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Auditing > Audit Process, Planning And Risk > Flashcards

Audit Process, Planning And Risk Flashcards

1
Q

What are the overall objective of the auditor?

A

To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion whether the financial statements are prepared, in all material aspects, in accordance with an applicable financial reporting framework and to report on the financial statements and to communicate as required by the ISAs and in accordance with the auditor’s findings.

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2
Q

What are the general principles of an audit?

A
  1. Integrity
  2. Objectivity
  3. Professional competence and due care
  4. Professional behavior
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3
Q

How must an auditor plan and perform the audit?

A

With an attitude of professional skepticism that circumstances may exist that could cause the financial statement to be materially misstated.

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4
Q

Does an audit conducted in accordance with the ISAs provides reasonable assurance that the statements taken as a whole are free from material misstatements?

A

Yes, but the inherent limitations of an audit may affect the auditor’s ability to detect material misstatements.

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5
Q

What are the inherent limitations of an audit?

A
  1. The use of testing
  2. The inherent limitations of the internal control systems ( possibility of management override or collusion)
  3. The fact audit evidence is often more persuasive than conclusive
  4. The fact that the auditor’s work is open to subjective judgement in terms of:
    - obtaining audit evidence (nature, extent and timing of the audit procedures)
    - the drawing of conclusion based on the audit evidence obtained.
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6
Q

What are the responsibility for the financial statements for an auditor?

A

For forming and expression an opinion on the statements.

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7
Q

What are the managements responsibility for the financial statements?

A

For preparation and fair presentation of the statements in accordance with the applicable financial reporting framework.

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8
Q

What does professional skepticism mean?

A

The auditor should make critical assessments with a questioning mind, taking into account that circumstances may exist that may result in the financial statements being materially misstated.

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9
Q

How does the auditor plan and perform the audit to reduce the risk of material misstatement to an acceptably low level?

A

The auditor performs audit procedures (risk assessment procedures) to obtain information to assess the risk of material misstatements and then performs further audit procedures (test of controls and substantive procedures) based on the assessment of risk at the assertion level.

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10
Q

What are the fundamental principles of auditing theory?

A
  1. Financial data are verifiable
  2. No necessary conflict of interests exists between the auditor and the management of the entity under audit
  3. The financial statements and other information presented for verification are free of collusion and other irregularities
  4. Internal controls reduce the probability of errors and irregularities
  5. The consistent application of GAAP results in fair presentation
  6. In the absence of any contrary evidence, that which held true in the past will hold true in the future
  7. When the auditor is examining financial data with the objective of expression independent opinion thereof, he/she acts exclusively in the capacity of auditor.
  8. The professional status of the independent auditor imposes commensurate professional obligations.
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11
Q

What are the auditor’s responsibility?

A

Be aware and comply with the following:

  • legislation and regulations applicable to the audit engagement
  • the Auditing Profession Act
  • the IFAC statements of auditing
  • the codes of conduct of the IRBA and the relevant professional bodies.
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12
Q

What is a statutory audit?

A

Audit mandated by an Act, for example, the Companies Act. The auditor’s duties and responsibilities are statutorily regulated by the relevant Acts.

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13
Q

What are non-statutory audits?

A

Audits requested by the clients although this is not statutorily required.

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14
Q

Why is absolute assurance not possible?

A
  1. The need for judgement
  2. The use of testing
  3. The inherent limitations of the accounting and internal control systems
  4. The fact that most audit evidence may be considered persuasive rather than conclusive
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15
Q

What is a review?

A

To enable the auditor to state, based on procedures that do not provide all the evidence of an audit, whether or not anything has come to the auditor’s attention that may cause the auditor to believe that the statements were not prepared in all material aspects in accordance with an identified reporting framework and/or certain given criteria.

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16
Q

What are the procedures of review?

A
  1. Enquiries

2. Analytical procedures

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17
Q

What are the elements of an assurance engagement?

A

Subject matter = financial statements
Criteria = compliance with ISAs
Users = shareholders
Audit opinion = provide reasonable assurance not absolute assurance

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18
Q

What are the stages of audit process?

A
  1. Engagement activities
  2. Planning the audit at the overall financial statements level and establishing the overall audit strategy
  3. Detailed planning at the assertion level for individual classes of transactions, account balances and disclosure
  4. Detailed testing: obtaining of audit evidence
  5. Evaluating, concluding and reporting
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19
Q

What does engagement activities involve?

A
  1. Client investigation for new and existing clients
  2. Determine skills and competence required
  3. Establish the terms of engagement
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20
Q

What does planning the audit at the overall financial statements level and establishing the overall audit strategy involve?

A
  1. Understand the entity and its environment
  2. Obtain an understanding of the entity’s internal control, including the information system
  3. Identify and assess the risk of material misstatement at the overall financial statements level
  4. Set materiality
  5. Overall audit strategy
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21
Q

What does setting materiality involves?

A

Identifying significant accounts to audit in detail at the assertion level

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22
Q

What does overall strategy involve?

A
  1. Formulating an overall audit approach at the financial statement level
  2. Specific risk response: professional skepticism, unpredictability, staff, etc
  3. Organizational, administrative and coordination issues for managing and controlling the audit as a whole (timing of visits, use of experts, etc)
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23
Q

What does detailed planning at the assertion level involves?

A
  1. For individual significant accounts:
    - identify the significant risks at the assertion level
    - identify significant (key) controls at the assertion level that may exist to address the risks
    - establish a detailed audit strategy for the individual accounts
  2. For non-significant accounts:
    - verify through substantive analytical review procedures
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24
Q

What does detail testing: obtaining of audit evidence involve?

A
  1. Test of controls

2. Substantive procedures

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25
Q

What does evaluating, concluding and reporting involve?

A
  1. Overall review of the financial information
  2. Conclude and formulate an audit opinion
  3. Reporting
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26
Q

What is the objective of engagement activities?

A

To determine the acceptability of new clients or to consider the viability to carry on as auditors for the existing clients.

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27
Q

What should be considered when performing a new client investigation or consider changes in circumstances of existing clients?

A
  1. The independence of the auditor
  2. The integrity (risk) of the client and its management
  3. Changes in the entity for existing clients
  4. Communication with predecessor auditors
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28
Q

How do you determine the skills and competence requirements for the engagement?

A
  1. Knowledge and experience requirements for the relevant industries
  2. Skill, experience and expertise required for the audit
  3. Experts required
  4. Sufficient audit staff
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29
Q

What is the objective of planning of the audit?

A

To ensure the audit work will be performed in an effective manner. The results of the planning process are the formulation of the overall audit strategy for the audit as a whole and a detailed strategy and audit approach for individual accounts to determine the nature, timing and extent of the audit procedures necessary for the obtaining of audit evidence and risk of material misstatement is appropriately addressed.

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30
Q

How should an auditor obtain an understanding of the entity and its environment?

A
  1. The relevant industry, regulatory and other external factors
  2. The nature of the entity (internal)
  3. Financial reporting
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31
Q

How should an auditor obtain an understanding of the entity’s internal control, including information system?

A

By obtaining an understanding of the following:

  1. The control environment
  2. Management’s risk management policies
  3. The information systems and business processes relevant to financial reporting
  4. The internal control systems
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32
Q

What does assess of the risk of material misstatements at the overall financial statement level relates to?

A

The risks affecting the financial statements as a whole, and all account balances, classes of transactions and disclosure (management’s integrity, financial position of the entity, the control environment, etc)

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33
Q

What is in the overall audit approach at the financial statement level?

A
  1. A combined (system) or substantive approach at the financial statement level
  2. A broad description of the nature, timing and extent of the tests of controls and substantive procedures as a whole
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34
Q

The specific risk response in terms of overall audit strategy includes…

A

Responding to the risks identified and include:

  • level of professional skepticism applied
  • level of unpredictability applied
  • specific audit staff requirements: level of seniority, experiences, etc
  • response to specific risks such as going concerns, etc
35
Q

What needs to be considered in terms of organizational and administrative issues for managing and controlling the audit as a whole?

A
  1. Client specifics
  2. Dates and timing
  3. Engagement team specifics (experience, skills, experts)
  4. Audit budgeting
  5. Areas requiring special attention
  6. Communication with the entities
36
Q

How do you identify and assess the risk of material misstatement for the specific class of transaction, account balance or disclosure?

A
  1. Identify the inherent risk for the specific account at the assertion level
  2. Identify possible controls (significant controls) that will reduce or limit the risks at the assertion level
37
Q

What is the objective of the obtaining of audit evidence?

A

The auditor should obtain appropriate and sufficient audit evidence on which to base the audit opinion.

38
Q

How can an auditor obtain audit evidence?

A
  1. A combination of tests of controls and substantive procedures; or
  2. In some circumstances, substantive procedures only
39
Q

What is the objective of the evaluation, concluding and reporting activities?

A

These are performed at or near the end of the audit to enable the auditor to assess whether the financial information is consistent with his or her knowledge of the business, audit evidence obtained and whether the information is fairly presented.

40
Q

How do you perform an overall review of the financial information and evaluate audit differences?

A
  1. Agree financial statements to the underlying accounting records
  2. Test significant journal entries and other adjustments made during the preparation of the financial statements
  3. Perform an overall review of the financial information
  4. Set final materiality
  5. Evaluate the appropriateness of audit evidence obtained
  6. Evaluate audit differences
41
Q

What will quality control ensure?

A
  1. The firm acts appropriately in all given circumstances and in doing so limits its risk of legal liability and reputation damages resulting from assurance and other related service failures
  2. A professional service is rendered to clients at all times
42
Q

Name the two levels of quality control…

A
  1. Firm as a whole

2. Individual audits

43
Q

What are the elements of quality control?

A
  1. Leadership responsibilities for quality
  2. Relevant ethical requirements
  3. Acceptance and continuance of client’s relationship and engagements
  4. Human resources (assignment of staff at audit level)
  5. Engagement performance
  6. Monitoring
44
Q

List the methods and timing of obtaining engagement acceptance information.

A
  1. Enquires of management and other inside and outside the entity
  2. Observation and inspection
  3. Analytical review
45
Q

What are the sources available to the auditor to evaluate and screen a new prospective client?

A
  1. Communicate with the predecessor auditors
  2. Enquiry of client personnel
  3. Enquiry from third parties
  4. Enquiry with other auditors with similar clients in the industry
  5. Press and media coverage of the client
  6. Background searches of relevant databases
46
Q

What should an auditor consider whether any changes occurred regarding the client that might affect the ability to continue as their auditors?

A
  1. Takeovers and mergers, resulting in conflict of interest with other clients
  2. Factors affecting the auditor’s independence
  3. Changes in owner/shareholders, management, directors, business practice, litigation status, etc, resulting in additional risks.
47
Q

What should be considered when performing a client investigation in the engagement activity?

A
  1. The independence of the auditor
  2. The integrity of the client (risk of the client and management thereof)
  3. Changes in the entity for existing clients
  4. Information obtained from communication with the predecessor auditor
  5. Financial responsibility of the client
  6. The legal procedures in respect of the engagement
48
Q

Matters to considered when determining skills and competence for the engagement are…

A
  1. Firm personnel have knowledge of the relevant industries or subject matters
  2. Firm personnel have experience of relevant regulatory or reporting requirements, or have the ability to obtain the necessary skills and knowledge
  3. The firm has sufficient personnel with the necessary skills and competences
  4. Experts are available, if needed
  5. Whether the audit deadline can be met.
49
Q

What is the purpose of engagement letters?

A

To avoid any misunderstandings between the client and the auditor with respect to the engagement. They record the auditor’s acceptance of the engagement, his or her responsibilities to the client, the objective and scope of the audit and the format of any reports.

50
Q

What are the benefits of planning the audit?

A
  1. Appropriate attention is devoted to important areas of the audit
  2. Potential problem areas are identified and timeously resolved
  3. The audit I’d organized and managed in an effective and efficient manner
  4. The engagement team members with the appropriate experience and expertise are allocated to the audit
  5. Work is properly delegated to assistants and reviewed
  6. Work performed by other auditors and experts is properly coordinated
51
Q

What is the objective with obtaining knowledge on the entity and its environment?

A

To enable the auditor to identity and assess the risk of material misstatements at the overall financial statement level.

52
Q

How will obtaining knowledge help with the audit?

A
  1. Plan the audit
  2. Exercise professional judgement when evaluating and assessing the risk of material misstatements
  3. Identify significant classes of transactions, account balances and disclosures which will be tested individually in detail
  4. Respond to identified risks by:
    • setting materiality
    • formulating overall audit strategy
    • assigning staff of the right experience, skills and competence
    • coordinating overall audit
53
Q

What are some of the external factors to be considered when obtaining an understanding of the entity and its environment?

A
  1. Industry factors
    • market and competition, including demands, capacity
    • cyclical and seasonal activities
    • product technology relating to the entity’s product
    • energy supply and costs
    • regulatory factors
54
Q

What are some internal factors to consider when obtaining knowledge of the entity and its environment?

A
  1. Business operations
    • nature of revenue sources
    • products or services and markets
    • alliance, joint ventures and outsourcing activities
    • geographic dispersion and industry segmentation.
    • key customers
    • important suppliers
    • employment
  2. Investment and investment activities
    • acquisition, mergers or disposal of business activities
    • investment and disposition of securities and loans
    • capital investment activities
    • investment in non-consolidated entities
  3. Financing and financing activities
    • group structure
    • debt structure
    • leasing of PPE
    • beneficial owners
    • related parties
    • use of derivative financial instruments
  4. Financial reporting
    • accounting principles and industry specific practices
    • revenue recognition practices
    • accounting for fair values
    • foreign currency assets, liabilities and transactions
    • industry specific significant categories
    • financial statement presentation and disclosure
55
Q

What is the procedure in obtaining knowledge of the entity and its environment (risk assessment procedures)?

A
  1. Enquires of management and others within the entity
  2. Analytical procedures
  3. Observation and inspection
56
Q

Who are the management and others within the entity that you should enquire to find obtain knowledge of the entity?

A
  1. Management and those charged with governance
  2. Internal audit personnel
  3. Personnel involved in recording and processing complex transactions
  4. Internal legal council
  5. External persons such as industry experts, analysts and rating agencies
57
Q

What does analytical procedure help with?

A

It helps to identify the existence of unusual transactions or events, amounts, ratios and trends and to determine the financial position, etc.

58
Q

What is involved in observation and inspection in risk assessment procedures?

A
  1. Observation of the entity’s activities and operations
  2. Inspection of documents, records and internal control manuals
  3. Reading reports prepared by management
  4. Visit to the entity’s premises
  5. Tracing transactions through the system
59
Q

What are the components of internal control system?

A
  1. The control environment
  2. The entity’s risk management process
  3. The information system and related business processes relevant to financial reporting
  4. Internal controls
60
Q

The element of control environment comprise of the following:

A
  1. Communication and enforcement of ethical values
  2. Commitment to competence
  3. Participation by those charged with governance
  4. Management’s philosophy and operating style
  5. Organizational structures
  6. Assignment of authority and responsibilities
  7. Human resource policies and practices
61
Q

The internal controls entails the control activities and the monitoring of the working of the controls, what are some of the specific control actives?

A
  1. Reconciliations, reporting, reviewing and approving
  2. Checking of arithmetical accuracy of records
  3. General and application controls of computerized systems
  4. Control accounts and trial balances
  5. Stationery controls
  6. Comparing of internal data with external sources
  7. Comparing physical assets with recorded assets
  8. Limiting access to assets and records
  9. Budgetary control
62
Q

What is the value to the auditor for understanding the accounting information system and the internal control system?

A

It will assist the auditor to understand the control risk and develop appropriate audit procedures accordingly.

63
Q

What are some sources for obtaining information in internal controls?

A
  1. A system walk-through test
  2. Enquiry of management and personnel
  3. Inspection of documents
  4. Observations of controls and processes
  5. Internal control questionnaire
  6. Prior year working papers
64
Q

IT also poses specific risks to an entity’s internal controls, business processes and accounting system, what does this include?

A
  1. Reliance on systems or programs that are inaccurately processing data, processing inaccurate data, or both
  2. Unauthorized access to data may result in the destruction of data or improper changes to data, including the recording of transactions
  3. Possibility of IT personnel gaining access privileges beyond those necessary to perform their duties(breaking down of segregation of duties)
  4. Unauthorized changes to data in master file
  5. Unauthorized changes to systems or programs
  6. Failure to make necessary changes to systems or programs
  7. Inappropriate manual intervention over programmed controls
  8. Potential loss of data or inability to access data as required
65
Q

The risk of material misstatement exists at two levels, what are they?

A
  1. Overall financial statements level

2. Assertion level

66
Q

What is the risk of material misstatement at the overall financial statements level?

A

This relates to the financial statements as a whole and potentially affects multiple accounts and assertions

67
Q

What is the risk of material misstatement at the assertion level?

A

Risks pertaining to the specific classes of transactions, account balances and disclosures and will directly affect the nature, timing and extent of further audit procedures (test of controls and substantive procedures) for the individual accounts.

68
Q

What approach should be taken when performing an audit?and what does it entails?

A

Risk-based approach. It entails that the auditor identifies the risks that could lead to the financial statements being materially misstated, and then reacts to these risks by adjusting the audit approach accordingly (nature, timing and extent of test of controls and substantive procedures) to limi the audit risk to an acceptable level.

69
Q

What is an audit risk?

A

Risk of:

  1. Material misstatements (consisting of the two components, inherent and control risk)
  2. Risk that the auditor will not detect suck misstatements (detection risk)
70
Q

What is the inherent risk?

A

The susceptibility of an assertion to a misstatement that could be material, either individually or when aggregated with other misstatements, assuming that there are no related internal controls.

71
Q

What are some factors that affects the inherent risk at the assertion level?

A
  1. Complex calculations are more likely to be misstated than simple calculations
  2. Accounts based on estimates are more risky than accounts based on routine, factual data
  3. External circumstances, e.g. Technological development might lead to obsolete inventory and overstatement
  4. Lack of funding/working capital (going concern)
72
Q

What is control risk?

A

The risk that a misstatement that could occur in an assertion and that could be material, either individually or when aggregated with other misstatements, will not be prevented or detected and corrected on a timely basis by the entity’s internal controls.

73
Q

What are the methods of assessing control risks?

A

The auditor assess the control risks by performing test of controls to obtain audit evidence about the operating effectiveness of controls in preventing or detecting and correcting, material misstatements at the assertion level.

74
Q

What does test of controls consists of?

A
  1. Inspection
  2. Observation
  3. R-calcuation
  4. Enquiry
  5. Re-performance
75
Q

What is a detection risk?

A

The risk that the auditor’s procedures will not detect a material misstatement that exists in an assertion that could be material either individually or when aggregated with other misstatements.

76
Q

What is detection risk a function of?

A

Effectiveness of the audit procedures (test of controls and substantive procedures) and of the application thereof by the auditor.

77
Q

What is the relationship between risks?

A

Audit risk = inherent risk x control risk x detection risk

78
Q

Discuss the inverse relationship between materiality and audit risk.

A

The higher the audit risk, the lower materiality will be set to compensate for this. The lower the audit risk, the higher the materiality may be set because the chance is small that a material misstatement could occur and go undetected.

79
Q

What are the quantitative indicators of materiality?

A 
Turnover = 1/2 - 1 %
Gross profit = 1 - 2 %
Net income = 5 - 10 %
Total assets = 1 - 2 %
Equity = 2 - 5 %
80
Q

What are the components of an overall audit strategy?

A
  1. The overall audit approach (nature, timing and extent of audit procedures - test of controls and substantive procedures)
  2. The specific risk responses to:
    • level of professional skepticism applied
    • level of unpredictability applied
    • level of experience of audit staff required
    • response to specific risks identified
  3. Organization, administration, coordination and control of the overall audit
81
Q

What is the definition of an audit approach?

A

The strategy or method to obtain audit evidence against which to measure the fair presentation of the financial statements. The audit approach can be combined (test of controls) or substantive approach and contains the nature, timing and extent of the audit procedures to be performed to limit the risk of material misstatements, namely the test of controls and the substantive procedures.

82
Q

Discuss the nature, timing and extent of an audit if the reliance on internal controls is justified.

A 
Nature = more analytical
Timing = spread over the years/ early verification is possible
Extent = less
83
Q

Discuss the nature, timing and extent of audit approach if reliance on internal control is not justified.

A 
Nature = more substantive
Timing = near/at year end (no early verification)
Extent = more
84
Q

What is the meaning of nature of the audit procedure?

A

This relates to how the procedures will be performed to limit the risk of material misstatements, namely:

  1. test of controls
    • inspections, observations, enquiries, re calculations, re performance, confirmation
  2. Substantive procedure
    • detail testing (inspection, observation, re calculation, re performance and confirmation, and/or analytical procedures

Auditing (21 decks)

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