3. Planning the Assignment

Question 1

Overtrading

Answer 1

Cash decreasing = cash flows out to fund the increases in working capital

Receivables increasing = the company expands without the resources the support the expansion

Question 2

Control risks

Answer 2

• High turnover of staff in the control department - increases the risk that the internal controls in place will not be effective
• Senior management regularly override the system of controls

Question 3

Audit strategy

Answer 3

BIG PICTURE

General strategy: scope, timing, direction of the audit + guides the development of the audit plan

• Understanding the entity’s business
• Understanding the entity’s environment
• Understanding the entities accounting + related internal control
• Materiality + risk
• Resources

The results of initial analytical calc, identification of specific audit risks, details of eco factors + industry conditions

Question 4

Audit plan

Answer 4

More detailed: nature, timing, extent of audit procedures required to obtain sufficient + appropriate audit evidence

Question 5

Understanding the entity

Answer 5

Analytical procedures
Enquiry (shall: management, may: 3rd parties)
Inspect
Observe
Understand the entity

Question 6

Current ratio

Answer 6

current assets/current liabilities

Assess the ability to pay current liabilities

Question 7

Quick ratio

Answer 7

current assets (-inventory)/current liabilities

Assess the ability to pay current liabilities

Question 8

Materiality thresholds

Answer 8

Revenue: 0.5 - 1%
Assets: 1-2 %
Profits: 5-10%

Question 9

Performance materiality

Answer 9

The amount set by the auditor below materiality for the FS - reduce to a v low Po that the aggregate of uncorrected + undetected misstatements exceeds materiality for the FS as a whole

~ 70% materiality

Question 10

Control risk

Answer 10

The risk that a misstatement will not be prevented, or detected + corrected, on a timely basis by the entity’s internal control

• high turnover of staff in the control department
• senior mgmt regularly override the system of controls

Question 11

Auditors responsibilities re: fraud

Answer 11

Identify + assess the risks of mm due to fraud

Design + implement appropriate tests in response

Respond appropriately to actual or suspected fraud identified