Question

1. To be  persuasive, the evidence should be _______, and  -------
2. The use of specific evidence, e.g., when should we use physical examination or when should we use confirmation, etc.
3. Types of confirmation, positive, negative, blank …
4. What audit procedure and audit program are
5. Reasons for audit planning
6. Definitions of inherent risk and acceptable audit risk
7. The major steps in audit planning

Answer 1

To be persuasive, the evidence should be sufficient and appropriate.

1)The use of specific evidence, e.g., when should we use physical examination or when should we use confirmation, etc.

Step 1 – Identify the assertion tested

Audit procedures are performed in order to test financial statement assertions. Therefore, the first step in explaining an audit procedure is to identify the assertion that needs to be tested.

The assertions embodied in the financial statements, as used by the auditor to consider the different types of potential misstatements that may occur, may take the following forms:

Transactions and events	Account balances at the period-end	Presentation and disclosure
Occurrence Completeness Accuracy Cutoff Classification	Existence Rights and obligations Completeness Valuation and allocation	Occurrence and rights and obligations Completeness Classification and understandability Accuracy and valuation

A brief explanation of the various assertions is as follows:

Completeness
This means that all transactions have been recorded in the financial statements – ie all assets, liabilities, equity interests (capital and reserves) and other disclosures have been included in the financial statements.

Occurrence
This assertion means that transactions and events and other matters that have been recorded actually took place – and relate to this organisation.

Valuation and allocation
This means that all items have been included in the financial statements at appropriate amounts according to company policy and the relevant financial reporting framework. Furthermore, any allocations or valuation adjustments required (like impairment) have been made and financial and other information is disclosed fairly and at appropriate amounts.

Classification and understandability
Financial information is appropriately presented and disclosed, and disclosures are clearly expressed so as to make them understandable to the users. For this, the disclosures should use simple language and state matters clearly and concisely.

Accuracy
Accuracy means that amounts and other data relating to transactions and events have been recorded at the correct amounts – ie at the amounts appearing in the source documents.

Rights and obligations
This means that the entity has a right to its assets – ie it is free to use or dispose of the assets as it sees fit. Furthermore, the entity is obliged to pay off the liabilities that are shown in the statement of financial position.

Existence
This means that assets, liabilities and equity interests (capital and reserves) are physically present/belong to the entity on the reporting date.

Cutoff
This means that transactions and events have been recorded in the correct accounting period – for example, if goods are delivered prior to year end, they are included in the cost of goods sold, not inventory.

Step 2: Identify the audit procedure

	Explanation				Example of substantive procedure relating to valuation of property, plant and equipment (PPE)
1	Choose the assertion that will be tested				Choose an assertion from Completeness, Valuation and allocation, Rights and obligations and Existence if you are testing the period-end balance of PPE; valuation of non-current assets is the assertion tested
2	Identify the risk that will cause a material misstatement in the financial statements – the audit risk is the total value of PPE that may be misstated due to over-valuation/ undervaluation of PPE				One risk relates to the revalued assets not representing fair values, thus under/overstating PPE
3	Think of the audit procedures that should be performed in order to avoid the risk mentioned in step 1 (refer to ‘AEIOU’ below)				The auditor will agree the availability of a revaluation report (a source document for the revaluation) and confirm that the value mentioned in the valuation report matches the amount at which the PPE is revalued and shown in the financial statements. Furthermore, the auditor will recalculate the revaluation surplus in accordance with the provisions of IAS 16, Property, Plant and Equipment to confirm the correctness of the accounting entries relating to revaluation surplus. The amount added to revaluation surplus should be the difference between the net book value of PPE and the revalued amounts. The auditor should agree the assumptions used in the report for reasonableness. For example, the value per square feet in the valuation report should be similar to the value per square feet of other similar properties in that locality. There are many more procedures that will apply to this risk.

2) Types of confirmation, positive, negative, blank

1. Positive confirmation

A letter sent to the debtor requesting direct confirmation of the account balance’s accuracy. If inaccurate, the debtor must produce a reason for the discrepancy and update the account balance. If accurate, the debtor must simply confirm the account balance through a response.

2. Blank confirmation form

Blank confirmation forms are a type of positive confirmation requiring the debtor to return a letter detailing the account balance. The number is then used to cross-reference against the listed receivable balance to ensure accuracy.

3. Negative confirmation

A letter sent to the debtor that denotes a specific account and value associated with its balance. The third party can choose to reject the balance and supply their number for the suggested account, or they can choose not to respond to the letter. A suggestion of a differing balance or nonresponse is considered confirmation.

What audit procedure and audit program are

Audit procedures are the processes, technique, and methods that auditors perform to obtain audit evidence which enables them to make a conclusion on the set audit objective and express their opinion.

An audit program is a set of directions that the auditor and its team members need to follow for the proper execution of the audit. ... Thus, an auditor prepares a program that contains detailed information about various steps and audit procedures to be followed by the audit.

Reasons for audit planning

Importance of Audit Planning

The importance of audit planning mainly lies on the realms of ensuring that auditors are able to effectively evaluate the relevant risks associated with the audit process so that they can strategize, and come up with ways to mitigate the risk.

In addition to this, audit planning also tends to be highly important because of the following reasons:

• Firstly, it is considered as an important part of the audit process because of the reason that it helps the auditor to decide upon areas which require urgent attention to important areas within the audit process. More importantly, it also calls for auditors to plan their audit in a way that helps them focus on important areas more, and less relevant areas later on during the course of the audit.
• Secondly, Audit Planning tends to be an increasingly important task because of the fact that it helps the auditors to identify issues and high-risk elements on a timely basis. This can further help them to address these concerns in a timely manner too, which saves a considerable amount of time. For example, they might need additional documents to justify a transaction of considerable size. In this case, they can ask their client to arrange for the documents in a proper manner.
• They can also help auditors properly organize and manage the audit engagement, where they are able to allocate their time and resources in an effective manner. This is something that is greatly going to help them plan their activities bearing in mind the time constraint that they have, and major auditing assertions they have to cover during this time period.
• Audit planning is also important in order to ensure that auditors are able to structure their audit teams bearing in mind the scope of the overall audit that is supposed to be conducted. In order to appropriately structure the team based on the capabilities and resources that are required for the audit.
• Most importantly, audit planning really helps the auditors to effectively decide on the direction of the audit process, so that they are able to supervise the work of the engagement team members after the work has been completed. This is a highly important process because of the reason that it acts as a quality control parameter, which can help them to evaluate their performance after the audit has been completed, in comparison to the audit statements presented.
• In the same manner, it can also be seen that audit planning helps auditors to adopt a more structured approach towards the audit process so that they are able to execute the audit in a much effective manner.

Definitions of inherent risk and acceptable audit risk

Inherent risk is the risk posed by an error or omission in a financial statement due to a factor other than a failure of internal control. In a financial audit, inherent risk is most likely to occur when transactions are complex, or in situations that require a high degree of judgment in regard to financial estimates. This type of risk represents a worst-case scenario because all internal controls in place have nonetheless failed.

The major steps in audit planning

1. Research the Audit Area

It is essential to understand the business process or function to be audited. If not familiar with it, thoroughly research the process or function to fully understand the subject matter. Review internal procedures, search the internet for resources, and seek help from subject matter experts.

2. Maintain Open Communications Throughout the Planning Process

The sooner the audit team reaches out to the auditee, the better. There is a certain amount of trepidation involved in any audit. Working with an auditee prior to the audit helps ease concerns the auditee may have. Communicating in person is always preferable. If this is not possible, telephone calls are the next best thing. Avoid communicating by email if possible.

3. Conduct Process Walk-Throughs

Armed with a working understanding of the process or function, conduct a face-to-face walk through with the auditee. Identify key business objectives, methods employed to meet objectives, and applicable rules or regulations. A walkthrough may include a tour of facilities. You may gather background information relative to the nature, purpose, volume, size, or complexity of automated systems, processes, or organizational structure. You might scan documents or records for general condition. All these activities provide opportunities to interface with the auditee and build rapport before the formal entrance conference.

4. Map Risks to the Organization, Process, or Function

Ask the auditee what his concerns are, what "keeps him up at night." Through research and interviews, identify risks to meeting business objectives and controls employed to mitigate those risks. Rate risks with the auditee based on probability of occurrence and potential impact. Consider control design, gaps, or mitigating factors to determine if the control system effectively mitigates risks.

5. Obtain Data Prior to Fieldwork

This has become a principal focus for us recently. We emphasize data in our initial requests for information. We perform data analytics before we begin field work. Identifying anomalies to confirm a condition or weakness early helps us target testing and optimize sample selections.