Audit & Assurance

Question 1

What stages of the audit is Materiality important?

Answer 1

Planning - which balances and transactions to focus on and decide audit procedures

Execution - Evaluate errors discovered and determine the extent of additional procedures required

Reporting - Evaluate aggregate of uncorrected errors that have been identified

Question 2

Steps in Setting Materiality

Answer 2

1. Identify users of the financial statements
2. Identify users objectives
3. Determine base for materiality
4. Identify percentage threshold for materiality
5. Determine overall materiality
6. Determine performance materiality
7. Determine specific materiality
8. Determine specific performance materiality

Question 3

Common Base Overall Materiality Benchmarks and their % threshold

Answer 3

Income before tax (5% - 10%)
Total Assets (0.5% - 2%)
Revenues (0.5% - 2%)
Expenses (0.5% - 2%)
Equity (0.5% - 5%)

Question 4

Factors in determining overall materiality

Answer 4

Financial Statement Level
unusual or non-recurring items that need to be normalized or adjusted for
- Management bonuses
- g/l in disposal of PP&E

Question 5

Determining Performance materiality

Answer 5

Financial Statement Level
Auditor focused - considers the amount of audit work required to ensure that the identified and potentially unidentified misstatements will not exceed overall materiality

Usually 60% - 75% of overall materiality

Question 6

Determining Specific Materiality

Answer 6

Account Level
If there are balances or classes of transactions where an amount less than overall materiality would influence or change the decision of a known user.
- Specific risks and balances in sensitive audit areas
- Based on objectives not risk

Amount must be less than less than the overall materiality

Question 7

Determining Specific Performance Materiality

Answer 7

Account Level
Set at level lower than both Overall Materiality and Specific Materiality
Base at 60% - 75%

Question 8

Difference between Materiality and Audit Risk

Answer 8

Materiality - Driven by the needs of the users of the financial statements

Audit Risk - Based on factors that relate to the company

Question 9

Calculating Normalized Income Base

Answer 9

Income before taxes
- Gains
\+ Losses
\+ Management Bonuses
\+ Severance Payments

Question 10

What is the relationship between Materiality and Audit Risk

Answer 10

Performance materiality is set by the auditor with the objective of reducing the likelihood of undetected material misstatements and the audit risk to an acceptably low level.

Question 11

Who is the main user if a company is at risk of going concern?

Answer 11

Bank - interested in exercising its claim on assets

Question 12

What is Audit Risk

Answer 12

The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated
Function of ROMM and Detection Risk
Both inherent and control risk are then assessed, and the practitioner derives an acceptable level of detection risk

Question 13

What is ROMM

Answer 13

Risk of Material Misstatement
= IR * CR
The risk in the financial statements prior to audit, because of the clients inherent risk (IR) and control risk (CR).
The auditor does not control this risk but merely assesses it.

Question 14

Detection Risk

Answer 14

The risk that the procedures performed by the auditor will not detect a material misstatement
High ROMM = we need a low detection risk
- More assurance is needed from procedures

Low ROMM = High DR
- Less detailed procedures are required

Question 15

Inherent Risk

Answer 15

= Before related controls

• Poor financial health
• 1st time audited
• Market Competition
• Industry Regulation
• Potential Sale/ Acquisition
• IPOS
• Performance Bonuses

Question 16

Control Risk

Answer 16

= will not be prevented, detected, or corrected on a timely basis by the entity’s internal control

• Outdated technology (GL system)
• Segregation of duties
• Management attitude
• Lack of internal audit function
• Lack of policies and documentation

Question 17

Responses to ROMM

Answer 17

• Emphasizing professional skepticism to the audit team
• Assigning more experienced staff to the audit team
• Increasing supervision of the audit
• Adding elements of unpredictability in audit procedures
• Making changes to the nature, timing, and extent of the audit procedures
• If the company has multiple locations/branches, increasing the number of locations/branches to be tested

Question 18

Pervasive Risks

Answer 18

Cannot be isolated to a single account

- Overall Financial Statement Risk

Question 19

Auditors requirement of Control Risk

Answer 19

The auditor is only required to obtain an understanding of internal controls relevant to the audit
- Evaluating the design of the controls and determining whether the controls have been implemented as designe

Question 20

Going Concern

Answer 20

Entity is viewed as continuing in business for the foreseeable future

Question 21

Going Concern - Management Responsibility

Answer 21

Public companies

- 12-month assessment of the company’s ability to continue as a going concern

Question 22

Going Concern - Auditors Responsibility

Answer 22

Assess if management has done an appropriate job of supporting the going-concern assumption

a) To obtain sufficient appropriate audit evidence regarding the appropriateness of management’s use of the going concern assumption;
b) To conclude, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern; and
c) To report in accordance with this CAS

Question 23

Requirement if going concern assumption is not correct

Answer 23

If disclosures are adequate - Issue unqualified opinion and include an Emphasis of Matter paragraph in the audit report
If the disclosure is inadequate - Issue an adverse opinion

Question 24

Two types of Fraud

Answer 24

1. Fraudulent Financial Reporting
   - Management Level
   - Intentional omissions or manipulation of amounts
   - Manage users and influence user perceptions
2. Misappropriation of assets
   - Employee Level
   - Embezzlement, and theft of property

Question 25

Three Fraud Pillars

Answer 25

1. Incentives and Pressures
2. Opportunity
3. Rationalization and Attitude

Question 26

Auditor’s Responsibilities - Fraud

Answer 26

• Identify and assess the risks of material misstatement of the financial statements due to fraud
• Obtain sufficient appropriate audit evidence regarding the assessment of risks of material misstatement due to fraud through designing and implementing appropriate responses
• Respond appropriately to fraud or suspected fraud identified during the audit

Question 27

Auditor’s Discharging Responsibilities - Fraud

Answer 27

• Determine audit responses to address risk of material misstatement.
• Evaluate audit evidence to consider whether an identified misstatement may indicate fraud has occurred.
• Obtain written representations from management in relation to fraud.
• Communicate with management, those charged with governance, and regulatory authorities.

Question 28

Response to Audit Risk at Assertion Level

Answer 28

Practitioner will need to design and perform additional audit procedures based on the risk of material misstatement.
If the auditor concludes that fraud risk exists for a particular material class of transactions, account balances, and disclosures, the auditor shall treat those assessed risks of material misstatement due to fraud as significant risks.

Question 29

What make up risk

Answer 29

Account + Assertion + Facts

1st step - identity assertion