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The audit process

Audit basics

 Planning and understanding the

business

 Risk assessment

 Substantive testing

 Finalize / Completion stage

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The PwC audit powered by Aura
Overview

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Organizer

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Planning Activities view

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Understanding the entity and its environment
ISA 315.11

• Industry, regulatory and other external factors

• Nature of the entity
• Selection and application of accounting policies, including the reasons for changes
thereto
• Objectives and strategies and related business risks
• Measurement and review of the entity’s financial performance

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Researching Your Client
Individual Exercise

Tasks:

Research Liberate U Shoes by reading the

Learner Material - Understanding the
Entity - Liberate U Shoes.

Time: 15 minutes

We will then deliberate on the information

T provided

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Risk assessment procedures
How do I gain my understanding?

Inquiries of
management

Analytical
procedures

Observation and
inspection

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 Materiality

Per ISA 320.2...

Misstatements, including omissions,

are considered to be material if they,
individually or in the aggregate, could
reasonably be expected to influence
the economic decisions of users taken
on the basis of the financial
statements

PwC UTB/8
 Applying materiality on the job
You are auditing a telecommunications client and noted that the
accountant wrongly added a 1% charge to all local phone calls on
July 1, 2018 in the billing system.

Question
Q Do you believe that this would have a material
impact?

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 Applying materiality on the job

Q
Question
What if this error occurred more frequently,
for instance for every third phone call or on
more days during the year?
What impact would this have on materiality?

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 Applying materiality on the job

Answer

A The magnitude would be bigger and will likely

be material.

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 Applying materiality on the job

Q
Question
What if you discovered the error was a result
of the CFO deliberately over charging the
customer so the results for July would meet
the budget?
Would this error then become material?

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 Applying materiality on the job

Answer

A Yes. If the CFO is deliberately manipulating

the financial results this is material because it
indicates fraud which would dramatically
change our perception of the integrity of
management and our audit procedures.

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 Materiality

Overall materiality

Per ISA320.10, when establishing the

overall audit strategy, the auditor shall
determine materiality for the financial
statements as a whole
Our assessment of materiality at the overall
financial statement level is termed as overall
materiality
It is the maximum amount of misstatement
that could exist before information in financial
statements is considered misleading

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 Materiality

Performance materiality

Per ISA320.11, the auditor shall determine

performance materiality for purposes
of assessing the risks of material
misstatement and determining the nature,
timing and extent of further audit
procedures
It takes into account the
aggregation risk of individually
immaterial misstatements that
may cause the financial statements
to be materially misstated

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 Materiality

De-minimis SUM

The De-minimis SUM level is mainly

dependent on the client’s expectation of
misstatements to be communicated
to those charged with governance.

Misstatements below this level are

deemed to be trivial for the
purposes of the audit.

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The three components of audit risk
Inherent risk
The susceptibility of an
account balance or class of
transactions or disclosure
to misstatement, before
consideration of any
related controls.
Inherent risk +
PwC
Control risk
The risk that a material
misstatement will not be
prevented or detected
and corrected by the
client’s internal controls.
Control risk = Risk of Material
Detection risk
The risk that our audit
procedures will not detect
a material misstatement
that exists in the financial
statements.
Misstatement
UTB/18
 Brick analogy

Any material misstatement

Inherent Risk
at all?
Yes

Control Risk Caught by controls?

No

Detection Risk Caught by our audit?

No

Audit Risk Wrong opinion

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Risk of material misstatement (RoMM)

Nature of the risk

Likelihood of the risk occurring
Likely Magnitude of the potential misstatements

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PwC UTB/21
Knowledge check #1

Risk of material misstatement is

comprised of what two types of risks?

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Knowledge check #2

What are the three criteria for assessing

the level of inherent risk?

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Knowledge check #3

The audit team determined that a risk

has a high likelihood of occurring and
the likely magnitude exceeds overall
materiality. However, the client has
adequate controls addressing this risk,
so they decide to assess the risk as
normal. What has the audit team done
incorrectly?

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The PwC Audit Powered by Aura
Overview

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Obtaining Audit Evidence

Evaluate whether further evidence

is necessary from tests of details
and/or
substantive analytics

Tests of Details or
Substantive Analytics

Controls testing

Filling the Evidence Bucket

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Obtaining Audit Evidence

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 Tests of Details
Definition

One type of
substantive test
Involves the examination of
support for individual items that
make up balance sheet and profit
and loss accounts

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 Tests of Details
Examples of Procedures

Inspection

Reperformance
Inquiry
Observation
Recalculation
External
Confirmation

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Substantive Testing Overview

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Key characteristics:
• Preferred method
• Aims at establishing if there is material
monetary misstatement
• Items to be tested are selected based on
monetary value or higher risk
• Applied to either a specific part or the
whole of the account Targeted
• Results should not be projected to the testing
untested items in a population

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Key characteristics:

• Application to a representative
group whereby results can be
projected to the untested items
in a population Targeted
testing
• Homogeneous populations
Audit
• Can be combined with targeted sampling
testing
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Key characteristics:

• Particular attribute or
characteristic
• NOT testing monetary values
• NO project misstatements Accept-reject
testing

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The 4-step Process

Step 1 Step 2 Step 3 Step 4

Determine Define a Compute Investigate
suitability, significant differences significant
assess differences
difference
reliability of and
or
underlying data corroborate
and develop an threshold
with
independent evidence
expectation

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 Reliability of Audit Evidence
More Reliable
• Original documents
• Auditor obtained
evidence
• Written evidence
• External generated
evidence

Less Reliable
• Photocopies or facsimiles
• Audit evidence obtained
indirectly
• Oral evidence
• Client generated evidence

Audit evidence is most reliable when the client’s internal controls are effective.

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 Identified misstatements

The de minimis SUM

Identified
posting level is used to
misstatements
determine which
can arise from
identified misstatements
fraud or error Identified
will be posted to the
misstatements SUM
should be
posted to the
summary of
uncorrected
misstatements
(SUM)

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The PwC audit powered by Aura
Overview

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The Audit Opinion

Adverse
Opinion

Qualified
Opinion

Disclaimer
Opinion
of Opinion

Unqualified
Opinion

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Questions