FIN4053 AUDITING & ASSURANCE

SERVICES 1

5. INITIAL ENGAGEMENT AND AUDIT

PLANNING

PowerPoint® Slides
by Yew Kuok Weng
Learning objective & outcome

Understand, describe and evaluate

• Establishing terms of engagement (Engagement letter)
• Understanding the client’s business and accounting
system
• Types of audit tests
• Analytical procedures
• Planning and preliminary analytical procedures
• Concept of reasonable assurance
• Materiality
• Preliminary assessment of risk
• Development of audit plan and audit program
• Documentation and working papers

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`
Appointment Ethics

Applies when:
• New client acceptance
• New engagement acceptance
• Changes in professional
appointment
 Reasons For Changes In Professional
Appointments

• ETHICAL ISSUES - too familiar with client affects

independence and judgment

• AUDIT FEES - too little

• CLIENT’S SIZE - bigger than audit firm. could be a repeat

of the Enron & Worldcom scandal

• AUDIT ROTATION BY LARGE CLIENTS - big clients usually

wants a different opinion from another audit firm
 Issues to Consider Before Accepting

• Profitability and possibility of being reappointed

• Do you have AVAILABLE staff with the relevant technical
expertise
• Does acceptance of the engagement create any conflicts of
interest/ independence issues?
• Management’s integrity – background of Directors
• Engagement risk
• Reason for change in auditors
Appointment Ethics

•Procedures after accepting nomination

• Proper conduct of outgoing auditors’ removal
or resignation
• New auditors’ appointment must be valid
• Engagement letter sent to the directors of the
audit client
AUDIT ENGAGEMENT LETTER

• Letter sent BY auditor TO each client BEFORE

commencement of the engagement.

• WHAT DO YOU THINK IS THE PURPOSE?

• Avoid misunderstandings between client and auditors with

respect to the audit engagement.
• Document and confirm auditors’ acceptance.
AUDIT ENGAGEMENT LETTER

• Recurring audits – The letter will remain effective from one audit
appointment to another until it is replaced

• Must be reviewed annually to ensure it continues to reflect client’s

circumstances.
AUDIT ENGAGEMENT LETTER

General contents of an audit engagement letter:

• Objective of the audit of financial statements
• Management’s responsibility for the financial
statements
• Auditor’s responsibility
• Scope of an audit
• Unavoidable risk due to test nature and other
inherent limitations
AUDIT ENGAGEMENT LETTER

• Unrestricted access to whatever records, documents

and other information in connection with the audit
• Arrangements regarding planning of the audit
• Expectation to receive from client’s management
written confirmation of any representations made in
the course of the audit (Letter of Representation)
• Basis of fees
AUDIT ENGAGEMENT LETTER

• CAN THE AUDITOR’S CHANGE THE ENGAGEMENT LETTER?

• Acceptable reasons include a change in client’s

circumstances – example of a change in the directors of the
client’s company

• Acceptable reasons also include a misunderstanding as to

the nature of the audit.
Introduction
 Planning is CRUCIAL

 ISA 300 – plan is to conduct audit in

an efficient and timely manner

 Amount of planning varies

according to the size and
complexity of the entity
 Importance of Planning

Ensure work is Ensuring that the

Audit is organised
focused on material nature and quantity
properly and work
areas of risk and of the work done
completed
identify potential addresses the risks
efficiently
problem areas and problem areas

Proper delegation Coordination of

of work to team work performed by
members external parties

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Novembe
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r 2016
 Planning phase
 Know your client
 Internal control system review
 Planning the audit
 Evaluation of audit risk
 Develop an audit strategy

 Operational Phase
 Audit Testing
 Analytical Review

 Reporting Phase
 Preparation and signing of audit report

•Segi
 The management letter or letter of weakness
Unversity Lecturer - Sharmela •5
Steps in Audit Planning

Obtain knowledge of client’s business

Perform analytical procedures

Make preliminary judgments about

materiality levels, consider the audit risk

Obtain understanding of entity’s internal

control structure

•Segi Unversity Lecturer - Sharmela Develop audit strategies •6

 Need to understand:
 The industry, regulatory and external factors

 Nature of the entity

 Objectives, and strategies and related business

risks that may result in a material misstatement
 Measurement and review entity’s financial
performance
 Assessment and components of Internal Controls
Planning – Obtain Knowledge of the Client

 Understand Specified Aspects of The Client’s

Environment
 The auditor needs to identify and assess the risks
of material misstatements in the client’s financial
statements

What Do We Need To Look Into?

Planning – Obtain Knowledge of the Client

 The auditor should obtain an understanding of

the client’s internal control systems relevant to
the audit to identify potential misstatements
 Also to determine the extent of substantive
testing required
Introduction

 ISA 230 (Redrafted) defines audit

documentation (often referred to as ‘working
papers’) as: ‘The record of audit procedures
performed, relevant audit evidence obtained,
and conclusions the auditors reached’.

 These standards guide the auditor to produce

audit documentation that is of an acceptable
standard. Understanding and applying the
standards will protect the auditor from
unwelcome and unnecessary litigation.
•2
IMPORTANCE OF WORKING PAPERS

 Working papers are important because they:

 are necessary for audit quality control
purposes
 provide assurance that the work delegated by
the audit partner has been properly completed
 provide evidence that an effective audit has
been carried out
 increase the economy, efficiency, and
effectiveness of the audit contain sufficiently
detailed and up-to-date facts which justify the
reasonableness of the auditor’s conclusions
 retain a record of matters of continuing
significance to future audits.

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TIMELINESS, FORM, CONTENTS AND EXTENT
OF AUDIT DOCUMENTATION
 If audit documentation is to serve the purposes described
above, then it must be prepared on a timely basis.
 ISA 230 clearly indicates that the quality of the audit
documentation for a specific engagement is measured by the
extent to which an experienced auditor, having no previous
connection with the audit, is able to understand:
 the nature, timing, and extent of the audit procedures performed
and applicable legal and regulatory requirements
 the results of the audit procedures performed, and the audit
evidence obtained
 significant matters arising during the audit,
 the conclusion reached on these, and the significant professional
judgments made when reaching those conclusions.
TIMELINESS, FORM, CONTENTS AND EXTENT
OF AUDIT DOCUMENTATION

 It is not necessary for auditors to

document all the matters they have
considered in carrying out their audit
work.

 In an audit file, the audit work

documented must be sufficient and
appropriate in the circumstances for
the matter being considered.
TIMELINESS, FORM, CONTENTS AND EXTENT
OF AUDIT DOCUMENTATION

Working papers as a minimum should

include:

 Information on planning the audit work;

 The nature, timing, and content of the
audit procedures performed;
 The results of the audit procedures; and
 The conclusions drawn leading to an
opinion.
TIMELINESS, FORM, CONTENTS AND EXTENT
OF AUDIT DOCUMENTATION

 ISA 230 suggests that auditors to prepare and retain, as

part of the audit documentation, a ‘completion
memorandum’.
 This memorandum describes the significant matters
identified during the audit and how they were
addressed, and includes cross-references to other
relevant supporting documentation.
 Helps auditors focus on the significant matters arising,
and on whether all audit objectives have been met in
connection with them. It also helps facilitate any
subsequent (internal or external) reviews or
inspections of the audit work carried out.
CONTENTS
 Each audit working paper must be headed with the
following information:
 The name of the client
 The period covered by the audit
 The subject matter
 The file references
 The initials (signature) of the member of staff who prepared the
working paper, and the date on which it was prepared
 The initials of the member of staff who reviewed the working papers
and the date on which the review was carried out
PERMANENT AND CURRENT FILE
 In the case of recurring audits, some working
paper files may be classified as "permanent"
audit files which are updated with new
information of continuing importance as
distinct from "current" audit files which contain
information relating primarily to the audit of a
single period.
PERMANENT FILE

 The permanent file is audit work papers containing

all the data which are of continuing interest from
year to year.
 Examples:
 Copies or excerpts of company documents
 Prior year analysis
 Internal control information including: internal control
questionnaires, flow charts, organization charts , and a
listing of controls and control weakness.
CURRENT FILES

 The current work paper file contains all

documentation applicable to the year under
audit.
 Includes client summary such as description of
the client, client industry, client internal
controls and the auditor’s materials.

•11
DOCUMENT RETENTION
 The auditor should adopt appropriate
procedures for maintaining the confidentiality
and safe custody of the working papers and for
retaining them for a period sufficient to meet
the needs of the practice and in accordance
with legal and professional requirements of
record retention.’

 Working papers are the property of the auditor.

CONCLUSION
 When assessing how important it is for an audit firm to
maintain adequate documentation for all audit
engagements, focus on the extent to which an audit
firm relies on working papers prepared. This reliance is
not limited to the importance placed on them in
allowing the audit firm to arrive at a conclusion about
the truth and fairness of financial statements – it
extends as well to reliance on the fact that they have
been prepared in a professional manner to defend any
subsequent allegations that the audit firm has acted
negligibly in the event of an alleged audit failure.

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THE END

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