Audit & Assurance

Session 2 Audit planning

(understanding the entity)
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SCHOOL
BPP
BUSINESS
SCHOOL
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SCHOOL
OF
BUSINESS

The overall audit process

Plan the
audit

Test
controls

Understand
the entity

Assess
the risk

If so

RESTRICTED
substantive
testing

If not

Select audit
procedures

Report to
management

Review

FULL
substantive
testing

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Report to
management

AUDIT
REPORT

Session learning outcomes

o Explain the objectives of an auditor, the need to plan and conduct the audit
in accordance with ISAs.
o Describe how an auditor obtains an understanding of the entity and its
environment.
o Explain the benefits and limitation of analytical procedures at the planning
stage
o Analyse the audit risks and explain the auditors response to these risks.
o Define and explain the concept of materiality

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The need for audit planning

o The 5 Ps Proper Planning Prevents Poor Performance
o Aiming for an efficient and effective audit
The auditor shall plan the audit work so that the engagement will be
performed in an effective manner (ISA 300, Planning an audit of financial
statements)
This ensures
o appropriate attention is devoted to important areas of the audit
o potential problems are identified
o that the work is completed promptly
o proper assignment of work amongst the audit team
o coordination of work done by other auditors and experts; and
o facilitates an effective review.

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The need for audit planning

Do we need to do the same extent of planning for all audits?
The form and nature of planning is affected by
o Size of the entity
o Complexity of the audit
o Auditors experience with the entity
o Knowledge of the business
o Commercial environment
o Method of processing transactions
o Reporting requirements

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The challenge for auditors

You agree to
provide an opinion
on an organisations
financial statements

Dont apply your

expertise to all
the available
information?

DISCREDITED
You put your reputation
on the line.

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How do you
mitigate this
risk?
Understand
the entity
under review
Understand
the risks
faced by the
auditor
Work to
control them
via use of an
audit risk
model

Understanding the entity

ISA 315 Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and its Environment
Process:
Perform risk assessment procedures to understand the entity
and its environment

Assess the risk of material misstatement at the financial

statement and assertion level

Risk impacts on a
particular aspect of the
financial statements

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Risk impacts on the

whole of the financial
statements

Understanding the entity

What is considered?
1. Industry, regulatory and other external factors, including the
applicable financial reporting framework
2. Nature of the entity
3. Objectives and strategies and related business risks
4. Measurement and review of the entity's financial performance
5. Selection and application of accounting policies
6. Internal control

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Understanding the entity

ISA 315 Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and its Environment

Perform risk assessment procedures to understand the entity

and its environment

Procedures can include:

o Enquiries of management and others
within the entity
o Observation and inspection.
o Analytical procedures

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Analytical procedures (ISA 520)

Also known in practice as Analytical review (AR), so what do we mean by
AR?
The analysis of relationships to identify plausible relationships between items of
financial and non-financial information, this understanding then helps identify
inconsistencies and unexpected relationships.
The analysis can be informed from comparing the following:
o Prior periods
o Budgets and forecasts
o Industry information
o Predictive estimates i.e. expectations
o Relationships between elements of financial information, i.e. ratio analysis
o Relationships between financial and non-financial information, e.g. payroll costs to the
number of employees.

10 BPP BUSINESS SCHOOL

Analytical procedures (ISA 520)

Example of applying AR
Financial Statement extracts
Income Statement
Revenue

2013

2012

304,800

254,000 Trend analysis

Statement of Financial Position

Receivables
Ratio analysis receivable days

56,640

28,320

67.8

40.7

Revenue increase 20%

Receivables increase
100%

Ratios
Expectations

11

Compare to 2013 revenue budget - 300k

Board minutes won a new contract to
supply goods in 2013

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Significant increase (problems recovering?)

Compare to industry averages (would our
view differ if the industry average was 65
days in 2013?)