Audit Procedures Flashcards
sensitivity analysis
looks at how different values of an independent variable affect a dependent variable e.g. what factors affect profit and how can they be measured
how should internal audit work be evaluated?
- assess the internal audit function to see if it seems appropriate
- are they adequately trained and proficient?
- are assistants adequately supervised, reviewed and document?
- is there sufficient evidence
- are conclusions appropriate
- are reports consistent
- are any issues properly disclosed and resolved
how would related party transactions be addressed?
- Identify full list of related parties
- Review minutes of meetings of shareholders and directors
- Make enquiries with directors and staff during audit
- Obtain written representations on completeness of disclosure
- Review loan agreements for guarantors
- Review transactions between the two parties to ensure arm’s length basis
how to handle suspected fraud?
- look for evidence of deficiencies in the system
- increase professional scepticism
- evaluate and test controls
- increase substantive work
- investigate any apparent override/circumvention
-consider impact on other areas
how can data analytics be used in journals testing?
- year on year comparisons
- number of manual input vs system generated journals
- who and when journals are posted
- identifying fraud risks
- unusual double entries
- identifying transactions that do not occur regularly
what are the negative impacts of data analytics?
- cost
- dependent on underlying data quality
- training is necessary
- ensuring the security of client and audit data
examples of data analytics routine
- comparing the last time an item was bought with it was sold
- inventory ageing
- receivables and payables ageing
- analysis of revenue and gross margins trends
- analysing how transactions are processed
- depreciation recalculations
- analysis of capital expenditure vs repairs & maintenance
- three way matching of revenue and expenditure
how can data analytics be used?
- analyse all transactions in a population and identify any outliers for further examination
- reperform calculations relevant to the financial statements
- match transactions as they pass through a processing cycle
- assist in segregation of duties testing
- compare entity data to externally obtained data
- manipulate data to assess the impact of different assumptions
key stages to audit planning
- assess whether controls can be relied on
- this will affect the amount of substantive testing (tests of detail and analytical procedures) conducted
what does ISA 330 say about relying on controls?
- they must be tested
- they must obtain evidence it is effective and in operation throughout the period under review
- approach must be adapted in accordance with the nature of the control and the risk it is mitigating
- must be confirming a relevant financial statement assertion
which substantive procedures are compulsory?
- Agreeing the financial statements to the underlying accounting records
- Examining material journal entries
- Examining other adjustments made in preparing financial statements
when are analytical procedures used?
for large volumes of predictable transactions
when are tests of details used?
to gain information about account balances and for verifying existence and valuation
procedures for bad debts
- Calculate trade receivables days and identify any trends
- Inspect correspondence with customers for evidence of disputes or bad debts
- Inspect board minutes
- Review aged trade receivables analysis to identify overdue amounts
- Assess the reasonableness of the allowance for receivables by reference to other forms of supporting evidence
- Obtain a written representation from management confirming the adequacy of the allowance for receivables
how should the internal audit function be assessed?
Objectivity - who do they report to and do conflicting responsibilities/restrictions exist?
Competence - do they have the adequate resources, technical training and proficiency to conduct the internal audit?
Systematic and disciplined approach - is the internal audit properly planned, supervised, reviewed and documented?
what impact does relying on the work of the internal audit department have?
- accurate system documentation means controls need only be confirmed using ‘walk-through tests’, saving time
- if controls are satisfactorily tested by internal audits, they can be tested less
- this will reduce substantive procedures and sample sizes
how is an auditor’s point estimate developed?
- using a different model than the one used by management
- using management’s model but developing alternative assumptions or data
- using the auditor’s own method
- using an expert
- consideration of other comparable conditions
how are accounting estimates audited?
ISA 540
- obtain evidence from subsequent events
- test how management made its estimate
- develop an auditor’s point estimate
what is considered when management’s estimates are made?
- the method chosen by management
- any significant assumptions made by management
- the data used in the estimate
- how management has selected a point estimate and has approached the existence of estimation uncertainty
how would you ensure a company can meets it debts as they fall due?
- obtain a written statement confirming that the company is a going concern
- review profit and cash flow forecasts
- request a statement of borrowing facilities to be included in the bank confirmation letter.
- review the day to day utilisation of the overdraft facility and proximity to the current limit
- obtain loan confirmations and that payments are being met
what does gross profit margin tell you?
- how much profit per sale
- a high profit margin is good
- means you are selling for a higher price then you are making the product
what are the ranges of materiality based on profit before tax?
5%
what are the ranges of materiality based on gross profit?
0.5%-1%
what are the ranges of materiality based on revenue?
0.5%-1%
what are the ranges of materiality based on total assets?
1%-2%
what are the ranges of materiality based on net assets?
2%-5%
what are the ranges of materiality based on profit after tax?
5%-10%
what are the limitations of analytical procedures?
- substantial knowledge of the business is required for the results to be meaningful
- they can be performed mechanically
- relevant information may not be available
- consistency of results may conceal a material error
what are the benefits of analytical procedures?
- identifies items for attention that detailed tests may miss
- uses information outside account records
- allows comparison of data from different sources
what are the key purposes of obtaining written representations?
ISA 580
- They are a source of audit evidence
- They provide evidence that management has fulfilled its responsibilities with respect to the financial statements
- Failure to provide indicates a lack of management integrity
what is the purpose of quality management procedures?
- Provides assurance the work of the firm complies with professional standards, applicable regulatory and legal requirements
- Compliance with the firm’s own procedures for managing quality risks
- Assurance reports are appropriate in the circumstances
- Protects the auditor
- Serves the public interest
what are the four Task Force on Climate-related Financial Disclosures?
Governance
Strategy
Risk Management
Metrics and Targets
what should be included in the engagement letters for matters which are not statutory audits?
- Emphasis on the engagement not being an audit
- Scope of work will be primarily analytical procedures and enquiry
- Calculations will be reviewed based on management’s assumptions
- Forecasts and assumptions will not be prepared by the firm
how do auditors express their opinion on the directors’ report?
- if consistent with FS, no modification “the director’s report is consistent with FS”
- if misstatement, included in ‘Other Information’ section or in ‘Opinions on other matters prescribed by the Companies Act 2006”
