Week 4: Accepting an Engagement and Audit Planning

What is the purpose of audit planning?

To ensure the audit is effective and well-organized, complying with ISA 300.

Why is audit planning important?

1. To obtain sufficient, appropriate evidence.

2. To manage audit costs.

3. To avoid misunderstandings with the client.

What are the main phases of audit planning?

1. Client acceptance and initial planning.

2. Understanding the client’s business and industry.

3. Performing preliminary analytical procedures.

4. Setting materiality levels.

What factors are considered in client acceptance?

Due diligence on new clients, communication with the predecessor auditor, and assessment of risks related to client integrity or disputes over accounting principles.

What are the key contents of an engagement letter?

Objectives and scope of the audit, responsibilities of auditor and management, financial reporting framework, expected report form and content, standards, limitations, and fees.

What is the purpose of an engagement letter?

To formalize the agreement between the auditor and client, ensuring clarity on the audit’s scope, responsibilities, and expectations.

What factors influence the development of an audit strategy?

Client characteristics (e.g., locations, subsidiaries, industry specifics), reporting objectives (interim vs. final), significant factors like materiality, previous audit results, and risk assessment.

What is the importance of understanding a client’s business and industry?

To identify industry-specific risks, common risks, and unique accounting requirements relevant to the client.

What are key areas to examine when understanding a client’s business?

Revenue sources, major customers/suppliers, governance, related parties, and board minutes for key decisions.

What are preliminary analytical procedures?

Procedures comparing financial data with prior periods, budgets/forecasts, industry norms, and non-financial data to identify trends and anomalies.

What are common uses of financial comparisons in auditing?

Comparing financial data with prior periods, industry averages, and internal budgets to identify inconsistencies or unusual patterns.

What is materiality in auditing?

Misstatements that could influence the decisions of users of financial statements.

What are the steps to set materiality in auditing?

1. Establish overall materiality based on factors like fraud risk and financial stability.

2. Determine tolerable misstatement for accounts/transactions.

3. Evaluate findings and adjust.

What is tolerable misstatement?

The amount of materiality allocated to individual accounts or transactions, acting as a safeguard to ensure overall materiality coverage.

What is the purpose of audit documentation?

To record audit procedures, evidence, and conclusions, supporting compliance with ISAs, quality control, and external inspections.

What types of documents are included in audit documentation?

Planning documents (strategy, risk analysis), work papers, checklists, correspondence, and client records.

Why are preliminary analytical procedures used?

To identify trends, significant deviations, and areas of risk requiring detailed audit attention.

What is the significance of a common-size financial statement?

It helps auditors identify anomalies by standardizing financial data as a percentage of a base figure (e.g., revenue or total assets).

What are the responsibilities outlined in an engagement letter?

The auditor is responsible for expressing an opinion, while management is responsible for financial statements and providing necessary access.

What is included in the audit strategy?

Scope, timing, and direction of the audit, resource allocation, significant factors, and reporting objectives.