Planning the Assignment Flashcards
What is an audit strategy?
Details of scope, timing, and direction of the audit, and development of the audit plan.
What are the key components of an audit strategy?
Understanding the entity, materiality, risk assessment, nature/extent/timing, and direction/supervision/review.
What is an audit plan?
Overall strategy and implementation
What does the audit plan ensure?
Attention to important areas, problems identified and addressed, audit is organised and managed, and that direction/supervision/review occurs from senior auditors.
Understanding the entity - WHY
To assess risk, design audit procedures, and develop the strategy and plan
Understanding the entity - WHAT
External factors, nature of the entity, overall objectives/strategies/business risks that may lead to misstatement, measurement /review of financial performance, and internal controls
Understanding the entity - HOW
Enquiries of management, analytical procedures, observation, inspection, prior knowledge and discussions.
What is materiality?
An expression of the relative significance of a particular matter in the context of the financial statements as a whole. Identified due to size and nature.
Planning materiality thresholds?
Profit before tax = 5 - 10%
Revenue = 0.5 - 1%
Total Assets = 1 - 2%
What are the benefits of a risk assessment?
Makes audit more efficient, means fewer inappropriate opinions, and fewer negligence claims.
Calculation of audit risk?
Inherent Risk x Control Risk x Detection Risk
What is inherent risk?
Risk that a misstatement occurs in the first place
What is control risk?
Risk that controls do not prevent the misstatement.
What is detection risk?
Insufficient/inappropriate work and poor judgement.
What is the difference between error and fraud?
Errors are unintentional; Fraud is intentional.
Related party transactions
Transactions between the entity and a related party should be disclosed in the financial statements and shareholders made aware.
Describe the use of analytical procedures
They MUST be used at planning stage to identify risk, they CAN be used as a substantive procedure, and they MUST be used in the evaluation stage to assist in forming an overall conclusion.
Path for performing analytical procedures
Understand the business > Develop and expectation > Compare actual to expectation > Unexpected variations = risk.
Gross Profit Margin
(Gross profit x 100) / Revenue
Current Ratio
Current Assets / Current Liabilities
Interest Cover
Profit before interest payable / interest payable
Quick ratio
(Receivables + Current Investments + Cash) / Current Liabilities
What are the signs of overtrading?
Cash decreasing and receivables increasing.
