Introduction – Regulatory Framework

Role of Auditing

The objective, services it

Agency Theory
provides and its values

How it is It’s role in enhancing The Audit

regulated Corp.governance Profession

Accounting
Standards Quality Control in
The Auditing
Profession
Independency threats
Ethical Code and procedures to
overcome them

Auditor
Statutory Liability/limit to
regulation Joe Christopher 2016
auditor liability
 The Audit Process – slide 1

Understanding the financial report audit process

Accounting and Management makes

Auditor assesses
Auditing assertions in financial Audit risk
Business risk
Contrasted statements

Auditors
validate assertions

Done by developing Determines the

Audit objectives and level of audit
Undertaking audit tests Evidence
to gather evidence required

Work done by auditor is

Audit tests may be
evidenced via
Substantive or test of controls
Joe Christopher 2016 working paper file
 The Audit Process – slide 2
• Planning, knowledge of the business and evaluating business risk

Client acceptance – On acceptance –

Plan the Audit-determine
procedures prepare
scope and audit program
to be followed engagement letter

strategy for determining scope and developing

audit program is based on -

Obtaining an understanding Understanding internal Assessing risk of

of clients business controls within entity material misstatements

Assesses business risk via swot analysis, PEST and analytical procedures

Prepare responses to assessed risk via audit program

Plan test of controls Plan substantive procedures Completion and Review

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 The Audit Process – slide 3
Assessing specific business risk and materiality

Inherent risk Control Risk

Related Going
risk from
fraud parties concern
Red
Inherent risk
Factors affecting flag
at assertion
inherent risk indicators
level
at report level
Earnings
Effect of I.R
management
on Account
balance

I.R and I.T

Materiality

Quantitative Guidelines

Inverse relationship with audit risk

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 The Audit Process – slide 4

Understanding And Assessing Internal Control

Definition of I.C ASA 315.54

Inherent
Management
Limitations
responsibility for I.C External Auditor
Reasonable evaluates
I.C assurance I.C Activities
Objectives

Management Transaction
Controls Controls

Internal Audit
Characteristics of satisfactory I.C Function aids monitoring
of controls

5 elements of I.C

Monitoring of controls
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 The Audit Process – slide 5

Understanding And Assessing Internal Control

Auditor’s Requirements – ASA 315.

Auditor assesses control risk at two levels

Financial Individual
Report Level assertion level
Audit strategy –to understand
aspects important to audit

Decide on most effective

and efficient audit approach

Substantive Test systems and controls

(tests underlying data) (Less substantive testing)

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 The Audit Process – slide 6
Procedures for understanding the control structure

Five elements of internal control

Understanding Understanding Understanding Understanding Understanding

the control the risk Information the control the processes
Environment Assessment System Activities in place for the
(e.g. attitude Process (methods for (e.g. policies monitoring of I.C
and (identifying recording, and (assessing
actions of and reporting and procedures in effectiveness
Management) reacting to maintaining place to ensure of I.C’s and
business risk). Accountability) day to day taking
Compliance) corrective action).

Procedures for documenting the understanding of internal control

Assessing internal control

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High Less than High
 The Audit process – slide 7

Test of controls

Assess control risk

Control risk is assessed as high when
Control risk is assessed as less than high
there are no controls, or controls are
when controls appear reasonable
inefficient or ineffective

Determines the Status of audit trail

Plan the scope of test of controls
sufficiency and determines method
appropriateness of
evidence to be
collected If control risk is less than high, than
test controls – consider aspects of
If control risk is high, plan to
internal control such as existence,
perform substantive tests
effectiveness and continuity for
only or a combination of test of
which evidence needs to be gathered
controls and substantive tests -
level of testing is to give auditor There is a relationship between
sufficient appropriate evidence test of controls and assertions

(Substantive testing to be
Continued - next slide
Joe Christopher 2016
covered in chapter 10)
 The audit process – slide 8 Test of controls - continued

Test of controls cover all aspects of operations

Revenue Cash Expdt’ure Inventory Purchase Petty Cash

Payroll
system system system system system system

Computer
programs

For each system/cycle consider key functions, transactions,

types of misstatements and types of testing
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 The Audit Process - Substantive tests– slide 1

Substantive test of Together with test

transactions and balances of controls are
undertaken to
gather evidence.
Tests on balances are
test on transactions
done to substantiate the While test of controls
focus on individual
ending balance of an test whether controls
transactions that
account (may comprise of are working
make up the balance
multiple transactions) substantive tests
Testing is associated with auditors assessment of risk determine whether
relevant to assertions about transactions monetary errors
(Income statement accounts) and account balances at period have occurred.
end (Balance Sheet Accounts).
At times a dual
If controls are weak and risk assessed as high substantive purpose test is
testing procedures are directed at the specific assertions. conducted
simultaneously

Objective of substantive testing is to reduce detection risk

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 The audit process – substantive testing - slide 2

Substantive test of transactions and balances – cont.

Applicable to various systems

e.g. CASH

Transactions
Balance (Cash)
(Receipts and Payments)

Assertions, e.g.
Assertions, e.g.
existence, rights and
occurrence
obligations, completeness,
Completeness, etc
valuation, etc

Common procedures, Common procedures,

e.g. examining supp. e.g. testing bank
documents, sequence reconciliations, bank
checks, cut off checks, confirmations, enquiry,
calculation tests, etc Joe Christopher 2016 observation, etc.
 The audit process – substantive testing - slide 3

Substantive test of transactions and balances – cont.

Applicable to various systems

e.g. Accounts receivable

Transactions
Balance (A/c’s receivable)
(Sales and cash receipts)

Assertions, e.g.
Assertions, e.g.
existence, rights and
occurrence
obligations, completeness,
Completeness, etc
valuation, etc

Common procedures, Common procedures,

e.g. vouch to support. e.g. confirmations, cut
doc, cut off tests, off tests, review ages
test prices and costs, etc analysis, subsequent
Joe Christopher 2016 receipt test, etc.
 The audit process - Substantive test of transactions and balances – slide 4.

Applicable to various systems

e.g. Inventory

Transactions
Balance (Inventory)
(Purchase and COGS)

Assertions, e.g.
Assertions, e.g.
existence, rights and
occurrence
obligations, completeness,
Completeness, etc
valuation, etc

Common procedures, Common procedures,

e.g. vouch to support. e.g. attending stock take,
doc, sequence check, cut off tests, independent
cut off tests, etc valuation etc.
Joe Christopher 2016
 The audit process - Substantive test of transactions and balances – slide 5

Applicable to various systems

e.g. A/C’s Payable

Transactions-(Purchases
Balance (A/C’s Payable)
and cash payments)

Assertions, e.g.
Assertions, e.g.
existence, rights and
occurrence
obligations, completeness,
Completeness, etc
valuation, etc

Common procedures, Common procedures,

e.g. vouch to support. e.g. confirmations,
doc, sequence check, vouching to supp. docs.,
cut off tests, etc analytical procedures, etc.
Joe Christopher 2016
 The audit process - Substantive test of transactions and balances – slide 6.

Applicable to various systems

e.g. non current assets

Transactions-(acquisitions, Balance (Net asset value

disposals, depreciation) and acc. Dep.)

Assertions, e.g.
Assertions, e.g.
existence, rights and
occurrence
obligations, completeness,
Completeness, etc
valuation, etc

Common procedures, Common procedures,

e.g. vouch to supp. doc, e.g. recon. of ledger to
assess revaluations, asset register, vouching to
analytical review supp. docs., physical
of dep. charge, etc Joe Christopher 2016 inspection, etc.
 The audit process - Substantive test of transactions and balances – slide 7.

Applicable to various systems

e.g. Investments and Intangibles

Balance ( Investments and

Transactions
Intangibles)

Assertions, e.g.
Not common – existence, rights and
test balances directly obligations, completeness,
valuation, etc

Common procedures,
e.g. recon. of ledger to
invest. register, vouching
to supp. docs., physical
Joe Christopher 2016 inspection, confirmations,
etc.
 The audit process - Substantive test of transactions and balances – slide 8.

Applicable to various systems

e.g. Non Current Liabilities and Equity

Balance ( Long term loans

Transactions
and equity, etc)

Assertions, e.g.
Not common – existence, rights and
test balances directly obligations, completeness,
valuation, etc

Common procedures,
e.g. review minutes,
examine contracts,
agreements, inspect share
Joe Christopher 2016 register, tracing, vouching,
confirmations, etc.
 Summary-Audit completion and review
Audit completion and review procedures

Importance of relevant dates, year end, date of audit report,

signing of directors declaration, distribution of annual report – auditors responsibilities

Subs. Obtaining
Events Events Reps.
After events Assessing
subs. subs. letters
Balance Review- going
to date of to issue of – solicitor’s
Sheet Type 1 and concern
audit financial and
Date- audit Type 2 basis
report report M’gment
procedures events
letter

Events bet. B/S date Reviewing working

and date of Audit Obtaining comfort
letters where papers- fin. Report
Report – auditors and other info.
responsibility relevant
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contained in fin .report
 Summary – The Auditor’s reporting obligations
Audit Objective/Reporting obligations

Types of Audit Opinions

Obligations to
report Structure of
Unqualified Qualified
Audit
Report Qualified
S307/308 of the Unqualified Unqualified
Corp. Act 2001 Opinion opinion
ASA 700 with Adverse
emphasis Disclaimer
Qualitative of matter
True and Fair criteria of Qualified with
View audit emphasis of
report matter

Auditor’s responsibility Communication

for other with s/holders,
exec. management, A.C Recent Changes
information in
Annual Report and electronic presentation
Joe Christopher 2016