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CHAPTER 4:
AUDIT PLANNING
FUNDAMENTALS OF AUDITING
PHD. THAO BUI
2023
Overview of the financial statement auditing process
Audit planning: To accept, keep clients
(pre-planning) and make audit planning
Audit Audit Audit Audit performing: To perform audit
Planning Performing Completion
Audit completion: To terminate the audit,
make the audit statement and handle
the after-audit
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Overview of the financial statement auditing process
Audit Audit Audit
Planning Performing Completion
• Client acceptance and
Planning
continuance
• Overall audit strategy
• Preliminary
engagement activities • Audit plan
• Audit program
Pre-planning
Content
4.1. Client acceptance and continuance
4.2. Preliminary engagement activities
4.3. Planning the audit
4.4. Types of audit test
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References
• VSA 210, Agreeing the terms of audit engagements.
• VSA 300, Planning an audit of financial statements.
• VSA 315, Identifying and assessing the risks of
material misstatement through understanding the
entity and its environment.
• VSA 320, Materiality in planning and performing an
audit.
• VSA 500, Audit evidence.
4.1. Client acceptance
and continuance
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4.1. Client acceptance and continuance
ISQC 1 states that audit firms should establish policies and procedures for the acceptance
and continuance of client relationships
Evaluate the client’s background;
Determine whether the auditor can meet the ethical requirements regarding the client;
Communicate with the previous auditor;
Determine the need for other experts;
Select staff to perform the audit and;
Obtain an engagement letter.
New Client
Investigate new client before
accepting
Evaluate the client’s
integrity ?
• business community,
possibility of fraud?
• financial stability, and
• relations with its previous
auditor
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Continuing Clients
Previous conflicts over scope
Any pending litigation between
of the audit, type of opinion
client and auditor
and fee
Client Auditor
relationship
Serious doubts about the
integrity of client’s management
Major influences on the Continuance of the Relationship
Evaluate the client’s background
Sources of information for client evaluation
To Understand client’s Publicly available Audit firm Information from
business, and information experience client
internal control
To search: To review: (1) To review client
to identify types of (1) Media and documentation, documentation
discuss with client (2) To discuss with
potential material government databases
staff and
(2) Client, Industry, lawyer, banker, prior
misstatements and their and government audit manager management
likelihood of occurrence websites
(Prior workpapers, (BRC, IC, Client press
releases, minutes important
client financials)
meetings, government
correspondence, people
associated with entity,
internal audit personnel,
employees, management)
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Communicate with the predecessor (existing) auditor
New (proposed) auditor should communicate with the predecessor (existing) auditor of the
potential client.
Extent of communication depends on client’s permission and the legal or ethical
requirements relating to this disclosure.
Purpose of this communication is to determine whether there are technical or ethical
facts, or circumstances the new auditor should be aware of, prior to accepting the audit.
Existing auditor should advise whether there are any professional reasons for
not accepting the appointment.
If the client denies the existing auditor permission to discuss its affairs with the
proposed successor auditor or limits the disclosure, that fact should be
disclosed to the proposed successor auditor.
Select staff for engagement
Capabilities and competencies required for assigned engagement staff:
Understanding of, and practical experience with, audit engagements of similar
nature and complexity through appropriate training and participation.
Appropriate technical knowledge, including relevant information technology.
Knowledge of relevant industry in which the client operates.
Ability to apply professional judgement.
Understanding of the firm’s quality control policies and procedures.
Understanding of professional standards and regulatory and legal
requirements.
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Use of specialists
Situations where an auditor might use an expert: valuations of certain types of
assets (land and building, works of art, precious stones, etc.); specific IT expertise (e.g.
in the audit of a telecommunications company); legal opinions; etc.
Expert’s Competence, Objectivity:
professional certifications, experience and reputation
any relationship between expert and client
Develop overall audit strategy
Overall audit strategy: set the scope, timing
and direction of the audit, and guide the
Understand Prepare development of the detailed audit plan.
client’s audit Audit plan: converts the audit strategy into a
background program more detailed plan and includes the nature,
timing, and extent of audit procedures in order
to obtain sufficient audit evidence to reduce
audit risk to an acceptably low level.
Audit program: detailed list of the audit
procedures to be performed during the audit
Develop
overall Develop
audit audit plan Shall be updated and changed as necessary
strategy during the course of the audit
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Questions
What is the objective of pre-planning audit?
A. To determine audit risks
B. To evaluate the effectiveness of the internal control
C. To determine whether to accept the audit engagement
letter with client
D. All of the above are incorrect
Questions
Which of the following should the auditors
obtain from the predecessor auditors before
accepting an audit engagement?
A. Analysis of balance sheet accounts.
B. Analysis of income statement accounts.
C. All matters of continuing accounting
significance.
D. Facts that might bear on the integrity of
management.
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Questions
Which of the following factors would be most likely to cause a
professional auditor in public practice to decline a new audit
engagement?
A. The prospective client has already completed its physical inventory
count.
B. The auditor lacks an understanding of the prospective client’s
operations and industry.
C. The auditor is unable to review the predecessor auditor’s working
papers.
D. The prospective client is unwilling to make all financial records
available to the auditor.
4.2.
Preliminary
Engagement
Activities
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4.2.1. Perform procedures regarding the
4.2. continuance of the client relationship and
the specific audit engagement
Preliminary 4.2.2. Evaluate compliance with ethical
Engagement requirements, including independence
Activities 4.2.3. Establish an understanding of the terms
of the engagement
4.2.1. Perform procedures regarding the continuance of the client
relationship and the specific audit engagement
Engagement partner should ensure that
appropriate procedures have been followed, and
conclusions reached are appropriate and have been documented.
Deciding whether to continue a client relationship includes consideration of
significant matters
• arisen during the current or previous audit engagement, and
• their implications for continuing the relationship.
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4.2.1. Perform procedures regarding the continuance of the client
relationship and the specific audit engagement
Acceptance and continuance of client relationships and specific audit engagements
include considering:
Integrity of the principal owners, key management and those charged with
governance of the entity;
Whether the engagement team is competent to perform the audit engagement and
has the necessary time and resources; and
Whether the firm and the engagement team can comply with ethical requirements.
4.2.2. Evaluate compliance with ethical
requirements, including independence
Engagement partner should consider whether members of the
engagement team have complied with ethical requirements:
Integrity;
Objectivity;
Professional competence and due care;
Confidentiality;
Professional behavior; and
Independence.
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4.2.2. Evaluate compliance with ethical requirements, including independence
Independence
Members of the auditor team as well as the entire audit firm must meet the relevant
independence requirements
procedures to check personal financial investments of partners and employees
and the business relationships with the potential audit client
review the non-audit services the audit firm are providing or have recently been
providing to this potential client
any pending litigation between client and the auditor
4.2.2. Evaluate compliance with ethical requirements, including independence
Self-Interest
Threats
Advocacy Self-Review
Threat Threat
Ethical
threats
Intimidation Familiarity
Threat Threat
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4.2.2. Evaluate compliance with ethical requirements, including independence
“Self-Interest Threat” occurs when an auditor could benefit from a financial interest
in, or other self-interest conflict with, a client:
A direct financial interest or material indirect financial interest in a client
Undue dependence on total fees from a client
Concern about the possibility of losing the engagement
Having a close business relationship with a client
Potential employment with a client
Contingent fees relating to assurance engagements
4.2.2. Evaluate compliance with ethical requirements, including independence
“Self-Review Threat” occurs when
(1) results of a previous engagement needs to be reevaluated in reaching conclusions on the
present assurance engagement or
(2) when a member of the audit team previously was an employee of the client (especially a
director or officer) in a position to exert significant influence over the subject matter of the
assurance engagement.
For example, assisting an audit client in matters such as preparing accounting records or
financial statements may create a self-review threat when the firm subsequently audits the
financial statements.
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4.2.2. Evaluate compliance with ethical requirements, including independence
“Advocacy Threat” occurs when a member of the audit team promotes, or seems to
promote, a client’s position or opinion - subordinating his judgment to that of the
client.
Examples of circumstances that may create this threat include:
• selling, underwriting or otherwise dealing in financial securities or shares of an
assurance client;
• acting as the client’s advocate in a legal proceeding.
4.2.2. Evaluate compliance with ethical requirements, including independence
“Familiarity Threat” occurs when an auditor becomes too sympathetic to the client’s
interests because he has a close relationship with a client, its directors, officers or
employees.
• a member of the audit team having an immediate family member or close family
member who is a director or officer of the client;
• a member of the audit team having a close family member who is an employee of the
client and in a position to significantly influence the subject matter of the engagement;
• a former partner of the firm being a director, officer of the client or an employee in a
position of significant influence;
• long association of a senior member of the audit team with the assurance client; and
• acceptance of gifts or hospitality, unless the value is clearly insignificant, from the
assurance client, its directors, officers or employees.
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4.2.2. Evaluate compliance with ethical requirements, including independence
“Intimidation Threat” occurs when a member of the audit team may be deterred from
acting objectively and exercising professional skepticism by threats, actual or
perceived, from the directors, officers or employees of an assurance client:
Being threatened with dismissal or replacement in relation to a client
engagement.
Being threatened with litigation.
Being pressured to reduce inappropriately the extent of work performed in order
to reduce fees.
4.2.2. Evaluate compliance with ethical requirements, including independence
Ethical safeguards can be grouped into two broad categories:
Safeguards created externally, by legislation, regulation or the accountancy profession:
educational, training and experience requirements to become a certified member of the profession;
continuing education requirements; professional accounting, auditing and ethics standards and
monitoring and disciplinary processes; peer review of quality control; and professional rules or
legislation governing the independence requirements of the firm.
Safeguards established within the work environment.
• leadership stressing the importance of independence;
• designation of a member of senior management to oversee the adequate functioning of the
safeguarding system;
• policies and procedures to assure quality control of assurance engagements;
• written independence policies;
• internal policies to monitor compliance with independence ethics;
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4.2.2. Evaluate compliance with ethical requirements, including independence
Engagement partner remains alert for evidence of non-compliance with ethical
requirements.
Inquiry and observation regarding ethical matters occur as necessary throughout
the audit engagement.
If members of the engagement team have not complied with ethical requirements,
appropriate actions should be taken
4.2.3. Establish an understanding of the terms of the engagement
may affect legal responsibilities to the
client: its scope of work, responsibilities,
and limitations.
Engagement letter
should be signed before the
an agreement between the audit firm
commencement of the engagement, to
and the client for the conduct of the
avoid misunderstandings with respect to
audit and related services.
the engagement.
acceptance of a change in Engagement:
auditor and the client should agree on the
new terms
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4.2.3. Establish an understanding of the terms of the engagement
Engagement letter generally include reference to:
• objective of the audit of financial information;
• management’s responsibility for the financial information;
• applicable financial reporting framework;
• scope of the audit, including reference to applicable
legislation, regulations;
• form of any reports or other communication of results of the
engagement,
• unrestricted access to whatever records, documentation and
other information requested in connection with the audit.
4.2.3. Establish an understanding of the terms of the engagement
Establishing and negotiating Audit Fees:
Professional fees should be a fair reflection of the value of the professional
services performed for the client, considering:
• the skill and knowledge required for the type of professional services involved;
• the level of training and experience of the persons necessarily engaged in
performing the professional services;
• the time required by each person engaged in performing the professional services;
• the degree of responsibility that performing those services entails.
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4.2.3. Establish an understanding of the terms of the engagement
Contingency Fees:
• Contingency fee is an arrangement whereby no fee will be
charged unless a specified finding or result is obtained, or
when the fee is otherwise contingent on the findings or results
of these services, including fees charged on a percentage or
similar basis.
• Professional audit services should not be offered or rendered
to a client under a contingency fee
• Contingency fee can jeopardize the auditor’s independence
4.2.3. Establish an understanding of the terms
of the engagement
Commissions:
• Auditor should not take or pay commissions.
• Auditor should not accept a commission for the
referral of the products or services of others.
• Payment or receipt of a commission by a
professional accountant could impair objectivity
and independence.
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Questions
Which of the following should not normally be included in the
engagement letter for an audit?
A. A description of the responsibilities of client personnel to provide
assistance.
B. An indication of the amount of the audit fee.
C. A description of the limitations of an audit.
D. A listing of the client’s branch offices selected for testing.
You are an audit manager in Alpha audit firm. You are preparing the engagement letter for the
audit of Beta Ltd, for the year ending 31 December 2022.
Beta has been an audit client for five year, being one of your firm’s most important clients, and
Alpha has provided audit, taxation and management consultancy advice during this time. The
client has been satisfied with the services provided, although the taxation fee for the period to 31
December 2021 remains unpaid.
Audit personnel available for this year’s audit are most of the staff from last year, including Mr.
Bean, an audit partner. Mr. Bean has been the audit partner since Beta became an audit client.
You are aware that Lily Bean, the daughter of Mr. Bean, has recently been appointed the financial
director at Beta. To celebrate her new appointment, Lily has suggested that all of the audit staff out
to an expensive restaurant prior the start of the audit work for this year.
Required
Identify and explain the ethical risks arising in carrying out your audit of Beta for the year ended 31
December 2022, and suggest ways of mitigating each of the risks you identify.
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