05 Planning & Audit Tests[CompatibilityMode]

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Chapter 5

Audit Planning and

Types of Audit Tests

The Phases of an Audit That

Relate to Audit Planning

Client acceptance and continuance

Establish an understanding with

client

LO# 1

5-2

Preliminary engagement activities

Assess risks and establish materiality

Plan the audit

Prospective Client Acceptance

1. Obtain and review financial information.

2. Inquire of third parties.

3. Communicate with the predecessor auditor.

4 C id l b i dit i k

LO# 1

5-3

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 agency

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Continuing Client Retention

Evaluate client retention periodically

Near audit completion

5-4

or after a significant event

Conflicts over accounting & auditing

issues

Dispute over fees

Establish an understanding

with client

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

LO# 2

5-5

engagement.

In establishing an understanding with client, three topics must be discussed:

1.The engagement letter;

2.The internal auditors;

3.The audit committee.

The Engagement Letter

The engagement letter formalizes 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

LO# 3

5-6

include:

• Arrangements for use of specialists or

internal auditors.

• Any limitations of liability of the auditor

or client.

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Internal Auditors

5-7

Internal Auditors

LO# 4

5-8

The Audit Committee

Responsible

directly to the

board of

commissioners

Regulation no. IX.1.5 of Bapepam Regulation no. Kep-29/PM/2004, dated September 23, 2004

requires the following for audit committee members of publicly held companies:

•

Minimum one of them is the independent commissioner.

LO# 5

5-9

No specific

requirements

for privately

held companies

•

Review all issued financial information by company.

•

Review the complaints to the capital market and other regulations.

•

Review the activities of internal auditors.

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Preliminary Engagement Activities

Determine the Audit

Engagement Team

Requirements

5-10

Assess Compliance with

Ethical Requirements,

Including Independence

Use audit

risk model

LO# 6

Assess

Risks

Establish

Materiality

Preliminary Engagement Activities

5-11

Restrict risk at

account

balance level

Achieve

acceptable

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.

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

t

LO# 7

5-12

strategy.

• Basically, the audit plan should consider how to

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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:

5-13

•

Assess the need for specialist.

•

Assess the possibility of illegal acts.

•

Identify related parties.

•

Conduct preliminary analytical procedures.

•

Consider additional value-added services.

•

Document Audit Strategy and Plan and Prepare Audit Programs

Let’s look at each of these steps.

Specialists

A major consideration is planning the audit is the need for

specialist (SA 336).

The use of an IT specialist

i

ifi

t

t f

LO# 7

5-14

is a significant aspect of

most audit engagements.

The presence of complex

information technology

may require the use of an

IT specialist.

Illegal Acts

Illegal

Acts

LO# 7

5-15

Direct &

Material

Consider laws & regulations as

part of audit

Material &

Indirect

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Illegal Acts

5-16

Related Parties

Some examples from PSAK No. 7, “Related Party Disclosure”

•

Affiliates of the enterprise.

•

Entities using equity method to

account for investments.

How to Identify Related Parties

•

Review board minutes.

•

Review conflict-of-interest

statements.

LO# 7

5-17

•

Principal owners of enterprise.

•

Management.

•

Immediate families of the principal owners & management.

•

Other parties that can have

significant influence.

•

Review transactions with major customers, suppliers, borrowers, and lenders.

•

Review large, unusual, or nonrecurring transactions especially at year end.

•

Review loan agreements for

guarantees.

Preliminary Analytical Procedures

To understand the client’s business and transactions

To identify financial statement

accounts likely to contain errors

LO# 7

5-18

By understanding the client’s business and

identifying where errors are likely to occur, the

auditor can allocate more resources to investigate

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Additional Value-Added Services

Tax Planning

System Design and Integration

Internal Reporting

5-19

Risk

Assessment Benchmarking

Electronic Commerce

Auditors who audit public companies are limited in

the types of consulting services that they can offer

their audit clients.

Document Audit

Strategy and Plan

Nature

LO# 7

Document overall audit strategy and audit plan, which involves documenting

the decisions about

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

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. procedures. D

Types of Audit Tests

Risk Assessment

Procedures

Used to obtain an understanding of the entity and its environment,

including internal controls.

Di t d t d th l ti f th LO# 8

5-21

Tests of Controls

Directed toward the evaluation of the effectiveness of the design and implementation of internal controls.

Substantive

Procedures

Detect material misstatements in a transaction class, account balance, and disclosure component of the

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Tests of Controls

Inquiry

Inspection

5-22

Walk

Through

Reperformance

Observation

Tests of Controls

LO# 8

5-23

Substantive Procedures

Analytical

Procedures

Tests of

Details

LO# 8

5-24

Obtains evidential matter about particular assertions

related to account balances or classes

of transactions

Tests for errors

or fraud in

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Dual Purpose Tests

Substantive

Tests

Tests of

Controls

5-25

Dual

Purpose

Test

Purposes of Analytical Procedures

Preliminary

Analytical

Procedures

Used to assist the auditor to better understand the business and to plan the

nature, timing, and extent of audit procedures.

Substantive

LO# 9

5-26

Substantive

Analytical

Procedures

Used to obtain evidential matter about particular assertions related to account balances or classes of transactions.

Final

Analytical

Procedures

Used as an overall review of the financial information in the final review stage of the

audit.

Types of Analytical Procedures

Trend Analysis

Ratio

LO# 9

5-27

Ratio

Analysis

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Substantive Analytical

Procedures Decision Process

5-28

Develop an Expectation

Developing an expectation is the first step in the decision process for the amount or account balance. This is the most important step in performing analytical procedures. Auditing standards require the auditor to have an expectation whenever analytical procedures are used. An expectation can be developing using a variety of information sources such as: