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AA > Chapter 4 - Planning an audit (basics) > Flashcards

Chapter 4 - Planning an audit (basics) Flashcards

1
Q

PERFORMANCE

Gross profit margin

A

Gross Profit/Revenue x 100%

Profitability BEFORE looking at overhead expenses

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2
Q

PERFORMANCE

Operating margin

A

Operating Profit/ Revenue x 100%

Profitability AFTER looking at overhead expenses

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3
Q

PERFORMANCE

Return on capital employed

A

Operating Profit/ Equity + Debt x 100%

How effectively resources are used to generate profit

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4
Q

List some of the benefits of planning:

A
  • Attention to important areas
  • Problems identified timely
  • Organised effectively/efficiently
  • Staff with appropriate competence selected
  • Facilitates direction of work
  • Aids coordination of work
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5
Q

Is Audit Strategy detailed or rough/general

A

Overall/Rough/General

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6
Q

What are the general principles covered in Audit strategy?

A
  • Understanding the entity/environment
  • Materiality
  • Analytical Procedures
  • Risk Assessment
  • Audit Approach
  • Coordination of audit (timing, team, locations, deadlines, budget)
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7
Q

What 4 sources can you use to obtain an understanding?

A
  • Firm
  • Client
  • Yourself
  • “Other”
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8
Q

How can you use your FIRM to obtain an understanding?

A
  • Partner
  • Management briefing
  • Industry experts
  • Last year’s team
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9
Q

How can you use the CLIENT to obtain an understanding?

A
  • Discussion
  • Observation
  • Analytical Procedures
  • Website
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10
Q

You can use your past experiences to obtain an understanding of the client.

TRUE/FALSE

A

TRUE

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11
Q

List some OTHER ways to obtain an understanding of a client.

A
  • Websites
  • Companies House
  • Industry Surveys
  • Credit reference agencies
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12
Q

What should the auditor understand about the ENVIRONMENT?

A
  • Law and Regulations
  • Industry conditions (competition, tech, seasonality)
  • Data protection regulations
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13
Q

What should the auditor understand about the ENTITY?

A
  • Operations
  • Internal Control Systems
  • Accounting Policies
  • Objectives/Strategies
  • Structure/Finance
  • Investments
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14
Q

Define MATERIALITY

A

Omission or misstatement of that information could influence the user’s economic decisions taken on the basis of the F/S.

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15
Q

What are the materiality ranges for:

Profit before Tax

Gross Profit

Revenue

Total Assets

Net Assets

Profit after Tax

A

Profit before Tax 5%

Gross Profit 0.5% - 1%

Revenue 0.5% - 1%

Total Assets 1% - 2%

Net Assets 2% - 5%

Profit after Tax 5% - 10%

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16
Q

Matters can be MATERIAL by NATURE

Suggest how.

A
  • Related Party Transactions
  • Small amounts that impact critical points
  • turning profit into loss
  • net assets into net liabilities
  • affect Companies 2006 threshold to determines if a company is small or medium sized
  • Misleading descriptions (accounting policies)
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17
Q

Define PERFORMANCE MATERIALITY

A

Below materiality threshold

Reduce the risk of small misstatements aggregating to exceed materiality for the whole F/S

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18
Q

WHEN do we use ANALYTICAL PROCEDURES?

A
  • Planning stage (identify risk)
  • Evidence stage (substantive procedures)
  • Completion stage (forming conclusion on F/S)
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19
Q

What are the LIMITATIONS of analytic procedures?

A
  • Need a sound knowledge of entity (difficult if first year audit)
  • Experienced staff required
  • Quality depends on source data
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20
Q

SHORT - TERM LIQUIDITY

Current Ratio

A

Current Assets/Current Liability

Assess ability to pay current liabilities from current assets

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21
Q

SHORT - TERM LIQUIDITY

Quick Ratio

A

Current Assets excluding inventory/Current liability

Assess ability to pay current liabilities from reasonably liquid assets

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22
Q

Solvency

Gearing ratio

A

Net Debt/Equity

Assess reliance on external finance

23
Q

Solvency

Interest Cover

A

Profit before Interest Payable/Interest payable

Assess ability to pay interest charges

24
Q

Efficiency

Trade receivables collection period

A

Trade receivables/Revenue x 365

Assess average time taken to collect cash from credit customers

25
Q

Efficiency

Inventory Holding Period

A

Inventory/Cost of Sales x 365

Assess average time inventory is held

26
Q

Efficiency

Trade payables payment period

A

Trade payables/Purchase x 365

Assess average time taken to pay suppliers

27
Q

Define business risk

A

Risk that could affect an entity’s ability to achieve objectives/execute strategies.

28
Q

Define audit risk

A

Risk that the auditor expresses an inappropriate opinion on the F/S

29
Q

Audit risk is made up of what three risks:

1.

2.

3.

A
  1. Inherent risk
  2. Control risk
  3. Detection risk
30
Q

Explain inherent risk

A

A material misstatement in the balances, transactions, disclosures that are not related to internal controls

31
Q

Explain control risk

A

A misstatement is not prevented/detected/corrected by internal control systems.

32
Q

Explain detection risk

A

Procedures performed by the auditor won’t detect a material misstatement

33
Q

Detection risk is made up of:

1.

2.

A
  1. Sampling risk

2. Non Sampling risk

34
Q

What is a sampling risk?

A

A conclusion drawn from the results of a sample test is different from the conclusions that would have been drawn from the whole population.

35
Q

What are some RISK factors that are common to most audits?

A
  1. Management override
  2. Journals
  3. Revenue Recognition
  4. Cyber security
36
Q

What is management override?

A

Management manipulate accounting records.

37
Q

How can JOURNALS be a risk factors?

A
  • Inappropriate/Fraudulent activities
  • Unusual items
  • Round number entries
  • Journals made by individuals who don’t norm do so
  • made outside of office hours
  • posting to suspense account
38
Q

The risk of misstatement is higher where management reward is linked to revenue/profit

TRUE/FALSE

A

TRUE

39
Q

LIST some audit approaches to reduce AUDIT RISK.

A
  • Emphasise professional scepticism to staff
  • Assign extra/more experienced staff
  • Use experts/internal auditors
  • Provide more supervision
  • Incorporate more unpredictability
40
Q

At the assertion level, the responses to assessed risk should be adjusted by:

1.

2.

3.

A
  1. Nature - type of test
  2. Extent - how much testing
  3. Timing - during the year/at year end/after year end
41
Q

If the auditor wants to rely on the work of others, internal audit/third party, it needs to be assessed on:

A

General assessment: competent and independent

Specific assessment: is it suitable for the purpose

42
Q

Why should you do limited substantive testing even if controls are expected to be effective and are actually effective?

A

Inherent limitation of controls (collusion, management override, human error, non routine transaction)

43
Q

The audit procedure should include the nature/timing/extent of:

A
  • Planned risk assessment procedures

- Further audit procedures

44
Q

DATA ANALYTICS can be embedded into the AUDIT PLAN to:

A
  • Transaction analysis (looks at 100% of transactions, controls might have failed)
  • Judgmental areas (sensitivity analysis to test assumptions on NRV of inventory)
  • Analytical Procedures (use external market/economic data to form expectations)
45
Q

BENEFITS of using data analytics:

A
  • Practical way to deal with Big data
  • Enables 100% checking (no sampling risk)
  • Enhances quality of info (visual representation of results)
  • Faster
  • Audit procedures carried out on a continuous basis rather than at year end only
46
Q

The results of data analytics still need to be evaluated using professional skills and judgement of the auditor to analyse results and draw conclusions

TRUE/FALSE

A

TRUE

47
Q

PROBLEMS of using data analytics:

A
  • Cost especially in small firms
  • Staff training
  • Data security must be ensured
  • Quality of analytics depend on underlying data used
48
Q

What is cyber-security?

A

Protection of DATA, SYSTEMS, NETWORKS in cyberspace.

No unauthorized modification/disclosure/destruction.

Protect information systems from failure.

49
Q

What are the KEY RISKS of an entity’s IT systems:

A

Hacking

Fraud theft of funds

Deliberate sabotage

Viruses

Denial of service attacks

50
Q

What are the BUSINESS risks of an entity’s IT system?

A
  • Reputational Damage
  • Breaches of Data Protection Legislation –> FINES
  • Misstatements in F/S
51
Q

List the IT SECURITY CONTROLS.

A

Business Continuity Planning - business will continue even if disaster/system failure

System Access Control - Protect systems/Detect unauthorized access

Compliance - with legal requirements and organisational policies

Personnel Security - trustworthy employees/training/reporting arrangements

Security policy - written version available to all employees

(look in workbook)

52
Q

What is cloud computing?

A

Access data from any location

53
Q

What are the benefits of cloud computing?

A

Saving costs compared to traditional IT storage at site

54
Q

What are the problems of cloud computing?

A

Passes control to cloud-based service provider

Data could be lost, stolen or corrupted

Consider if they’re reliable

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