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.
