Explain the benefits of audit planning.

(4 marks) Dec 2014

Audit planning is addressed by ISA 300 Planning an Audit of Financial Statements. It states that
adequate planning benefits the audit of financial statements in several ways:

i) Helping the auditor to devote appropriate attention to important areas of the audit.
ii) Helping the auditor to identify and resolve potential problems on a timely basis.
iii) Helping the auditor to properly organise and manage the audit engagement so that it is
performed in an effective and efficient manner.

iv) Assisting in the selection of engagement team members with appropriate levels of capabilities and
competence to respond to anticipated risks and the proper assignment of work to them.

iv) Facilitating the direction and supervision of engagement team members and the review of their
work.
v) Assisting, where applicable, in coordination of work done by experts.

Define 'professional judgement' and describe TWO areas where professional judgement is applied
when planning an audit of financial statements. (3 marks) mock examination

Professional judgement

Professional judgement is the application of relevant training, knowledge and experience in making
informed decisions about the appropriate courses of action in the circumstances of the audit
engagement. The auditor must exercise professional judgement when planning an audit of financial
statements (ISA 200).

Professional judgement will be required in many areas when planning. For example, the determination
of materiality for the financial statements as a whole and performance materiality levels will require
professional judgement.

Professional judgement will also be required when deciding on the nature, timing and extent of audit
procedures.

In the context of audit planning, define the following terms:

(i) The overall audit strategy; and

(ii) The audit plan. (4 marks) Sep2019

Overall Audit Strategy

The overall audit strategy sets out the scope, timing and direction of the audit and guides the
development of the audit plan.

(don’t forget to mention the factors to be included in audit strategy document-from book)
Audit Plan

The audit plan describes the nature, timing and extent of risk assessment procedures, further audit
procedures to be carried out at the assertion level, and other procedures required for the execution of
an effective audit.

Describe auditor’s responsibilities in relation to the prevention and detection of fraud and error. (4
marks) Mar-June 2018, Sep-Dec 2019

Auditor must conduct an audit in accordance with ISA 240 The Auditor9s Responsibilities Relating to
Fraud in an Audit of Financial Statements and is responsible for obtaining reasonable assurance that the
financial statements taken as a whole are free from material misstatement, whether caused by fraud or
error.

In order to fulfil this responsibility, auditor is required to identify and assess the risks of material
misstatement of the financial statements due to fraud.

They need to obtain sufficient appropriate audit evidence regarding the assessed risks of material
misstatement due to fraud through designing and implementing appropriate responses. In addition,
auditor must respond appropriately to fraud or suspected fraud identified during the audit.

When obtaining reasonable assurance, auditor is responsible for maintaining professional skepticism
throughout the audit, considering the potential for management override of controls and recognizing
the fact that audit procedures which are effective in detecting error may not be effective in detecting
fraud.

To ensure that the whole engagement team is aware of the risks and responsibilities for fraud and error,
ISA 240 requires that a discussion is held within the team. For members not present at the meeting,
audit engagement partner should determine which matters should be communicated to them.

Explain why analytical procedures are used during THREE stages of an audit. (3 marks) Sep-Dec 2018

Analytical procedures can be used at all stages of an audit, however, ISA 315 Identifying and Assessing
the Risks of Material Misstatement through Understanding the Entity and Its Environment and ISA 520
Analytical Procedures identify three particular stages.

During the planning stage, analytical procedures must be used as risk assessment procedures in order to
help the auditor to obtain an understanding of the entity and assess the risk of material misstatement.

During the final audit, analytical procedures can be used to obtain sufficient appropriate evidence.
Substantive procedures can either be tests of detail or substantive analytical procedures.

At the final review stage, the auditor must design and perform analytical procedures which assist them
when forming an overall conclusion as to whether the financial statements are consistent with the
auditor’s understanding of the entity.
 In line with ISA 220 Quality Control for an Audit of Financial Statements, describe the audit
supervisor’s responsibilities in relation to supervising and reviewing the audit assistants’ work during
the audit. (4 marks)

Supervision

 Tracking the progress of the audit to ensure the timetable can be met

 Considering the competence of the team

 Addressing significant matters arising and modifying the planned approach accordingly

 Identifying matters for consultation. Consultation may be required where the firm lacks appropriate
internal expertise.

Review

 The work has been performed in accordance with professional standards

 Appropriate consultations have taken place

 The work performed supports the conclusions reached

 The evidence obtained is sufficient and appropriate to support the auditor's report.

 The objectives of the engagement procedures have been achieved.

You should also be aware of direction although it is not part of current question

Direction

Direction involves informing team members of:

 Their responsibilities

 Objectives of the work to be performed

 The nature of the business

 Risks  Problems that may arise

 The detailed approach to the performance of the engagement.

Explain the difference between an interim and a final audit. (5 marks) June2014

Interim audit
 The interim audit is that part of the audit which takes place before the year end. The auditor uses the
interim audit to carry out procedures which would be difficult to perform at the year end because of
time pressure. There is no requirement to undertake an interim audit; factors to consider when deciding
upon whether to have one include the size and complexity of the company along with the effectiveness
of internal controls.

Typical procedures undertaken during the interim audit include consideration of inherent risks,
documenting and testing of internal controls, testing of profit and loss transactions for the year to date
and identification of potential problems which may affect the final audit work.

Final audit

The final audit will take place after the year end and concludes with the auditor forming and expressing
an opinion on the financial statements for the whole year subject to audit. It is important to note that
the final opinion takes account of conclusions formed at both the interim and final audit.

Typical work carried out at the final audit includes follow up of items noted at the inventory count,
obtaining confirmations from third parties, analytical reviews of figures in the financial statements,
substantive procedures of account balances and transactions, review of events after the reporting
period and going concern.

Describe FOUR benefits of documenting audit work. (4 marks) June 2014

i) Provides evidence of the auditor9s basis for a conclusion about the achievement of the
overall objective of the audit.
ii) Provides evidence that the audit was planned and performed in accordance with ISAs and
applicable legal and regulatory requirements.

iii) Assists the engagement team to plan and perform the audit.
iv) Assists members of the engagement team responsible for supervision to direct, supervise and
review the audit work.
v) Enables the engagement team to be accountable for its work.
vi) Retains a record of matters of continuing significance to future audits.

Ethics and Acceptance

Define audit independence. (4 marks) June2020

Auditor Independence

Auditor independence includes independence of mind and independence of appearance.

Independence of mind is the state of mind which permits the expression of a conclusion without
being affected by influences which compromise professional judgement, thereby allowing an
individual to act with integrity, and exercise objectivity and professional scepticism. (Independence
in appearance is the avoidance of facts and circumstances which are so significant that a reasonable
and informed third party would be likely to conclude that a firm’s, or an audit team member9s,
integrity, objectivity or professional scepticism has been compromised.

Describe the process Audit firm should have undertaken to assess whether PRECONDITIONS for an
audit were present when accepting the audit of Client. (3 marks). Sep-Dec 2017

ISA 210 Agreeing the Terms of Audit Engagements states that auditors should only accept a new
audit engagement when it has been confirmed that the preconditions for an audit are present.

To assess whether the preconditions for an audit are present, audit team should have determined
whether the financial reporting framework to be applied in the preparation of financial statements
is acceptable. In considering this, the auditor should have assessed the nature of the entity, the
nature and purpose of the financial statements and whether law or regulation prescribes the
applicable reporting framework.

In addition, the firm should have obtained the agreement of client management that it
acknowledges and understands its responsibility for the following:

i) Preparation of the financial statements in accordance with the applicable financial reporting
framework, including where relevant their fair presentation;

ii) For such internal control as management determines is necessary to enable the preparation of
financial statements which are free from material misstatement, whether due to fraud or error; and

iii) To provide auditor with access to all relevant information for the preparation of the financial
statements, any additional information which the auditor may request from management and
unrestricted access to personnel within client from whom the auditor determines it necessary to
obtain audit evidence.

List SIX matters to be included within an audit engagement letter. (3 marks) Dec 2015, Mar 2020
i) The objective and scope of the audit;
ii) The responsibilities of the auditor;
iii) The responsibilities of management;
iv) Identification of the financial reporting framework for the preparation of the financial
statements;
v) Expected form and content of any reports to be issued;
vi) Elaboration of the scope of the audit with reference to legislation;
vii) The form of any other communication of results of the audit engagement;
viii) The fact that some material misstatements may not be detected;
ix) Arrangements regarding the planning and performance of the audit, including the composition of
the audit team;
x) The expectation that management will provide written representations;
xi) The basis on which fees are computed and any billing arrangements;
xii) A request for management to acknowledge receipt of the audit engagement letter and to agree
to the terms of the engagement;
xiii) Arrangements concerning the involvement of internal auditors and other staff of the entity; xiv)
Any obligations to provide audit working papers to other parties; xv) Any restriction on the auditor9s
liability;
xvi) Arrangements to make available draft financial statements and any other information.

Explain the safeguards which your firm should implement to ensure that this conflict of interest is
properly managed. (4 marks) Dec 2017

i) Both client and its competitor should be notified that your audit firm would be acting as auditors
for each company and, if necessary, consent obtained.
ii) Advising one or both clients to seek additional independent advice.
iii) The use of separate engagement teams, with different engagement partners and team members;
once an employee has worked on one audit, then they would be prevented from being on the audit
of the competitor for a period of time. This separation of teams is known as building a “Chinese
wall.”
iv) Procedures to prevent access to information, for example, strict physical separation of both
teams, confidential and secure data filing.
v) Clear guidelines for members of each engagement team on issues of security and confidentiality.
These guidelines could be included within the audit engagement letters.
vi) Potentially the use of confidentiality agreements signed by employees and partners of the firm.
vii) Regular monitoring of the application of the above safeguards by a senior individual in audit firm
not involved in either audit.

Explain the Purpose of an audit Engagement Letter. (2 marks) March 2020

An engagement letter provides a written agreement of the terms of the audit engagement between
the auditor and management or those charged with governance.

It confirms that there is a common understanding between the auditor and management, or those
charged with governance, of the terms of the audit engagement helps to avoid misunderstandings
with respect to the audit. (for better answer please take reference from the book)

What are the factors to be considered before Accepting/continuing an audit engagement?

Take reference from book-chapter 4 subtopic 6