Day 2 induction and audit basics slides

Induction and Audit BasicsDay 2

What is an audit really?• Definition

– Express opinion whether AFS prepared, within materiality, in accordance with identified financial reporting framework

• Considerations– Sufficient, appropriate evidence

– Enhances credibility, but not absolute assurance

– Does not guarantee future viability

• Auditing & society– May be required by statute, external requirements or

voluntarily

– We sell peace of mind

The Nexia audit approach• Planning & risk assessment

– Briefing/Pre-planning meeting– Obtain/update & record understanding of client’s business– Document & evaluate internal control– Engagement team discussion– Identify & assess risks– Set materiality – Design audit strategy & tailor programmes

• Review & approve risk assessment & audit strategy• Fieldwork• Completion procedures • Conclude & report/express opinion

The Audit ProcessClient

Acceptance / Continuance

Pre-planning:Review of files

& Meetings

Understanding of Client’s BusinessDocument & Evaluate Internal Control

Preliminary Analytical ReviewInternal Audit

Prior Years' ExperienceEngagement Team Discussion

Identify and Assess RisksControl Evaluation

Set Materiality

Audit Strategy

Tailor AuditProgrammes

AuditWork

Conclude onMatters for Partner

Attention

Link

Briefing / pre-planning meeting• Partner to brief team prior to planning• Prepare

– Review permanent & prior yr file, prior yr management letters, AFS, etc

– Identify points forward

• Focus of meeting– Latest developments– Likely risk areas– Potential going concern problems– Input from partner

• Minutes / notes of meeting• Incorporate in planning

Obtain/update & record understanding of client business

• Often have unrecorded knowledge– Must record to comply with the ISAs

• Aim – To obtain/update understanding of client’s

business & record relevant details to design audit approach

• Record in relevant parts of the file

Document & evaluate internal control• Reasons

– Gain understanding of business

– Assists in drafting substantive tests

– Assessment of control risk

• ISAs require understanding of internal control relevant to audit– Control environment

– Entity’s risk assessment procedures

– Information system re financial reporting

– Control activities

– Monitoring of controls

Document & evaluate internal control

• Information relevant to the audit– Use professional judgment – Usually relate to objective of preparing financial

statements– May be relevant if apply to non-financial data– Partner / manager to provide guidance– File in current file

Document & evaluate internal control• Depth of understanding

– Use professional judgment– Evaluate design & implementation relevant to

audit, and to extent not done yet for• Significant risks• Risks for which substantive procedures alone not

adequate

– Inquiry alone not sufficient – confirm by• Observation• Inspection of document & reports• Walk-through tests

– Must include risks arising from IT

Engagement team discussion

• ISA 315 requires discussion of susceptibility of AFS to material misstatements due to fraud or error

• Objective is to • Understand above for areas assigned to team members

– How results of their areas impact on others

• May be further discussions– Objective is to communicate & share information

Identify & Assess Risks

• Direct impact on extent & nature of procedures• Based on understanding – not educated guess• Assess at

– Overall FS level

– Assertion level for balances, classes of transactions & disclosures

• Revision of risk assessment – continuous• Response to risk in order to reduce audit risk

– At overall FS and individual assertion level

Set materiality • Information is material if its omission or

misstatement influences users

• Generally procedures focus on high-risk areas

• But MUST consider materiality

• Perform substantive procedures for material transactions, balances & disclosures irrespective of risk

Design audit strategy

• Consider risk, materiality, understanding (incl. internal control)

• Do not blindly follow prior year

• Address risks by section, by assertion

• Assertions for – Classes of transactions– Account balances– Presentation & disclosure

Directional Testing

• Hinges on double entry bookkeeping

• Test debit entries for overstatement

• Test credit entries for understatement

• Usual misstatement assumed

– Improper expenditure

– Unrecorded income

• Direction of test depends on risk of item

Impact of directional testing

• Most obvious in– Purchases Payments Accounts payable– Revenue Receipts Accounts Receivable– Payroll Payments Accounts Payable

• Does not apply to– Inventory– Bank– Provisions

Tailor programmes

• Tailor templates / existing programmes for– Risks identified– Industry of client– Client’s accounting system– Significant accounting work performed

by Nexia

Conduct the fieldwork• Proper brief

– Prior year file without brief NOT good enough

• Read planning, ensure client & risks understood

• Understand audit approach• For individual sections

– Study TB, draw up leads & then follow programme

• Do not blindly follow prior year file • Follow tailored programmes

Audit evidence• ISAs require sufficient, appropriate

evidence on which to base opinion• What is audit evidence?• Sufficient vs. Appropriate• Obtained for each assertion• Must be adequately documented

– Procedures performed– Extent & nature of tests– Items selected for testing– Results

Procedures for obtaining audit evidence

• Includes– Risk assessment procedures– Tests of controls– Substantive procedures

• Risk assessment procedures include evaluation of internal control– Regardless of planned approach– All 5 elements of internal control– Inquiry alone not sufficient– Document intended reliance

Tests of control• Required where

– Risk assessment includes expectation of operating effectiveness of controls

– Substantive procedures alone not adequate– Efficiency is overriding consideration

• Objective: determine if internal control– Suitably designed– Operated effectively throughout period

• Usually precede substantive tests

Tests of control• Conducted through

– Reperformance– Inspection– Observation– Enquiry

• Value of no significance• Every failure important• Record results and confirmed reliance on

controls

Substantive tests• Includes

– Analytical review (AR) & detailed substantive tests

• Responsive to risk assessment & controls

• Required for material balances, classes of transactions & disclosures– Regardless of risk assessment– May be AR

• Always consider AR first – detailed tests when – No AR, reliance on others; or– Significant risk & no controls reliance

Substantive tests• Remember directional testing• Do per assertion, as risks may be different• Practical considerations

– Substantive approach common in practice– BUT consider effectiveness of not relying on

controls– May be cases where have to rely on controls

Fieldwork - Obtaining evidence

Evaluate if not done yet.

Rely?

Do some Substantive Testing

No further testing

Detailedsubstantive testing

Significant risk/substantive procedures

inadequate?

YES

NOYES

NO

Controls inplace?

NOMaterial

Balance, Class ofTransactions or

Disclosure?

YES

Test controls

NO YES

Completion / Conclude

• Completion covered in subsequent course

• Partner expresses opinion on FS– Based on results of audit evidence

• You must conclude on individual sections– Based on results of tests performed

Documentation• Types of documentation

– Permanent & Current

• Documentation & referencing– Record tests, procedures & conclusions– Serves as evidence to support opinion– Basis on which your performance measured– Various types of documentation

• Attributes of quality documentation

Documentation…• Preparation of documentation

– Evidence logical thought, communicate ideas & resolve issues completely

– Ask: What is purpose of this WP?– ISA 230 requirements must be adhered to

• Headings• Dated• Identity of compiler & reviewer• Purpose & applicable info• Cross referencing• Conclusions

• Specific weaknesses

Documentation…• Computer generated documentation

– Same standards as manual documentation– Additional standards for identification & filing, backups

• Minimising documentation– Always be aware of ways to do this

• Use of prior year documents– Do not accept without questioning– Ask senior before changing

• Technical accuracy & completeness– Perform a self-review where possible

• Confidentiality of documentation• Review of documentation

Referencing• Refers to numbering of documentation

– Unique number – .1 used if it is a continuation

• Missing page easily determinable• Reference in red ink• Cross referencing

– Relating 2 or more w/papers– Must be between specific amounts / procedures

• Separate ref. no. for each w/paper• Leads referenced as x.20 – e.g. Bank & Cash = 32.20• Roman numerals & alphabet letters unacceptable

Audit Trail

• Objective– AFS agree to books

• TB is summary of books– Must be agreed to AFS– Only via lead schedules– If not on lead, reference to sub lead

Referencing systems

Trial Balance

Lead Schedules

A.F.S.

Referencing System

From TB R100 000Explained onsupportingdocumentation

To A.F.S.or

Next / Lead schedule

Standard audit symbols

• Indication of procedures applied very NB– Tick mark/symbol explains work done– Usually at bottom of w/paper

• Must be clearly distinguishable– ‘ ^ ‘ & ‘c/c ‘ standard for ‘casts’ & ‘cross cast’

• ‘Traced to supporting documentation’ not sufficient– Specify WHICH supporting documentation 

Dealing with errors

• Tests of control– Consider cause & document conclusions– Amendments to substantive tests depend on

reasons for departure• Poorly trained “temp” vs. incompetent work

throughout

• Consider extending tests

• No amendments if corrected long before y/e

Dealing with errors

• Tests of control– Can be isolated due to a

• Person, season, type of transaction

– If isolated• Rely on control but test deviations substantively

– Summary• Report to management

• Design substantive tests

• Combination of both

Dealing with errors• Substantive tests

– If no errors, no evaluation process needed – Errors: misstatements of amounts /disclosures

• Mistakes in gathering or processing data• Incorrect accounting estimates• Mistakes in application of accounting principles• Classification/manner of presentation & disclosure

– Irregularities: intentional misstatements• Include fraudulent reporting and theft• Must be brought to attention of partner

– Errors categorised as• Known errors, errors in estimates, projected errors

When misstatement detected• Investigate what caused the misstatement

– May have common feature– May be intentional - existence of fraud

• Error from isolated event not necessarily representative – Have to perform additional procedures to

confirm

• If isolated & all affected items tested and corrected, known and projected errors are eliminated

When misstatement detected• Discuss with management because

– Mistake may be ours– Client's knowledge may help– May take immediate preventative action – Financial loss may result if not rectified– Practical difficulties later– Client should investigate full effect of error

• May extend tests / alternative procedures

• Consider reasons & effects on other areas

• Assess whether intentional or unintentional

When misstatement detected• Document in file• Extrapolate remaining errors• Encourage client to:

– Adjust for at least all known errors & estimates– Consider adjusting for projected errors

• Types of errors– Known errors can be specifically identified – Projected errors result from audit sampling

applications• Less than 100% of items tested

• Summarise uncorrected errors > materiality

Monetary errors

• Project error results of sample to population– Does not indicate precise amount of error

• The ratio method– Projected error = value of error * value of

representative pop/ value of items tested

• The difference method– Projected error = error found/no. of items in

sample * number of items in population

Assessing results of sample

• Total projected error > materiality – Insuff. evidence to conclude that account correct

• Total error < materiality– Decide if acceptable low risk that true monetary

value exceeds materiality

• Use professional judgment & experience

• Action depends largely on reason for error

• Client might decide to adjust regardless– Deduct adjustments from projected error

Summary of process

• Determine materiality at planning

• Record errors > materiality / recordable error on O/U

• Discuss errors with client

Irregularities

• If conclude that error may be intentional– Speak to senior first!!!– Refer matter to appropriate level of management– Consider implications for any other areas of audit– Advise client if legal advice is necessary– Consider communication with audit committee /

Board– Compliance with S20 (5) of PAAA / APA

Internal Training

• Core audit courses

• On-the-job coaching

• IT / Other training

• 4 core training modules• Will attend each course as you progress • Combination of theory / lectures & case

studies / group discussions• Extensive use of videos and role plays for

soft skills training• Presentation and writing skills covered• Network opportunity• Assessments of your performance

Core Audit Courses

• Significant part of training you will receive

– Eventually you will provide it

• Theoretical training limited – must learn while doing

– Benefit from experience of your superiors

• Not everyone equally good at it

– Your responsibility to ensure you get it

– Be proactive

On-the-job coaching

Internal Training

• Core audit courses

• On-the-job coaching

• IT / Other training

Close• Implement lessons – make time for “soft”

issues• Manage your time• ASK ASK ASK• Attitude• Use Assessments for personal growth-

CHANGE if you have to• Use opportunity to learn about business• Focus on the big picture• Questions?

DO OR DO NOT

THERE IS NO TRY

Yoda, from “The Empire Strikes Back”