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

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

Obtaining an Engagement

Class Synopsis on: Obtaining an Engagement Assurance: Knowledge Level Amin Siddiki FCA

Obtaining an Engagement

Ref:

BSA 210: Agreeing the Terms of Audit Engagement

Appointment Considerations

·         Before a new client is accepted, the auditors must ensure that there are noindependence or other ethical issues likely to cause significant problems with the ethical code.

·         New auditors should ensure that they have been appointed in a proper and legal manner

Acceptance Procedures

·         Ensure professionally qualified to act

o   Consider whether disqualified on legal or ethical grounds, for example, if there would be a conflict of interest with another client

·         Ensure existing resources adequate

o   Consider available time, staff and technical expertise

·         Obtain references

o   Make independent enquiries if directors are not personally known.

·         Communicate with present auditors

o   Enquire whether there are reasons/circumstances behind the change which the new auditors ought to know, also as a matter of courtesy

Some of the basic factors for consideration are given below:

•          The integrity of Management will be of great importance, particularly if the company is controlled by one or a few dominant personalities.

•          The audit firm will consider whether the client is likely to be high or low risk to the firm in terms of being able to draw an appropriate assurance conclusion in relation to the client.

Table contrasts low and high risk clients:

Low Risk	High Risk
Good long-term prospects	Poor recent or forecast
Well-financed	Likely lack of finance
Strong internal controls	Significant control weaknesses
Conservative, prudent accounting policies Competent, honest management	Evidence of questionable integrity, doubtful accounting policies
Competent, honest management	Lack of finance director
Few unusual transactions	Significant unexplained transactions or transactions with connected companies.

Sources of information about new clients

•          Enquires of other sources

•          Bankers, solicitor

•          Review of documents

•          Most recent annual accounts, credit rating

•          Previous accounts/auditors

•          Previous auditors should be invited to disclose fully all relevant information

•          Review of rules and standards

•          Consider specific laws/standards that relate to industry

Communication with previous/retiring auditors

Prospective auditors should seek the prospective client’s permission to contact the previous auditors.

If this permission is not given

The prospective auditors should considercarefully the reason for such refusal when determining whether or not to accept the appointment.

Normally permission will be given, so the prospective auditors can write to the outgoing auditors.

Example: Initial Communication with previous/retiring auditor

xx-xx- xxxx

ABC & Co

Chartered Accountants

Dear Sir

Ref: XYZ Ltd.

Professional Clearance

We have pleasure in informing you that we have been appointed as auditors of “XYZ Ltd.” for the year xx December 20xx. Since you were the previous auditors of the company, we would like to know from you if there is any professional reason as to why we should not accept the appointment.

XYZ & Co

Chartered Accountants

Procedures, after accepting nomination

1. Ensure that the outgoing auditor’s removal or resignation has been properly conducted in accordance with national legislation.

                                       •        The new auditor should see a valid notice of the outgoing auditor’s resignation, or confirm that the outgoing auditors were properly removed.

2. Ensure that the new auditor’s appointment is valid. The new auditor’s should obtain a copy of the resolution passed at the general meeting appointing them as the company’s auditors.
3. Submit a letter of engagement to the directors of the company

Other Assurance Engagements

1. The above considerations will be required for any assurance engagements.
2. The legal considerations relating to audit will not be relevant to otherassurance engagements but the ethical, risk, and practical considerations will be just as valid

Engagement Letter

Auditing standards require that the auditor and the client should agree on the terms of the engagement. The agreed terms must be in writing and the usual form would be a letter of engagement.

The purpose of an engagement letter is to:

1. Define clearly the extent of the firm’s responsibilities and so minimize the possibility of any misunderstanding between the client and the firm.
2. Provide written confirmation of the firm’s acceptance of the appointment, the scope of the engagement and the form of their report.

Form & Content of an Audit Engagement Letter

The form and content audit engagement letters may vary for each client, but they would generally include reference to the following:

1. The objective of the audit of financial statements.
2. Management’s responsibility for the financial statements.
3. The scope of the audit, including reference to applicable legislation, regulations or pronouncements of ICAB to whom the auditor adheres.
4. The form of any reports or other communication of results of the engagement.
5. The fact that because of the test nature and other inherent limitations of an audit, together with the inherent limitations of any accounting and internal control systems, there is an unavoidable risk that even some material misstatements  may remain undiscovered.
6. Unrestricted access to whatever records, documentation and other information is requested in connection with the audit.
7. The agreement of management to make available to the auditor draft financial statements and any accompanying other information in time to allow the auditor to complete the audit in accordance with the proposed timetable.

The auditor may wish to include in the letter the following items:

1. Arrangements regarding the planning and performance of the audit, including the composition of the audit team.
2. Expectation of receiving from management written confirmation of representations made in connection with the audit.
3. A request for management to acknowledge receipt of the audit engagement letter and to agree to the terms of the engagement outlined therein.
4. The agreement of management to inform the auditor of facts that may affect the financial statements, of which management may become aware during the period from the date of the auditor’s report to the date the financial statements are issued.
5. Description of any other letters or reports the auditors expects to issue to the client.
6. The confidentiality of any reports issued and if relevant, the terms under which they can be shared with third parties.
7. The basis on which fees are computed and any billing arrangements.

When relevant, the following points could also be made in the audit engagement letter:

·         Arrangements concerning the involvement of other auditors and experts in some aspects of the audit.

·         Arrangements concerning the involvement of internal auditors and other staff of the entity.

·         Arrangements to be made with the predecessor auditor, if any, in the case of an initial audit.

·         Any restriction of the auditor’s liability when such possibility exists.

·         A reference to any further agreements between the auditor and the client.

·         Any obligations to provide audit working papers to other parties.

An example of an audit engagement letter is set out in the Appendix 1 of BSA 210.

Audit Engagement Letter for Recurring Audits

The auditor should consider whether circumstances require the terms of the engagement to be revised and whether there is a need to remind the client of the existing terms of the engagement.

The auditor may decide not to send a new audit engagement letter or other written agreement each period.

However, the following factors may make it appropriate to send a new letter to revise the terms of the audit engagement or to remind the entity of existing terms:

1. Any indication that the entity misunderstands the objective and scope of the audit.
2. Any revised or special terms of the audit engagement.
3. A recent change of senior management.
4. A significant change in ownership.
5. A significant change in nature or size of the entity’s business.
6. A change in legal or regulatory requirements.
7. A change in the financial reporting framework adopted in the preparation of financial statements.
8. A change in other reporting requirements

Thank You