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a) Matters on auditor should consider during the planning stage of an audit of a confirming
client
• Understanding the accounting and internal control systems
• The auditor should seek to understand the accounting policies adopted by the entity and
changes in these policies. The auditor's cumulative knowledge of the accounting and
internal control systems and the relative emphasis expected to be placed on tests of
control and substantive procedures.
• Reviewing matters raised in the previous year's audit, which may have continuing
relevance in the current year. This is done by reviewing previous year's working papers.
The auditor will be able to identify areas noted as having weak controls or specific
accounting problems. Attention should be paid to such areas in the audit plan.
• Assessing the effects of any changes ih legislation or accounting practice affecting the
financial statements of the company. The audit plan should include a review of these
changes and whether the client has complied.
• The auditor should consult with management and staff of the organization about current
trading circumstances and any significant changes . in the business carried on and the
management of the enterprise. E.g. changes in management might weaken the internal
control system.
• Identify any significant changes in the clients accounting procedures such as installation
of a new computer information system. Changes to a computerized system could result in
weak controls.
• Conditions requiring special attention such as the existence of related parties.
• .Consider any current or impending financial difficulties, which could face the company.
E.g. shortage of raw materials or failure to raise working capital.
• The auditor should check the nature and timing of reports and other communications.
with the client so that the audit plan accommodates such timings e.g. he should consider
the dates of the annual general meeting, stock taking, dates when management reports are
available.
• Set materiality levels for audit purposes and in particular identify areas with material
transactions, which call for more audit work.
• The assessment or internal audit department and level of reliance to be place on its work.
• The auditor should also determine the number of audit staff required, experience and
special skills required and the timing of the audit visits.
b) Define
Inherent risk
Is the susceptibility of an account balance or class of transactions to misstatements that could be
material individually or when aggregated with misstatement in other account balances or classes
assuming there were no related internal controls.
Control risk.
Is the risk that a misstatement could occur in an account balance or class of transactions and that
could be material individually and when aggregated with misstatements in other balances or
classes will not be detected or prevented and corrected on timely basis by the accounting and
internal control system.
c) Procedures an auditor could use to assess the risks in (b) above in the course of his audit
of a company.
i) Inherent risks
• Assess experience and knowledge of the managers because lack of experience on the part
of managers can affect preparation of the entity's financial statements
• Assess the integrity of managers e.g. attitude of managers towards internal controls
• Assess the factors affecting the industry in which the entity operates e.g. economic and
competitive conditions as measured by financial ratios
• Review those transactions not subjected to normal processing transactions under ecommerce.
• Assess the potential for technology obsolescence for products and services produced by
the entity.
ii) Control risks
• The auditor can perform compliance tests to confirm operational effectiveness of the
system
• Study and understand the financial reporting process from the initial stage to the final
stage
• Perform walkthrough tests so as to ensure the accounting system is correct,
• Document the internal control system that is used by the entity
Kavungya answered the question on May 14, 2019 at 12:52
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