Module 5: Audit Planning Flashcards
What is ‘planning’ and how does it fit into the audit process?
- Planning = considering how to plann the rescource of the audit
- Develop understanding of entity so they can focus attention in areas most likeloy to contain incorrect information
- Undertaken before startig initial audit and commences before year end
What is the purpose of audit planning?
- ensure sufficent and appropriate attention directed to important areas
- Potential problems are identified and resolved early
- assisting in the selection of staff
- effectively and efficiently
- Facilitating direction and supervision
What is the risk-based approach to auditing?
uditor tailors the nature, timing and extent of audit procedures performed on each area according to risk
What is audit strategy and how does it differ from an audit plan?
strategy sets out scope, timing and direction of the audit (Audit Strategy Memorandum)
plan sets out nature, timing and extent of audit procedures
Why does understanding about the client need to be gained?
- Helps with risk-based auditing
- Design and perform audit procedures
Which areas does understanding need to be gained about?
- Entity and environment
* Organisational strcuture and business model
* Industry, regulatory and external factors - pplicable financial reporting framework and the entity’s accounting policies
- Internal control
- Measures used to assess financial performance
What are the risk assessment procedures that can enhance an auditor’s understanding of the client?
- Enquiries of management and others within the entity
- Analytical procedures
- Observation
- Inspection
- Prior period knowledge
- Discussion among the engagement team
What are analytical procedures?
evaluation of financial information through analysis of plausible relationships among both financial and non-financial data.
What techniques can be used as analytical procedures?
- Comparison with budgets and industry information where available
- Ratio analysis
- Reasonableness tests
- Trend analysis
- Large and unusual items review
What is business risk and why does it need to be managed?
- Risks which arise from the nature of the entity’s business and could prevent the entity from achieving its goals.
- May arise from change or complexity.
What are the main categories of risk that could affect businesses?
- Operational risks
- Legal and regulatory risk
- Reputational risks
- Enviomental risks
- Disaster risks
- Cybersecurity risks
- Health and safety risks
- Interest rate risk
- Exchange rate risks
- Credit risks
- Liquidity risks
- Refinancing risks
What are the main elements of the FRC’s risk management framework?
guidance provides a high-level overview of some of the factors boards should consider
* Board’s responsibilities for risk management and internal control
* Establishing risk management and internal control systems
* Monitor and review of systems
* Board’s financial and business reporting responsibilities
Why do external auditors need to consider client’s business risks?
Further understand the business and evaluate the level of audit risk
What is audit risk and what are its components?
Audit risk is when auditor gives an inappropriate opinion on the financial statements when the financial statements are materially misstated.
Audit Risk = Risk of material misstatement (RoMM) x Detection Risk (DR)
RoMM = Inherent risk x Control Risk
Detection risk elements
- Sampling risk - testing a sample from a population does not give the same conclusions as testing the whole population
- Non-sampling risk - ncorrect judgement is made because the audit procedures used were not appropriate or testing results were wrongly interpreted by the audit team.
Audit Risk Formula
Audit Risk = Risk of material misstatement (RoMM) x Detection Risk (DR)
RoMM = Inherent risk x Control Risk
Relationship between RoMM and DR
- Detection risk is the balancing figure in the audit risk equation.
- Inverse relationship
What is the relationship between business risk and audit risk?
Understanding the client’s business risks can help the auditor to identify risks of misstatement, and to design a response to that risk.
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.
How is materiality used in the audit process?
materiality should be considered by the auditor when:
* Identifying transactions and balances that are individually material (planning)
* Evaluating the potential impact of identified risks (planning)
* Determining the nature, timing and extent of audit procedures (planning/testing)
* Evaluating whether sufficient appropriate evidence has been gathered (completion)
* Evaluating the effect of unadjusted misstatements (completion)
What are the types of materiality used in the audit process?
When to decide
- Overall materiality - threshold of what is significant to the fanancial statements as a whole (Calculated in planning and continously reassessed)
- Performamce materiality- a percentage of overall materality
- Specific items materiality
What is the difference between overall materiality and performance materiality?
- Performance materiality impacts the amount of work the auditor performs
- Overall materiality is calculated at the overall financial statement level and so relates to the accounts as a whole
What are audit data analytics?
data analytics are the use of technology for the examination of data to try to identify patterns, trends or correlations.
What are the advantages of using ADA techniques?
- Data is processed quicker and accurately
- Cost effective
- Improves audit quality through:
- deeper understanding of entity
- improved audit testing focus
- tests performed on large or complex data
- identifies fraud
How are ADA techniques used at the planning stage?
used to both supplement and enhance the traditional procedures performed by the auditor for risk assessment
* Analytical review
* Fraud detection
ADA steps
- 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 relevent and reliable
- Carry out the ADA technqiue
- Evaluate and report on the result of the ADA
What is fraud?
An intentional act involving deception to obtain an unjust or illegal advantage.
types of fraud
- Fraudulent financial reporting - manipulation of financial information
- Misappropriation of assets - theft of company assets or inappropriate and unauthorised use of company assets
responsibilities of directors and external auditors with respect to fraud
- Directors are responsible for preventing and detecting fraud (internal controls)
- Auditors are responsible for obtaining reasonable assurance that the financial statements are free from material misstatement
How is the risk of fraud considered at the planning stage?
3 things considered
Fraud traingle:
* Incentive
* Oppurtunity
* Rationalisation
How does fraud affect audit risk?
- incentives and rationalisation represent inherent risks
- opportunities represent control risks
