The Risk-based Financial Statement Audit –

Client Acceptance, Audit Planning,

Supervision and Monitoring
 Audit Evidence and Documentation

Conclusion &
Risk Assessment Risk Response
Reporting

Risk-based Audit Process

Professional Judgment
Professional Skepticism

Preliminary Engagement Activities
Planning an Audit
Considering materiality
and audit risk
Understanding the entity
& its environment
(including internal controls)
compliance with laws & regulations
Identify & assess risks of material
misstatements
Responding to assessed
risks on financial Completing the audit &
statements level forming an opinion on the financial
statements
Responding to assessed
risks on assertions level
Issuing the
Extent of testing auditor’s report
Frauds, errors, and non-
Post-audit responsibilities including
final
assembly of audit files
Considering Other Specific Audit
Areas
Audit Quality
The Risk-based Financial Statement Audit –
Client Acceptance, Audit Planning,
Supervision and Monitoring
 ▪ YOUR competence Understanding client’s business &industry
To ▪ YOUR independence Identify independence threats
accept/continue ▪ YOUR capability to serve the client Check your resources & client auditability.
or not? ▪ The PROSPECTIVE CLIENT’S
Articles, inquiry, previous auditor (RID)
integrity
New client/new
engagement
Use of acceptable FRF

Request for a change in engagement? Agreement of management on audit premise Preconditions?

Reasonable Unreasonable Engagement letter Agree terms of

Continue the engagement
Stop the old
old; if not
and start the Recurring audit Audit of components
allowed,
new Should I send a new one every year? Should I send a separate one to each?
withdraw

Audited FS

Evaluated by the
Unaudited FS Audit opinion
auditor
4
 Audited FS
Evaluated by
Unaudited FS
the auditor Audit opinion
ASSERTIONS
A
U A
D U
Audit files:
I D Permanent
T I Temporary
T Assembly:
P 60 days from
R E audit report
date
O V
C I Retention:
No shorter
E D than
D E 7 years
U N
R C
E E
S

AUDIT DOCUMENTATION
The Risk-based Financial Statement Audit –
Client Acceptance, Audit Planning,
Supervision and Monitoring
 AUDIT PLANNING
Coordination | Assignment of work | Direction and supervision | Manage the audit | Attention to important areas | Potential problems
Identifying and assessing Establishing overall
overall Direction, Supervision,
Developingan
Developing anAudit
Audit Plan
ROMM audit strategy
audit strategy Review

Inquire, Inspect, Observe,

Analytical Procedures
Obtaining an understanding of
M the entity & its environment,
RAP
3 including internal controls
Affected by both the size and/ nature
of a misstatement
Immaterial if trivial & inconsequential
Considering materiality Must be considered by the auditor in
both the PLANNING and
COMPLETION phases

Identifying and assessing RMM

Applying the audit risk model

 AUDIT PLANNING
Coordination | Assignment of work | Direction and supervision | Manage the audit | Attention to important areas | Potential problems
Overall Performance Specific
Identifying and assessing Establishing overall
overall Direction, Supervision,
Developingan
materiality
Developing anAudit
Audit
materiality
Plan materiality
ROMM audit strategy
audit strategy Review
Other terms General materiality Tolerable Individual
Inquire, Inspect, Observe,
level; planning
Analytical Procedures misstatement; materiality
Obtaining an understanding of materiality scoping materiality
M the entity & its environment,
RAP
3 Nature/definition Smallest aggregate Amount less than Amount set by the
including internal controls
amount of
Affected by both the size and/ nature
OM. Calculated as auditor for
misstatement
of a misstatement a certain particular/specific
Immaterial if trivial &applicable to all FS
inconsequential percentage of OM classes of
Considering materiality Must be considered by the auditor in in order to capture transactions,
both the PLANNING and any uncorrected account balances,
COMPLETION phases misstatements. or disclosures
Importance/use Helps determine Used in Used for specific
Identifying and assessing RMM whether the PAJEs determining items that the
are significant (scoping) FS line auditor deems to
items to be tested. need its own
materiality
consideration
Applying the audit risk model
Illustration Benchmark x % OM x % PM x %
Where % is 100%-
Haircut or Cushion
 AUDIT PLANNING
Coordination | Assignment of work | Direction and supervision | Manage the audit | Attention to important areas | Potential problems
Identifying and assessing Establishing overall
overall Direction, Supervision,
Developingan
Developing anAudit
Audit Plan
ROMM audit strategy
audit strategy Review

Inquire, Inspect, Observe,

Analytical Procedures
Obtaining an understanding of
M the entity & its environment,
RAP
3 including internal controls
Affected by both the size and/ nature
of a misstatement
Immaterial if trivial & inconsequential
Considering materiality Must be considered by the auditor in
both the PLANNING and
COMPLETION phases
AASC Bulletin Series 001 of 2010
FS Level
Identifying and assessing RMM Control risk
Assertion level
High Medium Low
High Lowest Lower Medium
Inherent
risk Medium Lower Medium Higher
Applying the audit risk model

Low Medium Higher Highest

 AUDIT PLANNING
Coordination | Assignment of work | Direction and supervision | Manage the audit | Attention to important areas | Potential problems
Identifying and assessing Establishing overall
Establishing overall Direction, Supervision,
Developingan
Developing anAudit
Audit Plan
ROMM audit strategy
audit strategy Review

Efficient and effective audit.

The auditor shall To establish audit

P establish an overall
overall strategy, consider:
S audit strategythat
audit strategy thatsets
sets 1. Characteristics of FRF used? Industry specific requirements? Coverage (locations, components)?
A the scope, timingand
scope, timing and the engagement
3 direction
direction ofofthe
theaudit,
audit, 2. Reporting objectives Reporting frequency and deadlines? Expected communications?
0 and that guides the of the engagement
development of the 3. Factors significant in Materiality? High RMM areas? Substantive or nonsubstantive approach?
0
audit plan.
audit plan. directing ET
4. Results of PEA
5. Nature, timing, and Selection of audit team? Is EQCR needed? Are experts needed? How will budget
Audit strategy vs extent of resources be affected?
audit plan?

Audit Strategy – sets
out in GENERAL terms
how the audit is to be
conducted and sets the
scope, timing, and
direction of the audit.
Scope: What activities will be covered? Audit Plan – contains the
Timing: When will audit work be detailed responses to the
Nature RAP
performed? auditor’s risk assessment and
Timing FAP
Direction: What are the focal areas? determines how the audit will be Others
Extent
Resources: What resources are needed? performed at the assertion level.
 AUDIT PLANNING
Coordination | Assignment of work | Direction and supervision | Manage the audit | Attention to important areas | Potential problems
Identifying and assessing Establishing overall
overall Direction, Supervision,
Direction, Supervision,
Developingan
Developing anAudit
Audit Plan
Plan
ROMM audit strategy
audit strategy Review
Review

Audit Plan – contains the

Affected by:
detailed responses to the
Nature RAP 1. Size and complexity
auditor’s risk assessment and FAP
Timing of the entity
determines how the audit will be Other Audit
Extent 2. Area of the audit
performed at the assertion level. Procedures
3. Assessed RMM
4. Capabilities and
Sets out in broad terms the planned audit procedures. competence of team
members

Audit Program – contains a detailed set of instructions to

assistants involved in the audit.
 OTHER AUDIT PLANNING CONSIDERATIONS

Use of service organization Audit of Group FS

 OTHER AUDIT PLANNING CONSIDERATIONS

Use of an auditor’s expert Use of the work of internal auditors

Let’s now go to the questions!

14
Before accepting an audit engagement, a successor auditor should
make specific inquiries of the predecessor auditor regarding RID

a. The degree of cooperation the predecessor received concerning

the inquiry of the client’s lawyer
b. The predecessor’s evaluation of matters of continuing accounting
significance
c. Disagreements the predecessor had with the client concerning
auditing procedures and accounting principles
d. The predecessor’s assessments of inherent risk and judgments
about materiality
Which of the following factors most likely would cause a CPA to not
accept a new audit engagement?
a. The CPA lacks an understanding of the prospective client's
operations and industry
b. The prospective client is unwilling to make all financial records
available to the CPA
c. The prospective client has already completed its physical
inventory count
d. The CPA is unable to review the predecessor auditor's audit
documentation
The auditor should design the written audit program so that
a. Each account balance will be tested under either tests of controls
or tests of transactions
b. The audit procedures selected will achieve specific audit
objectives
c. All material transactions will be selected for substantive testing
d. Substantive tests prior to the balance sheet date will be minimized
The following are considered by a CPA firm in deciding whether to
accept a new client, except
a. The client’s financial ability
b. The client’s probability of achieving an unqualified opinion
c. The client’s standing in the business community
d. The client’s relations with its previous CPA firm
The in-charge auditor most likely would have a supervisory
responsibility to explain to the staff assistants
a. What benefits may be attained by the assistants' adherence to
established time budgets
b. How the results of various auditing procedures performed by the
assistants should be evaluated
c. That fraud is not to be reported to those charged with governance
d. Why certain documents are being transferred from the current file
to the permanent file
As the acceptable level of detection risk decreases, the assurance
directly provided from
a. Tests of controls should decrease
b. Tests of controls should increase
c. Substantive tests should increase
d. Substantive tests should decrease
Which of the following factors most likely would lead a CPA to
conclude that a potential audit engagement should be rejected?
a. Management has a reputation for consulting with several
accounting firms about significant accounting issues
b. It is unlikely that sufficient appropriate evidence is available to
support an opinion on the financial statements
c. Internal control activities requiring the segregation of duties are
subject to management override
d. The details of most recorded transactions are not available after a
specified period of time
In relation to audit planning, the auditor should document the
following:
a. The overall audit strategy
b. The detailed audit plan
c. Significant changes made during the audit engagement
d. All of the above
An auditor should obtain sufficient knowledge of an entity's
information system relevant to financial reporting to understand the:
a. Safeguards used to limit access to computer facilities
b. Process used to prepare significant accounting estimates
c. Procedures used to assure proper authorization of transactions
d. Policies used to detect the concealment of fraud
In using the work of a specialist, an auditor of a non-issuer may refer
to the specialist in the auditor's report if, as a result of the specialist's
findings, the auditor
a. Becomes aware of conditions causing substantial doubt about the
entity's ability to continue as a going concern
b. Desires to disclose the specialist's findings, which imply that a more
thorough audit was performed
c. Discovers significant deficiencies in the design of the entity's
internal control that management does not correct
d. Is able to corroborate another specialist's earlier findings that were
consistent with management's representations
An auditor is required to establish an understanding with a client
regarding the services to be performed for each engagement. This
understanding generally includes
a. The auditor’s responsibility for ensuring that the audit committee is
aware of any significant deficiencies in internal control that come to
the auditor’s attention
b. The auditor’s responsibility for determining preliminary judgment
about materiality and audit risk factors
c. Management’s responsibility for errors and the illegal activities of
employees that may cause material misstatement
d. Management’s responsibility for providing the auditor with an
assessment of the risk of material misstatement due to fraud
The work of internal auditors may affect the independent auditor’s:
I. Procedures performed in obtaining an understanding of internal
control;
II. Procedures performed in assessing the risk of material
misstatement;
III. Substantive procedures performed in gathering direct evidence.

a. I, II, and III

b. II and Ill only
c. I and II only
d. I and III only
If a change in the type of engagement from higher to lower level of
assurance is not justified, the auditor should
a. Qualify the report on the original engagement
b. Continue with the revised engagement, but make explicit reference
about the original engagement
c. Refuse to agree to management’s request on the change of
engagement and continue with the original engagement
d. Withdraw from the engagement
In connection with the examination of financial statements, an
independent auditor could be responsible for failure to detect a
material fraud if
a. Statistical sampling techniques were not used on the audit
engagement
b. The fraud was perpetrated by one client employee, who
circumvented the existing internal controls
c. Accountants performing important parts of the work failed to
discover a close relationship between the treasurer and the cashier
d. The auditor planned the work in a hasty and inefficient manner
A retail entity uses electronic data interchange (EDI) in executing and
recording most of its purchase transactions. The entity's auditor
recognizes that the documentation of the transactions will be retained
for only a short period of time. To compensate for this limitation, the
auditor most likely would
a. Increase the sample of EDI transactions to be selected for cutoff
tests
b. Plan to make a 100% count of the entity's inventory at or near the
year-end
c. Decrease the assessed level of control risk for the existence or
occurrence assertions
d. Perform tests several times during the year, rather than only at
year-end
Reasons for discontinuing clients might include the following, except
a. Client need for specialized services the current audit firm is unable
or unwilling to provide
b. Inability to negotiate an acceptable increase in the audit fee
c. Difficulty in working with client personnel
d. Evidence indicating a client’s management has integrity
Which of the following is required documentation in an audit in
accordance with generally accepted auditing standards?
a. An internal control questionnaire identifying controls that assure
specific objectives will be achieved
b. An audit plan setting forth in detail the procedures necessary to
accomplish the engagement's objectives
c. A flowchart or narrative of the information system relevant to
financial reporting describing the recording and classification of
transactions for financial reporting
d. A planning memorandum establishing the timing of the audit
procedures and coordinating the assistance of entity personnel
Which of the following is not considered by the CPA when he makes
an overall audit plan?
a. Identification of complex accounting areas including those involving
accounting estimates.
b. The nature and timing of reports and other communication with the
entity that are expected under the engagement.
c. The effect of information technology on the audit.
d. The content of the representation letter.
Which of the following matters generally is included in an auditor's
engagement letter?
a. The auditor's responsibility to search for significant internal control
deficiencies
b. The factors to be considered in setting preliminary judgments about
materiality
c. Management's vicarious liability for illegal acts committed by its
employees
d. Management's responsibility for the entity's compliance with laws
and regulations
Is there a need to send a new engagement letter every year?
a. Definitely yes
b. Definitely no
c. No need to send new engagement letter every year except when
there are revisions in the agreement or in the major parties to the
agreement
d. There is a need to send a new engagement letter every year
especially if there are mutual understandings.
The existence of audit risk is recognized by the statement in the
auditor's standard report that the
a. Audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements
b. Auditor obtains reasonable assurance about whether the financial
statements are free of material misstatement
c. Financial statements are presented fairly, in all material respects, in
conformity with GAAP
d. Auditor is responsible for expressing an opinion on the financial
statements, which are the responsibility of management.
Which of the following procedures would an auditor most likely
perform in planning a financial statement audit?
a. Inquiring of the client's legal counsel concerning pending litigation
b. Searching for unauthorized transactions that may aid in detecting
unrecorded liabilities
c. Comparing the financial statements to anticipated results
d. Examining computer generated exception reports to verify the
effectiveness of internal controls
The element of the audit planning process most likely to be agreed
upon with the client before implementation of the audit strategy is the
determination of the
a. Procedures to be undertaken to discover litigation, claims, and
assessments
b. Evidence to be gathered to provide a sufficient basis for the
auditor’s opinion
c. Pending legal matters to be included in the inquiry of the client’s
attorney
d. Timing of inventory observation procedures to be performed
The audit program usually cannot be finalized until the

a. Engagement letter has been signed by the auditor and the client
b. Search for unrecorded liabilities has been performed and
documented
c. Reportable conditions have been communicated to the audit
committee of the board of directors
d. Consideration of the entity’s internal control has been completed
This is a listing of all the things which the auditor will use to gather
sufficient appropriate audit evidence:
a. Audit plan
b. Audit program
c. Audit risk model
d. Audit procedure
This refers to the development of a general strategy and a detailed
approach for the expected nature, timing and extent of audit refers to
a. Audit planning
b. Supervision
c. Pre-engagement
d. Direction
What is the objective of an audit team during the planning stage?
a. To determine the scope of the audit procedures to be performed
b. To be able to minimize the risk of material misstatement
c. To be able to determine the extent of tests of controls
d. To be able to produce the time budget
In obtaining an understanding of the entity and its environment,
including its internal control, an auditor is required to obtain
knowledge about the
a. Consistency with which the internal controls are currently being
applied
b. Controls related to each principal transaction class and account
balance
c. Design of relevant internal controls pertaining to financial reporting
in each of the five internal control components
d. Effectiveness of the internal controls that have been implemented
This type of materiality is used in scoping in and out-scoping line
items to be audited.
a. Performance Materiality
b. Overall Materiality
c. Account Balance Materiality
d. Planning Materiality
In determining the overall materiality, which of the following is the best
choice for the audit engagement?
a. Lowest materiality
b. Highest materiality
c. Either lowest or highest, depending on the audit team
d. None of the choices
Consider the following statements:
1. Materiality is directly related to audit risk; the more material the
account balance or transaction, the higher is the audit risk needed
hence, more substantive tests and vice versa;
2. Materiality is directly related to detection risk; the more material
the account balance or transaction is, the lower the detection risk
is present.

a. Both statements are correct

b. Both statements are incorrect
c. Only one statement is correct
d. Only one statement is incorrect
When the auditors allocate the preliminary judgment about materiality
to account balances, the materiality allocated to any given account
balance is referred to as

a. Tolerable misstatement
b. The materiality range
c. Tolerable materiality
d. The error range
When a CPA is the auditor of a parent entity and also the auditor of its
subsidiary, branch or division (component), which of the following
factors need not be considered in deciding whether to send a
separate engagement letter to the component?
a. Number of reports to be prepared during the peak audit season
b. Whether a separate audit report is to issued on the component
c. Legal requirements
d. Who appoints the auditor of the component
Analytical procedures used in planning an audit should focus on
a. Assessing the adequacy of the available evidence
b. Providing assurance that potential material misstatements will be
identified
c. Enhancing the auditor’s understanding of the client’s business
d. Reducing the scope of tests of controls, and substantive tests
If the auditor anticipates reliance on the client’s internal controls, the
auditor would
a. Eliminate the need for performance of substantive tests
b. No longer perform tests of controls and proceed immediately to
substantive tests
c. Perform tests of controls and increase the amount of substantive tests
d. Test controls and use the results of testing as a basis for determining
the nature, extent and timing of substantive tests
If a change in the type of engagement from higher to lower level of
assurance is reasonably justified, the report based on the revised
engagement
a. Should refer to the original engagement in a separate paragraph
preceding the opinion paragraph
b. Should always refer to any procedures that may have been performed
in the original engagement
c. Should qualify the opinion due to a scope limitation
d. Omits reference to the original engagement
On the basis of audit evidence gathered and evaluated, an auditor decides
to increase the assessed risk of material misstatement from that originally
planned. To achieve an overall audit risk level that is substantially the
same as the planned audit risk level, the auditor would:
a. Increase inherent risk
b. Decrease detection risk
c. Increase materiality levels
d. Decrease substantive testing
Of the following nonfinancial information, what would an auditor most likely
consider in performing analytical procedures during the planning phase of
an audit?
a. Turnover of personnel in the accounting department
b. Square footage of selling space
c. Management's plans to repurchase stock
d. Objectivity of audit committee members
In designing audit programs, an auditor should establish specific audit
objectives that related primarily to the
a. Selected audit techniques
b. Cost-benefit of gathering evidence
c. Timing of audit procedures
d. Financial statement assertions
In planning an audit of a new client, an auditor most likely would consider
the methods used to process accounting information because such
methods
a. Affect the auditor's preliminary judgment about materiality levels
b. Influence the design of internal control
c. Determine the auditor's acceptable level of audit risk
d. Assist in evaluating the planned audit objectives
Holding other planning consideration equal, a decrease in the amount of
misstatement in a class of transactions that an auditor could tolerate most
likely would cause the auditor to
a. Decrease the extent of auditing procedures to be applied to the class of
transactions
b. Perform the planned auditing procedures closer to the balance sheet
date
c. Apply the planned substantive tests prior to the balance sheet date
d. Increase the assessed level of control risk for relevant financial
statements assertions
Which of the following procedures would an auditor least likely perform in
planning a financial statement audit?
a. Coordinating the assistance of entity personnel in data preparation
b. Selecting a sample of vendor’s invoices for comparison to receiving
reports
c. Reading the current year’s interim financial statements
d. Discussing matters that may affect the audit with firm personnel
responsible for non-audit services to the entity
The establishment of the overall audit strategy involves
a. Considering the important factors that will determine the focus of the
engagement team’s efforts
b. Determining the characteristics of the engagement that defines its
scope
c. Ascertaining the reporting objectives of the engagement to plan the
timing of the audit and the nature of the communications required
d. All of the answers
Which of the following auditor concerns most likely could be so serious
that the auditor concludes that a financial statement audit cannot be
performed?
a. Management fails to modify prescribed internal controls for changes in
information technology
b. Internal control activities requiring segregation of duties are rarely
monitored by management
c. Management is dominated by one person who is also the majority
stockholder
d. There is a substantial risk of intentional misapplication of accounting
principles
In allocating materiality, most practitioners choose to allocate to
a. Other comprehensive income accounts
b. Equity accounts
c. Income statement accounts
d. Balance sheet accounts
The following factors affect the inherent risk at the financial statement
level, except
a. Management integrity
b. Management characteristics
c. Operating characteristics
d. Systemic characteristics
Risk assessment procedures include the following, except

a. Confirmation of accounts receivable

b. Observation and inspection
c. Analytical procedures
d. Inquiries of management
Which of the following factors most likely would influence an auditor's
determination of the auditability of an entity's financial statements?
a. The complexity of the information system relevant to financial reporting
b. The operating effectiveness of controls
c. The existence of related party transactions
d. The adequacy of the accounting records
Which of the following statements would least likely appear in an auditor's
engagement letter?
a. After performing our preliminary analytical procedures we will discuss
with you the other procedures we consider necessary to complete the
engagement
b. Our engagement is subject to the risk that material errors or fraud,
including defalcations, if they exist, will not be detected
c. During the course of our audit we may observe opportunities for
economy in, or improved controls over, your operations
d. Fees for our services are based on our regular per diem rates, plus
travel and other out-of-pocket expenses
Which of the following would an auditor most likely use in determining the
auditor's preliminary judgment about materiality?

a. The contents of the management representation letter

b. The results of the internal control questionnaire
c. The anticipated sample size of the planned substantive tests
d. The entity's annualized interim financial statements
THANKS!

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