The document discusses the concepts of auditing and assurance. It provides details on:
1. The key parties in an assurance engagement are the intended users, responsible party, and practitioner. The practitioner examines the subject matter and reports their findings.
2. Audits can provide either reasonable or limited assurance depending on the level of testing performed. External audits aim to promote confidence in financial reporting.
3. There are limitations to auditing due to reliance on management, limited fraud detection, use of sampling, and subjectivity in financial reporting. The auditor provides an opinion but cannot guarantee accuracy.
The document discusses the concepts of auditing and assurance. It provides details on:
1. The key parties in an assurance engagement are the intended users, responsible party, and practitioner. The practitioner examines the subject matter and reports their findings.
2. Audits can provide either reasonable or limited assurance depending on the level of testing performed. External audits aim to promote confidence in financial reporting.
3. There are limitations to auditing due to reliance on management, limited fraud detection, use of sampling, and subjectivity in financial reporting. The auditor provides an opinion but cannot guarantee accuracy.
The document discusses the concepts of auditing and assurance. It provides details on:
1. The key parties in an assurance engagement are the intended users, responsible party, and practitioner. The practitioner examines the subject matter and reports their findings.
2. Audits can provide either reasonable or limited assurance depending on the level of testing performed. External audits aim to promote confidence in financial reporting.
3. There are limitations to auditing due to reliance on management, limited fraud detection, use of sampling, and subjectivity in financial reporting. The auditor provides an opinion but cannot guarantee accuracy.
The document discusses the concepts of auditing and assurance. It provides details on:
1. The key parties in an assurance engagement are the intended users, responsible party, and practitioner. The practitioner examines the subject matter and reports their findings.
2. Audits can provide either reasonable or limited assurance depending on the level of testing performed. External audits aim to promote confidence in financial reporting.
3. There are limitations to auditing due to reliance on management, limited fraud detection, use of sampling, and subjectivity in financial reporting. The auditor provides an opinion but cannot guarantee accuracy.
Download as PPTX, PDF, TXT or read online from Scribd
Download as pptx, pdf, or txt
You are on page 1of 53
Audit & Assurance
Company and its Audit
Users of Financial Statements Shareholders Potential shareholders Government Other Stakeholders Company Assurance The Practitioner examines the subject matter made available by the responsible Party, matches it to the suitable criteria using evidence and reports to the intended users. Elements of Assurance Engagement: 1. An assurance Engagement will involves three parties. The intended users who is the person who requires the assurance report. The responsible party, which is the organization responsible for preparing the subject matters (Financial Reports) be reviewed. The practitioner (i.e. an accountant) who is the professional who will review the subject matter(financial information) and provide the assurance. 2. Subject Matter: a second element are required in an assurance engagement is Subject matter information. The subject matter is the data that the responsible party has prepared and which requires verification. 3. Suitable Criteria: suitable criteria are required in an assurance engagement. The subject matter is compared to the suitable criteria in order for it to assured and an opinion provided. 4. Appropriate Evidence: Appropriate evidence has to be obtained by the practitioner in order to give the required level of assurance. 5. An Assurance Report: An assurance report is the opinion that is given by the practitioner to the intended users and the responsible party.
Types Of Assurance assignments High level of assurance but not absolute assurance Positive assurance More testing(Analytical tests, test of control, and substantive test. Example is External Audit. Reasonable Assurance Moderate level of assurance Negative assurance Lesser testing-focus on obvious errors only (analytical testing) Limited Assurance Agency theory
Engages another person to perform a service on their behalf Delegates some decision-making authority Principal The owner Agent The Directors Problems : May have concerns over motives of agents? May question the trust they have placed in the agent? Principal and agent may have different attitude to risk Possible solutions Set up mechanisms to align the interests of agents with principles (eg performance related pay) Monitoring mechanisms (eg the audit) Purpose of External Audit The purpose of external audit is to promote confidence and trust in financial information. Definition External audit has been defined as : The independent examination and expression of opinion on the financial statements of an entity'. The primary role of an external audit to is to report on the truth and fairness of the financial statements of an entity on behalf of its owners(the shareholders). The auditor gives an opinion on whether the financial statements have been prepared in accordance with an acceptable financial reporting framework, e.g. IFRSs and Comply with any specific statutory requirements, e.g. to keep adequate accounting records. External Audit The objective of external audit of financial statements is to enable the auditor to express an opinion on whether the financial statements are prepared, in all material respect, in accordance with an applicable financial reporting framework. An audit of financial statements is an example of an assurance engagement. General Principle of External Audit Engagement: According to the international standards on Auditing, the general principles of an audit are: 1. Compliance with Code of Ethics(IFAC) 2. Performance of an audit in accordance with ISAs 3. Audit with professional Skepticism 4. Professional Judgment. 5. Sufficient appropriate audit evidence. Main important Terms and concepts True and Fair presentation: Financial statements are produced by management which give true and fair view of the entitys result. The auditor in reviewing these financial statements gives an opinion on the truth and fairness of them. Although there is no definition in the international standards on Auditing of true and fair it is generally considered to have the following meaning. True information is factual and confirms with reality in that there are no factual errors, in addition it is assumed that to be true it must comply with accounting standards and any relevant legislation. Lastly true includes data being correctly transferred from accounting records to the financial statements. Fair information is clear, impartial and unbiased, and also reflects plainly the commercial substance of the transactions of the entity. Accountability: it often means answerability.(Management is accountable to shareholders) Stewardship: Stewardship is the responsibility for taking good care of resources on behalf of someone else. (Management acts as stewards of shareholders investments). Agency: Agency is a relationship between a principle(who engage the agent) and another party, (who is engaged i.e. an agent), where the second party (agent) is authorized to carry out the principles instructions in the transactions with a third party Materiality Materiality is an expression of the relative significance or importance of a particular matter in the context of the financial statements as a whole. A matter is material if its omission or misstatement would reasonably influence the economic decision of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Limitation of Audit Reason why auditors cannot give absolute assurance. 1. Auditor rely heavily on management to provide information. 2. Auditors have only a limited responsibility to detect fraud. 3. Auditor plan their work to detect material error and fraud only. 4. Auditors need to understand their clients in great depth if they are to understand how fraud could be carried out and hidden. However, auditors cannot become too close to their clients because their independence will be called into question. 5. The lack of accuracy often associated with the subject matter e.g. financial statements are often subject to estimation and judgment. 6. The fact that the evidence is usually gathered on a test/sample basis. Limitation of Auditors Auditor can never certify that the accounts are correct. They can only ever express an opinion Limitations of auditing Not all items in the FS are tested Audit report has inherent limitation Audit report is issued after a long time after the year- end Audit evidence sometimes indicates what is probable, not certain Auditing is not objective, judgment have to be made Limitations in accounting and control system Advantages & Disadvantages of External Auditor providing consulting services Advantages of External Auditor Providing Consulting Services: 1. The Auditors are competent and skilled enough to provide consulting services, as they have detailed knowledge of the activities of the organization. 2. The auditors are able to use their experience of other industries, which can be beneficial for the organization and can recommend the best practices of other industries to the client organization. Disadvantages of External Auditors: 1. There is a chance that, while providing consulting services, the auditor can leak some confidential information relating to one organization to another. 2. There is the danger that the auditors will try to please the directors by not giving a qualified report to avoid the loss of fees for their consulting work. Audit of Small Companies The majority of companies are required by national Law to have an audit. A key exemption to this requirement is that given to small companies. Many EC countries have a small company exemption from audit that is based on the turnover and total Assets at the end of the year. Audit Exemption for Small companies: The main reason for exempting small companies are; 1. For owner-managed companies, those receiving the audit report are those running the company. 2. The advice/value, which accountants can add to a small company is more likely to concern other services, such as accounting and tax, rather than audit which also give rise to a conflict of interest under the ethics rules. 3. The impact of misstatements in the accounts of small companies is unlikely to be material to the wider economy. 4. It may also be cost beneficial for the small entities The Auditors Duties Fundamental duties are; Form an opinion on whether the financial statements give a true and fair view and are prepared in accordance with applicable reporting framework. Issue an audit report. Implicit duties to check that; Return received from all branches of the company. Accounting records are consistent with The Financial statement. Proper accounting records have been kept Information and explanation were received Directors Report is consistent with Financial Statement. Duty to check and ensure; Adequate accounting records, compliance with legislation, truth and fairness, adequate Disclosure. The Auditors Rights. The Auditor fundamental Rights is to; To access all books and records of the company. To access all information and explanation The right to receive notice of a general meeting. Have the right to attend Annual General Meeting. Also have the rights to speak in AGM Having the right to resign. And finally have the right to circulate the information to the shareholders.
Appointment of Auditors Only a member of a recognized supervisory body is eligible to be appointed as an auditor. The person to be appointed as the auditor is required to hold a professional accountancy qualification. 1. Appointed by shareholders. 2. Appointment runs from the end of the Annual General meeting(AGM) until the end of the next AGM. 3. On Appointment, need to get Clearance from outgoing auditor 4. For entities in which a shares is owned by the state, the auditor is appointed by the secretary of the state or Ministry of Finance (or a person authorized by the Ministry of Finance). Removal of Auditors RESIGNATION: Sometimes it is necessary for the auditor to resign. If an auditor resign, they should do so in writing and they may wish to speak to the shareholder at Annual General Meeting(AGM) to Shareholders to explain their reasons. FORCED REMOVAL: Sometimes, the Board of Directors or some shareholders may wish to remove the auditors. A General Meeting must be called so that the shareholders can vote on the proposal (via an ordinary resolution). 1. Director can not remove the auditors themselves. 2. Can be removed by a simple majority at a General Meeting. 3. The auditor should be given notice of such a meeting. 4. The all allowed to speak at the General Meeting. International Standards on Auditing (ISAs) The accounting profession believes in practices both self- regulated and self-promotion. The profession established and maintains the international Federation of Accountants (IFAC). IFAC is a global organization comprising of 155 members and associates (mostly national professional institutes) spread across 118 countries. Membership stands at more then 2.5million accountants that come from public practices, industry, and commerce, the public sector as well as education backgrounds. The international Standards on Auditing(ISAs) are issued by the International Auditing and Assurance Standards Board(IASB) and provide guidance on the performance of an audit. Development of ISA 1. Research and Consultation A Project task force is established to develop An ISA 2. Transparent Debate: A Draft of the Proposed ISA is discussed and debated at an open (on the Public) IAASB Meeting.
3. Exposure for Public comments The Draft is then placed on the IAASB website (for at least 120 days) and widely distributed for public comments
4. Consideration of Comments: A Second open IAASB meeting is held to consider all received comments. If significant changes are made, then the draft is again exposed for public comments 5. Affirmative Approval The draft is converted into a finalized standard subject to an affirmative vote by at least two-third of meeting Corporate Governance Corporate Governance represents the set of polices and procedures that determine how an organization is directed, administrated and controlled. Although the contents of corporate governance will vary from organization to organization, almost all will have the following components. Accountability. Compliance. Transparency and Integrity.
Objective of Corporate Governance Objectives and importance of corporate Governance: Align shareholders interest with the interest of the management. Direct and control organizations activates. Review effectiveness, efficiency and ethics of the board of directors. Builds investors and shareholders confidence in the organization. Provide a system of check and balance to minimize power abuse. Provide a framework and incentive for management, executives and board of directors to act in the best interests of their organization and its shareholders. Those charge with Governance are defined as the persons who are accountable for ensuring that the entity achieves its objectives, with regard to reliability of financial reporting, effectiveness and efficiency of operation, compliance with applicable laws, and reporting to interesting parties. Some important terms in corporate governance: 1. An Executive Directors: An Executive director is a director responsible for the administration of a company. 2. A Non-Executive Director(NED): a non-executive director is a director without day-to-day operational responsibilities of the Company.
Responsibilities of Board of Directors in corporate Governance Establish a code of corporate ethics. Ensure that the organization establishes polices, procedures and controls to manage the potential risks it will face . Compliance with laws and regulation. Ensuring that an effective systems of internal controls is in place and functioning. Ensuring that a high quality and timely independent audit is conducted. Establish and oversee the work of audit and remuneration committee. Advantages of Audit Committee 1. Improves public confidence. 2. Better quality financial reporting. 3. Guidance to BOD 4. Improves ICS. 5. Helps in Risk Management. Limitations of Audit Committee: 1. Although audit committees do oversee the work of auditors (both internal and external) they do not have the authority to appoint or dismiss them. This limits the amount of power the committee has over the organizations auditor. 2. Audit committees generally do not have as much technical expertise and knowledge as the auditors they are overseeing. 3. Independent directors often do not have as thorough a knowledge of the organizations operations and functioning as executive director. 4. Most of the members of the audit committee are non-executive director. The board may feel that the auditor committee has been formed to limit its power and allow outsiders to run thee company. 5. The non-executive directors have to be paid more for carrying out the responsibilities associated with the audit committee. Hence, it increases the cost of the organization.
Internal Audit An independent Appraisal activity established within an organization as a service to it. A control in itself which functions by examining and evaluating the adequacy and effectiveness of other controls. Steps to conduct internal audit 1. Identify the risks which may occur if there are no controls in place. 2. Identify controls in place. 3. Evaluate whether the controls in place reduce the risk to an acceptable level i.e. they are adequate. 4. Evaluate whether the controls are working 5. Re poeffectively.rt Functions 1. Reviewing accounting and internal control systems. 2. Helping with risk assessment. 3. Reviewing 3Es (Economy, Efficiency and Effectiveness) of operations. 4. Examining operating and financial information. 5. Reviewing compliance with laws and regulations. 6. Carrying out special investigations(e.g. into suspected fraud) Factor determining need of internal audit Cost benefits analysis Complexity of operations Scale of operations Changes in key risks and process Problems with existing controls Ability of Current management to carry out assignment which would normally be carried out by internal auditors. Need of special assignments that normally internal audit carries out( For example IT audit). What Dose Corporate Governance Says about Internal Audit IA should report to the Audit committee. The AC will monitor if internal audit is effective. If there is no IA department, the AC should determine whether there is need for one. In case they believe the internal audit department is not required, it needs to explain the reason for this in the annual report. Assistance to the Board of Directors: o The IA department checks reports that are not audited by the external auditors. o It can help the Board of Directors with regards to accounting and auditing standards when required. o IA cal cooperation with external auditors which can reduce the time and cost of external audit.
Difference Between External and Internal Audit Internal Audit External Audit Objective Add value and improve operations Truth and Fairness of the Financial Statements. Report to Board of Directors and Audit Committee Shareholders Scope Operations primarily Financial statement Relationship with the organization Employees or outsourced independent IA and Risk Management: IA ensures risk management systems are operating effectively and that the strategies implemented for business risk are operating effectively. Business Risk (Risk that the companys objective are not met or strategy not executed properly or inappropriate objective and strategies were set). IA and Fraud: Assess the adequacy and effectiveness of control. Be alert to suspicious activities. Report suspicious activities. Carry out special investigations. Limitations of IA: Independency issues as employees so may be concerned about job security. If it is not reporting to the AC, Management can influence them( They will be checking the work of the people they are reporting to).
Outsourcing Internal Audit Advantages: Greater Expertise, specialist skills and access to better audit technology without extra cost available. The risk of staff turnover is passed on the firm Lesser cost of training staff and retaining staff. May be more independent. Lesser management time consumed in administering the department. IA will be immediately available (also good for short time) Flexibility in terms of that the staff can be called in according to workload. Disadvantages: May not be independent if the same firm is offering external audit and internal audit. May be more expensive The firm will not have in-depth knowledge of the company. Lesser control by the management over the standards of services. If the company has an existing IA department which is to be made redundant, that may face opposition from the other staff.
Internal Audit Assignments 1. VFM Audit: a value for money audit focuses on whether the best combination of services has been obtained for the lowest level of resources. in performing a value for money audit there are three areas which an auditor will commonly focus on being economy, efficiency and effectiveness and these are known as 3Es. 2. IT Audit: An information technology audit is an examination of the control within an information technology infrastructure. This determines if the information system are: Safeguarding Assets Maintaining Data integrity and Operating effectively and efficiently to achieve the organization goals or objectives.
Internal Audit Assignments 3. Best Value Audit: the best value reviews involves the following; Reviewing whether the products/services meet the requirements of the customers. Determining whether there is balance between cost and quality of the service or not. Comparing product/service with competitors to find out the best and the worst features in the products of the entity so as to make improvements. The most important ingredients of best value review are explained with the 4Cs these four Cs are; 1) Challenge: indentifies the need of the service and the way it is provided. An entity should discontinue providing a service if the reason why the service is provided cannot be identified satisfactory. 2) Compare: Compares the attribute of the services provided with those provided by similar organization. 3) Consult: Suggests consulting with users in order to know whether or not the services provided meet the needs of the consumers. 4) Compete: Encourage fair competition so as to secure efficiency and effective services. Fundamental Principles of Ethics 1. Integrity: Members should be straightforward and honest in all professional and business relationships. 2. Objectivity: Members should not allow bias, conflicts of interest or undue influence of others to override professional or business judgments. 3. Professional Competence and due care: Members have a continuing duty to maintain professional knowledge and skill. 4. Confidentiality: Members should represent the confidentiality of information acquired as a result of professional and business relationship and should not disclose any such information to third parties without proper and specific authority. Information can be disclose if; if the client have given their consent. If there is an obligation to disclose e.g. if the client is suspected of money laundering, terrorism, dug trafficking. If it is required by a regulatory body, e.g. financial services legislation. If a court order has been obtained. If a member has defend himself in court or at a disciplinary hearing. If it is in the public interest. 5. Professional Behavior: Members should comply with relevant laws and regulations and should avoid any action that discredit the profession. Threats to objectivity and independence 1. Self-interest Threats: self-interest threats arises when the auditors put their own interest above those of the client or shareholders e.g. Financial interests(shares), Receiving Material gifts, fee dependency, personal or business relationship with client and low balling. 2. Self-Review threats: this threats arises when the auditors perform work/produce information for the client that they end up reviewing themselves as part of an assurance engagement e.g. giving advice on accounting or control systems and then audit them(e.g. by performing internal audit services for the client), Prepare financial information or assist with calculations then audit this information, provide services for the client e.g. tax, valuation, corporate finance and then review this work as part of the audit, Join the audit team after working for the client. 3. Familiarity Threats: Familiarity threats arise when the auditors develop a close relationship with the client and as a result become too sympathetic to their interests or too trusting of the their work. 4. Advocacy threats: when auditors fail to take a balanced view on their clients affairs and are perceived to be either taking their client side or are biased against their client. 5. Intimidation threats: this threats is caused by a client being in position to put pressure on an auditor to prevent them acting objectively.
Procedures before accepting a client 1. Out going auditor clearance: contact outgoing auditor with the clients permission & ask for any professional reasons why thy should not accept appointment (if the client has caused problems, you may wish to say no to the appointment) 2. Client related issues: i. Formalities( of removal of outgoing auditor fulfilled) ii. Integrity of the clients management assessed. iii. Gather knowledge of the business. iv. Client screening (risk assessment) v. Check if the client will limit the scope of the auditor. 3. Auditors related issues: i. Ensure independence. ii. Ensure competence and skills. iii. Ensure resource(Staff, time etc) iv. Ensure no conflicts of interest with other clients. Procedures before accepting a client 4. Precondition for an audit: To assess whether the precondition for an audit are present the auditor must; i. Determine whether the financial framework to be applied in the preparation of the financial statements are acceptable. ii. Assess the nature of the entity and purpose of the financial statements and whether law or regulation prescribe the applicable reporting framework. iii. Obtain the agreement of the management that it acknowledge and understands its responsibility for the following. Preparation of the financial statements in accordance with the applicable reporting framework. For internal control. To provide the auditor with access to all relevant information for the preparation of the financial statements
Engagement Letter Compulsory for every new engagement. Sent before the audit start. Purpose of Engagement: An Engagement letter provides a written agreement of the terms of the audit engagement between the auditor and management or those charged with governance. It confirms that there is a common understanding between the auditor and management, or those charged with governance, of the terms of the audit engagement helps to avoid misunderstandings with respect to the audit. Contents of Engagement Letter The content of engagement letter for an audit services will include the following. 1. Objective of audit of financial statements. 2. The responsibilities of the directors(for accounting records, the financial statements, and the accounting policies on which they based on). 3. The responsibilities of auditor and the scope of the audit(their duty to conduct an audit in accordance with auditing standards, to review accounting policies and disclosures, to perform test and to form an opinion on the financial statements) 4. Communication between the auditor and the client (e.g. form of audit report, management representation letter of weakness etc.). 5. The basis for fee calculations. 6. Agreement of management to provide a representation letter. 7. Use of the work of internal audit. 8. The auditors use specialist. 9. Deadline. 10. Access to all information. 11. Complaints procedures and jurisdiction. 12. The need of co-operation and agreement of terms. What if management refuse to sign the engagement letter? Identify the reason. Try to reach a suitable compromise keeping in mind your duties and responsibility. Refuse the engagement if matter still not resolved
Audit Plan Its a key requirement of the ISAs that all audit are properly so that: Auditor can determine the amount of work that needs to be done and therefore allocate the right amount and type of people to the job; The work is properly organized and managed. The correct fee can be determine. The work is carried out, within budget, and meets deadlines. Important or problem areas are identified and dealt with appropriately so that auditors can identify and deal with risk. Identify the need for experts and co-ordination of work of others. An Audit strategies sets the scope, timing and directions of the audit and guides the development of the more detailed audit plan. Once the overall strategy has been planned, detailed considerations can be given to each individual audit objective and how it can be best met. Key Component's of audit strategies 1. Knowledge of Business: About: The market and its competitions. Legislation and regulation. Ownership of the entity. Nature of Products/service and markets. Locations of production facilities and factories. Key customers and suppliers. Accounting policies and industry. Financing structure. From: Inquiry of the management. And others within entity. Those charged with governance, internal auditor, employees, Legal counselor, Observation and inspections. Analytical procedures. Other sources. Previous experience of the auditor with the entity and industry.
Key Component's of audit strategies Identify Risk: Audit risk. Business Risk( Financial risk, operational Risk and compliance risk) Assess Risk by: i. Knowledge of the business. ii. Analytical procedures(to help understand the clients financial statements and to help spot possible error) Analytical Procedures are comparison with prior years budgets, industry information. Importance of the Risk Assessment: ISA 315 identifying and assessing the risk of material misstatement through understanding the entity and its environment. Assessing engagement risk at the planning stage. This will ensure that attention is focused early on the areas most likely to cause material misstatement. It will help the auditor to fully understand the entity which vital for effective audit. Any unusual transactions or balances would also be identified early these could be addressed in timely manner. Assessing risk early should also result in an efficient audit. The team will only focuse their time and effort on key areas as opposed on balance or transaction that might be immaterial or unlikely to contain errors.
Key Components of Audit strategy Materiality: information is material if its omission or misstatement could influence the economic decision of the users taken on the basis of financial statements. Types of Materiality: 1. Materiality by size: such materially refers to the importance depends on value. A number of immaterial error could add up to be material misstatement. 2. Commonly calculated as: 5% of PBT/ 1% of Gross Revenue. 2. Material By Nature: the quality refers to an amount that might be low in value but due to its prominence could influence the users decision for Example; Bank balance. Transactions with directors. Related party transactions. 3. Performance Materiality Level: this is the amount set by the auditor, it is below the materiality level, and its use for particular transaction, account balance and disclosures. Performance materiality for the financial statements is a whole will be lower then materiality of the financial statements as whole. Materiality level of particular class of transaction, account balance or disclosure. Key Components of Audit strategy 4. Scope, timing and direction of audit procedures: Scope: Financial reporting framework for the financial statements? Are there industry specific or other special reporting requirement? Are other factors which influence the overall approach to audit? i. Multiple location ii. Group Audit. iii. Needs of Experts. Timing: Deadline for Final reporting. Any interim reports. Reports to management. Reports to those who charged with governance. Direction: the direction of the audit cover the overall approach and concern such issue as; Preliminary identification of material components and account balances. Reliance on control or fully substantive approach. The need for site vistas and other logical issues. The impact of resent development of the client, and its industry, in regulatory or financial reporting requirement.
Audit Risk Audit Risk: is defined as the risk of that the auditor expresses an inappropriate opinion when the financial statements are materially misstated. Audit Risk need to be at an acceptably low level The elements of audit risk are as follows; i. Inherent Risk. ii. Control Risk. iii. Detection Risk. The formula for Audit Risk is as follow AR = Inherent Risk Control Risk Detection Risk
Elements of Audit Risk 1. Inherent Risk: Inherent Risk describes something's about the nature of a business or its transaction that make it particularly susceptible to material misstatements. It can be present in the nature of the business or balance. 2. Control Risk: the Risk that an organizations internal control system do not adequately protect the organization either because they have not been adequate designed and /or implemented. 3. Detection Risk: Detection Risk is all down to the auditors and is the risk that the auditors procedures fail to detect a material misstatement. This could be due to a number of factor such as; Choosing the wrong sample to test. Human error. Lack of training. Inexperience. Audit Plan An audit plan converts the audit strategy into a more detailed plan and includes the nature, timing and extent of the audit procedures to be performed by engagement team members in order to obtain sufficient and appropriate audit evidence to reduce audit risk to a low level. Audit planning is a detailed recording of each procedures and process required to perform an audit. Once the overall strategy has been determined, the auditor should prepare a detailed plan of the areas determined in the audit strategy. The audit plan contains the nature, timing and extent of the procedures to be performed. The audit plan covers: Allocation of work and duties to the assistants. Allocation of time and cost. Formation of various teams. Audit test. Data gathering techniques. Audit objectives. Types of audit evidence desire. The audit plan is developed in order to reduce audit risk to an acceptable low level.
In the case of a company, the board of directors acts as the agents of the body of shareholders, the principals. The directors are accountable for their stewardship of the company.