What are the activities auditor should undertake at the beginning of the current audit engagement?

SAS No. 47 Planning an Audit of Financial Statements

Status

Issued by Auditing Standards Committee in Taiwan on 1 October, 2009

Summary

This Statement deals with the auditor’s responsibility to plan an audit of financial statements so that the audit will be performed in an effective manner.

Planning an audit involves establishing the overall audit strategy for the engagement and developing an audit plan.

An overall audit strategy sets the scope, timing and direction of the audit, and guides the development of the audit plan.

An audit plan includes a description of the nature, timing and extent of planned risk assessment procedures; the nature, timing and extent of planned further audit procedures at the assertion level; and other planned audit procedures that are required to be carried out so that the engagement complies with Statements of Auditing Standards.

Planning is a continual and iterative process that often begins shortly after the completion of the previous audit and continues until the completion of the current audit engagement.

The nature and extent of planning activities will vary according to the size and complexity of the entity, the key engagement team members’ previous experience with the entity, and changes in circumstances that occur during the audit engagement.

The engagement partner and other key members of the engagement team shall be involved in planning the audit, including planning and participating in the discussion among engagement team members.

The auditor shall undertake the following activities at the beginning of the current audit engagement:

• Performing procedures required by SAS No. 44 Quality Control for Audit of Historical Financial Information regarding the continuance of the client relationship and the specific audit engagement;
• Evaluating compliance with relevant ethical requirements, including independence, in accordance with SAS No. 44 Quality Control for Audit of Historical Financial Information; and
• Establishing an understanding of the terms of the engagement.

The audit documentation shall include the overall audit strategy, the audit plan, and any significant changes made during the audit engagement to the overall audit strategy or the audit plan, and the reasons for such changes.

For initial audit engagements, the auditor shall undertake the following activities prior to starting an audit:

• Performing procedures required by SAS No. 44 Quality Control for Audit of Historical Financial Information regarding the acceptance of the client relationship and the specific audit engagement; and
• Communicating with the predecessor auditor, where there has been a change of auditors, in compliance with SAS No. 17 Communication between Successor and Predecessor Auditors.

Effective date

This Statement is effective from 1 January, 2010.

This article entails the auditor’s duties as laid down in standards on auditing SA 300 while planning the Nature, timing and scope of Audit of the Financial Statements especially in case of recurring audit engagements.

Scope

SA 300 deals with the auditor’s responsibility towards planning for an audit of financial statements and its context is focused more on a recurring audit. This standard also prescribes the additional considerations required for an initial audit engagement.

Objective of the standard & Requirement laid down

The objective is to plan the audit in accordance with the size and complexity of the entity to perform the audit in an effective manner. Partner and key members of the engagement team are required to be involved in the audit planning through discussion which will enhance the audit effectiveness and efficiency.

Preliminary Engagement & Planning Activities

Following preliminary activities are to be undertaken at the beginning of the current audit engagement: i. Client relationship and specific audit engagement procedures are to be performed in accordance with SA 220 (Quality Control for Audit Work) ii. Evaluate ethical requirement compliance including independence per SA 220 iii. Understand the terms of engagement as required by SA 210 (Terms of Audit Engagements)

Planning Activities :

Overall audit strategy sets the scope, direction and timing of the audit and in turn, develops the Audit plan.

* SA 315 – Identifying and assessing the risk of material misstatement through understanding the entity and its environment

* SA 330 – The auditor’s responses to assessed risks During the audit, the overall audit strategy and audit plan can be updated or changed when unexpected events occur or any change in conditions etc.

Auditor has to plan the direction, timing, supervision and review of the engagement teamwork depending on the following:

i. Size and complexity of the entity

ii. Audit area

iii. Competencies and capabilities of the engagement team members

iv. Level of assessed risk of material misstatements etc

Documentation

Following are the list of requirements which are to be documented:

i. Overall audit strategy which exhibits the key decision of the audit planning

ii. Audit Plan which includes standard audit program and audit completion checklist

iii. Any significant changes made during the audit engagement to the above and the reasons for the same

Additional Considerations in Initial Audit Engagements

With respect to initial audit, certain additional considerations to be followed prior to the start of the audit:

i. Acceptance of the client relationship and the specific audit engagement per SA 220

ii. If there is any change of auditors, communicate with the predecessor auditor in compliance with relevant ethical requirements

iii. Audit procedures necessary to obtain appropriate audit evidence for opening balance

Sample of an Audit Plan:

Audit Objective

The objective of this audit engagement is to conduct an internal audit of XXXX cinemas for the period XXX which will require XXX of professional services.

Approach

Our audit approach for this audit engagement will include interviewing key employees, checking the documents, data extraction & verification and other appropriate audit tools as and when required. Following areas will be verified in detail for:

1. Internal Control System

Primarily, the internal check system of the cinema must be examined. A check of the daily receipts of the cinema must be carried out and this should include a check of the daily receipts of tickets for reserved and unreserved seats. All sold tickets must be verified against their counterfoils.

2. Cash and Bank Balances

Cash in hand must be verified physically and reconciled to books. Bank balances must be confirmed with the banks and reconciliations need to be reviewed during the audit.

3. Agreements

All purchase hire and other agreements regarding the films need to be verified to check compliance with the terms and conditions.

4. Brand Promotions and Advertisements

For all brand promotions and advertisements at the theatre, invoices raised on clients and receipts for these invoices must be checked with job contracts for rates and correctness of charging.

5. Payments

Expenses such as wages, salaries, electricity charges and other costs must be adequately vouched to ensure correctness of the expenses booked and paid.

6. Outstanding Liabilities

Examination of outstanding liabilities like posters and advertising expenses must be carried out to check if they are properly recorded in the books.

7. Advances

Advances paid to the film producers and distributors for the screening contract must be examined to ensure recoverability of the dues.

8. Allocation

The allocation of expenditure between capital and revenue should be checked to ensure correctness. Major operating expenses must be vouched.

9. Valuation

Value of unexpired purchased film must be verified and valuation of the same needs verified to ensure correctness of carrying values.

10. Food and Beverages

Closing stock of canteen must be physically verified and matched with the books.

11. Parking tokens and collections

Parking tokens issued daily must be reconciled to the actual collections and recorded correctly

12. Taxes

All tax levies on behalf of the government (both Central and Local) on the tickets must be checked and ensured that they are duly deposited into the government’s accountAudit will be carried on by team of XX and a senior partner will be involved for the review of reports. The audit is planned to be completed on XXX and report will be issued to the management on XXX.

Effective Date: SA 300 is applicable for the audit of financial statements for periods beginning on or after 1st April 2008.

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What activities does the auditor perform during the initial phase of the audit engagement?

Which activities need to be done before the audit starts?

What is engagement activities in the audit process?

Which of the following activities should be performed by the auditor at the beginning of the current audit engagement?