Chapter 3 - planning the assignment

Question 1

What is the differnce betwwen an audit strategy and a audit plan?

Answer 1

• Audit strategy → determines scope, timing and dirction of audit. (auditor work)
• Audit plan → is more detailed showing how the overall strategy will be implimented (partner led)

Question 2

What are the key components of the audit strategy?

Answer 2

Question 3

What does audit planning ensure?

Answer 3

Question 4

How is the materiality value calculated for the following items on the financial statment?

1. Profit before tax
2. Revenue
3. Total assets

Answer 4

1. Profit before tax → 5 - 10%
2. Revenue → ½ - 1 %
3. Total assets 1 - 2%

Question 5

What is audit risk calculated on and whose responsibility is it to manage the risks?

Answer 5

1. Inherent risks → Client controlled
2. Control risks → Client controlled
3. Detection risks → Auditor controlled

Question 6

1. What is an inherent risk?
2. What are the 3 levels of inherent risk?

Answer 6

1. The susceptibility to material mistatment → mistatment that could occur in the first place
2. Industry level → affecting whole industry _{(multiple companies)}

• Entity level → affacting whole entity_{<em> (e.g managment get profit related bonuses, change in criteria leading to mistakes)</em>}
• Balance level → affecting a particular account _{(items which are subjective → depressiation)}

Question 7

1. What is a control risk?
2. What is a detection risk?

Answer 7

1. The risk that client controls did not prevent or detect material misstatment.
2. The risk that auditors procedures do not detect a material mistatment → _{insufficient work or poor judgement}

Question 8

To maintain a acceptable level of audit risk detection risk must below, how can this be achieved?

Answer 8

• Staff reviews / training
• Increased sample size
• lower materiality (more tests and work)

Question 9

1. Whose responsibility is it to detect and prevent?
2. What are the two types of fraud?

Answer 9

1. The managers
   2.

Question 10

1. What is an analytical procedure?
2. When must is it used?
3. When can it be used?

Answer 10

1. Evaluation and comparision of financial infomation through analysis of releationships with finacial & non financial data.
2. At planning to indentify risk & to assist in forming a conclusion on finacial satstments
3. To form a substantive procedure

Question 11

What are the limitations of analytical procesures?

Answer 11

Question 12

To aquire sound knowledge about the client what sources can be used?

Answer 12