Section B, Planning and risk assessment: Key Features of the Exam:

Question 1

Purpose and matters to be included of an engagement letter?

Answer 1

Purpose:
Outlines nature of contract between audit firm and audit client, to minimise risk of misunderstanding of the terms of engagement and confirms acceptance of engagement

Include:
Objective and scope of audit
Auditors responsibilities
Management responsibilities
Identification of applicable financial reporting framework for the preparation of financial statements

Question 2

Planning an audit, reason and benefits:

Answer 2

Reason:
Addressed by ISA300, planning an Audit of Financial Statements

Benefits:
1) Help auditor to devote appropriate attention to important areas of audit
2) Help auditor to identify and resolve potential problems on timely basis
3) Help properly organise and manage audit engagement so performed in an effective and efficient manner
4) Assisting in selection of engagement team members with appropriate capabilities and competence to respond to anticipated risks

Question 3

Audit risk and response with relation to new client:

Answer 3

Risk: Audit team not familiar with accounting policies, transactions and balances, increased detection risk and less assurance over opening balances due to not performing audit previously

response:
Ensure suitably experience team assigned to audit. Adequate time allocated for team member to obtain understanding of audit client and risks of material misstatement, including detailed team briefing to cover key areas of audit and increased audit procedures over opening balances.

Question 4

Risk and response to incorrect capatilsed expenditure:

Answer 4

Audit Risk:
Follow rules of IAS 16, Property, Plant and Equipment (PPE) and deviation could result in PPE being overstated (or understated) and expenses being understated (or overstated)

Response:
Obtain schedule of costs that have been capitalised and supporting documentation such as invoices and minutes

Question 5

How can an internal/external audit department document a process?

Answer 5

1) Narrative notes - are a written description of a system which detail what occurs at each stage and could include any controls which operate at each stage
2) Questionnaires - Internal Control Questionnaires (ICQ) or internal control evaluation questionnaires (ICEQ) contain list of questions, ICQs are used to assess whether controls exist whereas ICEQs test effectiveness of controls
3) Flow charts are a graphic illustration of internal control system. Lines usually demonstrate the sequence of events and standard symbols are used to signify controls or documents

Question 6

When providing control objectives, what should your sentence always start with?

Answer 6

“To ensure that”

Question 7

Substantive procedures to test on the payroll department:

Answer 7

1) Cast sample of payroll records to confirm completeness and agree total wages and salaries expense per payroll system to trial balance

2) Recalculate gross and net pay figures for a sample of employees and agree to the payroll records

3) For a sample of wage payments, agree total net pay per payroll records to bank transfer listing and to cash book

4) Compare total payroll figure this year to prior year, identify any significant differences and discuss with mgmt