In order to conduct an audit effectively and efficiently, an auditor should properly plan for the assignment Explain the matters that an auditor should take into account at the planning stage of an audit exercise Outline the ways in which an auditor acquires knowledge about the client‘s business and industry

In order to conduct an audit effectively and efficiently, an auditor should properly plan for the assignment.

i) Matters to be considered at the planning stage of the audit.
ISA 300 – Planning an audit of financial statements states that the auditor should plan the audit so that the engagement will be performed in an effective manner. Planning the overall audit strategy for the engagement and developing an audit plan

  • Matters to be considered;
    Knowledge of business
    – General economic factors and including conditions affecting the entity‘s business
    – Important characteristics of entity, its business, its financial performance and its reporting requirements including changes since date of prior audit
    – General level of competence of management
  • Understanding accounting and internal control systems
    – Accounting policies adopted by the entity and changes in those policies
    – Effect on new accounting and auditing pronouncements
    – Auditing cumulative knowledge of accounting and internal control systems is the relative emphasis expected to be placed on tests of control and substantive procedures
  • Risk and materiality
    – The expected assessment of inherent and control risks and the identification of significant audit areas
    – The setting of materiality levels for audit purposes
    – Possibility of material misstatement, including experience of past periods or fraud
    – Identification of complex accounting areas including those involving accounting estimates
  • Nature, timing and extent of procedures
    – Possible change of emphasis on specific audit areas
    – Effect of information technology on the audit
    – Work of internal auditing and its expected effect on external audit procedures
  • Co-ordination, Direction, Supervision and Preview
    – Involvement of other auditors in audit of components e.g subsidiaries, branches and divisions
    – Involvement of experts
    – Number of locations
    – Staffing requirements

Other matters;
– Possibility that going concern assumption may be put to question

– Conditions requiring special attention, such as the existence of related parties
– Terms of engagement and any statutory responsibilities
– Nature, timing of reports or other communication with the entity that are expected under the engagement

ii) Ways of acquiring knowledge of business and industry
According to ISA 310 – Knowledge of business, such methods are;
• Previous experience with entity and industry
• Discussion with the people of the entity e.g. directors, senior operating personnel
• Discussion with internal audit personnel and review of internal audit reports
• Discussion with other auditors and with legal and other advisors who have provided services to entity or within the industry
• Discussion with knowledgeable people in the entity e.g. industry economists, industry regulators, customers, suppliers and competitors
• Publications related to industry e.g. government statistics, surveys, texts, trade journals, reports prepared by banks and security dealers, financial newspapers etc
• Legislation and regulations that significantly affect the entity
• Visits to entity‘s premises and plant facilities
• Documents produced by entity e.g.

  • Minutes of meetings
  • Material
  • sent to shareholders
  • Material filed with regulatory authorities
  • Promotional literature
  • Prior years annual and financial reports
  • Budgets
  • Interim financial reports
  • Management policy manual
  • Manuals of accounting and internal control systems
    The auditor can also consider;
    i) General economic factors such as;
    – General economic activity
    – Interest rates and availability of financing
    – Inflation, currency revaluation
    – Government policies
    – Monetary
    – Taxation
    – Tariffs, trade restrictions
    – Fiscal
    – Financial incentives

ii) Industry – Important conditions affecting client‘s business

  • Market and competition
  • Cyclical or seasonal activity
  • Changes in product technology
  • Business risk
  • Adverse conditions as declining demand
  • Key ratios and operating statistics
  • Specific accounting practices and problems
  • Environmental requirements and problems
  • Regulatory framework
  • Energy supply and cost

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