Pre-Engagement

Pre-engagement
Planning
activities
Systems and
Risk Response
Governance and
Ethics
Controls
Test of Controls
Conclusion
Planning Materiality
Risk of Material
Misstatement
Audit Strategy
Audit Plan

Summary of Stages

Pre-Engagement: Deciding whether to audit a company and then setting the terms if
required
Planning: Understanding the risk and what work will need to be done to gather
evidence to make the appropriate conclusion
Risk Response: The gathering of the evidence
Conclusion: The analysis of the evidence to determine the audit outcome

Pre-engagement activities

Before an auditor commences with an audit engagement, specific

considerations are considered by the auditor to assess if the appropriate
conditions exist to meet an audits objective.

- Considerations
o Integrity and ethical values of owners and key management
o Audit team resource availability
▪ Competence
▪ Time
▪ Number of staff

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 ▪ Industry knowledge
o Significant matters
▪ Fee
▪ Prior auditors
▪ Industry
- Engagement Letter Components
o Scope of audit
o Auditor responsibilities
o Management responsibilities
o Financial reporting framework
o Report

Governance and Ethics

- Legal Governance
o Companies Act
o Auditing Professions Act
- Ethical Governance
o King IV
o Code of Professional Conduct
o Companies Act (Only specific sections)
o Other ethical principles and approaches
▪ Think Good for Self / Good for Others
▪ Think general universal ethical principles

Systems and Controls

- Understanding of each of the core cycles

- System of Internal Control
o Control Environment
▪ The tone at the top
o Risk Assessment
▪ How the business identifies the risk to their objectives
o Control Activities
▪ The controls to mitigate the risks
o Information and Communication
▪ How information is stored and communicated
o Monitoring Activities
▪ How reviews are conducted to ensure objectives and controls
are being met
- General Controls vs Application Controls
o General
▪ Organisational controls

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 ▪ System development and change controls
▪ Access controls
▪ Business continuity controls
▪ Operating controls
o Application
▪ Input
• Integrity of inputted data
▪ Processing
• Verification of correct processing of inputted data
▪ Output
• Data viewing and post processing accuracy

Planning Materiality

- Step Process
o Considerations
▪ Stability of Indicators
▪ Statement of Financial Position vs Statement of Comprehensive
Income
▪ Current Year vs Prior Year vs Budget
o Calculation
▪ TAGEN
o Conclusion
▪ Inverse relationship between risk and materiality
▪ Generally more conservative

Risk of Material Misstatement

In order to reduce the risk of not meeting the overall objective of an audit,
auditors need to identify circumstances which may cause the financial
statements to be incorrect. Important to remember: TRIGGER + EFFECT ON
FINANCIAL STATEMENT

- Overall Financial Statement Level

o Specific criteria that may result in all or multiple aspects of the financial
statements being incorrect
o Standard items include
▪ Multiple locations
▪ Management incentive
▪ Staff concerns
▪ Tight deadlines
▪ Going concern
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 - Assertion Level
o What should the accountant do?
o What could go wrong in what the accountant should do?
o Therefore FR principles are important

Audit Strategy

The auditors response to the risks of material misstatement identified at the

overall financial statement level

- Scope
o What conditions are prevalent in the audit client that requires you to do
more audit work than initially anticipated
▪ Are there multiple locations that need visiting?
▪ Are they in a highly regulated area / listed that needs additional
understanding?
▪ Are they a new client for which greater understanding is
required?
- Direction
o What are the focus areas for the audit
▪ What are the higher risk areas that need focus?
▪ Can we trust management based on governance
considerations?
▪ Do we need to adjust materiality for risk?
▪ What form of procedures will give us better evidence for the risk
identified?
- Timing
o Consideration of when to do evidence gathering
▪ What is the risk associated with balances / classes of
transaction
▪ Is the deadline tight
- Resources
o Consideration of who should be part of the audit team
▪ Do I need more senior staff
▪ Do I need more staff in general
▪ Are external parties needed

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Audit Plan / Approach

The auditors response to the risks of material misstatement identified at the

assertion level for account balances and classes of transaction

- In essence, here you are deciding what the nature of gathering evidence will
be for a specific account balance / class of transaction. This will either be
substantive procedures alone or combined with Tests of Control. Therefore,
here you are deciding if you are testing controls or not as you have to do
substantive procedures anyway.
- Considerations for deciding whether to test controls include (not an
exhaustive list)
o Necessity
▪ Can I gather evidence from substantive procedures alone or
not?
▪ Is the system automated?
▪ Do they have a complex system?
o Possibility
▪ Are there actual controls in place?
▪ Is the IT and control environment sound?
▪ Do I have the resources to do it?
o Desirability
▪ Is this a training opportunity for the team?
▪ Will management of the client benefit from such a report?
▪ Will my audit see benefits in the future?
- Timing and Extent of when the procedures will be done form part of the plan
as well.
o Timing
▪ Will I do the procedures at interim or year-end
o Extent
▪ Will my sample size for small or large?
▪ How does risk affect my sample size?

Tests of Control

The first type of procedure that your are exposed to that gathers audit
evidence from which a conclusion will be made.

- Format: who, what, on what, why

- Audit Verbs – Inspect / Observe / Reperform / Inquiry
- Test key controls

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 o IE: controls directly mitigating the risk to an objective
o Therefore knowing what a control is becomes vital
- Testing Manual Controls
- Testing Automated Controls
o Use of System CAATS