You are the manager responsible for the audit of ABC Company, which has a turnover of KShs 750 million. The company has been audited your firm for a number of years and this is the second year you have been responsible as manager for the audit. However, owing to your responsibilities for other audits you are only intending to make periodic visits to the
company during the course of the audit and you will not be involved in any of the detailed audit work.
a) State the matters you would consider in planning the audit, prior to the commencement of the detailed audit work. (13 marks)
b) Describe the way in which you would control the audit from the commencement of the work the audit staff to the review stage the partner immediately prior to him signing the audit report (7 marks)
(Total: 20 marks)
a) Matters to consider when planning the audit
In planning the audit the auditor will need to consider the following:
1. Understanding the accounting and internal control systems
The auditor‘s cumulative knowledge of the accounting and in ternal control systems and the relative emphasis expected to be placed on tests of control and substantive procedures.
2. Reviewing matters raised in the previous year‘s audit, which may have continuing relevance in the current year. This is done reviewing previous year‘s working papers. The auditor will be able to identify areas noted as having weak controls or specific accounting problems. Attention should be paid to such areas in the audit plan.
3. Assessing the effects of any changes in legislation or accounting practice affecting the financial statements of the company. The audit plan should include a review of these changes and whether the client has complied.
4. The auditor should consult with management and staff of the organization about current trading circumstances and any significant changes in the business carried on and the management of the enterprise. E.g. changes in management might weaken the internal control system.
5. Identify any significant changes in the clients accounting procedures such as installation of a new computer information system. Changes to a computerized system could result in weak controls.
6. Conditions requiring special attention such as the existence of related parties.
7. Consider any current or impending financial difficulties, which could face the company.
E.g. shortage of raw materials or failure to raise working capital.
8. The auditor should check the nature and timing of reports and other communications with the client so that the audit plan accommodates such timings e.g. he should consider the dates of the annual general meeting, stock taking, dates when management reports are available.
9. Set materiality levels for audit purposes and in particular identify areas with material transactions, which call for more audit work.
10. The assessment of internal audit department and level of reliance to be place on its work. The auditor should also determine the number of audit staff required, experience and special skills required and the timing of the audit visits.
b) Ways to control the audit
1. Scoping of the work and delegation
First I would determine the scope of the work to be carried out and our client‘s expectation. Basing on this I will identify the staff that I will require to carry out the work. In doing this I will need to consider, the complexity of the assignment and the level of experience required of the staff. I will delegate the work to a team that has appropriate training and experience to carry out the work
I would give appropriate instructions/directions to the staff I have delegated the work to. This involves informing assistants of their responsibilities and the objectives of the procedures they are to perform. This also involves informing them of matters such as the nature of the entity‘s business and possible accounting and auditing problems that may affect the nature, timing and extent of audit procedures to be performed. I would summarise such instructions in an audit programme.
3. Supervision of the work
I would supervise the work being carried out the audit team. This will include:
• Monitoring the progress of the audit to consider whether assistants have the necessary skills and competence to carry out their assigned tasks;
• Establish whether assistants understand the audit instructions as documented in the audit programme;
• Ensure that work is being carried out in accordance with the overall audit plan and the audit program;
• To identify and address any significant accounting and auditing questions raised during the audit;
• Resolve any differences of professional judgment between the audit team.
Before submitting the work to the partner I will need to review the work done. This is to ensure that:
• The work has been performed in accordance with the audit program
• The work performed and the results obtained have been adequately documented.
• All significant audit matters have been resolved or are reflected in audit conclusions.
• The objectives of the audit procedures have been achieved; and
• The conclusions expressed are consistent with the results of the work performed and support the audit opinion.
• I would then submit the work done to the audit partner for review.