Lecture Auditing and assurance services (Second international edition) Chapter 5 Audit planning and types of audit tests

Chapter Five

Audit Planning
and
Types of Audit Tests

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The Phases of an Audit
That Relate to Audit Planning

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Prospective Client Acceptance
1. Obtain and review financial information.
2. Inquire of third parties.
3. Communicate with the predecessor
auditor.
4. Consider unusual business or audit
risks.
5. Determine if the firm is independent.
6. Determine if the firm has the necessary
skills and knowledge.
7. Determine if acceptance violates any
applicable regulatory or ethical

requirements.

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Continuing Client Retention
Evaluate client retention
periodically

Near audit completion or
after a significant event

Conflicts over
accounting & auditing
issues

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Dispute over fees


Establish Terms of the Engagement
In establishing the terms of the engagement,
three topics must be discussed:
1.The engagement letter.
2.The internal auditors.

3.Those charged with governance.

The terms of the engagement, which are
documented in the engagement letter, should
include the objectives of the engagement,
management’s responsibilities, the auditor’s
responsibilities, and the limitations of the
engagement.
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The Engagement Letter
The engagement letter formalises the arrangement
reached between the auditor and the client.
In addition to the items mentioned in the sample
engagement letter in Exhibit 5-1 in the textbook,
the engagement letter may include:

• Arrangements for use of experts or
internal auditors.

• Any limitations of liability of the auditor
or client.

• Additional services to be provided.
•Arrangements regarding other services.

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Internal Auditors

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Those Charged with Governance

Board of Directors

Audit Committee

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Preliminary Engagement Activities
Determine the Audit
Engagement Team
Requirements

Assess Compliance with
Ethical Requirements,
including Independence

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Planning the Audit
• The auditor will develop an overall audit strategy
for conducting the audit. This will help the auditor
to determine what resources are needed to perform
the engagement.
• An audit plan is more detailed than the audit
strategy.
• Basically, the audit plan should consider how to
conduct the engagement in an effective and
efficient manner.

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Planning the Audit
When preparing the audit plan, the auditor should be
guided by the results of the risk assessment procedures
performed to gain an understanding of the entity.

Additional steps:

•Assess business risks and
establish materiality.

• Assess the need for experts.
•Consider the possibility of noncompliance (illegal) acts.

•Identify related parties.
•Conduct preliminary analytical
procedures.

•Consider additional value-added
services.
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Let’s look at
each
of these steps.


Assess Risks and Establish Materiality
Assess
Risks

Use audit
risk model

Restrict risk at
account
balance level

Establish
Materiality

Achieve
acceptable
low level of
audit risk

You may want to review the detailed discussion in
Chapter 3 of the process used to assess the client’s
business risks and to establish materiality.
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Experts
A major consideration in planning the audit is the
need for an auditor’s expert (ISA 620).
The use of an IT expert
is a significant aspect of
most audit
engagements.
The presence of complex
information technology
may require the use of an
IT expert.
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Non-Compliance (Illegal) Acts
Non-Compliance Acts

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Direct &
Material

Material &
Indirect

Consider laws and
regulations as part
of audit

Be aware may have
occurred;
investigate if
brought to attention

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Non-Compliance Acts

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Related Parties
Some examples from IAS 24 Related
Party Disclosure

Related Parties

•Parents and subsidiaries.
•Significant influence.
•Joint control.
•Associate entity.
•Joint venture.
•Management.
•Close family of the

•Review minutes of meetings of boards

•Other parties that can have

•Review significant contracts and

principal owners & management.
significant influence.

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How to Identify

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and management.

•Review conflict of interest
statements.

•Review records of the entity’s
investments.

•Review contracts and agreements with
key management or those charged with
governance.
agreements not in the entity’s ordinary
course of business.


Preliminary Analytical Procedures
To understand the
client’s business
and transactions

To identify
financial statement
accounts likely to
contain errors

By understanding the client’s business and
identifying where errors are likely to occur, the
auditor can allocate more resources to investigate
necessary accounts.

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Additional Value-Added Services
Tax Planning

Internal
reporting

Transaction
Support

ITconsultancy

Benchmarking

Risk
Assessment

Auditors are limited in the types of
consulting services that they can offer
their audit clients.
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Document Overall Audit Strategy and

Audit Plan
Document overall audit
strategy and audit plan, which
involves documenting the
decisions about
A

The auditor documents how the client
is managing its risk (via internal
control processes) and the effects of
the risks and controls on the planned
audit procedures.

U
D

Nature

I
T
T

Timing

E
S

Auditors ensure they have addressed the risks they
identified by documenting the linkage from the client’s
business, objectives, and strategy to the audit plan.

The auditor’s preliminary decision concerning control
risk determines the level of control testing, which in
turn affects the auditor’s substantive tests of the
account balances and transactions.

T
S

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Extent
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Document Overall Audit Strategy and
Audit Plan

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Types of Audit Tests

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Risk
Assessment
Procedures

Used to obtain an understanding of
the entity and its environment,
including internal control.

Tests of
Controls

Performed to obtain audit evidence
about the operating effectiveness
of controls in preventing, detecting
and correcting material
misstatements.

Substantive
Procedures

Detect material misstatements in a
transaction class, account balance,
and disclosure element of the
financial statements.

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Tests of Controls

Inquiry

Inspection
Observation

Walk
Through

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Reperformance


Tests of Controls

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Substantive Procedures

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Tests of
Details

Analytical
Procedures

Tests for errors or
fraud in individual

transactions, account
balances, and
disclosures

Obtains evidence
about particular
assertions related to
account balances or
classes of
transactions

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Dual Purpose Tests
Tests of
Controls

Substantive
Tests

Dual
Purpose
Test

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