Audit Planning Flashcards
What are Risk Assessment Procedures
Procedures that will enhance the auditor’s understanding of the entity.
Roles of Audit Planning (CAFE PA)
- Selection of capable and competent members of the engagement team
- Help auditor appropriate attention to important areas of the audit
- Facilitate the direction and supervision of the engagement team
- Help auditor properly organize the audit in an efficient and effective manner
- Help in identifying and resolving of potential problems on a timely basis
- Assisting where applicable in coordination of work done by the auditors of components and experts
Factors affecting the planning of an audit (SECTA)
- Size and complexity of the entity
- Experience of the team with the entity
- Changes in the circumstance
- Timing of appointment
What is Audit Strategy
Sets the scope, timing and direction of the audit. It also guides the development of audit plan
Audit Plan
include a description of following:
1. timing and extent of Risk Assessment Procedures and Further Audit Procedures
2. Other planned audit procedures required
What must be documented in Audit Planning
- The overall strategy of the Audit
- The Audit Plan
- Any significant changes made during the engagemen
Specific Audit Procedures
- Inquiry
- Observation
- Inspection
- Analytical Procedures
In which part of the Audit is analytical procedures required
- Planning- Required
- Substantive Testing- Not required but can still be done
- Completing the Audit- Required
Inherent Risk
Susceptibility of an assertion to be materially misstated before the consideration of any internal controls
Control Risk
Risk that misstatement can occur and will not be corrected on a timely basis by the entity’s system of internal control
Sources of Audit Evidence
- Interactions with management, those charged with governance, and key entity personnel
- Certain external parties such as regulators
- Publicly available information about the entity
When is information deemed material?
If its omission or misstatement can influence the economic decisions of users taken on the basis of financial statement
Procedures when applying Analytical Procedures
- Prior year’s financial statements
- Annualized financial statements
- Anticipated results (budgets, forecast)
- Typical relationships among account balances
- Industry averages
- Non-financial information
Detection Risk
Risk that auditor’s substantive procedures will not detect a misstatement that exists in the account balances that could be material
Audit Risk
Risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated
(INHERENT RISK X CONTROL RISK X DETECTION RISK)
Relevant Assertion
Assertion about a class of transactions, account balances or disclosure is relevant when it has an identified risk of material misstatement
Inherent Risk Factors
Characteristics of events or conditions that affect the susceptibility to misstatement whether due to fraud or error of an assertion about a class of transactins
Examples of Inherent Risk Factors (CUSCS)
Complexity
Uncertainty
Subjectivity
Change
Susceptibility of misstatement
Inherent Risk Assessment Procedures
- Understand the entity and its environment and the applicable financial reporting framework
- Identify significant classes of transactions
- Spectrum of inherent risks
Information gathered during Risk Assessment Procedures (SIMFS)
- Entity’s organizational structure, ownership, and governance and business model integrates the use of IT
- Industry, regulatory, and other external factors
- Measures used internally and externally to assess the financial performance
- Applicable financial reporting framework
- How inherent risks affect susceptibility of assertions to misstatement and to the degree they do so
Effect of Lower Detection Risk
Nature- More effective procedures may be applied
Timing- Closer or nearer to year end
Extent- Larger Sample size
Effect of Higher Detection Risk
Nature- Less Effective Procedures may be applied
Timing- Procedures will be performed at interim or several dates
Extent- Smaller Sample size
Matters to be considered when establishing audit strategy: Characteristics of the Engagement
- Financial Reporting Framework used
- Industry Specific requirements
- Location of the component of the entity
Matters to be considered when establishing audit strategy: Reporting Objectives
- Deadlines of reporting
- Key dates for expected communications
Matters to be considered when establishing audit strategy: Factors in directing engagement team’s effort
- Determination of materiality levels
- Preliminary identification of areas where there may be higher risk
- Preliminary identification of material components
- Evaluation of whether the auditor may plan to obtain evidence regarding controls
- Identification of recent significant developments affecting the entity
Contents of Audit program
May vary for each engagement but generally contains the following:
1. Audit objectives
2. Nature, timing and extent of audit procedures required
3. Time budgets
Purpose of Audit Program
Set of instructions to assistants involved in the audit and means to control and record the proper execution of the work.
Auditor’s Expert
Individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining evidence
The most widely used profitability ratio is the
Earnings per Share
The major concern when using the nonfinancial date in the analytical procedures is the
Accuracy of the Non-financial data
When are auditors likely to encounter judgement problems in the use of analytical procedures
- Whenever the auditor places reliance on management’s explanation for unusual fluctuations in account balances without developing independent expectations
- Whenever the auditor allows unaudited balances to unduly influence expectations of current balances
- Whenever the auditor fails to consider the pattern reflected by several unusual fluctuations when trying to explain what caused them
When allocating materiality, most practitioners choose to allocate to
The SFP because there are fewer accounts
Common bases of preliminary judgement about materiality
- Total Assets
- Current Assets
- Total Revenue
- Net Income
- Gross Income
- Owners Equity
When setting a preliminary judgement about materiality with regards to peso amount
More evidence is required for low peso amount than for a high peso amount
The risk of material misstatement refers to
The combination of inherent risk and control risk
