HOLOGRAPHIC

GRADIENTS
RISK
ASSESSMENT
KELOMPOK 4
 STAGES OF THE AUDIT OF FINANCIAL STATEMENT
1

PRE ENGAGEMENT ACTIVITY

2

AUDIT STRATEGY
3

AUDIT PLANNING
4
 1

STAGES OF THE AUDIT

FINANCIAL STATEMENT
 Pre-engagement Activities
Stage of audit
Planning

Establish Overall Audit Develop an Audit

Stategy Plan

Obtain audit evidence as the response to

assessed risk

Perform substantive
Perform test of controls
procedures

Evaluation, conclusion and reporting

Stage of audit
Stage of audit

1. PLANNING
Initial planning activities include formal
acceptance of the client by the audit firm,
verifying compliance with independence 2. RISK ASSESMENT
requirements, building the audit team
and performing other procedures to Identifying and assess the risks that
determine the nature, timing and extent could lead to a material
of procedures to be performed in order misstatement in the financial
to conduct the audit in an effective statements. The auditors need to be
manner. well informed about the industry and
wider environment in which the
company operates, and about what
its competitors, customers,
suppliers and regulators are doing.
Stage of audit
3. AUDIT STRATEGY AND PLAN
Prepare a detailed audit plan to address
the risks of material misstatement in the
financial statements, includes designing a
testing approach to various financial
statement items, deciding whether and
how much to rely on the company’s
internal controls, developing a detailed
timetable, and allocating tasks to the audit
team members.
4. GATHERING EVIDENCE
Auditors apply professional scepticism and
judgement when gathering and evaluating
evidence through a combination of testing the
company’s internal controls, tracing the
amounts and disclosures included in the
financial statements to the company’s
supporting books and records, and obtaining
external third party documentation.
5. FINALISATION
The auditors exercise professional judgement
and form their overall conclusion, based on the
tests they have carried out, the evidence they
have obtained and the other work they have
done. This conclusion forms the basis of the
audit opinion.
 2

PRE ENGAGEMENT
ACTIVITIES
 Pre-engagement Activities
Stage Of Audit
Planning

Establish Overall Audit Develop an Audit

Stategy Plan

Obtain audit evidence as the response to

assessed risk

Perform substantive
Perform test of controls
procedures

Evaluation, conclusion and reporting

Introduction

● The first phase of the audit process is to perform

pre-engagement activities. The auditor has certain
responsibilities in agreeing the terms of an audit engagement.
● The terms preliminary engagement activities and
pre-engagement activities are used interchangeably.
● Pre-engagement activities take place before the auditor
accepts or declines an audit engagement. These activities are
performed when the auditor has to decide whether to accept a
new client or to continue with the relationship with an existing
client.
Pre-engagement activities when accepting new clients by referring
to SQC1, ISA 220, ISA 300 and The CPC
At the beginning of the current audit engagement the auditor shall
undertake the following activities (ISA300 par 6):
1. performing procedures required by ISA 220 regarding the
continuance of the client relationship and the specific audit
engagement;
2. evaluating compliance with relevant ethical requirements,
including independence in accordance with ISA 220; and
3. establishing an understanding of the terms of the
engagement, as required by ISA 210
❏ By performing the above procedures, the auditor is ensuring that independence is
maintained to perform the audit, as well as that there are adequate resources and
technical competences available to perform an efficient audit.

❏ Undertaking the above procedures also allows the auditor to ensure that there are
no issues with management integrity which will affect the auditor’s willingness to
continue the engagement and also that there is no misunderstanding with the audit
client as to the terms of the engagement.

❏ The auditor shall also communicate with the entity’s previous auditors where there
has been a change of auditors in accordance with the relevant ethical requirements.
Reviews of the predecessor auditor’s working papers can help establish the overall
audit strategy unless this is prohibited by law or regulation.
Important Principles

Before an audit firm can accept or continue with a client relationship the
firm has to consider (ISA 220 par 12 and A8 and ISQC 1 par 26):
1. the integrity of the principal owners, key management and those
charged with governance of the entity;
2. whether the engagement team is competent to perform the audit
engagement and has the necessary capabilities, including time and
resources to do so;
3. whether the firm and engagement team can comply with the
relevant ethical requirements; and
4. Review significant matters that have arisen during the current or
previous audit engagement, and their implications for continuing the
relationship.
The Integrity Of The Principal Owners, Key Management And Those
Charged With Governance Of The Entity;
When considering the integrity of the client the engagement partner may consider the
following (ISQC par A19):
1. the identity and business reputation of the client’s principle owners, key
management, and those charged with governance;
2. the nature of the client’s operations, including its business practices;
3. information concerning the attitude of the client towards matters such as:
a. an aggressive interpretation of accounting standards and the internal control
environment; and
b. a reputation for maintaining poor relationships with its auditors;
4. the client’s attitude towards paying the audit fee (will they be able to pay the audit
fee and/or are they only concerned with keeping the fee as low as possible);
5. any indications that the client will impose a limitation on the audit;
6. indications that the client might be involved in any criminal activities;
7. the reasons for the proposed appointment of the firm and non-reappointment of
the previous firm (reason/s for the change of auditors); and the identity and
business reputation of related parties.
Competence, capabilities and resources of the engagement team
When considering the competence, capabilities of the engagement team, the
engagement partner may consider the following (ISA 220 par A11 and ISQC1 par A18):
1. the audit team’s experience with audit engagements of a similar nature and
complexity;
2. the professional standards and applicable legal and regulatory requirements that
must be adhered to and whether the firm personnel have experience with these
requirements, or the ability to gain the necessary skills and knowledge;
3. the availability of sufficient personnel at the firm who has the necessary
competence and capabilities;
4. the technical expertise within the team or access to other auditors or experts that
do have the relevant expertise (ISA600, ISA610 and ISA620);
5. knowledge of the relevant industry in which the client operates;
6. the audit team’s ability to apply professional judgement; the ability to comply with
the firm’s quality control policies and procedures as per ISQC1;
7. the availability of personnel to perform quality control reviews; and
8. the ability of the engagement team to complete the engagement within the
reporting deadline.
The relevant ethical requirements (ISA 200, par 14)

The firm and the engagement team are required to be independent in order to comply
with the ethical requirements prior to accepting a new client or when continuing to
provide statutory audit services to an existing client.

Ethical requirements example

1. There is a familiarity threat, as the audit partner is married to the CEO.
2. There is an intimidation threat, as the audit team might be reluctant to ask
challenging question in fear of upsetting the audit partner’s spouse.
3. Based on the above, the threat to independence is seen as significant.
4. It will not be appropriate for the audit partner to be involved in the audit of the
company
Other significant matters

When considering other significant matters the engagement partner may consider the
following:
1. any changes that occurred during the year for existing clients;
2. information obtained from communication with the predecessor auditor (ISA 300
par 13(b));
3. whether there is a legal vacancy to appoint the auditors ; and
4. any professional and legal responsibilities that might arise .
Establishment of the terms of the engagement

After the auditor has considered the four aspects above, the terms of the audit must be
agreed upon. The auditor may only accept a new client or continue an audit
engagement if the terms of the audit has been agreed upon.
ISA 210 par 9 to 10 states that the agreed terms of the audit engagement shall be
recorded in an audit engagement letter and shall include:
1. To whom the engagement letter is addressed
2. the objective and scope of the audit of the financial statements;
3. the responsibilities of the auditor;
4. the responsibilities of management and those charged with governance;
5. Audit reporting
6. Fees
7. Recurring audits
It is vital that management and auditors are aware of their respective responsibilities,
and it is the engagement letter that sets the scene for the relationship between them. It
can prevent subsequent disagreements if things go wrong.
 3

Audit Strategy
Audit Strategy
Audit strategy is the overall approach that auditors take to perform the
audit work. In this case, auditors need to establish an overall audit
strategy that sets the scope, timing, and direction of an audit at the
planning stage.
Purpose Of Audit Strategy
The main purpose of the audit strategy is to minimize the audit risks
and to perform the audit in an efficient and effective manner.

- assist in setting the

timing for meetings,
- allows auditors to
- guiding the team
determine the number
members on
TEAM of resources needed
performing their tasks, TIME - what level of
and - performing MEMBER
experience and
reviews of the audit
expertise is required in
work by the senior
the audit work
members of the audit
team

designing a suitable
audit approach AUDIT RISK & Size of Audit Scope
including the test of APPROACH SCOPE based on Evaluation
control and substantive Risk
test.
Matter to Consider when Establishing Audit
Strategy
Did Audit Strategy can be
Change?

Auditors may need to change an

overall audit strategy during the
course of the audit if they obtain any
findings that require them to revise
the audit plan
 4

AUDIT PLANNING
Audit Planning Purpose

1. To enable the auditor to obtain appropriate evidence

that is sufficient in the circumstances at hand.
2. To help keep audit fees reasonable.
3. To avoid misunderstanding with clients
Audit Planning Stage:

1. Accept clients and carry out initial audit planning

2. Understand the client's business and industry
3. Assess the client's business risk
4. Carry out preliminary analytical procedures
5. Determine materiality and assess acceptable audit risk, as well as
inherent risk
6. Understand internal control and assess control risk
7. Gathering information to assess fraud risk
8. Develop an overall audit strategy and audit program
Audit Planning Stage:

1. Accept clients and carry out initial audit planning

There are four things that the auditor needs to do in planning the initial audit,
which are as follows:
a. Deciding whether to accept a new client or continue an old client for audit
(making a new engagement or an old engagement)
b. Identify why the client wants an audit, as this information will affect the next
part of the planning process
c. Meet the assignment requirements set by the client
d. Develop an overall audit strategy by forming a team that has special expertise
in their field
Audit Planning Stage:

2. Understand the client's business and industry

There are several aspects of the approach to understanding the client's business
and industry, including:
● Industry and external environment
● Operations and business processes
● Management and governance
● Client strategy and goals
● Size and performance

3. Assess the client's business risk

The auditor will examine and understand the business strategy that has been carried
out by the client and the auditor will assess whether there are risks that may occur in the
client's business.
Audit Planning Stage:

4. Carry out preliminary analytical procedures

The objectives of the preliminary analytical procedure consist of:
● Initial analytical procedures
● Substantive analytical procedures
● Final analytical procedure

5. Determine materiality and assess acceptable audit risk, as well

as inherent risk
This stage is divided into two points, namely:
● Determine the initial materiality level
● Considering acceptable audit risk and inherent risk
Audit Planning Stage:

4. Carry out preliminary analytical procedures

The objectives of the preliminary analytical procedure consist of:
● Initial analytical procedures
● Substantive analytical procedures
● Final analytical procedure

5. Determine materiality and assess acceptable audit risk, as well

as inherent risk
This stage is divided into two points, namely:
● Determine the initial materiality level
● Considering acceptable audit risk and inherent risk
Audit Planning Stage:
6. Understand internal control and assess control risk
Each internal control is designed by the auditor to prevent or detect the occurrence
of material misstatements in the financial statements.
The control environment is an internal control component that contains four
processes, namely risk assessment, control activities, information and
communication, and monitoring.

7. Gathering information to assess fraud risk

The auditor should begin to collect information to assess the risk of fraud during the
planning of the audit and update that assessment throughout the audit process.

8. Develop an overall audit strategy and audit program

In planning an audit of an individual assertion or class of transactions, the auditor may
choose between the following two initial audit strategies:
● Primarily substantive approach
● Lower assessed level of control risk approach