GS PPT Topic 5 Client Evaluation Planning the Audit(1)

8/17/2019 GS PPT Topic 5 Client Evaluation Planning the Audit(1)

1/58

TOPIC 5

CLIENT EVALUATIONAUDIT RISK ASSESSMENT


2/58

Course ContentGENERAL

1) Introduction to auditing & auditors (Chapter 1)2) The auditing environment and boundaries for nancial auditing (Chapters 1 & 6)3) ole of auditing in corporate governance (Chapter 2) ! GROUP ASSIGNMENT announced (due May 2 "ee#)$) %rofessional and ethical obligations of auditors and auditors legal liabilit' (Chapters 3 & )

AUDITING PROCESS

% *++I+,5) Cl ent e!aluat on " #lann n$ t%e au& t 'C%a#ter ()

MIDTERM E AM 'APRIL ()

6) *udit ris#- materialit' concepts and audit evidence (Chapters . & 1/)

SC*OOL +REAK 'A#r l ,-.May,)

0 I4) Control ris#s & tests of controls and 0esigning substantive procedures (Chapter 11 & 12)5) *uditing transactions & balances ! 1 (Chapters 1$ & 1 ).) *uditing transactions & balances ! 2 (Chapters 16 & 14)

C 7% TI +1/)Completing the audit (Chapter 15)11)The *uditor s report (Chapter 4)

/INAL E AM


3/58

b8ective of 9inancial *uditor

The main responsibilit' of nancial audit is to perform theannual audit of the nancial accounts and reporting- providingan opinion "hether the' are a true and fair re:ection of thecompan' s position in all material respects in accordance "ithsome accounting frame"or# & principles;

< = 0>?• To give an O# n on on nancials• True an& 0a r ! e1• In all ater al respects• In accordance "ith a frame"or# ( I/RS )• @' obtaining e! &en3e for management assert ons• @' being in line "ith IAS and PES and in conformit' "ith the

egulations


4/58

*udit is#

• *udit ris# is the ris# that an auditoreApresses an inappropriate audit opinion"hen a nancial report is materiall'misstated

• In other "ords- it is the ris# of notdetecting material misstatements;

• Therefore- all audit "or# should focus onpreventing this ris#; *udit planning iscritical from this perspective;


5/58

9inancial *udit %rocess

• %erform is# *ssessment %rocedures• *ssess the is# of 7aterial

7isstatement• espond to *ssessed is#s• %erform *udit %rocedures

• valuate *udit vidence• Communicate *udit 9indings


6/58

9inancial *uditing %rocess

1; Clientvaluation and,etting thengagement 2; %lanning the

*udit

3; Aecution ofthe *udit%rogram $; Completion

of the *udit andthe *uditor s

eport

6

is#*ssessme

ntis#esponse eporting


7/58

%hase 1 ! ,etting the ngagement

CLIENT

EVALUATION

Gathering information to assess the client based on the acceptance policy

Meeting with Previous Auditor

Engagement Letter


8/58

%hase 2 ! is# *ssessment

PLANNING THE AUDIT

Information Gathering for the PreliminaryRisk Assessment

Preparation of the Audit Program

ime and Resource Planning


9/58

%hase 3 ! is# esponse

EXECUTION OF

THE AUDIT

PROGRAM

Evaluation of the Internal ControlSystem

Update of the Audit Program

Testing of Transactions & alances

Evaluation of Evidences !athered


10/58

%hase $ B eporting

COMPLETION &

REPORTING

!orming the opinion

Preparation " distribution of the AuditReport


11/58



*udit

3; Aecution ofthe *udit%rogram $; Completion

of the *udit andthe *uditor s

eport

""

is#*ssessme

ntis#esponse eporting


12/58

ase B ett ng t engagement B

Client valuation• >tep 1? *ssess client integrit'

• >tep 2? *ssess audit rm s abilit' tomeet ethical re uirements- service clien

• >tep 3? %repare client engagement lette


13/58

Evaluate

integrity ofmanagement

teps in acceptance of a client

(3)Engagement

Evaluateindependence

Prepare

engagementletter

Determine abilityto use due care

(1)Client integrity &

other considerations

Identify specialcircumstances

and unusual ris s

!ssesscompetence

to perform audit

(")Ethical & legalconsiderations

13


14/58

(1) Client integrit' & otherconsiderations

Evaluating the integrity of management# Communicating $ith e%isting auditors PES"'(

)a*ing en+uiries of other third parties(

,evie$ing previous e%perience if any $ith the client( Identifying special circumstances and unusual ris*s#

Identifying intended users of the audited financialstatements(

Assessing a prospective client-s legal and financialsta.ility(

Evaluating the client-s audita.ility(

1$


15/58

(1) Client integrit' & otherconsiderations

Cl ent nte$r ty . Au& tor s%oul& 3ons &er4 / eputation of client- management- directors- #e'

sta#eholders / Client s reason for s"itching auditor

/ Client s attitude to ris# eAposure and management / Client s attitude to using internal controls to mitigate ris# / *ppropriateness of the client s interpretation of

accounting rules / Client s "illingness to allo" auditor full access to

information re uired to form an opinion / Client s attitude and "illingness to pa' fair amount for

audit "or#


16/58

(2) thical and legalconsiderations

Ethical considerations relate to $hether the audit firm isa.le to meet independence criteria0 complete theengagement $ith professional competence and perform theaudit $ith due care(

legal considerations relate to ensuring compliance $iththe re+uirements of the Professional Code of Conduct and

the Corporations Act in the evaluation ofindependence and ensuring there are no conflicts of

interest(

16


17/58


Ethical re+uirements prescri.ed under Corporations Act

Auditor to give $ritten representation that there are nocontraventions of independence re+uirements(

Auditor should ta*e reasona.le steps to ensure any conflicts of interest cease(

Auditor cannot play a significant role in audit of a listed

company for more than 1 consecutive years(

14


18/58


Assessing competence to perform an auditEngagement team to have appropriate

competence and capa.ilities to perform the audit in

accordance $ith Auditing Standards0 legal andregulatory re+uirements(

2etermining a.ility to use due care

Involves revie$ of $or* done and 3udgementse%ercised .y those assisting in the audit(

15


19/58

(3) ngagement etter

'ISA 'N ) 2,6) / %repared b' auditor- ac#no"ledged b' client / 9orm of contract- can eApand on obligations in Companies *ct / Aplains scope and ob8ective of audit- timing of various aspects

of audit- overvie" of client responsibilities and auditorresponsibilities

/ Con rms auditor s right of access to information-independence considerations

/ Identi cation of the applicable nancial reporting frame"or#;

/ eference to eApected form and content of reports to beissued;

/ >ets fees


20/58



*udit

3; Aecution ofthe *udit%rogram $; Completionof the *udit and

the *uditor seport

45

is#*ssessme

nt

is#esponse eporting


21/58

>tages of an *udit

vervie" of the audit

Dnderstanding theclient

is#identi cati

on andstrateg'

is# andmaterialit'assessmen

t

Test ofControls

>ubstantive Testing

Conclusion and

formingan opinion

is#*ssessme

nt

is#esponse eporting


22/58

is# *ssessment (*udit %lanning)

%lanning starts "ith obtaining an understanding of the entit' and itsenvironment in order to understand events- transactions and practices

aEecting the entit';

%lanning also involves setting materialit' levels- assessing audit ris#

and its components- and obtaining an understanding of the internalcontrol structure ;

*uditor must plan the audit to reduce audit ris# to an acceptabl' lo"level; * "ell planned audit ensures that suFcient appropriate evidenceis gathered for accounts that are seen as the most ris#' in terms ofmaterial misstatement

(Audit risk is the risk that an auditor expresses an inappropriate audit opinionwhen a fnancial report is materially misstated)

22


23/58

>teps in the planning process

#a e preliminary $udgments about

materiality levels

Consider theaudit ris

Develop preliminary

audit strategiesfor significantassertions

%btain an

understandingof the entity s internalcontrol structure

%btain anunderstanding ofthe entity and its

environment

23


24/58

,aining an Dnderstanding of aClient

*ccording to I>* (+G) 31 - gaining anunderstanding of the client is necessar' toassess the ris# that the nancial report containsa material misstatement due to?

• The nature of the client s business• The industr' in "hich the client operates• The level of competition "ithin that industr'

• The client s customers and suppliers• The regulator' environment in "hich the

client operates


25/58

,aining an Dnderstanding of aClient>tages

',) ENTIT7 LEVEL

'2) INDUSTR7 LEVEL

'8) ECONOMICLEVEL


26/58

(1) ntit' evel• To plan an audit- the auditor should obtain an understanding

of the entit' and its environment in order to understandevents- transactions and practices that ma' have a signi canteEect on the nancial statements;

• The auditor needs to gain #no"ledge of issues such asproducts and mar#ets- conduct of operations- and transactions"ith related parties;

• +eed to match accounting policies "ith the t'pe of businessoperations based on #no"ledge and prior industr' eAperience;

4626


27/58

(1) ntit' evel

ENTIT7LEVEL

7a8or customers

Capacit' to adaptto changes intechnolog'

=arranties anddiscounts

Client reputationand operations

International Transactions

7a8or suppliers

Client relations"ith emplo'ees

>ources ofnancing

"nershipstructures


28/58

(1) ntit' evel• Capital investment activities- including investments in

technolog'- and nonBconsolidated activities such as 8ointventures- are of signi cance from an audit perspective;

• Issues such as debt structure- leasing arrangements-guarantees etc; are also important;

• *ccounting principles- revenue recognition practices-accounting for fair values and #no"ledge of industr'Bspeci c practices are all important ;

425


29/58

(2) Industr' evel

• Dnderstanding industr' conditions includesunderstanding the mar#et for a client s

products- the capacit' of competitors relativeto mar#et conditions- and price competition;

• Certain industries ma' also have transactions

that increase the ris#s of materialmisstatements (

472.


30/58

(2) Industr' evel

I+0D>T

Le!el o0Co #et t

on

Cl entRe#utaton

Le!el o0Go!ern

entSu##ort

Le!el o0Go!ern

entre$ulat o

n

Le!el o0De an&0or 3l ent

$oo&s9ser!3es


31/58

(3) conom' evelHo" do overall economic conditions aEect client

/ Interest rate changes- nancial crises / >hareholder eApectations of increasing pro ts in good

times / =hat are speci c pressures on client to understate or

overstate pro ts in these conditions / conomic do"nturns can create circumstances that

re uire "riteBoEs of receivables- inventor' or otherassets;

These conditions increase the inherent ris# of misstatementsand re uire close eAamination b' the auditor;


32/58

*dditional >pecial Topics that impact*udit %lanning


33/58

egulator' issues

The regulator' environment can have directeconomic conse uences or aEect the accountingand disclosure re uirements;

>peci c regulator' re uirements for particularindustries must be considered;

The auditor should be a"are that nonBcompliance "ith relevant la"s and regulationsma' materiall' aEect the nancial statements;

8833


34/58

The entit' s ob8ectives- strategiesand related business ris#s

Some matters the auditor may consider include#

2evelopments in the industry(

9e$ products and services(

E%pansion of the .usiness

Current and prospective financing re+uirements

8:3$


35/58

7easurement and revie" ofnancial performance

*s part of gaining understanding ofclient- auditor should learn ho" clientmeasures its o"n performance

/ Client uses #e' performance indicators(


36/58

7easurement and revie" ofnancial performance

Such measures from an audit perspective $ouldinclude#

;ey ratios and operating statistics<

;ey financial performance indicators<

Employee performance measures<

Industry trends<

=orecasts0 .udgets and variance analysis

Analyst reports and credit rating reports(

8636


37/58

%erforming anal'ticalprocedures

Analytical procedures involve a study and comparisonof relationships among data to identify e'pected orune'pected fluctuations and other unusual items

>Identify fluctuations in accounts that are inconsistent$ith auditor-s e%pectations .ased on their understandingof the client- I ! (*+) ,"-

Analytical procedures can .e conducted throughoutthe audit process

• is# assessment phase ! ris# identi cation• is# response phase ! estimating account

balances

• eporting ! overall revie" 8?34


38/58

%erforming anal'tical procedures

The common types of analytical procedures involve acomparison of the entity-s financial information $ith#

/ Compara.le information for a previous period orperiods

/ E%pected results such as .udgets0 plans0forecasts0 industry .enchmar*s0 industry averages(

nhance theunderstandi

ng of theclient

Identif' accounts atris# of materialmisstatement

Highlightunusual

:uctuations inaccounts


39/58

%erforming anal'ticalprocedures

COMMON ANAL7TICAL PROCEDURES

,: SIMPLE COMPARISONS• *ccount balance "ith previous 'ear- budget

2: TREND ANAL7SIS '*ORI ONTAL ANAL7SIS)• Comparison of account balances over time• >elect base 'ear- restate all accounts in subse uent 'ears as a J of

that base

8: COMMON.SI E ANAL7SIS 'VERTICAL ANAL7SIS)• Comparison of account balances to single line item

• @alance sheet ! eApress each item as J of total assets• Income statement ! eApress each item as J of sales

;: RATIO ANAL7SIS• *ssess relationship bet"een various nancial report balances- and

bet"een them and nonB nancial items (%ro tabilit' ratios- i uidit'ratios- >olvenc' ratios)


40/58

Consideration of fraud inplanning

The importance of considering fraud in the planning of an audit has increased in recent years

ISA 240

The auditor shall evaluate whether the informationobtained from the other risk assessment proceduresand related activities performed indicates that one or

more fraud risk factors are present.

Auditor must asses ris* of material misstatement due to fraud

:5$/


41/58

9raud is#

• *uditor adopts attitude ofprofessional scepticism

/ 7aintaining an independent uestioningmind

/ >earch thoroughl' for corroboratingevidence to validate informationprovided b' the client

/ 0on t 8ust rel' on past eAperience "ithclient


42/58

9raud is#Indicators ( ed 9lags) of %ossible 9raud?

• High turnover of #e' emplo'ees•


43/58

9raud is#

T"o T'pes of 9raud?

1; 9inancial reporting fraud• Improper asset values- unrecorded liabilities• 0ela'ing eApenses- bringing for"ard revenues• 9ictitious revenues- understating eApenses• Inappropriate application of accounting principles

2; 7isappropriation of assets fraud• Dsing compan' credit card for personal items• 9ailure to remove eABemplo'ees from pa'roll• Dnauthorised discounts or refunds to customers• Theft of stoc# or other assets


44/58

9raud is#

IncentiveK%ressure

ationalisation pportunit'

9 *D0I><

@I need to meet my monthly targets./

0*obody really chec s any ay./ 0Everyone is doing it./


45/58

*uditing for fraud

Procedures to identify the ris* of material misstatementdue to fraud#

En+uiries of management(

Consideration of any unusual or une%pected relationshipsidentified(

Consideration of any other information o.tained

$hile planning that gives an indication for possi.le fraudris* e(g( lac* of controls in cash related assets'(

$


46/58

,oing Concern is#

• ,oing concern means belief thatcompan' "ill remain in business forforeseeable future; It 8usti es valuing

assets on basis the' "ill continue to beused in business and liabilities paid"hen due;

• *uditor must consider "hether it isappropriate to assume that client "illremain a going concern (I>* (+G) 4/)


47/58

Ludging 7anagement s,oing Concern *ssumptions

https2 youtube com atch4v5yyy,6789Ebo

https://www.youtube.com/watch?v=yyy5Uq4zEbohttps://www.youtube.com/watch?v=yyy5Uq4zEbohttps://www.youtube.com/watch?v=yyy5Uq4zEbohttps://www.youtube.com/watch?v=yyy5Uq4zEbo


48/58

,oing Concern is#

• emaining a going concern is theresponsibilit' of client governance

• *uditor must obtain suFcientappropriate evidence to assessvalidit' of going concern assumption

• *uditor ma#es professional 8udgement about going concern ris#-based on ris# indicators


49/58

,oing Concern is#

I>* (+G) 4/ has list of going concern ris#indicators- eAamples include?• >igni cant debtKe uit' ratio• ong term loans due- no alternative nance

• %rolonged losses- inabilit' to pa' debts "hen due• oss of signi cant customer- supplier problems(e;g; problems obtaining ra" materials- inputs)

• High staE turnover- loss of #e' personnel- stri#es• %oor gro"th planning- inade uate ris#

management• @eing under investigation for nonBcompliance• Competitive pressures


50/58

,oing Concern is#

• *uditor is re uired to assess clienteEorts to identif' going concern ris#factors and should obtain related

evidence on this• If going concern is in doubt- underta#e

additional audit procedures• *ssess cash :o"- revenues- eApenses- interim results• evie" debt contracts- board meeting minutes• 0iscussions "ith client management and la"'ers


51/58

,oing Concern is#

• *uditor should also consider factorsthat mitigate (reduce) going concernris#

• 7itigating factors include?• etter of guarantee from parent compan'• *vailabilit' of assets or segment of business

for sale for cash

• *bilit' to raise funds through share issue orborro"ing

• Consider ade uac' of clientdisclosures in nancial report about

oin concern issues


52/58

Corporate ,overnance

• Corporate governance is the rules-s'stems and processes "ithin companiesused to guide and control activities• Dsed to monitor actions of staE and assess level of

ris# faced• Controls used to reduce identi ed ris#s and ensurefuture viabilit' of the compan'

• +GM principles and recommendations for

listed companies• Companies re uired to disclose their compliance• Nif not- "h' not


53/58

IT nvironment

*uditor should consider particular ris#s faced b'client related to IT (I>* (+G) 31 ) such as?

• Dnauthorised access to computers- soft"are- data / +eed securit'- pass"ords to prevent distorted data

• rrors in programs / Can occur if not thoroughl' tested before

implementation- or mista#es made "hen changingprograms

/ estrict program change rights to authorised personnel / %rograms need to be suitable for client re uirements

• ac# of bac#up and loss of data

Client should have appropriate IT installation andsecurit' procedures- and training for staE


54/58

*udit 0ocumentation


55/58

*udit 0ocumentation

*uditor must document each stage ofthe audit in "or#ing papers (*>* 23/OI>* 23/)• %rovides evidence of "or# completed-

details evidence gathered to supportopinion

• Include in a "or#ing paper / Client name- audit period / Title of contents of paper- le reference / 0etails of preparer- revie"er

/ Cross references to other documents


56/58

*udit 0ocumentation

Purpose and function of $or*ing papers#

2emonstrate that the audit $as performed inaccordance $ith the auditing standards(

)onitor the progress of the audit(

Provide a guide to the planning and performanceof su.se+uent audits(

,ecord the nature0 timing and e%tent of auditprocedures performed(

6


57/58

*udit 0ocumentation

or*ing paper files include#

Permanent file

Current file

or*ing trial .alance

Schedules and analyses

Audit memoranda and corro.orating information

Proposed ad3usting and reclassifying entries

Audit program

4


58/58

*udit 0ocumentation

Per anent / le• Client information and documentation that appl' to

more than one audit / e;g; client address- #e' personnel- long term contracts

/ rg charts- *rticles of Incorporation / 7ain accounting policies- results of prior audits / Copies of prior period nancial reports

Current / le• Client information and documentation that appl' to

current audit / vidence gathered for this audit

GS PPT Topic 5 Client Evaluation Planning the Audit(1)

Documents

Transcript of GS PPT Topic 5 Client Evaluation Planning the Audit(1)