Audit initial stages

Once an assurance firm has found a potential client there are things to consider to determine whether they can accept the appointment. 

Using TRIMROT:

• Technical competence

Is specialised assurance needed? does the firm have sufficient expertise to work with the client?

• Resources

Do they have the resources, staff, time, industry knowledge?

• Independence

Is the firm barred due to professional ethics eg conflict of interest?

• Money Laundering

The firm must perform money laundering regulations

• References/risks

Consider the integrity of management, references might be needed from a 3rd party eg Bank

• Outgoing auditors

Why the change of auditor?

• Terms of engagement

The terms of any assurance engagement must be clarified and agreed in a letter of engagement

• Ensure proper removal/resignation of the outgoing auditor in accordance with legislation – the new auditors should confirm this is satisfactory by reviewing official documentation which provides evidence of their resignation, such as minutes from a general meeting and a valid notice of resignation.

• Ensure that the new auditors' appointment is valid by agreeing their appointment to the resolution which is passed at the general meeting to appoint new auditors.

• Submit a letter of engagement

• The new auditors should obtain all books and records belonging to the client currently held by the previous auditor

Key contents of the engagement letter are (ADDS TO FIRMS Fees): 

• Auditors' responsibilities* 
• Directors' responsibilities* (including preparation of the financial statements) 
• Directors' representations 
• Scope/Objectives* of the assurance engagement 

• Terms agreed 
• Other services 

• Fraud, (clarifying that the directors are responsible for detecting fraud and errors) 
• Irregularities 
• Report to management*, including the nature and content of these reports 
• Management of the audit (timings etc) 
• Specialists, (may be required, such as to value large or unusual assets) 

• Fees (the basis of calculation)

* These (x4) items are required by ISA (UK) 210.

Before any auditor can effectively plan an audit, they must be confident in their ability to apply 

• Materiality 
• Professional scepticism 
• Professional judgement

Materiality guidelines: To set the materiality level they must decide the level of error which would distort the view given by the financial statements. Example below:

Step 1: Understanding the entity

Matters to consider - 

• Industry, regulatory and other external factors, including the applicable financial reporting framework 
• Nature of the entity 
• Objectives and strategies and related business risks
• Measurement and review of the entity's financial performance
• Selection and application of accounting policies
• New legislation Internal control

Under ISA (UK) 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing (UK), the auditor should plan and perform the audit to reduce audit risk to an acceptably low levels. It is made up of three components as is illustrated by the below diagram:

Value                                                  %

Revenue                                         1/2 - 1

Total Assets                                    1 - 2 

Profit before tax                             5 - 10

Analytical Procedures: Evaluation of financial information through the study of plausible relationships among both financial and non-financial data

Analytical procedures include the following types of comparisons: 

• Prior periods 
• Budgets and forecasts 
• Industry information 
• Predictive estimates 
• Relationships between elements of financial information, ie ratio analysis 
• Relationships between financial and non-financial information, ie payroll costs to the number of employees 
• Investigation of unusual/significant changes

• Broad scope of the audit 

• Consider the impact of any preliminary analysis or impact of existing knowledge of the industry 

• Review and consideration of the key audit factors (as determined using the professional judgement of the auditor) 

• Nature, timing and extent of the resources necessary (size of the audit team, requirement to use specialists) 

• Management, direction and supervision of the audit team (decisions on the timing of briefing meetings, partner reviews, manager visits etc)

• More detailed than the audit strategy 
• Nature, timing and extent of the specific audit procedures required for each material class of transactions, account balance or disclosure 
• Planning these procedures takes place over the course of the audit to ensure that the audit complies with ISAs (UK)

The key objectives of planning an audit are:

• Ensure appropriate attention is devoted to important areas of the audit, as determined by the auditor’s professional judgment. 
• Identify potential problems and resolve them on a timely basis 
• Ensure that the work is properly organised and managed 
• Assign work to engagement team members properly, according to ability, experience or technical knowledge 
• Facilitate direction and supervision of engagement team members, ensuring timely review and clear reporting