AAA 1 - REVISION

CHAPTER 4 - OBTAINING AND ACCEPTING A NOMINATION

Fee computation
--> The seniority and experience of auditor engaged on the works
TENDERING
--> The time expended
CONSIDERATION
--> The degree of risk
--> The nature of the client's business, the complexibility of its operation and
audit work to be performed.
--> The priority and importance of the work to the client
--> Any expenses properly incurred during the audit
APPOINTMENT/NOMINATION is given

Prospective auditor must consider:

BEFORE ACCEPTING --> Ensure professional qualified to act as external auditor
NOMINATION --> Ensure existing resources adequate
--> Communicating with existing auditor (*)
--> Obtain references (**) Sources of information:….

Consideration of LEGAL ISSUES

AFTER ACCEPTING
--> Ensure that the existing auditor's removal or resignation has been properly conducted
NOMINATION
in accordance with national legislation.
--> Ensure that the prospective auditor's appointment is valid
--> Set up and submit engagement letter to directors of the company

PRECONDITION FOR THE --> Financial reporting framework applied by client is ACCEPTABLE
AUDIT --> Client's mgt acknowledges and understands its responsibility for the following:
--> Preparing FS true and fair
ISA 210 Agree the terms of audit engagement --> Internal controls that necessary to ensure reasonably that FS are free
requires auditor to only accept a new audit client from MM due to fraud and errors
if precondition for an audit are present --> Provide auditors right to access to all relevant information and person
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for audit purposes

Contents of an engagement letter

ENGAGEMENT LETTER --> Objectives and scope of the audit of the financial statements
--> Responsibilities of the auditors and mangements
--> Identification of applicable fiancial reporting framework for the prepration of FS
1. when?
2. What? --> Form and content of any reports to be issued by auditor
3. Recurring audit
--> not necessary to issue a new EL each year --> Inherent limitation of audit statemment
but review EL annually
--> EL should be renewed if there are changes --> Arrangements regarding the planning and performance of the audit
Eg: change Financial framework
--> Fee computation
--> Basis on which fees are computed
--> Billing arragements
--> A request for management to acknowledge receipt of the audit engagement letter
and to agree to the terms of the engagement onlined therein.
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CHAPTER 5 - PLANNING AND RISK ASSESSMENT

5.1 PLANNING THE AUDIT

to
--> devote appropriate attention to IMPORTANT AREAS
--> organise and manage the audit effectively
WHY DO WE NEED --> Assist in selection of audit team members
PLANNING THE
--> Identify and resolve POTENTIAL problems in TIMELY basis
AUDIT?
--> Facilitate the direction, supervision and review audit works
--> Assist in co-ordination of work done by COMPONENTS and EXPERTS

PLANNING
DOCUMENT

--> high level of documents

INCLUDING
AUDIT Characteristic of
Reporting objectives Nature, timing,
STRATEGY audit
Timing of the audit Significant
engagement and extent of
Nature of factors
(subject resources
communication
matters/clients)

FR framework Reporting objectives Determine M Select audit team

industry-specific Timetable identification of risks Assigment of work
requirements… Meetings with mgt.. Results of previous audit Set budget
… Significant changes… …
AAA 1 - REVISION

For more detail, see lecture guide

audit strategy is converted into detailed audit plan
Including
A desciption of nature, timing and extent of RISK ASSESSMENT PROCEDURES to
AUDIT
identify RoMM
PLAN
A description of nature, timing and extent of FURTHER AUDIT PROCEDURES to
response assessed RoMM

2. RISK ASSESSMENT

UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT

--> Identify and assess RoMM

--> design and implement APPROPRIATE AUDIT PROCEDURES to
WHY ?
response to assessed risks
--> make appropriate auditor's jugements

I-R-E Internal
Nature of Accounting Business
…. ….
WHAT? control
entity policies risks
system

I - Industry condition Operating Revenue recognition Sales system

R - Regulatory environment Investing Accounting for fair value Purchase system
E - External factors Financing … …
= general economic condition

for more detail, see lecture guide

AAA 1 - REVISION

AUDIT RISK

IR - INHERENT RISK CR - CONTROL RISK DR - DETECTION RISK

DEFINITION? …..

FACTORS?
….

AUDIT RISK MODEL

AR = IR * CR *DR
Risk of material misstatement
= RoMM
can not be controlled
can be assessed
AAR If RoMM is high => DR low = do more work
=C = increase amount of work, timing
= increase experienced staff
= increase sample size…
If RoMM is low => DR high = do less work
= decrease amount of work, timing
= decrease experienced staff
= decrease sample size…
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CHAPTER 7 - COMPLETION AND AUDIT REPORT

TYPES OF AUDIT REPORT & AUDIT OPINION

UNMODIFIED MODIFIED AUDIT REPORT

Modified audit report Modification to BOTH auditor's report

with unmodified audit and audit opinion
Unmodified opinion
opinion
= Auditor agrees Unmodified
with the FS opinion
= FS are presented draw an attention of users to the matters
fairly Modified opinion
that presented in FS not presented in FS
Eg: subsequent events Eg: last year FS audited by other firm
with modified opinion Insufficient
FS contains MM audit evidence =
EOM OM (disagreement) Limitation of

(1) Misstatement (2) (3) Level of limitation of scope

Material but not Pervasive M and Pervasive M but not pervasive M & pervasive
(2) Qualified '(3) Adverse (2) Quaified (4)
opinion opinion opinion Disclaimer
(except for) (except for) of opinion
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CHAPTER 7 - REPORTING
--> Title
--> Addressee
ELEMENTS OF AUDIT --> Opinion
--> Basis
REPORT --> Responsibility….

Key: The most significant matter during the audit

KAM - KEY AUDIT MATTER Eg: significant risk/significant auditor judgements: estimation…

Key: Auditor wants to draw USER's attention to the matters

EOM - EMPHASIS OF MATTERS THAT PRESENTED/DISCLOSED IN THE FS
Eg:Uncertainty relating to the future outcome of a litigation
MATTER

Key: Auditor wants to draw USER's attention to the matters

MATTERS THAT NOT PRESENTED/DISCLOSED IN THE FS
OM - OTHER MATTER Eg: this is first year audit
Eg: FS is inconsistent with other reports: annual report
….
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CHAPTER 6: AUDIT APPROACH

Risk assessments

Is there any effective internal control No

existence?

Yes
FULL SUBSTANTIVE TESTING

Is internal control effective

in implementation? Obtain evidence
Observation "ASSERTIONS"
Re-performance TEST OF CONTROL Eg: existence
Inspection Completeness
Inquiry Yes Valuation
…

Rely on the IC
Reduce SUBSTANTIVE TESTING

Internal control procedures/Activities

--> Authorisation

--> Physical control

--> Performance review

--> Information processing

--> Segregation of duty

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erly conducted

mation and person

 AAA 1 - REVISION

he prepration of FS