Process of assurance: planning the assignment Flashcards
What are the objectives/benefits of planning an assurance engagement?
Ensures appropriate attention is devoted to important areas of audit
Identify potential problems and resolve on a timely basis
Ensure that the audit is properly organised and managed
Assign work to engagement team members properly
Facilitate direction and supervision of engagement team members
Facilitate review of work
What is the audit strategy?
The formulation of the general strategy of the audit, which sets the scope, timing and direction of the audit and guides the development of the audit plan
What components are included in the audit strategy?
Understanding the entity's business Understanding the entity's environment Understanding the entity's accounting and related internal control systems Materiality and risk Resources
Why does the auditor need to understand the entity?
To identify risks
Helps auditor design and perform procedures
Provides frame of judgement to assess results against e.g. materiality
What areas do you need to understand when understanding the entity and its environment?
Nature of entity Objectives and strategies Entities financial performance Internal control Industry, regulatory and external factors
What is professional scepticism?
An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence
What are analytical procedures?
MUST be used at risk assessment stage as part of understanding the entity and environment
Aim is to look for relationships between sets of data both financial and non-financial
What kind of documents are reviewed during analytical procedures?
Prior periods Budgets Ratio analysis Non-financial information Industry information
How do you calculate return on capital employed?
Return on Capital employed = PBIT (Profit before interest and tax) ÷ Capital Employed
What is the purpose of calculating return on capital employed?
Tests if there is effective use of resources
How do you calculate gross profit margin?
Gross profit margin = (Gross profit ÷ Revenue) X 100
What is the purpose of calculating gross profit margin?
Assessment of profitability
How do you calculate cost of sales percentage?
Cost of sales percentage = (Cost of sales ÷ Revenue) X 100
What is the purpose of calculating cost of sales percentage?
Relationship of costs to revenue
How do you calculate operating cost percentage?
Operating cost percentage = (Operating Costs ÷ Revenue) X 100
What is the purpose of calculating operating cost percentage?
Relationship of costs to revenue
How do you calculate net profit margin?
(PBIT ÷ Revenue) X 100
What is the purpose of calculating net profit margin?
Assessment of profitability
How do you calculate current ratio?
Current assets ÷ Current liabilities
What is the purpose of calculating current ratio?
Assess ability to pay current liabilities
short term liquidity
How do you calculate quick ratio?
(Receivables + current investments + cash) ÷ Current liabilities
What is the purpose of calculating quick ratio?
Assess ability to pay current liabilities
short term liquidity
How do you calculate gearing?
(Net debt ÷ Equity) X 100
What is the purpose of gearing?
Assess reliance on external finance (long term liquidity)
How do you calculate interest cover?
Profit before interest payable ÷ Interest payable
What is the purpose of interest cover?
Assess ability to pay interest charges
How do you calculate net asset turnover?
Revenue ÷ Capital employed
What is the purpose of net asset turnover?
Assess revenue generated by assets
How do you calculate inventory period?
(Inventory ÷ COS) X 365 (days)
What is the purpose of inventory period?
Assess inventory levels held
How do you calculate trade receivable period?
(Trade receivables ÷ Revenue) X 365 (days)
What is the purpose of trade receivable period?
Assess ability to turn revenue into cash
How do you calculate trade payable period?
(Trade payables ÷ COS) X 365 (days)
What is the purpose of trade payable period?
Assess ability to pay suppliers
What is materiality?
A matter is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements
When in materiality and audit risk particularly considered?
Identifying and assessing risks of material misstatement
Determining nature, timing and extent of further audit procedures
Evaluating effect of uncorrected misstatements
What transactions are considered material by nature regardless of their value?
Transactions relating to directors
What is performance materiality?
The amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole
