Planning the assignment Flashcards
What are the key components of the audit strategy?
DUSTMEN-RR
- DIRECTION of work
- UNDERSTANDING the entity and its environment
- SUPERVISION of work
- TIMING of audit procedures
- MATERIALITY
- EXTENT of audit procedures
- NATURE of audit procedures
- RISK ASSESSMENT
- REVIEW of work
According to ISA 300, what is the objective of the auditor?
To plan the audit so it will be performed effectively
According to ISA 300, what are the stages of the planning process?
Starts with a high-level audit strategy that is then translated into a more detailed audit plan that drives the work carried out by the audit team and shows how the strategy will be implemented
What does audit planning ensure? (6)
RAPIDO
- REVIEWS by more senior auditors are facilitated
- Work is ASSIGNED to the appropriate member of the audit team
- Potential PROBLEMS are identified
- Attention is paid to the most IMPORTANT areas
- Appropriate DIRECTION and supervision of audit team members
- The audit is properly ORGANISED and managed
What does ISA 315 require?
The auditor to gain an understanding of the entity in order to be able to identify risk
What external factors does ISA 315 detail as important in gaining an understanding of the business?
FIR
- Financial reporting FRAMEWORK
- INDUSTRY
- REGULATORY
What internal factors does ISA 315 detail as important in gaining an understanding of the business?
PAIR
- Measurement and review of the entity’s financial PERFORMANCE
- Entity’s selection and application of ACCOUNTING POLICIES
- INTERNAL CONTROLS
- Business RISKS related to objectives and strategies, which may result in a material misstatement of the financial statements
How does ISA 315 require the auditor to gain an understanding of the business? (6)
KA-CIAO
- Prior KNOWLEDGE of the client
- Discussions among the AUDIT TEAM
- Enquiries of management and other CLIENT STAFF
- INSPECTION of documents and assets
- ANALYTICAL procedures
- OBSERVATION of processes
Why is materiality important in the audit?
The standard audit report sets out the scope of an audit stating that the engagement involves reasonable assurance that the financial statements are free from material misstatement.
Define materiality
An expression of the relative significance of a particular matter in the context of the financial statements as a whole. A matter is material if its omission or misstatement could influence the economic decision of users taken on the basis of the financial statements.
How does materiality influence the planning stage?
Drives the level of work to be carried out; e.g. sample sizes, whether to test a balance
How does materiality influence the audit process?
Influences the evaluation of audit evidence; e.g. if the auditor discovers a material misstatement then an adjustment to the financial statements should be requested
Why might an item, error, or misstatement be material?
- Profit before tax: 5-10%
- Revenue: 0.5-1%
Total assets: 1-2% - Nature
Define the audit risk model
audit risk = inherent risk X control risk X detection risk
Define audit risk
The risk that the auditor arrives at an inappropriate opinion on the financial statements
What are the two elements of audit risk?
- Risk that the financial statements contain a material misstatement
- Risk that the auditor fails to detect any material misstatements
How can the risk that the financial statements contain a material misstatement occur?
- Misstatement occurs in the first place (inherent risk)
2. Client controls do not prevent or detect misstatement (control risk)
How can the risk that the auditor fails to detect any material misstatements occur?
- Insufficient work
- Inappropriate work
- Poor judgement
(detection risks)
Define inherent risk
The risk that items in the financial statements will be misstated due to their nature. The susceptibility of a transaction, account balance or disclosure to material misstatement, irrespective of the internal controls in place.
What are the three levels of inherent risk?
BIE
- Balance
- Industry
- Entity
Define control risk
The risk that a material misstatement would not be prevented, detected, or corrected by the accounting and internal control systems
Define detection risk
The risk that the auditor’s procedures will not detect a misstatement that exists in an account balance or class of transactions that could be material, either individually or when aggregated with misstatements in other balances or classes.
What does ISA 315 identify as indicators of significant risk? (6)
SCURFS
- SIGNIFICANT accounting, economic, or other developments
- COMPLEXITY
- UNUSUAL transactions
- RELATED PARTY transactions
- FRAUD
- SUBJECTIVITY
Define error
An unintentional misstatement in financial statements
Define fraud
An intentional act involving the use of deception to obtain an unjust or illegal advantage
What is the difference between error and fraud?
Error is unintentional; fraud is intentional
What does ISA 240 identify as the two categories of fraud that are of concern to auditors?
- Misappropriation of assets; theft
2. Fraudulent financial reporting
Who is responsible for the prevention and detection of fraud?
Those charged with governance of an entity and management
Define related party
An individual or organisation who is influenced by, or has influence over, the entity
Is it wrong for an entity to deal with a related party?
There is nothing wrong with an entity dealing with a related party, although this does increase the potential for the financial results to be manipulated
Define analytical procedures
The analysis of significant ratios and trends including the resulting investigations of fluctuations and relationships that are inconsistent with other relevant info or which deviate from predictable amounts
What does ISA 315 outline about the use of analytical procedures during the audit?
Must be used at planning to identify risk
What does ISA 520 outline about the use of analytical procedures during the audit? (2)
- Can be used as a form of substantive procedure to gather audit evidence
- Must be used to assist in forming an overall conclusion on the financial statements
What are the limitations of analytical procedures? (3)
- They require a sound knowledge of the entity
- Experienced staff may be required to carry them out
- The quality of analytical procedure depends upon the reliability of source data
What are the stages of performing analytical procedures? (4)
- Understand the business
- Develop an expectation
- Compare actual to expectation
- Unexpected variations = risk
What sort of risk is a sampling risk?
Detection risk
What sort of risk is high staff turnover in the accounts department?
Control risk
What sort of risk is senior management regularly overriding the system of controls?
Control risk as controls may be ignored leading to an increased risk of material fraud or error
What sort of risk is directors’ pay is related to company profitability?
Inherent risk as it may motivate the directors to distort the financial information
What sort of risk is a significant number of balances based on estimates?
Inherent
What sort of risk is the financial statements include complex transactions?
Inherent
What sort of risk is audit staff are inexperienced audit staff?
Detection
What sort of risk is the company is seeking to raise finance?
Inherent
What sort of risk is the organisation having few employees in its accounting department?
Control
What sort of risk is the organisation operates in a fast-moving, high-tech environment
Inherent
