The Audit Process - Planning
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CPA Auditing and Attestation (AUD) › The Audit Process - Planning
In developing an overall audit strategy, the auditor should consider:
Findings from substantive tests performed at interim dates
Preliminary evaluations of materiality, audit risk, and internal control
Whether the inquiry of the client's attorney identifies any litigation, claims, or assessments not disclosed in the financial statements
Whether the allowance for sampling risk exceeds the achieved upper precision limit
Explanation
In developing an overall audit strategy, an auditor should consider preliminary evaluations of materiality, audit risk, and internal control.
Materiality levels are set by:
AICPA
SEC
FASB
Professional Judgement
Explanation
Materiality levels are set by the judgment of the auditor. The auditor may use industry standards to help in determining the materiality level, however, experience and judgment are the final determinants.
The users of a company's set of financial statements would be:
Shareholders
Creditors
Both
Neither
Explanation
Both creditors and shareholders would need access to reliable financial statements in order to decide if the company is worth investing in or lending money to.
“Performance Materiality” is defined as
The amount set above the overall materiality level
The amount necessary to get management to perform the audit appropriately
A level required to evaluate staff performance
The amount set below the overall materiality level
Explanation
Performance Materiality is defined as the amount that is less than the overall materiality level. Performance materiality is set to respond to smaller misstatements or omissions that in aggregate may affect the materiality level.
In addressing materiality, the auditor should:
Determine how much error they should let management get away with
Discuss with management the required materiality levels
decide whether any omission may change the judgement of any person relying on the information
Discuss with partners any liability issues regarding materiality
Explanation
In addressing materiality, the auditor should decide whether the omission or misstatement would change the judgment of the reader.
During the initial planning phase of an audit, the auditor would most likely:
Discuss the timing of the audit procedures with the client's management
Inquire of the client's attorney as to whether any unrecorded claims are probable of assertion
Identify specific internal control activities that are likely to prevent fraud
Evaluate the reasonableness of the client's accounting estimates
Explanation
Procedures that an auditor may consider in planning the audit include discussing the type, scope, and timing of the audit with the client's management.