Chapter 5 Audit Planning and Documentation

Answer 1
1. Review previous years audit files.
2. Discuss with the management of BFL.
3. Read news related to the fashion industry.
4. Visits to the shops and head office of BFL.
5. Review internal documents of BFL.
6. Discuss with internal auditor and review of internal audit report.
7. Discuss with specialists, including legal advisors and other knowledgeable people in the
fashion industry.
8. Review legislation and regulations that significantly affect BFL.

Answer 2
1. Nature of revenue sources
2. Key customers
3. Products or services and markets
4. Conduct of operations
5. Alliances, joint ventures, and outsourcing activities
6. Employment
7. Geographical dispersion
8. Research and development activities and expenditures

Answer 3
(a)
The auditors should satisfied that appropriate procedures regarding the acceptance of audit
engagement have been followed, and that conclusions reached in this regard are appropriate
and have been documented.

Acceptance of audit engagement include the considering of:

The integrity of the two directors of GF Limited.
Whether ABC & Co is competent to perform the audit engagement and whether ABC &
Co is familiar with the restaurant industry.
Whether ABC & Co has the adequate time and resources to complete the audit in such a
short period of time as requested.
Whether ABC & Co and the engagement team can comply with ethical requirements.

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(b)
The incoming auditors should
(1) find out whether the change of auditor was properly dealt with in accordance with the
Companies Ordinance and/or other legislation; and
(2) request the prospective clients permission to communicate with the ex-auditor.

On receipt of permission from GF Limited to communicate with XYZ & Co, ABC & Co
should write to XYZ & Co to obtain professional clearance; that is, a request in writing to
XYZ & Co to establish if there are any unusual circumstances surrounding the proposed
change which ABC & Co should be aware of, so that ABC & Co may determine whether
ABC & Co should accept such nomination.

(c)
For the acceptance of a new client, CBA & Co has to consider the following:
(1) The integrity of the new client.
(2) The competency of the audit firm to perform the audit and whether the audit firm has
the capabilities, time and resources to perform the audit.
(3) Whether the firm can comply with ethical requirements.

Answer 4
According to HKSA 300 (Clarified), adequate planning benefits the audit of financial
statements in several ways, including the following:
(a) Carry out a most effective and efficient audit.
(b) Conduct the audit in a timely manner.
(c) Achieve audit objectives.
(d) Allocate appropriate team members and assignment of work.
(e) Achieve better co-ordination.
(f) Draw attention to high risk important areas.
(g) Complete audit on a timely basis.
(h) Respond appropriately to recent changes in industry regulations and financial
reporting.

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Answer 5
(a)
The analytical procedures to be applied as part of risk assessment procedures at the planning stage are
for the following purposes:
(1) To understand the clients business and industry in order to assess the clients business
risk.
(2) To understand the clients classes of transactions and account balances.
(3) To indicate aspects of the entity of which the auditor was unaware and will assist in
assessing the risks of material misstatement, in particular risks of material
misstatement due to fraud in order to determine nature, timing and extent of further
audit procedures.
(4) To identify financial statement accounts that are likely to contain errors.
(5) To provide an indication of the companys performance by comparing clients ratios to
ratios of industry or competitors.
(6) To identify areas of increased risk of misstatements that may require further attention
during the audit where unusual changes in ratios compared to prior years or industry
average.
(7) To identify areas of specific risk by comparing the liquidity and activity ratios with
prior years.
(8) To allocate more resources for investigation of areas of high risk of material
misstatement.
(9) To help identify the existence of unusual transactions or events, and amounts, ratios, and
trends that might indicate matters that have audit implications.

(b)
Analytical procedures are the evaluations of financial statements made by a study of
comparison of recorded amount to expectation developed by the auditor.

Auditors compare clients account balances or ratios with:

1. industry data, e.g. industry average
2. prior period data, e.g. account balance, total balance and ratios
3. auditor-determined expected results
4. client-determined expected results
5. expected non-financial data

(c)
Independence requires independence in mind and independence in appearance.

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Independence of mind
The state of mind that permits the provision of an opinion without being affected by
influences that compromise professional judgment, allowing an individual to act with
integrity, and exercise objectivity and professional skepticism.

Independence in appearance
The avoidance of facts and circumstances that are so significant that a reasonable and
informed third party, having knowledge of all relevant information, including safeguards
applied, would reasonably conclude a firm's, or a member of the assurance team's, integrity,
objectivity or professional skepticism had been compromised.

It is importance for an auditor to maintain objectivity which means not to allow bias, conflict
of interest or undue influence of others to override professional judgments.

(d)
The close relationship between Mary and the accounting manager of NWL creates the
familiarity threat.

Familiarity threat is the threat that due to a long or close relationship with a client or
employer, a professional accountant will be too sympathetic to their interests or too accepting
of their work.

The familiarity threat created would be so significant that the safeguard available to eliminate
the threat or reduce it to an acceptable level is to remove Mary from the assurance team.

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Answer 6
There is no 'right' answer as the determination of audit planning materiality is a judgment
process with only limited professional guidance offered.

The calculation needs to take into consideration both quantitative data (ie financial
information, etc) as well as qualitative aspects (eg users, risks, type of industry, etc).

The calculation generally involves a decision as to an appropriate base for materiality. This
would mainly be determined by the users (eg if J is listed, then profit will most likely be the
key information of interest), industry, the type of operations and other factors which affect the
judgment as to which financial information is of key importance and therefore should be the
basis for the auditor's materiality decision.

The next important decision relates to the choice of percentage. There are some generally
accepted percentage ranges ('rules of thumb') in relation to the most common bases. The
major factor in determining the percentage used will be the overall risk of the entity.

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Answer 7
In addition to the mentioned objectives, audit documentation serves a number of purposes,
including:
Assisting the audit team to plan and perform the audit.
Assisting members of the audit team responsible for supervision to direct and supervise
the audit work, and to discharge their review responsibilities.
Enabling the audit team to be accountable for its work.
Retaining a record of matters of continuing significance to future benefits.
Enabling the conduct of quality control reviews and inspections.
Enabling the conduct of external inspections in accordance with applicable legal,
regulatory or other requirements.

Answer 8

1. A lease agreement. PF

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2. A confirmation of financial institution deposits. CF
3. Articles of incorporation. PF
4. An analysis of long-term debt. PF
5. A pension agreement. PF
6. An adjusted trial balance. CF
7. Adjusting journal entries. CF
8. An analysis of miscellaneous expense. CF
9. An analysis of owners equity accounts. PF
10. A chart of accounts. PF

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