section D

Question 1

ISA 300- Planning an audit of FS objective

Answer 1

to help auditor plan the audit so it will be performed in an effective manner. this is done by the adoption of 2 items: audit plan and strategy

Question 2

audit strategy vs audit plan

Answer 2

strategy: characteristics of the engagement that define its scope as well as factors that might be significant in carrying out the engagement

plan: specific risk assessment procedures, assess risks of MM, responses to risks and any other work required to comply with ISAs, perform audit procedures, evaluate evidence

Question 3

reasons for planning

Answer 3

-appt attention to imp areas
-problems identified n solved timely
-proper organisation and management
-proper assignment of work
-direction, supervision, review of team members
-coordination with experts and comp auditors

Question 4

nature of audit might change

Answer 4

all such changes and reasons must be well documented

Question 5

planning is a one off process at start of an engagement true or false

Answer 5

false
it is iterative and so the need for any additional procedures should be constantly reviewed.

Question 6

what happens after planning

Answer 6

identify issues that may lead to uncertainty or risk in FS
-obtain understanding of entity and its environment
-understand internal controls

Question 7

how to obtain understanding of entity and environment

Answer 7

-relevant industry, regulatory and external factors
-nature of entity , ownershio, structure etc
-accounting policies selected and how they r applied
-measurement and review of financial performance

Question 8

how to understand control environment

Answer 8

-control activites
-entity’s risk assessment process
-monitoring of controls
-information system, including relevant business process relevant to financial reporting and communications

Question 9

significant risks

Answer 9

those that require special audit attention

Question 10

factors that indicate a risk might be significant

Answer 10

-risk of fraud
-degree of subjectivity
-unusual transactions
-significant transactions with a related party
-complexity of the transactions

Question 11

auditor’s responses to assessed risks

Answer 11

after assessing risks
now obtain SAE regarding those risks
by designing and implementing appropriate reponses
this is where audit testing starts to appear

determine whether controls testing is appropriate or not

some substantive testing will always be carried out

where controls are ineffective, they will not be tested and only substantive testing will be relied upon instead

all conclusions must be fully documented to support the audit opinion

Question 12

objectives of the auditor

Answer 12

to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatements, whether due to fraud and error

to report on the FS and communicate as per ISAs in accordance with auditor’s findings

Question 13

key requirements for auditor to obtain reasonable assurance and express an opinion

Answer 13

-ethics
-professional skepticism
-professional judgement
-SAE and audit risk

Question 14

audit risk is made of

Answer 14

detection x inherent x control risk

Question 15

audit risk definition

Answer 15

risk that auditor will express inappropriate opinion when FS are materially misstated

Question 16

inherent risk

Answer 16

susceptibility of an assertion to a misstatement assuming there are no internal controls

Question 17

control risk

Answer 17

risk that MS will not be prevented, detected or corrected on a timely basisd

Question 18

detection risk

Answer 18

risk that auditor will not detect a misstatement that exists in an assertion that could be material eithr individually or in aggregation

Question 19

risk of material misstatement means

Answer 19

risk that FS are materially misstatetd (control x inherent risk)

Question 20

what are business risks

Answer 20

they result from significant conditions, events, circumstances, actions or inactions that could adversely affect an entity’s ability to achieve its objectives and execute its strategies, or its from setting inappropriate objectives and strategies

Question 21

is business risk model a replacment for the traditional audit risk model

Answer 21

no
its a vehicle for identifying audit risk
recognising that most business risks will have financial consequences
and therefore
an effect on the financial statements

it helps gain a better understanding of the business and increases likelihood of identifying risks of material misstatements

Question 22

three categories of business risks

Answer 22

financial
operational
compliance

Question 23

financial risk

Answer 23

arises from the company’s financial activities or the financial consequences of operations

eg.
business continuity problems (going concern)
overtrading
credit risk
interest risk
high cost of capital
unrecorded liabilities

Question 24

operational risk

Answer 24

risk arising from operations such as stock outs, physical disasters, loss of key staff, poor brand management, loss of orders

Question 25

compliance risk

Answer 25

risk arising from non compliance of laws, regulations, policies, procedures and contracts

eg.
listing rules
health n safety
tax penalties
data protection
litigation
sales tax (VAT) problems

Question 26

what to do after identifying business risks

Answer 26

management must decide whether they accept the risk or what their control strategy will be to manage the risk

Question 27

materiality

Answer 27

info is material if its ommission can affect the decisions of users of FS

Question 28

item can be material due to

Answer 28

nature (eg. transactions with directors)
value (such as a significant asset acquired)
impact (such as a 1000$ that turns a profit into loss)

Question 29

materiality threshold

Answer 29

revenue: 0.5-1%
assets: 1%-2%
PBT: 5-10%

Question 30

materiality threshold guidance

Answer 30

handle with care
focus on nature of company
eg. PBT is good for a manufacturer
revenue may be better for a NFP organization

Question 31

materiality level adopted will impact 3 areas

Answer 31

-how many and what items to examine
-whether to use sampling techniques
-what level of error is likely to lead to a modified audit opinion

Question 32

what is performance materiality

Answer 32

isa requires auditor to calculate

it is the amount or amounts set by auditor at less than materiality for the FS as a whole to reduce to an appropriately low level the probability that the aggregate of undetected and uncorrected MS will exceed materiality for FS as a whole.

PM also refers to the amounts set by auditor at less than materiality level or levels for particular classes of transactions, account balances or disclosures.

Question 33

do materiality levels need to be revised

Answer 33

yes if new info becomes available during audit

Question 34

analytical procedures stages

Answer 34

should perform initially for understanding as a risk assessment procedure

should perform in overall review at the end of the audit

then can use as a substantive audit evidence

Question 35

what are analytical procedures

Answer 35

comparasions, trend analysis and reasonable tests of the following:
-prior periods
-budgets
-industry info
-predictive estimates
-ratio analysis
-relationships between financial and non financial info eg. payroll costs and number of employees

Question 36

ratios

Answer 36

always compare to prior periods and comparable cos

always include commentary

use other ratios too except the ones chosen by prior auditors