Auditing and Assurance: Steps in Planning a New Client's Audit Report

This report provides a comprehensive overview of the auditing and assurance process, specifically focusing on the critical steps involved in planning a new client's audit. It outlines the procedures, including client acceptance, initial audit planning, understanding the client's business and industry, assessing business risks, and performing preliminary analytical procedures. The report uses AFT Pharmaceuticals Limited, an Australian Securities Exchange-listed company, as a case study, analyzing its financial entries and relevant audit tests. The aim is to provide a detailed guide for audit teams, emphasizing the importance of thorough scrutiny of financial records, risk assessment, and the calculation of financial ratios to ensure transparency and accountability. The report also addresses the challenges and advantages associated with each step in the audit planning process, providing a practical framework for effective auditing.

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AUDITING AND ASSURANCE 2
Executive Summary.
The purpose of this report was to critically brief various stems involved in audit process to an
audit team. The senior auditor also calculated financial ratios relating to AFT Pharmaceuticals
Limited. This is one of the companies listed under Australian Security Exchange with ASX code
ACW and GICS industry group of pharmaceuticals, biotechnology and life science. Therefore
the team of auditors aimed at analyzing annual reports of the company so as to scrutinize the new
client’s audit.

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Table of Contents
Executive Summary.....................................................................................................................................2
Table of Contents........................................................................................................................................3
Introduction.................................................................................................................................................4
Steps in planning the new clients audit.......................................................................................................4
Acceptance of client and performance of initial audit planning..........................................................4
Understanding the client’s business and industry...............................................................................6
Assessing client’s business risk............................................................................................................7
Performing preliminary analytical procedures....................................................................................8
Australian Security Exchange listed company under analysis......................................................................9
The financial entries of AFT Pharmaceuticals Limited as at 31st December 2016................................9
Audit tests.................................................................................................................................................10
Conclusion.................................................................................................................................................11
References.................................................................................................................................................12

AUDITING AND ASSURANCE 4
Auditing and Assurance
Introduction.
Auditing and assurance is a very critical aspect in development and accountability of any
company or a firm. It is a key aspect in management of all undertakings in achieving a complete
firm in terms of transparency and accountability. The purpose of this report is to critically
analyze key steps in planning the new client of one of the company listed under Australian
security exchange. According to the standards set by auditing and assurance requirements,
financial records and data need to be fully scrutinized in order to assess the viability and
vulnerability of a particular company in terms of financial management and resource allocations.
This is typically done by calculation of financial ratios of a company. The present and most
recent financial recorded documented in annual reports are very useful in audit process. As a
senior auditor in the firm of NY partners aim at forming a team of auditors to assess the new
client’s audit by use research analysis and computation of financial ratios. This report aim at
critically analyzing AFT Pharmaceuticals Limited(Chopra, 2012). This is one of the companies
listed under Australian Security Exchange with ASX code ACW and GICS industry group of
pharmaceuticals, biotechnology and life science. Therefore my team of auditors aims at
analyzing annual reports of this company so as to scrutinize the new client’s audit.
Steps in planning the new clients audit.
Typically, there are four main steps in planning the new client’s audit. These procedures
will form a clear base of an audit process in relation to client’s expectations for his or her
company or firm for this case. These steps include acceptance of client and performance of initial
audit process, understanding the business and industry of the client, assessment of client business
risk and performance of preliminaries analytical procedures. Auditing process involves audit
planning, control and recording (ISO 300) that will form basis of these four steps.
Acceptance of client and performance of initial audit planning.
This is a very crucial procedure in audit planning. The main reason for this step involves
accepting the client need for conducting auditing process. It is a fact that many companies limit
the auditing of their companies for no apparent reasons. They fear auditing their companies as if
they are anticipating some irregular and illegal undertakings within their firms that need not be

AUDITING AND ASSURANCE 5
revealed. Therefore accepting the clients wish to audit their companies is a very great progress
for auditing firms.
An initial audit planning need to be performed to as to form as base line of what to be anticipated
in the entire audit process of the company(Nickels, 2015).
For the purpose of this report, audit planning typically means development of a general
strategy with highly documented approach for anticipated nature, timing and expected extent of
the audit. For this case, the senior auditor need to brief his team so as to plan their work to enable
the team in conducting effective audit in a timely manner with a lot of efficiency. This step will
be included in auditing AFT Pharmaceuticals Limited. In addition, the form and nature of
performance of initial audit planning will be affected highly by the complexity and size of the
company (Bragg, 2015). AFT Pharmaceuticals Limited is a complex company with huge
commercial environment of operation. Therefore, performance of initial audit planning process
involves well established methods of processing transactions and significant reporting of
requirements to which AFT Pharmaceuticals limited or the new clients is subjected to.
Advantages of accepting the client and performance of initial audit planning.
 A good audit planning enhances proper division of labor and specialization
between the interim and the final audit. This is very important in eliminating any
repetition of tasks that have been done.
 It also put into consideration times in which information is needed for audit
plan(Saloner, 2009). This will promote cooperation by limiting disruptions of
client’s work.
 Again, it assists in completion of work via efficient use of time and acute
allocation of tasks to audit team.
 It enhances devotion of attention to crucial audit areas by identification of
potential problematic areas within the audit affecting a particular client.
 It also helps ion active utilization of junior auditors in coordination of tasks done
by senior auditor and other team members.
 It helps in control and direction of audit tasks by senior auditor.
 Lastly, it brings forth the anticipated channels of attaining the objectives of the
audit.

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Understanding the client’s business and industry.
This step is crucial in audit planning. To have proper scrutinization of audit of any client,
the business enterprise and industry ventured is of great importance. This will help the audit team
in understanding the various terminologies in preparation of annual reports to avoid any loophole
during the actual audit process(Wild, 2014). It is also important in understanding the standard
rules and regulations bidding that particular business or industry. This will enable audit team to
understand quality control and to conduct peer review.
For the purpose of this step, quality control is described as procedures and policies that
are critically put into consideration by the auditor to make sure that the audit conducted by the
audit team adheres to the quality standards established by the accounting profession as well as
quality standards of audit firm. Like in this case AFT Pharmaceuticals Limited deals with
biotechnology and pharmaceuticals. Therefore the auditor will prepare on that field. Therefore,
by knowing quality control and peer review concerning the client business and industry, an
independent review based on auditing practices and accounting standards will be conducted by
audit firm (Miller, 2015). This section also indicates the various sources of information on
client’s nature of business and industry.
Various sources of information on client’s nature of business and industry.
It is important for audit team to obtain an understanding concerning the information
systems of any client. This would include the related business and industry process as well as all
the relevant financial reports in annual report. This is clearly asserted by ISA 315. Therefore, in
order to perform an audit of financial records, audit team need to obtain knowledge on client’s
business and industry so as to understand transactions, events and practices that brings
significant effects on those financial records or audit report generated from audit team
judgment(McGregor, 2016). Before accepting an engagement, it is very important for audit team
to obtain a preliminary knowledge of the industry ventured by the client and any management,
ownership as well as operations of business entity under audit. To fully understand client’s
business and industry, the following sources are very important and relevant.
 Business and industry experience in the previous proceedings.
 Engaging into discussion with community within the business.

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 Researching information from other auditors and legal advisors who have
provided services to the business previously.
 Scrutinizing publications and various journals of the industry and the business
entity.
 Visits to plant facilities and any other relevant places of business.
 Scrutinizing all relevant documents including budgets, operations and system
manuals, annual financial reports as well as minutes of meeting conducted within
the auditing timing.
Finally, it is a duty of senior auditor to ensure that audit assistants obtain any relevant and
enough knowledge of client’s industry and business entity so as to carry out delegated tasks.
Assessing client’s business risk.
It is important to assess the business risks of clients in planning audit process so as to
include those risks in the audit report. In assessing the client’s business risk, senior auditor needs
to set out audit approach to indicate how financial records need to be audited within the budget
of audit work. It is important to get a summary indicating full terms of engagements that are
highly needed to set out the nature of audit to be conducted by audit team(Arens, 2016). Again, a
time schedule needs to be provided indicating preferred dates of the timing of the audit.
In that case, risks need to be assesses by recording any changes concerning a particular client
since the last audit was conducted. The AFT Pharmaceuticals Limited will be subjected to risks
of medical regulations and diagnosis of various terminal illnesses. There will be financial report
on the same by AFT Pharmaceuticals Limited. Audit assistant need to gather information about
the client and details of client’s contracts. In assessing client’s business risk, there are difficulties
faced in implementation of audit plan.
 The firm may have numerous clients with corresponding year ends. This risk
makes allocation of audit team difficult as well as timing required.
 Any abrupt shifts in the business and industry of the client need more allocation
of time that need to allocate outside the planned time.
 Some clients lack co-operation by declining to offer necessary information and
explanations in appropriate time(Loughran, 2010). This will place the client’s
business in risks.

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 Lastly, there could be shortages of audit staffs due to low turnover during the
actual audit process. This will affect the timing of the arranged audit thus putting
the client’s business into risks.
Performing preliminary analytical procedures.
This is the very last step in planning a new client’s audit. However, it is very crucial as
well. In carrying out preliminary analytical procedures and in planning audit of a new client, the
senior auditor together with his audit team needs to carry out a set of procedures(Fletcher, 2012).
They are analyzed into detailed chronological ways.
 The auditor and his time should carry out a preliminary review of the client and
his business entity. This procedure will involve gathering a clear understanding of
the nature of the client’s industry and business entities.
 The audit team need to engage into a discussion with management with an aim of
obtaining an understanding of their structure and a clear realization of the current
circumstances in operations of the client and other aspects that would critically
impact the internal control system and accounting standards of the new client.
 There should be appropriate and effective communication with previous auditor
of the client so as to gather information that seems relevant to the audit of the new
client.
 It is also good to gather preliminary understanding of the nature of the client’s
accounting and internal control system(Whittington, 2015). This will highly help
in finding out the level by which the auditor will depend on the internal control
system of the client.
 The audit team needs to put into considerations any legislations and accounting
standards that could have implications towards the new client’s audit.
 The senior auditor needs to scrutinize the nature and timing of reports and
relevant communications of the client so as to accommodate the timings in the
audit plan.
 The senior auditor needs to find out the number of audit team members need and
the timing of the audit visit.

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 Lastly, the senior auditor need to prepare an audit planning memorandum that
sum up the scope of the tasks under the engagement and the strategic plan to be
cultivated so as to meet the client’s requirements.
Australian Security Exchange listed company under analysis.
The company under analysis in this section is AFT Pharmaceuticals Limited. This is one
of the companies listed under Australian Security Exchange with ASX code ACW and GICS
industry group of pharmaceuticals, biotechnology and life science(Daft, 2015). Therefore my
team of auditors aims at analyzing annual reports of this company so as to scrutinize the new
client’s audit.
By use of most recent annual reports, the team wishes to calculate the financial ratios
under consideration. The assessment of the new firm by researching information from academic
sources, news, and newspaper and industry magazine will be used to generate the annual reports
of AFT Pharmaceuticals Limited. The team has extracted the financial record of AFT
Pharmaceuticals Limited so as to calculate the related financial ratios.
The financial entries of AFT Pharmaceuticals Limited as at 31st December
2016.
Item Amount
Current assets 400,000
Current liabilities 320,000
Stock 200,000
Total long term debt 320,000
Capital employed 650,000
Gross profit 280,000
Sales 1,200,000

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Earnings attributed to
equity shareholders
960,600
Equity 1,460,000
Credit sales 840,000
Average debtors 360,000
Credit purchases 720,000
Average creditors 260,000
From the above entries extracted from annual report of AFT Pharmaceuticals Limited, the
following ratios are calculated.
Current ratio = current assets÷current liabilities. 400,000÷320,000 = 1.17647059. The
interpretation of this ratio is that AFT Pharmaceuticals Limited has more current assets than
liabilities thus high ability to meet short term maturity obligations as and when they fall due.
Acid test ratio = (current asset – stock) ÷current liabilities = (400,000-200,000) ÷ 320,000
= 0.625. The interpretation of
this ratio indicates that the company is in poor liquidity position when stocks form most
of the total current assets.
Debt ratio = (total long term debt ÷ capital employed) × 100 = (320,000 ÷ 650,000) × 100 =
49%. A company is highly geared if the debt ratio is more than 50%. The 49% indicate that the
company is partly geared.
Gross profit margin = (gross profit ÷ sales) × 100 = (280,000 ÷1,200,000) × 100 = 23.3333. The
interpretation indicates that the company cost of production has been controlled perfectly in
relation to distribution and administration costs.
Return on equity = (earning attributed to equity shareholder ÷ equity) ×100
= (960,600 ÷1,460,000) ×100 = 65.79. This value indicates high efficiency by
which AFT company other supplier’s funds generate returns to shareholders.

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Debtors turnover = credit sales ÷ average debtors = 840,000 ÷ 360,000 = 2.3333. This ratio
indicates number of times debtors pay within the year. There is high efficient management of
credit by the company.
Creditors turnover = credit purchases ÷ average creditors = 720,000 ÷ 260,000 = 2.769. The
interpretation of the ratio shows that creditors are paid approximately three times by the
company during the year.
The above represent the required financial ratios as at 31st December 2016 extracted from AFT
Pharmaceuticals Limited annual reports.
Audit tests.
There are audit tests that need to be performed when handling audit and evidence collection.
1) Inspection: this involves examination of tangible assets, documents and financial and
annual records for purpose of audit process.
2) Observation: this is based on analyzing procedures that are performed by other auditors
such as counting of stock of client personnel.
3) Inquiry and confirmation: this involves gathering information from the company such as
debtor circularization.
4) Recalculation and re-performance: it is concerned on scrutinization of arithmetic
accuracy of accounting records by performance of independent calculations.
5) Analytical procedure: this indicates consistency between financial data and anticipated
patterns under investigation.
Conclusion.
In conclusion, the audit team is now in a position to plan the new client audit. This
process is very important in ascertaining the accountability of companies and firms on
maintaining tenacity in their methods of operation and promote adherence to the set accounting
and auditing and assurance standards altogether.

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References.
Arens, A.A. (2016). Auditing and Assurance Services, Student Value Edition. Pearson.
Bragg, S.M. (2015). Accounting for Inventory. Accounting Tools.
Chopra, S. (2012). Supply Chain Management. Pearson Education.
Daft, R.L. (2015). Management. South Western College Pub.
Fletcher, F. (2012). Business Problem Solving. Routledge.
Loughran, M. (2010). Auditing For Dummies. For Dummies.
McGregor, D. (2016). The Human Side of Enterprise. McGraw-Hill Education.
Miller, T.L. (2015). Horngren’s Financial and Management Accounting. Pearson.
Nickels, G.W. (2015). Understanding Business (Irwin Introduction to Business). McGraw-Hill
Education.
Saloner, G. (2009). Strategic Management. Wiley Publishers.
Whittington, R. (2015). Principles of Auditing & Other Assurance Services (Irwin Accounting).
Rental Book. McGraw-Hill Education.
Wild, J.J. (2014). Fundamental Accounting Principles Handcover. McGraw-Hill Education.