Why Is Planning An Audit Important?
Why Is Planning An Audit Important?
Planning an audit includes establishing the overall audit strategy for the engagement
and developing an audit plan. Proper planning benefits the audit in several ways. It
helps the auditor:
a) Identify and devote appropriate attention to significant areas of the audit
b) Identify and resolve potential problems on the audit
c) Properly organize and manage the audit engagement so that it is performed in
an effective and efficient manner
d) Assist in the selection of engagement team members with appropriate levels of
capabilities and competence
e) Facilitates the supervision of engagement team members
f) Assists in coordination of work done by specialists and auditors of
components of the entity. If the audit is not properly planned, the auditor may
issue an incorrect audit report or conduct an inefficient audit.
5. What is materiality?
Materiality refers to the amount by which a set of financial statements could be
misstated without affecting the judgment of a reasonable person. For example,
suppose a company’s earnings per share is 4.50 but due to an unintentional error the
company mistakenly reports EPS of 4.52. This very small difference is unlikely to
affect an investor’s decisions in any significant way.
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8. What the different factors considered when understanding the entity and its
environment? Explain.
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9. What is risk of material misstatement?
Risk of material misstatement is the risk that financial statements are materially
misstated prior to audit. It is the risk that the figures and disclosure in the financial
statement are not in accordance with accounting standards and the acceptable financial
reporting framework.
16. What are analytical procedures? Explain the use of analytical procedures in the
planning, testing and completion stage of the audit.
Evaluations of financial information made through analysis of plausible relationships
among both financial and nonfinancial data.
Analytical procedures can be used by an auditor to accomplish three purposes:
Risk assessment procedures to assist the auditor to better understand the
business and to plan the nature, timing, and extent of audit procedures
(sometimes referred to as planning or preliminary analytical procedures).
Substantive analytical procedures are used as a substantive procedure to
obtain evidential matter about particular assertions related to account balances
or classes of transactions.
Final analytical procedures are used as an overall review of the financial
information in the final review stage of the audit.
17. Explain the audit risk model, including the relationship between audit risk,
detection risk, inherent risk and control risk.
The audit risk model provides a framework for auditors to follow in planning audit
procedures and evaluating audit results. The auditor considers audit risk at the relevant
assertion level because this directly assists the auditor to plan the appropriate audit
producers for the accounts, transactions, or disclosures. This model expresses the
general relationship of audit risk to the auditor’s assessments of risk of material
misstatement (inherent risk and control risk) and the risks that the auditor’s procedures
will fail to detect a material misstatement in a relevant assertion (detention risk). The
determination of audit risk and the use of the audit risk model involve considerable
judgment on the part of the auditor. The audit risk model assist the auditor in
determining the scope of auditing procedures for an assertion in an account or
disclosure.