Planning & Risk Assessment (2)

Question 1

1. Four Phases Of An Audit

Answer 1

The four phases of an audit:

1. Knowing the audit client - Accepting the audit engagement
2. Planning the audit
3. Performing audit procedures
4. Reporting the findings

Question 2

2. Planning An Audit – Why?

What is one of the most important steps?
Auditors plan an audit engagement to: (4)

Answer 2

One of the most important steps in audit planning is gaining an understanding of the client’s business and industry.

Auditors plan an audit engagement to:

• Obtain sufficient & appropriate evidence
• Keep audit costs reasonable
• Avoid misunderstanding with the client

In other words, the aim is to run an effective & efficient audit

Question 3

Planning An Audit: Pre-planning

Why is it done?
What happens in detailed planning: (2)

Answer 3

Pre-Planning:

• Conducted when evaluating the client for engagement.
• Applies to both existing and new clients.

Detailed Planning:

• Establishing the overall audit strategy.
• Developing an audit plan.

Question 4

Audit Strategy

Definition?
Components (3)
Purpose?

Answer 4

Definition:

• The initial planning phase that sets out in general terms how the audit is to be conducted.

Components:

• Scope
• Timing
• Direction

Purpose:

• Aligns the audit with identified risks.

Question 5

Audit Strategy & Internal Control

Importance?
Objectives (2)

Answer 5

Importance:

• Understanding the client’s internal control system is crucial.

Objectives:

• Reliable reporting
• Compliance

Audit Risk Model: (AR = IR x CR x DR)

• AR: Audit Risk
• IR: Inherent Risk
• CR: Control Risk
• DR: Detection Risk

Question 6

Risk Assessment Procedures

Substantive Tests (3)
Test of control?

Answer 6

Substantive Tests:

• Analytical procedures
• Tests of details of transactions
• Tests of details of balances

Tests of Control:

• Assess if controls are effectively designed and operated.

Question 7

Interim Audits

What is it?
Why(2)

Answer 7

Definition:

• Conducted before the financial year-end, focusing on tests of control.

Reasons:

• Controls effective in prior years
• Efficiency in testing at that time

Question 8

Advantages of Interim Audits

Answer 8

Benefits:

• Client staff may be less busy.
• Allows modification of the audit plan if controls are inadequate.
• Alerts management to issues early.
• Reduces need for audit staff overtime at year-end.

Question 9

Care in Interim Audits

Considerations (3)

Answer 9

Considerations:

• Effectiveness of controls nearer year-end.
• Need for additional detailed tests.
• Changes in the risk environment (people, policies, procedures).

Question 10

Interim & Final Audits

2 points

Answer 10

Final Audit:

• Work from interim audit may need to be ‘rolled forward’.
• Focuses on tests of detail within the year-end financial statements.

Question 11

What is the purpose of an audit plan?

Answer 11

The audit plan aims to build up sufficient confidence in the audit opinion by assessing audit risks and specifying how they will be reduced to an acceptable level.

Question 12

What are the three factors that the nature and extent of audit planning depend on?

Answer 12

1. Size & complexity
2. previous experience of the audit team
3. and changes during the audit period.

Question 13

What are the main components of an audit plan? (3)

Answer 13

1. Tests of controls
2. Tests of details of transactions & balances
3. Analytical procedures

Question 14

What additional information does an audit plan contain? (4)

Answer 14

• Materiality levels,
• the audit team (management, direction, supervision),
• budgets and deadlines, and
• how to use the work of other experts.

Question 15

Why is detailed planning required in an audit?

Answer 15

Detailed planning is required to establish the overall audit strategy and develop a specific audit plan, ensuring an effective and efficient audit.

Question 16

What must auditors document during the planning phase?

Answer 16

Auditors must document their understanding of the accounting system and control systems to determine their audit approach.

Question 17

Why might an auditor need to use the work of other experts? (3, 2 examples)

Answer 17

An auditor might need other experts to:

• value assets (e.g., land, buildings, jewellery),
• determine quantities of assets (e.g., oil underground), or
• provide legal opinions.

Question 18

What should an auditor assess of the expert when using their work? (5)

Answer 18

The auditor should assess the expert’s:

• professional qualifications,
• experience,
• resources,
• objectivity,
• and the adequacy of the expert’s work for audit purposes.

Question 19

When should an auditor refer to the work of an expert in the audit report?

Answer 19

If the audit report is modified due to the expert’s work, the auditor may need to refer to it, with the expert’s permission and possibly legal advice.

Question 20

What is the role of internal auditors?

Answer 20

Internal auditors are employed by the organization to assess and monitor internal control systems, and their work may be useful to external auditors.

Question 21

How should external auditors assess internal auditors? (6)

Answer 21

External auditors should assess internal auditors for:

Competence

• qualifications,
• experience,
• policies,
• procedures,
• quality of work

Objectivity

Question 22

What must external auditors do if they use the work of internal auditors? (2)

Answer 22

• They must perform audit procedures to ensure the work is adequate, and
• if internal auditors help directly, the external auditor must supervise, review, evaluate, and test their work.

Question 23

What are service organizations in the context of auditing?

Answer 23

• Service organizations provide services like payroll,
• auditors need to consider the controls at these organizations if the services are material to the audit.

Question 24

What type of report from a service organization can an external auditor rely on?

Answer 24

An external auditor can rely on a report that not only describes the controls but also tests them.