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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.
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.
What to know:
Market and its competition.
Regulatory framework.
Accounting
Financial structure.
How to know:
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:
Risk Assessment:
IAS 315 states that the auditor should identify and assess the risk involve in
business through understanding the entity environment.
Audit risk is the risk that the auditor expresses an inappropriate audit opinion
when the financial statements are materially misstated .
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.
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 .
According to Meigs:
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 :
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.
Board Of directors:
Auditors:
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:
Appropriate Audit:
Appropriateness is the measure the quality of audit evidence and its relevance to a
particular assertion and reliability.
General Meaning:
Explanation.
Announcement.
Definition:
Types of Assertions:
Accuracy.
Cut-off.
Classification.
(2) Assertions about Account Balances.
Existence.
Rights and obligation.
Completeness.
Valuation and Allocation.
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.
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.
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.
It is the estimated selling price in the ordinary course of business, less the
estimated costs necessary to make the sale.
Procedures:
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.
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.
If inventory held by third party the auditor should ask for direct confirmation
from the third party regarding quantity, values.
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.
Packaged Programs:
Merits of CAAT:
Demerits of CAAT:
Expensive.
Time consuming.
Lack of knowledge, skill.