Audit Planning: General Flashcards
Materiality
o Item material if could influence decisions taken by users (shareholders)
o Material by nature: transaction changes profit to a loss, related party transaction
o Material by size: Revenue/GP: 1% PBT: 5% Total Assets: 1-2%
o Performance materiality: set lower to ensure aggregate misstatements
Audit Risk
o Risk of giving incorrect audit opinion (failure to identify material misstatement)
inherent risk: industry, company, balance (revenue, accounting estimate)
control risk: weakness in company’s internal controls detection risk: auditor does not identify misstatement
• inappropriate staff, incorrect audit approach, sampling risk
Audit Approach
o combination of:
tests of controls: ensure operating effectively
tests of detail: substantive procedure
analytical procedures (AP) on numbers (% movement, ratio): substantive procedure
• suitable for large volumes of predictable transactions (depr’, wages)
o must use substantive procedures on:
material balances
material journals
agreeing FS to accounting records
Audit Approach: Use of…
use of internal audit:
internal audit work: testing controls, inventory counts, legal requirements
consider: objectivity, competence, if work was properly performed/documented consider: materiality, risks, if further procedures needed
o use of expert:
asset fair value, provision outflow estimate, tax payable consider their objectivity and competence
o use of component (subsidiary/associate) auditor for group FS:
consider: independence, competence, if work was properly planned/performed/documented
communicate: materiality, risks, work to be performed, ethical requirements
obtain: identified risks, uncorrected misstatements, internal control weakness, management bias, fraud, confirmation of auditor ethical compliance and all agreed work completed
Audit procedures
Audit plan sets out timing of procedures to be performed
Timing, deadlines, team, budget
