit Planning Requirement of audit planning Involvement of key engagement team members Involvement of audit partner and key members of the engagement team draws on their experience and insight, and thereby enhance the efficiency and effectiveness of audit planning process; Preliminary engagement Performing any procedure surrounding ASA 220 regarding continuance of audit; Evaluating compliance with ethical requirements including independence; and Signing audit engagement letter (contract). This is a comprehensive definition of Internal control Basically internal controls are the processes and procedures the client uses to achieve its business objectives and safeguard its assets 7 Audit planning Planning activities The auditor shall establish an overall audit strategy (substantive approach, control approach or a mixture of both) that sets the scope, timing and direction of the audit, and that guides the development of the audit plan. In establishing the audit strategy, the auditor shall: consider characteristics of the engagement, ascertain reporting objectives of the engagement, consider significant factors in directing engagement team’s effort, consider results of preliminary assessment and other relevant engagements (if applicable), and ascertain the nature, timing and extent of resources requirement. This is a comprehensive definition of Internal control Basically internal controls are the processes and procedures the client uses to achieve its business objectives and safeguard its assets 8 Audit planning 4. Developing an audit plan The auditor shall develop an audit plan that include the description of planned risk assessment procedure, planned audit procedure at assertion level, and other audit procedures that are required so that the engagement complies with Australian Auditing Standard. Updating the strategy and audit plan as necessary during the course of audit Plan the nature, timing and extent of direction and supervision of team members and the review of their work This is a comprehensive definition of Internal control Basically internal controls are the processes and procedures the client uses to achieve its business objectives and safeguard its assets 9 Elements of audit planning Purpose of audit planning Formulating the overall audit strategy, and Developing an audit plan. To achieve the purpose, we need to: consider the types of assurance consider selecting an appropriate audit team; understand the client; consider audit risk and its various components; understand risk of material misstatement; understand materiality; understand audit strategy; understand audit procedure; audit evidences understand assertions; understand audit process; This is a comprehensive definition of Internal control Basically internal controls are the processes and procedures the client uses to achieve its business objectives and safeguard its assets 10 Types of assurance Reasonable assurance Limited assurance No assurance This is a comprehensive definition of Internal control Basically internal controls are the processes and procedures the client uses to achieve its business objectives and safeguard its assets 11 Selecting an appropriate audit team Fundamental principles of professional ethics (APES 110) Integrity; Objectivity; Professional competence and due care Confidentiality; and Professional behaviour. Independence and various threats to independence (APES 110) Independence (in mind and in appearance) Threats to independence Self interest; Self review; Familiarity; Advocacy; Intimidation. Safeguard to independence Straightforward and honest Not allow personal feelings and prejudices to influence judgement Maintain their knowledge and skills Privacy of information obtained as a consequence of their work Complying with relevant laws and regulations to avoid any conduct that may disrespect the profession. This is a comprehensive definition of Internal control Basically internal controls are the processes and procedures the client uses to achieve its business objectives and safeguard its assets 12 AUDIT RISK AUDIT RISK is the risk that an auditor expresses an inappropriate audit opinion when a financial report is materially misstated. This means the auditor gives an opinion that the financial report is true and fair when it contains a significant error or fraud Factors that lead auditor to give incorrect audit opinion are audit risk factors Audit risk can never be zero Audit risk is reduced during risk response phase by identifying the key risks and adjusting audit effort accordingly The definition of audit risk is a key concept for students It is the risk that the auditor did not identify a material –(significant)-misstatement when providing an audit opinon. TheAudit risk can never be zero Audit risk is reduced during by identifying the key risks in the planning phase and focussing audit effort accordingly 13 Understanding the client ENTITY LEVEL INDUSTRY LEVEL ECONOMY LEVEL This is a comprehensive definition of Internal control Basically internal controls are the processes and procedures the client uses to achieve its business objectives and safeguard its assets 14 AUDIT RISK STAGES IN AUDIT RISK ASSESSMENT 1.Identification of accounts and related assertions most at risk of material misstatement-which is INHERENT RISK Identification of accounts and related assertions most at risk of material misstatement due to their nature and the client’s business environment Assertions are statements made by management about recognition, measurement, presentation and disclosure of items in financial report and notes e.g. all inventory items stated on balance sheet actually exist The 1st stage in audit risk assessment is the Identification of accounts and related assertions most at risk of material misstatement due to their nature and the client’s business environment-which is is INHERENT RISK Related assertions are the representations management makes about an account presented in the financial statements. For example by presenting an account balance for inventory in the Balance sheet management is making the following representations: *all the inventory exists at balance date *all inventory that should have been recorded has been recorded *the inventory is owned by the company *the inventory is appropriately valued Assertions will be covered in more depth in later modules 15 AUDIT RISK ASSESS CONTROL RISK Assessment of client’s system of internal controls to minimise risk of material misstatement for each account and related assertion assessed as high risk by auditor AUDITOR PLANS TO UNDERTAKE DETAILED TESTING OF EACH IDENTIFIED ACCOUNT Based on auditor’s assessments of riskiness of account and related assertions, and effectiveness of the client’s system of internal controls After identifying inherent risks the auditor will assess the client’ internal controls to minimise the likelihood of material misstatements from those inherent risks. Where a client has good corporate governance it is likely that they would have identified the risks and established appropriate controls. A favourable assessment of controls would result in a low control risk assessment. Based on the idntification of inherent risks and assessment of control risks the auditor will plan the detailed testing to be undertaken in the risk response phase of the audit. This planning is for each key account and its related assertions. 16 Audit Risks Consideration of risk This table contrasts the audit strategies for High IR and CR with low IR and CR. Substantive tests are the audit procedures the auditor takes to obtain evidence to enable the auditor to provide Reasonable assurance that material misstatements do not exist . Substantive tests are part of the risk response stage of the audit and will be covered in depth in later modules. 17 Materiality Materiality guides audit planning, testing, and assessment of information in financial report Information is material if it impacts on the decision-making process of users of the financial report Setting lower materiality level during planning increases quality and quantity of evidence required to be gathered After identifying inherent risks the auditor will assess the client’ internal controls to minimise the likelihood of material misstatements from those inherent risks. Where a client has good corporate governance it is likely that they would have identified the risks and established appropriate controls. A favourable assessment of controls would result in a low control risk assessment. Based on the idntification of inherent risks and assessment of control risks the auditor will plan the detailed testing to be undertaken in the risk response phase of the audit. This planning is for each key account and its related assertions. 18 AUDIT STRATEGY AUDIT RISKINHERENT RISKCONTROL RISKDETECTION RISK HIGH RISK CLIENTHIGHHIGHLOW AUDIT STRATEGYNo (or very limited) tests of controlsIncreased reliance on substantive tests of transactions and account balances AUDIT RISK INHERENT RISKCONTROL RISKDETECTION RISK LOW RISK CLIENTLOWLOWHIGH AUDIT STRATEGYIncreased reliance on tests of controlsReduced reliance on substantive tests of transactions and account balances This table contrasts the audit strategies for High IR and CR with low IR and CR. Substantive tests are the audit procedures the auditor takes to obtain evidence to enable the auditor to provide Reasonable assurance that material misstatements do not exist . Substantive tests are part of the risk response stage of the audit and will be covered in depth