Required procedure in audit planning

ISA 200 requires that, in undertaking an audit of
financial statements, auditors should:

·
Conduct
their audit in accordance with ISAs.

·
Plan and
perform the audit with an attitude of professional skepticism recognizing

that
circumstances may exist that cause the financial statements to be materially misstated.
This requires the auditor to make a critical assessment with a questioning mind
as to the validity of the audit evidence obtained, and to be alert to any audit
evidence that contradicts or bring into question the reliability of documents
or management information.

This is a critical component of the way that
auditors are expected to conduct themselves during the course of the audit and
is designed to:

·
Reduce
the likelihood of auditors ignoring or turning away from suspicious
circumstances;

·
Drawing
general conclusions from specific events;

·
Using
faulty assumptions when carrying out audit procedures.

This is not to say that auditors should assume that
management is intrinsically dishonest, or indeed that they are totally honest.
Accordingly representations from management are not a substitute for auditors
obtaining sufficient reliable evidence on which to base their conclusions.

·
Carry out
procedures designed to obtain sufficient appropriate audit evidence, in
accordance with auditing standards, to determine, with reasonable assurance,
whether the financial statements are fee from material misstatement.

·
Plan and
perform the audit so as to reduce audit risk to an acceptably low level. We will
examine the concept of audit risk in more detail later. It is the risk that the
auditor will give an inappropriate opinion son the financial statements, i.e.
by saying they are ‘true and fair’ when they are not, or alternatively, by
saying they are not ‘true and fair’ when they are.

·
ISA 200
also makes the important point, which the student must fully appreciate, that
the responsibility for preparing and presenting the financial statements rests
with the management of the entity and that the audit does not relieve them of
that responsibility.

It is appropriated to make some comment about
phrases which you will find repeated throughout this book. It is important you
become familiar with them and fully understand what they mean.

‘Sufficient, appropriate audit evidence’

This is a phrase to be committed to memory. Audit
evidence is the subject of chapter 11. The gathering of evidence is a matter of
judgments in deciding on the nature, timing and extent of audit procedures.
Even when evidence has been gathered it is a matter of judgments as to what
conclusions are drawn from the evidence. For example, the auditors may gather
much evidence on the future useful life of some plant and machinery-its natural
life, the possibility of obsolescence, the cost of repairs as against
replacement, etc. but still have to determine whether they think the life
selected by the directors is reasonable in the circumstances.

‘Reasonable Assurance’

This is a difficult concept and, to some extent,
can be rather subjective. It relates to the accumulation of evidence throughout
the audit process which allows the auditor to conclude that the financial
statements, taken a a whole, are free from material misstatements. It relates
to the whole audit process.

Absolute assurance is not possible because:

·
Auditors
carry out their work based on sampling of transactions;

·
Internal
controls can be overridden by management or defeated by collusion; and

·
Most
audit evidence is persuasive rather than conclusive.

For example, the auditors might test a sample of
two hundred sales invoices out of a total population of one hundred thousand in
order to verify the operation of an internal control in the sales system. If
they find no errors, or even an acceptable number of errors, they may
reasonably conclude that the remaining ninety-nine thousand eight hundred draw
the conclusion, based on their audit test, which persuades them that it is more
likely to be true than not true.

‘Free of Material Misstatement’

Materiality is discussed in detail in chapter 10.
It relates to the significance, or otherwise, of errors or misstatements in the
context of either the accounts as a whole or in the context of individual
transactions and balances. Misstatement is usually in terms of fact, for
example if creditors do not include a significant accrual or the valuation of
stock does not comply with IAS 2 (SSAP 9). Or the requirements of the companies
act re fixed assets have not been fully complied with. In those cases the
auditor has to consider the effect of the error or omission on the accounts and
recommend appropriate action.