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AUD 721AUDIT & INVESTIGATIONAudit planningFor Dr. Sharifah nazatul faizasyed mustapha nazriPresented by - Ameer Shafiq Kamalullail

OBJECTIVE OF AUDIT PLANNINGPre-PlanPlanningTest of ControlSubstantive ProceduresCompletionReportingAUDIT STRATEGYAUDIT PLANNINGComprises of 3 sections, namely : Scope/characteristics of engagementTiming of forms of communicationsDirectionConverts the audit strategy into more details and it includes the nature, timing and extent of audit procedures to be performed by engagement team members in order to obtain sufficient appropriate audit evidence to reduce audit risk to an acceptable low level. OBJECTIVEDevelop general strategy and detailed approachObtain sufficient-appropriate evidenceDetermine amount of work to be carried outMaintain reasonable costTo avoid misunderstandings with clients123452BASIC AUDIT PROCESSPre-PlanPlanningTest of ControlSubstantive ProceduresCompletionReporting3TERMS OF ENGAGEMENTCLIENT ACCEPTANCE & CONTINUANCEEvaluate the clients backgroundEthical requirementsCommunicate with previous auditorDetermine need for other expertsSelect staff to perform the auditObtain engagement letterObjectives of the engagementManagements responsibilitiesAuditors responsibilitiesLimitations of the engagement123456Predecessor & Successor 4KNOWLEDGE OF CLIENTS BUSINESSBackground InformationWhatWhyRelated parties involvedAffiliated companyPrincipal ownerParty that can influence managementTo fulfill the requirement by GAAP (General Accepted Accounting Principles) requires disclosure of related party transactionsUnderstanding clients business or operationsTo determine if any unique accounting is requiredTo identify industry risks for setting acceptable audit riskTo identify industry risks for setting inherent risksDetermining materialityUnderstanding internal controlIdentify sources and nature of available audit evidenceUnderstanding substance of transactionsAssessing whether sufficient appropriate evidence is availableAssessing appropriateness of accounting policiesEvaluating overall financial statement presentation5KNOWLEDGE OF CLIENTS BUSINESSEngagementRegulatory, External, Industry ObjectiveObtain an understanding of the industry (competition in the industry; growth in market size), regulatory (legal framework; reporting framework), and other external factors (economy they are trading n eg. Interest rates, inflation, etc)Identifying risks of material misstatements; some industries are subject to risks of material misstatements as a result of unique accountingNature of EntityObjectiveThe nature of an entity refers to the clients operations, its ownership, the types of investments it is making and plans to make and the way the entity is structured and how it is financedBetter idea of what to expect in the financial statementsRisk assessmentPerformance MeasuresObjectiveInternally generated information used by management may include KPIs, budgets, variance analysis, segment information and divisional, departmental or other level performance reports and comparisons of an entitys performance with that of competitorsUsed to measure and review the entitys financial performanceRisk, Objectives & StrategiesObjectivesStrategies are the operational approaches used by management to achieve objectives (defining what the entity wants to achieve). Business risk will eventually have financial consequences and therefore inflict an impact on the financial statementsIncreases the likelihood of identifying risk of material misstatementsInternal ControlsObjectivesInternal controls is the label given to the entitys policies and procedures designed to provide reasonable assurance about the achievement of the entitys objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulationsInherently limited to a certain extent breakdown, override, human errors, collusion, controls. Cost limitations6RISK ASSESSMENTAudit RiskInherent RiskControl RiskDetection RiskAR = IR x CR x DR7RISK ASSESSMENT

Relationship between Inherent, Control and Detection RiskAuditors assessment of controlHighMediumLowAuditors assessment of inherent riskHighLowestLowerMediumMediumLowerMediumHigherLowMediumHigherHighestThe darker shaded areas in this table relate to detection risk.

There is an inverse relationship between detection risk and combined level of inherent and control risks. When inherent and control risk are high, acceptable levels of detection risk need to be low to reduce audit risk to an acceptable low level.

On the other hand, when inherent risk are low, an auditor can accept a higher detection risk and still reduce audit risk to an acceptable low leveleg.8RISK ASSESSMENTHow to assess risk ?SSet audit risk (AR) to an acceptable and reasonably low levelAAssess the risk of material misstatements (IR X CR)CCalculate the detection risk (AR/ (IR X CR)Design the audit procedures based on detection riskD9RISK ASSESSMENTAt Financial Statements LevelAt Account Balance and Class of Transaction LevelManagement experience and knowledge and changes in management during the period eg. The inexperience of management may affect the preparation of the financial statements of the entityThe complexity of underlying transactions and other events, which might require using the work of an expertUnusual pressures on management eg. Circumstances that might predispose them to misstate financial statement such as inability to obtain financing to continue in operationsSusceptibility of assets to loss or misappropriation such as assets, which are highly describe and moveable such as cashThe nature of the entity such as the potential for technological obsolescence of its products and servicesFinancial statement accounts are likely to be susceptible to misstatement eg. Accounts which require adjustment in the prior period or which involve a high degree of estimationThe integrity of management that might lead them to misstate the financial statementsAccounting systems: the degree of judgment involved in determining account balancesFactors affecting the industry in which the entity operates; eg. Economic and competitive conditionsNature of transactions: the completion of unusual or complex transactions particularly at or near period endFactors auditor will consider when assessing inherent risks10RISK ASSESSMENTFactors auditor will consider when assessing control risks7 COMPONENTSHuman resource policies and practicesOrganizational structure determines the way it imposes authority and responsibilityManagement philosophy and operating style reporting and risksAssignment of authority and responsibilityParticipation by those charged with governance is there positive involvementCommunication and enforcement of integrity and ethical valuesCommitment to competence11RISK ASSESSMENTRisk Assessment ProcedureInquiryConsist of seeking information of knowledgeable persons, both financial and non-financial through-out the entity or outside the entity; to assess strength of control environment of the entity. ObservationConsists of looking at a process or procedure being performed by others; eg. The observation by the auditor of the counting of inventories by the entitys personnel or the performance of control activities (policies and procedures that help ensure that management directives are carried out, a component of internal controls) InspectionAs an audit procedure, examining records or documents whether internal or external of tangible assets inspections of manuals, systems documentation, internal controls evaluation reportsDiscussion amongst the engagement teamDiscussion with all personnel performing an engagement including any experts contracted by the firm in connection with that engagement. Analytical proceduresEvaluations 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.

Important and powerful tool for auditors in explaining the performance of a business. They are used at the planning, testing and review stages of the audit. Analytical procedures refers to analysis of relationships using techniques like ratio and trend analysis. Then any unusual fluctuations or unexpected fluctuations would subject to investigations by performing audit procedures and uses audit procedures to gather evidence. 12RISK ASSESSMENTRisk Assessment Procedure (cont. on Analytical Procedures)Analytical ProcedureUsed in obtaining an understanding of an entity and its environment and in the overall overview at the end of the audit.

Means the evaluation of financial and other information, and the review of plausible relationships in that information. The review also includes identifying fluctuations and relationships that d not appear consistent with other relevant information or resultsTypesComparison of comparable information to prior periods to identify unusual changes of fluctuations in amounts

Comparison of actual or anticipated results of the entity with budgets and/of forecasts, or the expectations of the auditor in order to determine the potential accuracy of those results

Comparison to industry information either for the industry as a whole or by comparison to entities of similar size to the client to determine whether receivable days, eg. Are reasonableUseRisk assessment proceduresAnalytical procedures as substantive proceduresAnalytical procedures in the overall review at the end of auditUsed at the beginning of the audit to help the auditor obtain an understanding of the entity and assess the risk of material misstatement. Audit procedures can then be directed to these risky areasUsed as substantive procedures in determining the risk of material misstatement as the assertion level during work on the income statement and balance sheetHelps the auditor at the end of the audit in forming and overall conclusion as to whether the financial statements as a whole are consistent with the auditors understanding of the entity13RISK ASSESSMENTImportance of Risk Assessment Procedure Attention is focused early on the areas most likely to cause material misstatementsFully understand the entity which is vital for an effective auditUnusual transactions or balance would also be identified early, and could be addressed timelyTo develop a detailed work programsEnsure appropriate and experienced staff allocated Reduce risk of an inappropriate audit opinion12345614DETERMINATION OF MATERIALITYMisstatements of omissions are material if they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements Judgments about materiality are made in light of surrounding circumstances, and are affected by the size of nature of a misstatement, or a combination of both

Judgments about matters that are material to users of the financial statements are based on a consideration of the common financial information needs of users as a group. The possible effect of misstatements on specific individuals users, whose needs may wary widely, is not considered. Size of the ItemThe most common application of materiality has to do with the size of the item consideredNature of the ItemThe nature of the item is a qualitative characteristicCircumstancesThe materiality of an error depends upon the circumstances of its occurrenceLOW MATERIALITY LEVEL

There will be additional cost incurred for an auditor to audit with a lower materialityThe lower the materiality, the more costly is the auditIf any error or whatever small size needs to be found in the audit, the auditor would spend significantly more time than when a certain level of imprecision (higher materiality level) is considered acceptable. 15AUDIT EVIDENCESUFFICIENCYThe measure of the quantity of audit evidenceQuantity needed is assessed by the assessed-risk of material misstatement AND by the quality of the audit evidence gathered. The GREATER the assessed-risk, the MORE audit evidence is likely to be required (to meet audit objective)The HIGHER the quality of the evidence, the LESSER evidence may be required to meet the audit test. Has inverse relationship between sufficiency and appropriateness. APPROPRIATENESSAll information used by the auditor in arriving at the conclusion on which the audit opinion is based, and includes the information contained in the accounting records underlying the financial statements and other information. RelevanceEvidence on its relevance to the audit objective being testedIf auditor relies on evidence that is unrelated to the assertion, the auditor may reach and incorrect conclusion about the assertionSourcesWhen using information produced by the entity, the auditor shall evaluate whether the information is sufficiently reliable for the auditors purposes, including as necessary in thecircumstances:Obtaining audit evidence about the accuracy and completeness of the information; andEvaluating whether the information is sufficiently precise and detailed for the auditors purposesQualification of InformerIf information to be used as audit evidence has been prepared using the work of a managements expert, the auditor shall, to the extent necessary, having regard to the significance of that experts work for the auditors purposes: Evaluate the competence, capabilities and objectivity of that expert; Obtain an understanding of the work of that expert; andEvaluate the appropriateness of that experts work as audit evidence for the relevant assertion. ReliabilityWhether a particular type of evidence can be relied upon to signal the true state of an assertionExternal evidenceInternal evidenceis more reliable thanDirect evidenceIndirect evidenceDocumentary formOral representationOriginal documentsPhotocopiesEffective Internal ControlIneffective Internal Control16USING THE WORK OF INTERNAL AUDITORMust obtain an understanding of a clients internal audit department and its workPrior to using the work of internal auditors, external auditors should consider internal auditors objectivity and competenceInternal auditors should not be delegated tasks that require extensive professional judgment17ENGAGE EXPERTS IF NEEDEDEXPERTSPersons skilled in fields other than accounting and auditing, who re not members of the audit teamShould be unrelated to the company being auditedAre not referred to in the audit report unless the specialists findings cause the auditors report to be modified WHOWHOWHATAUDITORSMust know about the experts professional qualifications, experience and reputationKNOWShould obtain an understanding of the experts methods and assumptionOBTAIN18AUDIT EVIDENCESUFFICIENCYThe measure of the quantity of audit evidenceQuantity needed is assessed by the assessed-risk of material misstatement AND by the quality of the audit evidence gathered. The GREATER the assessed-risk, the MORE audit evidence is likely to be required (to meet audit objective)The HIGHER the quality of the evidence, the LESSER evidence may be required to meet the audit test. Has inverse relationship between sufficiency and appropriateness. APPROPRIATENESSAll information used by the auditor in arriving at the conclusion on which the audit opinion is based, and includes the information contained in the accounting records underlying the financial statements and other information. RelevanceEvidence on its relevance to the audit objective being testedIf auditor relies on evidence that is unrelated to the assertion, the auditor may reach and incorrect conclusion about the assertionSourcesWhen using information produced by the entity, the auditor shall evaluate whether the information is sufficiently reliable for the auditors purposes, including as necessary in thecircumstances:Obtaining audit evidence about the accuracy and completeness of the information; andEvaluating whether the information is sufficiently precise and detailed for the auditors purposesQualification of InformerIf information to be used as audit evidence has been prepared using the work of a managements expert, the auditor shall, to the extent necessary, having regard to the significance of that experts work for the auditors purposes: Evaluate the competence, capabilities and objectivity of that expert; Obtain an understanding of the work of that expert; andEvaluate the appropriateness of that experts work as audit evidence for the relevant assertion. ReliabilityWhether a particular type of evidence can be relied upon to signal the true state of an assertionExternal evidenceInternal evidenceis more reliable thanDirect evidenceIndirect evidenceDocumentary formOral representationOriginal documentsPhotocopiesEffective Internal ControlIneffective Internal Control19