Ameer Hamza

BAFM-22-10
Audit And Assurance
Questions Assignment#2
CHAPTER#3 Planning and Risk
Assessment
1. describe planning and process of planning and
explain professional scepticism?
Planning is a crucial aspect of any endeavor, whether it's a project, an event,
or a long-term business strategy. It involves establishing objectives,
determining the steps needed to achieve those objectives, allocating
resources effectively, and anticipating potential obstacles or risks. The
process of planning typically involves several key steps:
1. **Defining Objectives**: This is the first step in the planning process.
Objectives should be clear, specific, and measurable. They provide a clear
target for the planning efforts.
2. **Analyzing the Situation**: Before formulating plans, it's essential to
understand the current situation. This may involve conducting a SWOT
analysis (Strengths, Weaknesses, Opportunities, Threats) to identify internal
and external factors that may impact the plan.
3. **Generating Alternatives**: Once the objectives and situation are clear,
brainstorming or other creative techniques can be used to generate
alternative courses of action.

4. **Evaluating Alternatives**: Each alternative should be evaluated based

on its feasibility, potential benefits, resource requirements, and alignment
with objectives. This evaluation helps in selecting the most appropriate plan.
5. **Developing the Plan**: The selected alternative is further refined into a
detailed plan. This includes defining tasks, setting timelines, allocating
resources, and establishing milestones.
6. **Implementing the Plan**: Once the plan is developed, it needs to be put
into action. This involves executing the tasks according to the timeline and
monitoring progress closely.

7. **Monitoring and Controlling**: Throughout the implementation phase,

progress is monitored against the established milestones and objectives. Any
deviations from the plan are identified and corrective actions are taken to
bring the project back on track

8. **Reviewing and Revising**: Periodically, the plan should be reviewed to

assess its effectiveness and relevance. Based on this review, adjustments
may be made to the plan to adapt to changing circumstances or to improve
outcomes.

Professional skepticism is an essential mindset for professionals in various

fields, including auditing, accounting, finance, and consulting. It involves
maintaining a questioning attitude, critically assessing evidence, and being
alert to the possibility of error, bias, or fraud. Key aspects of professional
skepticism include:

1. **Questioning Mindset**: Professionals with a skeptical mindset are

naturally curious and ask probing questions to gain a deeper understanding of
the information presented to them.
2. **Critical Evaluation**: They critically evaluate the information they
receive, considering its source, reliability, and relevance. They don't take
information at face value but instead seek corroborating evidence

3. **Awareness of Bias**: Professionals with professional skepticism are

aware of their own biases and the potential biases of others. They strive to
remain impartial and objective in their assessments.
4. **Risk Awareness**: They are alert to the risks inherent in the information
or processes they are evaluating, including the risk of error, manipulation, or
fraud.
5. **Independence**: Professional skepticism requires independence of
judgment, allowing professionals to form their own opinions based on the
evidence rather than being unduly influenced by others.

In summary, professional skepticism is a critical mindset that helps

professionals approach their work with rigor, objectivity, and a healthy dose
of caution, ensuring that they maintain high standards of quality and integrity
in their decision-making and evaluations.

2) Differentiate between the audit strategy and

audit plan?
Audit strategy and audit plan are both integral components of the audit
process, but they serve different purposes and operate at different levels of
detail. Here's how they differ:
1. **Audit Strategy**:

- **Definition**: The audit strategy sets the overall framework and approach
for conducting the audit engagement. It outlines the scope, objectives,
timing, and resources needed for the audit.
- **Level of Detail**: The audit strategy is a high-level document that
provides guidance on how the audit will be conducted. It doesn't delve into
specific procedures or tasks.
- **Key Components**: The audit strategy typically includes considerations
such as the overall audit approach (e.g., risk-based, substantive
testing),materiality thresholds, the staffing and supervision requirements,
and any significant audit considerations (e.g., complex transactions,
regulatory requirements).
 - **Purpose**: The purpose of the audit strategy is to provide a roadmap for
the audit team, ensuring that everyone understands the overarching goals
and approach of the audit engagement.
2. **Audit Plan**:

- **Definition**: The audit plan is a detailed document that outlines the

specific procedures and tasks to be performed during the audit. It translates
the objectives and scope defined in the audit strategy into actionable steps.
- **Level of Detail**: The audit plan is highly detailed, specifying the audit
procedures to be followed, the timing of these procedures, the responsible
team members, and any other relevant details.

- **Key Components**: The audit plan typically includes a detailed

breakdown of audit procedures for each significant account balance or
transaction cycle, including substantive testing, analytical procedures, tests
of controls, and any other procedures deemed necessary.

- **Purpose**: The purpose of the audit plan is to guide the day-to-day

activities of the audit team, ensuring that all necessary procedures are
carried out effectively and efficiently to achieve the audit objectives.

3) Describe the need and what is involved in

understanding the entity and environment?
Understanding the entity and its environment is crucial in auditing as it
provides essential context for assessing risks and planning the audit
approach. This involves:

1. **Understanding the Entity**: This includes gaining insights into the

entity's business operations, its industry, organizational structure, key
personnel, and strategic objectives. It helps auditors comprehend the entity's
business model, processes, and internal controls.
 2. **Understanding the Environment**: Auditors need to assess the
external environment in which the entity operates, including economic,
regulatory, and competitive factors. This helps in understanding how external
factors might impact the entity's financial performance and risk profile.
Overall, understanding the entity and its environment allows auditors to
identify risks, tailor audit procedures, and provide valuable insights to
stakeholders.
4) Explain the concept of materiality and
performance materiality?
Materiality is a fundamental concept in auditing that refers to the significance
or importance of an item, transaction, or discrepancy in financial statements.
It guides auditors in determining the level of detail and scrutiny applied
during the audit process.
- **Materiality**: Materiality is the threshold at which the inclusion or
omission of an item in financial statements could influence the decisions of
users relying on those statements. It's a subjective judgment based on both
quantitative and qualitative factors.

- **Performance Materiality**: Performance materiality is a lower threshold

set by auditors to ensure that the aggregate of uncorrected and undetected
misstatements does not exceed materiality for the financial statements as a
whole. It allows auditors to focus their efforts on areas where misstatements
are more likely to have a significant impact, while still providing reasonable
assurance that the financial statements are not materially misstated.

5) Explain the audit risk model and define the

terms inherent risk,control risk and audit risk?
The audit risk model is a framework used by auditors to assess and manage
the risk of issuing an incorrect audit opinion. It is typically represented as
follows:
Audit Risk = Inherent Risk × Control Risk × Detection Risk
Here are the definitions of the terms involved:
1. **Inherent Risk**: This represents the susceptibility of an assertion or
account balance to material misstatement before considering the effectiveness
of internal controls. It's influenced by factors such as the nature of the entity's
business, complexity of transactions, and industry regulations.
2. **Control Risk**: Control risk refers to the risk that a material
misstatement could occur in an assertion or account balance and not be
prevented or detected on a timely basis by the entity's internal controls. It
reflects the effectiveness of the controls in place to mitigate risks.
3. **Audit Risk**: Audit risk is the risk that auditors may issue an
inappropriate opinion on financial statements that contain material
misstatements. It is the risk that the auditor fails to detect and correct
material misstatements.
Detection Risk, the third component of the audit risk model, represents the
risk that audit procedures will fail to detect a material misstatement that
exists in an assertion or account balance.
In summary, the audit risk model helps auditors assess and manage the
overall risk of issuing an incorrect audit opinion by considering inherent risk,
control risk, and detection risk.

6)Distinguish between fraud and error,

summarise the respective responsibilities of
management and the auditor with respect to
fraud?
Distinction between Fraud and Error:
1. **Fraud**: Fraud involves intentional misrepresentation of financial
information, such as manipulation, falsification, or omission of information,
with the intent to deceive stakeholders. It is a deliberate act and involves
deceit or dishonesty.
2. **Error**: Error, on the other hand, is an unintentional mistake in financial
statements. It may result from oversight, misunderstanding, or negligence but
does not involve intent to deceive.
Responsibilities of Management and Auditor:
1. **Management Responsibilities**:
- Management is responsible for the prevention and detection of fraud
within the organization.
- They are also responsible for ensuring that financial statements are free
from material misstatement due to fraud or error.
- Management should establish and maintain effective internal controls to
mitigate the risk of fraud and error.
2. **Auditor Responsibilities**:
- The auditor's primary responsibility is to express an opinion on the
fairness of the financial statements.
- They are required to plan and perform the audit to obtain reasonable
assurance that the financial statements are free from material misstatement,
whether due to fraud or error.
- While the auditor is responsible for detecting material misstatements,
including those resulting from fraud, they are not responsible for preventing
or detecting fraud to the same extent as management.
In summary, while both management and auditors have responsibilities
related to fraud and error, management primarily focuses on prevention and
detection within the organization, while auditors focus on detecting material
misstatements during the audit process.
7) Explain the auditors approach to the risk or
material misstatement due to fraud?
The auditor's approach to the risk of material misstatement due to fraud
involves several key steps:
1. **Understanding the Entity and its Environment**: The auditor gains
an understanding of the entity's business, industry, and internal control
environment. This helps in assessing the risk of fraud and identifying areas
prone to manipulation or deceit.
2. **Assessing Inherent Risk**: The auditor evaluates the susceptibility of
the financial statements to material misstatement due to fraud, considering
factors such as industry conditions, complex transactions, and management
integrity.
3. **Evaluating Internal Controls**: The auditor assesses the effectiveness
of the entity's internal controls in preventing and detecting fraud. Weaknesses
in internal controls increase the risk of fraud and may require additional audit
procedures.
4. **Performing Analytical Procedures**: Analytical procedures are used
to identify unusual or unexpected trends, relationships, or fluctuations in
financial data that may indicate the presence of fraud.
5. **Scanning for Fraud Risk Factors**: The auditor looks for red flags or
indicators of potential fraud, such as management's excessive focus on
meeting financial targets, strained relationships with stakeholders, or
significant related-party transactions.
6. **Testing Controls and Substantive Procedures**: The auditor performs
tests of controls to assess their effectiveness in mitigating the risk of fraud.
Substantive procedures are also conducted to gather evidence about the
accuracy and completeness of financial information.
7. **Communicating with Management and Those Charged with
Governance**: The auditor discusses their assessment of fraud risk with
management and those charged with governance, highlighting any concerns
or areas of heightened risk.
8. **Documenting Findings and Conclusions**: The auditor documents
their understanding of the entity's fraud risks, the procedures performed to
address those risks, and the conclusions reached regarding the risk of
material misstatement due to fraud.
In summary, the auditor's approach to the risk of material misstatement due
to fraud involves a thorough assessment of inherent risk, evaluation of
internal controls, performance of analytical procedures, scanning for fraud
risk factors, testing controls and substantive procedures, communication with
management and governance, and comprehensive documentation of findings
and conclusions.