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AUDIT PLANNING |
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Fundamentals
of Auditing ACC 311
VU
Lesson
41
AUDIT
PLANNING
Audit
Engagement letter
Evaluating
Internal Audit
Work/Review/Controlling
Where
the external auditor has
decided to place reliance on the
work of internal auditor, he
should
review
the working papers to
satisfy himself as
to:-
i)
Audit
programs are
adequate.
ii)
The
work is performed by trained staff
and the work of assistants
is properly supervised,
reviewed
and documented.
iii)
Sufficient
appropriate audit evidence was
obtained.
iv)
Conclusions
made are appropriate.
v)
Reports
prepared are based on the
work done.
vi)
Exceptions
or unusual items have been
properly resolved. The external auditor
should
record
all the working he has
received. The external auditor
should also test the work
of
internal
auditor.
Testing
the Work of Internal
Auditing
It can
be done in the following
ways:
i)
Re-performing
the work done by internal auditor, on
test basis, to ensure that
the same
results
are achieved;
ii)
Selecting
a few similar items and
perform independent test;
and
iii)
Observation of
internal auditing procedures.
Terms of
Audit Engagements
Meaning
and Objective
Audit
Engagement Letter is written by the
auditor to his client. The letter
documents terms of
engagement
as agreed between the auditor and
the client.
Following
are the components of Audit
Engagement Letter
Principal
Contents
i)
The objective of
financial statements.
ii)
Management's
responsibility for financial
statements.
iii)
The
scope of the audit.
iv)
The
form of any reports or other
communications.
v)
The
fact that due to certain
unavoidable factors, the
auditors may not be able to
detect all
material
misstatements due to fraud or
error.
vi)
Requirement
of unrestricted access to records
etc.
Optional
Contents
i)
Arrangements
regarding the planning of the
audit.
ii)
Expectation of
receiving written
representations.
iii)
Request
for confirmation of terms of
engagement.
iv)
Description of
any other letters or reports
the auditor expects to issue to
the client.
v)
Basis
for computation of fees.
Contents
to be included under Special
Circumstances
i)
Arrangements
concerning the involvement of other auditors,
experts, internal auditors
and
other
client staff.
ii)
Arrangements
to be made with predecessor auditor, in
case of initial audit
only.
iii)
Restriction
on auditor's liability, if
any.
Reference
to any further agreements
between the auditor and the
client.
iv)
Note:
A specimen engagement letter as
given in the AS is given at
Annexure-2.
Audit
of Components
In
case of components (branch,
subsidiary or division) the auditor has
to decide whether to send
a
separate
engagement letter for the component. It
would depend on the
following:
i)
Who
appoints auditor of the component.
ii)
Whether
a separate audit report is to be issued
on the component.
iii)
Legal
requirements.
131
Fundamentals
of Auditing ACC 311
VU
iv)
The extent of
any work performed by other
auditors.
v)
Degree
of ownership by parent.
vi)
Degree
of independence of the component's
management.
Recurring
Audits
Should
auditor write an engagement letter
every year? Answer to this
question is dependent on the
following
factors:
i)
If client
misunderstands the objective
and scope of the
audit.
ii)
Any
revised or special terms of
engagement.
iii)
A
recent change of senior
management, board of directors or
ownership.
iv)
A
significant change in nature or
size of the client's
business.
v)
Legal
requirements.
Example
of an Audit Engagement Letter
The
following letter is for use as a
guide in conjunction with the
considerations outlined in this
ISA
and
will need to be varied
according to individual requirements
and circumstances.
To the
Board of Directors or the appropriate representative
of senior management:
You
have requested that we audit the
balance sheet of ..............as of .............,
and the related
statements
of income and cash flows for
the year then ending. We are
pleased to confirm
our
acceptance
and our understanding of
this engagement by means of
this letter. Our audit will
be made
with
the objective of our expressing an
opinion on the financial
statements.
We
will conduct our audit in
accordance with International
Standards on Auditing (or
relevant
national
standards or practices). Those
ISAs require that we plan and
perform the audit to
obtain
reasonable
assurance about whether the financial
statements are free of
material misstatements. An
audit
includes examining, on a test
basis, evidence supporting the amounts
and disclosures in
the
financial
statements. An audit also includes
assessing the accounting
principles used and
significant
estimates
made by management, as well as evaluating
the overall financial statement
presentation.
Because
of the test nature and
other inherent limitations of an audit,
together with the inherent
limitations of
any accounting and internal
control system, there is an
unavoidable risk that even
some
material
misstatements may remain
undiscovered.
In
addition to our report on
the financial statements, we expect to
provide you with a separate
letter
concerning
any material weaknesses in
accounting and internal control
systems, which come to
our
notice.
We remind you that
the responsibility for the preparation of
financial statements including
adequate
disclosure
is that of the management of the company. This
includes the maintenance of
adequate
accounting
records and internal controls, the
selection and application of accounting
policies, and the
safeguarding
of the assets of the
company. As part of our audit process, we
will request from
management
written confirmation concerning
representations made to us in connection
with the
audit.
We
look forward to full cooperation
with your staff and we trust
that they will make
available to us
whatever
records, documentation and other
information are requested in
connection with our
audit.
Our
fees, which will be billed as
work progress, are based on
the time required by the
individuals
assigned
to the engagement plus
out-of-pocket expenses. Individual
hourly rates vary according
to the
degree
of responsibility involved and the
experience and skill
required.
This letter
will be effective for future
years unless it is terminated,
amended or superseded.
Please
sign and return the attached
copy of this letter to indicate
that it is in accordance with
your
understanding
of the arrangements for our audit of the
financial statements.
132
Fundamentals
of Auditing ACC 311
VU
XYZ &
Co.
Acknowledged on
behalf of
ABC
Company by
(Signed)
Name
and Title
Date
________
133
Table of Contents:
- AN INTRODUCTION
- AUDITORS’ REPORT
- Advantages and Disadvantages of Auditing
- OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS
- What is Reasonable Assurance
- LEGAL CONSIDERATION REGARDING AUDITING
- Appointment, Duties, Rights and Liabilities of Auditor
- LIABILITIES OF AN AUDITOR
- BOOKS OF ACCOUNT & FINANCIAL STATEMENTS
- Contents of Balance Sheet
- ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
- Business Operations
- Risk Assessment Procedures & Sources of Information
- Measurement and Review of the Entity’s Financial Performance
- Definition & Components of Internal Control
- Auditing ASSIGNMENT
- Benefits of Internal Control to the entity
- Flow Charts and Internal Control Questionnaires
- Construction of an ICQ
- Audit evidence through Audit Procedures
- SUBSTANTIVE PROCEDURES
- Concept of Audit Evidence
- SUFFICIENT APPROPRIATE AUDIT EVIDENCE AND TESTING THE SALES SYSTEM
- Control Procedures over Sales and Debtors
- Control Procedures over Purchases and Payables
- TESTING THE PURCHASES SYSTEM
- TESTING THE PAYROLL SYSTEM
- TESTING THE CASH SYSTEM
- Controls over Banking of Receipts
- Control Procedures over Inventory
- TESTING THE NON-CURRENT ASSETS
- VERIFICATION APPROACH OF AUDIT
- VERIFICATION OF ASSETS
- LETTER OF REPRESENTATION VERIFICATION OF LIABILITIES
- VERIFICATION OF EQUITY
- VERIFICATION OF BANK BALANCES
- VERIFICATION OF STOCK-IN-TRADE AND STORE & SPARES
- AUDIT SAMPLING
- STATISTICAL SAMPLING
- CONSIDERING THE WORK OF INTERNAL AUDITING
- AUDIT PLANNING
- PLANNING AN AUDIT OF FINANCIAL STATEMENTS
- Audits of Small Entities
- AUDITOR’S REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIALSTATEMENTS
- MODIFIED AUDITOR’S REPORT