Importance of Planning:

 Planning is the key requirement of International Standards of Auditing (ISA0)

so that;
 Work is properly organized and managed.
 Auditor can determine the amount of work that needs to be done and therefore
allocate the right amount and type of people to job.
 Identify the problem areas to work on.

Basic Understanding of Audit Strategy and Plane:

Strategy of Audit:

An audit strategy sets the scope, timing and direction of audit. It guides the
development of the more detailed audit plan.

 Knowledge of business.
 Risk.
 Materiality:

Financial statements will normally be useful to the indented users if they are free
from material error or misstatement.

 Scope, Time And Direction:

The auditor decides the scale of audit, what to include and what not to include.

Audit Plan:

Audit plan converts the audit strategy into more detailed plan.

Component of Audit Strategy:

 Understanding the client.

 Analytical Procedures.
 Scope, Timing and Direction.
 Materiality.
 Audit risk Assessments.
 Understanding the client:

What to know:
 Market and its competition.
 Regulatory framework.
 Accounting
 Financial structure.

How to know:

Inquiry from those charged with governance.

Observation.
Inspection.
Internet.
 Analytical Procedures:

Definition: Analytical procedures mean the evaluation of financial and other

information and the review of relationship in that information.

Types of Analytical Procedures:

1. Comparisons:
Comparing entity’s current financial information with:
a. Financial information of prior period.
b. Budgeted or forecast.
2. Relationship:
Relationship of financial information with:
a. Financial information called Ratio analysis.
b. Relevant non-financial information.
 Materiality:

Any amount that can influence the economic decision of the users of financial
statements is material.

Types of Materiality:

1. Materiality by size.

2. Materiality by nature.

3. Performance Materiality.

 Materiality by Size:
 It is often calculate by using benchmark such as:

5% of profit.

1% of revenue.

 Materiality by Nature:

It refers to an amount that may be low in value but due to its prominence
(importance)it could influence the users decision.

 Performance Materiality:

It is used for testing individual transactions account balances and disclosures.

Risk Assessment:

IAS 315 states that the auditor should identify and assess the risk involve in
business through understanding the entity environment.

Risk Assessment Levels:

a. Financial Statement Level :

It means there is a risk that financial statement as a whole may be distorted.
b. Assertion level:
It means that the individual transactions or balance may be distorted, but not
the financial statements as a whole.

Audit Risk Model:

Audit risk is the risk that the auditor expresses an inappropriate audit opinion
when the financial statements are materially misstated .

Audit Risk = Inherent Risk * Control Risk * Detection Risk

Client Risk Under the control

( Financial statement Risk )

1- Inherent Risk :
 It is a type of risk due to nature of business or transactions .
2- Control Risk :
A type of risk that can be controlled but is not controlled due to negligence
of business.
3- Detection Risk :
This is the risk that the procedures performed by the auditor will not detect
the misstatements.

Types of Detection Risk:

a. Sampling Risk :
A risk that the sample is not representative of the population .
b. Non Sampling Risk :
This type of risk arises due
 Misapplication of procedures .

Internal Control System

According to Meigs:

Internal Control Consists of all measures taken to provide management with

assurance that everything is functioning as it should .

Objectives of internal control

1-Business risks including operational financial and compliance risks are

minimized.

2- Ensure the adherence to company polices

3- Ensure the adherence to laws and regulations.

 Why Does auditor Need To Understand Internal Control :

It helps the auditor to;

Ensure that all record , data and statements are accurate .

 Components Of Internal Control

 Control Environment .
 Risk Assessment.
 Information System .
 Control Procedures or Activities .
 Monitoring Aspect.
1- Control environment :

Control environment means the general or overall attitude , awareness and

actions of directors and management regarding the internal control and its
importance in entity .

When Evaluating the Control Environment the Auditor Considers the

following matters ;

 Managements operating style .

 Commitment to competence.
 Organizational Structure

Entity Risk Assessment Process :

Risk assessment process means that how the management determines the
business risks to be managed i-e What are the threats to the achievement of
ongoing business .

 Information System :

Information system includes all the business processes relevant to financial

reporting and communication .

1- Record, process and report transaction

2- Maintain account ability for assets, liabilities and equity .

Control Procedures :

Control activities are those policies and procedures which management has
established to achieve the entity specific objectives .

Types Of Controls :
 1- Physical Control .
2- Authorization and Approval .
3- Personnel .
4- Arithmetic and Accounting .
5- Management.
6- Organization.
7- Supervision .
8- Segregation of Duties.

Internal Control In Computerized Environment :

Everything in the organization is not recorded manually , computerized systems

are used so control system also apply on them .

Inherent Limitations Of Internal Control :

1- Cost VS Benefit: Sometimes the cost of implementing a control may be very

high as compared to the benefit it is providing.
2- Human error: There are chances of human error due to carelessness,
distraction, mistakes.
3- Non Routine Transactions: Most internal control procedures are directed at
everyday transaction rather than non routine transaction.
4- Outdated Controls: The controls are useless and ineffective if they are not
changed with the circumstances.
 Responsibilities of different Parties Regarding ICS:
 Management:

Design and implement effective ICS

 Board Of directors:

The BOD makes sure that effective ICS is designed.

 Auditors:

Review and report on ICS .

 Evidence:
Means Proof.

 Audit Evidence:

The auditor should obtain Sufficient and Appropriate audit evidence to be able to
draw reasonable conclusions on which to base the audit opinion.

 Sufficient Evidence:

Sufficiency is the measure of Quantity of audit evidence.

 Appropriate Audit:

Appropriateness is the measure the quality of audit evidence and its relevance to a
particular assertion and reliability.

 Financial Statement Assertion:

General Meaning:

 Explanation.
 Announcement.
 Definition:

Financial statement assertions are management explanation about the recognition,

measurement, presentation and disclosure of information in the financial statement.

 Types of Assertions:

(1)Assertions about Classes of transaction and event.

 Accuracy.
 Cut-off.
 Classification.
(2) Assertions about Account Balances.

 Existence.
 Rights and obligation.
 Completeness.
 Valuation and Allocation.

(3) Assertions about Presentation and Disclosure.

 Occurrence.
 Completeness.
 Classification and understandability.
 Accuracy and valuation.
 Sources of Audit Evidence:
 Test of Controls:
Test performed to obtain audit evidence about the suitability of design and
effective operation of the accounting and internal control systems.
 Substantive Procedures:
Test performed to obtain audit evidence to detect material misstatement in the
financial statements by tests of details of transactions and balances, and
analytical procedures.
 Analytical Procedures:
Analytical procedures involve the evaluation of financial information through
analysis of relationship among both financial and non-financial data
 Types of Audit Procedures:
 Inspection of records or documents.
 Inspection of tangible assets.
 Observation.
 Enquiry.
 Confirmation.
 Recalculation.
 Reperformance.
 Analytical procedures.
 Audit Sampling:
It is the application of audit procedures to less than 100% of the
items, within a class of transactions or account balance such that all the
sampling units have an equal chance of selection, in order to assist in forming a
conclusion.
 Method of Sampling:
 Random Selection.
 Systematic Selection.
 Monetary unit Selection.
 Haphazard Selection.
 Block Selection.

Audit Procedures for Non-Current Liabilities:

Key Assertion for Liabilities:

 Completeness.
 Allocation.

Liabilities Types:

 Current liabilities.
 Non-Current Liabilities.

Procedures:
 Bank confirmation letter needs to be obtained.
 Obtain the Breakdown of loans outstanding at year end.
 Inspect the cash book.

Audit Procedures for Payables Accruals:

Key Assertions for payables, Accruals:

 Completeness.
 Existence.
 Valuation.
 Cut-off.
 Rights obligations.
Procedures:
 Obtain a list of trade payables.
 Obtain supplier statements.
 Inspect the late payments.
 Inspect the invoices.
 Recalculate a payment schedule.

Audit Procedures for Inventory:

 Accounting for inventory:

The valuation rules for inventory are given in IAS 2:

According to its inventory should be valued at cost or NRV whichever is lower.

Net Realizable Value (NRV):

It is the estimated selling price in the ordinary course of business, less the
estimated costs necessary to make the sale.
Procedures:

I. Inventory count responsibility of client.

II. The auditor only attends the count.
III. The auditor needs to perform procedures before, during and after inventory
count.

Before Inventory Count:

 If an internal control department exists, discuss the procedures that they carried
out and review their working papers.
 Consider locations.
 Consider the nature and values of stock.

During Inventory Count:

 Tests of Control:
Observe the inventory count to ensure that the instructions are being followed.
 Non warehouse staff performing and managing the count.
 Count sheets written in pen.
 No movement of inventory.
 Substantive Procedures:
 Sheet to floor:

Select a sample of items from inventory count sheet and check warehouse.

 Floor to Sheet:
Select a sample of items from warehouse and check in inventory sheet.

After Inventory Count:

 The auditor should record the inventory count sheet.

  Discuss weakness in count sheet.
 Calculate the inventory turnover ratio.

Inventory Held by Third Parties:

If inventory held by third party the auditor should ask for direct confirmation
from the third party regarding quantity, values.

Computer Assisted Audit Techniques (CAAT’s):

The use of computers as a tool to perform audit procedures.

Two Board:

 Test Data:

Test data involves the auditor submitting fake data in the clients system to
ensure that the system correctly processes it and corrects misstatements.

 Audit Software:
Computer programs which are designed to carry out Substantive
procedures.
These Software’s are used for:
 Calculating ratios.
 Sequence check.
 Sample Selections.
 Preparing Reports.

These Software’s can include:

 Packaged Programs:

These are not client specific.

 Purpose Written programs:

These are client specific.

Merits of CAAT:

 Test more items quickly.

 Test the system rather than printouts.

Demerits of CAAT:

 Expensive.
 Time consuming.
 Lack of knowledge, skill.