Conducting an audit in accordance with Generally Accepted Auditing Standards req
ID: 2500298 • Letter: C
Question
Conducting an audit in accordance with Generally Accepted Auditing Standards requires that the audit is properly planned, performing preliminary upfront analytical procedures, assessing the clients business risk and making sure that the auditors understand the client’s business and industry.
(a) Identify and describe at least three aspects of proper audit planning and why they are important.
(b) Define what an analytical procedure is and give at least three procedures that should be performed and their purpose. For example, comparison of last year’s Allowance for Doubtful Accounts to this year’s Allowance for Doubtful accounts – the amount has decreased by 25%, while sales have increased by 10% from last year. How might this affect how you look at Accounts Receivables and the related Allowance for Doubtful Accounts? Would you increase or decrease your audit procedures?
(c) Why does an auditor need to understand the client’s business and their industry? Provide an industry and what risks may that industry pose to our client.
(Points : 30) Essay for final exam on External Auditing
Explanation / Answer
Aspects:
“Audit risk” is the risk that an auditor may give an inappropriate audit opinion on financial statements that are materially misstated. To reduce the audit risk to an acceptably low level means the auditor needs to be more than certain that the financial statements are not materially misstated. This is reiterated by ISA 200, which states, “The auditor should plan and perform the audit to reduce audit risk to an acceptably low level that is consistent with the objective of an audit.”
“Inherent Risk” as per ISA 400 is “the susceptibility of an account balance or class of transactions to misstatements that could be material, individually or when aggregated with misstatements in other balances or classes, assuming that there are no related internal controls”. Assessing audit risk and inherent risk is an essential part of audit planning because it determines the quantity and quality of evidence that will need to be gathered and the Page 2 of 7 staff that need to be assigned to the particular audit. In establishing the overall audit strategy, the auditor should
Procedure:
a. identify the characteristics of the engagement that define its
scope;
b. ascertain the reporting objectives of the engagement in order to
plan the timing of the audit and the nature of the communications
required;
c. consider the factors that, in the auditor's professional judgment,
are significant in directing the engagement team's efforts;
d. consider the results of preliminary engagement activities and,
when applicable, whether knowledge gained on other engagements
performed by the engagement partner for the entity is relevant;
and
e. ascertain the nature, timing, and extent of resources necessary to
perform the engagement
An auditor need to understand the client’s business and their industry to:
The auditor must have an understanding of the client?s external environment, including economic conditions, impact of competition, reporting obligations, legal and regulatory requirements. The auditor should source this information by reading industry trade publications, and regulatory requirements.