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Fundamentals of Auditing

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Fundamentals of Auditing ­ACC 311
VU
Lesson 43
AUDIT PLANNING
(Establishing Overall Audit Strategy)
Audits of Small Entities
In audits of small entities, the entire audit may be conducted by a very small audit team. Many audits
of small entities involve the audit engagement partner (who may be a sole practitioner) working with
one engagement team member (or without any engagement team members). With a smaller team,
coordination and communication between team members are easier. Establishing the overall audit
strategy for the audit of a small entity need not be a complex or time-consuming exercise; it varies
according to the size of the entity and the complexity of the audit. For example, a brief memorandum
prepared at the completion of the previous audit, based on a review of the working papers and
highlighting issues identified in the audit just completed, updated and changed in the current period
based on discussions with the owner-manager, can serve as the basis for planning the current audit
engagement.
Communications with those charged with Governance and Management
The auditor may discuss elements of planning with those charged with governance and the entity's
management. These discussions may be a part of overall communications required to be made to
those charged with governance of the entity or may be made to improve the effectiveness and
efficiency of the audit. Discussions with those charged with governance ordinarily include
 The overall audit strategy and timing of the audit, including any limitations thereon, or
any additional requirements.
When discussions of matters included in the overall audit strategy or audit plan occur, care is required
in order to not compromise the effectiveness of the audit. For example, the auditor considers whether
discussing the nature and timing of detailed audit procedures with management compromises the
effectiveness of the audit by making the audit procedures too predictable.
Additional Considerations in Initial Audit Engagements
The auditor should perform the following activities prior to starting an initial audit:
(a)
Perform procedures regarding the acceptance of the client relationship and the specific audit
engagement.
(b)
Communicate with the previous auditor, where there has been a change of auditors, in
compliance with relevant ethical requirements.
For initial audits, additional matters the auditor may consider in developing the overall audit strategy
and audit plan include the following:
Unless prohibited by law or regulation, an arrangement to be made with the previous auditor for
example to review the previous auditor's working papers.
Any major issues discussed with management in connection with the initial selection as auditors, the
communication of these matters to those charged with governance and how these matters affect the
overall audit strategy and audit plan.
The planned audit procedures to obtain sufficient appropriate audit evidence regarding opening
balances.
The assignment of firm personnel with appropriate levels of capabilities and competence to respond
to anticipated significant risks.
Other procedures required by the firm's system of quality control for initial audit engagements (for
example, the firm's system of quality control may require the involvement of another partner or
senior individual to review the overall audit strategy prior to commencing significant audit procedures
or to review reports prior to their issuance).
Examples of Matters the Auditor May Consider In Establishing the Overall Audit Strategy
Following are the examples of matters the auditor may consider in establishing the overall audit
strategy:
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Fundamentals of Auditing ­ACC 311
VU
1. Scope of the audit engagement
2. Reporting objectives
3. Direction of the audit
1.
Scope of the Audit Engagement
The auditor may consider the following matters when establishing the scope of the audit engagement:
 The financial reporting framework on which the financial information to be audited has been
prepared, including any need for reconciliations to another financial reporting framework.
 Industry-specific reporting requirements such as reports mandated by industry regulators.
 The expected audit coverage, including the number and locations of components to be
included.
 The nature of the control relationships between a parent and its components that determine
how the group is to be consolidated.
 The extent to which components are audited by other auditors.
 The nature of the business segments to be audited, including the need for specialized
knowledge.
 The reporting currency to be used, including any need for currency translation for the
financial information audited.
 The need for a statutory audit of standalone financial statements in addition to an audit for
consolidation purposes.
 The availability of the work of internal auditors and the extent of the auditor's potential
reliance on such work.
 The entity's use of service organizations and how the auditor may obtain evidence
concerning the design or operation of controls performed by them.
 The expected use of audit evidence obtained in prior audits, for example, audit evidence
related to risk assessment procedures and tests of controls.
 The effect of information technology on the audit procedures, including the availability of
data and the expected use of computer-assisted audit techniques.
 The coordination of the expected coverage and timing of the audit work with any reviews of
interim financial information and the effect on the audit of the information obtained during
such reviews.
 The discussion of matters that may affect the audit with firm personnel responsible for
performing other services to the entity.
 The availability of client personnel and data.
2.
Reporting objectives, timing of the audit and communications required
The auditor may consider the following matters when ascertaining the reporting objectives of the
engagement, the timing of the audit and the nature of communications required:
 The entity's timetable for reporting, such as at interim and final stages.
 The organization of meetings with management and those charged with governance to
discuss the nature, extent and timing of the audit work.
 The discussion with management and those charged with governance regarding the expected
type and timing of reports to be issued and other communications, both written and oral,
including the auditor's report, management letters and communications to those charged
with governance.
 The discussion with management regarding the expected communications on the status of
audit work throughout the engagement and the expected deliverables resulting from the audit
procedures.
 Communication with auditors of components regarding the expected types and timing of
reports to be issued and other communications in connection with the audit of components.
 The expected nature and timing of communications among engagement team members,
including the nature and timing of team meetings and timing of the review of work
performed.
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Fundamentals of Auditing ­ACC 311
VU
Whether there are any other expected communications with third parties, including any
statutory or contractual reporting responsibilities arising from the audit.
3.
Direction of the Audit
The auditor may consider the following matters when setting the direction of the audit:
 With respect to materiality:
 Setting materiality for planning purposes.
 Setting and communicating materiality for auditors of components.
 Reconsidering materiality as audit procedures are performed during the course of the audit.
 Identifying the material components and account balances.
 Audit areas where there is a higher risk of material misstatement.
 The impact of the assessed risk of material misstatement at the overall financial statement
level on direction, supervision and review.
 The selection of the engagement team (including, where necessary, the engagement quality
control reviewer) and the assignment of audit work to the team members, including the
assignment of appropriately experienced team members to areas where there may be
higher risks of material misstatement.
 Engagement budgeting, including considering the appropriate amount of time to set aside
for areas where there may be higher risks of material misstatement.
 The manner in which the auditor emphasizes to engagement team members the need to
maintain a questioning mind and to exercise professional skepticism in gathering and
evaluating audit evidence.
 Results of previous audits that involved evaluating the operating effectiveness of internal
control, including the nature of identified weaknesses and action taken to address them.
 Evidence of management's commitment to the design and operation of sound internal
control, including evidence of appropriate documentation of such internal control.
 Volume of transactions, which may determine whether it is more efficient for the auditor
to rely on internal control.
 Importance attached to internal control throughout the entity to the successful operation
of the business.
 Significant business developments affecting the entity, including changes in information
technology and business processes, changes in key management, and acquisitions, mergers
and divestments.
 Significant industry developments such as changes in industry regulations and new
reporting requirements.
 Significant changes in the financial reporting framework, such as changes in accounting
standards.
 Other significant relevant developments, such as changes in the legal environment
affecting the entity.
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Table of Contents:
  1. AN INTRODUCTION
  2. AUDITORSí REPORT
  3. Advantages and Disadvantages of Auditing
  4. OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS
  5. What is Reasonable Assurance
  6. LEGAL CONSIDERATION REGARDING AUDITING
  7. Appointment, Duties, Rights and Liabilities of Auditor
  8. LIABILITIES OF AN AUDITOR
  9. BOOKS OF ACCOUNT & FINANCIAL STATEMENTS
  10. Contents of Balance Sheet
  11. ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
  12. Business Operations
  13. Risk Assessment Procedures & Sources of Information
  14. Measurement and Review of the Entityís Financial Performance
  15. Definition & Components of Internal Control
  16. Auditing ASSIGNMENT
  17. Benefits of Internal Control to the entity
  18. Flow Charts and Internal Control Questionnaires
  19. Construction of an ICQ
  20. Audit evidence through Audit Procedures
  21. SUBSTANTIVE PROCEDURES
  22. Concept of Audit Evidence
  23. SUFFICIENT APPROPRIATE AUDIT EVIDENCE AND TESTING THE SALES SYSTEM
  24. Control Procedures over Sales and Debtors
  25. Control Procedures over Purchases and Payables
  26. TESTING THE PURCHASES SYSTEM
  27. TESTING THE PAYROLL SYSTEM
  28. TESTING THE CASH SYSTEM
  29. Controls over Banking of Receipts
  30. Control Procedures over Inventory
  31. TESTING THE NON-CURRENT ASSETS
  32. VERIFICATION APPROACH OF AUDIT
  33. VERIFICATION OF ASSETS
  34. LETTER OF REPRESENTATION VERIFICATION OF LIABILITIES
  35. VERIFICATION OF EQUITY
  36. VERIFICATION OF BANK BALANCES
  37. VERIFICATION OF STOCK-IN-TRADE AND STORE & SPARES
  38. AUDIT SAMPLING
  39. STATISTICAL SAMPLING
  40. CONSIDERING THE WORK OF INTERNAL AUDITING
  41. AUDIT PLANNING
  42. PLANNING AN AUDIT OF FINANCIAL STATEMENTS
  43. Audits of Small Entities
  44. AUDITORíS REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIALSTATEMENTS
  45. MODIFIED AUDITORíS REPORT