1. Intro to audit

Question 1

management assertions

Answer 1

SFP (A, L, E)
1. Rights & Obligations
- do assets & liabilities belong to entity?

2. Completeness
   - have all the transactions & events been recorded?
3. Valuation & allocation
   - has everything been recorded at the correct amount?
4. Existence
   - does it actually exist?

SPL (income, expense, sales & profit)
1. Accuracy
- has everything been recorded correctly?

2. Cut-off
   - is the transaction recorded in the correct FY?
3. Classification
   - are the transactions recorded in the correct accounts?
4. Completeness
   - have all the transactions & events been recorded?
5. Occurrence
   - did the transaction really happen?

Question 2

types of audit procedures to obtain audit evidence

Answer 2

1. inspection of records & documents
2. inspection of tangible assets (e.g asset sighting)
3. recalculation
4. scanning
5. inquiry
6. observation
7. confirmation
8. analytical procedures
9. reperformance

Question 3

Business risk?

Answer 3

risk that auditor may be sued/ professional reputation may be damaged

Question 4

Audit risk?

Answer 4

failed to detect material misstatements

AR = IR x CR x DR

Question 5

inherent risk?

Answer 5

how exposed the account is to being misstated just by its nature (complex transactions)

High IR = complex, non-routine

Question 6

control risk?

Answer 6

risk that internal controls will not prevent & detect material error/ fraud.

High CR = not effective control in preventing erorrs

Question 7

risk of material misstatements formula?

Answer 7

RMM = IR x CR

Question 8

detection risk?

Answer 8

risk that audit procedures failing to detect misstatements

low DR = more work for auditor

Sampling risk vs Non-sampling risk
risk that sample risk that audit tests do
chosen may not not uncover existing
represent whole exceptions in sample
population

controllable by auditor through evidence gathering and audit planning

Question 9

Audit risk = IR x CR x DR
(acceptable) (high) (high) (low)
(acceptable) (medium) (low) (medium)

Question 10

materiality > error = ?
materiality < erorr = ?

Answer 10

true and fair
not fair and fair

high audit risk > high materiality > low sample size > low audit work

Question 11

overall materiality formula?

Answer 11

normalised NPBT (- one-off gains/+loss) x 5%

compare with total misstatement,
if total misstatement > OM,
client corrects - unmodified opinion
client don’t correct - qualified/adverse opinion

if total misstatement < OM,
suggest leave - unmodified opinion

Question 12

performance materiality formula

Answer 12

50% x OM

compare with each misstatement
if each misstatement > PM,
client corrects - unmodified opinion
client dont correct - qualified/ adverse opinion

if each misstatement < PM,
suggest leave - unmodified opinion

Question 13

identifying high risk accounts

Answer 13

preliminary analytical procedures
- auditors to set expectations
- compare unaudited TB to auditor’s expectations
- > 5% wld be considered high risk account

Question 14

evidence gathered should be ______ & _______?

Answer 14

relevant & reliable (external, documented evidence, original)