Planning, risks and procedures

Question 1

What does materiality mean?

Answer 1

item is material if it could influence decisions taken by users (shareholders)

Question 2

What is material by nature?

Answer 2

if the transaction changes a profit to a loss or a related party transaction

Question 3

What is material by size?

Answer 3

revenue = 0.5 - 1%
PBT = 5%
PAT = 5 - 10%
total assets = 1 - 2%
net assets = 2 - 5%

Question 4

What is performance materiality?

Answer 4

set lower to ensure aggregate misstatements < materiality

Question 5

What is audit risk?

Answer 5

risk of giving incorrect audit opinion (failure to identify material misstatement)

Question 6

What is inherent risk?

Answer 6

industry, company, balance (revenue, accounting estimate)

Question 7

What is control risk?

Answer 7

weakness in companys internal controls

Question 8

What is detection risk?

Answer 8

auditor does not identify misstatement - inappropriate staff, incorrect audit approach, sampling risk

Question 9

What are the 3 types of risk?

Answer 9

• inherent
• control
• detection

Question 10

What is involved in the audit approach?

Answer 10

combination of:
- tests of controls t ensure operating effectively
- tests of detail - substantive procedures
- analytical procedures on numbers (% movement, ratio) - substantive procedure

Question 11

What are analytical procedures used for?

Answer 11

suitable for large volumes of predictable transactions (depreciation, wages)

compare to expectations/understanding of client business

Question 12

When must you use substantive procedures?

Answer 12

• material balances
• material journals
• agreeing financial statements to accounting records

Question 13

What is an internal audit used for?

Answer 13

• internal audit work = testing controls, inventory counts, legal requirements
• consider - objectivity, competence, if work was properly performed/documented
• consider - materiality, risks, if further procedures needed

Question 14

Why would an expert be used?

Answer 14

• asset fair value, provision estimate, tax payable
• consider their objectivity and competence

Question 15

What is a component (subsidiary/associate) auditor used for in group FS?

Answer 15

• consider - independence, competence, if work was properly performed/documented
• communicate - materiality, risks, work to be performed
• obtain - uncorrected misstatements, internal control weakness, management bias, fraud, confirmation of auditor ethical compliance and all agreed work completed

Question 16

What are audit procedures?

Answer 16

audit plan sets out timing of procedures to be performed
timing
deadlines
team
budget