MSAF 608

ADVANCED AUDITING AND

Week 3 – Audit Planning and Quality

Dr Rita Amoah Bekoe

Audit Fees

Audit Firm
not Seeking Change in
Re-election Audit Size

Firm

Audit
Rotation
 Tendering and Obtaining Work
• Many large companies invite tenders for their audit
work. The directors then have the opportunity to
compare directly a range of offers
• Generally, a tender will take the form of detailed
written proposals. Factors include:
– The level of expertise each firm has in the industry
– Similar companies audited by each firm (good for
expertise, bad for confidentiality?)
– National and international presence
– The proposed fee
 Tendering and Obtaining Work Cont
• Basically, two main issues are important to consider
when approaching a tender;
• Fees
• Practical issues
 Tendering and Obtaining Work Cont
• FEES
• Three main issues to consider;
– What the job will involve and how long it will take
– Ascertaining which staff will be involved
– The firm's standard charge out rates can be applied and a
fee estimated
 Tendering and Obtaining Work Contd.

• PRACTICAL ISSUES
• The firm will have to consider the practical points arising
from the approach. Common considerations include:
– Does the proposed timetable for the work fit with the current
work plan?
– Does the firm have suitable personnel available?
– Where will the work be performed and is it accessible/cost-
effective?
– Are (non-accounting) specialist skills necessary?
– Will staff need further training to do the work?
– If so, what is the cost of that further training?
 Some Issues to be Included in an Audit
Proposal
• The fees and how it has been calculated
• An assessment of the needs of the prospective client
• An outline of how the firm intends to meet those
needs
• The proposed approach to the engagement
• A brief outline of the firm
• An outline of the key staff involved
 Acceptance
• There are a number of ethical procedures associated with accepting
engagements and these include;
• Procedures before Accepting Nomination
– Ensure that there are no ethical issues which are a barrier to accepting
nomination.
– Ensure that the auditor is professionally qualified to act and that there are no
legal or technical barriers.
– Ensure that the existing resources are adequate in terms of staff, expertise and
time.
– Obtain references for the directors if they are not known personally to the audit
firm.
– Consult the previous auditors to ensure that there are no reasons behind the
vacancy which the new auditors ought to know. This is also a courtesy to the
previous auditors.
 Acceptance Contd.
• Procedures after Accepting Nomination
– Ensure that the outgoing auditors' removal or resignation has
been properly conducted in accordance with the law. The new
auditors should see a valid notice of the outgoing auditors'
resignation, or confirm that the outgoing auditors were
properly removed.
– Ensure that the new auditors' appointment is valid. The new
auditors should obtain a copy of the resolution passed at the
general meeting appointing them as the company's auditors.
– Set up and submit a letter of engagement to the directors of
the company.
 DISCUSSION
You are a partner in an auditing firm that has just successfully
tendered for the audit of Unity Ltd, a company that deals in
children’s clothes with branches across the country. The
tender opportunity was received cold, meaning, the
company and its officers are not known to the firm. The
company has just been incorporated and has not previously
had an audit. You are about ready to accept nomination.
Required
Explain the procedures you and your auditing firm should
carry out prior to accepting this engagement.
 DISCUSSION
Recently your audit firm received a letter from Greg, the financial director of Foil PLc , a medium sized company
requesting that the firm should submit a tender proposal for the appointment as auditor of Foil ltd. Greg is not a
shareholder of Foil ltd. The contents of the letter was as follows:
Dear Partner,
This letter is an invitation to you to make a presentation to the audit committee of which I am the chairman on the
services you have to offer. I am the newly appointed financial director of Foil ltd and I will be removing the existing audit
firm as soon as I have appointed a firm to replace them. I find the existing firm, like most auditors I might add, to be
inefficient, too expensive and simply incapable of doing things my way. So that you don’t waste my committee’s time, I
have the following conditions you should consider before you make a presentation.
In terms of our public interest score we are not required to have an audit but our memorandum of incorporation
somewhat stupidly requires it. as this is not a ‘public interest score’ audit I assume you will not conduct a
comprehensive audit. Therefore the audit committee requires that the annual audit be conducted on a verification of
year end balances only basis. I am not interested in interim audits , engaging experts etc ,risk assessments, internal
control evaluations and all the other so called audit procedures which simply increase audit fee.
At the presentation you must state your fee for the audit. I have explained that we require only a verification of the year-end
balances and I have allowed 10 working days for this . Quote accordingly. If we appoint you, the audit committee will determine
your audit fee.
If you wish to be considered, you have a week to respond to this letter. I have extended the invitation to make a presentation to
several other firms. You will each be given 30mins to sell your products.
Greg.
• You are required to indicate whether your firm should accept the invitation to make a presentation for the audit of Foil ltd
based on the contents of the letter from Greg, the financial director. Your answer must fully explain all the reasons for your
decision.
• AUDIT PLANNING
 Objectives of Auditing
• Per ISA 200, the objectives of the auditor are
• To obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement,
whether due to fraud or error, thereby enabling the auditor
to express an opinion on whether the financial statements
are prepared, in all material respects, in accordance with an
applicable financial reporting framework; and
• To report on the financial statements, and communicate as
required by the ISAs, in accordance with the auditor’s
findings.
 Objectives of Auditing Contd.
• ISA 200 requires the auditor to:
• Comply with all ISAs relevant to the audit
• Comply with relevant ethical requirement
• Plan and perform an audit with professional skepticism
• Exercise professional judgment in planning and performing
an audit
• Obtain sufficient and appropriate audit evidence to allow
him obtain reasonable assurance
 Planning the Audit
• The main objective of the auditor is to plan the audit
so that it will be performed in an effective manner
• The audit plan provides specific procedures to
implement an audit strategy and complete an audit
• An overall audit strategy includes the following;
– Characteristics of the engagement
– Reporting objectives, timing of the audit and nature of
communications
– Significant factors, preliminary engagement activities and
knowledge gained on other engagements
– Nature, timing and extent of resources
 The Importance of Audit Planning
• Adequate planning helps to ensure that appropriate attention is devoted
to important areas of the audit, that potential problems are identified
and resolved on a timely basis.
• Planning the audit engagement ensure that it is properly organized and
managed in order to be performed in an effective and efficient manner.
• Adequate planning also assists in the proper assignment of work to
members of the engagement team.
• It facilitates the direction and supervision of members of the
engagement team.
• It also facilitates the review of their work, and assists, where applicable,
in coordination of work done by other auditors of components and
experts.
 Planning Activities
• In planning the audit, the auditor will have take into
consideration
– The audit risk
– Materiality
– The effect of the client’s computer based system
may have on his audit approach
 Planning Activities
Planning activities involve a number of things such as;
• Understanding the entity and its environment
• Risk assessment including fraud risk
• Internal controls/entity level controls
• Materiality
• Use of experts or specialists
• Communication with those tasked with running the entity
(those tasked with governance)
• Engagement team meetings
• Engagement leader approval of planning activities
 Planning Activities Contd.
Understanding the entity and its environment (ISA 315)
• It is the position of the standard that you cannot do
an audit that addresses the risks of material
misstatement without understanding the client and
the environment.
 Understanding the entity and its
environment
1. Relevant industry, regulatory, and other external factors
including the applicable financial reporting framework.
• Relevant industry factors include industry conditions such as
the competitive environment, supplier and customer
relationships, and technological developments. Examples of
matters the auditor may consider include:
• The market and competition, including demand, capacity, and price
competition.
• Cyclical or seasonal activity.
• Product technology relating to the entity’s products.
• Energy supply and cost
 Understanding the entity and its
environment Contd.
2. The nature of the entity, including:
• its operations;
• its ownership and governance structures;
• the types of investments that the entity is making and plans
to make, including investments in special-purpose entities;
and
• the way that the entity is structured and how it is financed,
• to enable the auditor to understand the classes of
transactions, account balances, and disclosures to be
expected in the financial statements.
 Understanding the entity and its
environment Contd.
3. The entity’s selection and application of accounting
policies, including the reasons for changes thereto.
• The auditor shall evaluate whether the entity’s
accounting policies are appropriate for its business
and consistent with the applicable financial reporting
framework and accounting policies used in the
relevant industry.
 Understanding the entity and its
environment Contd.
4. The entity’s objectives and strategies, and those
related business risks that may result in risks of material
misstatement.
• The entity’s defined objectives and the approaches
by which management intends to achieve those
objectives
• Business risk may arise from change or complexity
such as development of new product or services that
may fail.
 Understanding the entity and its
environment Contd.
5. The measurement and review of the entity’s financial
performance such as
• Key performance indicators (financial and non-financial) and key
ratios, trends and operating statistics.
• Period-on-period financial performance analyses.
• Budgets, forecasts, variance analyses, segment information and
divisional, departmental or other level performance reports.
• Employee performance measures and incentive compensation
policies.
• Comparisons of an entity’s performance with that of competitors
 Risk assessment including fraud
risk
• Analysis of financial information to determine unusual
or material transactions and balances to aid in risk
assessment
• Accounting estimates assessment; eg. Impairment of
loans and non-financial assets, taxes, asset retirement
obligations, net realisable value, etc.
• Related parties
• Laws and regulations
• Litigations and claims
• Going concern
Risk assessment including fraud risk
Contd.
Fraud definition
• Fraud – An intentional act by one or more individuals
among management, those charged with governance,
employees, or third parties, involving the use of
deception to obtain an unjust or illegal advantage (
ISA 240.11).
Fraud could be due to fraudulent financial reporting or
misappropriation of assets.
• Throughout the audit, an auditor must remain
professionally sceptical to the information received in
order not to issue the wrong opinion
 Assessment of Internal Controls
• The committee of sponsoring organization (COSO) has developed the
internal control integrated framework which enable organisations to
effectively and efficiently develop systems of internal control that adapt to
changing business and operating environments, mitigate risks to
acceptable levels and support sound decision making and governance of
the organisation
• COSO defines internal control as a process, effected by an entity’s board
of directors, management and other personnel, designed to provide
reasonable assurance regarding the achievement of objectives relating to
operations, reporting and compliance
• The framework provides three categories of objectives, namely;
Assessment of Internal Controls Contd.
• Operations objectives i.e. effectiveness and efficiency of an
entity’s operations, including operational and financial
performance goals and safeguarding assets against loss
• Reporting objectives i.e. internal and external financial and
non-financial reporting and may encompass reliability,
timeliness, transparency, or other terms as set by regulators,
standard setters or the entity’s policy
• Compliance objectives i.e. adherence to laws and regulations
to which the business is subject
• Internal control consists of five integrated components, namely;
Assessment of Internal Controls Contd.
• Control Environment
• Risk Assessment
• Control Activities
• Information and Communication
• Monitoring Activities
Assessment of Internal Controls Contd.
• Control Environment is the set of standards,
processes ands structures that provide the basis for
carrying out internal control
• Assessment of the integrity and values of the Company
• Effectiveness of board of directors
• Minutes of board of directors
• Appropriate functional structures and reporting lines
• Developing and retaining skilled personnel
• Rigor around performance measures, incentives and rewards
Assessment of Internal Controls Contd.
• Risk assessment involves processes for identifying
and assessing risks to the achievement of objectives
• Assessment of strategic and operational level objectives
• Management’s process for identifying and responding to risks
• Management plans for identifying and responding to changes
in business
• Consideration of fraud risk factors
Assessment of Internal Controls Contd.
• Control activities are the actions established through
policies and procedures that help ensure that
management’s directives to mitigate risks to the
achievement of objectives are carried out
• Assessment of authorizations and approvals, verifications,
reconciliations and business performance reviews
• Segregation of duties
Assessment of Internal Controls Contd.
• Information and communication includes;
• Systems, processes and procedures to support the
achievement of company’s objectives including financial
reporting
• Communication of financial reporting roles within the
company
• Communication with external parties
Assessment of Internal Controls Contd.
• Monitoring Activities is the process that provides
feedback on the effectiveness of the other four
components of internal control
• Internal auditing is often considered a highly effective
monitoring control
• Assessment of ongoing activities and separate evaluations
 Assessment of Materiality
• This is applied in planning and performing the audit in
evaluating the effect of identified misstatement and
uncorrected misstatement on the opinion
• Financial reporting frameworks often discuss the
concept of materiality in the context of the
preparation and presentation of financial statements.
Although financial reporting frameworks may discuss
materiality in different terms, they generally explain
that;
 Assessment of Materiality
• Misstatements, including omissions, are considered to be
material if they, individually or in the aggregate, could
reasonably be expected to influence the economic decisions
of users taken on the basis of the financial statements;
• Judgments about materiality are made in light of
surrounding circumstances, and are affected by the size or
nature of a misstatement, or a combination of both; and
• Judgments about matters that are material to users of the
financial statements are based on a consideration of the
common financial information needs of users as a group.
• The possible effect of misstatements on specific individual
users, whose needs may vary widely, is not considered