Planning and Risk · Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance...
Transcript of Planning and Risk · Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance...
Copyright 2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett 1
PART TWO:
Planning and Risk
Copyright 2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett 2
CHAPTER 5
OVERVIEW OF ELEMENTS OF THE FINANCIAL
REPPORT AUDIT PROCESS
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ACCOUNTING AND AUDITING
CONTRASTED
ACCOUNTING AUDITING
Responsib ility of management Responsib ility of auditor
Measure and record
accounting data in accordance
with accounting standards
Obtain sufficient appropriate audit
evidence about the propriety and
accuracy of the accounting data in
accordance with auditing standards
Prepare the financial report in
accordance with the identified
financial reporting framework
Provide an audit opinion on whether
the financial report is presented
fairly in accordance with the
identified financial reporting
framework
Distribute the financial report,
including the audit report, to
the owners of the entityFig. 5.1 Relationship
between accounting and
auditing (p.177)
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AREAS OF AUDIT
INTEREST • Accountable activity of the entity
Collection of original accounting data
Allocation and reclassification of accounting data
Presentation of results
• Organisation of the entity
External relationships
Internal organisational structure
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FINANCIAL REPORT
ASSERTIONS
• Existence
• Occurrence
• Completeness
• Rights and obligations
• Valuation
• Measurement
• Presentation and disclosure
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ASSERTIONS AND OBJECTIVES FOR INVENTORY
Example 5.1 Assertions and objectives for the account balance of inventory of
a manufacturing company (p. 183)
Financial report Illustrative audit objectives
assertion
Existence n Inventories included in statement of financial position physically exist.
n Inventories represent items held for sale in normal course of business.
Completeness n Inventory includes all products, materials and supplies owned by the
company that are on hand, in transit or stored at outside locations.
Rights and n The company has legal title of ownership to the inventories.
obligations
Valuation n Inventories are properly stated at cost (except when net realisable value
is lower).
n Slow-moving, defective and obsolete items included in inventories are
properly identified and valued.
Measurement n Inventory is recorded at the correct amount in the correct period.
Presentation and n Inventories are properly classified as current assets with major
disclosure categories and their bases of valuation adequately disclosed.
Note: Assertion of Occurrence relates to transactions related to inventory, not the balance
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AUDIT EVIDENCE
Audit evidence
Underlying accounting data
Books or original entry
General and subsidiary ledgers
Related accounting manuals
Worksheets supporting cost allocations, computation and reconciliations, etc.
+
Corroborating information
Documents, such as cheques,
Confirmations and other written
Information from inquiry,
Other information developed or obtained by the auditor
invoices, contracts and minutes
representations
observations and inspection
Fig. 5.2 The audit
equation (p. 184)
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EXAMPLE OF A CASH
PURCHASE TRANSACTION
Business
entity
(client)
Cash
Business
entity
(supplier) Inventory
Fig. 5.3 A cash purchase
transaction (p.184)
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AUDIT PROCEDURES
• Inspection
• Observation
• Inquiry
• Confirmation
• Computation
• Analytical procedures
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Transactions traced from initial entry in system to intermediate records, where transactions become components of subtotals, and ultimately to disposition in final records, where subtotals are summarised for presentation in financial report.
Direction of tracing can be modified: auditor can trace from point of initiation of transaction to final recording (assertion of completeness), or trace from final record back to point of initiation (assertion of existence).
THE AUDIT TRAIL
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SELECTING AUDIT
PROCEDURES
Influenced by the following factors:
• Auditor’s assessment of inherent risk
• Nature of the internal control structure and assessment of control risk
• Materiality of particular component of financial report
• Experience gained from previous audits
• Results of other audit procedures
• Source and reliability of information available
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Sufficiency — quantity of audit evidence necessary to provide the auditor with a reasonable basis for an opinion on the financial report.
Appropriateness — quality of audit evidence. Two dimensions:
• Relevance — relates to the financial report assertion of interest.
• Reliability — influenced by its source and nature.
SUFFICIENT APPROPRIATE AUDIT
EVIDENCE
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RELIABILITY OF AUDIT EVIDENCE
• Evidence from sources outside an entity is more reliable than evidence obtained solely from within an entity.
• Evidence generated internally is more reliable when the internal control structure is effective.
• Evidence obtained directly by the auditor is more reliable than evidence obtained from the client.
• Evidence in the form of documents or written representations is more reliable than oral representations.
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AUDIT RISK AT THE FINANCIAL
REPORT LEVEL
Audit risk is the risk that the auditor will give an inappropriate audit opinion when the financial report is materially misstated.
• Before issuing an opinion on the financial
report, the auditor needs to reduce audit risk sufficiently to make the opinion reliable.
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• The auditor reduces audit risk by performing audit procedures until there is sufficient appropriate evidence for each assertion of each significant transaction class or account balance to provide reasonable assurance that the financial reports are not materially misstated.
• The audit risk model focuses audit effort on those classes of transactions or balances that are likely to contain material misstatements.
REDUCING AUDIT RISK
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Three components:
• Inherent risk: (IR) susceptibility of an assertion to material misstatement given inherent and environmental characteristics, but without regard to prescribed control procedures.
• Control risk: (CR) risk that material misstatement might not be prevented or detected by internal control procedures.
• Detection risk: (DR) risk that auditors’ substantive procedures lead auditor to conclude no material misstatement when there is one.
COMPONENTS OF AUDIT RISK (AR)
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AR = f (IR, CR, DR)
THE AUDIT RISK MODEL
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GRAPHICAL DEPICTION OF AUDIT
RISK Fig. 5.4 Audit risk,
graphically depicted (p. 192)
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• Auditor cannot change inherent risk.
• Auditor cannot directly change control risk. Auditor can obtain evidence to support an assessed level of control risk less than high (expect to rely on internal control) by examining control environment, information system and control procedures and testing their effectiveness.
REDUCING AUDIT RISK I
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The level of detection risk is the lever the auditor can pull to reduce audit risk by:
• Appropriate planning, direction, supervision and review
• Decisions on the nature, timing and extent of audit procedures
• Effective performance of procedures and evaluation of results
REDUCING AUDIT RISK II
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INTERRELATIONSHIP OF
COMPONENTS OF AUDIT RISK
Exhibit 5.1 The interrelationships of the components of audit risk (p. 193)
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Defined:
• Risk that entity’s business objectives will not be obtained as a result of external and internal factors, pressures and forces brought to bear on entity and, ultimately, the risk associated with the entity’s survival and profitability.
• Requires extensive knowledge of client’s business and industry.
• Recent audit methodologies emphasise assessment of strategic business risk.
STRATEGIC BUSINESS RISK
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THE RELATIONSHIP OF STRATEGIC
BUSINESS RISK TO THE DETERMINATION
OF AUDIT RISK
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• Tests of control
• Substantive tests
TYPES OF AUDIT TESTS
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• To obtain evidence about either:
(1) the effectiveness of the design of the policies or procedures in the internal control structure; or
(2) the operating effectiveness of those policies or procedures.
• The tests are designed to provide evidence to support an assessment of control risk at a level below high (indicating reliance on the keys controls).
TESTS OF CONTROL
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• To obtain evidence about the validity and the propriety of the accounting treatment of transactions and balances or, conversely, of errors or irregularities therein.
• These tests reduce detection risk.
SUBSTANTIVE TESTS
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• Analytical procedures — study and comparison of relationships between accounting data and related information
• Tests of details — obtaining evidence on the items (or details) included in an account balance or class of transactions:
Tests of transactions
Tests of balances
TYPES OF SUBSTANTIVE
TESTS
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USING THE WORK OF AN EXPERT
OR ANOTHER AUDITOR
• Given complexity and highly specialised nature of many client operations, auditors often find they are unable to service clients effectively without specialist knowledge.
• Experts can be internal or external to the audit firm.
• Audit firms develop industry specialisations, have knowledge management systems supporting the specialisations and have employees designated as specialists by industry, function or technical area.
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ENSURING THAT WORK BY
AN EXPERT IS ADEQUATE
An auditor should:
• Assess skills and competence of expert
• Assess objectivity and independence of expert
• Communicate with expert to confirm terms of engagement and ensure expert understands objective and use of work
• Evaluate work of expert
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USING THE WORK OF
ANOTHER AUDITOR
•Audit work may be undertaken by a number of different auditors. (Consider a consolidated entity with subsidiaries in many countries.)
•The principal auditor retains responsibility for the overall audit opinion and must ensure the procedures used by other auditors are appropriate for the principal auditor’s purpose.
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ASSESSING THE WORK OF
ANOTHER AUDITOR
AUS 602 indicates that where an auditor
uses the work of another auditor, the
principal auditor should:
• Assess professional competence of other auditor
• Advise other auditor of requirements applicable to engagement
• Advise other auditor of use to be made of work, areas requiring special attention, and timetable.
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These are the specific means used to record audit evidence.
Working papers aid in:
• Planning and performing the audit
• Supervising and reviewing the audit work
• Gathering evidence and providing essential support for the auditor’s opinion
Two main divisions:
• Permanent file - store of documents relevant to this audit and future years (e.g. copies of articles of association, continuing contracts)
• Current working paper file - documentary record of evidence gathered and conclusions reached on this audit.
WORKING PAPERS
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Includes:
1. Overall audit plan
2. Review of accounting system and related internal controls
3. Audit program, listing the audit procedures undertaken
4. Details of audit testing undertaken
5. Working trial balance - schedule of general ledger accounts
6. Trial balance working paper schedules, including external documents
7. Draft of financial report and audit report
CURRENT WORKING PAPER FILE
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