Audit Planning and Risk Assessment Essay Sample free essay sample

Hearers should be after the audit so that the battle is conducted in an effectual mode. The aims of be aftering include: †¢ Directing appropriate attending to the different countries of the audit such as measuring materiality. so that when the detailed audit program is prepared. audit processs can be directed towards the stuff sums. †¢ Identify possible jobs or hazards so that they can be resolved at an early phase. †¢ Facilitate reappraisal and control of the audit. †¢ Assigning and briefing staff with appropriate accomplishments. cognition. preparation. proficiency. †¢ Organizing the work of others such as that of experts. †¢ Obtaining cognition and apprehension of the client’s concern. †¢ Supplying an economic and effectual service within appropriate timescales Planing an audit will allow development of: †¢ An audit scheme based on hazard analysis†¢ An audit program that turn toing the hazards identified. Planing processs: †¢ Review the old old ages working documents†¢ Identify job countries encountered†¢ Determine staffing demands†¢ Obtain an indicant of clip required†¢ If the client is new. We will write a custom essay sample on Audit Planning and Risk Assessment Essay Sample or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page reexamine the old auditors’ working documents to obtain shutting balances which will impact this year’s fiscal statements. †¢ Determine the trading form and jobs faced by the client company. †¢ Establish timetable. of import day of the months and deadlines †¢ Assess the consequence of alterations from old twelvemonth: 1. Systems 2. Law and ordinance 3. Accounting policies 4. Management 5. Other relevant affairs †¢ Perform analytical reappraisal or processs on the latest histories. †¢ Request readying of hard currency and net income projections where solvency jobs are foreseen. †¢ Review the work of internal audit. †¢ Evaluate whether trust on other expert is necessary †¢ Allocate and brief audit staff. ISA 315 Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment 1. The hearer should execute hazard appraisal processs in order to place and measure the hazards of material misstatement. Risk appraisal processs include: †¢ Making enquiries of direction and others within the entity †¢ Discuss with the client’s direction about its aims and outlooks. and its programs for accomplishing those ends †¢ Observation and review †¢ Perform analytical processs to assist the hearer in placing unusual minutess. 2. The hearer should obtain an apprehension of the entity and its environment. including the entity’s internal control systems. Understanding of the entity and its environment will assist the hearer to place the hazards of material mis-statement ; will supply the hearer with a footing for planing and implementing responses to assessed hazard and to guarantee that sufficient appropriate audit grounds is collected. An apprehension of the entity can be obtained through understanding †¢ Relevant industry. regulative. and the applicable fiscal coverage model †¢ The nature of its operations ; its ownership construction and administration construction †¢ The market and its competition †¢ Nature of products/services and markets†¢ Location of production installations and mills†¢ Key clients and providers†¢ Capital investing activities†¢ Significant changes over anterior old ages.3. The hearer should place and measure the hazards of material misstatement. and find whether any of the hazards identified are important hazards. This will assist the hearer to plan and execute farther audit processs. RISK ASSESSMENT The hearer should place and measure the hazards of material misstatement. whether due to fraud or mistake. at the fiscal statement and averment degrees. The hearer must obtain an apprehension of the entity and its environment. including internal controls. so that they can place and measure the hazards of material misstatement on fiscal statements due to fraud or mistake and design and execute farther audit processs. The aim is to guarantee that hearers obtain sufficient cognition of the concern of the entity to enable them to place and understand the events. minutess or pattern that may hold a important consequence on the fiscal statements or the audit. This cognition of the concern helps to measure the degrees of control and built-in hazard and to find audit processs. Procedures to follow: †¢ Enquiry of direction†¢ Analytical processs.†¢ Observation and review. Advantages of Risk Assessment†¢ Ensures that attending is focused early on the countries most likely to do material misstatements. †¢ Allows hearer to to the full understand the entity.†¢ Allows the hearer to place unusual minutess or balances every bit early as possible so that these could be addressed in a timely mode. †¢ Permits the audit squad to concentrate on cardinal countries.†¢ Ensure that an experient squad is selected with more experient staff allocated to higher hazard audits and high hazard balances. †¢ Reduces the hazard of an inappropriate audit sentiment being given. †¢ Permits the hearer to hold a good apprehension of the hazards of fraud. money laundering. †¢ Enables the hearer to measure whether the client is a traveling concern. ISA 400 RISK ASSESSMENTS AND INTERNAL CONTROL There are 2 chief classs of hazard 1. Business Hazard2. Audited account Hazard. 1. Business Hazards Business hazard is the hazard that the concern will neglect to run into its aim. Elementss of Business Risk include †¢ Financial hazard which arises from the company activities such as traveling concern jobs. overtrading. recognition hazard. involvement hazard. currency hazard and dislocation of accounting systems. †¢ Operational hazard originating from the operation of the concern such as doomed concern chances. loss of physical assets and deficiency of concern orders. †¢ Conformity hazard originating from non-compliances with Torahs and ordinances such as breach of companies Acts of the Apostless. and wellness and safety ordinances. 2. Audited account hazard is defined as the hazard that the hearer expresses an inappropriate audit sentiment when the fiscal statements are materially misstated. Audited account hazard has two constituents I. Hazards of stuff misstatement ( Financial Statement Risk ) II. Detection Hazard I. Hazard of material misstatement is defined as ‘the hazard that the fiscal statements are materially misstated prior to scrutinize. This consists of two elements built-in hazard and control hazard. Fiscal Statement Risk = Risk of stuff misstatement= built-in hazard + control hazard Built-in hazard is ‘the hazard that an averment about a category of dealing. history balance or revelation could be materially misstated. Built-in hazard is the hazard that misstatement will happen due to factors built-in in the company’s concern or environment or the nature of single dealing or balance. It is the hazard attached to an averment that could do a material misstatement. Certain averments. related categories of minutess and history balances such as stock are more prone to hazard. Built-in hazard depends on the type of concern.The following have a high built-in hazard: †¢ Businesss with merchandises capable to alterations in manner and engineering concern. The hazard is that stock could be overstated. †¢ Companies with a dominant main executive.†¢ Small and new companies.†¢ Companies sing traveling concern jobs.†¢ Companies confronting a extremely competitory environment. Control hazard is the hazard that a misstatement could happen in an history balance or category of minutess and that could be material either separately or when aggregated with misstatement in other balance or category. would non be detected and corrected on timely footing. by the accounting and internal control systems. This is the hazard that the client’s internal control system will non forestall mistakes happening or will non observe them after the happening so that they may be prevented. Example of control hazard – corporate civilization of slack control processs. deficiency of proper rapprochement of leger balances. II. Detection hazard Detection hazard is the hazard that auditor’s substantial processs do non observe a misstatement that exist in an history balance or category of minutess that could be material either separately or when aggregated with misstatements in other balance. One constituent of sensing hazard is trying hazard. Sampling hazard is the possibility that the auditor’s decision. based on a sample. may be different from the decision reached if the full population were subjected to the audit process. Note: Hazards must be related to the hazard originating in the audit of the fiscal statements and should include the fiscal statement averment impacted. Therefore. audit hazards should be related back to relevant averments in the fiscal statements and must province whether the history will be overstated or understated. Measuring Hazard: ISA 330 The auditor’s processs in response to assessed hazards 1. ISA 330 indicates that the hearer must react to the assessed hazard by finding the nature and extent of audit grounds to be obtained from the public presentation of substantial processs in response to the related appraisal of the hazard of material misstatement. This varies depending on the appraisal of built-in and control hazards. and that. irrespective of the assessed hazard of material misstatement. the hearer designs and performs substantial processs for each material category of minutess. history balance. and revelation and that the assessed degrees of built-in and control hazard can non be sufficiently low to extinguish the demand to execute any substantial processs. †¢ Emphasize to the audit squad the demand to keep professional incredulity in assemblage and measuring audit grounds. †¢ Assign more experient staff or those with particular accomplishments or utilizing experts. supplying more supervising. †¢ Make alterations to the nature. timing. or extent of audit processs as an overall response. for illustration. executing substantial processs at period terminal alternatively of at an interim day of the month. In planing farther audit processs. the hearer considers such affairs as the followers: †¢ The significance of the hazard.†¢ The likeliness that a material misstatement will happen.†¢ The features of the category of minutess. history balance. or revelation †¢ involved.†¢ The nature of the particular controls used by the entity and in peculiar whether they are manual or automated. †¢ Whether the hearer expects to obtain audit grounds to find if the entity’s controls are effectual in forestalling. or observing and rectifying. material misstatements. ISA 520 Analytical Procedures Analytic processs are used in obtaining an apprehension of an entity and its environment and in the overall reappraisal at the terminal of the audit. ‘Analytical procedures’ really is the rating of fiscal and other information. and the reappraisal of plausible relationships in that information. The reappraisal besides includes identifying fluctuations and relationships that do non look consistent with other relevant information or consequences. Types of analytical processs Analytic processs can be used as: – Compare information to prior periods to place unusual alterations or fluctuations in sums. – Compare existent or awaited consequences of the entity with budgets and/or prognosiss. or the outlooks of the hearer in order to find the possible truth of those consequences. – Compare to industry information either for the industry as a whole or by comparing to entities of similar size to the client to find whether sensible. Use of analytical processs †¢ Risk appraisal processsAnalytic processs are used at the beginning of the audit to assist the hearer obtain an apprehension of the entity and measure the hazard of material misstatement. Audited account processs can so be directed to these‘risky’ countries. †¢ Analytical processs as substantial processs Analytic processs can be used as substantial processs in finding the hazard of material misstatement at the averment degree during work on the income statement and statement of fiscal place ( balance sheet ) . †¢ Analytical processs in the overall reappraisal at the terminal of the audit Analytical processs help the hearer at the terminal of the audit in organizing an overall decision as to whether the fiscal statements as a whole are consistent with the auditor’s apprehension of the entity. ISA 320 AUDIT MATERIALITY Hearers must see materiality and its relationship to audit hazard when conducting and audit. Information is material if its skip or misstatement could act upon the economic determinations of users taken on the footing of the fiscal statements. Misstatements. including skips. are considered to be material if they could moderately be expected to act upon the economic determinations of users. Materiality is an of import construct in the audit procedure and affects: †¢ Audit hazard rating†¢ The nature. timing and extent of audit processs ( e. g. sample sizes ) . †¢ The finding of whether the fiscal statements are distorted by misstatements discovered. The auditor’s appraisal of materiality is influenced by the followers: †¢ The overall impact on the fiscal statements. A materiality degree for the fiscal statements as a whole. †¢ Individual history balances and minutess†¢ Performance materiality. An sum or sums lower than themateriality degree for the fiscal statements as a whole. It is the sum set by the hearer to cut down the chance that the sum of uncorrected and undetected misstatements exceeds materiality for the fiscal statements as a whole. Performance materiality Performance materiality is set to cut down the chance that the sum of uncorrected and undetected misstatements in the fiscal statements exceeds materiality for the fiscal statements as a whole ISA 320 defines public presentation materiality as 1. The sum ( s ) set by the hearer at lower ( smaller ) than the materiality for the fiscal statements as a whole to cut down the chance that the sum of uncorrected and undetected misstatements exceeds materiality for the fiscal statements as a whole to an suitably low degree 2. Performance materiality besides refers to the sums set a less than materiality for the fiscal statements as a whole when sing peculiar categories of dealing. history balances or revelations. Examples:Materiality for fiscal statements as a whole. of ?90. 000 Sum of identified but uncorrected misstatements ? 40. 000 Sum of expected ( unidentified mis-statements ) ? 30. 000 ? 70. 000Lower of ? 90. 000 and ? 70. 000= ? 70. 000 The hearer should put materiality for the fiscal statements as a whole AND should besides set up an sum set at less than materiality when planing the nature. timing and extent of farther audit processs. This will assist to cut down the hazard that misstatements in aggregative exceed the entire for materiality for the fiscal statements as a whole. Determination of materiality requires the exercising of professional opinion. ISA 315 Assertions – Representations or statements made by direction andincluded in the fiscal statements SIX Assertions about categories of minutess and events ( Statement of Comprehensive Income points ) 1. Happening: A fiscal or non fiscal dealing occurred/ took topographic point during the accounting period. 2. Completeness: all minutess of gross revenues and disbursals that took topographic point are recorded in the statement of comprehensive income. 3. Accuracy: the minutess are recorded at the right sums. 4. Cut-off minutess have been recorded in the right accounting period 5. Categorization: the minutess have been recorded in the proper histories. 6. Presentation and revelation: all minutess are presented and disclosed in conformity with the relevant fiscal coverage model. FIVE Assertions about history balances in the Statement of Financial Position 1. Being: an plus and liability exists at balance sheet day of the month. ( The key aim is that assets are non overstated and liabilities are non understated ) . 2. Completeness: all assets and liabilities have been recorded. 3. Rights and duty ( Ownership ) : The company has the rights to utilize the plus and is obligated to refund the liabilities. 4. Assertions about rating: The assets and liabilities are recorded at an appropriate value. For all non current assets this would be initial cost plus additions or subtractions decreased in value. 5. Assertions about presentation and revelations: Must be in conformity with relevant national statute law and accounting criterion. The auditor’s appraisal of the identified hazards at the averment degree provides a footing for sing the appropriate audit attack for planing and executing farther audit processs. The response must utilize: 1. Trial of controls/ conformity trials In some instances. the hearer may find that merely by executing trials of controls will he accomplish an effectual response to the assessed hazard of material misstatement for a peculiar averment. Trials of control are an audit process designed to measure the operating effectivity of controls in forestalling. or observing and rectifying. material misstatements at the averment degree. The hearer designs trials of controls to obtain sufficient appropriate audit grounds that the controls operated efficaciously throughout the period of trust. Matters the hearer may see in finding the extent of the auditor’s trials of controls include the followers: †¢ The frequence of the public presentation of the control by the entity during the period. †¢ The length of clip during the audit period that the hearer is trusting on the operating effectivity of the control. †¢ The relevancy and dependability of the audit grounds to be obtained in back uping that the control prevents. or detects and corrects. stuff misstatements at the averment degree.†¢ The extent to which audit grounds is obtained from trials of other controls related to the averment. 2. Substantial Procedures. If the hearer determines that executing merely substantial processs is appropriate for specific averments. he can except the consequence of controls from the relevant hazard appraisal. This may be because the auditor’s hazard appraisal processs have non identified any effectual controls relevant to the averment. or because proving the operating effectivity of controls would be inefficient. However. the hearer needs to be satisfied that executing merely substantial processs for the relevant averment would be effectual in cut downing the hazard of material misstatement to an tolerably low degree. Often the hearer may find that a combined attack utilizing both trials of the operating effectivity of controls and substantial processs is an effectual attack. Substantial process – An audit process designed to observe material misstatements at the averment degree. Substantial processs comprise trials of inside informations and substantial analytical processs. ( I ) Trials of inside informations ( of categories of minutess. history balances. and revelations ) . and ( two ) Substantive analytical processs. Trials of item are appropriate for affairs identified as important hazards. These include composite or unusual minutess which make indicate fraud or other particular hazards. Interim Audited account: In some fortunes. the hearer may find that it is effectual to execute audit processs at an interim day of the month before twelvemonth terminal Trial of Controls at interim phase:When the hearer obtains grounds about the operating effectivity of controls during an interim audit. the hearer should find what extra audit grounds should be obtained for the staying period. Substantial Audited account Procedures at interim phase ( a ) Identify sums that appear unusual( B ) Investigate any such sums( degree Celsius ) Perform substantial analytical processs or trials of inside informations to prove the interim period. Performing substantial processs at an interim day of the month without set abouting extra processs at a ulterior day of the month addition the hazard that the hearer will non observe misstatements that may be at the period terminal. Documentation at planning phase The signifier and extent of audit certification is a affair of professional judgement. and is influenced by the nature. size and complexness of the entity and its internal control. handiness of information from the entity and the audit methodological analysis and engineering used in the audit. Must document the followers: †¢ Audit Strategy†¢ Key elements of the entity†¢ Identified or assessed hazard of material misstatement †¢ Responses to turn to hazard†¢ Nature. extent. timing of processs.†¢ Decisions ISA 402 Audit Considerations Relating to an Entity Using a 3rd party Service Organisation. Third party service organisations are companies that provide outsourcing services that impact the control environment of their clients. Example of 3rd party service organisations: A client may utilize a service organisation such as one that records minutess and procedures related informations such as a computing machine systems service organisation. If the entity uses a service organisation. certain policies. processs and records maintained by the service organisation may be relevant to the audit of the fiscal statements of the client. ISA 402 is applied when the hearer intends to utilize a service auditor’s study as audit grounds. If the hearer concludes that the activities of the service organisation are important to the entity and relevant to the audit. the hearer should obtain a sufficient apprehension of the service organisation and its environment. including its internal control. to place and measure the hazards of stuff misstatement and design further audit processs in response to the assessed hazards If the hearer uses a service organisation auditor’s study. the hearer should see the nature of and content of that study. There are two types of service hearer studies: Type I service auditor’s study is a study merely on the description and design of controls at a service organisation. Type 2 service auditor’s study is a study on the description. design. and runing effectivity of controls at a service organisation When executing hazard assessment the hearer should execute the undermentioned processs to guarantee that the service organisation’s controls are runing efficaciously: †¢ Obtain a Type 2 study. if available. prepared by hearers of the service administration. †¢ Obtain a sensible confidence study by the service hearer †¢ Perform trials of control at the service administration †¢ Use another hearer to execute trials of control at the service administration on their behalf. If the hearer intends to utilize a study from a service hearer they should execute processs to guarantee they are satisfied with the competency and independency of the service hearer and that the service auditor’s study provides sufficient appropriate grounds about the effectivity of controls. ISA 620 – USING THE WORK OF AN EXPERT â€Å"Expert† means a individual or house possessing particular accomplishment. cognition and experience in a peculiar field other than accounting and scrutinizing. An expert may be:( a ) Engaged by the entity ;( B ) Engaged by the hearer ;( degree Celsius ) Employed by the entity ; or( vitamin D ) Employed by the hearer. When the hearer uses the work of an adept employed by the hearer. that work is used in the employee’s capacity as an expert instead than as an helper on the audit. The hearer should obtain sufficient appropriate audit grounds that the range of the expert’s work is equal for the intents of the audit. An expert’s work can be used: †¢ At the planning phase to obtaining an apprehension of the entity and executing farther processs in response to assessed hazards. †¢ During the audit to obtain audit grounds in the signifier of studies. sentiments. ratings and statements of an expert. The hearer needs to measure 4 issues in relation to an expert: 1. Necessity to utilize him2. Competence and objectiveness – is he an employee or a contracted 3rd party. 3. Scope of work of the expert.4. Actual work. See the beginning informations used. premises. methods and consequences. The consistence of the findings with other grounds ; the important premises made ; and the usage and truth of beginning informations. Before utilizing an expert the audit shall hold. in authorship: †¢ The functions and duties of the hearer and the expert †¢ The nature. range and aims of the expert’s work. †¢ The nature. timing and extent of communicating between the two parties. †¢ The demand for the expert to detect confidentiality. Mention to an Expert in the Auditor’s Report 1. When publishing an unqualified study. the hearer should non mention to the work of an expert. Such a mention might be misunderstood to be a making of the auditor’s sentiment or a division of duties. 1. If as a consequence of the work of an expert. the hearer decides to publish a qualified audit study. it may be appropriate to mention to or depict the work of the expert ( including the individuality of the expert and the extent of the expert’s engagement ) . In these fortunes. the hearer would obtain the permission of the expert before doing such a mention. If permission is refused and the hearer believes a mention is necessary. the hearer may necessitate to seek legal advice. 2. If the hearer makes mention to the usage of an expert in the audit study. the hearer the hearer shall bespeak that the mention to the expert does non cut down the auditor’s duty for the sentiment.