6: Understanding of the Client / Entity Flashcards
What are the four main aspects of a client that we need to understand?
- Client business
- Staff
- Systems
- Finance structure
What do we expect to obtain from Prior year audit file? (2)
- Issues that arose in the prior year audit and how these were resolved.
- Points brought forward for consideration
What do we expect to obtain from Prior year financial statements? (3)
- Information in relation to the size of the entity
- Key accounting policies; and
- Disclosure notes.
What do we expect to obtain from Accounting systems notes? (1)
-How each accounting system operates
What do we expect to obtain from Discussions with management? (2)
- Important issues
- Changes to company
What do we expect to obtain from Current year budgets and management? (3)
- Relevant historical financial info
- Changes to materiality
- Risk identification
What do we expect to obtain from Permanent audit file? (1)
-Matters of continuing importance
What do we expect to obtain from Entities website? (1)
-Press releases on recent changes
What do we expect to obtain from Prior year report to management? (1)
-Internal control deficiencies in prior year
What do we expect to obtain from Financial statements of competitors? (1)
-Help assessing our client’s performance in the year.
What are the four Risk assessment procedures?
- Enquiries
- Observation
- Inspection
- Analytical procedures
Describe enquiries (3)
- Seeking information of knowledgeable persons
- Financial or non-financial
- Within or outside entity
Describe Observation (1)
Looking at processes or procedures performed by others
Describe Inspection (1)
Inspecting records or documents
What are the three types of analytical procedures?
- Comparison of information to prior periods
- Comparison of actual or anticipated results of the entity with budgets and/or forecasts
- Comparison to industry information either for the industry as a whole or by comparison to entities
When are analytical procedures used?
- Planning stage
- Final audit
- Final review stage
What are the ratios used for profitability?
Gross profit
Net profit
What are the ratios used at planning?
Receivables Days
Inventory Turnover
Payables Days
What are the ratios used at Testing?
Current Ratio
Acid Test / Quick Ratio
What is the ratio used at Reporting?
ROCE
What is the definition of uncorrected misstatements?
Misstatements that the auditor has accumulated during the audit and that have not been corrected.
What are the three categories of misstatement?
No doubt
Judgemental
Projected
What type of Misstatement category is below?
Factual misstatements are misstatements about which there is no doubt.
No doubt
What type of Misstatement category is below?
Differences arising from the judgements of management
concerning accounting estimates that the auditor considers unreasonable, or the selection or application of accounting policies that the auditor considers inappropriate.
Judgemental
