Session 03 - Audit Risk and Audit Planning

7/29/2019 Session 03 - Audit Risk and Audit Planning

1/18

BA 120.1 Auditing Theory

Audit Risk, Business Risk and Audit Planning


2/18

` Review of previous week

` Managing risks

` The audit risk model


3/18

` Auditing defined

` The objectives, scope, and responsibilities of an

inde endent auditor in undertakin an audit

` Differences among assurance services, attestation

services, audit services, and other related services

` Code of ethics


4/18

Assessing ClientUnderstanding Obtaining Obtaining Wrapping

Retention Decisions

the Client v ence

about Controls

u s an ve

Evidence

p e

Audit

Planning an

Audit for

FinancialStatements

Audit

Materiality

Agreeing the

terms of

AuditEn a ements

PSA 315

Understanding

its

Environment

and Assessing

the Risks of

ater a

Misstatement


5/18

Business Risk Financial Reporting Risk

Engagement Risk

Audit Risk

Audit Risk Risk that the auditor expresses an inappropriate

audit opinion when the financial statements are materially

misstated.


6/18

` Avoid audit risk by not accepting certain companies as

clients thereby reducing engagement risk to zero.

e au r s a a eve a e au or e eves w

mitigate the likelihood that the auditor will fail to identify

material misstatements.


7/18

Factors that affect the auditors decision to accept or retain an

` Management integrity

` Inde endence and com etence of mana ement and the board

of directors

`The quality of the organizations risk management process andcontro s

` Reporting requirements, including regulatory requirements

` Existence of related-party transactions

`The financial health of or anization


8/18

Pre-requisites for an audit:

` etermine w et er t e inancia reporting ramewor

applied is acceptable

and understands its responsibility on:

` re aration of financial statements;

` its internal control;

` provide auditor with access to all relevant information and

o er resources.


9/18

-

` Inadequate capital

` ac o ong-run strategic an operationa p ans

` Low cost of entry into the market

` epen ence on a m te pro uct range

`

Dependence on technology that may quickly become

` Instability of future cash flows

` Previous inquiries by the SEC or other regulatory

agencies


10/18

`The objective and scope of the financial statements;

` e responsi i ities o t e au itor;

`The responsibilities of management;

` ent cat on o t e app ca e nanc a report ng

framework for the preparation of the financial statements;

reports to be issued by the auditor and a statement that

there may be circumstances in which a report may differ

from its expected form and content.


11/18

(#6) The auditor shall establish an overall audit strategy that sets thescope, timing and direction of the audit, and that guides thedevelopment of the audit plan.

` Identify the characteristics of the engagement that define its scope;

` Ascertain the re ortin ob ectives of the en a ement to lan thetiming of the audit and the nature of the communications required;

` Consider the factors that, in the auditors professional judgment, aresi nificant in directin the en a ement teams efforts;

` Consider the results of preliminary engagement activities and, whereapplicable, whether knowledge gained on other engagementserformed b the en a ement artner for the entit is relevant; and

` Ascertain the nature, timing and extent of resources necessary toperform the engagement.

item.


12/18

Information is material if its omission or misstatementcould influence the economic decisions of users taken on

the basis of the financial statements. Materiality depends onthe size of the item or error judged in the particular. ,

materiality provides a threshold or cut-off point rather than

being a primary qualitative characteristic which informationmus ave s o e use u .

a. Determining the nature, timing, and extent of auditprocedures, and

b. Evaluating the effects of misstatements.


13/18

PSA 315, #10: There is an inverse relationship between

, ,

materiality level, the lower the audit risk and vice versa.


14/18

AR = f(IR, CR, DR)

IR initial susceptibility of a transaction or accounting

ad ustment to be recorded in error or for the transaction not to

be recorded in the absence of internal controls.

CR - risk that the clients internal control system will fail toprevent or etect a m sstatement.

DR risk that the audit procedures will fail to detect a material

misstatement.


15/18

` Inherent risk is difficult to assess.

.

` The model treats each risk component as separate and

inde endent when in fact the com onents are not inde endent.

` Audit technology is not so precisely developed that each

component of the model can be accurately assessed.` The model is not particularly useful for helping auditors

determine the necessary control testing for issuing an opinion

on the effectiveness of internal controls as is be re uired in an

integrated audit.


16/18

` Understand the business and its risks

` Understand managements risk management and control

rocesses

` Develop expectations

` Assess quality of control system` Determining residual risk

` Manage remaining audit risk and respond to risks of material

.


17/18

The auditor must understand the following aspects of the

` Industry, regulatory, and other external factors, including theapplicable financial reporting framework;

` Nature of the entity, including the entitys selection and

application of accounting policies;` ect ves an strateg es an t e re ate us ness r s s t at

may result in a material misstatement of the financial statements.

` Measurement and review of the entit s financial erformance.

` Internal control.


18/18

Quiz

Auditing: Integral to the Economy

Documents

Session 03 - Audit Risk and Audit Planning