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BUS273 - Audit & Assurance Services > Planning An Audit (Basics) - Chapter 7 > Flashcards

Planning An Audit (Basics) - Chapter 7 Flashcards

1
Q

ISA300?

A

requires the auditor to plan the audit

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2
Q

benefits of audit planning under ISA300?

A
  • attention is devoted to important areas
  • problems are identified
  • audit is organised effectively & efficiently
  • appropriate staff are chosen
  • aids coordination of work
  • facilitates direction, supervision and review of work
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3
Q

ISA300 also requires the auditor to…

A

document an overall audit strategy and a detailed audit plan

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4
Q

6 key considerations when establishing the overall audit strategy?

A
  • audit approach
  • risk assessment
  • preliminary analytical procedures
  • materiality
  • entity & its environment
  • coordination of audit
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5
Q

does the auditor need to develop a plan that aligns with the overall audit strategy?

A

yes

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6
Q

an audit plan should include a description of…

A
  • the nature, extent & timing of planned risk assessment procedures
  • the nature, extent & timing of further audit procedures at the assertion level
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7
Q

how to gain an understanding of an entity?

A
  • discussion/observation
  • websites/online
  • analytical procedures
  • past experience
  • companies’ house

can gain an understanding from the firm, myself, the company and other

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8
Q

what must an auditor understand about a client?

A

the entity

the environment

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9
Q

must an auditor understand the FR framework of the entity?

A

yes

e.g., accounting principles, revenue recognition, complex transactions etc

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10
Q

attention should be paid to which specific areas when understanding an entity’s accounting policies?

A
  • methods applied to unusual transactions
  • controversial areas
  • environment changes
  • new financial laws/standards
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11
Q

must sustainability / climate-related risks be considered when understanding an entity?

A

yes

must determine how sustainability influences the entity’s business mode, regulatory factors, industry factors etc

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12
Q

can sustainability risks cause material misstatements?

A

yes e.g., non-disclosure or greenwashing or revocation of licenses, poor internal controls etc

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13
Q

financial statement level?
assertion level?

A

FS level = risks relating to the FS as a whole (can impact many assertions)

assertion level = risks relating to specific FS assertions

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14
Q

materiality thresholds?

A

0.5-1% of rev
5% of PBT
1-2% of total assets
2-5% of net assets
5-10% of profit after tax

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15
Q

examples of scenarios that are material by nature?

A

misleading descriptions

small amounts which impact critical points

transactions by directors

related party transactions

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16
Q

performance materiality?

A

an amount set at less than materiality for the FS to reduce risks of reaching materiality threshold

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17
Q

why is sustainability important?

A

investors are becoming increasingly invested in a company’s climate-friendly nature, heavily influencing their economic decision making

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18
Q

double materiality?

A

concept that considers sustainability issues that may create financial risks but also sustainability issues

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19
Q

when are analytical procedures used?

A
  • at the planning stage
  • can be used as a substantive procedure
  • used to help form an overall conclusion on the FS
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20
Q

limitations of analytical procedures?

A
  • require sound knowledge/experience of the entity which may be limited in a 1st year audit
  • experienced staff may be required to carry them out
  • quality of AP’s relies on the reliability of source data
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21
Q

how are analytical procedures performed?

A
  • understand the business
  • develop an expectation
  • compare actual to expectation
  • unexpected variations = risk
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22
Q

gross profit margin?

A

(gross profit / revenue) x 100

to assess profitability

23
Q

operating margin?

A

(operating profit / revenue) x 100

to assess profitability

24
Q

operating profit AKA..

A

PBIT

profit before interest and tax

25
Q

return on capital employed?

A

(operating profit / equity + debt) x 100

measures how effectively resources are in generating profit

AKA return on equity

26
Q

current ratio?

A

current assets / current liabilities

ability to pay current liabilities with current assets

27
Q

quick ratio?

A

(current assets - inventory) / current liabilities

ability to pay current liability from reasonably liquid assets

28
Q

gearing ratio?

A

net debt / equity

assessing reliance on external finance

29
Q

interest cover?

A

profit before interest payable / interest payable

assess ability to pay interest charges

30
Q

trade receivables collection period?

A

(TR / revenue) x 365

assess the average time taken to collect cash from credit customers

31
Q

inventory holding period?

A

(inventory / COGS) x 365

assess average length of time for which inventory is held

32
Q

trade payables payment period?

A

TP / COGS x 365

assess the average time taken to pay suppliers

33
Q

business risk?

A

risk that can adversely impact an entity’s ability to achieve their objectives

34
Q

can business risks be caused by climate change?

A

yes

e.g.,
- non-compliance
- sectoral risks
- loss of investors
- business failure to adapt/evolve
- extreme climate events

35
Q

two types of business risk in relation to climate change?

A

physical risks = risks exposed to due to climate change (e.g., severe weather)

transition risks = related to transition to low-carbon economy (e.g., new tech, stranded assets)

36
Q

climate change can impact what 3 things?

A
  • the FS
  • business / audit risks
  • going concern
37
Q

audit risk?

A

risk that the auditor will express an inappropriate opinion

audit risk = risk of material misstatement + detection risk

risk of material misstatement = inherent risk + control risk

detection risk = non sampling risk + sampling risk

38
Q

two levels of risk of material misstatement?

A

FS level = relating to the FS as a whole

assertion level = relating to specific FS assertions

39
Q

risk of material misstatement?

detection risk?

A

ROMM = risk that FS are misstated prior to the audit commencing

detection risk = risk that the auditor doesn’t detect material misstatements in FS

40
Q

risk assessment procedures are meant to help understand…

A
  • the entity and its environment
  • the FR framework
41
Q

inherent risk?

A

risk of misstatement before consideration of controls

42
Q

control risk?

A

the risk that a misstatement isn’t prevented by controls

43
Q

detection risk?
sampling risk?
non-sampling risk?

A

detection = risk that the auditor won’t detect MM

sampling = risk of wrong conclusion from non-representative sampling

non-sampling = risk of drawing wrong conclusion for other reasons (e.g., 1st year audit or time pressure)

44
Q

scalability?

A

ISA’s need to be applied to all entities regardless of size/complexity

45
Q

significant risks?

A

risk that is close to the upper end of the spectrum of inherent risk

require special consideration

e.g., transactions involving subjectivity, complex data, accounting principles are subjective

46
Q

common risks in audits?

A
  • management override
  • journals
  • revenue recognition
  • cyber security
47
Q

in order to reduce audit risk to an acceptable level, the auditor should…

A
  • determine overall responses to risks at FS level
  • perform audit procedures to respond to assessed risks at the assertion level
48
Q

examples of responses to risks at FS level?

A
  • emphasise need for pro scepticism
  • assign extra or more experienced staff
  • use the work of experts, internal auditors or other auditors
  • change the audit strategy
  • make audit procedures more unpredictable
49
Q

responses to risks at assertion level?

A
  • adjust nature & extent of procedures
  • consider risks from climate change
50
Q

considerations when relying on the work of others? (e.g., internal auditors, experts, other auditors)

A
  • competence
  • independence
  • whether the work is suitable for 3rd party reliance
51
Q

cyber security?

A

protects systems, networks and data

increased use of technology makes cybersecurity more relevant

risks include:
- hacking
- fraudulent theft
- sabotage
- viruses

52
Q

growth of big data results in which new business risks?

A
  • reputational damage
  • breaches of GDPR leading to fines
  • misstatements in FS
53
Q

IT security controls?

A

should be in place to cover prevention, detection and deterrence of IT risks

54
Q

cloud computing?

A

over recent years, more businesses have adopted cloud computing services, allowing businesses to access data from any location

  • creates cost savings
  • danger that inadequate cyber security can lead to theft or loss of data
  • auditor must consider if cloud computing software is reliable

BUS273 - Audit & Assurance Services (24 decks)

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