Audit Planning

Question 1

The general risks related to PPE are…

Answer 1

Incorrect capitalization
Inappropriate depreciation changes
Incorrect accounting for impairment

Question 2

The general risks related to manipulation and control of inventory are…

Answer 2

Incorrect determination of costs due to foreign currency conversion, import duties, etc
Inadequacy of the allowance for the reduction of carrying values to net realizable value
Theft and incorrect record of inventory quantity

Question 3

The significant risks relating to accounts payable and provisions are…

Answer 3

Risk of omission/understatement

Inadequacy/inaccurate of provisions

Question 4

Factors to consider when determining the timing of the audit procedures.

Answer 4

Chronological sequence of the audit procedures. Eg compliance procedures before the substantive procedure.
The size of the client.
The number of interim visit necessary to study the control and internal controls.
Compliance procedures should cover the entire period under review.
Client’s deadlines. The closer to the year end, the more roll forward procedures will have to be performed.
The timing with information should be prepared by the client and be ready.
The times when an audit visit would be convenient for the client.
The necessity to perform various tests simultaneously.
The necessity for an element of surprise.
The scheduling of the audit staff in order that all clients can be serviced.

Question 5

Informations that should be extracted from previous year’s audit file and use for the planning of current year audit.

Answer 5

Audit planning memorandum.
- planning materiality
- inherent risk factors and estimates thereof
- the audit approach followed
Problems anticipated.
Unadjusted differences and their impact in the current year.
The various types of adjustment made.
The actual time and costs compared to the budgeted time and costs and the reason for fluctuations.
The letter written to management which sets out weaknesses, recommendations, etc.

Question 6

Information to be extracted from the permanent audit file for the planning of a audit.

Answer 6

Information on client's background.
- type of business
- organizational structure
- description of the internal control system
- accounting policy
Logistical information relating to the audit:
- contact person
- business hours
- premises, addresses, etc
Statutory information and legal aspects:
- articles and memorandum
- important contracts and agreements

Question 7

Explain how a thorough knowledge of the client’s business can assist the auditor in performing his audit.

Answer 7

It helps to evaluate audit risk and materiality and identify problems. It helps to plan the audit effectively and conduct it. It helps to evaluate audit evidence and helps in giving a better service to the client.

Question 8

List the possible sources from which the auditor can obtain more information regarding the external factors affecting the joint venture.

Answer 8

Trade magazines and newspapers.
Specialists and analysts reports on the industry.
External data base that gives a comparison with important competitors that may provide industry averages.
Information provided by branches of your own audit firm.
Relevant publications of your audit firm including industry guidelines and newsletters.
Laws and regulations of government and revenue services.
Talk to lawyers.
New or revised accounting or auditing standard.

Question 9

List the most important factors to consider in order to determine the efficiency of management control over the joint venture, including computer operations.

Answer 9

Management’s commitment to security as evidenced by their actions to secure computer systems, etc.
Whether the size and organization of the the accounting department is sufficient for the functions that it performs and for the requirements of computer security.
Whether the computer security is reviewed regularly.

Question 10

A badly organized accounting department is…

Answer 10

With continue shortages in personnel.
With high personnel turnover.
Which continuously struggles to correct internal control problems

Question 11

Name three procedures that an auditor can perform in terms of IAS 250. “consideration of laws and regulations in the audit of financial statements” to obtain a general understanding of laws and regulations affecting his client.

Answer 11

Use existing knowledge of the entity’s industry and business.
Enquire of management concerning the entity’s policies and procedures regarding compliance with laws and regulations.
Enquire from management as to the laws and regulations that may be expected to have a fundamental effect on the operations of the entity.
Discuss with management the policies and procedures adopted for identifying, evaluating and accounting for litigation claims and assessments.

Question 12

Name two categories of financial statement assertion about account balances that the management of a company makes in financial statements in terms of ISA 500 “audit evidence”.

Answer 12

Completeness
Existence
Valuation and allocation
Rights and obligations

Question 13

Factors that affects the nature, timing and extent of the procedures performed by the auditor in terms of ISA315.

Answer 13

The size and complexity of the entity and of its accounting system.
Materiality considerations.
The types of internal controls involved.
Th nature of the entity’s documentation of specific internal controls.
The auditor’s assessment of inherent risk

Question 14

Procedures to be performed prior to the acceptance of new client.

Answer 14

Perform client investigation:
- determine independence of the auditors.
- determine the nature of the business and the integrity of management.
- determine whether the previous auditor has been informed of our appointment.
- determine whether management has given us permission to communicate with the previous auditor.
If client refuses to give permission, consider not accepting appointment as auditor.
If permission granted, write a letter to previous auditors to determine whether or not they are any professional reasons not to take on the position as auditors.
If no response try another means of contact.
Determine whether the client has the financial ability to pay the audit fee.
Determine whether a casual vacancy exists.
Determine skills and competence.
Determine terms of engagement.

Question 15

Identify the risk of being appointed as the new auditor.

Answer 15

Risk of incorrect opening balances, reliance on work of previous auditor

Question 16

Identify the risk of being a small to medium size audit firm when auditing a big client.

Answer 16

Risk of not having enough staff or competence to perform the audit.

Question 17

Identify risks related to client being listed on JSE.

Answer 17

Risk of non-compliance with JSE regulations as well as risk of incentive to overstate profit and net asset value

Question 18

Identify risk involved in taking over client whose previous auditor resigned as a result of a disagreement with management.

Answer 18

Cannot place reliance on Management’s integrity.

Question 19

Identify risk related to company accepting foreign currencies from oversea customers.

Answer 19

Risk of accounting for transactions at incorrect foreign exchange rate

Question 20

Identify risk involved in companies that prefer to receive cash

Answer 20

Risk of fraud or theft of cash

Question 21

Identify the risk related to company with new system

Answer 21

Risk of loss of information during change over to new system.
Risk that the new system does not accommodate needs of users

Question 22

Planned materiality percentages

Answer 22

Turnover = 0,5 - 1%
Gross profit = 1- 2%
Net profit = 5 - 10%
total assets = 1 - 2%
Total equity = 2 - 5%

Question 23

Identify the five components of internal control.

Answer 23

1) control environment:
- integrity and ethical value
- competence of employees
- management’s philosophy and operating style
- assignment of authority
- staff development
2) risk assessment:
- management to identify, evaluate and manage risks, estimate likelihood of occurrence, decide to terminate, transfer, mitigate or accept risks.
3) information and communication:
- system to have clear audit trails, clear communication to employees
4) control activities:
- segregation of duties, CIS controls, physical controls, operating reviews
5) monitoring deviation from actual to expected, rectify weaknesses

Question 24

What is an inherent risk?

Answer 24

The susceptibility of an account balance or class of transaction to misstatement that could be material, individually or when aggregated with misstatements in other balances or classes, assuming that there were no related internal controls.

Question 25

What is control risk?

Answer 25

Risk that a misstatement will occur in an account balance or class of transaction and that could be material, individually or when aggregated with misstatement in other balances or classes, will not be prevented or detected and corrected on a timely basis by the accounting and internal control system.
Inherent risks and control risks are risks that are directly related to the entity and not to the procedures the auditor performs.

Question 26

Inherent risk and control risks together has an effect on the detection risk, if the overall assessment of inherent risk and control risk combined, is assessed as high, what must be the detection risk be in order to reduce the overall audit risks to an acceptable level.

Answer 26

The detection risk must be set as low.

Question 27

Factors that affects the risks at the overall financial statement level.

Answer 27

Integrity/behavior of management.
Nature of business
Financial position
Control environment
New client
Listed on JSE
Tight audit deadline
Computerized environment
Management hold shares in the company -risk of fraud and misstatement
The number of accounting staff
Going concern risks

Question 28

Characteristics of a small business

Answer 28

Small number of employees.
Limited segregation of duties.
Management/owners dominate business.
Fewer owners/shareholders
Few source of income/ limited range of products or services
Uncomplicated accounting system

Question 29

Identify the relation between audit risk and detection risk.

Answer 29

Audit risk is the risk that the auditor expresses and inappropriate audit opinion on financial statements that are materially misstated. Audit risk is a product of inherent risk, control risk and detection risk. (audit risk = inherent risk x control risk x detection risk)

Question 30

What is detection risk?

Answer 30

Risk that the auditor’s substantive procedure will not detect a misstatement that exists in an assertion that could be material individual or when aggregated with other misstatements.
Detection risk is completely under the control of the auditor as it relates to the procedure he or she performs.

Question 31

Pre-engagement activities.

Answer 31

Assessment of independence
Business standing and integrity of management
Communication with previous auditors
Ability to pay the audit fee
Does vacancy exist?
Skill and competence required
Appointment letter

Question 32

Planning materiality

Answer 32

1) stability of the indicators
2) current year/budgeted/prior year
3) statement of financial position and comprehensive income
4) calculation of materiality range
5) conclusion (based on assessed risks of the company, if high then materiality is set at conservative level = low)

Question 33

Identify the assertion risks for the following:
Inventory
Accounts receivable
Sales 
Provision
Directors remuneration

Answer 33

Inventory: valuation
Accounts receivables: valuation and existence
Sales: accuracy and occurrence
Provision: completeness
Directors remuneration: presentation and disclosure

Question 34

Identify risks of a small entity

Answer 34

Record keeping informal/insufficient
Lack of proper segregation of duties
Financial statement may be incomplete/inaccurate
Auditors usually assisting preparation of financial statements which could lead to management believing that they are relieved of responsibilities
Management override of controls
Effectiveness of internal controls are dependent on the integrity, attitude and motives of the owner

Question 35

How would the auditor respond to risks indentified?

Answer 35

Incorporating additional element of unpredictability in the selection of further audit procedures to be performed. (nature)
Conducting more audit procedures as of the period end rather than at a interim date (timing)
Obtaining more extensive audit evidence (extent)
Assigning staff with appropriate experience and high level skills
Provide more supervision
Emphasis the need for professional skepticism by the audit team
Changing the way the audit was carried out compared to prior years by changing the nature, timing and extent of testing