audit engagement tutorial by anthony shitandi

ASSURANCE ENGAGEMENT TUTORIAL

Anthony ShitandiAbabsy & Associates

We will talk about1. Prospecting2. Proposal writing & presentation3. Engaging a client4. Planning for the Engagement5. Executing the Engagement6. Completing the Engagement7. Nuts & Bolts

1.0 Prospecting

• Tendering following advertisement• Referral from existing client• Walk ins• Partners/ CEO’s Social Networks

1.0 The Audit Process: Preparation

2.0 Proposal Writing and Presenting Proposal Writing To Include;•Firms Profile (Emphasizing Capabilities and core competencies•Demonstrations of Firms understanding of clients needs•Similar Assignments undertaken by the firm•Proposed Engagement Methodology•Proposed Team•Proposed Fees

Proposal Presentation To Provide for;•Introduction of Senior Management Team •Introduction of The Firm to the client•Discussion of the Proposal •Other Firms products the prospect might be interested in•Questions & Answers Session•Vote of thanks

3.0 Acceptance and Continuance of Client Relationships Upon being hired by the prospect as his

Auditor, and acceptance by the firm to have the prospect as his client, the following should be done;

1. Interview with Predecessor Auditor(s)2. Review existing records3. Assess clients Audit-ability4. Engagement Letter

3.1 Audit Acceptance– Audit accepting and agreeing on terms of reference/

engagement is the responsibility of an engagement partner.

– He oversees preparing, issuing, and revising engagement letter according to the requirements of ISA 210. The scope and performance of work is covered in the letter along with all important matters relating to the engagement.

4.0 The Audit Process: Planning

4.0 Planning for the Assignment

– An auditor should plan an audit in a manner that helps him to finish the engagement in an efficient and effective manner.

– A planning file is prepared before an audit starts which is reviewed by the top management of an

accounting firm. It reflects all aspects of an audit engagement both financial and non-financial.

4.0 Planning for the Assignment Cntd.

– The auditor should develop an overall strategy for the audit engagement (ISA 300).

– Establishing objectives, scope, extent and critical aspects of an audit job.

– The auditor should develop a plan so as to reduce audit risk to an acceptably low level. (ISA 300).

– The identification of sources of audit evidence and its relationship to critical audit objectives.

4.0 Planning for the Assignment Cntd.– Establishing materiality levels/standards, sample size,

and sampling techniques (ISA 320 & 530).– Establishing materiality and evaluating whether the

judgment about materiality remains appropriate as the audit progresses.

– The auditor should make inquiries of those charged with governance to determine whether they have knowledge of any actual, suspected or alleged fraud affecting the company under audit.

4.0 Planning for the Assignment Cntd.

– Documenting the nature, timing & extent of risk assessment procedures sufficient to assess the risks of material misstatements. (ISA 315)

4.01 Planning for the Assignment– perform following risk assessment procedures to

obtain an understanding of a company and its environment, including its internal control:

• Inquiries of management• Analytical procedures• Observation & Inspection (ISA 315)

– Analyzing the consistency of financial and related information by substantive analysis.

– Designing, documenting, and re-evaluation of an audit plan.– Evaluating and documenting management information system details.

5.0 The Audit Process: Execution

5.0 Performance and Execution of Audit Work

– Audit team performs various audit procedures and techniques for obtaining audit evidence of such quantity that minimizes audit risks to acceptable levels.

– An auditor should document a company’s selection and application of accounting policies and review them for their appropriateness with the business-line and ensure consistency with the applicable financial reporting framework of the industry. (ISA 315).


– Evaluating and documenting design of accounting and internal control system and determining the extent of reliance to be placed on it. (ISA 315)

– Designing interim audit program on an initial assessment of internal controls system.

– An auditor should obtain understanding of how a company has responded to risks arising from IT (ISA 315).

– Identifying and documenting the internal controls working in the system.

5.0 Performance and Execution of Audit Work– Performing compliance tests on internal controls.– Ascertaining the results of compliance tests and

documenting the risk in each area separately.– Recommending additional controls to mitigate the

risks identified with the existing controls.– Writing the final audit programme in the light of

interim audit findings and audit objectives set at the planning stage.

– Applying the substantive analysis and tests in accordance with the final audit programme.


– Determining adequacy of substantive tests after the initial results start coming.

– Devising additional audit tests for risks identified at the later stages.

– Review the audit work to ensure sufficiency and appropriateness of audit evidence and overall work quality.– At planning and performing stages of work, an auditor is

required to ensure the appropriateness of the going concern assumptions in the preparation of financial statements (ISA 570).

5.0 Performance and Execution of Audit Work– The auditor should obtain audit evidence that

management acknowledges the responsibility for the fair presentation of financial statements in accordance with applicable financial reporting framework, and has approved the

financial statements (ISA 580).– If management refuses to provide a representation that the auditor considers necessary

the auditor should express a qualified opinion or disclaimer of opinion (ISA 580).


– The auditor should perform audit procedures designed to obtain sufficient and appropriate audit evidence regarding the identification and disclosure by management of related parties and the effect of related party transactions that are material to the financial statements (ISA 550).

– An audit process must be efficient and effective in fulfilling the objectives of an audit engagement. An auditor must minimize the risk of not finding material misstatements in account balances and at the same time complete the audit work on agreed time period.


– The auditor should obtain sufficient appropriate audit evidence about compliance with those laws and regulations generally recognized by the auditor to have an effect on the determination of material amounts and disclosures in the financial statements. Further, the auditor is required to have sufficient understanding of these laws and regulations in order to consider them when auditing the assertions related to determination of the amounts to be recorded and disclosures to be made (ISA 250).

6.0 The Audit Process: Reporting

6.0 Audit Reporting and Forming of Audit Opinion

– Reporting results of audit procedures is the final stage of an audit work.

– Manager and engagement partners finalize the process of audit reporting.

– Summarizing the results of audit procedures i.e. accounting adjustments, management letter etc.

– Reviewing the sufficiency and appropriateness of audit evidence gathered during the audit process.

6.0 Audit Reporting and Forming of Audit Opinion– Reviewing subsequent events, going concern

status, management representations, and truth and fairness of financial statements.

– Identifying and recommending appropriate action on weaknesses and findings surfaced during the audit process.

– Discussions with client management on all issues highlighted during the audit work and documenting their feedback.

6.0 Audit Reporting and Forming of Audit Opinion– The auditor should inform those charged with governance of those uncorrected misstatements noted by the auditor during the course of audit that were considered by management as immaterial to the financial statements taken as whole. – Summarizing audit results that highlight the audit

procedures applied, audit observations and management comments on each observation.

– Forming an audit opinion after audit issues are cleared by client management (ISA 700).


– Communicating the final draft to client management.

– Preparing a final audit report with or without modified opinions.

– Attending AGM for responding to any audit related queries of members.

– Determining the potential effects of audit report modification due to subsequent events (if any), (ISA 560).


– Documenting audit points for next years’ audit.– Documenting the follow up results of the audit.

7.0 Audit Definition

• Auditing is a systematic examination of books and records of a business or other organization in order to ascertain or verify and to report upon the facts regarding its financial operations and the results thereof.

7.1 Audit File

• This is a file presented to the Auditor containing relevant information of the period. The File Comprises the records that the Auditor will be examining during the Audit.

7.11 Contents of Audit File• TB• Draft P&L• Draft Balance Sheet• Statement of Changes in Equity• Cash book• Payroll• Bank Statements• Bank Reconciliations• Management Reports• Sales Reports• Expense Analysis• Cheque Stamps• Invoices & Receipt Books• Asset Register• Stock Sheets/ Stock Reconciliations• VAT 3 Returns

7.12 Audit Evidence Decisions

• 1. Which audit procedures to use• 2. What sample size to select for a given

procedure• 3. Which items to select from the population• 4. When to perform the procedures (timing)

7.2 Audit Program

• It includes a list of the audit procedures the auditor considers necessary.

Sample sizes Items to select Timing of the tests

Most auditors use computers to facilitate the preparation of audit programs.

7.3 Persuasiveness of Evidence• Two determinants

Appropriateness Sufficiency

7.4 Characteristics of Reliable Evidence

1. Independence of provider2. Effectiveness of client’s internal controls3. Auditor’s direct knowledge4. Qualification of individuals providing the

information5. Degree of objectivity6. Timeliness

7.5 Persuasiveness and Cost

• In making decisions about evidence for a given audit, both persuasiveness and cost must be considered.

• The auditor’s goal is to obtain a sufficient amount of appropriate evidence at the lowest total cost.

7.6 Types of Audit Evidence

• 1. Physical examination

• 2. Confirmation

• 3. Documentation

• 4. Analytical procedures

• 5. Inquiries of the client

• 6. Recalculation

• 7. Reperformance

• 8. Observation

7.6 1 Physical Examination

• It is the inspection or count by the auditor of It is the inspection or count by the auditor of a a tangible assettangible asset..

• This type of evidence is most often associated This type of evidence is most often associated with inventory and cash.with inventory and cash.

7.62 ConfirmationBalance Sheet ItemBalance Sheet Item SourceSourceCash in bank Bank

Accounts receivable Customer

Accounts Payable Supplier/ Creditor

Advances from customers CUstomer

Shares outstanding Registrar and transfer agent

Insurance cover/Contingent liabilities Insurance company/ client’s legal counsel

Shares outstanding Registrar and transfer agent

7.63 Documentation

7.64 Analytical Procedures

• Understand the client’s industry and business • Assess the entity’s ability to continue as a

going concern • Indicate the presence of possible

misstatements in the financial statements• Reduce detailed audit tests

7.65 Inquiries of the Client

• It is the obtaining of written or oral information from the client in response to questions from the auditor.

7.66 Recalculation

• It involves rechecking a sample of calculations made by the client.

7.67 Reperformance

• It is the auditor’s independent tests of client accounting procedures or controls that were originally done.

7.68 Observation

• It is the use of the senses to assess client activities.

• The auditor may tour the plant to obtain a general impression of the client’s facilities.

7.7 Audit Documentation

• Purposes of audit documentation • Ownership of audit files• Confidentiality of audit files

7.71 Supporting Schedules

• Analysis• Trial balance • Reconciliation of amounts• Tests of reasonableness• Summary of procedures• Examination of supporting documents• Informational• Outside documentation

7.72 Preparation of Audit Documentation

Each audit file should be properly identifiedDocumentation should be indexed and

cross-referencedCompleted documentation must clearly

indicate the audit work performedIt should include sufficient information It should plainly state the conclusions

reached

7.3 Audit Risk & Materiality

• Materiality relates to the precision required in the audit of financial statements of a company. Risk relates to the confidence that the audited financial statements are free from material misstatements.

• Audit risk is the risk that the auditor may unknowingly fail to qualify his opinion on financial statements that are materially misstated.

7.3 1 Audit Risk

• Audit risk is the result of the auditors' findings, conclusions, recommendations, or assurance that may be improper or incomplete, as a result of factors such as evidence that is not sufficient and/or appropriate, an inadequate audit process, or misleading information due to misrepresentation or fraud.

7.3 1 Audit Risk Cntd.

• Factors such as the time frame, complexity, or sensitivity of the work; size of the program in terms of monetary amounts; adequacy of the audited company's systems and processes to detect in-consistencies, significant errors, or fraud; and auditors' access to records, also impact audit risk.


• Audit risk includes the risk that auditors’ procedures will not detect a mistake, inconsistency, significant error, or fraud in the evidence supporting the audit.

• The assessment of audit risk involves both qualitative and quantitative considerations. The risk related with audit can be reduced but cannot be eliminated completely because of selective work.


• Audit risk can be reduced by taking actions such as increasing the scope of work; adding experts, additional reviewers, and other resources to the audit team; changing the methodology to obtain additional evidence, higher quality evidence, or alternative forms of corroborating evidence; or aligning the findings and conclusions to reflect the evidence obtained.


• The auditor minimizes the audit risk to the level where his opinion on the financial statement is acceptable to all users. The auditor plans audit work with lowest perceived level of audit risk. The lowest level of audit risk is not quantified rather it is based on his judgment about the records prepared by the company.

7.3 2 Audit Materiality

• Overall assessment at financial statement level (rate high, low, medium)

• Assessment the account balance or class of transactions level

• Materiality is important to auditors because it has direct impact on the work to be done by them.

Important note:”Information is material if its omission or misstatement

could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful.”

7.33 bases of materiality are:

Most commonly used bases of materiality are;• Total Assets• Net Income• Net Assets• Current Assets• Sales• Gross Margin

7.3 3 Audit Materiality ctnd• The percentage approach to define materiality for assets

and profits must be dealt with care because underlying assumptions vary from company to company and sector to sector. An item may be material because of its nature, value and impact.

• The assessment of materiality at planning stages should be based on the most recent and reliable financial information.

7.3 4 Points about Materiality:

• It is an expression of the relative significance of a particular matter in the context of financial statements as a whole.

• It is based on judgment of an auditor.• It can be changed as audit work progresses

depending on the results of initial procedures.• Materiality is related with the true and fair

view concept.

7.3 4 Points about Materiality cntd.• A matter is material if its omission or misstatement

would reasonably influence the decisions of the users of the financial statements.

• Materiality has both qualitative and quantitative aspects.

• Materiality defines the nature, timing and extent of work required by the auditor in order to express his opinion on the financial statements.

7.01 Basic statutory audit

• The basic statutory audit consists of two tasks:– To check that the accounting database effectively

picks up all the company’s activities and is correct– To check that the financial statements are a

correct representation of the accounting database, use appropriate accounting policies and are a reasonable representation of the company’s real state

7.01 Basic statutory audit

• The external auditor signs a public report– a standard attestation regarding the representational

fairness of the financial statements

• The public report may be accompanied by a ‘management letter’ – Directed to company management (not published)– Comments on the audit findings, highlights potential areas

of weakness and makes recommendations

Coming Soon…..

• Compliance & Substantive procedures

Coming Soon…..

• Documentation: Audit Programme, Audit Working Papers & Audit Note book

Coming Soon…..

• Audit Risk: Inherent Risk, Control Risk & Detection Risk

Coming Soon…..

• Auditor Reports: Unqualified, Qualified, Disclaimer, Adverse

Coming Soon…..

• Guidance on Independence during engagement

Coming Soon…..

• Audit Documentation requirements

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• Documentation for Specific Matter

Coming Soon…..

• Audit Documentation Review Process

Coming Soon…..

• Retention & Subsequent Changes to Audit Documentation

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audit engagement tutorial by anthony shitandi

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