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Assurance > Chapter 3 - Planning the assignment > Flashcards

Chapter 3 - Planning the assignment Flashcards

1
Q

What is the objective of an auditor according to ISA 300?

A

Plan the audit so it will be performed in an effective manner

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2
Q

What is an audit strategy?

A

Sets the scope, timing and direction of audit

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3
Q

What is an audit plan?

A

More detailed than strategy, sets out timing, nature and extent of procedures

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4
Q

What is the first stage of planning?

A

Ensure that ethical requirements continue to be met

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5
Q

What is the second stage of planning?

A

Ensure terms of engagement are understood

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6
Q

What is the third stage of planning?

A

Establish overall strategy

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7
Q

What is the fourth stage of planning?

A

Develop an audit plan

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8
Q

What is the key contents of the overall audit strategy?

A

Understanding:
- Entity’s environment
- internal controls
- accounting systems
- Resources

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9
Q

What is the objective of the auditor according to ISA 315?

A

Identify and assess the risks of material mismanagement

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10
Q

What does ISA 315 require the auditor to understand?

A

Financial reporting framework

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11
Q

What are analytical procedures?

A

Evaluations of financial information through analysis of plausible relationships among financial/non-financial data

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12
Q

What does ISA 520 require auditors to do?

A

Apply analytical procedures in the overall review at the end of the audit and to obtain audit evidence

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13
Q

What are deemed possible sources of information?

A
  • interim financial info
  • budgets
  • management accounts
  • Bank and cash records
  • Board mins
  • Vat returns
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14
Q

What is the formula to calculate return on capital employed?

A

PBT and interest/capital employed

Shows effectiveness of resources used

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15
Q

What is the formula to calculate gross profit margin?

A

Gross profit/revenue x 100

Shows profitibility

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16
Q

What is the formula to calculate COS %?

A

COS/Revenue x 100

Shows relationship between costs and revenue

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17
Q

What is the formula for operating cost %?

A

Operating costs/revenue x 100

shows same as COS %

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18
Q

What is the formula for net profit margin?

A

PBT and interest/revenue x 100

Shows profitability

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19
Q

What is the formula for current ratio?

A

Current assets/current liabilities
Assesses ability to pay current liabilities

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20
Q

What is the formula for quick ratio?

A

Receivables + current investments + cash/current liabilities

Assesses ability to pay current assets

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21
Q

What is the formula for gearing?

A

Net debt/equity x 100

Assesses reliance on external finance

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22
Q

What is the formula for interest cover?

A

Profit before IR/IR

Assesses ability to pay interest charges

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23
Q

What is the formula for net asset turnover?

A

Revenue/capital employed

Assesses revenue generated by assets

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24
Q

What is the formula for inventory period?

A

Inventory/COS x 365

Assesses level of inventory

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25
Q

What is the formula for trade receivables period?

A

TR/Revenue x 365

Assesses ability to turn revenue into cash

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26
Q

What is the formula for trade payables period?

A

TP/revenue x 365

Assesses ability to pay suppliers

27
Q

What is materiality?

A

Expression of relative significance/importance of a particular matter

28
Q

What does the IFRS conceptual framework state about a matter being material?

A

Matter is material if its omission/misstatement influences economic decisions of users

29
Q

What is performance materiality?

A

Amount set below materiality for the financial statements as a whole

30
Q

What is the purpose of performance materiality?

A

To reduce the probability that the aggregates of uncorrected and undetected misstatements exceed materiality

31
Q

According to ISA 320, when in particular does materiality have to be considered?

A
  • Identifying/assessing risks of material misstatement
  • Determining nature, timing and extent of further audit procedures
  • Evaluating effect of uncorrected misstatements
32
Q

What should the assessment of materiality be based on?

A

Most recent and reliable financial info

33
Q

How do materiality assessments help auditors?

A
  • What to examine
  • Whether to use sampling techniques
  • Level of financial misstatement
34
Q

How is the materiality level set?

A

Auditors decide the level of misstatement that will distort the accounts

35
Q

What is tolerable misstatement?

A

Max misstatement that an auditor will accept

36
Q

How is materiality often expressed?

A

Proportion of profits

37
Q

How will the level of materiality change in a growing company?

A

Will increase

38
Q

What is a common calc of materiality based on PBT?

A

Materiality set at 5%-10% of PBT

39
Q

What is a common calc of materiality based on revenue?

A

Materiality set at 0.5%-1% of revenue

40
Q

What is a common calc of materiality based on total assets?

A

Materiality set at 1%-2% of total assets

41
Q

What does performance materiality focus on?

A

Diff between vele of tolerable and actual misstatements detected

42
Q

What kind of approach does performance materiality entail?

A

Prudent approach

Higher risk, lower performance materiality needs to be set

43
Q

What is audit risk?

A

Risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated

44
Q

How is audit risk calculated?

A

Audit risk = risk of material misstatement + detection risk

45
Q

How does the risk of material misstatement arise?

A

From inherent and control risk, both dependent on the entity

46
Q

What is detection risk dependent on?

A

Auditor

47
Q

What is inherent risk?

A

The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material

E.g. balance includes an estimate

48
Q

What is control risk?

A

Risk that a misstatement could occur in an assertion and could be material, is not prevented

49
Q

What is ISA 315 distinguish between?

A

Risk at financial statement level and assertion level

50
Q

How are risk at financial statement level viewed?

A

Pervasive in effect, require an overall response

51
Q

How should risk at the assertion level be assessed?

A

In terms of inherent and control risks

52
Q

What is detection risk?

A

Risk that auditor’s procedures undertaken to reduce risk won’t detect material misstatements

Auditors have a degree of control over this risk

53
Q

What does ISA 200 state?

A

Auditor shall obtain sufficient appropriate audit evidence to reduce audit risk

54
Q

How does an auditor manage overall risk?

A

By manipulating the level of detection risk

More work carried out, lower detection risk

55
Q

What 4 steps does ISA 315 require the auditor to take?

A
  1. identify risks
  2. assess risks
  3. consider whether risks could result in material misstatement
  4. Consider probability of risks
56
Q

What is a significant risk?

A

Identified risk of material misstatement for which the assessment of inherent risk is close to the upper end of the spectrum

57
Q

What are the inherent risk factors that ISA 315 says should be used to determine the significance of risk?

A
  • Complexity
  • Subjectivity change
  • Uncertainty
58
Q

What is ISA 550 devoted to?

A

Related party transactions

59
Q

What makes related transactions inherently risky?

A
  • Auditor may not be aware a party is related
  • Management may not be aware of reporting framework
60
Q

What does ISA 240 provide auditors?

A

Guidance on fraud

61
Q

Who is responsible for preventing and detecting fraud and error?

A

Company’s management, done by integrating systems of internal control promoting honest and ethical behaviour

62
Q

How does the ICAEW code of ethics require an auditor to respond fraud?

A

With relevant laws and regs

63
Q

What does ISA 315 require discussion among the engagement team about?

A

Where fraud may take place, usually done during planning phase

64
Q

Under ISA 330, when may the auditor need to perform additional procedures?

A

If effects of climate related risks part of materiality assessment

Assurance (16 decks)

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