Sunday, March 13, 2016

Planning the Assignment

Class Synopsis on: Planning the Assignment
Assurance: Knowledge Level
Amin Siddiki FCA

Related BSA (Bangladesh Standard on Auditing)
·         BSA 200: Objective and General Principles Governing an Audit of Financial Statements.
·         BSA 300: Planning an Audit of Financial Statements 
·         BSA 315: Understanding the Entity and its environment and Assessing the Risk of Material Misstatement.
·         BSA 320:  Audit Materiality
·         BSA 520:  Analytical Procedures

Planning Objectives
"The objective of the auditor is to plan the audit so that it will be performed in an effective manner."
Audit Strategy
The formulation of the general strategy for the audit, which sets the scope, timing and direction of the audit and guides the development of the audit plan
Audit Plan
An audit plan is more detailed than the strategy and sets out the nature, timing and extent of audit procedures (including risk assessment procedures) to be performed by the engagement team in order to obtain sufficient appropriate audit evidence.
Benefits of Audit Planning
An audit plan shows how the overall audit strategy will be implemented. Audits are planned to:
a.    Ensure appropriate attention is devoted to important areas of the audit.
b.    Identify potential problems and resolve them on a timely basis.
c.    Ensure that the audit is properly organized and managed.
d.    Assign work to engagement team members properly.
e.    Facilitate direction and supervision of engagement team members.
f.     Facilitate review of work.

Approach to Planning
a.    Ensuring that ethical requirements continue to be met
b.    Ensuring the terms of the engagement are understood
c.    Establishing the overall audit strategy --*****
d.    Developing an audit plan including risk assessment procedures, audit tests and any other procedures necessary to comply with BSAs. ****

Establishing the overall audit strategy --*****
  1. Determining the relevant characteristics of the engagement, such as the reporting framework used as this will set the scope for the engagement and understanding the entity and its environment.
  2. Discovering key dates for reporting and other communication.
  3. Determining materiality, preliminary risk assessment, whether internal controls are to be tested.
  4. Consideration of when work is to be carried out, for example, before or after the year end.
  5. Consideration of ‘team members’ available, their skills and how and when they are to be used, for example, particular skills for high risk areas. In addition, appropriate levels of staff are required to facilitate direction, supervision and review of more junior team members’ work.

Developing an audit plan including risk assessment procedures, audit tests and any other procedures necessary to comply with BSAs. ***
The auditor should develop an audit plan for the audit in order to reduce audit risk to an acceptably low level. The audit plan and any significant changes to it during the audit must be documented.
Key Contents of an Overall Audit strategy
ü  Understanding the Entity’s Environment
ü  Understanding the accounting and internal control systems
ü  Risk and Materiality
ü  Consequent nature, timing and extent of procedures
ü  Co-ordination, direction, supervision and review
ü  Other Matters

Understanding the Entity’s Environment
a.    General economic factors and industry conditions.
b.    Important characteristics of the client:
o   Business
o   principal business strategies
o   financial performance
o   reporting requirements, including changes since the previous audit.
c.    The general level of competence of management.

Understanding the accounting and internal control systems
a.    The accounting policies adopted by the entity and changes in those policies.
b.    The effect of new accounting or auditing pronouncements.
c.    The auditor’s cumulative knowledge of the accounting and internal control systems and the relative emphasis expected to be placed on different types of test.

Risk and Materiality
a.    The expected assessment of risks of fraud or error and identification of significant audit areas.
b.    The setting of materiality for audit planning purposes.
c.    The possibility of material misstatements, including the experience of past periods or frauds.
d.    The identification of complex accounting areas including those involving estimates.

Consequent nature, timing and extent of procedures
a.    Possible change of emphasis on specific audit areas.
b.    The effect of information technology on the audit.

Co-ordination, direction, supervision and review
a.    The number of locations.
b.    Staffing requirements.
c.    Need to attend client premises for inventory count or other year-end procedures.

Other Matters
a.    The terms of the engagement and any statutory responsibilities.
b.    The possibility that the going concern basis may be subject to question.
c.    Conditions requiring special attention.
d.    The nature and timing of reports or other communication with the entity that are expected under the engagement.

Professional Skepticism
Professional Skepticism means an attitude of the auditor that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence.

Professional skepticism includes being alert to: For Example
a.    Audit evidence that contradictsother audit evidence obtained.
b.    Information that brings into question the reliability of documents and responses to inquiries to be used as audit evidence.
c.    Conditions that may indicate possible fraud.

MaintainingProfessional skepticism throughout the audit is necessary if the auditor is, for example, to reduce the risks of
a.    Overlooking unusual transactions.
b.    Over generalizing when drawing conclusions from audit observations.
c.    Using inappropriate assumptions in determining the nature, timing and extent of the audit procedures and evaluating the results thereof.

Professional skepticism does not mean that auditors should disbelieve everything they are told.However, they must have a questioning attitude

Analytical procedures
Analytical procedures mean evaluations of financial information made by a study of plausible relationships among both financial and non-financial data. Analytical procedures also encompass the investigation of identified fluctuations and relationships that are inconsistent with other relevant information or deviate significantly from predicted amounts.
The BSA 520 states that analytical procedures include:
The consideration of comparison with
a.    Comparable information for prior periods.
b.    Anticipated results of the entity, such as budgets or forecasts, or expectations of the auditor, such as an estimation of depreciation.
c.    Similar industry information, such as a comparison of the entity’s ratio of sales to accounts receivable with industry averages or with other entities of comparable size in the same industry.

Consideration of relationships between:
a.    Elements of financial information that would be expected to conform to a predictable pattern based on the entity’s experience, such as the relationship of gross profit to sales.
b.    Financial information and relevant non-financial information, such as the relationship of payroll costs to number of employees

Various methods may be used to perform analytical procedures. These methods range from performing simple comparison to performing complex analyses using advanced statistical techniques. The choice of procedures is a matter of auditor’s professional judgment.

BSA 320:     Materiality
A matter is material if its omission or misstatement would reasonably influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the error in the context of its omission or misstatement.
When consider?
BSA 320 states that the materiality should be considered by the auditor when:
a.    Determining the nature, timing and extent of audit procedures; and
b.    Evaluating the effect of misstatements

Why Consider
Materiality assessment will help the auditors to decide:
a.    How many and what items to examine
b.    Whether to use sampling techniques
c.    What level of error is likely to lead to an auditor tosay the financial statements do not give a true and fair view

Traditional benchmarks include:
v  ½  - 1% of turnover
v  5 - 10% of profit before tax
v  1 - 2% of gross assets
Tolerable error: The maximum error that an auditor is prepared to accept in a class of transactions or balances in the financial statements.
Note that : 
The auditors will often calculate a range of values, and then take an average or weighted average of all the figures produced as the preliminary materiality level. However, different firms have different methods to calculate materiality level.
Materiality Vs Audit Risk
There is an inverse relationship between materiality and the level of audit risk, that is the higher the materiality level, the lower the audit risk and vice versa.
Review of Materiality
The level of materiality must be reviewed constantly as the audit progresses and changes may be required because:
a.    Draft accounts are altered (due to material error and so on) and therefore overall materiality changes.
b.    External factors may cause changes in risk estimates.

Continuous Risk Assessment
The auditors usually adopt a risk based approach to auditing and focused on his testing on the riskiest balances and classes of transactions.
Audit Risk
The risk that the auditors give an inappropriate opinion on the financial statements
The risk of Material misstatements = Inherent risk × Control Risk.
Audit Risk = IR × CR × DR

Inherent Risk
The susceptibility of an account balance or class of transactions to misstatement that could be material individually or when aggregated with misstatements in other balances or classes, assuming there were no related internal controls.

Control Risk
The risk that a material misstatement would not be prevented, detected or corrected by the accounting and internal control systems.
Detection Risk
The risk that the auditors’ procedures will not detect a misstatement that exists in an account balance or class of transactions that could be material, either individually or when aggregated with misstatements in other balances or classes.
Identifying and Assessing the Risk
BSA 315 says that the auditor shall identify and assess the risks of material misstatement at:
  1. The financial statement level; and
  2. The assertion level for classes of transactions, account balances and disclosures.
The auditor is required to take the following steps:
          Identify risks throughout the process of obtaining an understanding of the entity and its environment.
          Relate the risks to what can go wrong at the assertion level.
          Consider whether the risks are of a magnitude that could result in a material misstatement.
          Consider the likelihood of the risks causing a material misstatement.
Significant Risks
Some risks may be significant risks, which require special audit consideration. BSA 315 sets out the following factors which indicate that a risk might be a significant risk:
a.    Risk of fraud
b.    Related to recent significant economic, accounting or other development
c.    The complexity of transactions.
d.    It is a significant transaction with a related party
e.    The degree of subjectivity in the financial information
f.     It is an unusual transaction.

Thank You