STUDY UNIT 9: AUDIT PLANNING
WHAT IS THE PURPOSE AND RESULT OF AUDIT PLANNING?
Purpose: Planning enables you to identify the key risks and controls your audit should cover, ensuring
nothing is missed.
Result: An effective and efficient audit performed as a whole.
WHAT ARE THE ADVANTAGES OF AUDIT PLANNING?
Appropriate attention is devoted to important areas of the audit
Potential problem areas are identified and timeously resolved
Audit is organized and managed in an effective and efficient manner
Work performed by other auditors and experts is properly coordinated
Work is properly delegated to team members
Engagement team with the appropriate experience & expertise are allocated to the audit
WHAT IS THE PURPOSE OF OBTAINING AN UNDERSTANDING OF THE
BUSINESS?
Identify and assess risk of material misstatement at overall financial statement level
Formulating an overall audit response
NAME THE ASPECTS ON WHICH KNOWLEDGE MUST BE OBTAINED:
Financial reporting framework
Inventories
Accounting for fair values
Accounting for complex / unusual transactions
Revenue recognition practice
Internal Factors:
Organisational structure and ownership
Governance
Business model and strategy
Activities
Financing and Financing activities
Performance management measures and criteria
External factors
Industry factors
Regulatory factors
Other external factors
GIVE THE DEFINITION OF INTERNAL CONTROL
The process, policies and procedures designed and effected by those charged with governance and
management and other personnel to provide reasonable assurance about the achievement of the
entity’s objectives about reliability of financial reporting, effectiveness and efficiency of operations, and
compliance with laws and regulations.
NAME/DESCRIBE THE INHERENT LIMITATIONS OF CONTROLS/INTERNAL
CONTROLS
1. Only cost-effective controls can be implemented.
2. Controls are usually directed at the routine transactions rather than non-routine transactions.
3. Potential human error due to carelessness, distraction, errors of judgement, etc.
4. The possible circumvention of controls through collusion with parties outside the entity or between
employees within the entity.
5. A person responsible for exercising a control could abuse that responsibility, for example a member
of management overriding a control for his/her own benefit.
6. Procedures may become inadequate because of changing circumstances, or the compliance with
procedures may deteriorate.
NAME THE SOURCES OF INFORMATION TO OBTAIN KNOWLEDGE OF THE
ACCOUNTING SYSTEMS AND CONTROLS
• a system walk-through test.
• enquiry of management and personnel.
• inspection of documents (e.g., system flowcharts);
• observations of controls and processes.
• internal control questionnaires; and
NAME THE 5 COMPONENTS OF AN INTERNAL CONTROL SYSTEM
The Control Environment
Risk management process
Information systems
Control activities
Monitoring of controls
NAME THE MATTERS THAT WILL AFFECT THE CONTROL ENVIROMENT
The control environment:
- How management’s oversight responsibilities are carried out
- Independence of those charged with governance
- Retention and development of competent individuals
BRIEFLY DISCUSS WHAT AN ENTITY’S RISK ASSESMENT PROCEDURES
ENTAIL
The entity’s risk management process (risk management)
This consists of the entity’s process for identifying business risks and deciding on actions to respond
to those risks.
Specifically:
• how management identifies the risks;
• how they assess the risks; and
• how they address/manage the risks (actions taken to
manage the risks).
DEFINE AUDIT RISK
Audit risk (AR) is a function of the risks of material misstatement (RMM) and detection risk (DR)
Key elements of the definition
Risk that the financial statements are materially misstated (inherent and control risk) – 2
Levels
o Overall financial statement level
o At assertion level
Risk that material misstatements are not detected by the auditor (detection risk)
DISCUSS AND DEFINE THE 3 COMPONENTS OF AUDIT RISK
o Inherent risk (IR)
Susceptibility of an assertion to a misstatement that could be material, before consideration of
any related controls
E.g., complex transactions
Fixed – entity’s risk
o Control risk (CR)
Risk that a material misstatement could occur that is not detected on a timely basis by the
entity’s internal controls
Risk is a function of the effectiveness of internal controls of the entity
Fixed – entity’s risk
o Detection risk (DR)
Risk that the procedures performed by the auditor will not detect a misstatement that exists
and could be material
Risk is influenced by the effectiveness of audit procedures (Control tests and substantive
tests)
AR = RMM x DR
AR = (IR x CR) x DR
NAME AND DESCRIBE THE RISK OF MATERIAL MISSTATEMENT AT THE
OVERALL FINANCIAL STATEMENT LEVEL
The risk of material misstatement is the susceptibility of the financial statements, accounts,
and assertions to material misstatement, and the risk that the client’s current internal controls
would be ineffective in proactively identifying and correcting the misstatements.
DISCUSS THE REALTIONSHIP BETWEEN AUDIT RISK AND MATERIALITY
The auditor should consider materiality and its relationship with the audit risk when an audit is
performed
There is an inverse relationship between materiality and audit risk:
The higher the audit risk, the lower materiality and audit compensate for this and
The lower the audit risk, the higher materiality may be set because the chances is small that a
material misstatement could occur and go undetected.
It affects directly the nature, timing and extent of the audit procedures
NOTE:
1) the risk of misstatements at the overall financial statement level will have a direct impact on
the setting for planning materiality
2) this is important because planning materiality will be used to identify significant classes of
transactions, account balances and disclosures which will individually be audited in detail
NAME EXAMPLES OF MATTERS THAT WILL AFFECT THE RISK OF MATERIAL
MISSTATEMENT AT THE ASSERTION LEVEL
