Planning an Audit Engagement

Question 1

What are the reasons for planning?

Adequate planning helps the auditor… (6)

DISCOD

Answer 1

1. Devote attention to important areas of the audit.
2. Identify / resolve potential problems on a timely basis.
3. Organize audit to ensure performed effectively / efficiently.
4. Select staff with competence.
5. Direct / supervise team members and review work.
6. Coordinate work done by auditors of components / experts.

Question 2

What are the thresholds for ‘Material by Size’ (6)

Answer 2

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

Question 3

What are some examples of ‘Material by Nature’?

Answer 3

Matters relating to directors or RPT.
Small amounts impacting critical points.
Descriptions e.g misleading accounting policies.

Question 4

What is the purpose of Analytical procedures at the planning stage?

Answer 4

Must be carried out to help identify risk areas.

Question 5

What is the definition of materiality?

Answer 5

An item is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the FS.

Question 6

What are the limitations of Analytical procedures? (3)

Answer 6

1. Requires knowledge / experience of an entity (first-year audit).
2. High-level procedures.
3. Depends upon reliability of source data.

Question 7

Outline how Analytical Procedures should be performed…

Answer 7

1. Gain an understanding
2. Develop expectation
3. Compare actual to expectation
4. Unexpected variations are risks that require further attention (key risk areas)

Question 8

Gross profit margin: Formula

Answer 8

Gross profit / Revenue x 100

Question 9

Gross profit margin: Purpose

Answer 9

Assess profitability before taking into account overheads

Question 10

Current Ratio: Formula

Answer 10

Current assets / Current liabilities

Question 11

Current Ratio: Purpose

Answer 11

Assesses ability to pay current liabilities from current assets

Question 12

Gearing ratio: Formula

Answer 12

Net debt / Equity

Question 13

Gearing ratio: Purpose

Answer 13

Assesses reliance on external finance

Question 14

Trade receivables collection period (days): Formula

Answer 14

Trade receivables / Revenue x 365

Question 15

Trade receivables collection period (days): Purpose

Answer 15

Assesses average time taken to collect cash from credit customers

Question 16

Inventory holding period (days): Formula

Answer 16

Inventory / Cost of sales x 365

Question 17

Inventory holding period (days): Purpose

Answer 17

Assesses average time inventory is held for

Question 18

Trade payables payment period (days): Formula

Answer 18

Trade payables / Purchases x 365

Question 19

Trade payables payment period (days): Purpose

Answer 19

Assesses average time for suppliers to pay

Question 20

What is the information required regarding The Environment of an entity? (5)

Understanding the Entity

Answer 20

Laws and regulations
Industry conditions
Competition
Technology
Data protection regulations

Question 21

What is the information required regarding The Entity? (9)

Understanding the Entity

Answer 21

Operations
Ownership and governance
Investments
Structure / finance
Accounting policies
Objectives and strategies
System of internal controls
Use of outsourcing
Applicable financial reporting framework

Question 22

What factors must an Auditor consider when determining how sustainability influences a business?

Answer 22

Sustainability influence:
The entities business model
Industry factors
Regulatory factors
Other external factors

Question 23

Give an example of how sustainability and climate-related risks and opportunities may affect an entities business model.

Answer 23

A company transitioning to renewable energy sources as part of its operational strategy to reduce carbon emissions.

Question 24

Give an example of how sustainability and climate-related risks and opportunities may affect Industry factors.

Answer 24

In the fashion industry, increasing demand for eco-friendly materials and ethical sourcing practices.

Question 25

Give an example of how sustainability and climate-related risks and opportunities may affect Regulatory factors.

Answer 25

Compliance with the EU Corporate Sustainability Reporting Directive (CSRD) mandating disclosures on environmental impacts.

Question 26

Give an example of how sustainability and climate-related risks and opportunities may affect Other external factors.

Answer 26

Rising consumer preference for sustainable products and the associated reputational risks of not meeting these expectations.

Question 27

What are the benefits of Analytical Procedures at the planning stage?

TURM

Answer 27

Indicate areas where detailed testing can be kept to a minimum.
Obtain understanding on the entity / its environment.
Identify areas requiring more resources.
Identify risk areas / areas of potential MM

Question 28

What are the limitations of Analytical Procedures at the planning stage?

RUFE

Answer 28

They rely on information in the system which may not always be reliable.
Understanding / Knowledge of business to interpret results.
Sufficient knowledge may be absent in first year audit.
Experienced staff required to interpret results.