Planning for financial attest audit in the context of SAR of Autonomous District Councils.

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Presentation transcript:

Planning for financial attest audit in the context of SAR of Autonomous District Councils

Significant and Non- significant audit areas and audit decision tree

What is an Audit Area An audit area is just another name for an account area An audit area is just another name for an account area An Account Area is a set of transactions or a part of the accounts that are processed in a similar way and have a similar inherent risk profile An Account Area is a set of transactions or a part of the accounts that are processed in a similar way and have a similar inherent risk profile There can also be non-financial areas important to audit There can also be non-financial areas important to audit

Significant and Non Significant Audit Areas -I Significant audit areas are those account areas that impact significantly upon an entity’s financial statements. Significant audit areas are those account areas that impact significantly upon an entity’s financial statements. For these audit areas, we must obtain sufficient, relevant and reliable audit evidence to certify that the financial statements are true and fair. For these audit areas, we must obtain sufficient, relevant and reliable audit evidence to certify that the financial statements are true and fair. There is a risk of material misstatement of these audit areas There is a risk of material misstatement of these audit areas Due to their value, context or nature Due to their value, context or nature Due to inherent risks of misstatement Due to inherent risks of misstatement Due to the control risk in the entity Due to the control risk in the entity

Significant and Non Significant Audit Areas-II All other audit areas are non-significant wherein even if there are errors they will not have an impact on the audit opinion. All other audit areas are non-significant wherein even if there are errors they will not have an impact on the audit opinion. To ensure optimum utilisation of audit resources the focus of audit needs to be on significant audit areas. To ensure optimum utilisation of audit resources the focus of audit needs to be on significant audit areas. Thus identification of non significant audit areas is a vital part of the audit planning to ensure that audit is both effective and efficient. It also saves on resources. Thus identification of non significant audit areas is a vital part of the audit planning to ensure that audit is both effective and efficient. It also saves on resources.

Significant and Non Significant Audit Areas -III All audit areas should be assessed for significance and non significance to the financial statements All audit areas should be assessed for significance and non significance to the financial statements The analysis should be based upon The analysis should be based upon materiality by value and materiality by value and materiality by nature and context materiality by nature and context The results of auditor’s ‘Understanding of the business operations of the entity’ should also help in this assessment. The results of auditor’s ‘Understanding of the business operations of the entity’ should also help in this assessment. Analytical procedures may also be applied for such identification. Analytical procedures may also be applied for such identification.

Significant and Non Significant Audit Areas -IV Identification of non significant audit areas is usually dependent upon analysing audit areas into their smaller constituent parts. Identification of non significant audit areas is usually dependent upon analysing audit areas into their smaller constituent parts. The auditors should be careful to consider the aggregate value of all non-significant audit areas in relation to materiality. The auditors should be careful to consider the aggregate value of all non-significant audit areas in relation to materiality.

Audit Decision Tree

Decision regarding the Audit Approach to be adopted to determine the most appropriate audit approach, the auditors should consider: to determine the most appropriate audit approach, the auditors should consider: If a risk exists If a risk exists If controls can be relied upon in relation to that risk If controls can be relied upon in relation to that risk If an analytical procedure can be used If an analytical procedure can be used If other substantive procedures need to be used If other substantive procedures need to be used

Approach of Audit The audit approach chosen will: The audit approach chosen will: reflect understanding of the auditee entity and its business reflect understanding of the auditee entity and its business take account of audit judgement on Planning materiality take account of audit judgement on Planning materiality respond to the specific risk factors identified in the course of risk assessment respond to the specific risk factors identified in the course of risk assessment

Cost-effective audit approach Optimum mix of the following objectives: minimising sampling risk minimising sampling risk minimising audit cost minimising audit cost maximising assurance on the audit objectives maximising assurance on the audit objectives

The Audit Decision Tree A tool to help us decide how much audit work we need to do A tool to help us decide how much audit work we need to do It is a diagrammatic representation of the results of the audit planning process It is a diagrammatic representation of the results of the audit planning process It is designed to give us sufficient (e.g 95%) assurance that the accounts are free from material misstatement It is designed to give us sufficient (e.g 95%) assurance that the accounts are free from material misstatement We need to apply the decision tree to each audit assertion for each significant audit area. We need to apply the decision tree to each audit assertion for each significant audit area.

Identifying account areas Account areas are identified based on whether Account areas are identified based on whether Transactions are subject to similar controls or risks; or Transactions are subject to similar controls or risks; or How items are disclosed in the accounts; How items are disclosed in the accounts; Number of account areas: Number of account areas: Too few  differences in controls not considered Too many  inefficient audit Auditors must use their professional judgement in defining areas Auditors must use their professional judgement in defining areas

9 Audit Decision Tree

Results of decision tree Three levels of substantive testing: Three levels of substantive testing: Focussed Focussed Standard Standard Minimum Minimum Determines type of work done and sample sizes Determines type of work done and sample sizes

Assurance Factors Assurance factor SubstantiveControlConfidence Focussed395%0%95% Standard286%9%95% Minimum0.750%45%95%

Assurance Factor and Sample size Sample size determination formula Sample size determination formulaformula  Account area population x Assurance Factor Precision