Chapter 3: Planning the assignment Flashcards
What are the audit strategy roles?
- set the scope, timing
- direct the audit and guide the development of the audit plan
What is the role of the audit plan?
set out the nature, timing, extent of procedures (include risk assessment procedures) to be performed
Name key contents of an overall audit strategy
- understanding the entity’s environment
- understanding the accounting and internal control system (policy, and procedures)
- risk and materiality
- consequent nature, timing and extent of resources
- other matters, eg: going concern basis, special attention
Why do auditors have to obtain an understanding of the entity and its environment?
- identify and assess the RoMM
- design and perform further audit procedures
- a frame of reference for exercising audit judgment
How can auditors obtain an understanding of the entity and its environment?
- inquiry of mgt
- analytical procedures
- observation
- inspection
- prior period knowledge
- discussion among the engagement team
Besides understanding the entity’s nature, what else must auditors know in the planning stage?
the entity’s financial reporting framework (accounting policies)
Do analytical procedures only consider financial data?
No. Both financial and non-financial data
What do analytical procedures at the planning stage include?
- consideration of comparison: prior periods, budgeted, forecasts, expectations, similar industry information
- consideration of relationships: non-financial data, elements of financial information which created a patterns
Name 4 main accounting ratio which may be used as analytical procedures
- performance ratio
- short-term liquidity ratios
- long-term solvency ratios
- efficiency ratios
What is the formula to calculate the return on capital employed? State its purpose
1) PBIT/ equity + net debt
2) purpose: effective use of resources
What is the formula to calculate the return on shareholders’ funds? State its purpose
1) net profit for the period/ share capital + reserves
2) purpose: effective use of resources
What is the formula to calculate the gross profit margin? State its purpose
1) gross profit x 100/ revenue
2) purpose: assess profitability before taking overheads
What is the formula to calculate the cost of sale percentage? State its purpose
1) cost of sales x 100/ revenue
2) purpose: assess the relationship of costs to revenue
What is the formula to calculate the operating cost percentage? State its purpose
1) operating costs x 100/ revenue
2) purpose: assess the relationship of costs to revenue
What is the formula to calculate the net margin (operating margin)? State its purpose
1) PBIT x 100/ revenue
2) purpose: assess profitability after taking overheads
What is the formula to calculate the current ratio? State its purpose
1) current asset/ current liabilities
2) purpose: assess ability to pay current liabilities from reasonably liquid asset
What is the formula to calculate the quick ratio? State its purpose
1) receivables + current investment + cash/ current liabilities
2) purpose: assess ability to pay current liabilities from reasonably liquid asset
What is the formula to calculate the gearing ratio? State its purpose
1) net debt/ equity x 100
2) purpose: asset reliance on external finance
What is the formula to calculate the interest cover? State its purpose
1) profit before interest payable/ interest payable
2) purpose: assess the ability to pay interest charges
What is the formula to calculate the net asset turnover? State its purpose
1) revenue/ capital employed
2) purpose: assess revenue generated from asset base
What is the formula to calculate the inventory turnover? State its purpose
1) costs of sales/ inventories
2) purpose: assess level of inventory held
What is the formula to calculate the inventory days? State its purpose
1) average inventory/ cost of sales x 365
2) purpose: assess the average inventory-holding period
What is the formula to calculate the trade receivables collection period? State its purpose
1) trade receivables x 365/ revenue
2) purpose: assess ability to turn receivables into cash
What is the formula to calculate the trade payables payment period? State its purpose
1) trade payables x 365/ credit purchases
2) purpose: assess ability to pay suppliers
