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Process Of Assurance: Planning The Assigment Flashcards

1
Q

What is the purpose of audit strategy?

A

Determines
1. scope
2. timing
3. direction
of audit.

Determines
development of audit plan

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2
Q

Audit plan

A

How overall strategy will be implemented

Attention paid to most important areas
Identify potential problems
Property Organise and manage audit
Assign work to appropriate audit team member
Facilitate reviews by senior auditors

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3
Q

Some key components of the audit strategy

A
  1. Understanding the entity and its environment
  2. Materially
  3. Risk assessment
  4. Nature, extent and timing of audit procedures
  5. Direction, supervision and review of work
  6. Other matters
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4
Q

Auditor responsible for?

A

Carrying out audit procedures in order to obtain sufficient appropriate audit evidence to support their opinion.

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5
Q

Why understand the entity?

A
  1. Assess RISK
  2. Help design and perform audit PROCEDURES
  3. Develop audit STRATEGY and plan
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6
Q

Understanding the entity areas

A

{One entity area is run by a MINIO(n)}

  1. Measurement and review of financial performance
  2. Industry, regulatory and other external factors (incl applicable financial reporting framework)
  3. Nature of entity, incl selection and application of accounting policies
  4. Internal controls
  5. Objectives, strategies and related business risks that may result in a material misstatement of the FA
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7
Q

Understanding the entity: Financial reporting framework

A

{Financial Reporting Framework Understanding the Penis}

  1. Accounting for FINANCIAL INSTRUMENTS
  2. REVENUE recognition
  3. FOREIGN CURRENCY assets, liabilities, transactions
  4. Accounting for UNUSUAL or complex transactions
  5. Accounting PRINCIPLES + industry specific practices
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8
Q

Understanding the entity: Accounting policies

A
  1. Methods used to recognise, measure, present and disclose significant and unusual transactions
  2. Effect of significant accounting policies on controversial or emerging areas with lack of consensus
  3. Changes in the environment e.g. accounting or tax changes that may necessitate a change in accounting policies
  4. FRSs and laws/regulations that are new to the entity
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9
Q

Some methods used to understand the entity

A

Enquiries of management and other client staff

Analytical procedures

Observation of processes

Inspection of documents/assets

Prior knowledge of client

Discussions among audit team

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10
Q

Materiality definition

A

An expression of the relative significance of a particular matter in the context of the FS as a whole

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11
Q

Two ways a matter can be material

A
  1. In size
  2. In nature
    E.g. company and director transactions
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12
Q

Material by size thresholds
(For the exam)

A
  1. Profit before tax 5-10%
  2. Total assets 1-2%
  3. Revenue 1/2 - 1%
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13
Q

Usual approach to auditing

A

Risk-based

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14
Q

When is risk assessed?

A

At planning stage but re-assessed continually throughout

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15
Q

Effective risk assessment should:

A
  1. Improve EFFICIENCY (by focusing on high risk areas)
  2. Reduce inappropriate OPINIONS
  3. Reduce NEGLIGENCE claims against auditor
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16
Q

Audit risk definition

A

The risk an auditor arrives at an inappropriate opinion on the FSs.

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17
Q

Audit risk calculation

A

{DICs calculate audit risk}

Detection risk
x Inherent risk
x Control risk

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18
Q

2 elements of audit risk

A
  1. FS contain a material misstatement
  2. Auditor fails to detect material misstatements
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19
Q

How can FSs contain a material misstatement?

A
  1. Misstatement occurs
  2. Client controls don’t prevent/detect misstatement
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20
Q

How can the auditor fail to detect material misstatements?

A

Insufficient work

Inappropriate work

Poor judgement

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21
Q

Risk that a misstatement occurs in the first place

A

Inherent risk (IR)

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22
Q

Risk that client controls don’t prevent or detect misstatement

A

Control risk (CR)

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23
Q

Risk that the auditor fails to detect material misstatements

A

Detection risk (DR)

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24
Q

Inherent risk definition

A

The susceptibility of an assertion about:
A class of transaction,
Account balance
or Disclosure
To a misstatement
That could be material.

Either individually or when aggregated with other misstatements.
Before consideration of any related controls.

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25
Q

Three levels of inherent risk

A
  1. Industry level
  2. Entity level
  3. Balance level
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26
Q

Industry level IR

A

Affects whole industry

E.g. highly regulated industries like banking

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27
Q

Entity level IR

A

Affects whole entity

E.g. company not going concern, management get profit-related bonuses

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28
Q

Balance level IR

A

Isolated to a particular account balance

E.g. complex/subjective items

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29
Q

Detection risk

A

Risk auditor won’t detect misstatement that could be material.

Individually or aggregated with misstatements in other balances or classes

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30
Q

Inherent risk factors that should be used to determine the significance of a risk

A

Complexity
Subjectivity
Change
Uncertainty
Management bias/other fraud risk factors

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31
Q

Error definition

A

Unintentional misstatements (including omissions)

32
Q

Fraud definition

A

Intentional act
Involving deception
To obtain unjust/illegal advantage

33
Q

IAS (UK) 240 2 categories of fraud

A
  1. Misappropriation of assets
  2. Fraudulent financial reporting
34
Q

Misappropriation of assets

A

Theft

E.g. creating of ghost employees
theft of inventory

35
Q

Fraudulent financial reporting

A

Intentionally manipulating FS to deceive its users

36
Q

Management responsibilities to avoid and detect fraud/error

A

Main responsibility

Those charged with governance and management

Achieved by the design and implementation of an effective system of internal control

37
Q

Which risk is more likely to occur, error or fraud?

38
Q

What is a related party?

A

INFLUENCE: An individual or organisation
Influenced by or with influence over entity

39
Q

Risk for transactions with related parties…

A

May not be because of entity’s normal business

40
Q

Is there anything wrong with an entity dealing with a related party?

A

No

But there is greater risk for financial results to be manipulated.
Because transactions may not be at ‘arms length’

41
Q

Who is told about related party transactions?

A

Shareholders

42
Q

Is identifying related parties clear-cut?

A

No

They are often hard to identify in practice

43
Q

Problems identifying related parties

A
  1. Ds reluctant to disclose transactions
    Esp in case of family members
  2. Transactions may be hard to identify because not separate to usual transactions
  3. Transactions fraudulently concealed
44
Q

Analytical procedures definition

A

Analysis of plausible relationships between data (financial and non-financial)

And required analysis of identified fluctuations/relationships that are inconsistent with other relevant info. Or that differ from expected values by a significant amount

45
Q

ISA (UK) 315 and ISA (UK) 520 times analytical procedures must be used in an audit

A
  1. Planning
    To identify risk
  2. Forming an overall conclusion
46
Q

ISA (UK) 315 and ISA (UK) 520 times analytical procedures can be used in an audit

A

As a form of substantive procedure to gather evidence

47
Q

Preliminary AR limitations

A
  1. Require good knowledge of entity
    May be limited in first audit
  2. May need experienced staff
  3. Depends on source data reliability
48
Q

Analytical procedures steps

A
  1. Understand the business
  2. Develop expectation
  3. Compare to actual
  4. Unexpected variation = risk
49
Q

Plausible benchmarks for analytical comparison

A

Prior year
Budget
Industry averages

50
Q

ROCE formula

A

Profit before interest and tax/(equity + net debt)

51
Q

ROCE measures…

A

Effective use of resources

52
Q

Return on shareholders’ funds formula

A

Net profit for period/(share capital + reserves)

53
Q

Return on shareholders’ funds purpose

A

Effective use of resources

54
Q

Gross profit margin

A

Gross profit/revenue

55
Q

Gross profit margin measures …

A

Profitability before accounting for overheads

56
Q

Cost of sales percentage formula

A

Cost of sales/Revenue

57
Q

COS measures…

A

Relationship between costs to revenue

58
Q

Operating costs percentage formula

A

(Operating costs/overheads)/revenue

59
Q

Operating cost % measures…

A

Relationship of costs to revenue

60
Q

Net margin/operating margin calculation

A

Profit before interest and tax/revenue

61
Q

Net margin/operating margin measures…

A

Profitability after taking overheads into account

62
Q

Short term liquidity: current ratio

A

Current assets/current liabilities

63
Q

Current ratio measures…

A

Ability to pay current liabilities from reasonably liquid assets

64
Q

Short term liquidity: quick ratio

A

(Recoverable a + current investments + cash)/current liabilities

65
Q

Quick ratio measures…

A

Ability to pay current liabilities from the most liquid assets

66
Q

Long term solvency: gearing ratio

A

Net debt/Equity

67
Q

Gearing ratio measures…

A

Reliance on external finance

68
Q

Long term solvency: interest cover calculation

A

Profit before interest payable/interest payable

69
Q

Interest cover measures…

A

Ability to pay interest charges

70
Q

Efficiency: net asset turnover calculation

A

Revenue/capital employed

71
Q

Net asset turnover measures…

A

Revenue generated from asset base

72
Q

Efficiency: trade receivables collection period

A

(Trade receivables x 365)/credit revenue

73
Q

Trade receivables collection period assesses…

A

Average time taken to turn receivables into cash

74
Q

Efficiency: Trade payable’s payment period

A

(Trade payables x 365)/credit purchases

75
Q

Trade payables payment period measures…

A

Average time taken to pay suppliers

76
Q

Efficiency: inventory holding period calculation

A

(Inventory x 365)/COS

77
Q

Inventory holding period measures…

A

Average time inventory is held

AS (15 decks)

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