Ch 7 - Planning Flashcards
What are the benefits of planning an audit, as per the requirements of ISA 300?
- Attention devoted to important areas
- Problems identified on a timely basis
- Audit organization is effective and efficient
- Allows selection of sufficiently competent staff
- Facilitates direction, supervision and review of work
- Aids coordination of work done by non-team members, such as experts or component auditors
Why are audits planned?
Audits (and other assurance engagements) are planned because if they are not:
- time might be wasted doing the wrong work
- the important work might not be done at all
- ultimately, the wrong conclusion might therefore be drawn
What are the benefits of planning an audit for the auditor?
Planning helps the auditor know:
- what to do
- how much to do
- where to focus resources
- what the important matters are that need to be dealt with
What is the key planning document for an audit? What does it include?
Overall audit strategy. This includes:
- Understanding the entity and its environment
- Preliminary analytical procedures
- Materiality
- Risk assessment
- Audit approach
- Whether experts and/or internal audit will be relied on
- Timing
- Team
- Budgets
- Deadlines
What documentation is required as per ISA 300?
- Overall audit strategy
- Detailed audit plan
What are the features of a detailed audit plan?
An audit plan:
- is more detailed than the audit strategy,
- sets out the nature, timing, and extent of planned audit procedures (including risk
assessment procedures), and
- Should also be updated as necessary during the engagement.
How might automation help in the planning stage?
Automation can help with following:
- bringing information forward from the previous audit and populating checklists
- identifying resource requirements
- generating working paper templates
- identifying information required from the client prior to any site visit
How might automation help during the fieldwork phase?
Automated templates do the following:
- Help to ensure that all areas are covered in sufficient detail
- Enable electronic sign-off to take place
- Feed into the auditor’s report and into any report to management on deficiencies identified
When should information be considered material?
Information is material if its omission or misstatement could influence the economic
decisions of users taken on the basis of the financial statements.
What is performance materiality?
An amount or amounts set at less than materiality for the financial statements as a whole, to reduce the risk that the aggregate of smaller misstatements exceeds materiality for the financial statements as a whole.
What items may be considered material by nature?
- Transactions with directors or other related parties – these must always be disclosed in the FS
- Small amounts that lead to the crossing of thresholds (e.g. turning profit to loss, or turning a small company into a medium-sized company under Companies Act 2006 rules)
- Descriptions which are misleading (e.g. of accounting policies)
Why might analytical procedures be used in an audit, and when are they required to be used?
Analytical procedures may be used as a form of substantive procedures while gathering evidence
They are required to be used
- During the planning stage to identify risks and to obtain an understanding of the entity and its environment.
- In forming an overall conclusion on the financial statements.
Benefits of analytical procedures
- Helps to identify key areas for attention during an audit
- Includes information outside of accounting records (e.g. budgets)
- Allows comparison of data from different sources
Limitations of analytical procedures
- Requires good knowledge of business to understand results
- Consistent results can conceal material errors
- Tendency to be carried out without appropriate professional skepticism
- Requires an experienced member of staff to be done properly
- Reliable data may not be available.
How does an auditor perform analytical procedures?
The auditor calculates a ratio (e.g. return on capital) and compares it against their expectation made based on their understanding of the business. Any variation to this expectation should be considered a risk.
