Presentation 1 - Different Stages of Audit
- 1. Prepared by :Marzanur Rahman Discussion on Different Stages of Audit and Contents of Audit Working Files Re: Audit Practice Manual
- 2. DIFFERENT STAGES OF AUDIT CLIENT ACCEPTANCE/RETENTION AUDIT PLANNING TEST OF CONTROL SUBSTANTIVE PROCEDURES OPINION FORMULATION AUDIT COMPLETION FILES
- 3. According to Bangladesh Standard Auditing (BSA) 200 - Client acceptance / retention is quality control procedure in conjunction with relevant ethical requirements for an audit of financial statements. The objective of performing client acceptance and retention is to provide assurance to auditor in engagement level regarding : CLIENT ACCEPTANCE/RETENTION No interest likely to conflict with carrying out the audit properly with professional standard, Complying with BSA 200.4 requires compliance with ICAB and IFAC code of ethics. The auditor’s report issued is appropriate in the circumstances
- 4. Issues dealing with acceptance procedure 1. Dependence on an audit client 2. Loans to or from a client; guarantees; overdue fees 3. Goods and services: hospitality 4. Litigation 5. Family or other personal relationships 6. Ex-partners or senior employees 7. Mutual Business Interest Beneficial Interest And Trusteeships 8. Associated Firms 9. Provisions Of Other Services, Specialist Valuations And Advocacy 10. Rotation Of Audit Engagement Partner 11. Adequate Resources
- 5. AUDIT PLANNING Naturally, it is reasonable to assume that planning occurs towards the start of an audit engagement. however, according to BSA 300, planning should not be seen as a discrete and separate part of the overall audit. Planning often begins shortly after, or in connection with, the completion of the previous audit Similarly, the audit plan may be revised as the audit progresses, and should not be viewed as being fixed in place once the main planning phase has ended. for example, a significant event may take place as the audit is in progress, meaning that the audit plan needs to be changed The nature and extent of planning activities depends on the size and complexity of the audit client, previous experience of the audit firm with the client, and any changes in circumstance that may occur during the audit
- 6. BAS 300 contains a requirement that the auditor shall undertake the following activities at the beginning of the current audit engagement: Performing procedures regarding the continuance of the client relationship and the specific audit engagement. Evaluating compliance with relevant ethical requirements, including independence. Establishing an understanding of the terms of the engagement. BAS 300 also states that audit planning activities should: Establish the overall audit strategy for the engagement Develop an audit plan. Preliminary activity of audit planning
- 7. Audit Strategy The audit strategy sets out in general terms how the audit is to be conducted and sets the scope, timing and direction of the audit. the audit strategy then guides the development of the audit plan, which contains the detailed responses to the auditor’s risk assessment. The features of audit strategy is described bellow : 1. Identify the characteristics o f the engagement 2. Ascertain the reporting objectives of the engagement to plan the timing of the audit 3. Consider the factors that are significant in directing the audit team’s efforts in the auditor’s professional judgment 4. Consider the results of preliminary engagement 5. Ascertain the nature, timing and extent of resources necessary to perform the engagement
- 8. Audit Plan According to BSA 300, once the overall audit strategy has been established, an audit plan can be developed to address the various matters identified in the overall audit strategy, taking in to account the need to achieve the audit objectives through the efficient use of the auditor’s resources. BAS 300 provides guidance on what should be included in the audit plan, stating that the audit plan should describe: The nature, timing and extent of planned risk assessment procedures The nature, timing and extent of planned further audit procedures at the assertion level Other planned audit procedures that are required to be carried out so that the engagement complies with BASs.
- 9. Test of Control To obtain an understanding and audit evidence of design and implementation of internal controls relevant to the audit. Objective : To test the operational control system designed in appropriate manner To test the implement effectiveness of control system Nature of test of control Enquire or meeting Understating on Standard operating procedure (SOP) Walk through test with sample documents Physical verification
- 10. Timing of Tests of Controls The timing of tests of controls depends on the auditor’s objective and determines the period of reliance on those controls. If the auditor tests controls throughout a period, the auditor obtains audit evidence of the effectiveness of the operation of the controls during that period. However, If auditor plan to use the control test of the prior year, they just need to test the control of extended period.
- 11. Extent of Tests of Controls The more the auditor relies on the operating effectiveness of controls in the assessment of risk, the greater is the extent of the auditor’s tests of controls. In addition, as the rate of expected deviation from a control increases, the auditor increases the extent of testing of the control. However, the auditor considers whether the rate of expected deviation indicates that the control will not be sufficient to reduce the risk of material misstatement at the assertion level, the auditor may determine that tests of controls for a particular assertion may not be effective.
- 12. Substantive Procedure Substantive procedures are performed in order to detect material misstatements at the assertion level. Substantive procedure includes : Tests of details of classes of transactions, Verifying account balances, Examining material journal entries and other adjustment entries, Checking disclosures requirements and Substantive analytical procedures. Irrespective of the assessed risk of material misstatement, the auditor should design and perform substantive procedures for each material class of transactions, account balance, and disclosure
- 13. Nature of substantive Procedure The nature of substantive procedure depends on the objective of the audit on particular accounts head. Like – Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time and where risk of material misstatement is acceptably low . i.e. House rent, Investment Tests of details are ordinarily more appropriate to obtain audit evidence regarding certain assertions about account balances, including existence and valuation. i.e. Inventory, Receivable
- 14. Timing of substantive Procedure As like as nature the timing of substantive procedure depends on the objective of the audit . Substantive test can be performed at end of audit period or at any interim time. Before choosing the time of substantive procedure, auditor should consider – • The control environment of audited entity • Availability of the information • Objective of substantive procedure • Assessed risk of material misstatement • The nature or class of transaction
- 15. Extend of substantive Procedure The greater the risk of material misstatement, the greater the extent of substantive procedures. Because the risk of material misstatement takes account of internal control, the extent of substantive procedures may be increased as a result of unsatisfactory results from tests of the operating effectiveness of controls. However, increasing the extent of an audit procedure is appropriate only if the audit procedure itself is relevant to the specific risk.
- 16. Audit Opinion The final outcome of an audit is to form an independent audit opinion based on the evaluation of previous stages. The evaluation should include whether the financial statements are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework That conclusion shall take into account: The auditor’s conclusion, in accordance with ISA 330, whether sufficient appropriate audit evidence has been obtained The auditor’s conclusion, in accordance with ISA 450, whether uncorrected misstatements are material, individually or in aggregate
- 17. Opinion Tree
- 18. Audit Completion Audit completion procedures are to ensure that. competent, relevant and reasonable audit evidence was obtained to form an opinion on the appropriate manner. There are several process need to be carried out for audit completion. Those are : Audit file index Partner completion (initial & final) Audit standard review questionnaire File complétion questionnaire (initial & final) Critical review Justification of report Summary of unadjusted error Final analytical review
- 19. COMPONENT OF AUDIT WORKING FILE AUDIT PLANNING FILES AUDIT CONTROL FILES AUDIT PROCEDURES FILES AUDIT PROGRAM FILES AUDIT PERMANENT FILES Details of audit working file will be described in next session