Lesson 3 - planning the audit of financial statements Flashcards
With reference to the relevant ISA, describe the role and timing of planning.
ISA 300: Planning an audit of financial statements (2)
Planning an audit involves establishing the overall audit strategy for the engagement and developing an audit plan.
Benefits include
- Helping the auditor to devote appropriate attention to important areas of the audit
- Helping auditor identify and resolve potential problems on a timely basis
- Helping the auditor to properly organize and manage the engagement.
Describe the auditor’s objective in planning an audit (reference the relevant ISA)?
ISA 300: Planning an audit of financial statements (4)
The objective of the auditor is to plan the audit so that it will be performed in an effective manner.
Who is involved in the planning of an audit (reference the relevant ISA)?
ISA 300: Planning an audit of financial statements (5)
The engagement partner and other key members of the engagement team shall be involved in planning the audit.
With reference to the relevant ISA, describe some of the aspects that should be considered when gaining an understanding of an entity and its environment.
ISA 315: Identifying and assessing risks of material misstatement paragraph (19)
- The entity’s organizational structure, ownership and governance
- Industry, regulatory and other external factors
- The measures used to assess the entity’s financial performance.
- The financial reporting framework
- How inherent risk factors affect susceptibility of assertions to misstatements.
With reference to the relevant ISA, list the five components of an entity’s system of internal control.
ISA 315: Identifying and assessing risks of material misstatement
- The control environment (para 21)
- The entity’s risk assessment process (paras 22 and 23)
- The entity’s process to monitor the system of internal control (para 24)
- The information system and communication (para 25)
- Control activities (para 26)
What is the risk of material misstatement?
This is the risk that the financial statements are materially misstated prior to the audit and consists of two components at assertion level, namely inherent and control risk.
With reference to the relevant ISA, describe what is inherent risk.
ISA 315: Identifying and assessing risks of material misstatement paragraph (4)
Inherent risk is described as the susceptibility of an assertion about a class of transaction,
account balance or disclosure to a misstatement that could be material, either individually or
when aggregated with other misstatements, before consideration of any related controls.
With reference to the relevant ISA, describe what is control risk.
ISA 315: Identifying and assessing risks of material misstatement paragraph (4)
Control risk is described as the risk that a misstatement that could occur in an assertion about
a class of transaction, account balance or disclosure and that could be material, either
individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s system of internal control.
What are some example of inherent risks?
- Complex transactions
- Use of estimates
- Going concern issues
- External circumstances giving rise to business risks may also influence inherent
risk. For example, technological developments might make a particular product
obsolete, thereby causing inventory to be more susceptible to overstatement
With reference to the relevant ISA, describe what is detection risk.
ISA 200: OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR
AND THE CONDUCT OF AN AUDIT IN ACCORDANCE WITH
INTERNATIONAL STANDARDS ON AUDITING
Paragraph 13 (e)
Detection risk – The risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a
misstatement that exists and that could be material, either individually or when aggregated with other misstatements.
With reference to the relevant ISA, describe what is audit risk.
ISA 200: OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR
AND THE CONDUCT OF AN AUDIT IN ACCORDANCE WITH
INTERNATIONAL STANDARDS ON AUDITING
Paragraph 13 (c)
Audit risk – The risk that the auditor expresses an inappropriate audit
opinion when the financial statements are materially misstated. Audit risk
is a function of the risks of material misstatement and detection risk.
What is the audit risk equation?
Audit risk = RoMM x Detection Risk
RoMM = Inherent risk x Control Risk
With reference to the relevant ISA, describe what is a significant risk.
ISA 315: Identifying and assessing risks of material misstatement paragraph 12
A significant risk - identified risk of material misstatement:
- For which the assessment of inherent risk is close to the upper end of the spectrum of inherent risk factors affected by the combination of likelihood of a misstatement occurring and the magnitude of the potential misstatement.
- That is to be treated as a significant risk in terms of other ISAs.
List the inherent risk factors.
- Complexity
- Subjectivity
- Change
- Uncertainty
- Susceptibility to misstatement due to management bias or fraud.
With reference to the relevant ISA, define what non-compliance is.
ISA 250: Consideration of laws and regulations in an audit of financial statements paragraph 12:
Non-compliance - Acts of omission of commission, intentional or unintentional, committed by the entity, or by those charged with governance, by management or by other individuals working for or under the direction of the entity, which are contrary to the prevailing laws or regulations . Non-compliance does not include personal misconduct unrelated to the business activities of the entity.
