Planning the assignment Flashcards

1
Q

What are the objectives of planning?

A

Appropriate attention to important areas
Identify potential problems to resolve on a timely basis
Properly organised and managed
Assign work properly
Facilitate direction and review

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2
Q

What is the audit strategy?

A

Sets the scope, timing and direction and guides development

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3
Q

What does the strategy include?

A

Understanding entity’s business - locations, company structure, experience, management integrity
Understanding environment - PESTLE analysis
Understanding accounting and IC systems - reliability of detecting and preventing fraud/error
Materiality and risk
Resources - members, hours, timing, fees

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4
Q

What is professional scepticism?

A

An attitude that involves a questioning mind

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5
Q

Comparisons in analytical procedures?

A

Prior periods
Budgets
Ratio analysis
Non-financial information
Industry information

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6
Q

Return on capital employed

A

profit before interest and tax / capital employed
effective use of resources

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7
Q

Gross profit margin

A

(gross profit / revenue) x 100
assessment of profitability

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8
Q

Cost of sales %

A

(Cost of sales / revenue) x 100
relationship of costs to revenue

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9
Q

Operating cost %

A

(operating costs / revenue) x 100
relationship of costs to revenue

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10
Q

Net profit margin

A

(Profit before interest and tax / revenue) x 100
assessment of profitability

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11
Q

Current ratio

A

current assets / current liabilities
assess ability to pay liabs

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12
Q

Quick ratio

A

(rec + current investments + cash)/current liabs
assess ability to pay liabs

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13
Q

Gearing

A

(Net debt / equity) x 100
assess reliance on external finance

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14
Q

Interest cover

A

profit before interest payable / interest payable
assess ability to pay interest charges

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15
Q

Net asset turnover

A

revenue / capital employed
assess revenue generated by assets

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16
Q

Inventory period

A

(inventory/COS) x 365
assess inventory levels

17
Q

Trade receivables period

A

(Tr Rec/revenue) x 365
assess ability to turn revenue into cash

18
Q

Trade payable period

A

(Tr payables/COS) x 365
assess ability to pay suppliers

19
Q

Material definition

A

Its omission or misstatement could influence the economic decisions of users taken on the basis of FS. Can be qualitative or quantitative

20
Q

Method to calculate materiality

A

Revenue - 0.5 - 1%
Assets - 1 - 2%
Profit before tax - 5 - 10%

21
Q

What is performance materiality?

A

An amount set at less than materiality to reduce to an appropriately low level the probability that aggregated misstatements exceeds materiality

22
Q

What is audit risk?

A

The risk that the auditor expresses an inappropriate opinion when FS materially misstated

23
Q

What is inherent risk?

A

The susceptibility of an assertion due to the nature of the business, before consideration on related controls

24
Q

What is control risk?

A

The risk that misstatements will not be prevented, detected or corrected on a timely basis by internal controls

25
What is detection risk?
Risk that procedures performed by the auditor to reduce audit risk will not detect a misstatement that could be material. Made up of sampling and non-sampling risk
26
Audit risk =
Inherent risk x Control risk x Detection risk
27
Examples of inherent risk
Cash businesses Regulated industry Management under pressure Company trying to raise finance Estimates by management Company being sold
28
Examples of control risk
Environment: Integrity and competence of employees Existence of internal auditors Active role of management Activities: Physical/ logical controls Authorisation Reconciliations Information processing
29
Examples of detection risk
sampling - not testing whole population non-sampling - insufficient CAKE, rushed, lack objectivity and scepticism
30
What is the difference between error and fraud?
Error is unintentional, fraud is an intentional act to result in FS being misstated
31
What are the 2 types of fraud?
Financial reporting - misstatement/omission to deceive users Misappropriation of assets - theft or misuse
32
What are management's responsibilities in relation to fraud?
Preventing and detecting fraud Placing internal controls Creating culture of honesty and ethics
32
What are auditor's responsibilities in relation to fraud?
Obtaining reasonable assurance that FS free from material misstatements Identify risks, design tests, respond appropriately