Planning Engagements & Risk Assessments Flashcards
List three reasons why planning an engagement is important
Time may be wasted
Important work may be missed
Wrong conclusion may be drawn
A requirement of the auditing standards
Adds to quality
What is a risk of using audit packs?
These contain standard key planning areas - there is a risk that matters particular to the client may be forgotten
What are the key differences between the audit plan and the audit strategy
Strategy contains main general areas of planning
Plan: more detailed, sets out timing & extent of approach
How can automation help the planning stage of an audit?
Rolling forward PY info
Generating WP templates
How can automation help at the fieldwork stage of an audit?
Electronic sign offs & feed into auditors report
When setting materiality, what thresholds do auditors use?
%5 PBT
0.5 - 1% Gross profit
0.5 - 1% Revenue
1%-2% Total Assets
2%-5% Net Assets
5%-10% Profit after tax
Can remember some by RAP in ascending order
Revenue 0.5-1
Assets 1-2
Profit bt 5
What issues may be material by nature?
£1 that turns a profit into a loss
£1 that changes the threshold in which a company operates
Matters relating to directors
Related party transactions
Bottom two have to be disclosed in FSs regardless of value
Who applies the going concern basis of accounting
Management - Auditors assess whether this is appropriate
If an auditor has doubts over going concern status, what additional procedures should they implement?
Analysing cash flow
Reading terms of debentures & loan agreements
Inquiring of litigation claims & reasonableness of managements assessment of their outcome
How is management override tested during an audit?
Journals testing
Review of accounting estimates
Analysing significant or unusual transactions
Why does understanding the entity aid an audit?
Assess the skills and competence needed in audit team
Plan work so it is efficient
Assess control risk
Assess sig risks
Perform analytical procedures
Comply with professional requirements & ISAs
How can an auditor gain an understanding of an entity?
External sources; Industry surveys/publications, CH
The firm; Perm files, PY file, Past audit team members
The client; Correspondence, walkthroughs
What are some indicators of non compliance?
List in ISA 250A para 13-1
What is business risk?
What are the three general categories of business risk?
Business risk: defined in ISA 315
Risk to a business of achieving its objectives
SPECIFIC TO CLIENT - NOT AUDIT RISK
Financial Risk; financial consequences
Operational Risk; risks that impact being able to operate
Compliance Risk; risk from non-compliance with laws
What are some inherent risks factors to an audited entity?
Complex regulation
Complex accounting measures
Subjectivity - accounting estimates or valuations
Changing economic conditions/markets
Customer loss
Expansion to new locations
Why is there always some level of control risk at an audited entity
Frequently examined
Cost > benefit
Non routine transactions
Human error
Management override
Collusion to circumvent controls
Changes in procedures/personnel - time to adjust
What factors may increase detection risk within an audit?
Lack of understanding of client & industry
Using inappropriate sampling techniques
Failure to address risks - insufficient plan
Lack of skills/competence in team
What is audit risk
What would it mean if audit risk is 5%
The risk of giving an inappropriate opinion
Function of detection, control & inherent risk
5% chance of giving wrong opinion
What is sampling risk
That the sample is not representative of the whole population
What is non-sampling risk
The risk of reaching the wrong audit opinion
What are the thresholds for materiality?
- 0.5% - 1% Revenue
- 1% - 2% Gross Assets
- 5% - 10% PBT
