Ch 7-Planning, Materiality & ROMM

Question 1

Audit Strategy:

Characteristics of client- Company into and internal controls
Reporting requirements- Deadlines and MGMT letter (inc deficiencies and recommendations)
Resources- Audit team (do we need more)
Significant findings- Regulations and business developments
Risk assessment - Identify ROMM through analytical procedures at planning (trend/ratio analysis)
Materiality (draft) - %’s and by nature (bank, fin stmt, going concern disclosure)

Question 2

Audit plan:

1-Approach to audit
2-Risks and safeguards to audit firm
3-Significant risks (e.g. management override, errors with stock, overstatement, familiarity etc.)
4-Materiality
5-Communication- informal communication and relationship type
6- Related parties- nature of any relationships and transactions for ref to audit file

Question 3

Analytical procedures at planning stage:

1-Data analysis software
2- Ratios
3-Trend analysis
4-Market comparison

Question 4

Audit risks & ROMM

Answer 4

Inherent risk- transaction/account balance susceptible to errors in specific industry (e.g. forex)
Control Risk-Failure to prevent due to bad processes or lack of experience in client software
Detection Risk- Failure to detect (lack of knowledge & experience)

Question 5

Business risks (PIS- Point, impact,suffer)

Answer 5

Risk that business stops achieving goals:

-Reduced profit/cash flow
-Damaged reputation/legal cases
-Recession
-Competition
-Going concern

Question 6

Materiality: Calculate & justify

Revenue. (0.5 - 1%)
Total Assets (1 - 2 %)
PBT. (5 - 10%)

Use lower of threshold as benchmark for higher risks