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Part Two
Audit objectives Planning The Audit
Materiality
Structure of Seminar
1 Audit objectives
2 Planning the audit
3 The importance of planning
4 The overall audit strategy and the detailed audit plan
5 Materiality
1 Audit objectives
bull Overall objective of the auditbull Specific audit objectives
- The overall is reasonable
- Truth- Integrity- Ownership- Valuation- Close- Accuracy
Audit objectives
- Disclosure- Classification
2 Planning the audit
bull Steps in planning the audit1 Obtain an understanding of the entity and its
environment2 Make preliminary judgments about materiality
levels3 Consider the audit risk4 Obtain an understanding of the entityrsquos internal
control structure5 Develop preliminary audit strategies for significant
assertions
Planning the auditbull ASA 300 lsquoPlanning the Audit of a Financial Reportrsquondash ldquoThe auditor shall plan the audit so that the
engagement will be performed in an effective mannerrdquobull ASA 315 lsquoUnderstanding the Entity and Its
Environment and Assessing the Risk of Material Misstatementrsquo
ndash ldquothe auditor shall obtain an understanding of the entity and its environment including its internal controls sufficient to identify and assess the risks of material misstatements of the financial statements whether due to fraud or error and sufficient to design and perform further audit proceduresrdquo
Planning the audit
bull Obtaining an understanding of the entity and its environment
bull Why To understand the events transactions practices amp risks that may have a significant effect on the FS
bull What knowledge is neededndash Industry regulatory amp other external factors
bull Industry conditionsbull Regulatory environmentbull Economy-wide factors
Planning the audit
bull What knowledge is needed (cont)ndash Nature of entity including its accounting policiesbull Business operationsbull Investmentsbull Financingbull Financial reportingndash Entityrsquos objectives strategies amp business risksndash Measurement amp review of entityrsquos financial
performance
Audit Planning
bull How is knowledge obtainedndash Review industry and business datandash Review prior yearrsquos working papersndash Review past experience with clientndash Tour clientrsquos operationsbull Interim auditndash Make inquiries of audit committeendash Make inquiries of managementndash Perform analytical procedures
3 The importance of planning
bull An effective and efficient audit relies on proper planning procedures The planning process is covered in general terms by ISA 300 Planning an audit of financial statements which states that the auditor shall plan the audit so that the engagement is performed in an effective manner
bull Audits are planned tobull Help the auditor devote appropriate attention to
important areas of the auditbull 1048696 Help the auditor identify and resolve potential
problems on a timely basis
The importance of planning
Help the auditor properly organise and manage the audit so it is performed in an effective manner
1048696 Assist in the selection of appropriate team members and assignment of work to them
1048696 Facilitate the direction supervision and review of work
1048696 Assist in coordination of work done by auditors of components and experts
bull Audit procedures should be discussed with the clients management staff andor audit committee in order to
The importance of planning
co-ordinate audit work including that of internal audit However all audit procedures remain the
responsibility of the external auditors
A structured approach to planning will includebull Step 1 Ensuring that ethical requirements are met
including independencebull Step 2 Ensuring the terms of the engagement are
understoodbull Step 3 Establishing the overall audit strategy that
sets the scope timing and direction of the audit and
The importance of planning
guides the development of the audit plan
Identify the characteristics of the engagement that define its scope
Ascertain the reporting objectives to plan the timing of the audit and nature of communications required
Consider significant factors in directing the teamrsquos efforts
Consider results of preliminary engagement activities
The importance of planning
Ascertain nature timing and extent of resources necessary to perform the engagement
bull Step 4 Developing an audit plan that includes the nature timing and extent of planned risk assessment procedures and further audit procedures
4 The overall audit strategy and the detailed audit plan
The overall audit
bull The overall audit strategy and audit plan shall be updated and changed as necessary during the course of the audit
bull The matters the auditor may consider in establishing an overall audit strategy are set out in the table below
The overall audit strategy and the detailed audit plan
bull Examples of items to include in the overall audit strategy could be
Industry-specific financial reporting requirements
Number of locations to be visited
Audit clients timetable for reporting to its members
Communication between the audit team and the client
The overall audit strategy and the detailed audit plan
The detailed audit plan
risk assessment procedures
Plans to implement further audit procedures
Plans to implement additional audit procedures
4Audit Engagement Letter
ASA 210 lsquoTerms of Audit EngagementsrsquoPurpose Confirms terms of the engagementEffect Legal contract between auditor and clientSee textbook pp231-3 for an exampleContent Identification of the entity and the financial
report to be audited
Audit Engagement Letterbull Content (cont)
ndash Objectives of the auditndash Reference to professional standards and
statutesndash Auditorrsquos responsibilitiesndash Limitations of the auditndash Managementrsquos responsibilitiesndash Auditor independence requirementsndash Basis of feendash Acceptance by client
5 Materiality
bull ISA 320 Materiality in planning and performing an audit provides guidance to auditors on this area The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit Information is generally consider to be material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements
Materiality
1) Determining materiality and performance materiality when planning the audit
bull Performance materiality is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole Performance materiality also refers to the
Materiality
amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures
bull During planning the auditor must establish materiality for the financial statements as a whole Howeer if thvere are classes of transactions account balances or disclosures for which misstatements less than materiality for the financial statements as a whole couldreasonably
Materiality
be expected to influence the economic decisions of users taken on the basis of the financial statements the auditor must also determine
materiality levels to be applied to thesebull Determining materiality for the financial
statements as a whole involves the exercise of professional judgement (which we covered in section 1 of this chapter) Generally a percentage is applied to a chosen benchmark as a starting point for determining materiality for the
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
Structure of Seminar
1 Audit objectives
2 Planning the audit
3 The importance of planning
4 The overall audit strategy and the detailed audit plan
5 Materiality
1 Audit objectives
bull Overall objective of the auditbull Specific audit objectives
- The overall is reasonable
- Truth- Integrity- Ownership- Valuation- Close- Accuracy
Audit objectives
- Disclosure- Classification
2 Planning the audit
bull Steps in planning the audit1 Obtain an understanding of the entity and its
environment2 Make preliminary judgments about materiality
levels3 Consider the audit risk4 Obtain an understanding of the entityrsquos internal
control structure5 Develop preliminary audit strategies for significant
assertions
Planning the auditbull ASA 300 lsquoPlanning the Audit of a Financial Reportrsquondash ldquoThe auditor shall plan the audit so that the
engagement will be performed in an effective mannerrdquobull ASA 315 lsquoUnderstanding the Entity and Its
Environment and Assessing the Risk of Material Misstatementrsquo
ndash ldquothe auditor shall obtain an understanding of the entity and its environment including its internal controls sufficient to identify and assess the risks of material misstatements of the financial statements whether due to fraud or error and sufficient to design and perform further audit proceduresrdquo
Planning the audit
bull Obtaining an understanding of the entity and its environment
bull Why To understand the events transactions practices amp risks that may have a significant effect on the FS
bull What knowledge is neededndash Industry regulatory amp other external factors
bull Industry conditionsbull Regulatory environmentbull Economy-wide factors
Planning the audit
bull What knowledge is needed (cont)ndash Nature of entity including its accounting policiesbull Business operationsbull Investmentsbull Financingbull Financial reportingndash Entityrsquos objectives strategies amp business risksndash Measurement amp review of entityrsquos financial
performance
Audit Planning
bull How is knowledge obtainedndash Review industry and business datandash Review prior yearrsquos working papersndash Review past experience with clientndash Tour clientrsquos operationsbull Interim auditndash Make inquiries of audit committeendash Make inquiries of managementndash Perform analytical procedures
3 The importance of planning
bull An effective and efficient audit relies on proper planning procedures The planning process is covered in general terms by ISA 300 Planning an audit of financial statements which states that the auditor shall plan the audit so that the engagement is performed in an effective manner
bull Audits are planned tobull Help the auditor devote appropriate attention to
important areas of the auditbull 1048696 Help the auditor identify and resolve potential
problems on a timely basis
The importance of planning
Help the auditor properly organise and manage the audit so it is performed in an effective manner
1048696 Assist in the selection of appropriate team members and assignment of work to them
1048696 Facilitate the direction supervision and review of work
1048696 Assist in coordination of work done by auditors of components and experts
bull Audit procedures should be discussed with the clients management staff andor audit committee in order to
The importance of planning
co-ordinate audit work including that of internal audit However all audit procedures remain the
responsibility of the external auditors
A structured approach to planning will includebull Step 1 Ensuring that ethical requirements are met
including independencebull Step 2 Ensuring the terms of the engagement are
understoodbull Step 3 Establishing the overall audit strategy that
sets the scope timing and direction of the audit and
The importance of planning
guides the development of the audit plan
Identify the characteristics of the engagement that define its scope
Ascertain the reporting objectives to plan the timing of the audit and nature of communications required
Consider significant factors in directing the teamrsquos efforts
Consider results of preliminary engagement activities
The importance of planning
Ascertain nature timing and extent of resources necessary to perform the engagement
bull Step 4 Developing an audit plan that includes the nature timing and extent of planned risk assessment procedures and further audit procedures
4 The overall audit strategy and the detailed audit plan
The overall audit
bull The overall audit strategy and audit plan shall be updated and changed as necessary during the course of the audit
bull The matters the auditor may consider in establishing an overall audit strategy are set out in the table below
The overall audit strategy and the detailed audit plan
bull Examples of items to include in the overall audit strategy could be
Industry-specific financial reporting requirements
Number of locations to be visited
Audit clients timetable for reporting to its members
Communication between the audit team and the client
The overall audit strategy and the detailed audit plan
The detailed audit plan
risk assessment procedures
Plans to implement further audit procedures
Plans to implement additional audit procedures
4Audit Engagement Letter
ASA 210 lsquoTerms of Audit EngagementsrsquoPurpose Confirms terms of the engagementEffect Legal contract between auditor and clientSee textbook pp231-3 for an exampleContent Identification of the entity and the financial
report to be audited
Audit Engagement Letterbull Content (cont)
ndash Objectives of the auditndash Reference to professional standards and
statutesndash Auditorrsquos responsibilitiesndash Limitations of the auditndash Managementrsquos responsibilitiesndash Auditor independence requirementsndash Basis of feendash Acceptance by client
5 Materiality
bull ISA 320 Materiality in planning and performing an audit provides guidance to auditors on this area The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit Information is generally consider to be material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements
Materiality
1) Determining materiality and performance materiality when planning the audit
bull Performance materiality is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole Performance materiality also refers to the
Materiality
amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures
bull During planning the auditor must establish materiality for the financial statements as a whole Howeer if thvere are classes of transactions account balances or disclosures for which misstatements less than materiality for the financial statements as a whole couldreasonably
Materiality
be expected to influence the economic decisions of users taken on the basis of the financial statements the auditor must also determine
materiality levels to be applied to thesebull Determining materiality for the financial
statements as a whole involves the exercise of professional judgement (which we covered in section 1 of this chapter) Generally a percentage is applied to a chosen benchmark as a starting point for determining materiality for the
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
1 Audit objectives
bull Overall objective of the auditbull Specific audit objectives
- The overall is reasonable
- Truth- Integrity- Ownership- Valuation- Close- Accuracy
Audit objectives
- Disclosure- Classification
2 Planning the audit
bull Steps in planning the audit1 Obtain an understanding of the entity and its
environment2 Make preliminary judgments about materiality
levels3 Consider the audit risk4 Obtain an understanding of the entityrsquos internal
control structure5 Develop preliminary audit strategies for significant
assertions
Planning the auditbull ASA 300 lsquoPlanning the Audit of a Financial Reportrsquondash ldquoThe auditor shall plan the audit so that the
engagement will be performed in an effective mannerrdquobull ASA 315 lsquoUnderstanding the Entity and Its
Environment and Assessing the Risk of Material Misstatementrsquo
ndash ldquothe auditor shall obtain an understanding of the entity and its environment including its internal controls sufficient to identify and assess the risks of material misstatements of the financial statements whether due to fraud or error and sufficient to design and perform further audit proceduresrdquo
Planning the audit
bull Obtaining an understanding of the entity and its environment
bull Why To understand the events transactions practices amp risks that may have a significant effect on the FS
bull What knowledge is neededndash Industry regulatory amp other external factors
bull Industry conditionsbull Regulatory environmentbull Economy-wide factors
Planning the audit
bull What knowledge is needed (cont)ndash Nature of entity including its accounting policiesbull Business operationsbull Investmentsbull Financingbull Financial reportingndash Entityrsquos objectives strategies amp business risksndash Measurement amp review of entityrsquos financial
performance
Audit Planning
bull How is knowledge obtainedndash Review industry and business datandash Review prior yearrsquos working papersndash Review past experience with clientndash Tour clientrsquos operationsbull Interim auditndash Make inquiries of audit committeendash Make inquiries of managementndash Perform analytical procedures
3 The importance of planning
bull An effective and efficient audit relies on proper planning procedures The planning process is covered in general terms by ISA 300 Planning an audit of financial statements which states that the auditor shall plan the audit so that the engagement is performed in an effective manner
bull Audits are planned tobull Help the auditor devote appropriate attention to
important areas of the auditbull 1048696 Help the auditor identify and resolve potential
problems on a timely basis
The importance of planning
Help the auditor properly organise and manage the audit so it is performed in an effective manner
1048696 Assist in the selection of appropriate team members and assignment of work to them
1048696 Facilitate the direction supervision and review of work
1048696 Assist in coordination of work done by auditors of components and experts
bull Audit procedures should be discussed with the clients management staff andor audit committee in order to
The importance of planning
co-ordinate audit work including that of internal audit However all audit procedures remain the
responsibility of the external auditors
A structured approach to planning will includebull Step 1 Ensuring that ethical requirements are met
including independencebull Step 2 Ensuring the terms of the engagement are
understoodbull Step 3 Establishing the overall audit strategy that
sets the scope timing and direction of the audit and
The importance of planning
guides the development of the audit plan
Identify the characteristics of the engagement that define its scope
Ascertain the reporting objectives to plan the timing of the audit and nature of communications required
Consider significant factors in directing the teamrsquos efforts
Consider results of preliminary engagement activities
The importance of planning
Ascertain nature timing and extent of resources necessary to perform the engagement
bull Step 4 Developing an audit plan that includes the nature timing and extent of planned risk assessment procedures and further audit procedures
4 The overall audit strategy and the detailed audit plan
The overall audit
bull The overall audit strategy and audit plan shall be updated and changed as necessary during the course of the audit
bull The matters the auditor may consider in establishing an overall audit strategy are set out in the table below
The overall audit strategy and the detailed audit plan
bull Examples of items to include in the overall audit strategy could be
Industry-specific financial reporting requirements
Number of locations to be visited
Audit clients timetable for reporting to its members
Communication between the audit team and the client
The overall audit strategy and the detailed audit plan
The detailed audit plan
risk assessment procedures
Plans to implement further audit procedures
Plans to implement additional audit procedures
4Audit Engagement Letter
ASA 210 lsquoTerms of Audit EngagementsrsquoPurpose Confirms terms of the engagementEffect Legal contract between auditor and clientSee textbook pp231-3 for an exampleContent Identification of the entity and the financial
report to be audited
Audit Engagement Letterbull Content (cont)
ndash Objectives of the auditndash Reference to professional standards and
statutesndash Auditorrsquos responsibilitiesndash Limitations of the auditndash Managementrsquos responsibilitiesndash Auditor independence requirementsndash Basis of feendash Acceptance by client
5 Materiality
bull ISA 320 Materiality in planning and performing an audit provides guidance to auditors on this area The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit Information is generally consider to be material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements
Materiality
1) Determining materiality and performance materiality when planning the audit
bull Performance materiality is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole Performance materiality also refers to the
Materiality
amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures
bull During planning the auditor must establish materiality for the financial statements as a whole Howeer if thvere are classes of transactions account balances or disclosures for which misstatements less than materiality for the financial statements as a whole couldreasonably
Materiality
be expected to influence the economic decisions of users taken on the basis of the financial statements the auditor must also determine
materiality levels to be applied to thesebull Determining materiality for the financial
statements as a whole involves the exercise of professional judgement (which we covered in section 1 of this chapter) Generally a percentage is applied to a chosen benchmark as a starting point for determining materiality for the
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
Audit objectives
- Disclosure- Classification
2 Planning the audit
bull Steps in planning the audit1 Obtain an understanding of the entity and its
environment2 Make preliminary judgments about materiality
levels3 Consider the audit risk4 Obtain an understanding of the entityrsquos internal
control structure5 Develop preliminary audit strategies for significant
assertions
Planning the auditbull ASA 300 lsquoPlanning the Audit of a Financial Reportrsquondash ldquoThe auditor shall plan the audit so that the
engagement will be performed in an effective mannerrdquobull ASA 315 lsquoUnderstanding the Entity and Its
Environment and Assessing the Risk of Material Misstatementrsquo
ndash ldquothe auditor shall obtain an understanding of the entity and its environment including its internal controls sufficient to identify and assess the risks of material misstatements of the financial statements whether due to fraud or error and sufficient to design and perform further audit proceduresrdquo
Planning the audit
bull Obtaining an understanding of the entity and its environment
bull Why To understand the events transactions practices amp risks that may have a significant effect on the FS
bull What knowledge is neededndash Industry regulatory amp other external factors
bull Industry conditionsbull Regulatory environmentbull Economy-wide factors
Planning the audit
bull What knowledge is needed (cont)ndash Nature of entity including its accounting policiesbull Business operationsbull Investmentsbull Financingbull Financial reportingndash Entityrsquos objectives strategies amp business risksndash Measurement amp review of entityrsquos financial
performance
Audit Planning
bull How is knowledge obtainedndash Review industry and business datandash Review prior yearrsquos working papersndash Review past experience with clientndash Tour clientrsquos operationsbull Interim auditndash Make inquiries of audit committeendash Make inquiries of managementndash Perform analytical procedures
3 The importance of planning
bull An effective and efficient audit relies on proper planning procedures The planning process is covered in general terms by ISA 300 Planning an audit of financial statements which states that the auditor shall plan the audit so that the engagement is performed in an effective manner
bull Audits are planned tobull Help the auditor devote appropriate attention to
important areas of the auditbull 1048696 Help the auditor identify and resolve potential
problems on a timely basis
The importance of planning
Help the auditor properly organise and manage the audit so it is performed in an effective manner
1048696 Assist in the selection of appropriate team members and assignment of work to them
1048696 Facilitate the direction supervision and review of work
1048696 Assist in coordination of work done by auditors of components and experts
bull Audit procedures should be discussed with the clients management staff andor audit committee in order to
The importance of planning
co-ordinate audit work including that of internal audit However all audit procedures remain the
responsibility of the external auditors
A structured approach to planning will includebull Step 1 Ensuring that ethical requirements are met
including independencebull Step 2 Ensuring the terms of the engagement are
understoodbull Step 3 Establishing the overall audit strategy that
sets the scope timing and direction of the audit and
The importance of planning
guides the development of the audit plan
Identify the characteristics of the engagement that define its scope
Ascertain the reporting objectives to plan the timing of the audit and nature of communications required
Consider significant factors in directing the teamrsquos efforts
Consider results of preliminary engagement activities
The importance of planning
Ascertain nature timing and extent of resources necessary to perform the engagement
bull Step 4 Developing an audit plan that includes the nature timing and extent of planned risk assessment procedures and further audit procedures
4 The overall audit strategy and the detailed audit plan
The overall audit
bull The overall audit strategy and audit plan shall be updated and changed as necessary during the course of the audit
bull The matters the auditor may consider in establishing an overall audit strategy are set out in the table below
The overall audit strategy and the detailed audit plan
bull Examples of items to include in the overall audit strategy could be
Industry-specific financial reporting requirements
Number of locations to be visited
Audit clients timetable for reporting to its members
Communication between the audit team and the client
The overall audit strategy and the detailed audit plan
The detailed audit plan
risk assessment procedures
Plans to implement further audit procedures
Plans to implement additional audit procedures
4Audit Engagement Letter
ASA 210 lsquoTerms of Audit EngagementsrsquoPurpose Confirms terms of the engagementEffect Legal contract between auditor and clientSee textbook pp231-3 for an exampleContent Identification of the entity and the financial
report to be audited
Audit Engagement Letterbull Content (cont)
ndash Objectives of the auditndash Reference to professional standards and
statutesndash Auditorrsquos responsibilitiesndash Limitations of the auditndash Managementrsquos responsibilitiesndash Auditor independence requirementsndash Basis of feendash Acceptance by client
5 Materiality
bull ISA 320 Materiality in planning and performing an audit provides guidance to auditors on this area The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit Information is generally consider to be material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements
Materiality
1) Determining materiality and performance materiality when planning the audit
bull Performance materiality is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole Performance materiality also refers to the
Materiality
amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures
bull During planning the auditor must establish materiality for the financial statements as a whole Howeer if thvere are classes of transactions account balances or disclosures for which misstatements less than materiality for the financial statements as a whole couldreasonably
Materiality
be expected to influence the economic decisions of users taken on the basis of the financial statements the auditor must also determine
materiality levels to be applied to thesebull Determining materiality for the financial
statements as a whole involves the exercise of professional judgement (which we covered in section 1 of this chapter) Generally a percentage is applied to a chosen benchmark as a starting point for determining materiality for the
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
2 Planning the audit
bull Steps in planning the audit1 Obtain an understanding of the entity and its
environment2 Make preliminary judgments about materiality
levels3 Consider the audit risk4 Obtain an understanding of the entityrsquos internal
control structure5 Develop preliminary audit strategies for significant
assertions
Planning the auditbull ASA 300 lsquoPlanning the Audit of a Financial Reportrsquondash ldquoThe auditor shall plan the audit so that the
engagement will be performed in an effective mannerrdquobull ASA 315 lsquoUnderstanding the Entity and Its
Environment and Assessing the Risk of Material Misstatementrsquo
ndash ldquothe auditor shall obtain an understanding of the entity and its environment including its internal controls sufficient to identify and assess the risks of material misstatements of the financial statements whether due to fraud or error and sufficient to design and perform further audit proceduresrdquo
Planning the audit
bull Obtaining an understanding of the entity and its environment
bull Why To understand the events transactions practices amp risks that may have a significant effect on the FS
bull What knowledge is neededndash Industry regulatory amp other external factors
bull Industry conditionsbull Regulatory environmentbull Economy-wide factors
Planning the audit
bull What knowledge is needed (cont)ndash Nature of entity including its accounting policiesbull Business operationsbull Investmentsbull Financingbull Financial reportingndash Entityrsquos objectives strategies amp business risksndash Measurement amp review of entityrsquos financial
performance
Audit Planning
bull How is knowledge obtainedndash Review industry and business datandash Review prior yearrsquos working papersndash Review past experience with clientndash Tour clientrsquos operationsbull Interim auditndash Make inquiries of audit committeendash Make inquiries of managementndash Perform analytical procedures
3 The importance of planning
bull An effective and efficient audit relies on proper planning procedures The planning process is covered in general terms by ISA 300 Planning an audit of financial statements which states that the auditor shall plan the audit so that the engagement is performed in an effective manner
bull Audits are planned tobull Help the auditor devote appropriate attention to
important areas of the auditbull 1048696 Help the auditor identify and resolve potential
problems on a timely basis
The importance of planning
Help the auditor properly organise and manage the audit so it is performed in an effective manner
1048696 Assist in the selection of appropriate team members and assignment of work to them
1048696 Facilitate the direction supervision and review of work
1048696 Assist in coordination of work done by auditors of components and experts
bull Audit procedures should be discussed with the clients management staff andor audit committee in order to
The importance of planning
co-ordinate audit work including that of internal audit However all audit procedures remain the
responsibility of the external auditors
A structured approach to planning will includebull Step 1 Ensuring that ethical requirements are met
including independencebull Step 2 Ensuring the terms of the engagement are
understoodbull Step 3 Establishing the overall audit strategy that
sets the scope timing and direction of the audit and
The importance of planning
guides the development of the audit plan
Identify the characteristics of the engagement that define its scope
Ascertain the reporting objectives to plan the timing of the audit and nature of communications required
Consider significant factors in directing the teamrsquos efforts
Consider results of preliminary engagement activities
The importance of planning
Ascertain nature timing and extent of resources necessary to perform the engagement
bull Step 4 Developing an audit plan that includes the nature timing and extent of planned risk assessment procedures and further audit procedures
4 The overall audit strategy and the detailed audit plan
The overall audit
bull The overall audit strategy and audit plan shall be updated and changed as necessary during the course of the audit
bull The matters the auditor may consider in establishing an overall audit strategy are set out in the table below
The overall audit strategy and the detailed audit plan
bull Examples of items to include in the overall audit strategy could be
Industry-specific financial reporting requirements
Number of locations to be visited
Audit clients timetable for reporting to its members
Communication between the audit team and the client
The overall audit strategy and the detailed audit plan
The detailed audit plan
risk assessment procedures
Plans to implement further audit procedures
Plans to implement additional audit procedures
4Audit Engagement Letter
ASA 210 lsquoTerms of Audit EngagementsrsquoPurpose Confirms terms of the engagementEffect Legal contract between auditor and clientSee textbook pp231-3 for an exampleContent Identification of the entity and the financial
report to be audited
Audit Engagement Letterbull Content (cont)
ndash Objectives of the auditndash Reference to professional standards and
statutesndash Auditorrsquos responsibilitiesndash Limitations of the auditndash Managementrsquos responsibilitiesndash Auditor independence requirementsndash Basis of feendash Acceptance by client
5 Materiality
bull ISA 320 Materiality in planning and performing an audit provides guidance to auditors on this area The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit Information is generally consider to be material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements
Materiality
1) Determining materiality and performance materiality when planning the audit
bull Performance materiality is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole Performance materiality also refers to the
Materiality
amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures
bull During planning the auditor must establish materiality for the financial statements as a whole Howeer if thvere are classes of transactions account balances or disclosures for which misstatements less than materiality for the financial statements as a whole couldreasonably
Materiality
be expected to influence the economic decisions of users taken on the basis of the financial statements the auditor must also determine
materiality levels to be applied to thesebull Determining materiality for the financial
statements as a whole involves the exercise of professional judgement (which we covered in section 1 of this chapter) Generally a percentage is applied to a chosen benchmark as a starting point for determining materiality for the
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
Planning the auditbull ASA 300 lsquoPlanning the Audit of a Financial Reportrsquondash ldquoThe auditor shall plan the audit so that the
engagement will be performed in an effective mannerrdquobull ASA 315 lsquoUnderstanding the Entity and Its
Environment and Assessing the Risk of Material Misstatementrsquo
ndash ldquothe auditor shall obtain an understanding of the entity and its environment including its internal controls sufficient to identify and assess the risks of material misstatements of the financial statements whether due to fraud or error and sufficient to design and perform further audit proceduresrdquo
Planning the audit
bull Obtaining an understanding of the entity and its environment
bull Why To understand the events transactions practices amp risks that may have a significant effect on the FS
bull What knowledge is neededndash Industry regulatory amp other external factors
bull Industry conditionsbull Regulatory environmentbull Economy-wide factors
Planning the audit
bull What knowledge is needed (cont)ndash Nature of entity including its accounting policiesbull Business operationsbull Investmentsbull Financingbull Financial reportingndash Entityrsquos objectives strategies amp business risksndash Measurement amp review of entityrsquos financial
performance
Audit Planning
bull How is knowledge obtainedndash Review industry and business datandash Review prior yearrsquos working papersndash Review past experience with clientndash Tour clientrsquos operationsbull Interim auditndash Make inquiries of audit committeendash Make inquiries of managementndash Perform analytical procedures
3 The importance of planning
bull An effective and efficient audit relies on proper planning procedures The planning process is covered in general terms by ISA 300 Planning an audit of financial statements which states that the auditor shall plan the audit so that the engagement is performed in an effective manner
bull Audits are planned tobull Help the auditor devote appropriate attention to
important areas of the auditbull 1048696 Help the auditor identify and resolve potential
problems on a timely basis
The importance of planning
Help the auditor properly organise and manage the audit so it is performed in an effective manner
1048696 Assist in the selection of appropriate team members and assignment of work to them
1048696 Facilitate the direction supervision and review of work
1048696 Assist in coordination of work done by auditors of components and experts
bull Audit procedures should be discussed with the clients management staff andor audit committee in order to
The importance of planning
co-ordinate audit work including that of internal audit However all audit procedures remain the
responsibility of the external auditors
A structured approach to planning will includebull Step 1 Ensuring that ethical requirements are met
including independencebull Step 2 Ensuring the terms of the engagement are
understoodbull Step 3 Establishing the overall audit strategy that
sets the scope timing and direction of the audit and
The importance of planning
guides the development of the audit plan
Identify the characteristics of the engagement that define its scope
Ascertain the reporting objectives to plan the timing of the audit and nature of communications required
Consider significant factors in directing the teamrsquos efforts
Consider results of preliminary engagement activities
The importance of planning
Ascertain nature timing and extent of resources necessary to perform the engagement
bull Step 4 Developing an audit plan that includes the nature timing and extent of planned risk assessment procedures and further audit procedures
4 The overall audit strategy and the detailed audit plan
The overall audit
bull The overall audit strategy and audit plan shall be updated and changed as necessary during the course of the audit
bull The matters the auditor may consider in establishing an overall audit strategy are set out in the table below
The overall audit strategy and the detailed audit plan
bull Examples of items to include in the overall audit strategy could be
Industry-specific financial reporting requirements
Number of locations to be visited
Audit clients timetable for reporting to its members
Communication between the audit team and the client
The overall audit strategy and the detailed audit plan
The detailed audit plan
risk assessment procedures
Plans to implement further audit procedures
Plans to implement additional audit procedures
4Audit Engagement Letter
ASA 210 lsquoTerms of Audit EngagementsrsquoPurpose Confirms terms of the engagementEffect Legal contract between auditor and clientSee textbook pp231-3 for an exampleContent Identification of the entity and the financial
report to be audited
Audit Engagement Letterbull Content (cont)
ndash Objectives of the auditndash Reference to professional standards and
statutesndash Auditorrsquos responsibilitiesndash Limitations of the auditndash Managementrsquos responsibilitiesndash Auditor independence requirementsndash Basis of feendash Acceptance by client
5 Materiality
bull ISA 320 Materiality in planning and performing an audit provides guidance to auditors on this area The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit Information is generally consider to be material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements
Materiality
1) Determining materiality and performance materiality when planning the audit
bull Performance materiality is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole Performance materiality also refers to the
Materiality
amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures
bull During planning the auditor must establish materiality for the financial statements as a whole Howeer if thvere are classes of transactions account balances or disclosures for which misstatements less than materiality for the financial statements as a whole couldreasonably
Materiality
be expected to influence the economic decisions of users taken on the basis of the financial statements the auditor must also determine
materiality levels to be applied to thesebull Determining materiality for the financial
statements as a whole involves the exercise of professional judgement (which we covered in section 1 of this chapter) Generally a percentage is applied to a chosen benchmark as a starting point for determining materiality for the
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
Planning the audit
bull Obtaining an understanding of the entity and its environment
bull Why To understand the events transactions practices amp risks that may have a significant effect on the FS
bull What knowledge is neededndash Industry regulatory amp other external factors
bull Industry conditionsbull Regulatory environmentbull Economy-wide factors
Planning the audit
bull What knowledge is needed (cont)ndash Nature of entity including its accounting policiesbull Business operationsbull Investmentsbull Financingbull Financial reportingndash Entityrsquos objectives strategies amp business risksndash Measurement amp review of entityrsquos financial
performance
Audit Planning
bull How is knowledge obtainedndash Review industry and business datandash Review prior yearrsquos working papersndash Review past experience with clientndash Tour clientrsquos operationsbull Interim auditndash Make inquiries of audit committeendash Make inquiries of managementndash Perform analytical procedures
3 The importance of planning
bull An effective and efficient audit relies on proper planning procedures The planning process is covered in general terms by ISA 300 Planning an audit of financial statements which states that the auditor shall plan the audit so that the engagement is performed in an effective manner
bull Audits are planned tobull Help the auditor devote appropriate attention to
important areas of the auditbull 1048696 Help the auditor identify and resolve potential
problems on a timely basis
The importance of planning
Help the auditor properly organise and manage the audit so it is performed in an effective manner
1048696 Assist in the selection of appropriate team members and assignment of work to them
1048696 Facilitate the direction supervision and review of work
1048696 Assist in coordination of work done by auditors of components and experts
bull Audit procedures should be discussed with the clients management staff andor audit committee in order to
The importance of planning
co-ordinate audit work including that of internal audit However all audit procedures remain the
responsibility of the external auditors
A structured approach to planning will includebull Step 1 Ensuring that ethical requirements are met
including independencebull Step 2 Ensuring the terms of the engagement are
understoodbull Step 3 Establishing the overall audit strategy that
sets the scope timing and direction of the audit and
The importance of planning
guides the development of the audit plan
Identify the characteristics of the engagement that define its scope
Ascertain the reporting objectives to plan the timing of the audit and nature of communications required
Consider significant factors in directing the teamrsquos efforts
Consider results of preliminary engagement activities
The importance of planning
Ascertain nature timing and extent of resources necessary to perform the engagement
bull Step 4 Developing an audit plan that includes the nature timing and extent of planned risk assessment procedures and further audit procedures
4 The overall audit strategy and the detailed audit plan
The overall audit
bull The overall audit strategy and audit plan shall be updated and changed as necessary during the course of the audit
bull The matters the auditor may consider in establishing an overall audit strategy are set out in the table below
The overall audit strategy and the detailed audit plan
bull Examples of items to include in the overall audit strategy could be
Industry-specific financial reporting requirements
Number of locations to be visited
Audit clients timetable for reporting to its members
Communication between the audit team and the client
The overall audit strategy and the detailed audit plan
The detailed audit plan
risk assessment procedures
Plans to implement further audit procedures
Plans to implement additional audit procedures
4Audit Engagement Letter
ASA 210 lsquoTerms of Audit EngagementsrsquoPurpose Confirms terms of the engagementEffect Legal contract between auditor and clientSee textbook pp231-3 for an exampleContent Identification of the entity and the financial
report to be audited
Audit Engagement Letterbull Content (cont)
ndash Objectives of the auditndash Reference to professional standards and
statutesndash Auditorrsquos responsibilitiesndash Limitations of the auditndash Managementrsquos responsibilitiesndash Auditor independence requirementsndash Basis of feendash Acceptance by client
5 Materiality
bull ISA 320 Materiality in planning and performing an audit provides guidance to auditors on this area The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit Information is generally consider to be material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements
Materiality
1) Determining materiality and performance materiality when planning the audit
bull Performance materiality is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole Performance materiality also refers to the
Materiality
amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures
bull During planning the auditor must establish materiality for the financial statements as a whole Howeer if thvere are classes of transactions account balances or disclosures for which misstatements less than materiality for the financial statements as a whole couldreasonably
Materiality
be expected to influence the economic decisions of users taken on the basis of the financial statements the auditor must also determine
materiality levels to be applied to thesebull Determining materiality for the financial
statements as a whole involves the exercise of professional judgement (which we covered in section 1 of this chapter) Generally a percentage is applied to a chosen benchmark as a starting point for determining materiality for the
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
Planning the audit
bull What knowledge is needed (cont)ndash Nature of entity including its accounting policiesbull Business operationsbull Investmentsbull Financingbull Financial reportingndash Entityrsquos objectives strategies amp business risksndash Measurement amp review of entityrsquos financial
performance
Audit Planning
bull How is knowledge obtainedndash Review industry and business datandash Review prior yearrsquos working papersndash Review past experience with clientndash Tour clientrsquos operationsbull Interim auditndash Make inquiries of audit committeendash Make inquiries of managementndash Perform analytical procedures
3 The importance of planning
bull An effective and efficient audit relies on proper planning procedures The planning process is covered in general terms by ISA 300 Planning an audit of financial statements which states that the auditor shall plan the audit so that the engagement is performed in an effective manner
bull Audits are planned tobull Help the auditor devote appropriate attention to
important areas of the auditbull 1048696 Help the auditor identify and resolve potential
problems on a timely basis
The importance of planning
Help the auditor properly organise and manage the audit so it is performed in an effective manner
1048696 Assist in the selection of appropriate team members and assignment of work to them
1048696 Facilitate the direction supervision and review of work
1048696 Assist in coordination of work done by auditors of components and experts
bull Audit procedures should be discussed with the clients management staff andor audit committee in order to
The importance of planning
co-ordinate audit work including that of internal audit However all audit procedures remain the
responsibility of the external auditors
A structured approach to planning will includebull Step 1 Ensuring that ethical requirements are met
including independencebull Step 2 Ensuring the terms of the engagement are
understoodbull Step 3 Establishing the overall audit strategy that
sets the scope timing and direction of the audit and
The importance of planning
guides the development of the audit plan
Identify the characteristics of the engagement that define its scope
Ascertain the reporting objectives to plan the timing of the audit and nature of communications required
Consider significant factors in directing the teamrsquos efforts
Consider results of preliminary engagement activities
The importance of planning
Ascertain nature timing and extent of resources necessary to perform the engagement
bull Step 4 Developing an audit plan that includes the nature timing and extent of planned risk assessment procedures and further audit procedures
4 The overall audit strategy and the detailed audit plan
The overall audit
bull The overall audit strategy and audit plan shall be updated and changed as necessary during the course of the audit
bull The matters the auditor may consider in establishing an overall audit strategy are set out in the table below
The overall audit strategy and the detailed audit plan
bull Examples of items to include in the overall audit strategy could be
Industry-specific financial reporting requirements
Number of locations to be visited
Audit clients timetable for reporting to its members
Communication between the audit team and the client
The overall audit strategy and the detailed audit plan
The detailed audit plan
risk assessment procedures
Plans to implement further audit procedures
Plans to implement additional audit procedures
4Audit Engagement Letter
ASA 210 lsquoTerms of Audit EngagementsrsquoPurpose Confirms terms of the engagementEffect Legal contract between auditor and clientSee textbook pp231-3 for an exampleContent Identification of the entity and the financial
report to be audited
Audit Engagement Letterbull Content (cont)
ndash Objectives of the auditndash Reference to professional standards and
statutesndash Auditorrsquos responsibilitiesndash Limitations of the auditndash Managementrsquos responsibilitiesndash Auditor independence requirementsndash Basis of feendash Acceptance by client
5 Materiality
bull ISA 320 Materiality in planning and performing an audit provides guidance to auditors on this area The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit Information is generally consider to be material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements
Materiality
1) Determining materiality and performance materiality when planning the audit
bull Performance materiality is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole Performance materiality also refers to the
Materiality
amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures
bull During planning the auditor must establish materiality for the financial statements as a whole Howeer if thvere are classes of transactions account balances or disclosures for which misstatements less than materiality for the financial statements as a whole couldreasonably
Materiality
be expected to influence the economic decisions of users taken on the basis of the financial statements the auditor must also determine
materiality levels to be applied to thesebull Determining materiality for the financial
statements as a whole involves the exercise of professional judgement (which we covered in section 1 of this chapter) Generally a percentage is applied to a chosen benchmark as a starting point for determining materiality for the
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
Audit Planning
bull How is knowledge obtainedndash Review industry and business datandash Review prior yearrsquos working papersndash Review past experience with clientndash Tour clientrsquos operationsbull Interim auditndash Make inquiries of audit committeendash Make inquiries of managementndash Perform analytical procedures
3 The importance of planning
bull An effective and efficient audit relies on proper planning procedures The planning process is covered in general terms by ISA 300 Planning an audit of financial statements which states that the auditor shall plan the audit so that the engagement is performed in an effective manner
bull Audits are planned tobull Help the auditor devote appropriate attention to
important areas of the auditbull 1048696 Help the auditor identify and resolve potential
problems on a timely basis
The importance of planning
Help the auditor properly organise and manage the audit so it is performed in an effective manner
1048696 Assist in the selection of appropriate team members and assignment of work to them
1048696 Facilitate the direction supervision and review of work
1048696 Assist in coordination of work done by auditors of components and experts
bull Audit procedures should be discussed with the clients management staff andor audit committee in order to
The importance of planning
co-ordinate audit work including that of internal audit However all audit procedures remain the
responsibility of the external auditors
A structured approach to planning will includebull Step 1 Ensuring that ethical requirements are met
including independencebull Step 2 Ensuring the terms of the engagement are
understoodbull Step 3 Establishing the overall audit strategy that
sets the scope timing and direction of the audit and
The importance of planning
guides the development of the audit plan
Identify the characteristics of the engagement that define its scope
Ascertain the reporting objectives to plan the timing of the audit and nature of communications required
Consider significant factors in directing the teamrsquos efforts
Consider results of preliminary engagement activities
The importance of planning
Ascertain nature timing and extent of resources necessary to perform the engagement
bull Step 4 Developing an audit plan that includes the nature timing and extent of planned risk assessment procedures and further audit procedures
4 The overall audit strategy and the detailed audit plan
The overall audit
bull The overall audit strategy and audit plan shall be updated and changed as necessary during the course of the audit
bull The matters the auditor may consider in establishing an overall audit strategy are set out in the table below
The overall audit strategy and the detailed audit plan
bull Examples of items to include in the overall audit strategy could be
Industry-specific financial reporting requirements
Number of locations to be visited
Audit clients timetable for reporting to its members
Communication between the audit team and the client
The overall audit strategy and the detailed audit plan
The detailed audit plan
risk assessment procedures
Plans to implement further audit procedures
Plans to implement additional audit procedures
4Audit Engagement Letter
ASA 210 lsquoTerms of Audit EngagementsrsquoPurpose Confirms terms of the engagementEffect Legal contract between auditor and clientSee textbook pp231-3 for an exampleContent Identification of the entity and the financial
report to be audited
Audit Engagement Letterbull Content (cont)
ndash Objectives of the auditndash Reference to professional standards and
statutesndash Auditorrsquos responsibilitiesndash Limitations of the auditndash Managementrsquos responsibilitiesndash Auditor independence requirementsndash Basis of feendash Acceptance by client
5 Materiality
bull ISA 320 Materiality in planning and performing an audit provides guidance to auditors on this area The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit Information is generally consider to be material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements
Materiality
1) Determining materiality and performance materiality when planning the audit
bull Performance materiality is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole Performance materiality also refers to the
Materiality
amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures
bull During planning the auditor must establish materiality for the financial statements as a whole Howeer if thvere are classes of transactions account balances or disclosures for which misstatements less than materiality for the financial statements as a whole couldreasonably
Materiality
be expected to influence the economic decisions of users taken on the basis of the financial statements the auditor must also determine
materiality levels to be applied to thesebull Determining materiality for the financial
statements as a whole involves the exercise of professional judgement (which we covered in section 1 of this chapter) Generally a percentage is applied to a chosen benchmark as a starting point for determining materiality for the
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
3 The importance of planning
bull An effective and efficient audit relies on proper planning procedures The planning process is covered in general terms by ISA 300 Planning an audit of financial statements which states that the auditor shall plan the audit so that the engagement is performed in an effective manner
bull Audits are planned tobull Help the auditor devote appropriate attention to
important areas of the auditbull 1048696 Help the auditor identify and resolve potential
problems on a timely basis
The importance of planning
Help the auditor properly organise and manage the audit so it is performed in an effective manner
1048696 Assist in the selection of appropriate team members and assignment of work to them
1048696 Facilitate the direction supervision and review of work
1048696 Assist in coordination of work done by auditors of components and experts
bull Audit procedures should be discussed with the clients management staff andor audit committee in order to
The importance of planning
co-ordinate audit work including that of internal audit However all audit procedures remain the
responsibility of the external auditors
A structured approach to planning will includebull Step 1 Ensuring that ethical requirements are met
including independencebull Step 2 Ensuring the terms of the engagement are
understoodbull Step 3 Establishing the overall audit strategy that
sets the scope timing and direction of the audit and
The importance of planning
guides the development of the audit plan
Identify the characteristics of the engagement that define its scope
Ascertain the reporting objectives to plan the timing of the audit and nature of communications required
Consider significant factors in directing the teamrsquos efforts
Consider results of preliminary engagement activities
The importance of planning
Ascertain nature timing and extent of resources necessary to perform the engagement
bull Step 4 Developing an audit plan that includes the nature timing and extent of planned risk assessment procedures and further audit procedures
4 The overall audit strategy and the detailed audit plan
The overall audit
bull The overall audit strategy and audit plan shall be updated and changed as necessary during the course of the audit
bull The matters the auditor may consider in establishing an overall audit strategy are set out in the table below
The overall audit strategy and the detailed audit plan
bull Examples of items to include in the overall audit strategy could be
Industry-specific financial reporting requirements
Number of locations to be visited
Audit clients timetable for reporting to its members
Communication between the audit team and the client
The overall audit strategy and the detailed audit plan
The detailed audit plan
risk assessment procedures
Plans to implement further audit procedures
Plans to implement additional audit procedures
4Audit Engagement Letter
ASA 210 lsquoTerms of Audit EngagementsrsquoPurpose Confirms terms of the engagementEffect Legal contract between auditor and clientSee textbook pp231-3 for an exampleContent Identification of the entity and the financial
report to be audited
Audit Engagement Letterbull Content (cont)
ndash Objectives of the auditndash Reference to professional standards and
statutesndash Auditorrsquos responsibilitiesndash Limitations of the auditndash Managementrsquos responsibilitiesndash Auditor independence requirementsndash Basis of feendash Acceptance by client
5 Materiality
bull ISA 320 Materiality in planning and performing an audit provides guidance to auditors on this area The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit Information is generally consider to be material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements
Materiality
1) Determining materiality and performance materiality when planning the audit
bull Performance materiality is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole Performance materiality also refers to the
Materiality
amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures
bull During planning the auditor must establish materiality for the financial statements as a whole Howeer if thvere are classes of transactions account balances or disclosures for which misstatements less than materiality for the financial statements as a whole couldreasonably
Materiality
be expected to influence the economic decisions of users taken on the basis of the financial statements the auditor must also determine
materiality levels to be applied to thesebull Determining materiality for the financial
statements as a whole involves the exercise of professional judgement (which we covered in section 1 of this chapter) Generally a percentage is applied to a chosen benchmark as a starting point for determining materiality for the
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
The importance of planning
Help the auditor properly organise and manage the audit so it is performed in an effective manner
1048696 Assist in the selection of appropriate team members and assignment of work to them
1048696 Facilitate the direction supervision and review of work
1048696 Assist in coordination of work done by auditors of components and experts
bull Audit procedures should be discussed with the clients management staff andor audit committee in order to
The importance of planning
co-ordinate audit work including that of internal audit However all audit procedures remain the
responsibility of the external auditors
A structured approach to planning will includebull Step 1 Ensuring that ethical requirements are met
including independencebull Step 2 Ensuring the terms of the engagement are
understoodbull Step 3 Establishing the overall audit strategy that
sets the scope timing and direction of the audit and
The importance of planning
guides the development of the audit plan
Identify the characteristics of the engagement that define its scope
Ascertain the reporting objectives to plan the timing of the audit and nature of communications required
Consider significant factors in directing the teamrsquos efforts
Consider results of preliminary engagement activities
The importance of planning
Ascertain nature timing and extent of resources necessary to perform the engagement
bull Step 4 Developing an audit plan that includes the nature timing and extent of planned risk assessment procedures and further audit procedures
4 The overall audit strategy and the detailed audit plan
The overall audit
bull The overall audit strategy and audit plan shall be updated and changed as necessary during the course of the audit
bull The matters the auditor may consider in establishing an overall audit strategy are set out in the table below
The overall audit strategy and the detailed audit plan
bull Examples of items to include in the overall audit strategy could be
Industry-specific financial reporting requirements
Number of locations to be visited
Audit clients timetable for reporting to its members
Communication between the audit team and the client
The overall audit strategy and the detailed audit plan
The detailed audit plan
risk assessment procedures
Plans to implement further audit procedures
Plans to implement additional audit procedures
4Audit Engagement Letter
ASA 210 lsquoTerms of Audit EngagementsrsquoPurpose Confirms terms of the engagementEffect Legal contract between auditor and clientSee textbook pp231-3 for an exampleContent Identification of the entity and the financial
report to be audited
Audit Engagement Letterbull Content (cont)
ndash Objectives of the auditndash Reference to professional standards and
statutesndash Auditorrsquos responsibilitiesndash Limitations of the auditndash Managementrsquos responsibilitiesndash Auditor independence requirementsndash Basis of feendash Acceptance by client
5 Materiality
bull ISA 320 Materiality in planning and performing an audit provides guidance to auditors on this area The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit Information is generally consider to be material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements
Materiality
1) Determining materiality and performance materiality when planning the audit
bull Performance materiality is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole Performance materiality also refers to the
Materiality
amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures
bull During planning the auditor must establish materiality for the financial statements as a whole Howeer if thvere are classes of transactions account balances or disclosures for which misstatements less than materiality for the financial statements as a whole couldreasonably
Materiality
be expected to influence the economic decisions of users taken on the basis of the financial statements the auditor must also determine
materiality levels to be applied to thesebull Determining materiality for the financial
statements as a whole involves the exercise of professional judgement (which we covered in section 1 of this chapter) Generally a percentage is applied to a chosen benchmark as a starting point for determining materiality for the
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
The importance of planning
co-ordinate audit work including that of internal audit However all audit procedures remain the
responsibility of the external auditors
A structured approach to planning will includebull Step 1 Ensuring that ethical requirements are met
including independencebull Step 2 Ensuring the terms of the engagement are
understoodbull Step 3 Establishing the overall audit strategy that
sets the scope timing and direction of the audit and
The importance of planning
guides the development of the audit plan
Identify the characteristics of the engagement that define its scope
Ascertain the reporting objectives to plan the timing of the audit and nature of communications required
Consider significant factors in directing the teamrsquos efforts
Consider results of preliminary engagement activities
The importance of planning
Ascertain nature timing and extent of resources necessary to perform the engagement
bull Step 4 Developing an audit plan that includes the nature timing and extent of planned risk assessment procedures and further audit procedures
4 The overall audit strategy and the detailed audit plan
The overall audit
bull The overall audit strategy and audit plan shall be updated and changed as necessary during the course of the audit
bull The matters the auditor may consider in establishing an overall audit strategy are set out in the table below
The overall audit strategy and the detailed audit plan
bull Examples of items to include in the overall audit strategy could be
Industry-specific financial reporting requirements
Number of locations to be visited
Audit clients timetable for reporting to its members
Communication between the audit team and the client
The overall audit strategy and the detailed audit plan
The detailed audit plan
risk assessment procedures
Plans to implement further audit procedures
Plans to implement additional audit procedures
4Audit Engagement Letter
ASA 210 lsquoTerms of Audit EngagementsrsquoPurpose Confirms terms of the engagementEffect Legal contract between auditor and clientSee textbook pp231-3 for an exampleContent Identification of the entity and the financial
report to be audited
Audit Engagement Letterbull Content (cont)
ndash Objectives of the auditndash Reference to professional standards and
statutesndash Auditorrsquos responsibilitiesndash Limitations of the auditndash Managementrsquos responsibilitiesndash Auditor independence requirementsndash Basis of feendash Acceptance by client
5 Materiality
bull ISA 320 Materiality in planning and performing an audit provides guidance to auditors on this area The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit Information is generally consider to be material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements
Materiality
1) Determining materiality and performance materiality when planning the audit
bull Performance materiality is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole Performance materiality also refers to the
Materiality
amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures
bull During planning the auditor must establish materiality for the financial statements as a whole Howeer if thvere are classes of transactions account balances or disclosures for which misstatements less than materiality for the financial statements as a whole couldreasonably
Materiality
be expected to influence the economic decisions of users taken on the basis of the financial statements the auditor must also determine
materiality levels to be applied to thesebull Determining materiality for the financial
statements as a whole involves the exercise of professional judgement (which we covered in section 1 of this chapter) Generally a percentage is applied to a chosen benchmark as a starting point for determining materiality for the
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
The importance of planning
guides the development of the audit plan
Identify the characteristics of the engagement that define its scope
Ascertain the reporting objectives to plan the timing of the audit and nature of communications required
Consider significant factors in directing the teamrsquos efforts
Consider results of preliminary engagement activities
The importance of planning
Ascertain nature timing and extent of resources necessary to perform the engagement
bull Step 4 Developing an audit plan that includes the nature timing and extent of planned risk assessment procedures and further audit procedures
4 The overall audit strategy and the detailed audit plan
The overall audit
bull The overall audit strategy and audit plan shall be updated and changed as necessary during the course of the audit
bull The matters the auditor may consider in establishing an overall audit strategy are set out in the table below
The overall audit strategy and the detailed audit plan
bull Examples of items to include in the overall audit strategy could be
Industry-specific financial reporting requirements
Number of locations to be visited
Audit clients timetable for reporting to its members
Communication between the audit team and the client
The overall audit strategy and the detailed audit plan
The detailed audit plan
risk assessment procedures
Plans to implement further audit procedures
Plans to implement additional audit procedures
4Audit Engagement Letter
ASA 210 lsquoTerms of Audit EngagementsrsquoPurpose Confirms terms of the engagementEffect Legal contract between auditor and clientSee textbook pp231-3 for an exampleContent Identification of the entity and the financial
report to be audited
Audit Engagement Letterbull Content (cont)
ndash Objectives of the auditndash Reference to professional standards and
statutesndash Auditorrsquos responsibilitiesndash Limitations of the auditndash Managementrsquos responsibilitiesndash Auditor independence requirementsndash Basis of feendash Acceptance by client
5 Materiality
bull ISA 320 Materiality in planning and performing an audit provides guidance to auditors on this area The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit Information is generally consider to be material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements
Materiality
1) Determining materiality and performance materiality when planning the audit
bull Performance materiality is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole Performance materiality also refers to the
Materiality
amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures
bull During planning the auditor must establish materiality for the financial statements as a whole Howeer if thvere are classes of transactions account balances or disclosures for which misstatements less than materiality for the financial statements as a whole couldreasonably
Materiality
be expected to influence the economic decisions of users taken on the basis of the financial statements the auditor must also determine
materiality levels to be applied to thesebull Determining materiality for the financial
statements as a whole involves the exercise of professional judgement (which we covered in section 1 of this chapter) Generally a percentage is applied to a chosen benchmark as a starting point for determining materiality for the
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
The importance of planning
Ascertain nature timing and extent of resources necessary to perform the engagement
bull Step 4 Developing an audit plan that includes the nature timing and extent of planned risk assessment procedures and further audit procedures
4 The overall audit strategy and the detailed audit plan
The overall audit
bull The overall audit strategy and audit plan shall be updated and changed as necessary during the course of the audit
bull The matters the auditor may consider in establishing an overall audit strategy are set out in the table below
The overall audit strategy and the detailed audit plan
bull Examples of items to include in the overall audit strategy could be
Industry-specific financial reporting requirements
Number of locations to be visited
Audit clients timetable for reporting to its members
Communication between the audit team and the client
The overall audit strategy and the detailed audit plan
The detailed audit plan
risk assessment procedures
Plans to implement further audit procedures
Plans to implement additional audit procedures
4Audit Engagement Letter
ASA 210 lsquoTerms of Audit EngagementsrsquoPurpose Confirms terms of the engagementEffect Legal contract between auditor and clientSee textbook pp231-3 for an exampleContent Identification of the entity and the financial
report to be audited
Audit Engagement Letterbull Content (cont)
ndash Objectives of the auditndash Reference to professional standards and
statutesndash Auditorrsquos responsibilitiesndash Limitations of the auditndash Managementrsquos responsibilitiesndash Auditor independence requirementsndash Basis of feendash Acceptance by client
5 Materiality
bull ISA 320 Materiality in planning and performing an audit provides guidance to auditors on this area The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit Information is generally consider to be material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements
Materiality
1) Determining materiality and performance materiality when planning the audit
bull Performance materiality is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole Performance materiality also refers to the
Materiality
amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures
bull During planning the auditor must establish materiality for the financial statements as a whole Howeer if thvere are classes of transactions account balances or disclosures for which misstatements less than materiality for the financial statements as a whole couldreasonably
Materiality
be expected to influence the economic decisions of users taken on the basis of the financial statements the auditor must also determine
materiality levels to be applied to thesebull Determining materiality for the financial
statements as a whole involves the exercise of professional judgement (which we covered in section 1 of this chapter) Generally a percentage is applied to a chosen benchmark as a starting point for determining materiality for the
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
4 The overall audit strategy and the detailed audit plan
The overall audit
bull The overall audit strategy and audit plan shall be updated and changed as necessary during the course of the audit
bull The matters the auditor may consider in establishing an overall audit strategy are set out in the table below
The overall audit strategy and the detailed audit plan
bull Examples of items to include in the overall audit strategy could be
Industry-specific financial reporting requirements
Number of locations to be visited
Audit clients timetable for reporting to its members
Communication between the audit team and the client
The overall audit strategy and the detailed audit plan
The detailed audit plan
risk assessment procedures
Plans to implement further audit procedures
Plans to implement additional audit procedures
4Audit Engagement Letter
ASA 210 lsquoTerms of Audit EngagementsrsquoPurpose Confirms terms of the engagementEffect Legal contract between auditor and clientSee textbook pp231-3 for an exampleContent Identification of the entity and the financial
report to be audited
Audit Engagement Letterbull Content (cont)
ndash Objectives of the auditndash Reference to professional standards and
statutesndash Auditorrsquos responsibilitiesndash Limitations of the auditndash Managementrsquos responsibilitiesndash Auditor independence requirementsndash Basis of feendash Acceptance by client
5 Materiality
bull ISA 320 Materiality in planning and performing an audit provides guidance to auditors on this area The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit Information is generally consider to be material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements
Materiality
1) Determining materiality and performance materiality when planning the audit
bull Performance materiality is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole Performance materiality also refers to the
Materiality
amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures
bull During planning the auditor must establish materiality for the financial statements as a whole Howeer if thvere are classes of transactions account balances or disclosures for which misstatements less than materiality for the financial statements as a whole couldreasonably
Materiality
be expected to influence the economic decisions of users taken on the basis of the financial statements the auditor must also determine
materiality levels to be applied to thesebull Determining materiality for the financial
statements as a whole involves the exercise of professional judgement (which we covered in section 1 of this chapter) Generally a percentage is applied to a chosen benchmark as a starting point for determining materiality for the
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
The overall audit strategy and the detailed audit plan
bull Examples of items to include in the overall audit strategy could be
Industry-specific financial reporting requirements
Number of locations to be visited
Audit clients timetable for reporting to its members
Communication between the audit team and the client
The overall audit strategy and the detailed audit plan
The detailed audit plan
risk assessment procedures
Plans to implement further audit procedures
Plans to implement additional audit procedures
4Audit Engagement Letter
ASA 210 lsquoTerms of Audit EngagementsrsquoPurpose Confirms terms of the engagementEffect Legal contract between auditor and clientSee textbook pp231-3 for an exampleContent Identification of the entity and the financial
report to be audited
Audit Engagement Letterbull Content (cont)
ndash Objectives of the auditndash Reference to professional standards and
statutesndash Auditorrsquos responsibilitiesndash Limitations of the auditndash Managementrsquos responsibilitiesndash Auditor independence requirementsndash Basis of feendash Acceptance by client
5 Materiality
bull ISA 320 Materiality in planning and performing an audit provides guidance to auditors on this area The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit Information is generally consider to be material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements
Materiality
1) Determining materiality and performance materiality when planning the audit
bull Performance materiality is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole Performance materiality also refers to the
Materiality
amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures
bull During planning the auditor must establish materiality for the financial statements as a whole Howeer if thvere are classes of transactions account balances or disclosures for which misstatements less than materiality for the financial statements as a whole couldreasonably
Materiality
be expected to influence the economic decisions of users taken on the basis of the financial statements the auditor must also determine
materiality levels to be applied to thesebull Determining materiality for the financial
statements as a whole involves the exercise of professional judgement (which we covered in section 1 of this chapter) Generally a percentage is applied to a chosen benchmark as a starting point for determining materiality for the
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
The overall audit strategy and the detailed audit plan
The detailed audit plan
risk assessment procedures
Plans to implement further audit procedures
Plans to implement additional audit procedures
4Audit Engagement Letter
ASA 210 lsquoTerms of Audit EngagementsrsquoPurpose Confirms terms of the engagementEffect Legal contract between auditor and clientSee textbook pp231-3 for an exampleContent Identification of the entity and the financial
report to be audited
Audit Engagement Letterbull Content (cont)
ndash Objectives of the auditndash Reference to professional standards and
statutesndash Auditorrsquos responsibilitiesndash Limitations of the auditndash Managementrsquos responsibilitiesndash Auditor independence requirementsndash Basis of feendash Acceptance by client
5 Materiality
bull ISA 320 Materiality in planning and performing an audit provides guidance to auditors on this area The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit Information is generally consider to be material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements
Materiality
1) Determining materiality and performance materiality when planning the audit
bull Performance materiality is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole Performance materiality also refers to the
Materiality
amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures
bull During planning the auditor must establish materiality for the financial statements as a whole Howeer if thvere are classes of transactions account balances or disclosures for which misstatements less than materiality for the financial statements as a whole couldreasonably
Materiality
be expected to influence the economic decisions of users taken on the basis of the financial statements the auditor must also determine
materiality levels to be applied to thesebull Determining materiality for the financial
statements as a whole involves the exercise of professional judgement (which we covered in section 1 of this chapter) Generally a percentage is applied to a chosen benchmark as a starting point for determining materiality for the
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
4Audit Engagement Letter
ASA 210 lsquoTerms of Audit EngagementsrsquoPurpose Confirms terms of the engagementEffect Legal contract between auditor and clientSee textbook pp231-3 for an exampleContent Identification of the entity and the financial
report to be audited
Audit Engagement Letterbull Content (cont)
ndash Objectives of the auditndash Reference to professional standards and
statutesndash Auditorrsquos responsibilitiesndash Limitations of the auditndash Managementrsquos responsibilitiesndash Auditor independence requirementsndash Basis of feendash Acceptance by client
5 Materiality
bull ISA 320 Materiality in planning and performing an audit provides guidance to auditors on this area The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit Information is generally consider to be material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements
Materiality
1) Determining materiality and performance materiality when planning the audit
bull Performance materiality is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole Performance materiality also refers to the
Materiality
amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures
bull During planning the auditor must establish materiality for the financial statements as a whole Howeer if thvere are classes of transactions account balances or disclosures for which misstatements less than materiality for the financial statements as a whole couldreasonably
Materiality
be expected to influence the economic decisions of users taken on the basis of the financial statements the auditor must also determine
materiality levels to be applied to thesebull Determining materiality for the financial
statements as a whole involves the exercise of professional judgement (which we covered in section 1 of this chapter) Generally a percentage is applied to a chosen benchmark as a starting point for determining materiality for the
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
Audit Engagement Letterbull Content (cont)
ndash Objectives of the auditndash Reference to professional standards and
statutesndash Auditorrsquos responsibilitiesndash Limitations of the auditndash Managementrsquos responsibilitiesndash Auditor independence requirementsndash Basis of feendash Acceptance by client
5 Materiality
bull ISA 320 Materiality in planning and performing an audit provides guidance to auditors on this area The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit Information is generally consider to be material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements
Materiality
1) Determining materiality and performance materiality when planning the audit
bull Performance materiality is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole Performance materiality also refers to the
Materiality
amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures
bull During planning the auditor must establish materiality for the financial statements as a whole Howeer if thvere are classes of transactions account balances or disclosures for which misstatements less than materiality for the financial statements as a whole couldreasonably
Materiality
be expected to influence the economic decisions of users taken on the basis of the financial statements the auditor must also determine
materiality levels to be applied to thesebull Determining materiality for the financial
statements as a whole involves the exercise of professional judgement (which we covered in section 1 of this chapter) Generally a percentage is applied to a chosen benchmark as a starting point for determining materiality for the
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
5 Materiality
bull ISA 320 Materiality in planning and performing an audit provides guidance to auditors on this area The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit Information is generally consider to be material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements
Materiality
1) Determining materiality and performance materiality when planning the audit
bull Performance materiality is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole Performance materiality also refers to the
Materiality
amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures
bull During planning the auditor must establish materiality for the financial statements as a whole Howeer if thvere are classes of transactions account balances or disclosures for which misstatements less than materiality for the financial statements as a whole couldreasonably
Materiality
be expected to influence the economic decisions of users taken on the basis of the financial statements the auditor must also determine
materiality levels to be applied to thesebull Determining materiality for the financial
statements as a whole involves the exercise of professional judgement (which we covered in section 1 of this chapter) Generally a percentage is applied to a chosen benchmark as a starting point for determining materiality for the
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
Materiality
1) Determining materiality and performance materiality when planning the audit
bull Performance materiality is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole Performance materiality also refers to the
Materiality
amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures
bull During planning the auditor must establish materiality for the financial statements as a whole Howeer if thvere are classes of transactions account balances or disclosures for which misstatements less than materiality for the financial statements as a whole couldreasonably
Materiality
be expected to influence the economic decisions of users taken on the basis of the financial statements the auditor must also determine
materiality levels to be applied to thesebull Determining materiality for the financial
statements as a whole involves the exercise of professional judgement (which we covered in section 1 of this chapter) Generally a percentage is applied to a chosen benchmark as a starting point for determining materiality for the
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
Materiality
amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures
bull During planning the auditor must establish materiality for the financial statements as a whole Howeer if thvere are classes of transactions account balances or disclosures for which misstatements less than materiality for the financial statements as a whole couldreasonably
Materiality
be expected to influence the economic decisions of users taken on the basis of the financial statements the auditor must also determine
materiality levels to be applied to thesebull Determining materiality for the financial
statements as a whole involves the exercise of professional judgement (which we covered in section 1 of this chapter) Generally a percentage is applied to a chosen benchmark as a starting point for determining materiality for the
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
Materiality
be expected to influence the economic decisions of users taken on the basis of the financial statements the auditor must also determine
materiality levels to be applied to thesebull Determining materiality for the financial
statements as a whole involves the exercise of professional judgement (which we covered in section 1 of this chapter) Generally a percentage is applied to a chosen benchmark as a starting point for determining materiality for the
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
Materiality
financial statements as a whole The following factors may affect the identification of an appropriate benchmark
bull Elements of the financial statements (eg assets liabilities equity revenue expenses)
bull 1048696 Whether there are items on which users tend to focus
bull 1048696 Nature of the entity industry and economic environment
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
Materiality
bull Entityrsquos ownership structure and financing
bull 1048696 Relative volatility of the benchmark
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
Materiality
2) Revision of materiality
bull The level of materiality must be revised for the financial statements as a whole if the auditor becomes aware of information during the audit that would have caused the auditor to have determined a different amount during planning
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
Materiality 3) Documentation of materiality
bull ISA 320 requires the following to be documented
bull 1048696 Materiality for the financial statements as a whole
bull 1048696 Materiality level or levels for particular classes of transactions account balances or disclosures if applicable
bull 1048696 Performance materialitybull 1048696 Any revision of the above as the audit
progresses
