Chapter 7 - planning an audit (basics) Flashcards
Benefits of an auditor planning an audit engagement?
- devote attention to important areas
- identify / resolve potential problems on a timely basis
- organise the audit to ensure it is performed in an effective / efficient way
- staff with an appropriate level of competence can be selected
- facilitates direction, supervision and review of audit work
- aids coordination of work done by auditors of components or experts.
It’s important to remember, that ISA 300 also requires an overall audit strategy and plan to be established and documented. These are regularly updated during the audit as it progresses.
Audit plan
Programme showing the nature, extent and timing of procedures in each area of the audit.
More detailed than audit strategy
Audit strategy
Overview of the audit setting out the scope, timing and direction.
what does the audit strategy cover?
The audit strategy covers the main general areas of planning such as:
the entity and its environment
materiality
preliminary analytical procedures
risk assessment
audit approach
coordination of the audit (timing, team, locations, budgets and deadlines).
What does the audit plan include?
- the nature, extent and timing of planned risk assessment
- the nature,extent and timing of further audit procedures at the assertion level
Processes used to automate the audit process
- workflow and project management
- data extraction and analysis platforms
- digital audit manuals/knowledge platforms
- document management
- collaborative software (eg cloud based platforms)
Benefits of automating the audit process:
- speeds up the work process
- auditor can concentrate on value adding activities
- promotes consistency/
accuracy - reduced volume of errors
Issues of automating the audit process:
- technology/ software/ application operated by third parties meaning lack of control held
- invalid or bias conclusions
- initial investment in technology is expensive
what should the auditor understand
- the environment ( laws and regulations)
- the entity
When gaining an understanding of the entity, the implications of sustainability and climate-related risks and opportunities on the following areas may be considered:
- the entity’s business model / supply chain
- industry factors
- regulatory factors (e.g. climate-related laws / regulations)
- other external factors.
what is net zero
balancing the amount of greenhouse gas emissions produced with their removal from the atmosphere to stabilise the climate
examples:
- impairment reviews - limiting useful life of assets
- length of licences, franchises, agreements cut short
- asset values - decommissioning assets due to poor ESG* credentials
materiality
An item is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.
In addition, some matters might be material by nature, for example:
- matters relating to directors or related party transactions which are required to be disclosed in the financial statements regardless of their value
- small amounts that impact on critical points e.g. change a profit into a loss; net assets to net liabilities; or affect thresholds such as whether the company is small or medium sized under the Companies Act
- descriptions e.g. of accounting policies which are misleading.
Performance materiality
Performance materiality
This is an amount set at less than materiality for the financial statements as a whole, to reduce the risk that the aggregate of smaller misstatements in individual account balances or classes of transactions could exceed materiality for the financial statements as a whole.
Double materiality
considers sustainability issues that may create financial risks for an entity (financial materiality) but also create sustainability issues when an entity’s activities could materially impact people/the environment
when analytical procedures can be used:
- must be carried out at the planning stage to identify risk areas
- can be used as a substantive procedure to gather audit evidence
- must be used to assist in forming an overall conclusion on the financial statements
limitations of analytical procedures:
- they require a sound knowledge/experience of the entity which may be limited in the first year audit
- experienced staff may be required to carry them out
- the quality of analytical procedures depends up the reliability of source data
process of analytics procedures
- understand the business
- develop an expectation
- compare to actual expectation
- unexpected variation = risk
gross profit margin=
gross profit / revenue x 100
operating margin =
operating profit/PBIT/ revenue x 100
interest cover ratio =
profit before interest payable / interest payable
trade receivables collection period
trade receivables / revenue x 365
inventory holding period
inventory / cost of sales x 365
trade payables payment period
trade payables / purchases x 365
audit risk
risk that the auditor expresses an inappropriate opinion on the financial statements. Audit risk comprises the risk of material misstatement and detection risk
risk of material misstatement
- inherent risk
- control risk
detection risk
- sampling risk
- non - sampling
audit risk
inherant risk x control risk x detection risk
substantive testing (do not expect controls to be effective)
- analytical procedures
- tests of detail
tests of control (expect controls to be effective)
shows that significant risks can include:
- subjective transactions
- accounting estimates (high uncertainty/complex)
- complexity in data collection/processing
- complex calculated account balances
- accounting principles with differing interpretation
- changes in an entity’s business (e.g. mergers/acquisitions).
material by nature
- misleading discriptions
- small amounts which impact on critical points
- transactions with directors
- related party transactions
