Audit Planning 593f36

ASPECTS TO BE CONSIDERED IN THE AUDIT PLAN • Knowledge of business (Slides 3-7) • Evaluating the internal control structure (Slide 8) • Risk and materiality (Slide 9) • Nature, timing and extent of procedures (Slide 10) • Coordination, direction, supervision and review (Slide 10)

1

AUDIT PLANNING 1. Knowledge of business  Economic factors affecting the entity's operations – general level of economic activity; for example, recession and growth – interest rates and availability of financing – inflation – government policies: monetary, fiscal, taxation, financial incentives such as sub-sidies, and tariffs and trade restrictions – foreign currency rates and controls.  Industry conditions affecting the entity's operations – the market and competition – cyclical or seasonal activity – changes in product technology – business risk; for example, high technology or market volatility declining or expanding operations – adverse conditions; for example, declining demand, excess capacity and serious price competition – key ratios and operating statistics 2 – specific ing practices and problems

1. Knowledge of business - continued  The client  The client's business - products, markets, suppliers, expenses and operations - client's nature of business, such as retailer, manufacturer, or service provider - location of production facilities, warehouses, offices - products or services and markets - important suppliers of goods and services - inventories (locations, consignments, storage facilities) - franchises, licenses, patents - expense classifications - research and development - foreign currency assets, liabilities and transactions - legislation and regulation that affect the client; for example, environmental - use of information technology - debt structure 3

1. Knowledge of business - continued ●

Financial performance - key ratios and operating statistics - trends.

●

Reporting environment - Legislation - regulatory environment - Taxation - measurement and disclosure issues unique to the entity - audit reporting requirements - s of the financial statements

4

Knowledge of business - continued ● Management & Ownership Aspects – – – – – – – –

Corporate structure Beneficial owners & related persons Control by one person Capital structure Management objectives Acquisitions, mergers or disposal of assets & activities Sources & methods of financing client management aspects • Composition • business reputation • experience of management • existence of audit committee and scope of its activities • existence of policy on corporate conduct • changes in professional advisers such as lawyers – operating management • experience and reputation • Turnover • financial staff and their status in the organisation • staffing of ing department • incentive or bonus plans as part of remuneration • internal audit function (existence, quality) internal control structure • details of computer hardware and software

5

Knowledge of business - continued The auditor can gain knowledge in a variety of ways: – previous experience with the client and its industry – enquiry of people within the company, such as directors and senior staff – discussion with internal audit staff – review of internal audit reports – discussion with other auditors – discussions with legal and other advisers who have pro-vided services to the client – discussion with relevant people outside the entity, such as economists, industry regulators, customers, suppliers and competitors – publications related to the industry such as government statistics, surveys, texts, trade journals, and financial newspapers – legislation and regulations that affect the client – tours of the client's offices and facilities – client documents, such as minutes of meetings, material sent to shareholders or filed with regulatory authorities, annual and financial reports of prior periods, budgets, internal management reports, interim financial reports, management policy manuals, ing and control manuals, chart of s and job descriptions – Review prior years working papers. 6

AUDIT PLANNING 2.

Evaluating the internal control structure – – – –

the ing policies adopted by the entity and changes in those policies the effect of new ing or auditing pronouncements the auditor's cumulative knowledge of the internal control structure the relative emphasis expected to be placed on tests of control (compliance testing) and substantive procedures (tests of transactions and balances)

7

AUDIT PLANNING 3.

Risk and materiality –

The expected assessments of inherent and control risks and the identification of key audit areas  Inherent risks- risk associated with the clients operations as well as the risk attached to the recording of transactions in various subsystems  Control risk -risk that internal controls are ineffective in preventing irregularities

–

The setting of materiality levels. Materiality refers to the significance of a misstatement in the financial statements. If materiality is increased a more rigorous audit will be conducted

–

The identification of complex transactions 8

AUDIT PLANNING 4.

Nature, timing and extent of procedures

•

possible change of emphasis on specific audit areas

•

the effect of information technology on the audit

•

the work of internal auditing and its reliability.

5.

Coordination, direction, supervision and review – –

the involvement of other auditors in the audit of subsidiaries, branches and divisions the involvement of experts –ASA 620 – – –

– –

Valuations Superannuation or foreign exchange calculations Interpretation of technical requirements e.g. legislation or legal documents

the number of locations Allocation of resources - staffing requirements, use of experts 9

OTHER ISSUES •

Review of the going concern assumption

•

Existence of related parties

•

of the engagement and any statutory obligations

•

Analytical procedures: • Comparison of current financial date to previous period • Comparison with forecast amounts • Ratio analysis and interpretation • Comparison of financial to non-financial data (e.g. payroll cost to number of employees) • Comparison of client figures to industry average 10

ASA 510 INITIAL ENGAGEMENT The auditor must obtain sufficient evidence that – The opening balances do not contain errors that materially affect the current years financial reports – Prior years closing balances have been correctly brought forward to the current year – Appropriate ing policies are consistently applied or changes in ing policies have been properly ed for and disclosed

CONTINUING ENGAGEMENTS APES 110 states that ‘acceptance decisions should be periodically reviewed for recurring client engagements’ 11

AUDIT BUDGET - ESTIMATE OF THE TIME, RESOURCES AND COST OF THE AUDIT Matters to be considered when setting the budget – Size and location of the client – Number of subsidiary entities – Extent of geographoc dispersions – Sales turnover – Asset base – Number of employees – Expected audit problems – Need for expert or specialised assistance – Extent of cumputerised system – Internal control system of client – Experiesnce and skill of available staff – Audit time-frame 12