Chapter 3 - Planning, Controlling And Recording

Question 1

Engagement letter

Answer 1

Reduces expectation gap by outlining responsibilities.

Contract between client and auditor.

Question 2

Planning an audit: why? Procedures?

Answer 2

Why? - ensures appropriate staff used, relevant areas worked on, compliance with ISAs.

Procedures? -

1) Review
2) client meeting to discuss
3) prepare audit approach
4) audit admin - time/cost, staff etc

Question 3

Materiality

Answer 3

An item is material if its omission could be expected to affect the decision of the user.

0.5 - 1 turnover
1 - 2 gross assets
5 - 10 profits before tax

Low working materiality level = lower risk of missing undetected transactions

Question 4

Analytic review

Answer 4

Performed at the planning stage.
Comparing this years accounts to last years, using FS, budgets and industry averages.
Identify risky areas that need more work and substantive testing.

Question 5

Audit risk

Answer 5

Risk of the auditor forming an inappropriate opinion:

Inherent risk - industry and company
Control risk - controls overridden
Detection risk - auditors don’t pick up the error

Detection risk compromises sampling and non sampling risk.
If Inherent and control risks high then detection must be low risk.