Topic 5 and 6 Overview Of Fs Audit And Audit Planning PDF

T O P I C 5 : F R A M E W O R K O F F S A U D I T T O P I C 6 : A U D I T P L A N N I N G TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 1...

T O P I C 5 : F R A M E W O R K O F F S A U D I T T O P I C 6 : A U D I T P L A N N I N G TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 1 PLANNING PHASIS OF THE AUDIT PROCESS Pre-engagement Audit Planning Study and Evaluation of Internal Controls Substantive Testing Completing the audit Issuance of the Audit Report Post-audit responsibilities TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 2 PLANNING PURPOSE OF AUDIT PLANNING (PSA 300) TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 3 PLANNING OBJECTIVE The objective of the auditor is to plan the audit so that it will be performed in an effective manner. TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 4 PLANNING PRELIMINARY ENGAGEMENT ACTIVITIES: (a) Performing procedures required by PSA 220 on the continuance of the client relationship and the specific audit engagement (b) Evaluating compliance with ethical requirements, including independence, as required by PSA 220; and (c) Establishing an understanding of the terms of the engagement, as required by PSA 210, “Terms of Audit Engagements.” TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 5 PLANNING PRE-ENGAGEMENT PROCEDURES TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 6 PLANNING  D E C L A R A T I O N O F I N D E P E N D E N C E TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 7 PLANNING E N G AG E M E N T L E T T E R TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT PLANNING 8 PLANNING ACTIVITIES: Establishing the overall audit strategy Develop an audit plan TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 9 PLANNING OV E R A L L AU D I T S T R AT E G Y (a) Identify the characteristics of the engagement that define its scope; (b) Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required; (c) Consider the factors that, in the auditor’s professional judgment, are significant in directing the engagement team’s efforts; (d) Consider the results of preliminary engagement activities and, where applicable, whether knowledge gained on other engagements performed by the engagement partner for the entity is relevant; and (e) Ascertain the nature, timing and extent of resources necessary to perform the engagement. TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 10 PLANNING OV E R A L L AU D I T S T R AT E G Y TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 11 PLANNING AUDIT PLAN (a) The nature, timing and extent of planned risk assessment procedures, as determined under PSA 315, “Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment.” – (Understanding the Client – PSA 310) (b) The nature, timing and extent of planned further audit procedures at the assertion level, as determined under PSA 330, “The Auditor’s Responses to Assessed Risks.” – (Audit Programs) (c) Other planned audit procedures that are required to be carried out so that the engagement complies with PSAs. TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 12 PLANNING UNDERSTANDING THE CLIENT (PSA 315) TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 13 PLANNING RISK ASSESSMENT PROCEDURES The audit procedures performed to obtain an understanding of the entity and its environment, including the entity’s internal control, to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels. TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 14 PLANNING RISK ASSESSMENT PROCEDURES (a) Inquiries of management, and of others within the entity who in the auditor’s judgment may have information that is likely to assist in identifying risks of material misstatement due to fraud or error. (b) Analytical procedures. (c) Observation and inspection. TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 15 PLANNING U N D E R S TA N D I N G THE ENTITY TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 16 PLANNING U N D E R S TA N D I N G T H E C L I E N T ’ S INTERNAL CONTROL SYSTEM The auditor shall obtain an understanding of internal control relevant to the audit. Although most controls relevant to the audit are likely to relate to financial reporting, not all controls that relate to financial reporting are relevant to the audit. It is a matter of the auditor’s professional judgment whether a control, individually or in combination with others, is relevant to the audit. TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 17 PLANNING U N D E R S TA N D I N G THE ENTITY’S CONTROL TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 18 PLANNING ASSESSMENT OF RISK AND MATERIALITY (PSA 320) TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 19 PLANNING AUDIT RISK The possibility or likelihood that the FS contain material misstatements and the auditor issues an inappropriate opinion. Audit Risk = Inherent Risk x Control Risk x Detection Risk Risk of Material Misstatement/Non-controllable risk TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 20 PLANNING R I S K O F M AT E R I A L M I S S TAT E M E N T S Risk that the FS are materially misstated prior to the audit. It has two components: – Inherent Risk – susceptibility of an assertion to a misstatement that could be material, individually or when aggregated with other misstatements assuming that there were no related internal controls. E.g. complex calculations, technological developments. – Control Risk – likelihood that a misstatement that could occur in an assertion will not be preventor or detected and corrected on a timely basis by the entity’s internal control. E.g. inappropriate management override. TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 21 PLANNING The auditor’s determination of materiality is a matter of professional judgment, and is affected by the auditor’s perception of the financial information needs of users of the financial statements. In this context, it is reasonable for the auditor to assume that users: (a) Have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information in the financial statements with reasonable diligence; (b) Understand that financial statements are prepared, presented and audited to levels of materiality; (c) Recognize the uncertainties inherent in the measurement of amounts based on the use of estimates, judgment and the consideration of future events; and (d) Make reasonable economic decisions on the basis of the information in the financial statements. TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 22 PLANNING S T E P S I N M AT E R I A L I T Y During planning 1. Establish a preliminary judgment about materiality 2. Determine tolerable misstatement (performance materiality) At Audit Completion 1. Estimate likely misstatements and compare the totals to the preliminary judgment about materiality TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 23 PLANNING M AT E R I A L I T Y TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 24 PLANNING R E L AT I O N S H I P O F AU D I T R I S K A N D M AT E R I A L I T Y INVERSE RELATIONSHIP The higher the audit risk, the lower the materiality. TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 25 PLANNING TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 26 PLANNING TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 27 PLANNING TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 28 PLANNING IDENTIFICATION OF RELATED PART I E S (PSA 550) TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 29 PLANNING OBJECTIVES OF THE AUDITOR Toobtain an understanding of related party relationships and transactions sufficient to be able: – (i) To recognize fraud risk factors, if any, arising from related party relationships and transactions that are relevant to the identification and assessment of the risks of material misstatement due to fraud; and – (ii) To conclude whether the financial statements, insofar as they are affected by those relationships and transactions: a. Achieve fair presentation (for fair presentation frameworks); or b. Are not misleading (for compliance frameworks); and (b) In addition, where the applicable financial reporting framework establishes related party requirements, to obtain sufficient appropriate audit evidence about whether related party relationships and transactions have been appropriately identified, accounted for and disclosed in the financial statements in accordance with the framework. TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 30 PLANNING APPLICATION OF ANALYTICAL PROCEDURES (PSA 520) TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 31 PLANNING A N A LY T I C A L P R O C E D U R E S Means evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. Analytical procedures also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount. TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 32 PLANNING A P P L I C AT I O N O F A N A LY T I C A L PROCEDURES (PSA 520) “Analytical procedures” means evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. Analytical procedures also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount. (a) To obtain relevant and reliable audit evidence when using substantive analytical procedures; and (b) To design and perform analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of the entity. TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 33 PLANNING VA R I A N C E A N A LYS I S TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 34 PLANNING AUDIT PROGRAMS It is a list of procedures (Test of Control or Substantive Testing) used to gather sufficient appropriate audit evidence. TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 35 PLANNING SAMPLE AUDIT PROGRAM TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 36 PLANNING QUESTIONS? TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT PLANNING 37 REFERENCES: Chapter 6 and 7 - Audit and Assurance Principle by Ireneo et al Financial Audit Manual TOPIC 5 and 6: FRAMEWORK OF FS AUDIT and AUDIT 38 PLANNING