Planning is one of the most important parts of the audit process and proper planning will ensure that the audit is executed and conducted properly. The audit process includes the following.
Obtaining an understanding of the entity and its environment
During this phase, the auditor will gain an understanding of the entity and its environment as well as the entity’s internal control and operating systems.
This is an important process as the auditor requires this understanding to be able to identify and assess the risks of material misstatement whether due to fraud or error, at the financial statement and assertion level.
This risk assessment will then provide the auditor with a basis for designing and implementing responses to the assessed risks of material misstatement (ISA 315, par 3).
Assessment of risks of material misstatement at the financial statement level and assertion level
Since the ISA follows a risk based approach to auditing, it is only natural that the next phase of the audit process is to establish risks at overall financial statement level and assertion level.
Risks of material misstatement at the financial statement level are risks that relate pervasively to the financial statements as a whole and potentially affect many assertions (ISA 315, par A122).
Assessment of risks of material misstatement at the assertion level relates to various management representations that are embodied in the financial statements. These are used by the auditor to consider the different types of potential misstatements that may occur.
There are thousands of companies in the world and although most companies share some business risks, such as economic change as well as political instability, the risks at financial statement level and assertion level is more unique to each company.
Planning activities and setting materiality
After the auditor properly assesses the risk, he needs to establish an overall audit strategy that sets the scope, timing and direction of the audit. This will guide him in the development of the audit plan and set the appropriate level of materiality for the audit.
In theory, planning an audit may seem like a simple exercise but in practice, it can be quite complex depending on the nature of the entity and how it operates. However the RSM audit approach applies rigorous standards of professional competence, independence and objectivity to ensure the process runs as smoothly as possible.
Trainee Accountant, Durban