Importance of Audit Planning

Audit planning involves establishing the overall audit strategy for the engagement and
developing an audit plan for the purpose of reducing audit risk to an acceptably low level. The
auditors consider involving the engagement team in planning the audit to benefit from the
experience and insight of engagement and other key members of the team to enhance the
effectiveness and efficiency of the planning process.
Adequate audit planning helps the auditors to ensure that appropriate attention is given to the
important areas of the audit. Audit planning also helps the process of identifying potential
problems and resolving them on a timely basis and that the audit engagement is properly
organized and managed in order to be performed it in an effective and efficient manner. In
addition, audit planning assists the proper assignment of work to engagement team members that
have an appropriate level of capabilities and competence to respond risks. Moreover, another
importance of audit planning is that it facilitates the direction and supervision of engagement
team members and the review of their work. Lastly, audit planning assists the coordination of
work done by experts.
Audit planning is not a discrete phase of audit but rather a continual process that often begins
short after the completion of previous audit and continues until the completion of the current
audit engagement.

Procedures due to increased risk of fraud

First of all, the audit manager should discuss with the management and those charged
with governance of the company on their awareness regarding payroll frauds and

potential frauds.
The audit manager should also review the board minutes for the purpose of finding
evidence of management discussion of the materiality of the fraud and as well as the

existence of any suspected or additional frauds.

Discuss with payroll manager about the nature of payroll fraud, how it occurred in the
company, and the impact in terms of financial the amount paid in to payrolls account

had on the company.

The auditor should review supporting documentation to ratify the total fraudulent

payments which are made and the materiality of this misstatement.

The auditor should review and test the internal controls of the company and payments

made to the new members to assess if any additional frauds may have occurred.
The auditor should consider whether the information obtained the audit team shows the

existence of risks or material misstatement with regards to fraud.

The auditor should obtain a written representation from the management of the
company showing their acknowledgement that they have disclosed to the auditors their
knowledge of any suspected ad the actual payroll frauds.

Audit risk 1:

The selling price of products has been reduced significantly by Eagle Heating since September
2014 and hence the inventory level is expected to increase at the year end.
Its possible that the selling price may have fallen so that the net realizable value (NRV) of
inventory is below Cost. IAS 2 Inventory requires the inventory to be stated at the lower cost of
NRV. Therefore, its possible that the inventory is overvalued or undervalued.
Auditor Response 1:
The auditor should do a detailed cost and NRV testing to assess whether inventory is
overvalued and requires a write down.
Audit Risk 2:
One of Eagles customers has been experience financial difficulties. Therefore, Eagle has agreed
that the customer should be given six-month payment break, after which payments will
continue normal. However, the finance director does not believe that allowance is required
against this receivable. However, if the customer is facing difficulties, there is an increased risk
that receivable is not recoverable and hence is overvalued.
Audit Response 2:
If the 6-months payment break is now over, review the cash receipts for this customer to assess
whether any payments have been made.
Discuss with the finance directors as to why he believes an allowance is not required. Review
whether any general allowance for uncollectable accounts is sufficient to cover the amount of
this receivable.
Audit risk 3:
The reduction of selling prices and the key customers financial difficulties with the increased
competition, there is a high possibility that Eagle is going to face going concern difficulties.

Audit Response 3:

The auditor should do a detailed going concern testing. The auditors should review the cash flow
forecast for the foreseeable future to assess whether going concern basis is appropriate or
whether additional going concern disclosures are required in the financial statements.

Audit risk 4:

In October 2014, the financial controller of Eagle was dismissed. He had been employed the
company for 20 years and has threatened to sue the company for unfair dismissal. However, if it
is probable that Eagle will make payments to the financial controller, a provision for unfair
dismissal is required. If a payment is possible rather than probable, a contingent liability
disclosure would be necessary. However, if Eagle has not done this there is risk over the
completeness of any provision or contingent liabilities.
Audit Response 4:
The Audit team should write to the companys lawyer and ask the existence and likelihood any
claim for the former financial controller.
Audit risk 5:

The dismissed financial controllers task is divided among the members in the finance team;
however, this has increased their workload. In addition, this increases the inherent and control
risk within Eagle as errors may have been made within the accounting records by the
overworked finance team members and since there is no one working in a supervisory capacity.

Audit response 5:

The team should remain alert throughout the audit for any additional errors within the finance
department. In addition, the team should discuss with the financial director as to whether he
will be able to provide them with assistance for any audit issues as there is no financial controller
available.

Audit risk 6:

Since the departure of the purchase ledger supervisor in August, no reconciliation of supplier
statement was performed. Therefore, there is an increased risk of errors within the trade
payables and the year-end payables may be under or overstated.
Audit response 6:

The audit should increase their testing on trade payables at the year end, with the main focus on
the completeness of payables. A detailed review of year-end purchase ledge control account
reconciliation should also be done with particular focus on any unusual reconciling items.

Five component of internal control

Control Environment: The control environment is the set of standards, processes, and
structures that provide the basis for carrying out internal control across the organization.
The control environment sets the tone of an organization, influencing the control
consciousness of its people. It is the foundation for all other components of internal
control, providing discipline and structure. Control environment factors include the
integrity, ethical values and competence of the entity's people; management's
philosophy and operating style; the way management assigns authority and
responsibility, and organizes and develops its people; and the attention and direction
provided by the board of directors

Risk Assessment: Every entity faces a variety of risks from external and internal
sources that must be assessed. A precondition to risk assessment is establishment of
objectives, linked at different levels and internally consistent. Risk assessment is the
identification and analysis of relevant risks to achievement of the objectives, forming a
basis for determining how the risks should be managed. Because economic, industry,
regulatory and operating conditions will continue to change, mechanisms are needed
to identify and deal with the special risks associated with change. Risk assessment also
requires management to consider the impact of possible changes in the external
environment and within its own business model that may render internal control
ineffective.

Control activities: are the policies and procedures that help ensure management
directives are carried out. They help ensure that necessary actions are taken to address
risks to achievement of the entity's objectives. Control activities occur throughout the
organization, at all levels and in all functions. They include a range of activities as
diverse as approvals, authorizations, verifications, reconciliations, reviews of
operating performance, security of assets and segregation of duties.

Information and Communication: Information is necessary for the entity to carry out
internal control responsibilities to support the achievement of its objectives.
Management obtains and uses relevant and quality information from both internal and
external sources to support the functioning of other components of internal control.

Communication is the continual process of providing, sharing, and obtaining

necessary information. Internal communication is the means by which information is
disseminated

throughout

the

organization

and

across

the

entity.

External

communication provides information to external parties in response to requirements and

expectations.
5

Monitoring activities ongoing evaluations, separate evaluations, or some combination

of the two are used to ascertain whether each of the five components of internal control
is present and functioning. Ongoing evaluations, built into business processes at
different levels of the entity, provide timely information. Separate evaluations,
conducted periodically, will vary in scope and frequency depending on assessment of
risks, effectiveness of ongoing evaluations, and other management considerations.
Findings are evaluated against criteria established by regulators, recognized standardsetting bodies or management and the board of directors, and deficiencies are
communicated to management and the board of directors as appropriate.

Describe a test of control which the auditor of Bonsai Trading would perform
Capital expenditure committee:

Select a sample of capital additions made during the year and confirm through the review

of capital expenditure committee minutes that this purchase was authorized.

Select a sample of capital expenditure purchase orders for evidence of authorization by
the capital expenditure committee.

Serial numbers

Select a sample of non-current assets on site, agree that a serial number is recorded on the
asset and confirm it is included in the non-current assets register.

Inspect the non-current assets register and verify that there are no duplicated serial
numbers

Goods received note (GRN)

Select a sample of GRNs, review to see if there is documentation of whether the item is of a
capital or revenue nature, and confirm whether the GRN is initialed as reviewed by a
responsible official. If the GRN is of a capital nature, agree it is included in the non-current
assets register.

Review of assets

Discuss with internal audit their programme of inspections; if there are any due to be carried
out between now and the year end, a member of Poplar & Co should attend this review to

observe the controls in operation.

Review internal audit reports and working papers for inspections undertaken earlier in the
year for evidence the control operated.

Access to non-current asset register

Attempt to access the non-current register using the password of a non-authorised individual