Ch 5 - Planning an audit (development)

Question 1

Give an example of a typical exam q re audit risk

Answer 1

Justify why the items listed as 1-3 in the scenario have been identified as key areas of audit risk, and for each item, describe the procedures that should be included in the audit plan in order to address those risks

Question 2

When justifying why an item has been identified as a key area of audit risk, what do you use the info to identify

Answer 2

Why the balance might be misstated (if given numbers, use your analytical procedures to support your point)
Whether the balance is likely to be understated or overstated if possible
Possible difficulties in gathering audit evidence
Use any numbers in the question to support your justification
Simple % changes
Margins/other ratios/comparing SOFP to SP&L items
E.g. receivables collection period
Compare financial to non-financial items e.g. revenue per contract
There are a list of significant risks in ISA 315 para 28 that can help

Question 3

How do you deal with audit procedures in the exam?

Answer 3

Can expect a long form question in exam to justify risk and describe the audit procedure you would perform
Need to tailor the audit procedures to the to the specific risks you identify in the quesiton, but you may be able to draw on your knowledge of audit procedures from work
Consider the use of both substantive tests and tests of control

Question 4

What are the 3 elements that audit procedures should contain?

Answer 4

Action (ISA 500)
Source (people, assets, docs)
Objective (relevant to ISA 315 assertions)

Question 5

How do you approach an audit procedures question?

Answer 5

A description of a system will help you think about how to test it
Identify the procedures in exam question marking keys that could be tailored to various risk areas
Evaluate and test controls over..
Obtain a breakdown of x and agree a sample of items to confirm y to z
Reconcile amounts recorded for cash sales (e.g. till rolls) with amounts banked
Discuss the estimate with management evaluate the reasonableness of their assumptions and compare to X, re-performing management calculations of Y

Question 6

Name some common phrases that can be used in the exam to answer a q on audit procedure?

Answer 6

Evaluate and test controls over..
Obtain a breakdown of x and agree a sample of items to confirm y to z
Reconcile amounts recorded for cash sales (e.g. till rolls) with amounts banked
Discuss the estimate with management evaluate the reasonableness of their assumptions and compare to X, re-performing management calculations of Y

Question 7

What are the procedures to deal with foreign currency transactions?

Answer 7

re-perform a sample of translation calculations, agreeing the rates used to a reliable third party source

Question 8

How is inventory dealt with?

Answer 8

ISA 501 (A1-A16)

Question 9

How should accounting estimates be dealt with?

Answer 9

ISA 540 (13, 22) could be applied to any estimate, but in particular remember subsequent events provide strong evidence of YE estimation

Question 10

Give some examples of accounting estimates that ISA 450 can be applied to

Answer 10

Post YE selling prices to support NRV of inventory
Cash after date testing to support valuation of receivables
Actual returns/repairs costs support warranty provisions

Question 11

How should preparing for opening balances be dealt with?

Answer 11

ISA 510

Question 12

How can you determine if the auditor needs to seek written representation on a particular risk area?

Answer 12

Look at the list of ISAs that require this in ISA 580 Appendix

Question 13

hat can data analytics be used for?

Answer 13

To obtain audit evidece

Question 14

How do examiners tend to test data analytics?

Answer 14

Recent exam q’s have tested your ability to identify suitable data analytics routines to address an identified audit risk

Question 15

What are some commonly performed data analytics routines?

Answer 15

• Comparing the last time an item was bought with the last time it was sold for cost/NRV purpose
• Inventory ageing and how many days inventory is in stock by item
• Receivables and payables aging and the reduction in overdue debt over time
• Analyses of revenue trends split by product or region
  Analyses of gross margins and sales, highlighting items with -ve margins
• Matches of orders to cash and purchases to payments
• ‘Can do did do’ testing of user codes to test whether segregation of duties is appropriate, and whether any inappropriate combinations of users have been involved in processing transactions
• Detailed recalculations of depreciation on fixed assets by item
  Analysis of capital expenditure vs repairs and maintenance
  Three-way matches between purchase/sales order, goods received/despatch notes and invoices

Question 16

What is a can do did do test?

Answer 16

test whether segregation of duties is appropriate, and whether any inappropriate combinations of users have been involved in processing

Question 17

What basis are accounts prepared on

Answer 17

Company FS are prepared on GC basis, unless man intends to liquidate the company, cease operations, or has no realistic alternative but to do so.

Question 18

When are accounts produced on a break up basis?

Answer 18

man intends to liquidate the company, cease operations, or has no realistic alternative but to do so.

Question 19

What are the accounting requirements re GC?

Answer 19

If there is doubts about the company’s ability to continue as a GC, it must be disclosed in the FS
If the company is not a GC, the FS should be prepared on a break up basis
The effective of the break up basis are
No LT assets or liabilities
Assets are valued at recoverable amount
Provisions may be required for new costs e.g. redundancies

Question 20

What is the effective base of the break up basis on the FS?

Answer 20

No LT assets or liabilities
Assets are valued at recoverable amount
Provisions may be required for new costs e.g. redundancies

Question 21

What are the audit issues re GC

Answer 21

ISA 570 sets out requirements for the auditor in relation to GC
The directors are responsible for preparing FS under the appropriate basis and making any necessary disclosures
The auditor’s responsibility is to obtain sufficient appropriate audit evidence about the appropriateness of man use of GC assumption
So auditor must consider GC at all stages of the audit

Question 22

Why must the auditor consider GC at all stages of the audit?

Answer 22

The auditor’s responsibility is to obtain sufficient appropriate audit evidence about the appropriateness of man use of GC assumption

Question 23

How should GC be dealt with during the planning process?

Answer 23

When performing risk assessment procedures, the auditor should consider events or conditions that cast doubt on the entity’s ability to continue as a GC
ISA 570 para A3 contains a list of factors that may indicate GC problems

Question 24

When must an auditor do re GC when events or conditions are determined?

Answer 24

the auditor needs to obtain evidence to determine whether or not material uncertainty exists

Question 25

What are procedures likely to include that are looking for evidence on GC

Answer 25

Review future plans including financial forecasts and projections
Review of company’s borrowing facilities and other fiannce, considering whether any loan covenants are breached
Review of minutes of board meetings

ISA 50 paragraph A16 may be useful in the exam

Question 26

Can auditors place reliance on third parties?

Answer 26

The auditor can place reliance on the work of third parties when forming an opinion the FS of X plc
Auditor of X plc still has sole responsibility for forming that opinion

Question 27

What does an internal audit typically do?

Answer 27

Typical work carried out by Internal Audit includes reviewing internal control systems

Question 28

How can the external auditor use use the internal audit?

Answer 28

As the external auditor needs to understand and document client systems to assess control risk, they may be able to place reliance upon the work performed by the Internal Audit

Question 29

What does ISA 610 set out?

Answer 29

ISA 610 sets out the procedure that the external auditor should carry out before placing reliance on the work done by internal audit

Question 30

What is included in the general assessment when assessing internal audit?

Answer 30

Assess internal audit function
Objectivity (consider status and reporting lines)
Completeness (consider resources, training and proficiency)
Systematic and disciplined approach (consider planning, supervision, review, documentation and QC for internal audit work)

Question 31

What is included in the specific assessment when assessing internal audit?

Answer 31

Assess the specific assessment
Assess the specific work that may be relied upon
Whether the work was properly planned, performed, supervised, reviewed and documented
Whether there is sufficient evidence to support the authors conclusions
Whether the conclusions reached are appropriate

Question 32

How should an auditor conclude on the work done by internal audit

Answer 32

External auditor should

• Test the work of the internal audit, and may observe their procedures to conclude on the adequacy of their work for the purpose of the external audit
• Extend their own procedures if they conclude the internal audit work isn’t adequate

Question 33

Does ISA 610 allow external auditors to use internal audit for direct assistance?

Answer 33

Doesn’t allow it

Question 34

How can the external audit use the internal audit process?

Answer 34

Where the audit committee monitors the work of internal audit, the auditor may review this process

Question 35

What are the performance indicators for assessing the work on internal audit?

Answer 35

Progress compared to planned work
Recommendations accepted as a % of recommendations made
Total time taken for an assignment compared to a plan
Number of reports produced within target dates
Feedback from users of internal audit

Question 36

Are auditors always capable of auditing every line of FS?

Answer 36

Auditors expertise in the fields of acc and audit might not be sufficient to allow them to audit every item in the FS

Question 37

When might experts be involved in audit? (which areas)

Answer 37

Interpretation of legal contracts
Valuation of L&B or FI
Analysis of complex tax issues
Designing procedures and evaluating results of data analytics

Question 38

What is an auditor’s expert/

Answer 38

An auditors expert is an indiv or org whose work is used by the auditor to assist in obtaining sufficient appropriate audit evidence

Question 39

What is a man expert?

Answer 39

A man expert is an indiv/org whose work is used by the entity to assist in the preparation of the FS

Question 40

Where shows the procedures that an external auditor should carry out before placing reliance on an auditor’s expert and management expert?

Answer 40

ISA 620 for auditor’s expert

ISA 500 for management expert

Question 41

What is the general assessment requirements for auditor’s expert and management expert?

Answer 41

Auditor’s expert: Assess the auditor experts competence, capabilities and objectivity of the expert
Management’s expert: Assess the competence, capabilities and objectivity of the expert

Question 42

What is the general specific requirements for auditor’s expert and management expert?

Answer 42

Auditor’s expert: Obtain an understanding of the field of expertise of the expert
Agree the nature, scope and objective of the expert’s work
Management’s expert: Obtain an understanding of the work of the expert

Question 43

How should auditors conclude on evidence from auditor’s expert and management expert?

Answer 43

Auditor’s expert Evaluate the adequacy of the expert’s work

Management’s expert: Evaluate the appropriateness of the work as audit evidence for the relevant assertions

Question 44

What are service orgs used for by a company?

Answer 44

Some companies outsource processes and operations to third-party orgs

Question 45

Give some examples of outsourcing to service organisations

Answer 45

Payroll

Facilities management

Question 46

What is the benefit and challenge of service organisations?

Answer 46

This might be good news in that an expert is carrying out the task
But provides a challenge to the audit team in terms of gathering evidence

Question 47

What must auditors do re service organisation?

Answer 47

Obtain an understanding of the outsourced services
Considered access to sources of evidence
Assess the risks arising

Question 48

What do services organisations typically obtain/

Answer 48

Service organisations typically obtain assurance reports over the adequacy of their internal controls

Question 49

What does an auditor become responsible for when it engages a parent company?

Answer 49

responsible for forming an opinion on 2 sets of FS
The parent company’s FS
The consolidated financial statements of the grip

Question 50

What must be done if the group auditor doesn’t audit all the components of the group?

Answer 50

They will need to place reliance on the component auditors in order to form an opinion on the FS

Question 51

Which ISA looks at the requirements for group audits?

Answer 51

ISA 600 sets out the requirements in relation to group audits

Question 52

Why is it important that a group eng partner understands they are responsible for the opinion on the group asset?

Answer 52

so before accepting the eng it is important to consider whether the auditor can obtain sufficient appropriate audit evidence

Question 53

What does materiality need to be determined for on group accs?

Answer 53

For the group FS

For the component FS (the materiality threshold will be lower than group materiality)

Question 54

What general assessment must be carried out for concluding on group FS?

Answer 54

Understanding the component auditor includes an assessment of
Compliance with ethical requirements such as independence
Professional competence
Whether the group audit team will be involved in the work of the component auditor, if nec, to obtain sufficient appropriate evidence
Applicable regulation for the component

Question 55

What specific assessment must be carried out for concluding on group FS?

Answer 55

The group audit team should
Communicate its requirements to the component auditor
Request communication from the component auditor

Question 56

What must be done to conclude on a group FS?

Answer 56

The group auditor should evaluate the sufficiency and appropriateness of audit evidence obtained by
Evaluating communication from the component auditor
Considering whether a review of further documentation is required

if the work performed is not adequate, the group auditor should determine which additional procedures need to be performed

Question 57

What should the group audit team communication to component auditor include?

Answer 57

Work to perform
Form and content communications
Request info that component auditor will cooperate
Ethical requirements relevant to the group audit
Component liability
Significant risks that are relevant to the component audit
List of related parties

Question 58

What should the component auditor communication to audit team include?

Answer 58

Confirmation of compliance with ethical requirements
Confirmation of compliance with group audit team requirements
Identification of the FI on which the component auditor reports
Information on non-compliance
List of uncorrected misstatements
Indicators of management bias
Overall findings and opinion