Lecture 3

Question 1

Risk

Answer 1

Cannot be eliminated, audit is all about reducing risk to sufficient level

Question 2

Business understanding ISA 315 (6)

Answer 2

• 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

Question 3

ISA 315 > auditor must use assertions for:

Answer 3

• Classes of transactions and events
• Account balances at period end
• Presentation and disclosures

Question 4

Obtain business knowledge from (3)

Answer 4

• External sources (media, credit agencies)
• Audit firm (PY file, team)
• Client (internal correspondence, client conversations)

Question 5

Audit risk definition

Answer 5

Risk of auditor giving incorrect opinion

“Risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated”

Question 6

Audit risk =

Answer 6

Inherent risk x control risk x detection risk

Question 7

Inherent risk definition

Answer 7

Risk existing in something a permanent, essential or characteristic attribute
“Susceptibility of an assertion to material misstatement assuming no related internal controls”

Question 8

3 levels of inherent risk used at different times

Answer 8

• Planning: industry/ sector level
• Entity level
• Individual audit programme: balance level

Question 9

Control risk definition

Answer 9

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

Question 10

Detection risk definition

Answer 10

Risk that an auditor’s procedures will not detect misstatement that exists in assertion that could be material.

Question 11

Auditor can control detection risk through (2)

Answer 11

• Planning

- Using correct team

Question 12

Detection risk made up of: (2)

Answer 12

• 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

Question 13

If IR + CR is high

Answer 13

Detection risk must be low

Question 14

If IR + CR is low

Answer 14

Detection risk high

Question 15

Materiality =

Answer 15

Information is material if omission or misstatement could influence economic decision of users

Question 16

Calculating materiality

Answer 16

• Turnover > 0.5% - 2%
• Profit before tax > 5%-10%
• Gross assets 1%-5%

Question 17

Audit risk must always be

Answer 17

Low

Question 18

Client engagement and acceptance process (steps)

Answer 18

Step 1) Complete independence checks
Step 2) Complete client & engagement acceptance procedures and money laundering
Step 3) Sign and issue engagement letter

Question 19

Money laundering

Answer 19

Disguising origin of funds from illicit sources to enable them to be used by those who control them

Question 20

Not paying creditors back =

Answer 20

Money laundering

Question 21

Auditor’s responsibilities in relation to money laundering (2)

Answer 21

• Report any grounds for suspicion that ML taking place

- Report to money laundering reporting officer/ SOCA

Question 22

Engagement letter

Answer 22

Written contract between auditor and client before work starts.

Question 23

Purpose of engagement letter

Answer 23

To avoid misunderstandings during audit

Question 24

Engagement letter should be

Answer 24

Issued and signed by audit partner and client before work starts

Question 25

Re-issue of engagement letters PLC

Answer 25

Annually

Question 26

Re-issue of engagement letters Non-listed

Answer 26

Every 3 years

Question 27

Re-issue of engagement letter

Answer 27

If changes/ misunderstandings

Question 28

Engagement letter confirms (3)

Answer 28

• Auditors acceptance engagement and extent of responsibilities
• Extent of scope of audit
• Director’s responsibilities