Planning the assignment Flashcards
What are the objectives of planning?
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
What is the audit strategy?
Sets the scope, timing and direction and guides development
What does the strategy include?
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
What is professional scepticism?
An attitude that involves a questioning mind
Comparisons in analytical procedures?
Prior periods
Budgets
Ratio analysis
Non-financial information
Industry information
Return on capital employed
profit before interest and tax / capital employed
effective use of resources
Gross profit margin
(gross profit / revenue) x 100
assessment of profitability
Cost of sales %
(Cost of sales / revenue) x 100
relationship of costs to revenue
Operating cost %
(operating costs / revenue) x 100
relationship of costs to revenue
Net profit margin
(Profit before interest and tax / revenue) x 100
assessment of profitability
Current ratio
current assets / current liabilities
assess ability to pay liabs
Quick ratio
(rec + current investments + cash)/current liabs
assess ability to pay liabs
Gearing
(Net debt / equity) x 100
assess reliance on external finance
Interest cover
profit before interest payable / interest payable
assess ability to pay interest charges
Net asset turnover
revenue / capital employed
assess revenue generated by assets
Inventory period
(inventory/COS) x 365
assess inventory levels
Trade receivables period
(Tr Rec/revenue) x 365
assess ability to turn revenue into cash
Trade payable period
(Tr payables/COS) x 365
assess ability to pay suppliers
Material definition
Its omission or misstatement could influence the economic decisions of users taken on the basis of FS. Can be qualitative or quantitative
Method to calculate materiality
Revenue - 0.5 - 1%
Assets - 1 - 2%
Profit before tax - 5 - 10%
What is performance materiality?
An amount set at less than materiality to reduce to an appropriately low level the probability that aggregated misstatements exceeds materiality
What is audit risk?
The risk that the auditor expresses an inappropriate opinion when FS materially misstated
What is inherent risk?
The susceptibility of an assertion due to the nature of the business, before consideration on related controls
What is control risk?
The risk that misstatements will not be prevented, detected or corrected on a timely basis by internal controls
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
Audit risk =
Inherent risk x Control risk x Detection risk
Examples of inherent risk
Cash businesses
Regulated industry
Management under pressure
Company trying to raise finance
Estimates by management
Company being sold
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
Examples of detection risk
sampling - not testing whole population
non-sampling - insufficient CAKE, rushed, lack objectivity and scepticism
What is the difference between error and fraud?
Error is unintentional, fraud is an intentional act to result in FS being misstated
What are the 2 types of fraud?
Financial reporting - misstatement/omission to deceive users
Misappropriation of assets - theft or misuse
What are management’s responsibilities in relation to fraud?
Preventing and detecting fraud
Placing internal controls
Creating culture of honesty and ethics
What are auditor’s responsibilities in relation to fraud?
Obtaining reasonable assurance that FS free from material misstatements
Identify risks, design tests, respond appropriately
