Approach

Question 1

Which step is the approach in the planning stage of the audit

Answer 1

The last step

Question 2

What does the approach set

Answer 2

An audit approach sets the scope, timing, and direction of the audit based on the results of an analysis of the risk of material misstatement (RMM) at the financial statement level.

the auditor may take a different approach for different assertions relating to the same account.

Question 3

What are the two types of audit approach

Answer 3

Substantive procedure

Combined Approach

Question 4

What are substantive procedures

Answer 4

An audit procedure designed to detect material misstatements at the assertion level. Substantive procedures comprise of:

Tests of details (of classes of transactions, account balances, and disclosures); and
Substantive analytical procedures.

Question 5

What is a combined approach

Answer 5

Focuses both on:

Substantive procedures
Test of controls

Question 6

Test of controls

Answer 6

An audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level.

Question 7

Inherent risk

Answer 7

The likelihood or material misstatement due to the particular characteristics of the relevant class of transactions, account balance, or disclosure

Question 8

Control risk

Answer 8

The risk that relevant controls are not operating effectively and will not prevent or detect a material misstatement

Question 9

The higher the auditor’s assessment of risk…

Answer 9

the more persuasive the audit evidence obtained is required to be

Question 10

What does a substantive approach indicate

Answer 10

A substantive audit approach places no reliance on the operating effectiveness of controls

Question 11

When is a substantive approach chosen

Answer 11

when the financial reporting system or internal controls over financial reporting are either not reliable or have not yet been established and implemented

commonly selected when control risk has been assessed as high

client’s internal controls have been determined to be poorly designed, lacking, or improperly implemented, there is little point in testing their operating effectiveness because no reliance will be placed on them

Question 12

When can control risk be set to low

Answer 12

if its supported through control testing

Question 13

When would a substantive approach be selected when controls can be relied on

Answer 13

If an assertion for an account consisted of few transactions, it would be faster to substantively test the account rather than spend time performing detailed test of controls

Question 14

What does a combined approach consider

Answer 14

considers the operating effectiveness of controls and whether or not the operating effectiveness of controls can be relied upon to reduce detection risk to an acceptably low level

Question 15

tests of controls should be performed to obtain sufficient appropriate audit evidence if:

Answer 15

The auditor intends to rely on the operating effectiveness of the controls, OR

substantive procedures alone cannot provide sufficient appropriate audit evidence at the assertion level

Question 16

In what situations would substantive procedures alone not provide sufficient appropriate evidence

Answer 16

Routine business transactions with highly automated processing, with little or no manual intervention, requiring the auditor to obtain an understanding of the IT system.

High volume, low dollar value transactions such that the volume of data is so great that testing through sampling alone becomes unfeasible.

High degree of judgement and estimation in accounting for certain transactions, where it is necessary for the auditor to obtain an understanding of the operating effectiveness of the controls.

Question 17

Can an auditor choose to do an audit based on test of controls alone

Answer 17

No, an auditor cannot choose to rely on testing on the operating effectiveness of controls alone to achieve sufficient appropriate audit evidence.

Substantive procedures are always required.

Question 18

What factors must you consider when determining which approach to choose

Answer 18

Inherent Risk

Control Risk

Question 19

Discussing significant components CAS 600

Answer 19

Determining a benchmark using professional judgement:

• could include a group of assets, liabilities, cash flows, income before tax, revenue, or turnover. (could have to discuss multiple categories in AO’s)
• what are users concerns?
• Components exceeding 15% are considered significant, in general.
• consider any unusual items and their impact
• consider significant elimination entries and their impact

Question 20

Using Component auditors discussion

Answer 20

Discuss the need to understand the work of the component auditor:
-When a component auditor is used, the auditor that is engaged with the client is responsible for the audit work as a whole.
When using a component auditor, CAS 600 must be consulted so that the group engagement team understands the following:
• Whether the component auditor understand and will comply with ethical requirements and is independent
• The component auditor’s professional competence
• If the engagement team will be able to be involved in the work to the extent necessary to obtain sufficient appropriate evidence.
• If component auditor operates in a regulatory environment
Procedures to understand the component auditors:
• Obtain a written conformation of their independence.
• Review resumes and qualifications
It is necessary to undertake procedures to perform on audit work completed by another auditor such as:
• Calculate and communicate component materiality, as well as significant risks and approach to help them with their planning.
• Reviewing the working papers. If there is a concern to the ability of the component auditor to perform work then more supervision is needed.
• If significant pervasive performance issues exist, the work may be performed directly by the engagement team or another component auditor

Question 21

Approach consideration for NPO’s

Answer 21

Scope limitation - because of the non-reciprocal nature of donations, it is hard to assert the completeness of contributions.
Small NPO’s tend to have limited controls which also may give rise to assertion concerns with revenue.
A qualified opinion may be needed with respect to any of these concerns which is common for NPO’s