Professional Documents
Culture Documents
Contents
Planning an audit: ISA 300 Understanding the business and materiality: ISAs 250, 315,and 320 Audit risk and sampling: ISAs 330 and 530 Fraud: ISA 240 Internal audit and review planning
Who will perform the audit work? (Staffing) When will the work be done? (Timing) What work is to be done? (The scope of the audit)
To prepare a suitable audit plan, the auditor needs to have an in-depth knowledge and understanding of:
the entity to be audited the environment in which the entity operates
The auditor needs this knowledge and understanding in order to assess the risk attached to the audit.
Risk assessment is a key feature of the audit planning process and the assessment of risk in the audit will affect:
the amount of audit work performed in general, and the areas on which the auditor will focus his attention.
Professional skepticism
ISA 200 requires that when planning and performing an audit, the auditor should adopt an attitude of professional skepticism. They should view what they are told with a questioning attitude, and consider whether it appears reasonable and whether it conflicts with any other evidence.
Helping the auditor to devote appropriate attention to important areas of the audit Helping the auditor to identify and resolve potential problems
Understanding the business and materiality: ISAs 250, 315 and 320
Understanding the entity and its environment Understanding the accounting and internal control systems Risk and materiality
The auditor should try to reach a judgment about how strong (or weak) the internal controls are, in order to make a decision about the amount of testing that should be carried out in the audit. He should consider:
His previous knowledge of the client company Any recent changes Any known problems in the internal controls of the client The effect of any new auditing or accounting requirements
Example (Financial statement level): Management have a tendency to override internal controls--- this would affect all areas of the accounting systems.
Assessments of inherent risks and control risks, and the identification of significant audit areas
Substantive approach (every item in the financial statements is tested and vouched to supporting documents) System approach (underlying accounting systems were tested with less emphasis on the testing of individual transactions and bal.)
ISA 320 Audit Materiality states that auditors should consider materiality at two stages of the audit:
At the planning stage, when the auditor evaluates the nature, timing and extent of the planned audit procedures. At the reporting stage, when the auditor evaluates the effects of misstatements that have been discovered by the audit.
Materiality levels
Based on quantitative factors, and expressed as a percentage of revenue, profit or asset values, such as 1% of revenue or 5% of post-tax profit. Example: The materiality level for inventory valuation may be set at 5% of post-tax profit. If the auditor finds, as a result of audit tests, that his estimate of inventory differs from the clients measurement by an amount that is more than 5% of post-tax profit, the error would be considered material.