Audit Planning

Question 1

What are the advantages of audit planning?

Answer 1

• Appropriate attention devoted to important areas of the audit
• Potential problem areas are identified & timeously resolved
• The audit is organised and managed effeciently & effectively
• Engagement team members with the appropriate expereince & expertise are allocated to the audit
• Work is properly delegated to assistants & reviewed
• The work performed by other auditors & experts are properly co-ordinated

Question 2

What are the inherent limitations of audit planning?

Answer 2

• only cost effective controls can be implemented
• controls are designed to address routine transactions and not abnormal transactions
• controls can be circumvented by the collision of two or more people
• there are human errors
• inappropriate management override of controls
• procedures may become inadequate & compliance with the control procedures may deteriorate

Question 3

What is risk of material misstatement?

Answer 3

Financial statements are materially misstated

Question 4

What is an inherent risk?

Answer 4

Susceptibility of an assertion to a misstatement that could be material (individually or aggregated with other misstatements), assuming that there are no related internal controls

Question 5

What is a control risk?

Answer 5

The risk that a misstatement could not be detected & corrected on a timely basis by the entity’s internal controls

Question 6

What is a detection risk?

Answer 6

The risk that an auditor’s procedures will not detect a misstatement that exists in an assertion

Question 7

Risk of Material Misstatement at Overall Financial Statement Level

Answer 7

Relates to financial statements as a whole & potentially affects multiple accounts

Question 8

Risk of Material Misstatement at Overall Assertion Level

Answer 8

• Risks pertaining to specific classes of transactions, account balances & disclosures
• It will directly affect the nature, timing & extent of further audit procedures of individual accounts

Question 9

Examples of RoMM @ Overall FS Level

Answer 9

• going concern problems
• management integrity
• legal liability
• nature of business
• control environment
• changes in management

Question 10

Examples of RoMM @ Overall Assertion Level

Answer 10

• balances suspectible of misstatements
• degree of complexity of transactions
• degree of subjecivity in determining account balances
• suspectibility of assets for misappropriation
• abnormal transactions to not subject to routine processing

Question 11

What is the relationship between materiality & audit risk?

Answer 11

• The higher the audit risk, the lower the materiality will be set
• The lower the audit risk, the higher the materiality may be set