Assurance

Professional Stage: Knowledge level

Process of Assurance: Planning the Assignment (Chapter- 03)
! "efine audit strateg# and audit plan!
Audit Strateg#
Audit strategy is the formulation of the general strategy for the audit, which stets the scope,
timing and direction of the audit and guides the development of the audit plan.
Audit plan
An audit plan shows the overall implementation of the audit strategy, being detailed than audit
strategy and sets out the nature, timing and extent of the audit procedures to obtain sufficient
appropriate audit evidence.
$! %dentif# the &e# contents of an audit plan or how audits are planned'
Audits are planned to:
Ensure appropriate attention is devoted to important areas of the audit;
Identify the potential problems are resolved on a timely basis;
Ensure that the audit is properly organized and managed;
Assign wor to engagement team members properly;
!acilitate direction to supervision of engagement team members; and
!acilitate review of wor.
3! (hat are the &e# contents of an overall audit strateg#'
a) )nderstanding the entit#*s environment
"eneral economic factors and industry conditions; and
Important characteristics of the client.

+) )nderstanding the accounting and internal control s#stem
#he accounting policies and charges in those police;
#he effect of new accounting or auditing pronouncements; and
#he auditor$s cumulative nowledge of the accounting and internal control systems.
c) ,is& and materialit#
#he expected assessments of riss of fraud or error;
#he setting of materiality for audit planning purposes-
#he possibility of material misstatements.
#he identification of complex accounting areas including those involving estimates!
d) Conse.uent nature/ timing and e0tent of procedures
%ossible change of emphasis on specific audit areas; and
#he effect of information technology on the audit.
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e) Coordination/ direction/ supervision and review
#he number of locations;
&taffing re'uirements; and
(eed to attend client premises for inventory count or other year)end procedures.
f) 1ther matters
#he possibility that the going concern basis may be sub*ect to 'uestion;
+onditions re'uiring special attention;
#he terms of the engagement and any statutory responsibilities; and
#he nature and timing of reports.
2! (hat are the appropriate procedures used +# the auditor in o+taining an
understanding of the entit#'
)nderstanding the entit#
,&A -./, followed for obtaining an understanding of the entity and its environment and
assessing the riss of material misstatements states that, 0the auditor should obtain an
understanding of the entity and its environment, including its internal control, sufficient to
identify and assess the riss of material misstatement of the financial statements whether due to
fraud or error, and sufficient to design and perform further audit procedures.
#he appropriate procedures to obtain an understanding of the entity and its involvement include:
(h#
.. #o identify and assess the riss of material misstatement in the financial statements;
1. #o enable the auditor to design and perform further audit procedures;
-. #o provide a frame of reference for exercising audit *udgment, for example, when setting
audit materiality.
(hat
.. Industry, regulatory and other external factors, including the reporting framewor.
1. (ature of the entity, including selection and application of accounting policies, internal
control.
-. 2easurement and review of the entity$s financial %erformance.
3ow
! In'uiries of management others within the entity.
$! Analytical procedures, observation and inspection.
3! %rior period nowledge.
2! 3iscussion of the susceptibility of the financial statement to material misstatement among
the engagement team.
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4! "escri+e an attitude of professional s&epticism!
An attitude of professional septicism means, the auditor maes a critical assessment, with a
'uestioning mind neither assuming that the management is dishonest nor assuming
un'uestioned honesty.
5! %dentif# the sources of information for anal#tical procedures applied through the
course of the audit!
Analytical procedures should be used at the ris assessment stage.
%ossible sources of information about the client:
Interim financial information;
,udgets;
2anagement accounts;
(on financial information;
,an and cash records;
4A# returns;
,oard minutes; and
3iscussions or correspondence with the client at the year end.
6! "efine materialit#! (hen should it +e considered'
7aterialit#
,&A framewor for the preparation and presentation of financial statements states that a matter
is material if its omission or misstatement would reasonably influence the economic discussion
of users taen on the basis of financial statements.
,&A -15 Audit materiality states that materiality should be considered by the auditor when:
3etermining the nature, timing and extent of audit procedures; and
Evaluating the effect of misstatements.
2ateriality assessment will help the auditors to decide:
6ow many and what extent items to examine;
7hether to use sampling techni'ues; and
7hat level of error is liely to permit an auditor to conclude the financial statements don$t
give a true and fair view.
2ateriality must be reviewed constantly as the audit progresses and changes may be re'uired
because:
3raft accounts are altered due to material error, and
External factors may cause changes in ris estimates.
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8! 3ow is materialit# used in the cause of an assurance engagement'
9igure: Audit 7aterialit#
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%lanning materiality based
on draft financial statements
and other available
information
Apply planning materiality
to individual audit
ob*ectives or balances
#est all items
&ample from remaining
items
!inal materiality based on
results obtained final
financial statements
Actual errors detected
Actual errors detected
+ompare and consider need
for additional testing
Actual errors pro*ected to
population
8! 3ow do #ou define tolera+le error' (hat is the availa+le approach of the percentage of
materialit#'
:olera+le error
#olerable error is the maximum error that an auditor is prepared to accept in a class of
transactions or balances in the financial statements.
3ifferent firm has different methods to calculate materiality level and this is one of the available
approaches as thus rule:
%tems ;
%rofit before tax /
"ross profit 5./5 8 ..55
9evenue 5./5 8 ..55
#otal assets .)1
(et Assets 1 8 /
%rofit after tax / 8 .5
It is also important to bear up in mind that, materiality has 'ualitative as well as 'uantitative
aspects. !or example, transactions relating to directors are considered material by nature
regardless of their value.
<! "efine anal#tical procedures!
Analytical procedures means evaluation of financial information made by a study of plausible
relationships among both financial and non financial data. Analytical procedures also
encompass the investigation of identified fluctuations and relationships that are inconsistent
with other relevant information or significantly divided from predicted amounts.
0! (hat is audit ris&' "raw a diagram containing contents ad su+ contents of audit ris&!
Audit ris&
Audit ris is the ris that the auditors give an impropriate opinion on the financial statements.
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9igure: Audit ris& including contents and su+-contents
Audit ,is&
9is that the financial
statements contain a
material misstatement
9is that the auditors will
fail to detect any material
misstatement
3etection ris
+ontrol 9is Inherent 9is
"efine inherent ris&/ control ris& and detection ris&!
%nherent ris&
#he susceptibility of an account balance or class of transactions to misstatement that could be
material individually or when aggregated with misstatements in other balances or classes,
assuming there were no related internal controls.
Control ris&
+ontrol ris is the ris that the material misstatement would not be prevented, detected or
corrected by the accounting and internal control system.
"etection ris&
3etection ris is the ris that the auditor$s procedures will not detect a material misstatement
that exists in an account balance or class of transactions that could be material either
individually or when aggregated with other misstatements.
! =ive few e0amples that might increase inherent ris&!
Inherent ris is the ris that items will be misstated due to characteristics of those items.
Example of issues that might increase inherent ris are:
.: ,alance is or includes an estimates;
1: ,alance is improper in the accounts;
-: !inancial statements are liable to misstatements because
company is in trouble;
company is seeing to raise fund; and
other motivation for directors to misstate the figures. and
;: !inancial statements contain balances with complex financial accounting re'uirements or a
choice of treatments.
#he auditor must use their professional *udgment and all available nowledge to assess inherent
ris and if no such information and nowledge is available then the inherent ris is high.
$! (hich factors indicate the significant ris&'
&ome riss may be significant riss, which re'uire special auditor concentration. ,&A -./ sets
out the following factors which indicate that a ris might be a significant ris.
.: 9is of fraud;
1: 9elated to recent significant economic, accounting or other development;
-: #he complexity of the transaction; and
;: <nusual transaction.
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4!(hat are the ris& assessment procedures performed +# an auditor to o+tain an
understanding a+out an entit# and its internal control'
#he auditor should perform the following ris assessment procedures to obtain an understanding
of an entity and its internal control:
.: In'uiries of management and others within with)in the entity;
1: Analytical procedures;
-: =bservation and inspection.
5! %dentif#ing and assessing the ris& (>SA 34!00)!
#he auditor should indentify and assess the riss of material misstatements at the financial
statements level and at the assertion level for classes of transactions, account balances, and
disclosures.
:he ?nd
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