As audit can be carried out on enterprises both
large and small, and both new and well established
large and small, and both new and well established
This piece describes the stages in the audit of an
established client enterprise which is big enough to have a comprehensive
system of accounting and record keeping
established client enterprise which is big enough to have a comprehensive
system of accounting and record keeping
and a system of controls over those
records.
Know your client
ISA 315 ‘obtaining an understanding of the entity
and its environment and assessing the risks of a material misstatement’ sets
out the matters the auditor should consider before commencing the audit
planning process and certainly before starting work.
and its environment and assessing the risks of a material misstatement’ sets
out the matters the auditor should consider before commencing the audit
planning process and certainly before starting work.
ISA 315 requires the auditors to :
·
Obtain
knowledge of the business which is sufficient to enable them to identify and
understand the events, transactions and practices that may have a significant
effect on the financial statements and the audit of them.
Obtain
knowledge of the business which is sufficient to enable them to identify and
understand the events, transactions and practices that may have a significant
effect on the financial statements and the audit of them.
·
Use the
knowledge gained to:
Use the
knowledge gained to:
·
Assess
the risks of fraud and error
Assess
the risks of fraud and error
·
Plan the
nature, timing and extent of audit procedures; and
Plan the
nature, timing and extent of audit procedures; and
·
Consider
the consistency and reliability of financial statements.
Consider
the consistency and reliability of financial statements.
Before commencing the audit proper, the auditor
must get to know their client. I.e. discover as much as possible about:
must get to know their client. I.e. discover as much as possible about:
·
The
present condition and future prospects of the industry of which the client is a
part, including the competition.
The
present condition and future prospects of the industry of which the client is a
part, including the competition.
·
The past
history and the present condition and future prospects of the client itself.
The past
history and the present condition and future prospects of the client itself.
·
The
clients:
The
clients:
·
Products
and services;
Products
and services;
·
Important
customers;
Important
customers;
·
Key
suppliers; and
Key
suppliers; and
·
Details
of significant contracts.
Details
of significant contracts.
·
The
management and key personnel of the client and any recent changes.
The
management and key personnel of the client and any recent changes.
·
The
products and manufacturing and trading processes of the client and any recent
changes.
The
products and manufacturing and trading processes of the client and any recent
changes.
·
The
locations of all the client’s operations.
The
locations of all the client’s operations.
·
Any
difficulties encountered by the client in:
Any
difficulties encountered by the client in:
·
Manufacturing;
Manufacturing;
·
Trading;
Trading;
·
Expanding
or contracting the business;
Expanding
or contracting the business;
·
Labor
relations;
Labor
relations;
·
Financial
the continuing operations.
Financial
the continuing operations.
·
Any
problems in accounting or in internal control systems.
Any
problems in accounting or in internal control systems.
·
Any
problems in accounting measurement e.g. in stock valuation or income
recognition.
Any
problems in accounting measurement e.g. in stock valuation or income
recognition.
·
Any
problems likely to lead to increased audit risk e.g. the difficulty of
assessing the value of long-term contracts in a civil engineering business.
Any
problems likely to lead to increased audit risk e.g. the difficulty of
assessing the value of long-term contracts in a civil engineering business.
·
Any
problems likely to be met in carrying out the audit e.g. distant geographical
locations, tight timing problems, specialist staff requirements e.g. IT
auditors.
Any
problems likely to be met in carrying out the audit e.g. distant geographical
locations, tight timing problems, specialist staff requirements e.g. IT
auditors.
·
Any
changes in law or accounting practice which may affect the client.
Any
changes in law or accounting practice which may affect the client.
This background research will involve research,
which will include reading:
which will include reading:
·
Previous
years’ audit files.
Previous
years’ audit files.
·
Published
material concerning the client company and the industry.
Published
material concerning the client company and the industry.
·
Internet
searches.
Internet
searches.
·
The
company’s interim, internal and management accounts, if these can be obtained.
The
company’s interim, internal and management accounts, if these can be obtained.
And holding discussions with:
·
The
management of the enterprise.
The
management of the enterprise.
·
Audit staffs
who has been previously engaged on the audit.
Audit staffs
who has been previously engaged on the audit.
In order to carry out a comprehensive and effective
audit which is nevertheless efficient in terms of time spent, the auditor must
focus the audit on areas of particular difficulty and risk. In addition, the
evaluation of many areas in the financial statements must entail a consideration
of the whole circumstances of a client.
audit which is nevertheless efficient in terms of time spent, the auditor must
focus the audit on areas of particular difficulty and risk. In addition, the
evaluation of many areas in the financial statements must entail a consideration
of the whole circumstances of a client.
As simple examples, the evaluation of the life of
fixed assets liable to obsolescence or the value of the investment in a
subsidiary company can only be effected by knowledge of all factors having a
bearing on the matter and many of these factors are external to the company.
fixed assets liable to obsolescence or the value of the investment in a
subsidiary company can only be effected by knowledge of all factors having a
bearing on the matter and many of these factors are external to the company.
Case study 1
Metal bash pressings ltd
Jane is the audit manager of Tickitt & Run and is about to start to
plan the audit of metakbash pressings ltd, a company which manufactures parts for
UK lorry manufacturers. She will need to research the background of:
plan the audit of metakbash pressings ltd, a company which manufactures parts for
UK lorry manufacturers. She will need to research the background of:
·
The
industry
The
industry
She finds that UK
lorry output is 75 per cent of normal levels. This reduces the market demand
for components and stimulates greater competition between components manufacturers,
resulting in lower prices for component suppliers. Companies with high
manufacturing costs could find their market share declining rapidly.
lorry output is 75 per cent of normal levels. This reduces the market demand
for components and stimulates greater competition between components manufacturers,
resulting in lower prices for component suppliers. Companies with high
manufacturing costs could find their market share declining rapidly.
·
The
company
The
company
The company is
suffering from price and cost squeezes, plant closures and redundancies. She
finds that a factory has closed and 50 workers have been made redundant.
However, the company has purchased for cash (with a bank loan) the business of
a company in receivership which is in a related industry. This new before it
can start trading profitably. It has a factory in a neighboring town and Jane
has to plan visits there and interviews with management and personnel.
suffering from price and cost squeezes, plant closures and redundancies. She
finds that a factory has closed and 50 workers have been made redundant.
However, the company has purchased for cash (with a bank loan) the business of
a company in receivership which is in a related industry. This new before it
can start trading profitably. It has a factory in a neighboring town and Jane
has to plan visits there and interviews with management and personnel.
Metalbash itself has
gone through an administrative reorganization during the year and some
experienced office staff have left. Any significant changes to operations may
weaken controls, change policies or worsen accounting records. Jane finds that
there is now a new chief accountant who is not familiar with the components
business.
gone through an administrative reorganization during the year and some
experienced office staff have left. Any significant changes to operations may
weaken controls, change policies or worsen accounting records. Jane finds that
there is now a new chief accountant who is not familiar with the components
business.
·
Product
and processes
Product
and processes
New production
processes have been introduced and some new machinery installed. Jane does not
know what has happened to the old machines. Changes in costs of manufacture may
have possible consequences to stock values and there is the value of redundant
equipment to consider.
processes have been introduced and some new machinery installed. Jane does not
know what has happened to the old machines. Changes in costs of manufacture may
have possible consequences to stock values and there is the value of redundant
equipment to consider.
·
Locations
Locations
Closures may involve
closure costs with disclosure problems from FRS3.
closure costs with disclosure problems from FRS3.
·
Client’s
difficulties
Client’s
difficulties
Difficulties
experienced by the client (e.g. on labor relations or cost and quality control)
may impact on internal controls. Jane finds that the new accountant has streamlined
several accounting processes and controls may have changed and be weaker.
experienced by the client (e.g. on labor relations or cost and quality control)
may impact on internal controls. Jane finds that the new accountant has streamlined
several accounting processes and controls may have changed and be weaker.
·
Systems
changes
Systems
changes
Accounting systems
change frequently nowadays as a consequence of the need to improve management
information systems. The accounting records of the new business have been
incorporated into new systems and some teething problems have occurred. A new
computer system has been installed.
change frequently nowadays as a consequence of the need to improve management
information systems. The accounting records of the new business have been
incorporated into new systems and some teething problems have occurred. A new
computer system has been installed.
·
Accounting
issues
Accounting
issues
Accounting
measurement problems may arise in product costs, redundant stocks, closure
costs, redundancy costs, lives of fixed assets, etc.
measurement problems may arise in product costs, redundant stocks, closure
costs, redundancy costs, lives of fixed assets, etc.
·
Key risk
areas
Key risk
areas
Some lorry makers
have gone into receivership and there is a risk of metalbash losing its
business or incurring fatal bad debts. Jane will need to concentrate
consequently upon the value of debtors and whether or not the business is going
to survive the next few years. In addition, any changes to systems and
personnel all have to be evaluated.
have gone into receivership and there is a risk of metalbash losing its
business or incurring fatal bad debts. Jane will need to concentrate
consequently upon the value of debtors and whether or not the business is going
to survive the next few years. In addition, any changes to systems and
personnel all have to be evaluated.
·
Key audit
issues
Key audit
issues
New systems will need
to be documented, the audit programmed amended for the new business and
additional audit procedures thought through to take account of the changed
circumstances of the business.
to be documented, the audit programmed amended for the new business and
additional audit procedures thought through to take account of the changed
circumstances of the business.
·
Planning
Planning
In planning the
audit, jane will need to consider locations, timing problems, staff
requirements, and the quality of audit staff needed for some of the risky areas
including a possible need to look into and assess new systems.
audit, jane will need to consider locations, timing problems, staff
requirements, and the quality of audit staff needed for some of the risky areas
including a possible need to look into and assess new systems.
·
Source of
information
Source of
information
Jane will do all this
by:
by:
·
Reading
the previous years’ files;
Reading
the previous years’ files;
·
Talking
to the staff member responsible for last year’s audit;
Talking
to the staff member responsible for last year’s audit;
·
Discussing
audit timings and the access to records with the new chief accountant;
Discussing
audit timings and the access to records with the new chief accountant;
·
reading
the minutes of directors; and senior management meetings;
reading
the minutes of directors; and senior management meetings;
·
Reviewing
the management accounts;
Reviewing
the management accounts;
·
Reading
any newspaper and magazine articles;
Reading
any newspaper and magazine articles;
·
Looking
at the company’s website and surfing the net for information about the industry
generally and any comments about her client from third party sources.
Looking
at the company’s website and surfing the net for information about the industry
generally and any comments about her client from third party sources.