Get Notes on : AUDIT PLANNING, CONTROL & RECORDING (iSA 300) NOTES
AUDIT QUALITY CONTROL
QUESTION ONE
audit planning process allows the audit senior to acquire adequate knowledge about the entity. This process ensures an effective control and review of audit work.
Required;
- Explain the auditor’s planning process when planning for an audit of a new client.
- how does audit planning assist in the conduct of an audit?
- Explain the following controlling procedures in a well planned audit:
- Direction and supervision of work
- review and co-coordination of work
- Quality controls
QUESTION TWO
You are an audit senior responsible for understanding the entity and its environment and assessing the risk of material misstatements for the audit of rock for the year ending 31 December 2004. rock is a company listed on a stock exchange. Rock is engaged in the wholesale import, manufacture and distribution of basic cosmetics and toiletries for sale to a wide range of stores, under a variety of different brand names. You have worked on the audit of this client for several years as an audit junior.
Required:
- Describe the information you will seek, and procedures you will perform in order to understand the entity and its environment and assess risk for the audit of rock for the year ending 31 December 2004.
- You are now nearing the completion of the audit of rock for the year ending 31 December 2004. Draft financial statements have been produced. You have been given the responsibility of performing a review of the audit files before they are passed to the audit manager and the audit partner for their review. You have been asked to concentrate on the proper completion of the audit working papers. Some of the audit working papers have been produced electronically but all of them have been printed out for you.
Describe the features of those working papers that show that they have been properly completed.
QUESTION THREE
iSa 230 audit Documentation (revised) establishes standards and provides guidance regarding documentation in the context of the audit of financial statements.
Required:
- list the purposes of audit working papers. (3 marks)
- The time is now towards the end of the audit, and you are reviewing working papers produced by the audit team. an example of a working paper you have just reviewed is shown below.
Client name Specs4You Co
Working paper payables transaction testing Year End 30 April 2021
prepared by …………………….. reviewed by ……………………
Audit assertion: To make sure that the purchases day book is correct.
Method: Select a sample of 15 purchase orders recorded in the purchase order system. Trace details to the goods received note (Grn), purchase invoice (pi) and the purchase day book (pDb) ensuring that the quantities and prices recorded on the purchase order match those on the Grn, pi and pDb.
Test details: in accordance with audit risk, a sample of purchase orders were selected from a numerically sequenced purchase order system and details traced as stated in the method. Details of items tested can be found on another working paper.
Results: Details of purchase orders were normally correctly recorded through the system. Five purchase orders did not have any associated Grn, pi and were not recorded in the pDb. Further investigation showed that these orders had been cancelled due to a change in spectacle specification. However, this does not appear to be a system weakness as the internal controls do not allow for changes in specification.
Conclusion: purchase orders are completely recorded in the purchase day book.
Required:
Explain why the working paper shown above does not meet the standards normally expected of a working paper.
QUESTION FOUR
International Standard on auditing 300, (Planning an Audit of Financial Statements) states that an auditor must plan the audit.
Explain why it is important to plan an audit.
Audit Planning and Control ANSWERS
QUESTION ONE
- planning for an audit of a new client
in planning the audit of a new client the auditor should carry out the following procedures:
- Carry out a preliminary review of the client. This will involve seeking to obtain a good understanding of the nature of die clients and the client’s business.
- Hold discussion with management to obtain an understanding of the management structure and a general feel of the current trading circumstances of the client and any factors that affect the client accounting and internal control system.
- Communicate with the previous auditor of the client and obtain all the information that is relevant to the audit of this new client. This would include any issues that arose from the previous audits that could have a continuing effect on the audit of this client.
- Seek to obtain a preliminary understanding of the nature of the clients accounting and internal control system. This will assist in determining whether the auditor could rely on the internal control system.
- Consider any accounting standards and legislation that could have an impact on the audit of this new client.
- The audit senior should check the nature and timing of reports and other communications with the client so that the audit plan accommodates such timings e.g. he should consider the dates of the animal general meeting, stock taking, dates when management reports are available.
- The audit senior should also determine the number of audit staff required, experience and special skills required and the timing of the audit visits.
- prepare an audit planning memorandum that summarizes the scope of the work under the engagement and the strategy to be followed to meet the client’s needs.
- how audit planning assists in the conduct of an audit
- it establishes the intended means of achieving the objectives of the audit. The plan lays out the strategy to be followed to ensure that the audit objectives as set out in the letter of engagement arc met.
- it assists in the direction and control of the work. a good plan assists in the proper utilization of assistants and in the coordination of work done by other auditors and specialists.
- it helps to ensure that attention is devoted to important areas of the audit. The planning process identifies potential problematic areas. E.g. areas with weak internal controls where more detailed substantive testing should be carried out.
- It helps to ensure that audit work is completed especially through more efficient use of time and proper allocation of work to audit staff.
- Ensures proper division of work between interim and final audit to avoid repetition of work already done.
- The audit plan takes into consideration times when information needed for audit purposes is available and when the client is not very busy. This encourages co-operation by ensuring less disruption of client’s work.
c. i. Direction and supervision
Direction involves giving audit assistants to whom work is delegated appropriate instructions/ directions. This involves informing assistants of their responsibilities and the objectives of the procedures then are to perform. This also involves informing them of matters such as the nature of the entity’s business and possible accounting and auditing problems that may affect the nature, liming and extent of audit procedures to be performed. Supervision involves;
monitoring the progress of the audit to consider whether assistants have the necessary skills and competence to carry out the assigned work.
Establish whether assistants understand audit instructions.
Ensure work is being carried out in accordance with the overall audit plan and program.
To identify and address any significant accounting and auditing questions raised during the audit.
resolve any differences of professional judgment between personnel.
- review and coordination of work.
This involves a review of audit work performed by each staff member by a person of equal or higher competence to consider whether
The audit work has been performed in accordance with the audit program.
The work performed and results obtained have been adequately documented.
All significant audit matters have been resolved or reflected in audit conclusions.
The objectives of the audit have been achieved.
The conclusions expressed are consistent with the results of the work performed and support the audit opinion.
- Quality controls
Quality controls refer to the various policies and procedures put in place by the auditor to ensure that all audits conducted by the firm meet the quality standards set by the accounting profession and firm’s own quality standards.
AUDIT PLANNING, CONTROL & RECORDING (iSA 300) NOTES
QUESTION TWO
(a) information and procedures: understanding the entity and its environment and risk assessment for rock
- Understanding the entity and risk assessment is likely to involve a review of prior year risk assessments as a starting point and the identification of changes during the year from the information gathered that may alter that assessment.
- risk assessment procedures involve enquiries of management and others, analytical procedures and observation and inspection. members of the engagements team should discuss the susceptibility of the financial statements to material misstatements.
- risk assessment also involves obtaining an understanding of the relevant industry, regulatory and other matters including the financial reporting framework, the nature of the entity, the application of accounting policies, the entity’s objectives and related business risks, and its financial performance. This may involve:
a review of prior year working papers noting any particular issues that arose warranting attention in the current year.
Discussions with the audit senior or manager working on rock in prior years to establish any particular problem areas.
Discussions with rock (and their other advisors such as banks and lawyers) to establish any particular problem areas.
a review of any third party information on the client such as press reports.
A review of management accounts, any financial information provided to the stock exchange or draft financial statements that may be available to establish trends in the business.
a review of any changes in stock exchange requirements.
A review of systems documentation (either generated by Rock or held by the firm) to see if it needs updating.
- Auditors should obtain an understanding of the control environment, the entity’s process for identifying and dealing with business risk, information systems, control activities and monitoring of controls.
- Risks should be assessed at the financial statements level, and at the assertion level, and identify significant risks that require special audit consideration, and risks for which substantive procedures alone do not provide sufficient, appropriate audit evidence.
- Analytical procedures are often used to highlight areas warranting particular audit attention. in the case of rock, they are likely to focus on inventory which is likely to have a significant effect on profit (there may be slow moving or obsolete inventory that needs to be written down) and on property, plant and equipment which (as a manufacturer and distributor) is likely to be a significant item on the balance sheet.
- Risk assessment will facilitate the determination of materiality and tolerable error (calculations are normally based on sales, profit and assets) that will be used in determining the sample sizes and in the evaluation of errors. (b) Types and features of audit working papers Features of audit working papers:
- All working papers (without exception) should show by whom they were prepared and when, and when they were reviewed and/or updated, and by whom, by means of signatures and dates – these may be electronic in the case of electronic working papers.
- Audit planning documentation should include the risk assessment which should be cross referenced to the audit program, and the audit program should be cross referenced to the audit working papers and vice versa.
- Working papers showing the work performed should be cross referenced to the audit program and the lead schedule on that particular section of the audit file, and should describe the nature of the work performed, the evidence obtained, and the conclusions reached.
- Each section of the audit file should have a lead schedule which should be cross referenced back to the relevant working papers.
- Trial balances should be cross referenced back to the relevant section of the audit file, and cross referenced forward to the financial statements.
- The financial statements should be cross referenced to the trial balance.
- Schedules of unadjusted differences should be cross referenced to the sections of the file to which they relate.
- Schedules of review points should all be ‘cleared’ to show that all outstanding matters have been dealt with.
QUESTION THREE
- The purposes of audit working papers include:
- To assist with the planning and performance of the audit.
- To assist in the supervision and review of audit work, and
- To record the audit evidence resulting from the audit work performed to support the auditor’s opinion.
- The audit working paper does not meet the standards normally expected in a working paper because:
- The page reference is unclear making it very difficult to either file the working paper in the audit file or locate the working paper should there be queries on it.
- it is not clear what the client year end date is – the year is missing. The working paper could easily be filed in the wrong year’s audit file.
- There is no signature of the person who prepared the working paper. This means it is unclear who to address queries to regarding the preparation or contents of the working paper.
- There is evidence of a reviewer’s signature. however, given that the reviewer did not query the lack of preparer’s signature or other omissions noted below, the effectiveness of the review must be put in question.
- The test ‘objective’ is vague – it is not clear what ‘correct’ means for example, it would be better to state the objective in terms of assertions such as completeness or accuracy.
- The test objective is also stated as an audit assertion. This is not the case as no audit assertions are actually listed here.
- it is not clear how the number for testing was determined. This means it will be very difficult to determine whether sufficient audit evidence was obtained for this test.
- Stating that details of testing can be found on another working paper is insufficient – time will be wasted finding the working paper, if it has, in fact, been included in the audit working paper file.
- information on the results of the test is unclear – the working paper should clearly state the results of the test without bias. The preparer appears to have used personal judgment which is not appropriate as the opinion should be based on the facts available, not speculation.
- The conclusion provided does not appear to be consistent with the results of the test. Five errors were found therefore it is likely that there are some systems weaknesses.
QUESTION FOUR
importance of audit planning
- according to international Standard on auditing 300 (revised), the auditor should plan the audit work so that the engagement will be performed in an effective manner. Specifically, planning is required for the following reasons:
- To develop a general strategy and detailed approach for the specific nature, timing and extent of the audit work. This will help to ensure that the audit is carried out in an efficient and timely manner.
- So that attention is devoted to the important areas of the audit. planning will also help to identify problem areas so they can be addressed in a timely fashion.
- To determine the amount of work to be carried out and therefore assist in determining the number of staff required to perform the audit work.
- To provide a document as a reference for an initial discussion of the approach to the audit with the company’s audit committee. The plan will also help ensure that audit work is coordinated with client staff: e.g. for production of specific documentation to assist the auditor.
To act as a basis for the production of the audit program.
