Question

Parker is the in-charge auditor for the upcoming annual audit of FGH Company, a continuing audit client. Parker will supervise two assistants on the engagement and will visit the entity before the fieldwork begins.

Parker has completed the engagement letter and established an understanding with the Chief Internal Auditor on the assistance to be provided by the internal audit function.

Which of the following activities should be considered as preliminary engagement and planning activities? (Select all that apply.)

• Reading the current year's interim financial statements.

• Discussing the scope of the examination with management of the client.

• Establishing the timing of the audit work.

• Arranging with the client for adequate working space.

• Coordinating the assistance of client personnel in data preparation.

• Establishing and coordinating staffing requirements, including time budget.

• Holding a brainstorming meeting with assistants assigned to the engagement and discussing possible fraud-related issues.

• Determining the extent of involvement, if any, of consultants, specialists, and internal auditors.

• Considering the effects of applicable accounting and auditing pronouncements, particularly recent ones.

• Preparing documentation setting forth the preliminary audit plan.

• Establish overall materiality and tolerable misstatement.

• Making a preliminary assessment about control risk.

• Updating the prior year's written audit program and possibly developing new procedures as warranted by changes in the business.

• Checking the mathematical accuracy of the company's prior year bank statements.

• Making the final determination of control risk.  

• Communicating the established preliminary materiality level to management.

• Communicating with the client's customers regarding the correct valuation of accounts receivable.

• Writing a rough draft of the audit opinion based on the preliminary assessment.  

Answer 1

Parker is in charge of Audit. While considering preliminary engagement and preliminary planning following activities will be considered by him :-

Reading current years interim financial statements is important as it will give him a better idea about the functioning of the company and the transactions carried out by the company.

Discussion scope of examination is also a part of auditor engagement which needs to be done so that the client is aware of the audit being done by the auditor.

Establishing timing of audit work is of prior importance so that work gets completed on time and with proper help of client.

Arranging of working space which is not discussed as it is implied it will be required at clients place.

Coordinating of client personnel for data preparation is also required as sometimes data is available with the client which when provided can by used by auditor for drawing conclusions.

As discussed, time required for audit is discussed so that audit is completed on time and without fuss.

Holding a brainstorming session is necessary, as audit is conducted by the team as a whole and issued may be found out by anyone so all should be aware of the fraud which may arise.

Sometimes, auditor may require external help in terms of valuation or help of any other kind from consultants, etc which also forms part of preliminary assessment.

Effect of accounting policies is also to arrived because at times many amendments happen which client are not aware of leading to non-compliances. The same is also to be covered in preliminary assessment.

Documentation is very important because it acts as a evidence that the auditor has carried on his work with due care and diligence. Similarly, documentation of audit plan is also necessary so that proper audit is carried on without any fuss and confusion and no part is left behind and every bit of data is covered.

Materiality is level of quality of data. Tolerable mis-statment is amount of mis-stateemnt which can be assumed to be OK. Tolerable mis-statement is important to be defined because it differs from person to person.

New procedures are to be incorporated and used so that prior years procedures and new procedures leave no fraud behind and proper report is presented to the shareholders.

Mathematical accuracy of bank statements is never checked.

Communication of materiality level is never done but is kept by the auditor to himself. Because if conveyed, the management may misuse that to its own advantage.

No communication is made with clients customers except for obtaining approval of the closing balances. No communication regarding valuation of accounts receivable takes place.

AUDIT OPINION :-

Audit opinion may be Unmodified or Modified Opinion.

Unmodified Audit Opinion :- ' In our opinion and to the best of our information and according to the explanations given to us, the aforesaid financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted as at 31st March XXXX, and their Profit/Loss Statement and Cash Flow for the year ended on that date.'

Modified Opinion may be of following types :-

Adverse Opinion - Mis-statments are material and impact of the same is high.

Qualified Opinion - Auditor concludes that mis-statements are high but not so material as would render Financial statements as unacceptable.

Disclaimer of Opinion - Auditor concludes that he is unable to obtain sufficient and appropriate audit evidence so as to give his opinion hence he disclaims from giving audit opinion.