PLANNING THE ASSIGNMENT

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Related BSA (Bangladesh Standard on Auditing)

BSA 200: Objective and General Principles Governing an

Audit of Financial Statements.

BSA 300: Planning an Audit of Financial Statements

BSA 315: Understanding the Entity and its environment

and Assessing the Risk of Material Misstatement.

BSA 320: Audit Materiality

BSA 520: Analytical Procedures

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Planning Objectives

"The objective of the auditor is to plan the audit so that it will

be performed in an effective manner."

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Audit Strategy

The formulation of the general strategy for the audit, which sets
the scope, timing and direction of the audit and guides the
development of the audit plan

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Audit Plan

An audit plan is more detailed than the strategy and sets out
the nature, timing and extent of audit procedures (including
risk assessment procedures) to be performed by the
engagement team in order to obtain sufficient appropriate
audit evidence.

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Benefits of Audit Planning

An audit plan shows how the overall audit strategy will be

implemented. Audits are planned to:

1. Ensure appropriate attention is devoted to important areas

of the audit.
2. Identify potential problems and resolve them on a timely
basis.
3. Ensure that the audit is properly organized and managed.
4. Assign work to engagement team members properly.
5. Facilitate direction and supervision of engagement team
members.
6. Facilitate review of work.
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Approach to Planning

1. Ensuring that ethical requirements continue to be met

2. Ensuring the terms of the engagement are understood

3. Establishing the overall audit strategy --*****

4. Developing an audit plan including risk assessment

procedures, audit tests and any other procedures
necessary to comply with BSAs. ****

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Establishing the overall audit strategy --*****

a. Determining the relevant characteristics of the

engagement, such as the reporting framework used as
this will set the scope for the engagement and
understanding the entity and its environment.

b. Discovering key dates for reporting and other

communication.

c. Determining materiality, preliminary risk assessment,

whether internal controls are to be tested.

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Establishing the overall audit strategy --*****

d. Consideration of when work is to be carried out, for

example, before or after the year end.

e. Consideration of ‘team members’ available, their skills

and how and when they are to be used, for example,
particular skills for high risk areas. In addition,
appropriate levels of staff are required to facilitate
direction, supervision and review of more junior team
members’ work.

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Developing an audit plan including risk assessment

procedures, audit tests and any other procedures necessary
to comply with BSAs. ***

The auditor should develop an audit plan for the audit in order
to reduce audit risk to an acceptably low level. The audit plan
and any significant changes to it during the audit must be
documented.

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Key Contents of an Overall Audit strategy

 Understanding the Entity’s Environment

 Understanding the accounting and internal control systems

 Risk and Materiality

 Consequent nature, timing and extent of procedures

 Co-ordination, direction, supervision and review

 Other Matters

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Understanding the Entity’s Environment

A. General economic factors and industry conditions.

B. Important characteristics of the client:

i. Business
ii. principal business strategies
iii. financial performance
iv. reporting requirements, including changes since the
previous audit.

C. The general level of competence of management.

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Understanding the accounting and internal control

systems

A. The accounting policies adopted by the entity and

changes in those policies.
B. The effect of new accounting or auditing
pronouncements.

C. The auditor’s cumulative knowledge of the accounting

and internal control systems and the relative emphasis
expected to be placed on different types of test.

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Risk and Materiality

1. The expected assessment of risks of fraud or error and

identification of significant audit areas.

2. The setting of materiality for audit planning purposes.

3. The possibility of material misstatements, including the

experience of past periods or frauds.

4. The identification of complex accounting areas including

those involving estimates.

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Consequent nature, timing and extent of procedures

a. Possible change of emphasis on specific audit areas.

b. The effect of information technology on the audit.

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Co-ordination, direction, supervision and review

1. The number of locations.

2. Staffing requirements.

3. Need to attend client premises for inventory count or

other year-end procedures.

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Other Matters

1. The terms of the engagement and any statutory

responsibilities.

2. The possibility that the going concern basis may be

subject to question.

3. Conditions requiring special attention.

4. The nature and timing of reports or other

communication with the entity that are expected under
the engagement.

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Professional Skepticism
Professional Skepticism means an attitude of the auditor that
includes a questioning mind, being alert to conditions which
may indicate possible misstatement due to fraud or error,
and a critical assessment of audit evidence.

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Professional skepticism includes being alert to: For Example

1. Audit evidence that contradicts other audit evidence

obtained.
2. Information that brings into question the reliability of
documents and responses to inquiries to be used as
audit evidence.
3. Conditions that may indicate possible fraud.

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Maintaining Professional skepticism throughout the audit is

necessary if the auditor is, for example, to reduce the risks of

1. Overlooking unusual transactions.

2. Over generalizing when drawing conclusions from

audit observations.

3. Using inappropriate assumptions in determining the

nature, timing and extent of the audit procedures and
evaluating the results thereof.

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Professional skepticism does not mean that auditors

should disbelieve everything they are told.

However, they must have a questioning attitude

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Analytical procedures
Analytical procedures mean evaluations of financial
information made by a study of plausible relationships among
both financial and non-financial data. Analytical procedures
also encompass the investigation of identified fluctuations
and relationships that are inconsistent with other relevant
information or deviate significantly from predicted
amounts.

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The BSA 520 states that analytical procedures include:

The consideration of comparison with

1. Comparable information for prior periods.

2. Anticipated results of the entity, such as budgets or

forecasts, or expectations of the auditor, such as an
estimation of depreciation.

3. 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.

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The BSA 520 states that analytical procedures include:

Consideration of relationships between:

1. Elements of financial information that would be

expected to conform to a predictable pattern based on
the entity’s experience, such as the relationship of gross
profit to sales.

2. Financial information and relevant non-financial

information, such as the relationship of payroll costs to
number of employees

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Various methods may be used to perform analytical

procedures. These methods range from performing simple
comparison to performing complex analyses using advanced
statistical techniques. The choice of procedures is a matter of
auditor’s professional judgment.

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Materiality
BSA 320

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Materiality
A matter is material if its omission or misstatement would
reasonably influence the economic decisions of users taken
on the basis of the financial statements. Materiality depends
on the size of the error in the context of its omission or
misstatement.

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When consider?

BSA 320 states that the materiality should be considered by

the auditor when:

1. Determining the nature, timing and extent of audit

procedures; and
2. Evaluating the effect of misstatements

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Why Consider

Materiality assessment will help the auditors to decide:

1. How many and what items to examine

2. Whether to use sampling techniques

3. What level of error is likely to lead to an auditor to say the

financial statements do not give a true and fair view

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Traditional benchmarks include:

½  - 1% of turnover

5 - 10% of profit before tax

1 - 2% of gross assets

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Tolerable error: The maximum error that an auditor is

prepared to accept in a class of transactions or balances in the
financial statements.

Note that :
The auditors will often calculate a range of values, and then
take an average or weighted average of all the figures
produced as the preliminary materiality level. However,
different firms have different methods to calculate
materiality level.

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Materiality Vs Audit Risk

There is an inverse relationship between

materiality and the level of audit risk, that is the
higher the materiality level, the lower the audit
risk and vice versa.

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Review of Materiality

The level of materiality must be reviewed constantly as the

audit progresses and changes may be required because:

1. Draft accounts are altered (due to material error and so

on) and therefore overall materiality changes.

2. External factors may cause changes in risk estimates.

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Continuous Risk Assessment

The auditors usually adopt a risk based approach to auditing

and focused on his testing on the riskiest balances and
classes of transactions.

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Audit Risk

The risk that the auditors give an inappropriate

opinion on the financial statements

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The risk of Material misstatements = Inherent risk ×

Control Risk.

And
Audit Risk = IR × CR × DR

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Inherent Risk
The susceptibility of an account balance or class of
transactions to misstatement that could be material
individually or when aggregated with misstatements in
other balances or classes, assuming there were no related
internal controls.

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Control Risk
 
The risk that a material misstatement would not be
prevented, detected or corrected by the accounting and
internal control systems.

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Detection Risk

The risk that the auditors’ procedures will not detect a

misstatement that exists in an account balance or class of
transactions that could be material, either individually or
when aggregated with misstatements in other balances or
classes.

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Identifying and Assessing the Risk

BSA 315 says that the auditor shall identify and assess the
risks of material misstatement at:

1. The financial statement level; and

2. The assertion level for classes of transactions, account
balances and disclosures.

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The auditor is required to take the following steps:

Identify risks throughout the process of obtaining an

understanding of the entity and its environment.

Relate the risks to what can go wrong at the

assertion level.

Consider whether the risks are of a magnitude that

could result in a material misstatement.

Consider the likelihood of the risks causing a

material misstatement.

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Significant Risks
Some risks may be significant risks, which require special
audit consideration. BSA 315 sets out the following factors
which indicate that a risk might be a significant risk:

1. Risk of fraud
2. Related to recent significant economic, accounting or
other development
3. The complexity of transactions.
4. It is a significant transaction with a related party
5. The degree of subjectivity in the financial information
6. It is an unusual transaction.

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Thank You

Amin Siddiki FCA