Chapter 7 - Planning an audit

Question 1

information are material if…

Answer 1

it’s misstatement or omission can change the decisions of shareholders

Question 2

what are the benefits of planning audit engagements as outlined in ISA 300

Answer 2

• attention focused on riskier areas
• larger problems are identified and resolved as early as possible
• competent staff can be selected, more expert staff = riskier areas
• audit can be carried out as organised and effectively as possible
• facilitates direction of work and supervision of team members/ review of work
• promotes co-ordination of work done by component auditors or experts

Question 3

key considerations of audit strategy in ISA 300

Answer 3

• must understand the business and their industry to tailor the audit plan
• co-ordinating timing, location, team members and deadlines to ensure efficiency
• audit approach: deciding how to rely on internal controls and the level of detailed testing to be carried out (test of controls and substantive testing - verification of account balances)
• analytical procedures: tests to identify unusual trends that could indicate risk
• materiality; the threshold for significant errors or misstatements

Question 4

the audit plan should include…

Answer 4

nature, extent and timing of
- planned risk assessment procedures
- audit procedures at the assertion level (balance by balance)
plan changes based on work completed, more work completed = more testing

Question 5

how should an auditor obtain an understanding

Answer 5

you - past experiences
your firm - manager briefing, last year’s audit team, industry experts
the client - obtain info native to the client, discussion, observation, websites and analytical procedures
other - ie research, articles to further understand the business/industry

Question 6

what are the areas the auditor should understand stated in ISA315 P19-20

Answer 6

The environment
- risk can arise because of the industry
- regulations and laws, understand the regulations of that industry, non compliance can lead to misstatements or fines
- industry conditions, seasonality - cash flow and revenue recognition differs, competition could cause entity to overstate in the FS
- data protection regulation ie GDPR - non compliance with rules that legislate how companies should manage and protect personal data

the entity
- operations
- ownership and governance
- investments
- accounting frameworks
- outsourcing of services i.e. payroll
- internal controls
- objectives and strategies

Question 7

what are the elements of financial reporting frameworks to be understood in ISA 315 A82

Answer 7

• industry specific practices
• accounting policies
• revenue recognition
• accounting for unusual transactions
• foreign currency transactions i.e currencies correctly translated and foreign subsidiaries accounted for in consolidated FS
• accounting for financial instruments ie forwards shares and options
  must pay attention to any new laws/ standards, changes in the environment/ industry or controversial issues, how the company handles unusual transaction

Question 8

how could an entity’s net zero pledges impact the FS

Answer 8

limit useful life of assets - if assets that aren’t environmentally friendly are to be replaced, their expected useful life is reduced - auditor should check they were written down correctly (impairment)
agreements and licenses could be terminated early if the entity failed to meat esg standards - should also be written down correctly in the FS
values of assets could also decrease if they don’t comply with esg standards - therefore auditor should ensure value is written correctly

Question 9

how is materiality determined in size and nature

Answer 9

size: 0.5-1% of gross profit and revenue, 5% of PBT, 5-10% of profit after tax, 2-5% of net assets, 1-2% of total assets

nature: misleading descriptions - ie accounting policies, saying something is accounted for differently to how it is

small amounts that could affect critical points - i.e an amount that could turn a profit into a loss or cause a a company to be classified differently under TCA2006

transactions with directors are always material regardless of size - conflict of interest and governance issues

transactions with related parties are always material could impact fairness of FS