Audit Planning Flashcards
Audit Planning
4 steps (RAMP)
- Risk
- Approach
- Materiality
- Procedures
Risk Assessment - first step after acceptance
The first step in audit planning (after acceptance) is the assessment of the overall financial statement level (OFSL) risk or the risk of material misstatement (RMM) for the financial statements as a whole.
Risk Assessment
Process
Identify case facts
- How do the facts increase and decrease risk?
Explain why the case fact is a risk factor
- How could the factor result in (or prevent) an error in the financial statements?
Conclude
- Provide a clear conclusion on OFSL risk.
Approach
Two general approaches an auditor can choose from:
- substantive approach
- combined approach
Leads to the risk of material misstatement, based on:
Inherent risk
Control risk
The approach selected is based on:
1. Control risk assessment
2. Efficiency of audit
Also need to look at RMM at the account or assertion level, which can be different than the OFSL.
Approach
Two general approaches an auditor can choose from:
- substantive approach
- do audits with 100% reliance on substantive procedures
- combined approach
- rely on internal control of company and do less substantive procedures
Leads to the risk of material misstatement, based on:
Inherent risk
Control risk
The approach selected is based on:
1. Control risk assessment
2. Efficiency of audit
Also need to look at RMM at the account or assertion level, which can be different than the OFSL.
Approach
Process
Identify relevant case facts
- control environment, nature of the business
Analyze the case facts
- discuss the impact the facts have on the approach
Conclude
Materiality
Users & Benchmark
Materiality is a user-based concept.Identify the users and their objectives.
Choose a benchmark for materiality that reflects the users’ objectives and needs (such as profit before tax or net assets).
Benchmarks
Income from continuing operations
Revenues or expenditures
Equity
Assets
Income from continuing operations: 3% - 7%
Revenues or expenditures: 1% - 3%
Equity: 3% - 5%
Assets: 1% - 3%
Materiality
Process
To calculate the overall financial statement materiality:
- Normalize the benchmark for unusual or non-recurring items and known errors.
- Apply the percentage threshold.
- Conclude.
Materiality
PM & SM
Performance materiality (PM)
- auditor-focused
- PM percentage threshold applied to overall materiality
Specific materiality (SM)
- for accounts that users are specifically concerned about
- SM threshold applied at an account level
Procedures
Procedures are the response to specific account and assertion level risks and arise primarily from the financial reporting issues identified.
Procedures
Process
Identify specific account/assertion level risks
- financial reporting issues
Design an audit procedure
- specific, detailed, and relevant to the risk identified
- provide the steps necessary to test the account and assertions
- Obtain a piece of documentation from the client that supports the balance you are looking at
- Perform audit tests on that documentation by comparing it with support
VOVOP: Verb, Object, Verb, Object, Purpose
Procedures
Assertions
Transactions/events
- occurrence
- completeness
- accuracy
- cut-off
- classification
- presentation
Balances
- existence
- rights/obligations
- completeness
- accuracy/valuation/allocation
- classification
- presentation
