Process of assurance: planning the assignment Flashcards
What does ISA (UK) 300, Planning an Audit of Financial Statements state about the objective of the auditor?
The objective of the auditor is to plan the audit so that it will be performed in an effective manner.
Define audit strategy.
Determines scope,timing and direction of audit and determines the development of the audit plan
Define audit plan
An audit plan shows how the overall audit strategy will be implemented
An audit plan is more detailed than the strategy and sets out the nature, timing and extent of audit procedures (including risk assessment procedures) to be performed by engagement team members in order to obtain sufficient appropriate audit evidence.
Key components of an audit strategy:
- Understanding the entity and its environment
- Materiality
- Risk assessment
- Nature, extent and timing of audit procedures
- Direction,supervision and review of work
- Other matters
What are six things audits are planned to do:
- attention is paid to the most important areas
- potential problems are identified
- the audit is properly organised and managed
- work is assigned to the appropriate member of the audit team
- appropriate direction and supervision of audit team members
- reviews by more senior auditors are facilitated
Do all audit procedures remain the responsibility of the external auditors?
Yes.
All audit procedures remain the responsibility of the external auditors.
detailed knowledge of client: the environment
- industry conditions
- laws and regulations
- other external factors
detailed knowledge of the client: the client
- operations
- ownership and governance
- structure and finance
- accounting policies
- objectives and strategies
- system and internal control
what is materiality?
relative significance of a particular matter in context of the financial statements as a whole
when is a matter material?
if its omission or misstatement could influence the economic decision of users taken on the basis of financial statements
Define 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.
The concept of performance materiality focuses on the difference between the level of tolerable misstatement and the level of actual misstatements detected.
identifying materiality:
- material by size
- material by nature (eg transactions between company and director)
material by size percentages
- Profit before tax: 5-10%
- Revenue: 1/2-1%
- Total assets: 1-2%
Define tolerable misstatement.
Tolerable misstatement is the maximum misstatement that an auditor is prepared to accept in a class of transactions or balances in the financial statements.
Often expressed as a proportion of its profits.
Define audit risk.
The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk.
