Auditing engagements

3rd edition
Chapter 1
Managing the engagement
and audit approach

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 Audit approach
Audit
approach

IA IA Audit
activity engagement methodology

•Risk-based approach
•Structure of IAA •Engagement planning •Cycle-based approach
•IAA staff •Performing engagement •Assurance engagements
•Types of IA services •Communicating results •Financial
•Managing the IAA •Monitoring progress •Compliance
•Operational

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 IA engagement
 What is an IA engagement?
o Examination to verify correctness of representations
 What should be – criteria
 What is – condition
 2 criteria compared – difference – finding
o IA process
 Engagement planning – Standard 2200
 Performing the engagement – Standard 2300
 Communicating results – reporting – Standard 2400
 Monitoring progress – follow-up – Standard 2500
(continued)

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 IA engagement (cont’d)
 Planning the engagement
o Refer page 3: Schematic presentation of the steps in the
planning phase
 Engagement objectives – audit objective
• To determine whether all monies received are
recorded
 Engagement criteria – what should be
• All cash receipts should be recorded in a cash
receipts journal
 Engagement scope – work to be done
• All cash receipts for March 2009 will be audited
 Engagement work programme
• Inspect cash receipts book for March and confirm
that all receipts are recorded by examining
number sequence of receipts
 Refer page 6: Abstract of engagement work programme
(continued)

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 IA engagement (cont’d)
 Performing the engagement
o Investigation of activities and actions performed
 Evidence is gathered of actual occurrences
• What is
o Compare this with criteria and standards set by
management
• What should be
o Difference between what is and what should be
• Engagement finding
 Refer page 7: Abstract of an engagement finding
(continued)

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 IA engagement (cont’d)
 Performing the engagement
o Gathering of information and evidence
 What to test
 How to get the information
 Where to get the information
 How many to test
 When to test
o Engagement procedure
 How
• Action verb – Verify . . .
 What
• that all leave forms . . .
 Why
• are properly authorised by . . .
(continued)
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 IA engagement (cont’d)
 Performing the engagement
o Engagement procedures
 Compliance
• Internal control activities functioning as intended
 Substantive
• Transaction/balance correctly recorded
• Transactions
 Verifying specific types of transactions
• Balances
 Verifying a specific balance of a group of transactions
• Analytical procedures
 Comparing information and analysing relationships
o End result is evidence
 Sufficient, relevant, reliable and useful
 Classified according to nature and source
(continued)

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 IA engagement (cont’d)
 Performing the engagement
o Recording evidence on Working papers
 Standards give specific guidelines on how working
papers should be designed
• Date
• Signed-off by preparer and reviewer
• Audit objective
• Work done and sample details
• Results and conclusion
• Referencing

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 Working paper
 Working paper:
o Standardised FORMAT!
 Used to document all the actions performed by the
audit team during the audit engagement
 Manual working papers / computerised working papers
(TeamMate)
 Minimum info needed: heading (WP reference, name of
client, period under review, signed-off by preparer and
reviewer, dates prepared and reviewed, subject)

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Name of client and process: Procurement/Purchases division
Period under review:
Scope:
Engagement objective:
Name of preparer: Date prepared:
Name of reviewer: Date reviewed:

 Subject: Internal control questionnaire

o Are all POs authorised?
o Is there segregation of duties between authorisation
and recording of purchase transactions?
o Are POs prepared and issued in numerical sequence?
o Are creditors’ reconciliations performed on a monthly
basis?

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Name of client and process: Procurement/Purchases division
Period under review:
Scope:
Engagement objective:
Name of preparer: Date prepared:
Name of reviewer: Date reviewed:

 Subject: Systems description / Process analysis design

o All POs are authorised by a designated procurement
manager
o There is segregation of duties between authorisation
and recording of purchase transactions
o POs are prepared and issued in numerical sequence
o Creditors’ reconciliations are performed on a monthly
basis

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Name of client and process: Procurement/Purchases division
Period under review:
Scope:
Engagement objective:
Name of preparer: Date prepared:
Name of reviewer: Date reviewed:

 Subject: Flow chart of ordering process

PO

Authorisation PO file

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 Name of client and process: Payroll
Period under review:
Scope:
Engagement objective:
Name of preparer: Date prepared:
Name of reviewer: Date reviewed:

 Subject: Risk assessment

o Ghost employees – High risk
o Overpayment of salaries – Medium risk
o Incorrect payments – Low risk
o Incorrect allocations of deductions – Low risk
o Unauthorised changes to pay rates/salary tariffs –
High risk

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Name of client and process: Payroll
Period under review:
Scope:
Engagement objective:
Name of preparer: Date prepared:
Name of reviewer: Date reviewed:
 Subject: Control analysis
o System should agree actual payments to authorised
payments according to employment contract
o System performs a number of checks
o Allocation of deductions should be internally verified by a
designated payroll clerk
o Changes to pay rates/salary tariffs should be authorised
by a designated senior HR official
o There should be segregation of duties between
authorisation of salary changes and recording and
payment thereof
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Name of client and process: Cash payments
Period under review:
Scope:
Engagement objective:
Name of preparer: Date prepared:
Name of reviewer: Date reviewed:

 Subject: Engagement Work programme/Audit

programme
(How) (What) (Why)
o Select a sample of cash payments in the CPJ and inspect for
signature of approval to ensure authorisation
o Recalculate (How) a sample of cash payments in the CPJ
(What) to ensure accuracy (Why)
o Trace (How) a sample of cash payments in the CPJ (What) to
the bank account in the GL to ensure that all transactions are
recorded / completeness. (Why)
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Name of client and process: Cash payments
Period under review:
Scope:
Engagement objective:
Name of preparer: Date prepared:
Name of reviewer: Date reviewed:
 Subject: Engagement Work programme/Audit
programme
o Engagement objective: (Why)
 To determine whether all cash payments are accurate
o Engagement scope:
 All cash payments for the first quarter of 2009
o Engagement procedures:
 Recalculate (How) a sample of cash payments in CPJ
(What)
 Verify that the amount in the CPJ corresponds to the
amount on the bank statement
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Name of client and process: Cash payments
Period under review:
Scope:
Engagement objective:
Name of preparer: Date prepared:
Name of reviewer: Date reviewed:
 Subject: Engagement work program/Audit programme
(incl a risk assessment and control analysis)
Risks Controls Engagement procedures WP ref

Duplicate Duplicate Inspect a sample of payments in the CPJ WP3-23

payments test and re-perform the duplicate test to
ensure . . . that there are no duplicate
payments/. . . that all payments are valid
Unauthorised Sign-off Inspect a sample of payment WP3-24
payments approval authorisation forms for sign-off approval
to ensure that all payments are
authorised

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Name of client and process: Cash payments
Period under review:
Scope:
Engagement objective:
Name of preparer: Date prepared:
Name of reviewer: Date reviewed:
 Subject: Engagement results
o Engagement objective:
 To determine whether all cash payments are valid
o Engagement procedures:
 Selected a sample of 30 cash payments from the CPJ
 Re-perform a duplicate test to identify duplicate
payments
o Engagement results:
 No duplicate payments were found
o Conclusion:
 The auditor concludes that all cash payments are valid
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Audit methodology
 Risk-based audit approach
 Cycle-based audit approach
 Assurance engagements
o Financial audits
o Compliance audits
 Rules and Regulations
 Policies and Procedures
 Best practice
• Adequate = sufficient on paper
• Effective = operate as intended
o Operational audits
 Flow of methodology
 Pages 16─17
(continued)
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 Audit methodology (cont’d)
 Risk-based approach
o Risks are measured i.t.o. likelihood and impact
o There are inherent risks and residual risks
(continued)

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 Audit methodology (cont’d)
 Cycle-based approach
o All I/S (Statement of comprehensive income) and B/S
(Statement of financial position) entries are divided
into groups
o Groups are structured to accommodate system flow
of transactions and are inter-related
o Cycles are interdependent
(continued)

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Audit methodology (cont’d)
 Cycle-based approach
o Financial audits
 Financial statements are divided into five categories
for auditing purposes:
• Revenue and receipts cycle R
• Purchases and payments cycle P
• Payroll cycle H
• Inventory and production cycle I
• Investing and financing cycle F
 Investing activities= PPE, investments and goodwill
 Financing activities= Share capital and reserves and
long- term loans / debentures
 Example page 13
(continued)
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Audit methodology
 Assurance engagements
o Financial audits (see previous slide)
o Compliance audits
o Operational audits

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