AUDIT PLANNING AND CONTROL
1.0 LEARNING OBJECTIVES
After studying this chapter, readers should be able to understand: ! The general concept of audit strategy.
! The Importance of audit strategy as an effective plan for an audit. ! Internal control systems, evaluation and assessment.
! Audit documentation.
! Relationship with experts.
! Audit risks and its relative importance to audit.
! Components of audit risks.
! How to assess audit risks.
Auditing has developed over many years, but it was not until the late nineteenth century (with the formation of joint stock companies, the predecessors to present day limited liability companies) that auditing became widely accepted in the United Kingdom and by extension, in other parts of the world. Individual firms of accountants have refined their approach to auditing from time to time and the professional accountancy bodies in various countries have published guidelines to their members on auditing procedures.
1.2 CONCEPTS OF AUDIT STRATEGY
Audit strategy is directed to the gathering of relevant and reliable audit evidence in order to support the expression of an opinion on the accounts. In carrying out an audit assignment, the auditor should:
(a) Consider his responsibilities as defined in the terms of engagement; (b) Familiarise himself with the client’s business and organisation; (c) Obtain a preliminary understanding of the principal features of the client’s accounting system and internal control procedures; (d) Determine and record the audit strategy to be adopted;
(e) Where it is proposed to carry out a detailed evaluation of all or certain internal controls with a view to placing some reliance on such controls, obtain a more detailed description of the accounting system and internal control procedures and review selected transactions to confirm that he has understood and recorded the system properly;
ADVANCED AUDIT AND ASSURANCE
(f) Review critically and evaluate those aspects of the client’s accounting system, procedures and internal controls on which he intends to place some reliance;
(g) Discuss any weakness in the system with the client in order, inter alia, to ascertain whether they are compensated by some other controls; (h) Test the system to determine whether the controls on which he intends to place reliance were operating during the period;
(i) Report apparent weakness and breakdown in internal control to the client in a management letter; and
(j) Based on the results of the work described above, carry out a programme of audit work to substantiate the amounts appearing in the accounts and related notes so as to ensure that the accounts show a true and fair view of the state of affairs and the results of the business. The above paragraph summarises the basic procedures that an auditor should carry out in order to express an opinion on the accounts. It should be noted, however, that the procedures and terminology used in practice may vary, even though, the fundamental concept may be the same. Furthermore, the extent to which the auditor places reliance on the work of an internal audit department may significantly affect the nature, timing and extent of his work. 1.3 DETERMINATION OF THE AUDIT STRATEGY
The purpose of determining an audit strategy is to enable the auditor familiarise himself with the client’s business and organisation as well as to obtain a preliminary understanding of the client’s accounting system. This will entail the preliminary identification of those internal controls on which he proposes to rely upon.
The auditor should then determine and record his audit strategy before commencing any detailed audit work. In doing so, the auditor will need to identify the optimum balance between, on one hand, relying on internal controls and reducing the level of his substantive tests, and on the other hand, placing little or no reliance on internal controls and seeking audit satisfaction from a higher...
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