Chapter 3 - Planning the assignment Flashcards
What is the objective of an auditor according to ISA 300?
Plan the audit so it will be performed in an effective manner
What is an audit strategy?
Sets the scope, timing and direction of audit
What is an audit plan?
More detailed than strategy, sets out timing, nature and extent of procedures
What is the first stage of planning?
Ensure that ethical requirements continue to be met
What is the second stage of planning?
Ensure terms of engagement are understood
What is the third stage of planning?
Establish overall strategy
What is the fourth stage of planning?
Develop an audit plan
What is the key contents of the overall audit strategy?
Understanding:
- Entity’s environment
- internal controls
- accounting systems
- Resources
What is the objective of the auditor according to ISA 315?
Identify and assess the risks of material mismanagement
What does ISA 315 require the auditor to understand?
Financial reporting framework
What are analytical procedures?
Evaluations of financial information through analysis of plausible relationships among financial/non-financial data
What does ISA 520 require auditors to do?
Apply analytical procedures in the overall review at the end of the audit and to obtain audit evidence
What are deemed possible sources of information?
- interim financial info
- budgets
- management accounts
- Bank and cash records
- Board mins
- Vat returns
What is the formula to calculate return on capital employed?
PBT and interest/capital employed
Shows effectiveness of resources used
What is the formula to calculate gross profit margin?
Gross profit/revenue x 100
Shows profitibility
What is the formula to calculate COS %?
COS/Revenue x 100
Shows relationship between costs and revenue
What is the formula for operating cost %?
Operating costs/revenue x 100
shows same as COS %
What is the formula for net profit margin?
PBT and interest/revenue x 100
Shows profitability
What is the formula for current ratio?
Current assets/current liabilities
Assesses ability to pay current liabilities
What is the formula for quick ratio?
Receivables + current investments + cash/current liabilities
Assesses ability to pay current assets
What is the formula for gearing?
Net debt/equity x 100
Assesses reliance on external finance
What is the formula for interest cover?
Profit before IR/IR
Assesses ability to pay interest charges
What is the formula for net asset turnover?
Revenue/capital employed
Assesses revenue generated by assets
What is the formula for inventory period?
Inventory/COS x 365
Assesses level of inventory
What is the formula for trade receivables period?
TR/Revenue x 365
Assesses ability to turn revenue into cash
What is the formula for trade payables period?
TP/revenue x 365
Assesses ability to pay suppliers
What is materiality?
Expression of relative significance/importance of a particular matter
What does the IFRS conceptual framework state about a matter being material?
Matter is material if its omission/misstatement influences economic decisions of users
What is performance materiality?
Amount set below materiality for the financial statements as a whole
What is the purpose of performance materiality?
To reduce the probability that the aggregates of uncorrected and undetected misstatements exceed materiality
According to ISA 320, when in particular does materiality have to be considered?
- Identifying/assessing risks of material misstatement
- Determining nature, timing and extent of further audit procedures
- Evaluating effect of uncorrected misstatements
What should the assessment of materiality be based on?
Most recent and reliable financial info
How do materiality assessments help auditors?
- What to examine
- Whether to use sampling techniques
- Level of financial misstatement
How is the materiality level set?
Auditors decide the level of misstatement that will distort the accounts
What is tolerable misstatement?
Max misstatement that an auditor will accept
How is materiality often expressed?
Proportion of profits
How will the level of materiality change in a growing company?
Will increase
What is a common calc of materiality based on PBT?
Materiality set at 5%-10% of PBT
What is a common calc of materiality based on revenue?
Materiality set at 0.5%-1% of revenue
What is a common calc of materiality based on total assets?
Materiality set at 1%-2% of total assets
What does performance materiality focus on?
Diff between vele of tolerable and actual misstatements detected
What kind of approach does performance materiality entail?
Prudent approach
Higher risk, lower performance materiality needs to be set
What is audit risk?
Risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated
How is audit risk calculated?
Audit risk = risk of material misstatement + detection risk
How does the risk of material misstatement arise?
From inherent and control risk, both dependent on the entity
What is detection risk dependent on?
Auditor
What is inherent risk?
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
What is control risk?
Risk that a misstatement could occur in an assertion and could be material, is not prevented
What is ISA 315 distinguish between?
Risk at financial statement level and assertion level
How are risk at financial statement level viewed?
Pervasive in effect, require an overall response
How should risk at the assertion level be assessed?
In terms of inherent and control risks
What is detection risk?
Risk that auditor’s procedures undertaken to reduce risk won’t detect material misstatements
Auditors have a degree of control over this risk
What does ISA 200 state?
Auditor shall obtain sufficient appropriate audit evidence to reduce audit risk
How does an auditor manage overall risk?
By manipulating the level of detection risk
More work carried out, lower detection risk
What 4 steps does ISA 315 require the auditor to take?
- identify risks
- assess risks
- consider whether risks could result in material misstatement
- Consider probability of risks
What is a significant risk?
Identified risk of material misstatement for which the assessment of inherent risk is close to the upper end of the spectrum
What are the inherent risk factors that ISA 315 says should be used to determine the significance of risk?
- Complexity
- Subjectivity change
- Uncertainty
What is ISA 550 devoted to?
Related party transactions
What makes related transactions inherently risky?
- Auditor may not be aware a party is related
- Management may not be aware of reporting framework
What does ISA 240 provide auditors?
Guidance on fraud
Who is responsible for preventing and detecting fraud and error?
Company’s management, done by integrating systems of internal control promoting honest and ethical behaviour
How does the ICAEW code of ethics require an auditor to respond fraud?
With relevant laws and regs
What does ISA 315 require discussion among the engagement team about?
Where fraud may take place, usually done during planning phase
Under ISA 330, when may the auditor need to perform additional procedures?
If effects of climate related risks part of materiality assessment
