audit chapter 3

8/12/2019 Audit Chapter 3

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The auditor should perform the following activities at the beginningof the auditPerform procedures regarding the continuance of the clientrelationship and the specific audit engagementDetermine compliance with independence and ethics reruirements,and

NOTES : The determination of compliance with independenceand ethics requirements is not limited to preliminary engagementactivities and should be reevaluated with changes circumtances.

Establish an understanding with the client regarding the services to be

performed on the engagement.

THE PRELIMINARYENGAGEMENT

ACTIVITIES


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The statutory audit engagement is an agreement made between the scretarydepartment and auditors

This agreement is made before the statuory audit is made

The statutory audit engagement is sent to the secretary by the auditors

STATUTORY

AUDITENGAGEMENT


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The main purpose of statutory audit engagement is according to thecompany act 1965.

The statutory audit engagement is made in order to prepare the statutory

audit.

THE PURPOSE

OF STATUTORY


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An auditors who, before the completion of the engagement, is requested tochanges the engagement to one which provides a lower level of assurances

should consider the approprianteness of doing so.

When the terms of the engagement are changed, the auditor and the clientshould agree on the new terms.

If the auditors is unable to agree to a change of the engagement and is not permitted to continue the original engagement, the auditor shouldwithdraw and consider whether there is any obligation, either contractualor otherwise, to report to other parties, such as the board of directors or

shareholders, the circumstances necessitating the withdrawal.

ACCEPTANCEOF A CHANGE IN

ENGAGEMENT


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First phase of the audit begins when the auditor receives an invitation to carryout the audit of a companys financial statements.

The auditors decision to accept or reject the invitation must follow certain procedures.

The acceptance of the audit is made out on a document called an auditengagement letter.

This letter is an important document to the auditor and is kept as one of hisworking papers.


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The engagement letter is an agreement between the CA firm and the client forthe conduct of the audit and related services.

It should specify whether the auditor will perform an audit, a review or acompilation, plus any other services such tax returns or management consulting.

It should also state any restriction to be imposed on the auditors work, deadlines

for completing the audit, assistance to be provided by the clients personal inobtaining records and documents and schedules to be prepared fot the auditor.

If often includes an agreement on fees, the engagement letter as also a means ofinforming the client that auditor cannot guarantee that all acts of froud will be

discovered.


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The audit engagement letter serves as a contract between the auditor or theaudit firm and the client company to be audited spelling out the type of auditrequired.

The audit engagement letter contains all agreements that are understood between the two parties which should help avoid any future misunderstanding.

The audit engagement letter can be used by the auditors as evidence in anylegal action taken against him in the future.

The audit engagement letter serves as basis for audit planning. The letter spellsout the type of audit to be carried out.


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The auditor would have had a formal discussion with the prospective clients.

The discussion forms the basis for the preparation of this letter.

It should contain all the terms as have been agreed upon in the discussion.

The audit engagement letter is prepared by the auditors.


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Among the factors that must be included in the audit engagement letter,are as follows :

(i) Address

(ii) The objectives of the audit .(iii) The statement of the basis to be used in the audit(iv) The statement that responsibility in the preparation of the

financial statement is the responsibility of the management.

The management is also responsible for the internal controland for adopting appropriate accounting policies.

The audit engagement letter must be signed by the client as an evidence ofagreements with all the terms contained therein.

A copy of letter is kept by the auditors in the permanent file.


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Planning is defined as developing on overall audit strategy

and an audit plan for the expected nature,timing and extent ofplanned risk assessment procedures as determine under ISA315,identifying and Asessing the Risk of MaterialMisstatement through understanding the entity and itsenvironment, and planned further audit procedures at theassertion level as determined under ISA 330


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Ensure that all transactions are executed in accordance with the procedures andapproval of specific or general approval of a decision by the management.

Ensure that all transactions are recorded immediately in the correct amount intothe appropriate accounts and within the time frame of the transaction occurred.

Ensure only authorized use of company assets in accordance with thevertification and approval by the management.

Ensure the existence of assets belonging to clients as stated in the records


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1. Knowledge to the business

Auditors should have knowledge of the business such to identify the typeof business, transaction,,economic factors and the management.

Auditors can apply this knowledge to design and plan appropriate

procedures.


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2. Understanding the accounting and internal controlsystems :

Accounting

Auditors ascertain the accounting policies adopted by the company and any

changes in those policies.

Auditors also familiarize himself with the accounting system and chart ofaccounts set up for processing of transaction by company.

Internal conrol systems

Auditors should ascertain and document the internal control systems in thecompany for the various financial and operational process.Example

purchases,sales and others.


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3.Preliminary assessment of the financial performance

Auditors should perform a preliminary analytical reviewof the draft financial statement at planning stage.

4. Assessing risks and identify problem

Auditors conduct an assessment of inherent and controlrisks and identify the significant audit areas


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5.Determining appropriate materiality levels for the audit

Auditors should set the materiality levels for audit purposes during the planning stage

Auditors also should consider the possibility of material misstatement ,including the experience of past periods ,or fraud or major errors.

6.Nature,timing and extent of audit procedures

Auditors should plan to conduct the audit at an appropriate time such thatcertain procedures could be carried out effectively.

Auditors also should consider the effect of information technology on the business and the audit.


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7.Co-ordination,direction,supervision,and review.

Auditors should ascertain the complexity of audit and consider whether otherexperts or other auditors are involved.

Auditors also should ensure that the staff assigned for the audit is adequate interms of number and in terms of seniority and expertise.

Auditors must prepare an audit assignment time table for each of the auditsections.


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8.Providing better service to the client

Auditors should be alert or mindful that the client maysometimes required more good service.

9.Other Matters

Conditions where special attention may be required.

The possibility that the going concern assumption maybe subject to question.

The nature and timing of special reports or othercommunication with the company that is expected underthe angagement.

audit chapter 3

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