ch3 planning the assignment Flashcards
what does the audit strategy do
determines scope, timing and direction of audit and determines the development of the audit plan
what is the audit plan
shows how overall strategy will be implemented
what does the audit strategy involve
- understanding the entity and its environment
-materiality
-risk assessment
-nature, extent and timing of audit procedures
-direction, supervision n review of work
-other matters
why is it important to understand the entity
- to assess risk
-to help design and perform audit procedures - to develop the audit strategy snd plan
ISA315 requires the auditor to understand which of the entity’s framework
financial reporting framework
accounting policies
when is a matter material
if its omission or mistatement could influence the economic decision of users taken on the basis of financial statements
when is a matter material
if its omission or mistatement could influence the economic decision of users taken on the basis of financial statements
items could be material due to
- size
-nature
what is the audit risk model
audit risk = inherent risk x control risk x detection risk
what are the 2 elements of audit risk
risk that the financial statements contain a material mistatement
risk that the auditor fails to detect any material mistatements
Inherent risk can be considered at three different levels
industry level
entity level
balance level
inherent risk factors that should be used to determine the significance of a risk
complexity
subjectivity
change
uncertainty
management bias or other fraud risk factors
when might an auditor consider the implications of climate related risks
when trying to understand the entity
risks faced by businesses and the public sector
physical risk
transition risk
two characteristics of fraud
- misappropriation of assets
- fraudulent financial reporting
the first line of defence against fraud
professional scepticism
how does an analytical procedure work
understand the business
develop an expectation
compare to actual to expectation
unexpected variations = risk
sources of information for analytical procedures
board minutes
interim accounts
management accounts
VAT returns
industry knowledge
gross profit margin
gross profit / revenue x 100
cost of sales percentage
cost of sales / revenue x100
operating cost percentage
operating cost or overheads / revenue x 100
return on capital employed
profit before interest and tax x 100
/ equity + net debt
return on shareholders funds
net profit for period x 100
/
share capital + reserves
current ratio
current assets / current liabilities
