TOPIC 4 AUDIT PLANNING

Prepared by: Aida Hazlin Ismail Shah Alam

AUDIT PLANNING

Planning in the audit context Importance of planning Steps in pre-planning Component of audit planning Role of analytical in audit planning

4 phases of an audit

Client acceptance and retention involve decisions to accept or decline the opportunity to become the auditor Planning the audit development of audit strategy for the conduct and scope of the audit Performing audit tests performing the audit tests (fieldwork) Reporting the findings communication of audit findings

STEPS IN ACCEPTING AUDIT ENGAGEMENT

CLIENT EVALUATION ETHICAL CONSIDERATIONS ENGAGEMENT

Evaluate integrity of the management

Evaluate independence

Prepare engagement letter

Identify special circumstances and unusual risks

Assess competence to perform audit

Determine ability to use due care

CLIENT EVALUATION

Important element of quality control (ISA 220) Procedures to follow: 1) Obtain and review available financial information of the prospective client 2) Make inquiries of third parties such as bankers, regarding information that may influence the evaluation of the prospective client 3) Communicate with the existing auditors to evaluate the integrity of the clients management 4) identify circumstances that require special attention or that carry unusual risks 5) Evaluate the audit firms independence 6) Establish that acceptance of the client would not violate codes of professional ethics

ETHICAL CONSIDERATION

Evaluate independence (By Law) Assess competence to perform audit - the audit team will match the need staffing need of the engagement Determining the ability to use due care - estimate the time budget for the engagement

Procedures in ensuring quality

1)

2)

3)

Audit Engagement partner is required to: Take responsibility for the overall quality on each audit engagement Ethical requirements complied by members Independence requirement complied

Procedures in ensuring quality

Procedures relating acceptance & continuance of clients have been followed Team members assigned has appropriate capabilities, competence, perform tasks with professional standards Engagement performance direction, supervision and performance of the audit engagement

ENGAGEMENT

Final steps in engagement Importance as a confirmation the terms of each engagement in the engagement letter (eg: page 237, figure 6.2)

PLANNING THE AUDIT

ISA 300 the plan should be to conduct the audit in an efficient and timely manner ISA 300.2 the auditor should plan the audit work so that the audit will be performed in an effective manner

STEPS IN AUDIT PLANNING

Obtain knowledge of the clients business Perform analytical procedures Make preliminary judgments about materiality

Consider audit risk

Obtain an understanding of the entitys internal control structure

Develop preliminary audit strategies for significant assertions

Obtaining the clients business

Auditor need to know the economy and industry within the entity operates Major industry policies and practices Types of business, product and services Entity internal control structure Government regulations that effect the entity Nature of report to be filed with regulatory agencies

Other specific knowledge

Determining the existence of related parties the duty of management to disclose to the auditor Considering the impact of applicable accounting standards Considering of laws and regulations Considering of fraud and errors Review prior year audit working paper Review industry and business data minutes of meetings Touring operating facilities and offices Making inquiries of management Making inquiries of audit committee

Performing analytical procedures

ISA 520 auditor should apply analytical procedures at the planning stage of the audit to obtain a more detailed understanding and to identify areas of potential risk. Analytical procedures involve a study and comparison of relationships among data to identify expected or unexpected fluctuations and other unusual items

Common type of analytical procedures

Comparisons of the entitys financial information with: Comparable information for a previous period or periods Anticipated results such as budget and forecasts Industry averages

The purpose of analytical procedures

To enhance the understanding of the entitys business Identify unexpected fluctuations and unusual relationships * Key financial ratios used in analytical procedures (refer to pg 258: Appendix 6A)

Information about clients legal obligation

Review documents such as: - Memorandum and articles of associations - Minutes of meetings - Contracts legal agreement affecting financial disclosure

Set materiality and assess acceptable risks

Determine what is the planning materiality and which area need to be emphasized. Could be done by looking at the financial statements of client as well as after an understanding the control system is obtained.

Develop and overall audit plan and audit program

Audit program is a proper instruction to carry out the audit work. Audit program divided into 2 types:

Standard audit program Tailored audit program