Planning The Audit Flashcards
What is the purpose & results of audit planning?
•Planning of the audit as a whole by a person with relevant knowledge, skills & experience.
•Continuous process.
•From accepting new clients/finalizing existing clients
•Purpose of planning an effective & efficient audit.
•Results of audit planning: Overall strategy for the audit as a whole.
: Audit plan for classes of transactions/account balances
What are the advantages of planning the audit?
•Appropriate attention is devoted to important areas of the audit
•Potential problem areas are identified & timeously resolved.
•Audit is organised & managed in an effective & efficient manner
•Work performed by other auditors & experts is properly co-ordinated.
•Work is properly delegated to assistants & reviewed.
•Engagement team with the appropriate experience & expertise are allocated to the audit
What is the purpose of obtaining knowledge of the business?
•To plan the audit.
•Exercise professional judgement when evaluating & assessing risk.
•Identify significant classes of transactions, account balances & disclosures
•Respond to identifying risks
Name the aspects on which knowledge should be obtained.
•Measurement & review: Financial performance
•Objectives, strategies & related business risk
•Internal factors: Investments & investment activities, business operations, financing & financing activities
•External factors: Industry factors, regulatory factors
Define internal control.
•The process designed & affected by those charged with governance, management & other personel.
•Tp provide reasonable assurance about the: achievement of business objectives with regard to the reliability of financial reporting
: Effectiveness & efficiency of operations
: Compliance with applicable laws & regulations
•Internal control is designed & implemented to address business risk that were identified & that threaten the achievement of any of the above objectives
Name & describe the inherent limitations of internal controls
•Only cost effective controls can be implemented
• Controls are designed to address routine transactions & not abnormal transactions
•Human judgement can be faulty
•Controls can be circumvented
•Management override of controls
•Inadequate procedures to changing circumstances
Name the sources of information to obtain knowledge on the accounting system & controls
•A system walk through test
•Enquiry of management & personel
•Inspection of documents
•Observation of controls & processes
•Internal control questionnaires
•Prior years working papers
Name the 5 components of internal control system
- Control environment
- Entity’s risk assessment procedures
- Entity’s information system
- Monitoring of internal controls
- Control activities
Name the matters that will affect the control environment
• Communication & enforcement of ethical values
• Commitment to competence
• Participation by those charged with governance.
• Management’s philosophy & operating style
• organisational structure
• Assignment of authority & responsibility
• Human resources policies & practices
Define audit risk
•The risk of material misstatement which the auditor will not be able to detect while performing the audit.
• A risk that the auditor will issue an incorrect audit opinion at the end of the audit due to the auditor’s failure to detect material misstatement due to other reasons
Define & discuss components of audit risk
• Inherent risk - Is the susceptibility to a misstatement that could be material either individually/when aggregated with other misstatements assuming that there are no related internal controls
• Control risk - Is the risk that a misstatement which could occur in an assertion & which could be material either individually/aggregated & corrected on a timely basis by the entity’s internal controls
•Detection risk - Is the risk that the auditors procedures will not detect a misstatement that exists in an assertion that could be material either individually/when aggregated with other misstatements
Name & discuss the RoMM @ the FS level
•Susceptibility of an assertion to a misstatement that could be material
•Without taking any related internal controls into account
•Risks that the entity’s internal controls will not prevent, detect/ correct MM
Discuss the relationship between audit risk & materiality
•This is an inverse relationship namely: The higher the audit risk, the lower the materiality will be set
: The lower the audit risk, the higher the materiality will be set
