ISA 300 Planning an Audit of Financial Statements provides guidance to assist auditors

in planning an audit.

a) Explain the benefits of audit planning.

Audit planning is addressed by ISA 300 Planning an Audit of Financial Statements. It states
that adequate planning benefits the audit of financial statements in several ways:

i. It helps the auditor to devote appropriate attention to important areas of the audit.
ii. It helps the auditor to identify and resolve potential problems on a timely basis.
iii. It helps the auditor to properly organise and manage the audit engagement so that it is
performed in an effective and efficient manner.
iv. It assists in the selection of engagement team members with appropriate levels of
capabilities and competence to respond to anticipated risks and the proper assignment
of work to them.
v. It facilitates the direction and supervision of engagement team members and the
review of their work.
vi. It assists where applicable, in coordination of work done by experts.

(b) Describe 6 audit risks, and explain the auditor’s response to each risk, in planning
the audit of Sitia Sparkle Co.

Audit risk Auditor’s response

1) Sitia Sparkle Co purchases most of its raw
materials from suppliers in Africa and
these goods are shipped directly to the
company’s warehouse and the goods are
usually in transit for up to three weeks.
There is a risk that the inventory, purchases
& payables may not be accurate and may
be under or overstated.
2) In previous years an allowance for
receivables, made up of specific balances,
which equalled almost 1% of trade
receivables was maintained. However, the
finance director feels that this is excessive
The audit team test the purchases of goods
at the year end from before and after the
year end relating to goods from suppliers in
Africa should be increased to ensure that it
is complete and accurate.
Review and test the controls surrounding
how Sitia Sparkle Co identifies receivables
balances which may require a provision to
ensure that they are operating effectively in
the current year.
 and unnecessary and has therefore not
included it for 20X6 and has credited the
opening balance to the profit or loss
account.
There is a risk that receivables will be
overvalued. Some balances may be lost
and so will be overstated if not provided.
3) In September 20X5, Sitia Sparkle Co also
invested $0·9 million in a complex piece of testing to confirm the level of training costs
plant and machinery as part of the
development process. The full amount has
been capitalised and this cost includes the
purchase price, installation costs and
training costs.
Training costs are not permitted under
assets because the plant and machinery and
profits are overstated.
4) This year, the bonus scheme for senior
management and directors has been
changed so that rather than focusing on
profits, it is instead based on the value of
year-end total assets.
There is a risk that management might be
motivated to overstate the value of assets
through the judgements taken.
5) A new general ledger system was
introduced in May 20X6; the finance
director has stated that the data was
transferred and the old and new systems
were run in parallel until the end of August
20X6.
There is a risk of the balances in May
being loss of data if they have not been
transferred from the old system accurately.
Discuss with the finance director the
justification for not maintain an allowance
for receivables and release the opening
provision
Obtain the $0·9 million expenditure and
which have been included within assets.
Discuss with the finance director and the
level of any necessary adjustment about the
amount.
The team need to be alert to this risk.
Review and testing on judgemental
decisions, including treatment of provisions,
and compare treatment against with
previous years. Obtain from management to
confirm the basis of any significant
judgements.
The auditor should confirm that all of the
balances at the transfer date have been
recorded in the new general ledger system
correctly.
The auditor should document and test the
new system. They should review any
management reports run comparing the old
and new system during the parallel run to
identify any issues with the processing of
 This could cause the auditor not identifying accounting information.
a significant control risk.
6) In addition, the year-end close down of the The audit team should test the transactions
purchase ledger was undertaken on 8 which posted to the purchase ledger
August 20X6. between 1 and 8 August to identify whether
There is a risk that may be incorrect with any transactions have removed.
purchases and payables over or
understated.

(c) In line with ISA 220 Quality Control for an Audit of Financial Statements, describe
the audit supervisor’s responsibilities in relation to supervising and reviewing the audit
assistants’ work during the audit of Sitia Sparkle Co.

Supervision

During the audit of Sitia Sparkle Co, the supervisor should keep track of the progress of the
audit engagement to ensure that the audit timetable is met and should ensure that the audit
manager and partner are kept updated of progress. Tracking the progress of the audit
engagement. Considering the capabilities and competence of individual members of the
engagement team, whether they have sufficient time to carry out their work, whether they
understand their instructions

Review

Review responsibilities shall be determined on the basis that the work of a less experienced
team member is reviewed on a timely basis by a more experienced team member. The work
has been performed in accordance with professional standards and regulatory and legal
requirements. Significant matters have been raised for further consideration;
 ASSIGNMENT
SUBJECT : INTRODUCTION IN AUDITING

LECTURER : MR LIM

DATE : 25/02/2017

NAME : FONG YEE JEE

STUDENT ID : DAF2016013