Advanced Auditing

Advanced
Auditing
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Topics for discussion today
 Preliminary engagement activities
 Planning process
◦ Overview
◦ Risk and materiality
◦ Audit strategy & audit plan
 Going concern & factual insolvency
 Subsequent Events
 Fraud, AP Act (if time available)
 Reporting (if time available)
March 2010 Advanced Auditing Lecture 1 5

Preliminary Engagement Activities
 References:
◦ ISA 220 – Quality Control for Audits
◦ ISQC 1 – Quality Control for Firms
◦ ISA 210 – Agreeing the terms of audit engagements
 Objectives of Preliminary Engagement Activities

◦ Related to client
 the acceptability of a new client OR
 Consider the ability to continue as auditors for existing clients
◦ Provision of a quality audit
◦ Regulatory and ethical considerations
19 February 2009 Advanced Auditing 6

 Why perform Preliminary Engagement
Activities ?
◦ Limitation of auditor’s risks by not accepting
unsatisfactory clients
 Firm’s professional reputation could suffer
 Negative publicity (lawsuits; client failures)
◦ Types of risks faced by auditor
 Legal liability
 Against the firm because of company failures (= audit
failures)
 Reputational damage
 Because of being associated with a particular client

 Step 1: Perform a Client Investigation
◦ Consider: Independence of Auditor
 Overriding requirement of a statutory audit
 Threats to independence
 IFAC Code of Ethics
◦ Consider: Integrity of Client

 Matters to consider include
 Business reputation of owners and management
 Nature of operations
 Attitude of management regarding interpretation of
accounting standards

◦ Consider: Integrity of Client
 Matters to consider include
 Attitude towards keeping audit fee as low as possible
 Indications of limitations of scope of audit work
 Illegal activities of client
 Reasons for non-reappointment of previous auditor
◦ Consider: Changes to Existing Client

 Refer above

◦ Consider: Communication with previous auditor
 In terms of IFAC Code of Ethics
 Informed of intention to replace?
 Permission to discuss client?
 Has client’s permission been obtained to discuss client? No?
◦ Consider: financial responsibility of client

 Ability and willingness to pay audit fee?
◦ Consider: legal procedures in respect of the

engagement
 Does a vacancy exist?

 Step 2: Determine the auditor’s skills and
competence requirements
◦ Does the firm has the necessary capabilities,
competencies, time, and resources?
◦ Considerations
 Knowledge of industry
 Experience of relevant regulatory or reporting
requirements (or able to obtain such skills)
 Sufficient personnel with required skills and
competencies
 Experts available (if needed)
 Able to meet the audit deadline

 Step 3: Establish the terms of engagement
◦ Confirmation of relationship
◦ Contractual relationship
◦ Removal of any misunderstanding
◦ Copy of letter to be filed in working papers
◦ Reference: ISA 210 – Engagement Letters
 Refer to Appendix 1 for example of an engagement
letter

Planning: An Overview
 Obtaining an understanding of the entity,
including internal controls 
 Assessing the risk of material
misstatement in the financial statements

 Determining materiality 
 Establishing the overall audit strategy &
 Developing the audit plan

Audit Risk and Materiality
 AUDITING NOTES:
◦ Chapter 7. Important Elements of the Audit Process- Concept of
Materiality and Audit Risk.
 SAICA HANDBOOK:
◦ ISA 240: The Auditor’s responsibilities relating to fraud in an audit of
financial statements.
◦ ISA 315: Identifying and assessing the risks of material misstatement
through understanding the entity and its environment.
◦ ISA 320: Materiality in planning and performing an audit.
◦ ISA 330: The Auditor’s responses to assessed risks.
◦ ISA 450: Evaluation of misstatements identified during the audit
◦ ISA 510: Initial audit engagements – opening balances.
◦ ISA 520: Analytical Procedures.
11 Feb 2010 Advanced Auditing

14
Audit Risk : the auditor’s objective
 Identify and assess risks of material misstatement
◦ High, Medium, Low
 Risk may be due to
◦ FRAUD (ISA 240) or ERROR
 2 Levels of risk
◦ Financial Statement level AND Assertion level
 How?
◦ By obtaining an understanding of entity and its environment,
including internal control
 Why?
◦ Provides a basis for designing and implementing responses to
assessed risks of material misstatement
11 Feb 2010 Advanced Auditing 15

Audit Risk
 Definition of Audit Risk
◦ The risk that the auditor expresses an inappropriate
audit opinion when the annual financial statements are
materially misstated
◦ Audit Risk is a function of the risks of material
misstatement (IR & CR), and Detection Risk
(Ref: Glossary of Terms)
 Risk-based auditing

16
ISA 315
 Identification of risks
◦ Obtaining an understanding of the entity and its
environment, including Internal Control
 Assessing identified risks

◦ Evaluating whether the risks relate more pervasively
to the AFS as a whole
◦ Relating the risks to what can go wrong at the
assertion level
◦ Considering the likelihood of misstatement, and
possible magnitude of the misstatement

ISA 315
 Significant Audit Risks
◦ Risk of fraud
◦ Risk related to significant economic, accounting,
or other developments that require specific
attention
◦ Complex transactions
◦ Significant transactions with related parties
◦ Degree of subjectivity
◦ Transactions outside normal course of business
for entity

ISA 315
 Where auditor revises assessment of Audit
Risk
◦ Where assessment changes during the audit
 Revision of assessment
 Modification of audit procedures
 Documentation required
◦ Discussions between audit team
◦ Key elements of understanding
◦ Identified risks
 FS level
 Assertion level

ISA 315
 The link between ISA 315 and Audit Risk?
A failure to identify factors that may give rise to
the risk of material misstatement (and a failure
to respond to such risks) Increase in audit risk
Failure to understand
The entity and its environment
The accounting system and internal control systems

The Client Risks
 “Inherent Risk”
◦ Built-in risk that exists before internal controls are
put in place!!!
◦ Risks related to specific type of industry and type of
client
◦ Develop assessment by gaining understanding of
entity and its environment (A17 – A41)
 Industry, regulatory and external factors
 Nature of entity
 Objectives and strategies, and related business risks
 Financial performance of entity

21
The Client Risks
 “Control Risk”
◦ A66
 Evaluation of design of control involves considering whether
control is capable of effectively preventing, or detecting and
correcting, material misstatements.
 Implementation of a control means that the entity is using it
 No point in testing a control if it is not designed properly
◦ A67
 Risk assessment procedures
 Enquiry of personnel
 Observing the applicable controls
 Inspecting reports and documentation
 Tracing transactions i.e. Walk-through

The Client Risks
 Control risk
◦ Control activities
 Control environment – NB!!!
 E.g. Management override
 The entity’s risk assessment process
 The information system
 Control activities
 Monitoring of internal controls
◦ Essential to evaluate the effect of the identified
weaknesses (in system) on the financial
statement assertions
23
The Auditor’s Risk
 Detection risk
◦ Risk that the auditor will not detect a
misstatement that exists and could be material
 Risk that is inherent in the client’s operations and IS
NOT addressed by the client’s control system
◦ Detection risk is a function of the effectiveness
of the auditor’s audit procedures

24
The Auditor’s Risk
 Detection risk
◦ Detection risk may arise because
 Inappropriate audit procedure
 Misapplication of a procedure
 Misinterpretation of the results of a procedure
◦ There is an INVERSE relationship between risk
of material misstatement [IR & CR] and
Detection Risk

Assessing risk at two levels
 At financial statement level
 Will potentially affect many assertions
Factors that may affect audit risk at the financial
statement level
Management's integrity
Manipulation of AFS to meet their own needs
Management’s experience and knowledge
Errors in AFS
Pressure on management
Many business failures in industry
Need to raise loans

26
 At financial statement level
Factors that may affect audit risk at the financial
statement level (cont.)
Nature of entity’s business
Factors affecting the industry (→ going concern
problems)
Economic conditions
Consumer demand for company’s products
Need to consider how these factors will impact
on the AFS

 At financial statement level – responding to
risks
◦ Assigning staff with appropriate skills and
experience
◦ More supervision of staff
◦ Professional scepticism
◦ Elements of unpredictability in selecting items to
test, and in the performance of the work
◦ Adjustment of nature, timing, and extent of audit
procedures → more substantive in nature
◦ Use of experts (complex & judgmental areas)

28
 At financial statement level – responding to
risks
◦ Going concern risks → more discussions with
management, audit committee
◦ Focusing procedures on high risk areas
◦ Consideration of whether to continue with the
audit

 At assertion level
◦ Risk at financial statement level “trickles” down, and
becomes risk at the assertion level
 E.g. Poor management integrity
◦ Factors that may affect audit risk at the assertion

level
 Susceptibility of an account to misstatement
 Complexity of transactions
 Degree of judgement involved
 Susceptibility of assets to loss or misappropriation
 Complex and unusual transactions (at year-end)
 Transactions not subjected to routine processing
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Audit Risk
 Events and conditions that may indicate
risks of material misstatement
◦ Appendix 2 of ISA 315
 Do NOT learn “off by heart”
 Understand and be able to identify in a question
 Know how to respond to the identified risk

ISA 330 – Auditor’s responses to
risks
 Design and performance of further audit
procedures to obtain sufficient, appropriate audit
evidence
 Nature, timing and extent of further procedures are

based on, and are responsive to the assessed risks
of material misstatement at assertion level
◦ Tests of controls
◦ Substantive procedures (AR, Tests of Detail)
◦ Ref: ISA 330 Application and Other Explanatory Material

ISA 330 – Auditor’s responses to
risks
 Evaluating the sufficiency and
appropriateness of the audit evidence
gathered
◦ Based on audit procedures performed, and
evidence gathered
◦ Need to conclude on whether assessments of
risk of material misstatement at assertion level
remain appropriate
◦ Does the evidence corroborate or contradict
the assertions in the AFS

Risk of Material Misstatement: Fraud
 Misstatement of AFS is INTENTIONAL
 Responsibility for prevention and detection of fraud

◦ Lies with management and those charged with
governance
◦ Commitment to culture of honesty
◦ Consider potential for override of controls
 Responsibility of auditor
◦ To obtain reasonable assurance that AFS are free of
material misstatement – through error or fraud

 Ability of auditor to detect fraud depends
on factors such as
◦ Skill of perpetrator
◦ Frequency and extent of manipulation
◦ Degree of collusion
◦ Size of amounts
◦ Seniority of those involved
 More difficult to detect management fraud

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 Auditor’s requirements
◦ Professional scepticism
 Irrespective of past experience with client
◦ Discussion with audit team
◦ Risk assessment procedures

Materiality
 References
◦ ISA 320 – Materiality in Planning and Performing an Audit
◦ ISA 450 - Evaluation of Misstatements Identified During an Audit
 Audit report
◦ Auditor’s opinion on whether or not the AFS are materially
misstated
 AFS will contain a margin of uncertainty

◦ Where misstatement > acceptable margin of uncertainty
 Affects user’s decisions based on AFS
 Misstatement becomes MATERIAL

38
Materiality
 The nature of materiality
It is subjective
Professional judgement is required
It is relative
E.g. Coca Cola vs. the corner cafe
The balance sheet vs. the income statement
It is qualitative and quantitative
Qualitative
Where an amount > amount set as material
Quantitative
Judged against a factor other than an amount
 E.g. Important disclosure that is omitted

39
Setting of materiality
 Auditor must consider and set materiality
during the Planning stage of the audit
◦ Planning Stage
 Assess the risk of materiality misstatement AND
consider planning materiality
 Formulate an audit plan
 Nature, timing, and extent of audit procedures

40
Planning Materiality
 The relationship between planning materiality and
audit risk
◦ Inverse relationship
 Higher audit risk
 Set materiality lower in order to compensate for this
 Lower audit risk
 Set materiality higher
 Chance of material misstatement going undetected is lower
◦ Inverse relationship between audit risk and materiality
 Impact on nature, timing and extent of audit procedures
 The risk of material misstatement will have a direct impact on
setting of planning materiality levels

41
Planning Materiality
 It is a benchmark against which to measure
quantitative misstatements
 Considerations
◦ Amount of misstatement
 Quantitative
◦ Nature of misstatement
 Qualitative
◦ 2 Levels at which materiality is considered
 Overall level
 Individual level

42
Planning materiality
 Exam technique – when calculating materiality
◦ Stability of indicators – which figures to use
 Budget or actual
 Budgeted figures – will these figures be achieved?
 Un-audited figures of current year – whole year’s figures?
 Prior year audited figures
◦ Balance sheet or Income Statement
 Consider the nature of the business
 Which would be most appropriate ?
 Look at “activity” on B/S and I/S.
 Who are the users? Would they use the I/S or the B/S mostly?

 Exam technique – when calculating
materiality
◦ Calculation
 E.g. use of DP6
◦ Conclusion
 Do not leave materiality in a range – need a
number!!
 Where it is a high risk audit – be conservative
 Examples
 Incentive to overstate assets and understate liabilities
 Possible Going Concern
 Risks related to particular assets, liabilities etc
 Risks related to the accounting system

 Quantitative indicators of materiality
◦ E.g. DP6
 Turnover ½ - 1%
 Gross profit 1 – 2%
 Net income 5 – 10%
 Total assets 1 – 2%
 Equity 2 – 5%
◦ Will calculate upper and lower limits of materiality
 Using lower limit  more conservative level of materiality
 detection of more errors

45
 Qualitative indicators of materiality
◦ Consider when quantifying materiality
◦ Examples include
 Control environment
 Effectiveness of internal controls
 Integrity of management
 Appropriateness of accounting policies and the disclosure
thereof
 Statutory requirements and regulations
 Problems and errors – previous years
 Results of analytical procedures
 Possibility of illegal transactions

46
Final Materiality
 Is established at the end of the audit
 Is the standard against which identified
misstatements are measured, in order to
determine the effect on the AFS
 Consider responsibilities in terms of
reporting responsibilities (ISA 700)
◦ Conclusion required by ISA 700 takes into
account auditor’s evaluation of unadjusted audit
differences on the AFS (ISA 450)
47
Final Materiality
 Planning Stage
◦ Assess the risk of materiality misstatement AND
consider planning materiality
◦ Formulate an audit plan
 Nature, timing, and extent of audit procedures
 Evaluation of misstatements
◦ Selected audit procedures are carried out – on
samples of the population e.g. debtors, sales,
creditors
◦ Errors in samples
◦ Draw audit conclusions about the populations

Final Materiality
 Process followed by auditor
◦ Analyse & project sample errors over the
population
◦ If the projected misstatement is unacceptable
 Perform further tests OR
 Client to check population in detail for errors
◦ Discuss the misstatements with management 
correction of errors
 Refusal o correct errors  unadjusted differences  use
of FINAL MATERIALITY to determine materiality of
differences
 Misstatement is material  more misstatement that
acceptable  qualification of audit opinion

Final Materiality
 Why would the client refuse to correct
misstatements
◦ Disagreement over whether is a misstatement
 E.g. estimate of inventory obsolescence is too low
◦ Misstatement not regarded as material
 I.e. Won’t influence the user
◦ Ulterior motives
 E.g. loan covenant – current ratio required
◦ Too much bother to make the changes
◦ Not concerned about receiving a qualified opinion

Evaluating Unadjusted Audit
Differences
 Distinguish between
◦ Factual misstatement (known error)
 Able to substantiate with audit evidence
 E.g. sales invoices posted in wrong period
◦ Judgemental misstatement (likely error)
 Unable to specifically quantify and substantiate with
evidence
 Level of subjectivity
 E.g. provision for doubtful debts
◦ Projected misstatement
 I.e. Auditor’s best estimate of misstatement in a population
 Arises because of use of audit sampling

Differences
 Considerations
◦ Ref: ISA 450 – A16 examples
◦ Do not consider differences in isolation
 Aggregation of differences
 Trends identified e.g. understatement of provisions 
attempt to manipulate AFS?
◦ Effect of uncorrected differences related to prior
periods
◦ Statutory or other contractual obligations
 Less likely to tolerate
 E.g. maintaining specific ratios in terms of a loan covenant

Differences
 Considerations
◦ Nature of misstatement
 Error in principle VS misallocation of expense
 Difference arising out of dishonesty of director
 Subjective differences
◦ Impact of misstatement
 Assess impact on “popular” figures and ratios
 E.g. where difference affects EPS
◦ Absolute size and relative size of difference
 Absolute size e.g. R1,000,000
 Size in relation to other account headings

The Overall Audit Strategy
 Scope
◦ Client-specific issues and circumstances
 Number of locations / areas to visit
 Staff availability
 Travel and housing of audit staff
◦ Engagement team specifics
 Composition, experience, number
 QC requirements
 Use of CAATS
◦ Budgeting for the audit
 Audit time per section
 Audit fees, expenses

 Scope
◦ Communication with entity
 Attending meetings
 Written reports required (and timing)
 Communication with third parties
 Previous audit experience
◦ Going concern
 Applicability of going concern assumption
 Issues affecting going concern assumption
◦ Previous audit findings and recommendations
◦ Existence of related parties
◦ Use of internal auditors, other auditors, experts

 Timing
◦ Client dates e.g. inventory counts, reporting
deadlines
◦ Timing of audit visits e.g. interim, final audit
◦ Reporting dates
 Direction
◦ I.e. areas requiring attention
 E.g. Debtors

The Audit Plan
 Nature
◦ Tests of Control (combined approach) vs.
Substantive procedures
◦ Impact of internal controls on substantive

procedures
 Reliance is justified
 Nature – more analytical
 Timing – verification spread over year
 Extent – Less
 Reliance is NOT justified
 Nature – more detailed tests
 Timing – at year-end
 Extent – more

The Audit Plan
 Timing
◦ I.e. when the procedures will be done
 Tests of control
 Performed to cover whole period of reliance
 Substantive procedures
 Performed to verify transactions and year-end balances
 Tight audit deadline
 Early verification and roll-forward procedures
 Extent
◦ Relates to number of items to be tested
 Greater reliance – larger sample size
◦ Sufficient, appropriate audit evidence
Going Concern
 References:
◦ Jackson & Stent Chapter 15
 Financial statements are normally presented

on the “going concern” basis
◦ Operational existence
◦ For the foreseeable future
◦ No need to liquidate or curtail operations
 Cash is King

Going Concern
 Management’s responsibility
◦ to assess whether company has ability to
continue as a going concern
 Auditor’s responsibility
◦ Risk of expression of unqualified opinion where
has been inappropriately applied
◦ Need to gather sufficient, appropriate evidence to
support adoption (by management) of the going
concern assumption

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The Audit Plan for Going Concern
 Consideration of going concern starts at the Planning
Stage
 Nature, timing and extent of procedures is

determined by level of risk perceived by auditor
 Nature of testing
◦ Substantive evaluation of directors’ assessment of going
concern
◦ Procedures
 Analytical procedures
 Confirmation of evidence provided
 Enquiry of personnel

The Audit Plan for Going Concern
 Timing of testing
◦ Need most up-to-date information
 At year-end
 In post balance-sheet period
 Extent of testing
◦ Determined by “certainty” of company to
continue as a going concern

Going Concern
 References:
◦ ISA 570 (Explanatory Notes)
 Framework – events and conditions that cast

doubt on ability to continue as a going
concern
◦ Financial indicators
◦ Operating indicators
◦ Other indicators

Going Concern
 Mitigating factors
◦ Consideration of management’s plans to
return to going concern
 Specific and feasible
 Assumptions made by management
 Management’s written representations to commit
to plans

Going Concern
 Audit conclusions
◦ Based on audit evidence gathered
◦ Does a material uncertainty exist regarding
entity’s ability to continue as a going concern?
 Yes  Disclosure in AFS, else AFS don’t fairly
present the state of affairs of the company 
qualification of audit opinion

Going Concern – audit opinion
 Material uncertainty exists
◦ Disclosure made
 Emphasis of Matter para
◦ Inadequate disclosure, or failure to disclose
 Disagreement  “Except for” or Adverse opinion
 Going concern is NOT appropriate
◦ Adverse opinion
 Unable to determine appropriate basis
◦ Disclaimer of opinion

Factual Insolvency
 i.e. Assets < Liabilities
 All are fairly valued
 Matters for auditor’s attention

◦ Indicator of going concern problems
◦ Irregularities may take place

Factual Insolvency
 Irregularities
◦ Where company is factually insolvent
◦ Greater risk of
 Common law fraud
 Reckless trading (S22 of Co’s Act)
◦ If taking place
 Unlawful Act
◦ Rest of requirements for S45 RI?

Subsequent Events
 Reference:
◦ ISA 560 – Subsequent Events
 Types of subsequent events

◦ Adjusting events
◦ Non-adjusting events
◦ Dividends
◦ Going concern

Subsequent Events
 Auditor’s duties
◦ Between date of AFS and auditor’s report
 Identification of subsequent events
 Audit of subsequent events
◦ Between date of auditor’s report but before
AFS are issued
◦ After AFS have been issued
 Refer to page 17/15

S45 – Reportable Irregularities
 Reportable irregularity
◦ An unlawful act or omission committed by
 Statutes, regulations, common law
◦ Any person responsible for the mgt of entity
◦ Has, or is likely to, cause financial loss to the
entity, its partner, shareholder, creditor, investor
OR
◦ Is fraudulent or amounts to theft OR
◦ Is a material breach of any fiduciary duty owed
by the person to entity etc
Advanced Auditing
March/April 2009 Advanced Auditing 72
 The individual registered accountant
◦ Is satisfied or has reason to believe that
◦ A reportable irregularity has / is taking place MUST
◦ Without delay
◦ Send a written report to the IRBA, with particulars
◦ MUST notify management within 3 days, and
provide management with a copy of the report
◦ Within 30 days of sending report to IRBA
◦ Discuss report with management » representations
Advanced Auditing
 Send another report to the IRBA
◦ No reportable irregularity has / is taking place OR
◦ Suspected RI is no longer taking place, and that steps
have been taken to recover losses OR
◦ RI is continuing
 Where RI is continuing
◦ Notify appropriate regulator ASAP
 Details of irregularity
 In writing
 Copy of report
◦ Regulator may carry out investigations as needed
Advanced Auditing
Fraud – Introduction
 Primary responsibility for prevention and detection of
fraud (and error) rests with management and those
charged with governance
Good control environment
Risk assessment procedures
Implementation, operation, and monitoring of IC system
 Auditor’s responsibility
Consider fraud when assessing risk of material misstatement
Respond to assessed, identified, or suspected risk
Able to express audit opinion at acceptable level of audit risk
Advanced Auditing
Terminology
 Error
◦ Unintentional act which leads to misstatement of
AFS
 Fraud
◦ Intentional act, in order to obtain unfair illegal
advantage
◦ Fraud may be committed by
 Management
 Those charged with governance
 Employees
 3rd parties
Advanced Auditing
Terminology
 Fraud risk factors
◦ Indicate an incentive or pressure to commit fraud,
or provide an opportunity to commit fraud
 Management fraud
◦ Committed by member of management or person
charged with management
◦ S45 implications
 Employee fraud
◦ Committed by employee
◦ NO S45 implications
Advanced Auditing
Terminology
 2 Main categories of fraud
◦ Fraudulent financial reporting
 Intentional misstatements, including omissions – deceive
users
 Perpetrated by management
 Includes
 Falsification of accounting records
 Management override
◦ Misappropriation of assets
 Embezzlement
 Theft of physical assets, intellectual property
 Company pays for goods and services not received
Advanced Auditing
Auditor’s Responsibilities
 Requirements in terms of ISA 240
◦ Attitude of professional scepticism
 Even where management has previously acted with
integrity
◦ Discussion amongst audit team
 Client’s susceptibility to material misstatement due to
fraud and error
◦ Obtain information  identify risk of material
misstatement due to fraud and error
 NB: consider whether any of the information obtained
indicates whether any of the FRAUD RISK FACTORS are
present
Advanced Auditing
Auditor’s responsibilities
 Requirements in terms of ISA 240
◦ Assess the risk of material misstatement due to
fraud and error
 At FS level
 At assertion level
◦ Determine audit response to address the risk
 At FS level
 At assertion level
Advanced Auditing
Auditor’s response to risk due to
fraud
 At FS level
◦ Assignment and supervision of staff
◦ Consider accounting polices adopted by management
◦ Element of unpredictability in nature, timing and extent
of audit procedures
 At assertion level
◦ Impacts on nature, timing and extent of audit
procedures
◦ Considerations
 Attempts to conceal fraud
 Relevance and reliability of evidence collected
Advanced Auditing
fraud
 Management override
◦ Auditor must design and perform procedures to
respond to the risk of management override
 Evaluation of audit evidence

◦ Is initial assessment of material misstatement (assertion
level) still appropriate after initial procedures have been
conducted
◦ Examples
 Discrepancies in accounting records
 Conflicting or missing evidence
 Problematic relationships between auditor and management
Advanced Auditing
fraud
 Management representations
◦ To include
 Management is responsible for IC systems – prevent and
detect fraud
 Management has disclosed results of its assessment of risk
of material misstatement due to fraud
 Management has disclosed all frauds involving management
and employees
 Management has disclosed any allegations of fraud
◦ Should only ever be corroborating evidence
Advanced Auditing
Fraud Risk Factors
 Stage of audit
◦ At the planning stage
 Gaining understanding of entity and its environment
 Gather information to identify the risk of material
misstatement due to fraud
 Assessing the risk of material misstatement due to
fraud
◦ Does the information gathered indicate the
presence of the risk factors
Advanced Auditing
Fraud Risk Factors
 Consideration of
◦ Incentives / pressures
 On management to report fraudulently
 On management and employees to misappropriate assets
◦ Opportunities
 For management to report fraudulently
 For management and employees to misappropriate assets
◦ Attitudes / rationalisations
 Do attitudes of management and employees indicate
 Fraudulent reporting
 Misappropriation of assets
Advanced Auditing
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Advanced Auditing

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Advanced

March 2010 Advanced Auditing Lecture 1 5

 Objectives of Preliminary Engagement Activities

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◦ Consider: Integrity of Client

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◦ Consider: Changes to Existing Client

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◦ Consider: financial responsibility of client

◦ Consider: legal procedures in respect of the

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March 2010 Advanced Auditing Lecture 1 13

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 Assessing identified risks

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◦ Factors that may affect audit risk at the assertion

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 Nature, timing and extent of further procedures are

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 Responsibility for prevention and detection of fraud

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 AFS will contain a margin of uncertainty

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◦ Impact of internal controls on substantive

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 Financial statements are normally presented

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