Module 5 Audit Planning Flashcards
How does ‘Planning for an audit’ allow the auditor to achieve the overall audit objective?
- Ensure that sufficient attention is direction to the important areas of the audit
- Potential problems are identified and resolved early
- Assisting in selection of appropriate engagement staff
- Helping to complete work effectively and efficiently
- Facilitating direction and supervision of the audit
What does the overall audit strategy set out?
The Scope, timing and direction of the audit
What does the detailed audit plan describe?
The approach for expected nature, timing and extent of the audit procedures to be preformed
Which areas does understanding need to be gained about?
The entity and its environment, including:
-Organisational structure, ownership and governance, and business model.
-Industry, regulatory and other external factors.
-The measures used, internally and externally, to assess the entity’s financial performance.
Analytical procedures may include:
Comparing expected results or information with:
-prior periods
-similar industry information (for example, comparison of average credit period of an entity with industry average)
-budgets and forecasts made by the client
-auditor’s own expectations or estimates (reasonableness test)
Some techniques that can be used as analytical procedures are:
Comparison with budgets and industry information where available
Ratio analysis
Reasonableness tests
Trend analysis
Large and unusual items review
What are the main elements of the FRC’s risk management framework?
The guidance outlines four main areas.
1) The board’s responsibilities for risk management and internal control, and identification of factors boards should consider in order to exercise those responsibilities effectively.
2) Establishment of risk management and internal control systems.
3) Monitoring and review of risk management and internal control systems.
4) The board’s financial and business reporting responsibilities.
What is a principal risk?
A principal risk is a risk that can seriously affect the performance, future prospects or reputation of the entity. These should include those risks that would threaten its future performance, solvency or liquidity.
What is audit risk?
Audit risk is the risk that the auditor gives an inappropriate opinion on the financial statements when the financial statements are materially misstated.
What is the audit risk model?
Audit risk = Risk of material misstatement (RoMM) x Detection risk (DR)
RoMM = Inherent risk x Control risk
Audit risk = Inherent risk x Control risk x Detection risk
Inherent risk is
The susceptibility of a financial statement account to a material misstatement, irrespective of related internal controls. Inherent risk is assessed by the auditor – it cannot be reduced by internal controls.
A control risk is
The risk that the entity’s controls will not prevent or detect and correct a material misstatement in the financial statements on a timely basis.
A detection risk is
A risk under the auditors control
The risk that the auditors procedures will not detect material misstatements that exist in the financial statements
Inherent risks can arise from what 2 sources?
-Business risk
- Inherent risk factors
The impact of inherent risks can be categorised into two categories:
1) Financial statement level risks
2) Assertion level risks
What is the risk of material misstatement (RoMM)?
Is the combination of inherent risk and control risk
Detection risks are made up of two elements:
Sampling risk (SR): sampling risk is the risk that testing a sample from a population does not give the same conclusions as testing the whole population would have given.
Non-sampling risk (NSR): The risk that an incorrect judgement is made because the audit procedures used were not appropriate or testing results were wrongly interpreted by the audit team.
What is a low detection risk?
The auditor is less willing to accept the chance that they will not detect a material misstatement. Therefore, the auditor will increase the work performed to detect misstatements.
What is a high detection risk?
The auditor is more willing to accept the chance that they will not detect a material misstatement. Therefore the auditor can reduce the work performed to detect misstatements.
What is materiality?
A matter is considered to be material if its omission or misstatement would reasonably influence the economic decisions of the users taken on the basis of the financial statements.
Examples of materiality?
- An item is material because it is comparatively very large (size) eg big money error
- An item is material because it is important to the shareholders not due to its size (ie it is material due to its nature)
What are the types of materiality used in the audit process?
- Overall materiality
- Performance materiality
- Specific items materiality
What are the advantages of using Audit Data Analytics?
- Data can be processed more quickly
- More cost effective once implemented
- Improve audit quality
What are the 5 steps an auditor should consider when using ADA’s in the audit process?
- Consider the overall objective of the ADA and how it will be achieved;
- Obtain and cleanse the data to be used in the ADA;
- Consider whether the data to be used is relevant and reliable;
- Carry out the ADA technique; and
- Evaluate and report on the result of the ADA.
What are the two types of fraud?
1) Fraudulent financial reporting (more commonly performed by management)
2) Misappropriation of assets (more commonly performed by employees)
What is misappropriation of assets?
An intentional theft of company assets or inappropriate and unauthorised use of company assets.
What are the responsibilities of directors with respect to fraud?
The directors (and management) are responsible for preventing and detecting fraud by implementing internal controls
What are the responsibilities of auditors with respect to fraud?
The auditor is not to be held responsible for the prevention and detection of fraud
The auditor is responsible for obtaining reasonable assurance that the financial statements are free from material misstatement.
Fraud risks can be organised into three categories:
- Incentives or pressures;
- Opportunities; and
- Rationalisations
Fraud risk factors relating to incentives and rationalisation represent what type of risk?
Inherent risk
Fraud risk factors relating to opportunities represent what type of risk?
Control risks
