Question

How do I answer this auditing question:

Describe how would you perform the following planning activities and give reasons as to why you would carry out the procedures mentioned to:

1. Gain an understanding of Grafton (Pty) Ltd and its environment.

2. Gain an understanding of Grafton (Pty) Ltd's internal controls.

3. Identify and assess the risks of material misstatement

4. Make a preliminary judgement of materiality.

Please assist with the best approach to respond to this question.

Thank you.

Answer 1

The auditor would carry out any audit proceedure to report on the financial statements. Follow the answers,

1. Gain an understanding about the entity of which the audit is going to be, how can you justify that audit can be carried in without having a basic knowledge on what the entity is its history and type of business, governing body, management. This is the reason auditor will gain knowledge about the entity.
2. Internal controls forms an important role on how the auditor should go for substantive proceedures. If the controls are reliable he will go with one sort of proceedures and if not in the other way. So determining the level and reliability of internal controls is very much important.
3. Identification of risk of material mistatement is very much important because the core of audit is the same. The auditor should identify the material mistatements and report on the same it is the main objective of audit. The auditor should identify the reasons for mistatements and their impact on the financial statements.
4. Making a preliminary judgement of the mistatement will provide the auditor a base for how to examine the mistatement in a proper to ascertain the root causes of the mistatement and it's impact. It is the base for examination of mistatements.