INTRODUCTION auditors consider the professional responsibility and potential legal liability to start auditing. The audit work should be adequately planned and properly executed. If assistants are employed, they should be properly supervised.
DEFINITION According to AAS-8, “Audit planning refers to planning by the auditor made to enable him to conduct an effective audit, in an efficient and timely manner, and includes planning about area, scope, depth of transactions to be audited, persons to be assigned for audit etc”. “Audit planning is the process of deciding in advance what is to be done, who is to do it, how it is to be done, and when it is to be done by the auditor in order to have an effective and efficient completion of audit”. CONT’D The concept of adequate planning includes; investigating a prospective client before deciding whether to accept the engagement, obtaining an understanding of the client's business operations, and developing an overall strategy to organize, coordinate, and schedule the activities of the audit staff. CONT’D In planning the audit, the auditor needs to consider the ff; the terms of the engagement and the expected date of the report
the nature of the client's business, including applicable statutory
and contractual requirements the experience gained during previous audit engagements
the accounting policies and degree of complexity of the
accounting system materiality and the components of audit risk
any involvement of internal auditors and persons having special
expertise the intended reliance on internal control
the level of experience and the number of audit staff for the engagement AIM OF AUDIT PLANNING
An effective and efficient audit relies on proper planning
procedures. The objectives of planning work involve: ensuring that appropriate attention is devoted to the different areas of the audit ensuring that potential problems are identified; and
facilitating review
Good planning helps in assigning those proper tasks to the
members of the audit team, coordinating outside experts All members of the audit team must have an understanding of the entity's affairs. SOURCE OF INFORMATION FOR AUDITORS previous experience of the client and its industry visits to the client's premises and plant facilities
discussion with the client's staff and directors
discussion with other auditors and with legal and other
advisors who have provided services to the client or within the industry Publications related to the industry (eg. Government statistics, surveys, texts, journals, financial newspapers) legislation and regulations that significantly affect the client
Documents produced by the client (eg. Minutes of meetings)
Professional literature giving industry specific guidance.
CONT’D Matters to Consider in Relation to Knowledge of the Business General economic factors
The industry: conditions affecting the client's business
The entity: directors, management and ownership
The entity's business: products, markets, suppliers,
expenses and operations Financial performance: factors concerning the entity's financial condition and profitability Information technology
Reporting environment: external influences which affect
the directors in the preparation of financial statements. CONT’D Using the information, the auditors must use it: to assess risks and identify problems
to plan and perform the audit effectively and efficiently
and to evaluate audit evidence. AUDIT RISK Audit risk is the risk that auditors may give an inappropriate opinion on the financial statements. i.e the statements will contain material misstatement which the auditors fail to find Audit risk is the risk that the auditors give an unqualified opinion on the accounts when they should have given a qualified opinion. The concept of audit risk is consistent with the fact that the audit is designed to provide reasonable assurance, not absolute assurance CONT’D Audit risk has three components; inherent risk, control risk and detection risk. Inherent risk
The probability that material misstatements have
occurred is the susceptibility of an account balance or class of transactions to material misstatement, either individually or when aggregated with misstatements in other balances or classes, irrespective of related internal control. CONT’D Control risk Control risk is the risk that client internal controls fail to detect material misstatements. It is the risk that a misstatement; could occur in an account balance or transaction
could be material, either individually or when
aggregated with misstatements in other balances or classes; and Would not be prevented, or detected and corrected on a timely basis, by the entities internal control systems. CONT’D Detection risk The risk that errors could but would not be detected by the auditor’s procedures. is the risk that the auditors' substantive procedures do not detect a misstatement that exists in an account balance or class of transactions that could be material, either individually or when aggregated with misstatements in other balances or classes. CONT’D Detection risk is the risk that audit procedures will fail to detect material errors. Detection risk relates to substantive procedures and the inability of the auditors to examine all evidence. Detection risk is directly controllable by the auditor through substantive tests of details and others substantive audit procedures e.g if both control risk and inherent risk are high an auditor reduce allowable detection risk by increasing sample size CONT’D Substantive procedures are tests performed to obtain audit evidence to detect material misstatements in the financial statements Substantive tests consists of: a. Analytical procedures involve the use of comparisons to assess fairness. Example: Sale per square foot of retail price. b. Tests of details of transactions involve examining support for the individual transactions posted to an account. Example: Vouching debits to accounts receivable to entries in the sales journal and supporting sales invoices. c. Tests of details of balances involve examining support for the ending balance directly. Example: Confirming an ending accounts receivable balance directly with the customers. CONT’D the audit risk model may be expressed quantitatively as follows: AR = IR×CR×DR to illustrate the use of the model, assume that the auditor made the following professional judgments for a particular assertion, such as the valuation or allocation assertion for accounts receivable: AR=5%, IR=90%, AND CR=28% Detection risk can be determined by solving the model for dr as follows: DR = (AR) / (IR×CR) = .05 / (0.9 × 0.28) =.0.984, approximately 0.20 OR 20% CONT’D Classification of Audit Procedures: An auditor performs audit procedures to obtain evidence to
support an opinion on the financial statements. They are:
a. Procedures to obtain an understanding: In performing the audit, an auditor usually performs procedures to obtain an understanding of the client, its business and industry, and factors that may affect the inherent risk of misstatement in an assertion. b. Tests of Controls: They are made to provide evidence about the effectiveness of the design and operation of internal control structure policies and procedures. Example: A computer control procedure uses batch totals to ensure that the entire batch of transactions is recorded. c. Substantive Tests: They provide evidence as to the fairness of management’s financial statement assertions. MATERIALITY’ Materiality is an expression of the relative significance or importance of a particular matter in the context of financial statement as a whole. A matter is material if its omission or misstatement would reasonably influence the decisions of users of the auditors' report. The concept of 'true and fair' is linked with the concept of materiality, which is fundamental to the whole process of financial accounting. The auditors' task is to decide whether accounts show a true and fair view. CONT’D
Auditors plan and perform the audit to be able to provide
reasonable assurance that the financial statements are free of material misstatement and give a true and fair view. The assessment of what is material is a matter of professional judgment and includes consideration of both the amount (quantity), and the nature (quality) of misstatements. CONT’D
The assessment of materiality at this stage
should be based on the most recent and reliable financial information and will help to determine effective and efficient audit approach. Materiality assessment will help the auditors to decide: how many and what items to examine whether to use sampling techniques What level of error is likely to lead to a qualified audit opinion