Audit Planning and Materiality

Flashcards about Audit Planning and Materiality

PSA 210

This PSA involves agreeing on the terms of audit engagements.

PSA 230

This PSA covers audit documentation.

PSA 300

This PSA covers planning an audit of financial statements.

PSA 315

This PSA involves identifying and assessing the risks of material misstatement through understanding the entity and its environment.

PSA 320

This PSA addresses materiality in planning and performing an audit.

PSA 520

This PSA covers analytical procedures.

Acceptance or selection procedures

Evaluating the integrity of the client’s management, investigating the client’s background, and communicating with the predecessor auditor.

Continuance or retention procedures

Ensuring the audit firm’s continuing compliance with acceptance and continuance procedures.

Events that trigger client re-evaluation

Changes in management, directors or ownership, and/or nature of client’s business.

Independence

The CPA firm or auditor shall identify, evaluate and respond to any threat to independence

Professional competence

Determine if the CPA firm or auditor has the necessary skills and competence.

Ability to serve the client properly

The CPA firm or auditor must have the capability, time and resources to perform the audit.

Preconditions for an audit

Management has used acceptable financial reporting framework in the preparation of the financial statements

Engagement letter

An agreement between the CPA firm or auditor and the client for the conduct of the audit.

Importance of an engagement letter

Clarifies the nature of the engagement and the responsibilities of management and the auditor.

Audit Engagement in Recurring Audits

The auditor may decide not to send a new engagement letter each period.

Factors for sending a new engagement letter

Revision of the terms of audit engagement, a recent change of senior management, a significant change in ownership, a significant change in nature or size of the client’s business.

Audit procedures when the client requests for a change in engagement

Consider the appropriateness of reasons for the engagement.

Audit Planning

Establishing the overall audit strategy for the engagement and developing an audit plan, in order to reduce audit risk to an acceptably low level.

Factors that affect the nature and extent of audit planning

The size and complexity of the entity, changes in circumstances that occur during the audit engagement, the auditor’s previous experience with and understanding of the entity.

Planning Activities for the Audit Engagement

Establish an overall audit strategy, develop an audit plan.

Size and complexity of the entity

Audits of small entities requires lesser (or even no) direction, supervision, and review of the work of assistants.

Area of audit

Difficult aspects of audit demand increased direction, supervision, and a more detailed review of work of assistants.

Risks of material misstatement

As the assessed risk of material misstatement increases, a given area of the audit, the auditor ordinarily increases the extent and timeliness of direction, supervision and review.

Expert

A person or firm possessing special skill, knowledge and experience in a particular field or discipline other than accounting and auditing.

Discussing planned audit procedures with client management

Discussion is allowed to facilitate the conduct and management of the audit engagement.

Concept of materiality

Materiality is the amount (threshold or cut-off point) at which judgment of informed decision makers based on the financial statement may be altered

Factors to consider whether a risk is significant

Whether the risk is a risk of fraud.

Planning stage

To identify and assess risks of material misstatements.

Materiality at assertion level

Materiality level for individual or particular class of transactions, account balance, or disclosure where appropriate; this is also known as tolerable misstatement.

Performance materiality

Amount or amounts set by the auditor.

Identify the risks of material misstatement:

Identify risks of material misstatement based on understanding the entity and its environment

Risk of material misstatement (RMM)

The risk that the financial statements contain a material misstatement.

Inherent risk

The susceptibility of an assertion to a misstatement that could be material.

Control risk

The risk that a material misstatement will not be prevented or detected and corrected on a timely basis by the entity’s internal control.

Risk assessment procedures

Inquires of management and others within the entity that is likely to assist the auditor in identifying risk of material misstatement due to fraud or error.

Analytical procedures

Evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data.

In the planning stage

Performed as risk assessment procedures to obtain an understanding of the entity and its environment.

In testing stage

As substantive procedures when their application is more effective and efficient than test of details.

In the overall review or completion stage

As an overall review of the financial statements.