THE AUDIT PROCESS

Presentation by:

CPA Donald OmengoManager, Audit, KPMG KenyaThursday, 15th February 2018

THE AUDIT PROCESS

Presentation by:

CPA Donald OmengoManager, Audit, KPMG KenyaThursday, 15th February 2018

Uphold public interest

Presentation agenda

Internal Control Assessment and Risk Profiling

Obtaining Audit Evidence

Audit

Users of financial statements

Audit

Independent Auditor

…You

Audit

Detection

Risk

Audit

Risk

Risk of

Material

Misstatement

Audit

Testing is driven by

Audit Risk

Activities covered in an audit

Engagement Setup

Risk Assessment

Testing Completion

Activities covered in an audit (Cont..)

The four steps can be further broken down into:

Pre-engagement

Planning an audit Understanding the entity and its internal control

environment Risk assessment procedures

Documentation and audit evidence Audit completion Reporting

Overview of key concepts

Quality and Risk Management

Quality and Risk Management policies and procedures help usdeliver consistently high quality engagements, behave ethicallyand with integrity, and protect our brand and reputation.”

Audit Risk

“The risk that the auditor expresses an inappropriate auditopinion when the financial statements are materiallymisstated”.

Overview of key concepts (Cont..)

Fraud - As per ISA 240.11(a):

“Fraud is an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use ofdeception to obtain an unjust or illegal advantage”.

Professional Skepticism

“Professional skepticism is an attitude that includes aquestioning mind, being alert to conditions which may indicatepossible misstatement due to error or fraud, and a criticalassessment of audit evidence”.

Entity and control environment

Industry, regulatory, and other external factors

Nature of the entity

Objective and strategies and related business risksMeasurement and review of financial

performance Internal controls Consideration of the information system relevant

to financial reporting

Controls over Financial Reporting

Preventive - Aimed at avoiding the occurrence of misstatements in the financial statements

Example: Segregation of duties

Detective - Designed to discover misstatements after they have occurred

Example: Monthly bank reconciliations

Controls over Financial Reporting (continued)

Corrective - Needed to remedy the situation uncovered by detective controls

Example: Backups of master file

Controls overlap

✓ Complementary – function together✓ Redundant – address same assertion or control

objective✓ Compensating – reduces risk existing weakness

will result in misstatement

Components of Internal Control

The Control Environment

Risk Assessment

The Accounting Information and Communication System

Control Activities

Monitoring

Control environment Factors

Integrity and ethical values

Commitment to competence

Board of directors or audit committee

Management philosophy and operating style

Organizational structure

Human resource policies and practices

Assignment of authority and responsibility

Risk Assessment - Factors Indicative of Increased FR Risk

Changes in the regulatory or operating environment

Changes in personnel Implementation of a new or modified

information system Rapid growth of the organization Changes in technology affecting production

processes or information systems Introduction of new lines of business, products,

or processes

Risk assessment procedures

Identification and assessment risks of materialmisstatement at both the financial statement leveland assertion level. The auditor has to considerboth inherent and control risks.

The assessed level of risk of material misstatementis used to determine the acceptable level ofdetection risk and to plan the auditing proceduresto be performed.

Risk assessment procedures (cont..)

The engagement team is also required to assessthe risks of material misstatement due to fraud.The team at the planning stage is supposed tosummarize the key risks attached to the entity andfactors that may minimize or eliminate thoserisks.

Control activities

Performance reviews

Information processing

✓ General control activities✓ Application control activities

Physical controls

Segregation of duties

✓ Segregate authorization, recording and custodyof assets

Monitoring

Ongoing monitoring activities

✓ Regularly performed supervisory and management activities

✓ Example: Continuous monitoring of customer complaints

Separate evaluations

✓ Performed on non-routine basis

✓ Example: Periodic audits by internal audit

Audit Evidence

QualityQuantity

Sufficient and Appropriate

ReliableRelevant

Sufficient Audit Evidence

Influenced by:

✓ Competence of evidence

✓ Risks involved

✓ Materiality and tolerable error

✓ Experience

Appropriate and reliable Evidence

Appropriate influenced by:

Relevant

Satisfies audit objective

Timely

Reliability is influenced by:

Independence of source

How the evidence is obtained

Condition of internal control

Substantive Testing – Trade and other payables

Significant accounts:

Liabilities Expenses

Trade payables Cost of sales

Accrued expenses Other expenses

Substantive Testing – Trade and other payables

Trade Payables:

The liability is known with certainty.

Invoice received as of the end of the reportingperiod.

Accrued Expenses:

The liability is, generally, a calculation.

Invoice not yet received as of the end of thereporting period.

Substantive Testing – Trade and other payables (Cont..)

Relevant assertions

Completeness

Existence

Accuracy

Valuation

Rights and Obligation

Presentation and Disclosure

Substantive Testing – Trade and other payables (Cont..)

Nature of accrued expenses:

Expenses that were incurred as of the end of the reporting period but were not entered into Trade Payables.

Amounts are calculated based on information available.

Examples:

Accrued utilities expense, rent expense, interest expense, professional fees, etc.

Accrued salaries and bonus.

Goods received not invoiced.

Substantive Testing – Trade and other payables (Cont..)

Substantive audit procedures:

Trade Payables Sub-ledger Reconciliation - CEA of Trade Payables

Search for Unrecorded Liabilities - CA of Trade Payables and CA of Accrued Expenses

Identification and Testing of Accrued Expenses - CEA of Accrued Expenses

Substantive Testing – Trade and other payables (Cont..)

Substantive audit procedures (Search for Unrecorded liabilities) - Example procedure:

Obtain the details of invoices that were received, recorded, or paid after the period end.

Select specific transactions for testwork.

Inspect the evidence and determine if the invoice relates to services rendered or goods received during prior period or current period.

Substantive Testing – Trade and other payables (Cont..)

Substantive audit procedures (Search for Unrecorded liabilities) Example procedure (continued):

If the invoice relates to prior period - included in Trade Payables or Accrued Expenses at yearend.

If the invoice does not relate to prior period - excluded from Trade Payables and Accrued Expenses at yearend.

Key points to remember

Consider results from controls testing performed before you begin to perform substantive audit procedures.

Understand the objective of the substantive audit procedures you perform.

Understand the connection between the Statement of Financial Position and the Statement of Profit and Loss and Other Comprehensive Income.

Questions?

Thank you

Donald Omengo

Manager, KPMG Kenya

0709 576 451

domengo@kpmg.co.ke