Planning An Audit (Development) - Chapter 8 Flashcards
testing for understatement?
trace source documents to FS to see if it’s been included
testing for overstatement?
tracing balances in the FS to source docs
examples of sampled source docs to test for understatement?
- GDNs or GRNs
- payroll documents (e.g., time sheets, contracts, bonus letters)
- bank statements / loan documentation
examples of areas in the FS that are checked to assess for overstatement?
- nominal ledger
- asset register
which assertions relate to understatement / overstatement?
understatement = completeness
overstatement = existence / occurrence
examples of uses of analytical procedures?
- obtain breakdowns to identify anomalies
- analyse monthly data for variations
- calculate expected amounts & compare to actuals
making enquiries of management can assist with…
- anticipated changes in business activity
- rationale for an accounting treatment
- reasons for an unusual trend/result
what does an auditor NOT need to ask management for?
- acquisitions/disposals that have occurred
- accounting entries not subject to judgement
- queries on ratios / trends which are logical
how are audit procedures applied?
ACTION applied to a SOURCE to fulfil an OBJECTIVE
examples of audit procedures?
- use an expert
- read board minutes
- enquire management
- agree balance from the purchase / sales ledger
procedure applied to foreign currency transactions?
- reperform a sample of translation calculations
- agree the exchange rates used to a reliable source
examples of audit procedures involving data analytics software (DAS)?
- use data analytics software to identify … for investigation
- perform data analytics routines to recalculate/analyse
estimates are commonly made on…
- inventory obsolescence
- depreciation of PPE
- valuation of financial instruments
- pending litigation
- impairment
what does an auditor’s risk assessment focus on?
inherent risk factors such as:
- degree of uncertainty within an estimate
- how subject of complex a matter is
how does ESG influence accounting estimates?
- fair values
- impairment of non-current assets
- provisions/contingent liabilities (relating to transition risks)
if a company isn’t a going concern, FS must be prepared on a…
liquidation basis
or ‘break-up’ basis
impact of preparing FS on a liquidation basis?
- no non current assets or liabilities
- assets valued at recoverable amount
- provisions may be required for new costs
management / auditor responsibilities regarding going concern?
management = ensure FS are prepared using the appropriate basis
auditor = check if there’s a MM caused by going concern & the appropriateness of basis for FS
procedures to ascertain if an entity’s a going concern or not?
- review future plans e.g., forecasts / projections
- review financing e.g., borrowing facilities, loans & covenants
- review board minutes
can ESG impact going concern?
yes
- weather conditions can impact assets (change in demand, destruction of assets)
- transition risks can result in material write downs of assets
- failure to meet net-zero target can repel investors
who may an auditor rely on?
- internal auditors
- expert
- service organisation
- auditors of subsidiary
what does typical work of an internal auditor entail?
reviewing systems of internal control
before relying on internal auditors, what should be done?
- assess their objectivity & competence
- assess their approach (planning, review, documentation etc)
how should an auditor respond to internal auditor’s work?
- test their work (observe the procedures used) to conclude the adequacy of it
- extend your own procedures if internal auditors’ work is deemed inadequate
performance indicators when assessing the work of internal auditors?
- progress compared to planned work
- recommendations accepted vs recommendations made %
- total time taken for an assignment
- feedback from users of internal audit
examples of when an auditor’s expert may be required?
- interpreting legal contracts
- valuing PPE
- analysing tax issues
before relying on experts, what should be done?
- assess their competence and independence
- obtain an understanding of the field of expertise and evaluate the adequacy of the expert’s work
auditor responsibilities when an entity outsources operations?
- obtain an understanding of the outsourced services
- consider access to sources of evidence
- assess the risks arising
if a group auditor doesn’t audit all components…
they’ll need to rely on the component auditors
component?
an entity whose financial information is included in group FS
responsibilities of the group auditor?
- establish overall group audit strategy / plan
- direct/supervise component auditors
- determine sufficient/appropriate evidence
- form & communicate an opinion on group FS
who’s responsible for forming an opinion on group FS?
group engagement partner
must auditor’s reports for groups contain reference to component auditors?
no, not unless required by law
does materiality differ between group FS and component FS?
potentially
if anything, component auditors’ materiality threshold will be lower than group
does group auditor take responsibility for designing audit procedures?
yes
understanding the component auditor includes an assessment of…
- compliance with ethical requirements
- professional competence
- whether the group auditor can get involved if necessary
- applicable regulation for component auditor
group auditor should do what to the component auditor?
- communicate requirements
- request constant communication
should group auditor evaluate/review the work performed by the component auditor?
yes
if work performed isn’t adequate, the group auditor should determine how additional procedures will be performed
what should group auditors communicate to component auditors?
- work to perform
- form & contents of communications
- ethical requirements
- component materiality
- list of related parties
- significant risks
what should component auditor communicate to group auditor?
confirmation of:
- compliance w/ ethical requirements
- compliance w/ engagement team requirements
- list of uncorrected misstatements
- overall findings, conclusions or opinions
- description of identified deficiencies
