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Planning an Audit The Audit Process consists of the following phases:

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Presentation on theme: "Planning an Audit The Audit Process consists of the following phases:"— Presentation transcript:

1 Planning an Audit The Audit Process consists of the following phases:
Accepting the Audit Engagement Planning Performing Audit Procedures Reporting the Findings Accepting the Audit Engagement: Auditors are not obliged to perform a financial statement audit for any entity that requests it. The client’s interests must be served with competence and professional concern. In order to avoid legal liability auditors would avoid association with clients that pose high risk of litigation. Client evaluation Assess the integrity of the principal owners, management and governors Communication with existing or the previous auditor Identification of significant risks Ethical Considerations Ensure that the firm is professionally qualified to act Adequacy of the firms resources and competences Firm’s ability to meet the reporting deadline Conflicts , if any with existing clients or within the management 1

2 Planning an Audit Accepting Nomination
Ensure that the outgoing auditor’s removal or resignation has been properly conducted and in accordance with national regulations Ensure the new appointment is properly conducted in accordance with national regulations Prepare and send out an engagement letter to directors The Engagement Letter: a reminder of management's responsibilities in connection with the preparation of the financial statements and providing the auditors with unrestricted access to the accounting records and other related information; the objective or purpose of the audit; reference to professional standards (for example ISAs) to which the auditors will adhere (and, if applicable, to national legislation such as the Companies Act or any other regulations); an explanation of the nature and scope of the audit and the auditor's responsibilities; a statement of the fact that because of the test nature and other inherent limitations of an audit (and inherent limitations of any accounting and internal control systems) there is an unavoidable risk that material misstatements may not be detected by the audit; a statement to the effect that weaknesses in the entity's accounting system identified in the course of 2

3 Planning an Audit The Engagement Letter (continued…)
the audit will be brought to management's attention but may not be provided to third parties; an indication that management will be asked to provide certain written representations to the auditors; a requirement to sight all other disclosures to be issued with the financial statements; a statement that management are responsible for safeguarding the entity's assets and that the audit should not be relied on for detecting all material misstatements; a description of any other services provided by the auditors (this may be included in a separate letter); the basis on which fees will be computed and any billing arrangements; legal jurisdiction under which the contractual arrangements are made; complaints procedure in the event of client dissatisfaction; a request for the client to confirm the terms of the engagement by signing and returning a copy of the letter to the auditors. 3

4 Planning an Audit Specimen Engagement Letter

5 Planning an Audit The Audit Plan:
Understanding the entity’s business and industry Type of industry and vulnerability to changing economic conditions, and major industry policies and practices Type of products or services, entity locations and operating characteristics such as production and marketing methods Government regulations tat affect the entity and is industry and reports to be filed with regulatory agencies Accounting policies Recent financial performance Internal control Assessing Business Risks “Business risks result from significant conditions, events, circumstances or actions that could adversely affect the entity's ability to achieve its objectives and execute its strategies, or through the setting of inappropriate objectives and strategies” (ISA 315). Relevant information can be obtained from: Inquiries of management, entity personnel, connected parties such as legal counsel and business contacts and any other relevant external sources Observation and inspection (prior audit working papers, documents for significant transactions-capital expenditures, long-term loans, officer’s remuneration, important contracts, approvals for pledging assets, opening and closing of bank accounts etc). Visiting the entity’s premises 5

6 Planning an Audit Assessing Business Risks (continued…)
Analytical procedures (comparable information for prior periods, anticipated results such as budgets and forecasts, industry averages) Developing an Audit Strategy Having assessed the evidence, materiality and components of audit risk the auditor much choose among alternative audit strategies. The assessment of the internal control structure is crucial. This will determine the extent of the substantive procedures to be applied (i.e. substantiation of the amounts recorded in financial statement). Four decisions must be made before adopting a strategy: Is it cost-effective to adopt a lower assessed level of control risk strategy? Are control procedures effectively designed? Are control procedures effectively operated? Do the results of substantive procedures confirm the assessment of control risk?

7 Planning an Audit Preliminary Audit Strategies for Material Financial Statements Assertions

8 Planning an Audit Summary
Prior to accepting an audit engagement, the auditors should ascertain that it is possible to complete the assignment in accordance with all applicable professional standards, including ISAs and professional ethics. Important steps in accepting the engagement include evaluating the integrity of management, identifying any special circumstances and unusual risks, assessing competence, evaluating independence, determining that the engagement can be completed with due care, and issuing an engagement letter. Proper planning and assessment of the risks of material misstatements are crucial in performing an efficient, effective audit. Planning steps include obtaining an understanding of the entity and the industry, performing analytical procedures, making preliminary judgments about materiality levels, identifying and assessing audit risks, obtaining an understanding of the entity's internal control structure and developing preliminary audit strategies for significant assertions. The procedures performed, the evidence obtained and the auditors' evaluation of that evidence should be fully documented in working papers, which should provide the support for the auditors' report and evidence of the auditors' compliance with ISAs.

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