Audit planning 3

Question 1

What are the main steps in an audit?

Answer 1

1. Preplan
2. Obtain information background
3. Obtain information about client’s legal obligation
4. Perform preliminary analytical procedures
5. Set materiality & acceptable audit risk
6. Understand internal control & assess control risk
7. Develop an overall audit plan & audit programme

Question 2

What is internal control (IC)?

Answer 2

IC is the process designed and implemented by those charged with governance, management, and other personnel to provide reasonable assurance regarding the achievement of the entity’s objectives concerning financial reporting.

Question 3

What are the objectives internal controls are designed to achieve?

Answer 3

1. Reliability of the entity’s financial reporting
2. Effectiveness and efficiency of the entity’s operations
3. Compliance with applicable laws and regulations

Question 4

What are some key elements of the control environment?

Answer 4

1. Communication and enforcement of integrity and ethical values
2. Commitment to competence
3. Participation by those charged with governance
4. Management’s philosophy and operating style
5. Organizational structure
6. Assignment of authority and responsibilities
7. Human resources policies and practices

Question 5

What is the entity’s risk-assessment process?

Answer 5

It’s the way an entity identifies and responds to business risks. Management considers the significance of the risks and how they should be managed, which may involve introducing plans, programs, or actions.

Question 6

What are control activities/procedures?

Answer 6

Policies and procedures established by management to ensure directives are carried out. This includes performance review, information processing, physical controls, segregation of duties, and supervision.

Question 7

What is the purpose of monitoring controls?

Answer 7

To assess the effectiveness of internal control performance. This involves evaluating the design and operation of controls and taking corrective action where necessary.

Question 8

How can internal control weaknesses be communicated to management?

Answer 8

Through a formal letter at the end of the audit work listing any weaknesses in the design or operation of the IC system, explaining their significance and effect, and making suggestions for improvement.

Question 9

What are the characteristics of audit evidence?

Answer 9

1.Relevance
2.Reliability
3.Sufficiency
4. Timeliness

Question 10

What is the importance of auditor’s direct knowledge?

Answer 10

Evidence obtained directly by the auditor through physical examination, observation, computation, and inspection is more reliable than information obtained indirectly.

Question 10

What are some sources of audit evidence?

Answer 10

1.Directly obtained by the auditor
2.From third parties
3.From management

Question 11

What are the types of audit procedures for gathering evidence?

Answer 11

1. Physical examination
2. Observation
3. Confirmation
4. Inquiries
5. Reperformance
6. Analytical procedures
7. Documentation

Question 12

What is the difference between vouching and tracing?

Answer 12

Vouching is checking the validity of entries in the books of accounts with the original source documents, whereas tracing is following a transaction from its source document to the books of accounts to ensure completeness.