Module 5 Audit Planning

Question 1

How does ‘Planning for an audit’ allow the auditor to achieve the overall audit objective?

Answer 1

• 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

Question 2

What does the overall audit strategy set out?

Answer 2

The Scope, timing and direction of the audit

Question 3

What does the detailed audit plan describe?

Answer 3

The approach for expected nature, timing and extent of the audit procedures to be preformed

Question 4

Which areas does understanding need to be gained about?

Answer 4

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.

Question 5

Analytical procedures may include:

Answer 5

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)

Question 6

Some techniques that can be used as analytical procedures are:

Answer 6

Comparison with budgets and industry information where available

Ratio analysis

Reasonableness tests

Trend analysis

Large and unusual items review

Question 7

What are the main elements of the FRC’s risk management framework?

Answer 7

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.

Question 8

What is a principal risk?

Answer 8

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.

Question 9

What is audit risk?

Answer 9

Audit risk is the risk that the auditor gives an inappropriate opinion on the financial statements when the financial statements are materially misstated.

Question 10

What is the audit risk model?

Answer 10

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

Question 11

Inherent risk is

Answer 11

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.

Question 12

A control risk is

Answer 12

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.

Question 13

A detection risk is

Answer 13

A risk under the auditors control

The risk that the auditors procedures will not detect material misstatements that exist in the financial statements

Question 14

Inherent risks can arise from what 2 sources?

Answer 14

-Business risk

• Inherent risk factors

Question 15

The impact of inherent risks can be categorised into two categories:

Answer 15

1) Financial statement level risks

2) Assertion level risks

Question 16

What is the risk of material misstatement (RoMM)?

Answer 16

Is the combination of inherent risk and control risk

Question 17

Detection risks are made up of two elements:

Answer 17

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.

Question 18

What is a low detection risk?

Answer 18

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.

Question 19

What is a high detection risk?

Answer 19

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.

Question 20

What is materiality?

Answer 20

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.

Question 21

Examples of materiality?

Answer 21

• 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)

Question 22

What are the types of materiality used in the audit process?

Answer 22

• Overall materiality
• Performance materiality
• Specific items materiality

Question 23

What are the advantages of using Audit Data Analytics?

Answer 23

• Data can be processed more quickly
• More cost effective once implemented
• Improve audit quality

Question 24

What are the 5 steps an auditor should consider when using ADA’s in the audit process?

Answer 24

1. Consider the overall objective of the ADA and how it will be achieved;
2. Obtain and cleanse the data to be used in the ADA;
3. Consider whether the data to be used is relevant and reliable;
4. Carry out the ADA technique; and
5. Evaluate and report on the result of the ADA.

Question 25

What are the two types of fraud?

Answer 25

1) Fraudulent financial reporting (more commonly performed by management)

2) Misappropriation of assets (more commonly performed by employees)

Question 26

What is misappropriation of assets?

Answer 26

An intentional theft of company assets or inappropriate and unauthorised use of company assets.

Question 27

What are the responsibilities of directors with respect to fraud?

Answer 27

The directors (and management) are responsible for preventing and detecting fraud by implementing internal controls

Question 28

What are the responsibilities of auditors with respect to fraud?

Answer 28

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.

Question 29

Fraud risks can be organised into three categories:

Answer 29

1. Incentives or pressures;
2. Opportunities; and
3. Rationalisations

Question 30

Fraud risk factors relating to incentives and rationalisation represent what type of risk?

Answer 30

Inherent risk

Question 31

Fraud risk factors relating to opportunities represent what type of risk?

Answer 31

Control risks