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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is the audit strategy?

A

Sets the scope, timing and direction and guides development

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is professional scepticism?

A

An attitude that involves a questioning mind

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Comparisons in analytical procedures?

A

Prior periods
Budgets
Ratio analysis
Non-financial information
Industry information

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Return on capital employed

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Gross profit margin

A

(gross profit / revenue) x 100
assessment of profitability

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Cost of sales %

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Operating cost %

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Net profit margin

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Current ratio

A

current assets / current liabilities
assess ability to pay liabs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Quick ratio

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Gearing

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Interest cover

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Net asset turnover

A

revenue / capital employed
assess revenue generated by assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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
Q

What is detection risk?

A

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
Q

Audit risk =

A

Inherent risk x Control risk x Detection risk

27
Q

Examples of inherent risk

A

Cash businesses
Regulated industry
Management under pressure
Company trying to raise finance
Estimates by management
Company being sold

28
Q

Examples of control risk

A

Environment:
Integrity and competence of employees
Existence of internal auditors
Active role of management

Activities:
Physical/ logical controls
Authorisation
Reconciliations
Information processing

29
Q

Examples of detection risk

A

sampling - not testing whole population
non-sampling - insufficient CAKE, rushed, lack objectivity and scepticism

30
Q

What is the difference between error and fraud?

A

Error is unintentional, fraud is an intentional act to result in FS being misstated

31
Q

What are the 2 types of fraud?

A

Financial reporting - misstatement/omission to deceive users
Misappropriation of assets - theft or misuse

32
Q

What are management’s responsibilities in relation to fraud?

A

Preventing and detecting fraud
Placing internal controls
Creating culture of honesty and ethics

32
Q

What are auditor’s responsibilities in relation to fraud?

A

Obtaining reasonable assurance that FS free from material misstatements
Identify risks, design tests, respond appropriately