Module 15 Audit process planning Flashcards
When is the planning stage usually performed?
Before the year end
How does audit planning help auditors achieve audit objectives?
Helps to ensure that sufficient and appropriate attention is directed to the important areas of audit and to reduce audit risk to an acceptably low level
help to ensure that potential problems are identified and resolved early
Assists in the selection of appropriate engagement staff
Helping to complete work effectively and efficiently
Facilitates direction and supervision of the audit
What does the overall audit strategy do?
It sets out the scope, timing and direction of the audit
What does the detailed audit plan do?
It describes the approach for the expected nature, timing and extent of the audit procedures to be performed
Audits gain an understanding of the inherent and control risk of an entity by doing what?
By understanding the entity:
NAOMII
Industry, regulatory and other external factors
Nature of the entity
Selection and application of accounting policies
Objectives and strategies and the related business risks
Measurement and review of the entity’s financial performance
Internal control
How are inherent risks identified?
Through risk assessment procedures to gather information needed for identifying inherent risk
AEIO
Analytical procedures
Enquiry - enquiries with those charged with governance and other third parties
Inspection - Checking documents (prior year financial statements, prior year audit files, internal control files, business plans and strategic documents, industry publications, analyst reports, entity’s website)
Observation - a tour/observation of client premise/operations
What is analytical procedures (planning analytical review)?
Evaluation of financial information through analysis of plausible relationships among both financial and non financial data to identify consistencies and predicted patterns or significant fluctuations and unexpected relationships and the results of subsequent investigations.
When must analytical procedures be undertaken?
During the planning stage and when forming an overall conclusion on the consistency of the financial statements (completion stage)
What is the approach to analytical procedures (what can the comparison be?)
Financial information can be compared with prior periods (last year/month), expectations (budgets/forecasts), other entity in the same industry
Auditors will typically compare account totals and ratios to the prior year and budgets to identify unexpected or unusual movements
What are the techniques used in analytical procedures?
Comparison - (Planning and completion stage)
Ration analysis (Planning stage)
Reasonableness test (planning and substantive testing stage)
Trend analysis (substantive testing stage)
Large and unusual items review (substantive testing stage)
What are the three types of materiality?
Overall materiality - the threshold as to what is significant to the financial statements as a whole
Performance materiality - Set below overall materiality to reduce the probability that uncorrected/undetected misstatements exceed overall materiality to an acceptably low level (This is the materiality used to perform testing during audits)
Specific items materiality - Individual accounts/disclosures may have lower materiality levels due to their nature of being more material to the users of financial statement.
How is overall materiality calculated?
It is estimated during the planning stage and it is based on professional judgement and are usually based on materiality bases set out by the audit firm. This is usually before year end so it is based on prior year documents and this means it is planning materiality
Materiality is reassessed throughout the audit as circumstances inevitably change. At the completion stage, materiality is based on actual financial statements and this is known as reporting materiality
How is performance materiality set?
It is often set depending on the knowledge of the entity, the industry it operates and the auditor’s expectations in relation to misstatement in the current year.
Often set as a % of overall materiality and professional judgement is crucial.
How does misstatements occur in financial statements?
Through Error or Fraud
What are the two types of fraud?
Fraudulent financial reporting - an intential manipulation of financial information to obtain unjust or illegal advantage
Misappropriation of assets - an intentional theft of company assets or inappropriate and unauthorised use of company assets
