Planning an Audit Engagement Flashcards
What are the reasons for planning?
Adequate planning helps the auditor… (6)
DISCOD
- Devote attention to important areas of the audit.
- Identify / resolve potential problems on a timely basis.
- Organize audit to ensure performed effectively / efficiently.
- Select staff with competence.
- Direct / supervise team members and review work.
- Coordinate work done by auditors of components / experts.
What are the thresholds for ‘Material by Size’ (6)
5% of PBT
0.5% - 1% of Gross profit
0.5% - 1% of Revenue
1% - 2% of Total Assets
2% - 5% of Net Assets
5% - 10% of PAT
What are some examples of ‘Material by Nature’?
Matters relating to directors or RPT.
Small amounts impacting critical points.
Descriptions e.g misleading accounting policies.
What is the purpose of Analytical procedures at the planning stage?
Must be carried out to help identify risk areas.
What is the definition of materiality?
An item is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the FS.
What are the limitations of Analytical procedures? (3)
- Requires knowledge / experience of an entity (first-year audit).
- High-level procedures.
- Depends upon reliability of source data.
Outline how Analytical Procedures should be performed…
- Gain an understanding
- Develop expectation
- Compare actual to expectation
- Unexpected variations are risks that require further attention (key risk areas)
Gross profit margin: Formula
Gross profit / Revenue x 100
Gross profit margin: Purpose
Assess profitability before taking into account overheads
Current Ratio: Formula
Current assets / Current liabilities
Current Ratio: Purpose
Assesses ability to pay current liabilities from current assets
Gearing ratio: Formula
Net debt / Equity
Gearing ratio: Purpose
Assesses reliance on external finance
Trade receivables collection period (days): Formula
Trade receivables / Revenue x 365
Trade receivables collection period (days): Purpose
Assesses average time taken to collect cash from credit customers
Inventory holding period (days): Formula
Inventory / Cost of sales x 365
Inventory holding period (days): Purpose
Assesses average time inventory is held for
Trade payables payment period (days): Formula
Trade payables / Purchases x 365
Trade payables payment period (days): Purpose
Assesses average time for suppliers to pay
What is the information required regarding The Environment of an entity? (5)
Understanding the Entity
Laws and regulations
Industry conditions
Competition
Technology
Data protection regulations
What is the information required regarding The Entity? (9)
Understanding the Entity
Operations
Ownership and governance
Investments
Structure / finance
Accounting policies
Objectives and strategies
System of internal controls
Use of outsourcing
Applicable financial reporting framework
What factors must an Auditor consider when determining how sustainability influences a business?
Sustainability influence:
The entities business model
Industry factors
Regulatory factors
Other external factors
Give an example of how sustainability and climate-related risks and opportunities may affect an entities business model.
A company transitioning to renewable energy sources as part of its operational strategy to reduce carbon emissions.
Give an example of how sustainability and climate-related risks and opportunities may affect Industry factors.
In the fashion industry, increasing demand for eco-friendly materials and ethical sourcing practices.
