2) Planning and performing engagements

Question 1

Hot review

Answer 1

When: Before signing on ALL listed and selected HIGH risk clients

Provide objective evaluation on significant judgements made to prevent inappropriate opinions issued

Involves:
Review of F.S. and auditor report
Discussion of significant matters with engagement partner
Review of judgements and conclusions
Evaluation of firms independence

Question 2

Cold review

Answer 2

After sign off to a sample of audit files.

Seek reasonable assurance over firms system of quality control procedures so corrective actions may be taken

Ensures compliance with:
Firms procedures,
ISAs,
Ethical standards etc

Question 3

Audit strategy

Answer 3

Covers matters such as materiality, risk, audit approach, use of external/internal audit, timings, team, budget and deadlines

Question 4

Audit plan

Answer 4

MORE Detailed than audit strategy:

sets out nature, timing and extent of planned audit procedures (including risk assessment procedures). Further procedures for assertion levels

Question 5

Materiality

Answer 5

An item is material if its omission or misstatement could influence the economic decision of users taken on the basis of the financial statements.

Question 6

Materiality thresholds by value

Answer 6

Revenue:
0.5% - 1%

Gross assets:
1% - 2%

Profit before tax:
5%

Question 7

ISA 300

Answer 7

Planning an audit of financial statements

Question 8

Material by nature

Answer 8

Any matters relating to directors or related parties
£1 that turns a profit into a loss or that changes thresholds the company operates in (SME/large)
Accounting policies or disclosures
Debt / loan covenants e.g. gearing ratio
Regulation
Net asset → net liability

Question 9

Analytical procedures

Definition and requirements

Answer 9

‘Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data’

1. MUST be done at planning to identify high risk areas
2. Also used to form substantive procedures at testing
3. MUST be used to assist in forming over all conclusion at completion (ensure team has focused on high risk areas)

Question 10

Analytical procedures: BENEFITS

Answer 10

Uses information outside accounting records eg budgets
Identifies items that detailed tests may miss
Allows comparison of data from different sources
Efficient

Question 11

Analytical procedures: LIMITATIONS

Answer 11

Good knowledge of the business is required to understand results (e.g. growth in start-up vs FTSE100)
Experienced staff required
Consistency of results may conceal material error
Tendency to carry out procedures mechanically
Reliable data may not be available

Question 12

ISA 315/330

Answer 12

Understand the entity and its environment

Question 13

Letter of engagement (ISA 210) - Contract between auditor and client - signed BEFORE audit starts

Contents:

Answer 13

Auditor’s responsibilities
Director’s responsibilities
- Preparing and the presentation of the financial statements (full/interim) or forecasts (profit/cashflow).
- That management should provide reporting accountant with all relevant information and source data that was used in developing assumptions.

Purpose + scope of work

• To examine the statements/forecasts for the year(s) XXXX and consider if they are true and fair/reasonable of underlying assumptions and whether they have been properly prepared.
• State the level (reasonable/limited) of assurance that will be given for the engagement and how it will be presented (positive/negative).

Form of report
Test basis therefore unavoidable risk of misstatements not being discovered
Access to books and records
Practical matter eg: fees, timings

Limiting liability:

• Use and distribution of forecasts should be restricted to management for the purpose of (obtaining funds from bank).
• Forecast/interim report should not be shown to any other parties without the reporting accountant’s permission.
• A liability cap stating the maximum monetary amount of damages that can be claimed against the reporting accountant may be included.
• There should also be a caveat warning that there could be differences between the forecast and actual performance due to unforeseen circumstances

Question 14

Engagement quality control reviewer - ISQC 1

Answer 14

EQCR must be an technically competent and of adequate experience of the audited entities industry and listed companies (Partner).

Must be eligible for appointment as a statutory auditor but not involved in the performance of the audit or engagement team he/she is reviewing. I.e. they must be completely independent and objective.

Must have authority to objectively evaluate judgements