ACCA Qualification

ISA240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial

Statements

ISA300 Planning an Audit of Financial Statements

ISA520 Analytical Procedure.

MODULE:
AUDIT & ASSURANCE
INTERNATIONAL STREAM

Chapter 7 – Audit Planning

Prepared by Khor Seng Cheong
LESSON OUTCOME

In this lesson, you will learn the following:

A) Identify and explain the need for planning an audit

B) Identify and describe the contents of the overall audit strategy and audit plan
C) Explain and describe the relationship between the overall audit strategy and the audit plan.
D) Develop and document an audit plan
E) Identify and describe the need to plan and perform audits with an attitude of professional
scepticism
F) Discuss the effect of fraud and misstatements on the audit strategy and extent of audit work.
G) Describe and explain the nature and purpose of analytical procedures in planning
H) Explain the difference between interim and final audit
I)Describe the impact of the work performed during the interim audit on the final audit.[2]

A) Identify and explain the need for planning an audit

ISA300 PLANNING AN AUDIT OF FINANCIAL STATEMENTS

1.ISA 300. The objective of the auditor is to plan the audit so that it will be performed in an effective
manner. Further breakdown is:

• To identify the important areas that require more attention

• To conduct effective audit in efficient and timely manner

• To identify potential risks which have effect on audit as well as FS

• To allocate work to assistants in proper manner for utilization of

resources

• To identify the need for expert help and co-ordination of

work of others

• To determine nature, timing and extent of audit

procedures

2.The Role and Timing of Planning

Planning an audit involves establishing the

i) overall audit strategy for the engagement

(ii) developing an audit plan.

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Benefits of an adequate planning benefits are::

• Helping the auditor to devote appropriate attention to important areas of the audit.

• Helping the auditor identify and resolve potential problems on a timely basis.

• Helping the auditor properly organize and manage the audit engagement so that it
is performed in an effective and efficient manner.

• Assisting in the selection of engagement team members with appropriate levels

of capabilities and competence to respond to anticipated risks, and the proper
assignment of work to them.

• Facilitating the direction and supervision of engagement team members and the
review of their work.

• Assisting, where applicable, in coordination of work done by auditors of

components and experts.

3.Preliminary Engagement Activities

Performing the preliminary engagement activities at the beginning of the current
audit engagement assists the auditor in identifying and evaluating events or
circumstances that may adversely affect the auditor’s ability to plan and perform
the audit engagement. an audit engagement for which, for example:

• The auditor maintains the necessary independence and ability to perform the
engagement.

• There are no issues with management integrity that may affect the auditor’s
willingness to continue the engagement.

• There is no misunderstanding with the client as to the terms of the engagement.

4.Planning Activities

Planning Activities

2. Set up audit plan

1.Overall Audit Strategy
(OAS) (also known as Audit Planning
Memorandum, APM)

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(1) The Overall Audit Strategy

The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the
audit, and that guides the development of the audit plan.

In establishing the overall audit strategy, the auditor shall:

• Identify the characteristics of the engagement that define its scope;
• Ascertain the reporting objectives of the engagement to plan the timing of the
audit and the nature of the communications required;
• Consider the factors that, in the auditor’s professional judgment, are
significant in directing the engagement team’s efforts;
• Consider the results of preliminary engagement activities and, where
applicable, whether knowledge gained on other engagements performed by
the engagement partner for the entity is relevant; and
• Ascertain the nature, timing and extent of resources necessary to perform the
engagement.

In the process of establishing the overall audit strategy assists the auditor to
determine:

• The resources to deploy for specific audit areas, such as the use of
appropriately experienced team members for high risk areas or the
involvement of experts on complex matters;

• The amount of resources to allocate to specific audit areas, such as the

number of team members assigned to observe the inventory count at material
locations, the extent of review of other auditors’ work in the case of group
audits, or the audit budget in hours to allocate to high risk areas;

• When these resources are to be deployed, such as whether at an interim

audit stage or at key cut-off dates; and

• How such resources are managed, directed and supervised, such as when
team briefing and debriefing meetings are expected to be held, how
engagement partner and manager reviews are expected to take place (for
example, on-site or off-site), and whether to complete engagement quality
control reviews.

(2) The Audit Plan

The audit plan is more detailed than the overall audit strategy in that it includes the
nature, timing and extent of audit procedures to be performed by engagement team
members.

“An audit plan is the formulation of the general strategy for the audit, which sets the
direction for the audit, describes the expected scope and conduct of the audit and
provides guidance for the development of the audit program.”

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Planning for these audit procedures takes place over the course of the audit as the
audit plan for the engagement develops. For example, planning of the auditor’s risk
assessment procedures occurs early in the audit process. However, planning the
nature, timing and extent of specific further audit procedures depends on the
outcome of those risk assessment procedures. In addition, the auditor may begin the
execution of further audit procedures for some classes of transactions, account
balances and disclosures before planning all remaining further audit procedures.

The auditor shall develop an audit plan that shall include a description of:

(a) The nature, timing and extent of planned risk assessment procedures.

(b) The nature, timing and extent of planned further audit procedures at the assertion
level.

(c) Other planned audit procedures that are required to be carried out so that the
engagement complies with ISAs.

The auditor shall update and change the overall audit strategy and the audit plan as
necessary during the course of the audit.

The auditor shall plan the nature, timing and extent of direction and supervision of
engagement team members and the review of their work

5. Considerations in Initial Audit Engagements

The auditor shall undertake the following activities prior to starting an initial audit:
(a) Performing procedures required by ISA 220 regarding the acceptance of the
client relationship and the specific audit engagement

(b) Communicating with the predecessor auditor, where there has been a change of
auditors, in compliance with relevant ethical requirements.

6.Issues and considerations that are relevant to the audit planning process.

a. Staffing requirements and use of experts. (The involvement of experts).

Auditors should determine the number and grade of audit staff to be allocated
to each stage of the audit. More experience audit staff are required for high
risk areas or involvement of experts on complex matters.

In some cases, auditor may require the assistance of an expert (e.g.

engineer/doctor/lawyer/valuer) in particular field of specialization.

b. Considerations of materiality and risks (The determination of materiality)

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 When planning the audit, the auditor considers what would make the financial
statements materially misstated. The auditor’s assessment of materiality helps
to answer questions relating to nature of audit procedures.

Auditor uses his knowledge about the entity and its environment as a basis for
identifying and assessing the risks of material misstatements in the financial
statements. Auditor should assess the inherent risks and control risks that
affect the financial assertions.

In evaluating the effect of information technology on the client’s accounting systems,

the auditor needs information on the following:

• The extent to which information technology is used in each

significant accounting system.
• The complexity of the client’s technology activities.
• The organizational structure of the information technology
activities.
• The availability of data.
• The need for information technology assisted techniques to
father data and conduct of audit procedures.

c. Understand the applicable laws and regulations.

The auditor should recognize that non compliance of laws and regulations by
the client entity may materially affect the financial statements and he should
obtain a general understanding of the legal and regulatory framework
applicable to the client entity. The auditor should primarily be concerned with
the following laws and regulations:-

• Legal provisions that determine the form and content of the

client’s financial statement.
• Laws and regulations that affect the continuing operation of the
entity
• Non compliance of which can result in financial losses.

d. Identify related parties.

The auditor should identify all related parties during the planning phase of the
audit so that the auditor will be alert for related party transactions during the
audit. The related parties are holding company, subsidiaries, associates,
closed family members, substantial shareholders, joint venture, major
suppliers and buyers.

e. Going concern issue.

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 In the planning of audit, auditor should consider whether there are events or
conditions and related business risks which may cast significant doubt on the
entity’s ability to continue as a going concern.

f. Considering the internal audit function.

Auditor should assess the effectiveness, competence and objectivity of

internal audit function. The important criteria for this assessment are:

• Organization status of internal audit department. Internal auditor

should report to audit committee, not finance director.
• Scope of function. The nature and extent of functions performed
by internal auditors will affect the usefulness and relevance of
their work to external audit objective.
• Technical competence such as skills and knowledge of internal
auditor.
• Due professional care requires internal auditor should properly
planned, reviewed and documented.

g. Review audit strategy with audit committee.

The auditor should review the audit planning with audit committee. Audit
committee is a subcommittee from the board of directors whose
responsibilities are to assist the board of directors in meeting corporate
governance practice.

h. The performance of other risk assessment procedures.

7.Planning procedures vary form one audit to the next , but auditors should
take an organized steps to the planning process. A structured approach to
planning will include the following stages:

• Updating understanding of the entity and its environment

• Assessing risks of material misstatements

• Preparing the detailed audit approach

• Making administrative decisions such as staffing and budgets

.The main failings in the planning process for auditors arise from:

(a) starting work before finishing planning

(b) inadequate documentation
(c) lack of understanding of the business.

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8.Summary of Audit Planning Procedures

1. Considering the background information of client’s biz.

2. Considering to what extent reliance on internal control
3. Review the previous year audit points
4. Assess the effect of any changes in legislation /accounting practice.
5. Review management /interim accounts
6. Meeting senior management to identify problem areas.
7. Considering the timing of significant phases in preparing financial
statements
8. Considering availability of client’s employees’ assistance.
9. Considering the need for expert help & involvement of other auditors in
group audits
10. Determine the number and grade of audit staff required.
11. Consult members of the audit team to discuss any foreseeable
problems.
12. Preparing an audit budget for time and resources allocation.
13. Informing client on the expected date of attendance by the auditor’s
staff.

B) Identify and describe the contents of the overall audit strategy and audit
plan

9.Overal Audit Strategy. Overall Audit strategy sets the overall approach of the
audit and covers the scope, the timing and direction of the audit.

Scope

Timing Overall Audit Strategy (Possible strategies are

interim/final audit,

Direction substantive or controls, analytical review or test of details)

Scope covers what accounting standards, specific industrial standards and type of
audit.

Timing involves deadlines, interim and final audit

Direction covers assessment of materiality, risk areas, substantive testing.

Audit plan is to convert overall audit strategy into a more detailed plan and includes
nature, timing and extent of audit procedures. The content of audit plan cover:

• allocation of work and duties to assistants

• allocation of time and cost
• formation of various audit team

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 • designing the audit tests
• formulation of data gathering techniques
• establishing audit objectives
• deciding types of audit evidence desired.

10.The Audit Plan

In order to develop an audit plan, ISA 300 requires the auditors to consider the
followings:
• the auditors’ knowledge of the business (KOB). KOB involves type of industry,
competition, technology used, laws and regulations, various stakeholders,
financing structure, suppliers/buyers.
• understanding the accounting and internal control system
• risk and materiality
• the nature, timing and extent of procedures
• co-ordination, direction, supervision and review
• The timing of audit work must be planned to suite the nature of the business
being audited. Auditing may be done at or after the year end; divide into
interim and final or continuous.
• Audit planning is a continuous process throughout the audit
• Most practicing firms and internal audit departments have formalized the
planning exercise by using s standard planning memorandum, where decision
can be recorded.

C) Explain and describe the relationship between the overall audit strategy and
the audit plan.

11.The relationship between audit strategy and audit plan is:

• Overall audit strategy is prepared first before audit plan

• Overall audit strategy gives guideline for developing audit plan
• If there is any change in audit plan then auditor will have to change audit
strategy first.

Risk → Overal Audit Strategy →Audit Plan → Audit Programmes→ Audit

Procedures

12.Audit Programmes

The audit program is a mix of compliance and substantive tests that the auditor
intends to perform. It should not be confused with the plan.

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The audit programme serves as

(a) a set of instructions to the audit team

(b) a means to control and record the proper execution of the audit work
(c) a record of the audit procedures to be adopted, audit objectives, timing,
sample size and basis of selection for each area.

A standardized audit program is a pre-prepared listing of objectives and tests which

can be used on any audit. It streamlines work and act as a checklist to ensure that all
important areas are considered

D) Develop and document an audit plan

13.Documenting audit plan

The auditor shall include in the audit documentation:
(a) The overall audit strategy;
(b) The audit plan; and
(c) Any significant changes made during the audit engagement to the overall audit
strategy or the audit plan, and the reasons for such changes.

The documentation of the audit plan is a record of the planned nature, timing and
extent of risk assessment procedures and further audit procedures at the assertion
level in response to the assessed risks.

It also serves as a record of the proper planning of the audit procedures that can be
reviewed and approved prior to their performance.

The auditor may use standard audit programs or audit completion checklists, tailored
as needed to reflect the particular engagement circumstances.

A record of the significant changes to the overall audit strategy and the audit plan,
and resulting changes to the planned nature, timing and extent of audit procedures,
explains why the significant changes were made, and the overall strategy and audit
plan finally adopted for the audit. It also reflects the appropriate response to the
significant changes occurring during the audit

E) Identify and describe the need to plan and perform audits with an attitude of
professional scepticism and exercise the professional judgement (L2)

14.The auditor should plan in order to

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 • Recognize the circumstances that may exist to cause the financial
statements to be materially misled.
• Ensure the audit work is properly focused on material areas of risk.
• Ensure that the nature and quantity of work done addresses the risk
and problem areas.
• Ensure the work can be fully completed in time

15.ISA 200 defines professional scepticism as an attitude of having a questioning

mind (open but cautious mind), being alert to conditions which may indicate
possible misstatement due to fraud /error, and critical assessment of audit
evidence.

16.Professional scepticism should be practised by the auditor when:

• Information is presented directly by management or employees of

organization
• There are large or unusual transactions
• Examining the valuation of assets
• Examining the ownership of assets

17.Professional skepticism includes being alert to, for example:

• Audit evidence that contradicts other audit evidence obtained.

• Information that brings into question the reliability of documents and
responses to inquiries to be used as audit evidence.
• Conditions that may indicate possible fraud.
• Circumstances that suggest the need for audit procedures in addition
to those required by the ISAs.

18.Maintaining professional skepticism throughout the audit is necessary if

the auditor is, for example, to reduce the risks of:

• Overlooking unusual circumstances.

• Over generalizing when drawing conclusions from audit observations.
• Using inappropriate assumptions in determining the nature, timing,
and extent of the audit procedures and evaluating the results thereof.

19.Professional Judgment (ISA200: Para. 16)

Professional judgment is essential to the proper conduct of an audit. This is because

interpretation of relevant ethical requirements and the ISAs and the informed
decisions required throughout the audit cannot be made without theapplication of
relevant knowledge and experience to the facts and circumstances.

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Professional judgment is necessary in particular regarding decisions about:

• Materiality and audit risk.

• The nature, timing, and extent of audit procedures.
• Evaluating whether sufficient appropriate audit evidence.
• The evaluation of management’s judgments in applying the entity’s applicable
financial reporting framework.
• The drawing of conclusions based on the audit evidence obtained, for example,
assessing the reasonableness of the estimates made by management in preparing
the financial statements.

F) Discuss the effect of fraud and misstatements on the audit strategy and
extent of audit work.

ISA240 THE AUDITOR’S RESPONSIBILITIES RELATING TO FRAUD IN AN

AUDIT OF FINANCIAL STATEMENTS

20.The effect of fraud and misstatements on audit strategy & extent of audit work
are:

• Auditor should consider whether overall audit strategy & audit plan need to be
revised
• Auditor should not assume that instance of fraud or error is isolated
occurrence
• Auditor should communicate misstatements and their impact on audit strategy
to audit committee
• Auditor should perform further audit procedures to re-evaluate amount of
misstatement
• If auditor perceives risk, he should perform extensive procedures.

21.Responses to the Assessed Risks of Material Misstatement Due to Fraud

Overall Responses

In accordance with ISA 330, the auditor shall determine overall responses to address
the assessed risks of material misstatement due to fraud at the FS level.

In determining overall responses to address the assessed risks of material

misstatement due to fraud at the financial statement level, the auditor shall:

(a) Assign and supervise personnel taking account of the knowledge, skill and
ability of the individuals to be given significant engagement responsibilities and the
auditor’s assessment of the risks of material misstatement due to fraud for the
engagement;

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(b) Evaluate whether the selection and application of accounting policies by the
entity, particularly those related to subjective measurements and complex
transactions, may be indicative of fraudulent financial reporting resulting from
management’s effort to manage earnings; and

(c) Incorporate an element of unpredictability in the selection of the nature,

timing and extent of audit procedures.

22.Audit Procedures Responsive to Assessed Risks of Material Misstatement

Due to Fraud at the Assertion Level

In accordance with ISA 330, the auditor shall design and perform further audit
procedures whose nature, timing and extent are responsive to the assessed risks
of material misstatement due to fraud at the assertion level.

23.Audit Procedures Responsive to Risks Related to Management Override of

Controls

Irrespective of the auditor’s assessment of the risks of management override of

controls, the auditor shall design and perform audit procedures to:

(a) Test the appropriateness of journal entries recorded in the general ledger and
other adjustments made in the preparation of the financial statements. In designing
and performing audit procedures for such tests, the auditor shall:

(i) Make inquiries of individuals involved in the financial reporting process

about inappropriate or unusual activity relating to the processing of journal
entries and other adjustments;

(ii) Select journal entries and other adjustments made at the end of a
reporting period;

(iii) Consider the need to test journal entries and other adjustments
throughout the period.

(b) Review accounting estimates for biases and evaluate whether the
circumstances producing the bias, if any, represent a risk of material misstatement
due to fraud. In performing this review, the auditor shall:

(i) Evaluate whether the judgments and decisions made by management in

making the accounting estimates included in the financial statements, even if
they are individually reasonable,indicate a possible bias on the part of the
entity’s management
that may represent a risk of material misstatement due to fraud. If so, the
auditor shall reevaluate the accounting estimates taken as a whole; and

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 (ii) Perform a retrospective review of management judgments and
assumptions related to significant accounting estimates reflected in the
financial statements of the prior year.

(c) For significant transactions that are outside the normal course of business for the
entity, or that otherwise appear to be unusual given the auditor’s understanding of
the entity and its environment and other information obtained during the audit, the
auditor shall evaluate whether the business rationale (or the lack thereof) of the
transactions suggests that they may have been entered into to engage in fraudulent
financial reporting or to conceal misappropriation of assets.

24.Written Representations
The auditor shall obtain written representations from management and, where
appropriate, those charged with governance that:

(a) They acknowledge their responsibility for the design, implementation and
maintenance of internal control to prevent and detect fraud;

(b) They have disclosed to the auditor the results of management’s assessment of
the risk that the financial statements may be materially misstated as a result of fraud;

(c) They have disclosed to the auditor their knowledge of fraud or suspected fraud
affecting the entity involving:
(i) Management;
(ii) Employees who have significant roles in internal control; or
(iii) Others where the fraud could have a material effect on the financial
statements

(d) They have disclosed to the auditor their knowledge of any allegations of fraud, or
suspected fraud, affecting the entity’s financial statements communicated by
employees, former employees, analysts, regulators or others.

25.Communications to Management and with Those Charged with Governance

If the auditor has identified a fraud or has obtained information that indicates that a
fraud may exist, the auditor shall communicate these matters on a timely basis to the
appropriate level of management in order to inform those with primary responsibility
for the prevention and detection of fraud of matters relevant to their responsibilities.

G) Describe and explain the nature and purpose of analytical procedures in

planning

ISA520 Analytical Procedure

26.Analytical procedure means evaluations of financial information through analysis

of plausible relationships among both financial and non-financial data. Analytical
procedures also encompass such investigation as is necessary of identified

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fluctuations or relationships that are inconsistent with other relevant information or
that differ from expected values by a significant amount

It is an analysis of significant ratios and trends, including the resulting investigation

of fluctuations and relationships that are inconsistent with other relevant
information or which deviate form predicted amounts.

27.Analytical procedures include the consideration of comparisons of the entity’s

financial information with, for example:

• Comparable information for prior periods.

• Anticipated results of the entity, such as budgets or forecasts, or expectations of

the auditor, such as an estimation of depreciation.

• Similar industry information, such as a comparison of the entity’s ratio of sales to

accounts receivable with industry averages or with other entities of comparable size
in the same industry.

•Among elements of financial information that would be expected to conform to a

predictable pattern based on the entity’s experience, such as gross margin
percentages.

• Between financial information and relevant non-financial information, such as

payroll costs to number of employees.

28.Analytical procedures are used as:

• i.Risk assessment procedures during audit planning stage to understand the

business and identifying the potential risk areas. It is known as “Preliminary
Analytical Procedure”
• ii.Substantive procedures to obtain audit evidence. It is known as “Substantive
Analytical Procedures”
• iii.An overall review of the FS in finalization stage of audit. It is known as “
Analytical Review Procedures”

29.Time of usage

Analytical procedures can be used…

• During audit planning process to help identify the risk areas

• During the actual auditing process and used it as substantive procedures
• During the final review state to analyze the relationship and corroboration of
audit findings

Revision :
ISA315 The risk assessment procedures shall include the following:

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(a) Inquiries of management, and of others within the entity who in the auditor’s
judgment may have information that is likely to assist in identifying risks of material
misstatement due to fraud or error.
(b) Analytical procedures
(c) Observation and inspection

30.Analytical Procedures As Risk Assessment (also known as Preliminary AP

or PAP)

Analytical procedures performed as risk assessment procedures may identify

aspects of the entity of which the auditor was unaware and may assist in assessing
the risks of material misstatement in order to provide a basis for designing and
implementing responses to the assessed risks.

Analytical procedures performed as risk assessment procedures may include both

financial and non-financial information, for example, the relationship between sales
and square footage of selling space or volume of goods sold.

Analytical procedures may help identify the existence of unusual transactions or

events, and amounts, ratios, and trends that might indicate matters that have audit
implications. Unusual or unexpected relationships that are identified may assist the
auditor in identifying risks of material misstatement, especially risks of material
misstatement due to fraud.

However, when such analytical procedures use data aggregated at a high level
(which may be the situation with analytical procedures performed as risk assessment
procedures), the results of those analytical procedures only provide a broad initial
indication about whether a material misstatement may exist. Accordingly, in such
cases, consideration of other information that has been gathered when identifying
the risks of material misstatement together with the results of such analytical
procedures may assist the auditor in understanding and evaluating the results of the
analytical procedures.

31.Analytical Procedures as Substantive Procedure (also known as

Substantive AP)

When auditors want to apply analytical procedures as substantive procedures,

auditors should consider the following:

(a) Determine the suitability of particular substantive analytical procedures for given
assertions, taking account of the assessed risks of material misstatement and tests
of details, if any, for these
assertions;

(b) Evaluate the reliability of data from which the auditor’s expectation of recorded
amounts or ratios is developed, taking account of source, comparability, and nature
and relevance of information available, and controls over preparation.

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The following are the factors to consider when determine the reliability:

• Source of the information available. For example, information may be more

reliable when it is obtained from independent sources outside the entity;4
• Comparability of the information available. For example, broad industry data
may need to be supplemented to be comparable to that of an entity that
produces and sells specialized products;
• Nature and relevance of the information available. For example, whether
budgets have been established as results to be expected rather than as goals
to be achieved; and
• Controls over the preparation of the information that are designed to ensure
its completeness, accuracy and validity. For example, controls over the
preparation, review and maintenance of budgets.
•

(c) Develop an expectation of recorded amounts or ratios and evaluate whether

the expectation is sufficiently precise to identify a misstatement that, individually
or when aggregated with other
misstatements, may cause the financial statements to be materially misstated;

Matters relevant to the auditor’s evaluation of whether the expectation can be

developed sufficiently precisely to identify a misstatement are:

• The accuracy with which the expected results of substantive analytical

procedures can be predicted. For example, the auditor may expect greater
consistency in comparing gross profit margins from one period to another than
in comparing discretionary expenses, such as research or advertising.

• The degree to which information can be disaggregated. For example,

substantive analytical procedures may be more effective when applied to
financial information on individual sections of an operation or to
financial statements of components of a diversified entity, than when applied
to the financial statements of the entity as a whole.

• The availability of the information, both financial and non-financial. For

example, the auditor may consider whether financial information, such as
budgets or forecasts, and non-financial information, such as the number of
units produced or sold, is available to design substantive analytical
procedures.

(d) Determine the amount of any difference of recorded amounts from expected
values that is acceptable without further investigation

The auditor’s determination of the amount of difference from the expectation that can
be accepted without further investigation is influenced by materiality and the
consistency with the desired level of assurance, taking account of the possibility that
a misstatement, individually or when aggregated with other misstatements, may
cause the financial statements to be materially misstated.

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32.Analytical Procedures that Assist When Forming an Overall Conclusion
(Analytical Review Procedure)

The auditor shall design and perform analytical procedures near the end of the audit
that assist the auditor when forming an overall conclusion as to whether the financial
statements are consistent with the auditor’s understanding of the entity.

33. Steps in carrying out analytical procedures:

Step 1: Obtain an understanding of the business

Step 2: Identify relevant and credible relationships

Step 3: Establish the validity of any data to be used

Step 4: Predict a likely range of expected values

Step 5: Compare predictions with actual and consider the implications of any
variances

Step 6: Seek explanations for any variances and support those explanations.

You should familiarize yourself with the major financial ratios:

• Gross or net profit margin

• Current ratio/ quick ratio
• Inventory turnover
• Receivables turnover
• Payable turnover
• Gearing ratio

H) Explain the difference between interim and final audit

I)Describe the impact of the work performed during the interim audit on
the final audit.[2]

34.Interim Audit

Interim audit is voluntary, conducted before the final audit. It is solely at the
discretion of auditor to when the interim audit should be carried out. The objective of
interim audit is to speed up the final audit. It is carried out during the accounting
period.

35.Interim audit work/procedure

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 • The interim audit generally involves risk assessment, the testing of internal
controls, and certain analytical and other substantive procedures. Many of
these procedures are often performed concurrently.
• Risk assessment involves gathering information about the business, inquiries,
analytical procedures and determining the response to assessed risk. In
practice it also involves the determination of materiality and tolerable error.
• Risk assessment also involves evaluating the design of internal controls and
determining whether they have been implemented.

36.Advantages of interim audit

• Any error and fraud can be discovered at the early stage

• Books and records of clients are always up to date
• More time is available for detailed checking of account
• Reduces workload for final audit

37.Disadvantages of interim audit

• Audited figures may be still altered by client staff

• Waste of time in small entity
• High cost

38.Final Audit

Final audit is also called completed audit or a periodical audit. The audit is normally
carried out at the end of the accounting period

Final audit work/procedure

• Final audit procedures also involve a review of the financial statements as a

whole to ensure that they are internally consistent, and in accordance with the
relevant financial reporting framework and the auditor’s knowledge of the
business.
• Substantive procedures, which include analytical procedures, are designed to
provide evidence that the figures and disclosures in the financial statements
are complete, relevant, and accurate. Arriving at the final conclusions often
involves the performance of further analytical procedures on the financial
statements as a whole.
• It is common for auditors to provide management with lists of control
weaknesses (both structural and operational) together with recommendations
for improvement both after the interim and final audits.
• Auditors are also required to communicate with those charged with
governance.
• Auditors are to obtain management representations, third party confirmations
and final review of working papers to ensure consistency.

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39.Advantages of final audit

• Allocation of work to staff becomes easier

• Expenses involved are comparatively lower and it is suitable for small
organization
• Threat of alteration in audited figures can be reduced to a certain extent

40.Disadvantages of final audit

• Delay in presentation of final accounts and completion of work, in case of

large organization
• Overlooks some detailed aspects due to shortage of time.

Major difference b/w interim and final audit

• Interim audit and final audit parts of whole audit

• Interim audit performed during year but fi nal audit at or after the year-
end
• Interim audit performs procedures that cannot be performed at the final
audit
• Interim audit forms interim conclusion, but final audit results in audit
opinion
• Typical work at interim audit
• Typical work at final audit

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