Lecture 3 Flashcards
Risk
Cannot be eliminated, audit is all about reducing risk to sufficient level
Business understanding ISA 315 (6)
- Ensure skills/ competence of audit team
- Identify signif risks
- Assess client level controls
- Plan appropriate and efficient audit work
- Follow ISA requirements
- Helps identify fraud
ISA 315 > auditor must use assertions for:
- Classes of transactions and events
- Account balances at period end
- Presentation and disclosures
Obtain business knowledge from (3)
- External sources (media, credit agencies)
- Audit firm (PY file, team)
- Client (internal correspondence, client conversations)
Audit risk definition
Risk of auditor giving incorrect opinion
“Risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated”
Audit risk =
Inherent risk x control risk x detection risk
Inherent risk definition
Risk existing in something a permanent, essential or characteristic attribute
“Susceptibility of an assertion to material misstatement assuming no related internal controls”
3 levels of inherent risk used at different times
- Planning: industry/ sector level
- Entity level
- Individual audit programme: balance level
Control risk definition
Risk that a misstatement could occur in an assertion that could be material, individually or when aggregated with other misstatements and will not be prevented or detected and corrected on a timely basis by the entity’s internal controls
Detection risk definition
Risk that an auditor’s procedures will not detect misstatement that exists in assertion that could be material.
Auditor can control detection risk through (2)
- Planning
- Using correct team
Detection risk made up of: (2)
- Sampling risk = issue with sample size/ items picked from sample
- Non-sampling risk = risk in population > DR not low enough therefore audit procedures not good enough
If IR + CR is high
Detection risk must be low
If IR + CR is low
Detection risk high
Materiality =
Information is material if omission or misstatement could influence economic decision of users
Calculating materiality
- Turnover > 0.5% - 2%
- Profit before tax > 5%-10%
- Gross assets 1%-5%
Audit risk must always be
Low
Client engagement and acceptance process (steps)
Step 1) Complete independence checks
Step 2) Complete client & engagement acceptance procedures and money laundering
Step 3) Sign and issue engagement letter
Money laundering
Disguising origin of funds from illicit sources to enable them to be used by those who control them
Not paying creditors back =
Money laundering
Auditor’s responsibilities in relation to money laundering (2)
- Report any grounds for suspicion that ML taking place
- Report to money laundering reporting officer/ SOCA
Engagement letter
Written contract between auditor and client before work starts.
Purpose of engagement letter
To avoid misunderstandings during audit
Engagement letter should be
Issued and signed by audit partner and client before work starts
Re-issue of engagement letters PLC
Annually
Re-issue of engagement letters Non-listed
Every 3 years
Re-issue of engagement letter
If changes/ misunderstandings
Engagement letter confirms (3)
- Auditors acceptance engagement and extent of responsibilities
- Extent of scope of audit
- Director’s responsibilities
