3: Process of assurance: Planning audit

Question 1

What is the objective of the auditor in regards to planning?

Answer 1

Plan audit so it will be performed in an effective and efficient manner

Question 2

What are the objectives of planning? Give 6

Answer 2

🞂 Ensure appropriate attention is devoted to important areas of the audit
🞂 Identify potential problems and resolve them on a timely basis
🞂 Ensure that the audit is properly organised and managed
🞂 Assign work to engagement team members properly
🞂 Facilitate direction and supervision of engagement team members
🞂 Facilitate review of work

Question 3

What is the audit strategy?

Answer 3

Sets scope, timing and direction of audit.

Question 4

What is the audit plan

Answer 4

More detailed than audit strategy. Sets out nature, timing and extent of audit procedures.

Question 5

What is the 5 points of overall audit strategy?

Answer 5

1. Understanding the entity’s business - understand locations, company structure, experience and integrity of management.
2. Understand entity’s (UE) environment - Understand economic and industry conditions.
3. UE accounting and related internal controls systems - client accounting policies. Reliability of clients’ sustems for detecting and preventing fraud.
4. Materiality and risk - basis and calculation of materiality and results of risk assessment.
5. Resources - team members involced, budgeted hours, timing and fee.

Question 6

Why is understanding the entity important?

Answer 6

• Comply with ISA’S
• Identify key risks
• Determine level of materiality
• Improve efficiency of audit and manage costs

Question 7

How is understanding the entity done?

Answer 7

• Talk to management
• Review prior years financial statement and audit file.
• Site visit, check media/company website

Question 8

What are the 5 components of understanding the entity and its environment?

Answer 8

Nature of entity - Business operations: nature of revenue source.

Objectives and strategies - Effects of implementing a strategy, leading to new accounting requirements and business risk from improper implementation.

Entity’s financial performance - key ratio/operating stats

Internal control - Control activities, risk managment, information systems, monitoring.

Industry, regulatory, & external factors - economic activity, market and competition (s&d) and accounting principles.

Question 9

What is professional sceptism ?

Answer 9

an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.

Question 10

What stage should analytical procedures be used in?

Answer 10

Risk assessment stage

Question 11

What is analytical procedures looking for?

Answer 11

• Relationships between sets of data both financial and non-financial.
  Comparisons involve reviewing:
• Prior periods
• Budgets
• Ratio analysis
• Non-financial info
• Industry information

Question 12

What is a material matter?

Answer 12

If its omission (left out) or misstatement (incorrect) could influence the economic decisions of users taken on the basis of financial statements.

Question 13

What are the methods of assessing materiality values?

Answer 13

Take a weighted average of the following: RAP
Revenue - 0.5-1%
Assets - 1-2%
Profit before tax - 5-10%

Question 14

Why does the level of materiality need to be reviewed?

Answer 14

• Draft accounts are altered (due to material error)
• External factors may cause changes in risk estimates.

Question 15

Define audit risk

Answer 15

The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Question 16

What are the three types of risk

Answer 16

Inherent risk
Control risk
Detection risk

Question 17

Explain an inherent risk and give examples

Answer 17

• A factor that increases the susceptibility of an assertion to material misstatement (how susceptible something is to being wrong). E.G.
• Cash based businesses
• Profit related pay may influence managers
• Risk of not complying with accounting standards
• Management under pressure

Question 18

Explain a control risk and give examples

Answer 18

The risk that the internal controls fail to pretect material misstatement. Split into environment and activities.
Environment:
- Integrity and competence of employees (collusion)
- Existence of policies and procedures (annual leave - everyone can’t take at once)

Activities: PARIS-V
- Physical or logical controls
- Authorisation
- Segregation of duties
- Reconciliations
- Verifications
- Information processing and general IT controls

Question 19

Explain a detection risk and give examples

Answer 19

The risk that audit procedures fail to detect a material misstatement. Split into Sampling risk and non- sampling.

Sampling:
- Due to not testing 100% of population

Non-sampling risk (incompetence)
- Recent appointment
- Rush job
- Poor approach (no planning)
- Familiarity threats e.g. lacking objectivity & professional scepticism.

Question 20

How should the auditor identify and assess risks. 4 steps

Answer 20

1. Identify risks through obtaining understanding of the entity and its environment. e.g. analytical procediures, enquiry, observation, risk register.
2. Assess identified risks and what can go wrong at the assertion level. e.g. valuation of inventory overstated. Therefore, can either accept/eliminate/manage/reduce risk.
3. Consider whether risks are of a magnitude that could result in a material misstatement. Affects the testing that needs to be done: TOC (test of controls), substansive testing.
4. Design tests to respond to the risks identified.

Question 21

What is the difference between fraud and error?

Answer 21

-Fraud is an intentional act that may result in the financial statements being misstated
-Errors are unintentional

Question 22

What are managements responsibility in relation to fraud?

Answer 22

• Both preventing and detecting fraud and error.
• Do so by putting in place internal controls and creating a culture of honesty and ethical behaviour.

Question 23

What are the auditors responsibility

Answer 23

Responsible for obtaining reasonable assurance that the financial statements are free from material misstatement. Objectives: DIR
- Identify and assess risks of matieral misstatment due to fraud
- Design and implement appropriate tests in response (Enquiry/observation)
- Respond appropriately to actual or suspected fraud identified. (e.g. money laundering reporting officer)

Question 24

What are the two types of fraud?

Answer 24

FM

Fradulent financial reporting - intenional misstatement/omission to deceive users of financial statements

Misappropriation of assets - theft/misuse of entity’s assets.