Part Two
Audit objectives, Planning The Audit
＆ Materiality
Structure of Seminar
1.
2.
3.
4.
Audit objectives
Planning the audit
The importance of planning
The overall audit strategy and the
detailed audit plan
5. Materiality
1. Audit objectives
• Overall objective of the audit
• Specific audit objectives
- The overall is reasonable
-
Truth
Integrity
Ownership
Valuation
Close
Accuracy
Audit objectives
- Disclosure
- Classification
2. Planning the audit
• Steps in planning the audit:
1. Obtain an understanding of the entity and its
environment
2. Make preliminary judgments about materiality
levels
3. Consider the audit risk
4. Obtain an understanding of the entity’s internal
control structure
5. Develop preliminary audit strategies for significant
assertions
Planning the audit
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ASA 300 ‘Planning the Audit of a Financial
Report’
“The auditor shall plan the audit so that the
engagement will be performed in an effective
manner”
ASA 315 ‘Understanding the Entity and Its
Environment and Assessing the Risk of Material
Misstatement’
“the auditor shall obtain an understanding of the
entity and its environment, including its internal
controls, sufficient to identify and assess the risks
of material misstatements of the financial
statements whether due to fraud or error, and
Planning the audit
• Obtaining an understanding of the entity and its
environment
• Why? To understand the events, transactions,
practices & risks that may have a significant effect on
the F/S
• What knowledge is needed?
– Industry, regulatory & other external factors
• Industry conditions
• Regulatory environment
• Economy-wide factors
Planning the audit
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What knowledge is needed? (cont.)
Nature of entity, including its accounting policies
Business operations
Investments
Financing
Financial reporting
Entity’s objectives, strategies & business risks
Measurement & review of entity’s financial
performance
Audit Planning
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How is knowledge obtained?
Review industry and business data
Review prior year’s working papers
Review past experience with client
Tour client’s operations
Interim audit
Make inquiries of audit committee
Make inquiries of management
Perform analytical procedures
3. The importance of planning
• An effective and efficient audit relies on proper
planning procedures. The planning process is covered
in general terms by ISA 300 Planning an audit of
financial statements which states that the auditor shall
plan the audit so that the engagement is performed in
an effective manner.
• Audits are planned to:
•
Help the auditor devote appropriate attention to
important areas of the audit.
•
Help the auditor identify and resolve potential
problems on a timely basis.
The importance of planning
Help the auditor properly organise and manage the
audit so it is performed in an effective manner.
Assist in the selection of appropriate team members
and assignment of work to them.
Facilitate the direction, supervision and review of
work.
Assist in coordination of work done by auditors of
components and experts.
• Audit procedures should be discussed with the client's
management, staff and/or audit committee in order to
The importance of planning
co-ordinate audit work, including that of internal audit.
However, all audit procedures remain the
responsibility of the external auditors.
A structured approach to planning will include:
• Step 1 Ensuring that ethical requirements are met,
including independence
• Step 2 Ensuring the terms of the engagement are
understood
• Step 3 Establishing the overall audit strategy that
sets the scope, timing and direction of the audit and
The importance of planning
guides the development of the audit plan
Identify the characteristics of the engagement that
define its scope.
Ascertain the reporting objectives to plan the
timing of the audit and nature of communications
required.
Consider significant factors in directing the team’s
efforts.
Consider results of preliminary engagement
activities.
The importance of planning
Ascertain nature, timing and extent of resources
necessary to perform the engagement.
• Step 4 Developing an audit plan that includes the
nature, timing and extent of planned risk assessment
procedures and further audit procedures.
4. The overall audit strategy and
the detailed audit plan
The overall audit
• The overall audit strategy and audit plan shall be
updated and changed as necessary during the course
of the audit.
• The matters the auditor may consider in establishing
an overall audit strategy are set out in the table
below.
The overall audit strategy and
the detailed audit plan
• Examples of items to include in the overall audit
strategy could be:
Industry-specific financial reporting requirements
Number of locations to be visited
Audit client's timetable for reporting to its
members
Communication between the audit team and the
client
The overall audit strategy and
the detailed audit plan
The detailed audit plan
risk assessment procedures
Plans to implement further audit procedures
Plans to implement additional audit procedures
4.Audit Engagement Letter
ASA 210 ‘Terms of Audit Engagements’
Purpose
Confirms terms of the engagement
Effect
Legal contract between auditor and client
See textbook pp.231-3 for an example
Content
Identification of the entity and the financial
report to be audited
Audit Engagement Letter
• Content (cont.)
– Objectives of the audit
– Reference to professional standards and
statutes
– Auditor’s responsibilities
– Limitations of the audit
– Management’s responsibilities
– Auditor independence requirements
– Basis of fee
– Acceptance by client
5. Materiality
•
ISA 320 Materiality in planning and performing
an audit provides guidance to auditors on this
area. The objective of the auditor is to apply the
concept of materiality appropriately in planning
and performing the audit. Information is
generally consider to be material if its omission
or misstatement could influence the economic
decisions of users taken on the basis of the
financial statements.
Materiality
1) Determining materiality and performance
materiality when planning the audit
• Performance materiality is the amount or
amounts set by the auditor at less than
materiality for the financial statements as a
whole to reduce to an appropriately low level the
probability that the aggregate of uncorrected and
undetected misstatements exceeds materiality
for the financial statements as a whole.
Performance materiality also refers to the
Materiality
amount or amounts set by the auditor at less
than the materiality level or levels for particular
classes of transactions, account balances or
disclosures.
•
During planning, the auditor must establish
materiality for the financial statements as a
whole. Howeer, if thvere are classes of
transactions, account balances or disclosures for
which misstatements less than materiality for the
financial statements as a whole couldreasonably
Materiality
be expected to influence the economic decisions
of users taken on the basis of the financial
statements, the auditor must also determine
materiality levels to be applied to these.
•
Determining materiality for the financial
statements as a whole involves the exercise of
professional judgement (which we covered in
section 1 of this chapter). Generally, a
percentage is applied to a chosen benchmark as
a starting point for determining materiality for the
Materiality
financial statements as a whole. The following
factors may affect the identification of an
appropriate benchmark:
•
Elements of the financial statements (e.g.
assets, liabilities, equity, revenue, expenses)
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Whether there are items on which users tend
to focus
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Nature of the entity, industry and economic
environment
Materiality
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Entity’s ownership structure and financing
Relative volatility of the benchmark
Materiality
2) Revision of materiality
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The level of materiality must be revised for
the financial statements as a whole if the auditor
becomes aware of information during the audit
that would have caused the auditor to have
determined a different amount during planning.
Materiality
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3) Documentation of materiality
ISA 320 requires the following to be
documented:
Materiality for the financial statements as a
whole
Materiality level or levels for particular classes
of transactions, account balances or disclosures
if applicable
Performance materiality
Any revision of the above as the audit
progresses