Topic 4&5: planning engagements and risk assessment Flashcards
What is a business risk?
risk of the company not fulfilling its objectives and strategies. DO NOT MENTION IN AUDIT RISK QUESTIONS. only discuss in internal control deficiency consequences
What is audit risk?
Risk of expressing an inappropriate audit opinion (because auditor has failed to spot material errors and omissions)
what is an inherent risk?
susceptibility of an assertion to misstatement.
I.E areas of judgement, calculations which involve estimates
what is a control risk?
risk that internal controls do not prevent, detect or correct errors.
e.g new systems
lack of review/ reconciliation
what is detection risk?
risk that auditors procedures do not detect a misstatement.
e.g new client
time pressure
How to account for specific risks?
- start with ‘there is a risk of understatement/overstatement because’
2, list out the risk indicators and explain what could go wrong
calculate ratios etc
What is a good example of how to write up inventory risks?
some clothing lines are not popular and may be sold at a loss/ need writing down to their NRV
inventory days have risen from 35-40 days
new inventory management system appears ti be inaccurate. inventory in system may not exist
prices are denominated in the suppliers local currency and there is a risk of translation errors
what are the materiality thresholds?
If item as percentage of revenue is over 0.5% HRC or 1% LRC then material
if item as a percentage of assets is over 1% HRC 2% LRC then material
if item as percentage of PBT is over 5% HRC 10% LRC then material
what are the possible errors indicted by in increased profit margin?
Revenue could be overstated due to incorrect revenue recognition
C.O.S could be understated due to omitted expenses/ incorrect cut off
closing inv adjustment could be overstated
what are possible errors indicated by increase and decrease of operating profit margin?
Increase: omitted admin costs (forgotten to accrue for electricity).
decrease: have changed the classification of costs between categories year on year
what are possible errors indicated by an increase in inventory days?
overstated inventory if the inventory is obsolete and needs writing down
what are possible errors indicated by an increase in receivable days?
slow payers leading to a heightened risk of unrecorded bad debts
what are possible errors indicated by a decrease in payable days?
the trade payables figure is understated due to cut off issues (the last few weeks of purchases have not been recoded in the accounts)
what are the benefits of Data analytics?
enhances quality of assurance work and improves understanding of the entity
allows assurance work to be performed more efficiently, freeing up time to work on risk areas
100% transactions can be examined
timing of engagement can be changed because more work performed during accounting period
facilitates analysis of relationships between different classes in the financial statements. allowing trends and patterns to be identified
facilitates identification of outlying transactions
facilitates identification of items which are at risk of misstatement and fraud
what are examples of data analytics routines?
BRAVE
breakdown: could analyse revenue product line or geographic area
reperform: three-way matching (orders, GRN’s or GDN’s and invoices)
aged analysis: reperform aged inventory analysis so that more reliable and in a format auditor is familiar with
variance analysis: recalculate gross profit margin by inventory line and compare to last year or identify any negative margins/ loss making lines
exception report: software could identify any suppliers who take longer that average to send invoices after delivery
