ISA 315: Identifying and assessing risks of material misstatement through understanding the entity and its environment, requires auditors to assess the risks of material misstatement of the financial statements whether due to fraud or error, through obtaining an understanding of the entity and its environment, including internal controls, in order to be able to design and perform further audit procedures.
Required:
a) Discuss FOUR (4) procedures that should be carried out to obtain an understanding of an entity in the conduct of a first time audit. (6 marks)
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- Talk to key management and those charged with governance about the entity in order to obtain knowledge about how the business operates so that they know what its main risks and issues are and what has happened to and in the company during the year under review.
- Visit the entity and observe the types of assets it possesses and the systems in place which allow it to function. This will enable them to build up an understanding of the types of issues and balances the auditors would expect to see in the financial statements and the quality of the control systems.
- Obtain any available accounts, for example, draft financial statements and management accounts. Perform analytical procedures on current and past accounts to identify risk areas so that audit work can be focused on the more risky areas.
- Obtain budgets for the year under review and compare them to draft financial statements to identify any risk areas, perhaps where there have been major variances between intentions and actual results and discuss the results with key management.
- Review any internal control systems manuals and assess whether they are capable of preventing or detecting and correcting errors. If so, carry out tests of controls to determine whether they have operated as intended during the year.
(Any 4 points @ 1.5 mark = 6 marks)
b) ISA 300: Planning an audit of financial statements requires auditors to establish the overall strategy for an audit. An auditor is required to plan the audit by developing an audit strategy to guide the plan itself. Audit planning is necessary for a number of reasons of which the foremost is to achieve audit efficiency and effectiveness. Audit planning involves risk assessment procedures, further audit procedures and other audit procedures to obtain sufficient appropriate audit evidence. During the audit, if an auditor concludes that the initial plan requires alteration, then the auditor shall consider revising the audit strategy.
Required:
Explain with justification FOUR (4) key items which should be included in an audit strategy document. (4 marks)
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Audit planning/strategy document
The following matters should be included in an audit strategy document:
- Calculated planning materiality
- Identified risk areas
- Key dates and deadlines, such as directors’ meetings, shareholders’ meetings
- Specific reporting requirements, particularly if more than the statutory audit opinion is required
- Locations of the entity and where auditors will attend and when
- Audit approach planned, including:
o Extent of reliance on controls
o Extent of reliance on internal audit (if any)
o Extent of reliance on experts - Specific client/industry developments relevant to the audit
(Any 4 points for 4 marks)