Audit Approach Flashcards
What are some general ways to respond to the risk of material misstatement within an audit?
Emphasising the importance of professional scepticism to audit staff
Assigning additional/more experienced staff
Use experts
Increasing supervision
Adapting the audit strategy
What is audit confidence?
What are the three sources of audit confidence?
That the risk the financial statements are materially wrong is sufficiently low
Controls
Tests of details
Analytical procedures
Mix is decided on during the planning process
Why may an auditor carry out a test of control?
They are intending to rely on controls
They are unable to derive sufficient evidence from substantive procedures
What constitutes substantive procedures?
> when is it appropriate to apply each type
Over what items MUST an auditor carry out substantive procedures?
Tests of details and analytical procedures
> Analytical procedures are appropriate when there are large volumes of predictable data
> Tests of details are appropriate to verify existence and valuation. Appropriate for sig risks
Material items
What are some common ways audit firms use data analytics?
Cost vs NRV testing - comparing the last time an item was bought with when it was sold
Inventor ageing
Receivables/Payables ageing
Matching of orders to cash & purchases to payments
Risk analytics
Analytical Procedures
Journals testing - highlight unusual postings
Data visualisations
What are the main areas of the internal audit function that the external auditors must assess if wishing to rely on their work?
Objectivity
Competence
Ability to action responses
If working in a group audit, what does the group auditor need to understand about the component auditor?
Ethical standards
Independence
Professional competence
Whether sufficient and appropriate audit evidence has been gathered
Regulatory environment the same?
How can an auditor assess an estimate?
Use subsequent events
Test how management made its estimate; methods, asumptions, data
Develop auditors estimate; when cannot rely on management’s estimate
What is a specialised entity?
Why is an audit of a specialised entity more complex than that of a non specialised entity?
An entity such as banks, insurers, charities or law firms
Subject to extra regulatory requirements in addition to normal statutory audit
Why is an audit of a not-for-profit entity different to that of a profit making entity?
Cash may be significant
Controls may be limited
Income may be risky - donations are not guaranteed
Competence of staff may be low
Standard of record keeping may be low which may make evidence hard to gather
Restricted use of grants/government funds
Objectives of audit may differ
Report may not be addressed to shareholders
Lack of segregation of duties
What is the purpose of audit in the public sector?
Accountability
Ensures public money is spent wisely
Makes recommendations for future good practice
What issues are covered in a public sector audit that are not covered in private company audits?
Internal control systems are assessed - limitation of potential for corruption & fraud
Use of public funds
Regulations
Appropriate use of funds
Value for money
What are the thresholds for charities needing an audit of their financial statements?
Income of £1,000,000
OR
Income of £250,000 & Assets > £3.26 million
What mnemonic can help know what is needed to be assessed when relying on the work of others?
STRIP
Scope
Technical competence
Resources
Independence
Professionalism/power to be taken seriously
If you are asked to recommend an audit procedure, how would you structure answer
- Start with command word / verb
- State evidence needed
- Explain how evidence addresses risk
