5. Planning An Audit (Development) Flashcards
Justifying risks: Things to consider:
- Misstatement?
- Under/Overstatement?
- Difficulties gathering audit evidence
Justifying risks: Evidence to use
- %s
- Ratios
- Financial -> Non-financial info
(E.g. revenue per contract)
Describing audit procedures: Things you can consider
Substantives and tests of control
Audit procedures: 3 things they have to contain
- Action (ISA 500 procedures)
- Source (People, assets, documents)
- Objective (ISA 315 assersions)
Some risk repsosnse procedure examples
Evaluate and test controls over…
OBT!
Data analytics
Obtain a breakdown/schedule of [ ] and agree a sample of items to [ ] to
Confirm [ ]
Reconcile amounts recorded for cash sales (e.g. till rolls) with amounts banked
Discuss the estimate with management
Evaluate the reasonableness of their assumptions and compare to [ ]
Reperform management calculations of [ ] and trace the amounts to supporting documentation, such as…
Inspect/review [ ] to assess [ ]
Obtain a written representation from management regarding [ ]
Identify if journal entries were authorised by an appropriate person
Agree a sample of [ ] and ensure [ ]
Enquire of management as to whether [ ]
Review the notes to the financial statements to ensure [ ] has been properly disclosed
Recalculate [ ] to ensure [ ]
Review board minutes for details of []
Risk response procedures: FX transactions
Re-perform sample of translations
Agree rates to reliable 3P source
Accounting estimates: definition
Monetary amounts
Subject to estimation uncertainty
Estimation uncertainty definition
Susceptibility to inherent lack of precision in measurement
E.g. from inherent limitations of preparer’s knowledge
Some common estimates to look out for
Inventory obsolescence
Depreciation of PPE
Valuation of financial instruments
Pending litigation
Fair value of assets/liabilities
Impairment
Non-monetary exchanges
Revenue of long term contracts
OBT: What does understanding accounting estimates consist of?
Understanding:
1. Entity
2. Internal control
3. FRF
What does the auditor’s risk assessment focus on?
Inherent risk factors
E.g. degree of uncertainty within estimate, how subjective and complex the matter is
What is used to assess Mgmt’s point estimate?
auditor’s point estimate
Mgmnt’s point estimate definition
Amount elected for disclosure of estimate
OBT: How to assess mgmt estimates?
Either:
- Obtain evidence of subsequent events
(up to audit report date) - Test how management made the estimate
(method, assumptions, data, estimation uncertainty) - Develop own estimate
(When no reliance can be placed on mgmt estimate)
Sustainability risks on estimates examples
Fair values
Impairment of NCAs
Climate provisions/contingent liabilities
What can cause uncertainty when auditing estimates?
Tech advances
Regulatory framework updates (e.g. gov)
Break-up basis: 3 things
- No non-current assets/liabilities
- Assets valued at recoverable amount
- Provisions maybe required for new costs e.g. redundancies
OBT: Auditor’s responsibilities in relation to going concern?
Obtain evidence for:
1. Whether material uncertainty exists re. going concern
2. Appropriateness of mgmt use of going concern basis
When should the auditor consider going concern?
ALL times in audit
Procedures to assess going concern
- Mgmt inquiries (assess bias)
- Review future plans
E.g.
Forecasts & projections
Latest interim/mgmnt accounts - Review borrowing facilities
(And other finance)
Considering if loan covenants are likely to be breached - Review board/mgmnt minutes
Potential 3Ps an auditor will use?
- internal audit
- Experts
- Service organizations
- Sub auditors
3P reliance: Normal evidence taken from internal audit?
Control reliance
OBT: Steps for assessing reliance on internal audit
- General assessment
- Specific assessment
- Conclude
OBT: Steps for assessing reliance on internal audit: General assessment
Assess internal audit function:
-
Objectivity
(Status, reporting deadlines) -
Competence
(resources, training/proficiency) - Systematic and disciplined approach
(planning, supervision, review, documentation, quality management)
OBT: Steps for assessing reliance in internal audit: Specific assessment
Assess internal audit specific work:
- Properly planned, performed, supervised, reviewed, documented?
- Sufficient appropriate evidence to support auditor’s conclusions
- Conclusions reached appropriate?
OBT: Steps for assessing reliance on internal audit: Conclusion
- Test IA work (e.g. observe procedures)
- Extend IA procedures if concluded not adequate
IA good performance indicators
- Progress compared to planned work
- Recommendations accepted as a percentage of recommendations made
- Total time taken for an assignment compared to plan
- Number of reports produced within target dates
- Feedback from users of internal audit.
Can auditors use IA for direct assistance?
No
Examples of use of experts
- Legal contracts
- Valuation (land, buildings, financial instruments)
- Tax
- Data analytics
Environmental
1. Decommissioning plan costs
2. Repairing environmental damage (from regulatory change)
OBT: Procedure for assessing expert
- General assessment
- Specific assessment
- Conclude
Service organisations examples
Payroll, facilities mgmnt
OBT: Process when outsourced operations service organizations
- Understand outsourced services
- Considers access to sources of evidence
- Assess risks arising
How do service organisations often provide evidence of their reliability?
Provide assurance reports
Group audits: Who is responsible for forming opinion on group FS?
Group engagement partner
Is separate materiality determined for group FS?
Yes
Understanding component auditor: General assessment
- Compliance with ethical requirements (independence)
- Professional competence
- Whether the group audit team will be able to be involved in the work of the component auditor, if necessary, to obtain sufficient appropriate evidence
- Applicable regulation for the component auditor
Understanding component auditor: Specific assessment
- Communicate its requirements to the
component auditor - Request communication from the component auditor.
Understanding component auditor: Conclusion
- Evaluate component auditor’s work
- If inadequate, decide which additional procedures need to be performed
OBT: Group auditor should communicate to component auditor
- work to perform
- form and content of communications
- confirmation that component auditor will cooperate
- ethical requirements relevant to
the group audit - component materiality
- significant risks that are relevant to the component audit
- list of related parties.
OBT: Component auditor should communicate to group auditor:
- Confirmation of compliance with ethical requirements
- confirmation of compliance with group audit team requirements
- identification of the financial information on which the component auditor reports
- information on non-compliance
- list of uncorrected misstatements
- indicators of management bias
- overall findings and opinion.
OBT: General assessment: Auditor’s expert:
Assess the competence, capabilities and objectivity of the expert.
Still bound by FRC’s Ethical Standard and must be independent.
OBT: General assessment: Management’s expert
Assess the competence, capabilities and objectivity of the expert.
OBT: Specific assessment: Auditor’s expert
Obtain an understanding of the field of expertise of the expert.
Agree the nature, scope and objectives of the expert’s work
OBT: Specific assessment: Management’s expert
Obtain an understanding
of the work of the expert
OBT: Conclusion: Assessing Auditor’s expert
Evaluate adequacy of expert’s work
OBT: Conclusion: Assessing management’s expert
Evaluate the appropriateness of the work as audit evidence for the relevant assertions
