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Assurance > Chapter 4 Planning the assignment > Flashcards

Chapter 4 Planning the assignment Flashcards

-Define overall audit strategy and audit plan - obtain an understanding of the entity and its environment - identify sources and understand - fraud vs error difference

1
Q

What is important for the audit strategy?

A
  • determine the development
    • Understand entity
    • Risk assesment
    • Nature and timing of audit procedure
  • Direction, supervision
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2
Q

How does the audit plan go ahead and ensure?

A
  • Next step of strategy
    • Attention paid to most important areas
    • Potential problems are identified
    • Organised and managed
    • Assigned to appropriate member of audit team
  • Review by more senior auditors are facilitated
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3
Q

Which ISA requires auditor to gain understanding entity

A

ISA 315

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4
Q

ISA 315 details which aspects as important?

A
  • Industry, regulatory and other external factors
    • Nature of the entity
    • Objectives and strategies
    • Measurement and review of entity financial performance
    • Internal controls
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5
Q

ISA 315 can be fulfilled through what methods?

A
  • Enquiries of management and other client staff
    • Analytical procedures
    • Observation of processes
    • Inspection of documents or assets
  • Prior knowledge of the client
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6
Q

What is Importance of materiality in audit?

A
  • Expressed of relative significance of a matter in context of financial statements
  • e.g omission or misstatement leading to economic decision
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7
Q

What is performane materiality?

A

amount set less then materiality where aggregate of all uncorrected and undected errors do not exceed materiality as a whole

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8
Q

How to use the materiality?

A

at planning stage, this factor drives the level of work e,g, test a balance at all sample sizes,
influences audit evidence

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9
Q

How to identify materiality?

A

depends on auditors judgement

e.g. size, or nature (accounts of directors and company disclosed - material regardless of size), or

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10
Q

What are the % materiality used for exam purpose?

A

5-10% PBT
0.5 -1% Rev
1-2% Total asset

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11
Q

What is the importance of risk assesment

A
  • risk based approach
  • used at planning stage
  • ## focus on problem areas
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12
Q

What is the audit risk model equation?

A

Audit risk= Inherent risk x Control risk x Dection risk

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13
Q

How does Financial statement contain risk of material misstatement?

A

1) Misstatement occurs in the first place -> Inherent Risk (IR)
2) client controls do not prevent/detect misstatement - >Control Risk (CR)

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14
Q

How does auditor fails to detect risk of material misstatement

A

Insufficient work, Inappropriate work poor judgement -> Detection risk (DR)

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15
Q

What is inherent risk?

A

susceptibility of transaction, account balance or disclosure to material misstatement

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16
Q

What are the three levels of inherent risk?

A

1) Industry level - affect the whole e.g. highly regulated industries (bank)
2) Entity level - affect whole e.g. company maybe not going concern, senior get profit related bonuses
3) balance level - isolated to particular account balance e.g. items complex or subjective

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17
Q

What is control risk?

A

material misstatement not prevented, detected by accounting or internal control systems

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18
Q

What is detection risk?

A

Auditor’s procedures not detect a misstatement in account balance or class of transaction being material for individual or aggregate

19
Q

What are significant risks?

A 
Fraud
Significant accounting
Complexity
Related party transactions 
Subjectivity 
Unusual transactions
20
Q

What is fraud and error?

A

Fraud: intentional act involving use of deception to obtain unjust/illegal adv.
error: unintentional misstatement in FStats, incl. omission

21
Q

What are characteristics of fraud in ISA240?

A

Misappropriation of assets - e.g theft of sending cash to personal account or inventory
fraudulent finance reporting - intentionally manipulating finance statements to deceive

22
Q

What is the responsibility of management for fraud and error?

A

achievied by design and implementation of effective system of internal control

23
Q

What is the responsibility of auditor for fraud and error?

A

assurance that free of misstatement in Fstats, e.g plan, perform, review audits
some may not be detected, this is great risk as this is organised criminal scheme

24
Q

What is a related party?

A

individual or organisation with influence/d, non BAU transactions

25
Q

What is risk of related party?

A

increases risk of potential manipulation of finance, as transactions done at ‘arms length’

26
Q

How to identify who is related party?

A

Directors won’t disclose the transactions
not easy to identify in systems as its not seperate from normal transactions
transactions concealed whole or part from auditors

27
Q

What are the analytical procedures?

A

Evaluation of finance Info through plausible relationships of finance and non finance date

28
Q

What are the preliminary analytical procedures from ISA315 and ISA520?

A

ISA 315 used to identify risk

ISA 520 form substantive procedures to gather audit evidence & to get to a conslusion of FStat

29
Q

What are the sources of information for analytical procedures?

A
  • interim accounts
  • budgets
  • MI
  • VAT returns
  • board minutes
  • industry knowledge
30
Q

What is the return on capital employed formula?

A

(Profit before interest and tax) x 100 /(Equity + net debt)

effective use of resources

31
Q

What is the return on shareholders funds formula?

A

(Net profit for the period) x 100/ (share capital + reserves)
Effective use of resources

32
Q

What is the gross profit margin?

A

Gross profit/Revenue x 100

asses profitability before overheads

33
Q

What is the cost of sales percentage?

A

Cost of sales/Revenue x 100

asses relation of costs to revenue

34
Q

What is the operating cost percentage?

A

Operating costs or overheads/revenue x 100

assess cost to revenue

35
Q

What is the net margin/operating margin?

A

Profit before interest and tax/revenue x 100

assess profitability after taking overheads into account

36
Q

What is the current liquidity ratio?

A

Current asset/current liability

ability to pay CL from liquid asset

37
Q

What is the quick liqudity ratio?

A

(Receivables+ Current Investment + Cash)/Current liablity

Ability to pay CL from most liquid asset

38
Q

What is the gearing ratio?

A

Net debt/Equity

Asseses reliance on external finance

39
Q

What is the interest cover ratio?

A

Profit before interest pay/Interest payable

ability to pay interest

40
Q

What is the net asset turnover?

A

revenue/capital employed

revenue generated from asset base

41
Q

What is the trade receivables collection period?

A

Trade receivables x 365/Credit revenue

average time taken turning receivables into cash

42
Q

What is the trade payables payment period?

A

Trade payables x 365/Credit purchases

average time taken paying suppliers

43
Q

What is the inventoy holding period?

A

Inventory x 365/Cost of sales

average time inventory is held

44
Q

What do we look out for in evaluating the accounts using preliminary analytical procedures?

A
  • revenue growth measure
  • gross profit margin
  • interest cover rate
  • bank overdraft movement
  • trade receivables days
  • trade payables days
  • The movement from one year to another.
  • Is there a going concern risk
  • A reduction in payables days may indicate understatement in payables

Assurance (33 decks)

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