D3: Planning and risk assessment Flashcards
ISA for planning of audit
ISA 300: Planning of audit
why is audit planning important and beneficial ?
- helps to coordinate work of external and internal auditors and external experts.
- ensure engagement is well -organized and completed effectively.
- Facilitates direction, supervision and review of work
- to ensure work is equally distributed amongst team members
Imp. point: Audit planning
Nature of audit could change during term of engagement and the reasons for those changes need to be documented.
important stg.s in planning of audit :
Audit risk assessment
and assessment of materiality.
Q) Why do materiality benchmarks have a lower and upper range ?
- To give audit partners flexibility in choosing and deciding the overall materiality based upon their professional judgement of the client’s risk
The judgement used to set planning materiality is based on client’s risk such as
- new client : audit team unfamiliar with client’s business and environment : so materiality set at lower level.
- existing client: disposing subsidiary for the 1st time and it is significant event which audit team reqs. more understanding about the nature of event and its purpose. So materiality is set at lower level
The judgement used to set planning materiality is based on client’s risk such as
- new client : audit team unfamiliar with client’s business and environment : so materiality set at lower level.
- existing client: disposing subsidiary for the 1st time and it is significant event which audit team reqs. more understanding about the nature of event and its purpose. So materiality is set at lower level
How does partner have materiality based on their professional judgement ?
If client is asset rich company then materiality is based on total assets
and
if client is commercialized and service-oriented business then materiality is based on PBT
Why is materiality based on PBT ?
- PBT is a key item used by investors in assessing and measuring the company’s perfromance
Other names for materiality
planning materiality and overall materiality
When to change materiality benchmark from PBT ?
- Materiality benchmark can only be changed from PBT to normalized profits but NOT TO TOTAL ASSETs
- When company incurs loss in the current year.
-When facing volatility in the profits
-Company breaks even in the current year - company faces continues profits and losses
Business risk
- risk arising from significant event, conditions, actions or inactions that can have an adverse impact on the client’s ability to achieve objectives and to execute strategies or due to setting objectives inappropriately initially
Increased credit period
Business risk : affects CFs, liquidity probs, inability to make repayments to creditors on time
audit risk: increased risk of bad debts and overvalued receivables
Why auditors could issue wrong audit opinion
- due to carrying out insufficient planning carried out.
Increased inventory days
Business risk : Increased holding costs, obsolete inventory, cash tied up in W.C
audit risk: Risk of not writing down inventory value to lower of cost and NRV and NRV will be lower
