Relationship between client business risk BUSINESS RISK APPROACH

and global, local and internal environments

The relationship
of business risk
to the
determination
of audit risk

63
65

What is “Business Risk Approach”? Relationship of Factors Influencing Risks

to Risks and Planned Evidence
v Business risk (BR) affects audit risk since BR may result in “Material
misstatements” in the financial statements.
vThe auditor assesses the specific BRs that the entity faces in order to
Acceptable audit risk
determine whether the result in errors, fraud, or other irregularities, and
ultimately in a materially misstated FSs. D D I

Factors I Planned I Planned

influencing Inherent detection audit
risks risk risk evidence
I D

Control risk
64 66
 Audit preparation
Mối quan hệ giữa RRKT và Mức trọng yếu Audit preparation includes 2 phases:

v Pre-planning phase (Giai đoạn Tiền kế hoạch):

3. Client Acceptance
Quan heä giöõa Procedures carried out before accepting a new and Continuance
ruûi ro kieåm toaùn client or continuing with an existing client.
vaø möùc troïng yeáu
R M
Quan heä giöõa ruûi ro v Planning (Giai đoạn Lập kế hoạch)
kieåm toaùn, möùc Ø Establish an overall audit strategy 4. Audit Planning
troïng yeáu vaø baèng E Ø Develop an audit plan
chöùng kieåm toaùn

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67

Assess Risk of 3. Client Acceptance and Continuance

Material Misstatement
through client’s v Policies and procedures for client acceptance and continuance are
Business risk important as an audit firm will want to avoid association with a client whose
management lacks integrity.

v International Standard on Quality Control 1 (ISQC1) require an audit firm, as

part of its quality control, to establish policies for:
ØInvestigating potential clients and acceptance of an engagement
ØPeriodically reviewing continuance of clients.

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 Engagement Risk
v Engagement Risk is the auditor’s exposure to loss or injury to the
Client acceptance professional practice from litigation, adverse publicity or other events arising
and continuance
in connection with a financial statement audit.
v For examples: lack of integrity of management, risk of litigation, client
entity in a weak financial position.

v How to manage Engagement Risk?

Ø Avoid engagement that have a relatively high business risks.
Ø Accept engagement but establish a low acceptable audit risk together with
expanding audit procedures to compensate for the unusually high levels of risk.
71 73

Thư hẹn kiểm toán

Acceptance and continuance evaluation procedures Engagement letters (EL)

Procedures carried out before accepting a new client or continuing

with an existing client include: Objective 1. Procedures to process an EL
Ø Obtaining and reviewing available financial information regarding the client of EL
2. Agree on the terms of
Ø Making inquiries of third parties such as solicitors (legal consultants) and
engagement and other matters
bankers EL is a
3. An audit performed for many
Ø Communicating with previous auditor contract
financial year.
Ø Evaluating the firm’s independence and ability to serve the client, including
technical skills and knowledge of industry and personnel; and
Other
Ø Ensuring accepting engagement will not violate the Code of Ethics. Agree to potential modifications of EL
matter

To reduce Engagement Risk 72 74

 4. Audit Planning
4.1. Roles of audit planning
4.2. Establish an overall audit strategy
4.3. Develop an audit plan
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4.1. Establish an overall audit strategy
à What are benefits of an Adequate audit planning?
v Adequate audit planning assists the auditor to:
o Devote appropriate attention to important areas of the audit
o Identify and resolve potential problems on a timely basis
o Organise and manage the audit engagement efficiently and effectively
o Select a capable and competent engagement team
o Direct and supervise engagement team members and review their work; and
o Coordinate work to be done by auditors of components and experts.
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The nature of audit planning
v The planning stage is a very important stage of the audit and
has two aspects:
Ø Audit strategy: sets the scope, direction and timing of audit,
and guides the more detailed audit plan/program.
Ø Audit plan/program: sets out the nature, timing and extent of
audit procedures.
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4.2. Establish an overall audit strategy
v An important aspect of the audit planning process is obtaining knowledge of
the client’s business and its business risk, and through that understanding
making judgements in relation to areas of audit risk and materiality.
v Interrelationship between materiality, audit risk and what constitutes
sufficient appropriate audit evidence à impacts on auditor’s strategy.
v Types of strategies: Audit strategies can range from a lower assessed
level of control risk approach to a predominantly substantive approach.
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 Range of audit strategies Predominantly substantive approach

v If the auditor believes adequate controls do not exist or might be ineffective

Effective Ineffective
internal internal or testing controls are not cost effective, the audit strategy will be to:
control control
Lower assessed Predominantly Ø Use a planned assessed level of control risk of high
level of substantive
approach
Ø Plan to obtain a minimum understanding of internal control
control risk
Ø Plan no tests of control
Ø Plan extensive substantive audit procedures based
on planned acceptable level of detection risk of low
Audit strategy may be anywhere along this continuum. or medium.

79 81

Lower assessed level of control risk approach Group discussions

Compare the differences of “Lower assessed level of control risk
v If internal control is well designed and expected
approach” and “Predominantly substantive approach”.
to be highly effective, audit strategy will include:
Ø Low or medium assessed level of control risks
Ø Extensive understanding of relevant parts of internal control
Ø Extensive tests of control (TOCs)
Ø Reduced level of substantive audit procedures,
based on planned acceptable level of detection risk
being high or medium.

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 4.3. Develop an audit plan Contents of audit program

v ISA 300 requires auditor to develop and document an audit plan/program.
v An audit plan or audit program is a detailed list of audit procedures that
need to be applied to a particular balance or class of transactions
to implement the audit strategy.
v ISA 300.A17 notes that auditor may document audit plan by use of
appropriately tailored (for client) standard audit programs and checklists.
v An audit program will outline the following characteristics of
audit procedures:
Ø Nature — particular audit procedures to use and
particular items to which a procedure will be applied.
Ø Extent — number of items to which procedures will be applied, and
number of different tests to be performed.
Ø Timing — appropriate time to perform the procedure.

83 85

Purpose of detailed audit plan/program

v A well-prepared audit program should provide: Example of
audit program
Ø Evidence of proper planning of work for accounts
payable
Ø Guidance to inexperienced staff

Ø Evidence of work performed

Ø A means of controlling time spent on the engagement

Ø Evidence of consideration of internal control in relation

to proposed audit procedures.
84 86
 5. Financial report assertions Financial report assertions (1): Assertions about
and audit objectives and procedures classes of transactions & events for the period under audit
v Occurrence — transactions and events that have been recorded have
occurred and pertain to the entity.
5.1. Financial Report Assertions v Completeness — all transactions and events that should have been
recorded have been recorded.
5.2. Linking Audit Objectives to Management Assertions
v Accuracy — amounts and other data relating to recorded transactions and
events have been
5.3. Assertions & Audit Procedures
recorded appropriately.
v Cut-off — transactions and events have been recorded in the correct
accounting period.
v Classification — transactions and events have been recorded in the
87 proper accounts. 89

Financial report assertions (2): Assertions about

5.1 Financial report assertions account balances at the period end

v Directors and managers make assertions (embodied in the financial report)

v Existence — assets, liabilities and equity interests exist.
when they present a financial report.
v Rights and obligations — the entity holds or controls the rights to assets,
v Auditors use these assertions to assess risks by considering different types
and liabilities are the obligation of the entity.
of potential misstatements that may occur and designing audit procedures in
response to risks. v Completeness — all assets, liabilities and equity interests that should have
been recorded have been recorded.
v There are three categories of assertions:
v Valuation and allocation — assets, liability and equity interests are
Ø Classes of transactions and events
included in the financial report at appropriate amounts and any resulting
Ø Account balances
valuation adjustments are appropriately recorded.
Ø Presentation and disclosure.
88 90
 Financial report assertions (3): Assertions about Example: Assertions and objectives for inventory in
about presentation and disclosure a manufacturing company
Financial report Illustrative audit objectives
v Occurrence and rights and obligations — disclosed events, transactions assertion
and other matters have occurred and pertain to the entity. Existence ŸInventories included in the balance sheet physically exist.
ŸInventories represent items held for sale in normal course of business.
v Completeness — all disclosures that should be included in the financial
report have been included. Completeness ŸInventory quantities as per the accounting records include all products,
materials and supplies owned by the company that are on hand.
v Classification and understandability — financial information is ŸInventory quantities include all products, materials and supplies owned by the
company that are in transit or stored at outside locations.
appropriately presented and described, and disclosures are clearly expressed. Rights and ŸThe company has legal title or similar rights of ownership
obligations to the inventories.
v Accuracy and valuation — financial and other information is disclosed fairly ŸInventories exclude items billed to customers or owned by others.
and at appropriate amounts. Valuation and ŸInventories are properly stated at cost (except when the
allocation net realisable value is lower).
ŸSlow-moving, excess, defective and obsolete items included
in inventories are properly identified and valued.
91 93

Management Assertions for Each Category of Assertions 5.2. Linking Audit Objectives to Management Assertions

Transactions and Events Account Balances Presentation and Disclosure (1) Link the SIX general transaction-related audit objectives to management
Occurrence Existence Occurrence and rights assertions for classes of transactions.
and obligations
Completeness Completeness Completeness
Accuracy Valuation and Accuracy and (2) Link the EIGHT general balance-related audit objectives to management
allocation valuation
assertions for account balances.
Classification Classification and
understandability
Cutoff (3) Link the FOUR presentation- and disclosure-related audit objectives to
Rights and management assertions for presentation and disclosure.
obligations
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5.2.1. Linking A/Objectives to M/Assertions for CLASSES OF TRANSACTIONS (1) Hillsburg Hardware Co. (Applied to Sales Transactions)

(1) Link the SIX general transaction-related audit objectives to management

assertions for classes of transactions.

Recorded transactions
Occurrence
exist

Existing transactions
Completeness
are recorded

Recorded transactions
Accuracy are stated at the 95
correct amounts 97

5.2.1. Linking A/Objectives to M/Assertions for CLASSES OF TRANSACTIONS (2) 5.2.2. Linking A/Objectives to M/Assertions for ACCOUNT BALANCES (1)

(2) Link the EIGHT general balance-related audit objectives to management

assertions for account balances.

Transactions are included

Posting and
in the master files and
summarization Existence Amounts included exist
are correctly summarized.

Transactions are properly Existing amounts are

Classification Completeness
classified. included

Transactions are recorded Amounts included are

Timing Accuracy stated at the
on the correct dates.
96 correct amounts 98
5.2.2. Linking A/Objectives to M/Assertions for ACCOUNT BALANCES (2) Hillsburg Hardware Co. (Applied to Inventory)

Amounts are properly

Classification
classified

Transactions are recorded

Cutoff
in the proper period

Account balances agree

Detail tie-in with master file amounts,
and with the general ledger
99

101

5.2.2. Linking A/Objectives to M/Assertions for ACCOUNT BALANCES (3) 5.2.3. Linking A/Objectives to M/Assertions for PRESENTATION AND DISCLOSURE (1)

(3) Link the FOUR presentation- and disclosure-related audit objectives to

management assertions for presentation and disclosure.

Realizable Assets are included at

value estimated realizable value

Rights and
Assets must be owned
obligations

100 102
Mind mapping by yourself
Hillsburg Hardware Co. (Applied to Notes Payable)
Assertions &
audit procedures EXISTENCE (hiện hữu) — assets, liabilities and equity
(1) interests exist.

Audit procedures

Objectives v Perform physical counts on tangible assets (Kiểm kê)

Auditor has to prove that
ASSETS, LIABILITIES
presented on the FSs
actually exist.
To identify
Overstated
Assets & Liabilities
103
v Confirm assets stored outside entity or used by third
party (Gửi Thư xác nhận)
v Inspect costs and assess the future economic of
intangible assets (Đ/G giá trị TS)
v Send confirmation letters on account payable (Gửi TXN)
v Inspect supporting documents of accounts payable
(Kiểm tra tài liệu)
105

Assertions &
5.3. Linking Audit procedures to management assertions audit procedures OCCURRENCE (phát sinh) — recorded transactions &
(2) events have occurred and pertain to the entity
Mind mapping by yourself
Audit procedures
Objectives
Auditor has to prove that v Inspect supporting documents of transactions occurred
TRANSACTIONS &
EVENTS presented on the (Kiểm tra tài liệu)
FSs actually occur and v Inspect indirectly through verifying the existence of
belong to the entity.
relevant asset and liability accounts. (Kiểm tra gián tiếp
tính hiện hữu của tài sản, ví dụ: xem chứng từ mua tài
sản)
To identify
Overstated/non-occurrence
transactions
OR transactions
not belong to the entity
104
106
 Assertions &
audit procedures
(3)
Objectives
Auditor has to prove that
the entity has presented all
ASSETS, LIABILITIES, &
TRANSACTIONS properly
that existed or occurred in
the FSs.
To identify
uncorrected/understated
assets, liabilities,
& transactions
Assertions &
audit procedures
(4)
Objectives
Auditor has to prove that
ASSETS are owned by the
entity and LIABILITIES are
the obligation of the entity.
To identify
Assets & Liabilities
that the entity does not
have the ownership
or obligation
COMPLETENESS (Đầy đủ) — Assertions &
VALUATION AND ALLOCATION (Đánh giá & Phân bổ) —
all assets, liabilities and equity interests that audit procedures
(5) assets, liability and equity interests are
should have been recorded have been recorded. included in the FSs at appropriate amounts &
any adjustments are appropriately recorded.
Audit procedures Objectives
Audit procedures
Auditor has to prove that
the entity has valued and
v Obtain understanding of the entity’s internal control (tìm allocated ASSETS, v Assess whether the allocation methods applied by the
hiểu về KSNB) LIABILITIES, &
TRANSACTIONS properly in entity are in accordance with current accounting
v Obtain evidence supporting Completeness through accordance with current standards and accounting regulations. (Đánh giá PP
accounting standards &
verifying the existence & occurrence phân bổ áp dụng so với chuẩn mực & quy định kế toán)
regulations.
v Inspect relevant accounts v Assess whether the valuation methods applied
v Perform Cut-off Tests consistently. (Đánh giá PP đánh giá áp dụng)
To identify the
v Assess whether the allocations are appropriate. (Đánh
v Perform analytical procedures applications of
inappropriate & inconsistent giá PP phân bổ phù hợp)
valuation methods
107 109
RIGHTS AND OBLIGATIONS (Quyền & Nghĩa Vụ) —the Assertions & ACCURACY (Chính xác) —
entity holds or controls the rights to assets, audit procedures
and liabilities are the obligation of the entity. (6) amounts to recorded transactions & events
have been recorded appropriately
Audit procedures
Objectives Audit procedures
v Inspect supporting documents regarding Auditor has to prove that
the entity has performed v Obtain detailed balance and transactions (Thu thập chi
ownership/control of the entity over assets. accurate calculations, footed
(Kiểm tra chứng từ sở hữu) and posted numbers tiết số dư & giao dịch)
correctly between the FSs
and general ledgers (GL),
subsidiary ledgers.
v Inspect obligation of the entity to accounts payable v Agree numbers between GLs and subsidiary ledgers
(Đối chiếu số liệu sổ cái và sổ phụ)
To identify
v Perform footing of detailed balances and agree the totals
inconsistencies
with GLs (Xác định số dư chi tiết và đối chiếu với sổ cái)
between
the FSs and Ledgers
108 110
 Assertions &
audit procedures PRESENTATION and DISCLOSURE (Trình bày & thuyết minh) Tests of control (TOCs)
(7)

Objectives v An auditor performs tests of control to obtain evidence about

Auditor has to prove that Audit procedures whether the control activities of the internal control system are
FSs were presented &
disclosed properly in effective.
accordance with v Verify the presentation of the FSs:
requirements of current
accounting standards and Ø Classifications of accounts
v The tests are designed to provide evidence to support an
accounting disclosure.
Ø Off-setting balances assessment of control risk at a level below high (indicating
Verify the fulfilment of requirements of
reliance on the keys controls).
disclosure and additional information For examples: Tests of controls on sales transactions
To identify on the FSs.
inappropriate or
insufficient
presentation & disclosure
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6. Types of Audit Tests Substantive tests

v Performed on specific transactions and balances to see whether

Tests of control (Thử nghiệm kiểm soát)
the dollar amount of an account balance is materially misstated.
Substantive tests (Thử nghiệm cơ bản)
v These tests reduce detection risk.
Dual-purpose tests (Thử nghiệm kép)

112 114
 Types of substantive tests

v Analytical procedures: involve the study and comparison of relationships

between accounting data and related information.
For examples: Calculate receivables turnover ratio and days in receivables.
v Tests of details: obtaining evidence on the items (or details) included in an
account balance or class of transactions:
Ø Substantive tests of transactions,
eg.: perform cut-off test on Sales transactions
Ø Substantive tests of balances
eg.: send confirmation letters, inspect allowance for doubtful debts.
Ø Substantive tests of disclosures.
115

Dual-purpose tests

v Tests that apply both TOCs and substantive test together to the
same group of documents.
v For examples
The auditor inspected a sample of invoices to determine if these invoices were
approved for payments by authorized personnel, at the same with inspecting
the arithmetic accuracy of amounts shown on those invoices. (kiểm tra chứng
từ có xét duyệt đồng không, thời tính kiểm tra các phép tính số học trên hoá
đơn)

v Dual-purpose tests assist the auditor in improving the efficiency

of the audit.
116