Planning the audit
This section covers the tasks you’ll face when planning the audit
Click on any of the links to jump to that sub-section
Identifying significant risks
The risk of fraud
Deciding on the audit strategy
Setting materiality
Responding to the risks identified
Planning the audit correctly will save you a lot of time and effort. The key is identifying the significant risks (as required under ISA/ASA315) – but this isn’t as easy as it sounds.
Identifying significant risks
This video will cover the basics of identifying significant risks.
Here is an example of significant risk identification using the Cloud 9 Case that I wrote for Wiley – you can’t buy the case any more – but they are a running shoe company based in Australia and has its inventory manufactured in China.
The difficult part for almost every student is being able to differentiate between Business Risk and Inherent Risks
You need to identify risks at the ASSERTION level – a basic understanding of the assertions is in this video. These assertions are used throughout the entire audit.
And here are some examples on how to apply assertions on the audit
Analytical procedures are also used to identify potential risks.
An example of using analytical procedures to identify potential significant risks
The meeting minutes of the Board of Directors and various committees can also be helpful in identifying risks and gathering other information that will be useful during the audit.
The risk of fraud
The auditor should also be aware of the potential for fraud – remember we are looking for material misstatements, due to error or fraud. Shareholders are expecting the auditor to check for fraud – and this is correct to a certain extent – if a red flag is present, we do have an obligation to investigate.
There is much media coverage about auditors and their responsibility to search for fraud. Some examples include:
Investors right to expect auditors to check for fraud risk by Edmund Tadros in the Australian Financial Review, 24 Sept 2019
Auditors promote ‘mythology’ on fraud detection, claims regulator by Maddison Marriage in the Financial Times, 6 February 2019
Deciding on the audit strategy
Materiality
While we are evaluating risk on the client – the audit team also needs to consider materiality
We’re really starting to think about the base selection for materiality since the pandemic. So while in other videos, I talk about the general hierarchy of selecting the base – there has been some re-thinking in the current times.
Responding to the risks you identify
Once you’ve identified your significant risks – you need to develop an audit response – that is, what are you going to do to ensure that the risk doesn’t result in a material misstatement.
The next step is for the auditor to begin gathering evidence