Planning ISA 300

Question 1

Objectives

Answer 1

1. To devote appropriate attention to important areas
2. To identify potential problems and resolve on a timely basis
3. To organise and manage the engagement in an efficient and effective manner
4. To assist in assigning, directing, supervising and revising the audit.

Question 2

Professional Scepticism

Answer 2

Ensure that the right level of professional judgment is used and resources are allocated to high risk areas at the appropriate time for an effective and efficient audit

Question 3

Professional Scepticism Examples

Answer 3

1. Using a high degree of knowledge of the entity’s business and operating environment
2. Critically appraising management’s assertions, including the use of internal control
3. Challenging management’s “group-think” views
4. Designing the nature, timing and extent of audit procedures that respond to assessed risks
5. Designing audit procedures to find any evidence that would contradict management assertions
6. Revising the assessment of risks of material misstatement and modifying the audit approach as new or contradictory audit evidence becomes available

Question 4

Preliminary Engagement Activities

Answer 4

• procedures regarding the continuance of the client relationship
• evaluating compliance with ethical requirements
• reviewing the term of the engagement

Question 5

Audit strategy

Answer 5

Sets the scope, timing and direction of the audit, and helps guide the development of the detailed audit plan.

Question 6

Scope examples

Answer 6

• the financial reporting framework used
• industry-specific law and regulation requirements
• governance requirements
• requirements of locations of the components of the entity

Question 7

Direction examples

Answer 7

• determining the appropriate materiality levels
• preliminary identification of higher risks of material misstatement
• preliminary identification of material components and account balances
• identification of recent, industry, financial reporting or other relevant developments affecting the entity.

Question 8

Factors to consider when ascertaining and planning resources.

Answer 8

• the use of appropriately experienced team members for high risk areas or the involvement of experts on complex matters;
• the use of appropriately knowledgeable and experienced senior team members to review other information expected to be issued with the financial statements;
• the number of team members assigned to observe the inventory count at material locations;
• the hours to allocate to the audit of high risk areas, material areas, the planning process itself, control testing, review, audit completion;
• when resources are deployed
• how such resources are managed, directed and supervised

Question 9

The Audit Plan Content

Answer 9

1. A description of the nature, timing and extent of planned risk assessment procedures including those relating to disclosures.
2. A description of the nature, timing and extent of planned audit procedures at the assertion level for each material class of transactions, account balance, and disclosure including test of controls and substantive procedures
3. Audit procedures required to be carried out in order to comply with all relevant ISAs for the assignment.

Question 10

Examples of Occasions When Changes to Planning Decisions may Occur

Answer 10

1. Unexpected events
2. Changes in the entity’s environment
3. Unexpected results from audit procedures

Risks must be reassessed and the planned nature, timing and extent of audit procedures reconsidered.

Question 11

Direction, Supervision and Review

Answer 11

The nature, timing and extent of direction and supervision are based on the assessed risk of material misstatement and the level of experience of the audit team member.
Review responsibilities are determined on the basis that more experienced team members, including the engagement partner, review the work performed by less experienced team members

Question 12

Direction of the audit staff (e.g. by the audit engagement partner) covers:

Answer 12

• individual team member responsibilities
• the nature of the entity’s business and its environment
• risk-related issues
• potential problems
• detailed approach to the performance of the audit, and
• the administration of the audit

Question 13

Supervision covers:

Answer 13

• tracking the progress of the audit
• ensuring individual audit team members have sufficient direction
• ensuring that the audit plan is being adhered to
• addressing significant issues as they arise during the audit
• providing appropriate, timing feedback to senior members of the audit team

Question 14

Documentation

Answer 14

1. Audit Strategy - documenting the overall audit strategy records (scope, timing and direction), the key decisions considered necessary to properly plan the audit and to communicate significant matters to the engagement team.
2. Audit Plan - The documentation of the audit plan must be sufficient to demonstrate the planned nature, timing and extent of the risk assessment procedures, the audit procedures and the planning procedures themselves.
3. Changes to the Audit Strategy and Audit Plan - the reasons for the changes and the auditor’s response to the events, conditions or results of audit procedures that resulted in such changes, must be documented.

Question 15

Planning Steps

Answer 15

1. Understand the entity and identify potential risks
2. Understand internal control b considering the design and implementation of relevant internal controls to assess the potential risk of material misstatement
3. Consider whether the risks are of the type and magnitude that could result in a material misstatement of the financial statements
4. Consider the likelihood that the risks could result in a material misstatement of the financial statements
5. Relate the risks that have been identified to what can go wrong at the assertion level and at the overall financial statement level.
6. Plan, design and perform appropriate audit procedures in response to those identified risks.

Question 16

Risk Assessment Procedures

Answer 16

The audit procedures performed to obtain an understanding of the entity and its environment, including internal control, to identify and assess the risks of material misstatement.

e. g.
1. A - nalytical procedures
2. E - nquires
3. I - nspection
4. O - bservation
5. U - nderstanding the entity and its environment

Question 17

Elements of Internal Control

Answer 17

1. Control Environment
2. Risk Assessment
3. Information Systems
4. Control Activities
5. Control Monitoring

Question 18

Control Environment

Answer 18

1. Communication and enforcement of integrity and ethical values
2. Commitment to competence
3. Participation by TCWG
4. Management’s philosophy and operating style that is their approach to taking and manging business risk, attitudes and actions toward financial reporting, attitudes toward information processing and accounting and functions personnel
5. Organisational structure
6. Assignment of authority and responsibility
7. Human resources policies and practices

Question 19

Methods of Obtaining Evidence

Answer 19

• previous experience of entity
• inquiring of entity personnel
• observing the application of specific controls
• inspecting documents
• tracing transactions through the information system relevant to financial reporting

Question 20

Materiality

Answer 20

Information is material if its omission or misstatement could influence the decisions of primary users taken on the basis of the financial statements. Materiality depends on the nature and/or size of the terms to which the information relates
When dealing with qualitative aspects the auditor must use his understanding of the business and professional judgement to determine what is material

Question 21

Performance Materiality

Answer 21

A lower amount set by the auditor to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements could exceed materiality.
The determination of performance materiality draws on:
- the nature of the entity
- the auditor’s past experience
- the use of professional judgement
- the expectation of misstatements in the current period

Question 22

Materiality Thresholds

Answer 22

5–10% profit
​one half​ –1% net assets
1–2% total assets
​one half​ –1% revenue

Question 23

Evaluating Misstatements

Answer 23

When mateerial misstatements are discovered, the audit strategy and plan must be re-assessed to determine if the strategy, nature, timing and extent of audit tests need to be modified.
The auditor must review the immaterial misstatements accumulated during the audit and re-assess the overall audit strategy and audit plan if their aggregate approaches the overall materiality level.

Question 24

Audit considerations

Answer 24

• The possibility that undetected errors plus aggreagte would exceed the materiality level
• The application of professional judgement and scepticism when considering the cumulative impact of qualitative errors in isolation or in combination with qualitative misstatements.
• The likelihood that management is prepared to make further adjustments
• The effect on critical points e.g. profit to loss
• Whether projected errors can be reduced (to bring the aggregate below an acceptable threshold) by extending audit procedures
• The possibility that the misstatements affects other information that accompanies the financial statements.

Question 25

Audit Risk

Answer 25

The risk that financial statements were materially misstated prior to audit and the auditor will not detect such material misstatements.
This is reduced, using audit procedures, to an acceptable low level by the exercise of professional judgement

Question 26

Business Risk

Answer 26

A risk resulting from significant conditions events, circumstances, actions or inactions that could adversely affect an entity’s ability to achieve its objectives and execute its strategies, or from the setting of inappropriate objectives and strategies.

Question 27

Significant Risks

Answer 27

Where there is:

• greater ability for management intervention regarding accounting treatment;
• greater ability to use manual override of internal controls;
• complex calculations or accounting policies open to different interpretations;
• subjective judgment based on a significant measurement uncertainty; and
• the nature of the transactions makes it difficult to implement effective controls over the risks.

Question 28

Analytical procedures At the Planning Stage

Answer 28

• Required as risk assessment procedures
• They are used in to assist in understanding business, o identify areas of potential risk, to plan nature, timing and extent of other audit procedures by directing tests to areas of potentially material misstatement.
• They are based on interim financial information, budgets/forecasts and management accounts, draft financial statements, discussions with client and understanding the entity and its environment.

Question 29

For initial audits, the auditor must pay particular attention to:

Answer 29

• How the entity selects and applies accounting policies’
• Whether they are appropriate for its business and consistent with the financial reporting framework and accounting polices used in the relevant industry;
• The methods the entity uses to account for significant and unusual transactions;
• The effect of significant accounting policies in controversial or emerging areas; and
• The way changes in the entity’s accounting policies are dealt with.

Question 30

Examples of Business Risks to Be Managed

Answer 30

• Industry developments (e.g. the entity does not have the expertise to deal with changes in the industry or does not recognise the need for change).
• New products and services (e.g. that there is increased product liability or that the product may fail).
• Expansion of the business (e.g. that the demand has not been accurately estimated, the market incorrectly analysed).
• New accounting requirements (e.g. incomplete or improper implementation of a new IFRS or increased costs).
• Regulatory requirements (e.g. that there is increased legal exposure).
• Current and prospective financing requirements (e.g. the loss of financing due to the entity’s inability to meet requirements).
• Use of IT (e.g. the loss of e-commerce facilities due to a failure in the system).

Question 31

Transnational Audit

Answer 31

An audit of financial statements which is, or may be, relied on outside the audited entity’s home jurisdiction for purposes of significant lending, investment or regulatory decisions.

Question 32

Audit Professionals for Transnational Audits

Answer 32

Individuals taking on the role of an audit professional in transnational audits of historical financial information must have knowledge to the following for all relevant jurisdictions:

• financial reporting and auditing standards
• controlling of multi-location and group audits
• listing requirements
• corporate governance requirements
• national regulatory frameworks: and
• the global and local economiess and business environments