Week 5 - Planning An Audit Flashcards
two ways in which something can be material in the FS?
material by nature
quantitatively material
interest cover calculation?
how much your profit can cover your interest payment
profit from operations / interest expense
trade receivables days calculation?
t/r / sales x 365
payables settlement period calculation?
t/p / COGS x 365
what is the link between payables and receivables days?
ideally, receivables days will be on par or quicker than payables days to ensure the business always has funds available to settle payments
ISA300?
requires the auditor to plan the audit engagement and identify the benefits of planning
benefits of audit planning?
- devote attention to important areas
- identify problems early
- audit is organised
- appropriate staff are chosen
- facilitates direction, supervision & review
- aids coordination of work of experts
two major documents used in audit planning?
- detailed audit plan
- audit strategy
key considerations when devising an audit strategy?
- materiality
- entity & its environment
- coordination of audit
- audit approach
- risk assessment
- preliminary analytical procedures
audit approach?
e.g., the types of tests you do - tests of controls / tests of detail
if controls are strong, less substantive testing required
if controls are weak, more substantive testing
audit plan should include…
- the details of the risk assessment procedures
- the details of further audit procedures at the assertion level
assertion level?
FS level?
assertion level = when looking at specific areas of the FS
FS level = looking at the whole FS
can an audit plan be modified?
yes if necessary in response to new information, or the result of the audit testing carried out
how to obtain an understanding of a client?
- via the firm (partner, manager briefing)
- via the client (discussion, observation)
- via myself (past experience)
- other (companies’ house, internet)
what should an auditor understand about a client?
- the environment (e.g., laws & regs, industry conditions, competition etc)
- the entity (e.g., operations, policies, strategies etc)
ISA315?
requires the auditor to understand the FR framework of the entity
e.g., accounting principles, revenue recognition, industry-specific practices
when understanding an entity, must the implications of sustainability be considered?
yes
e.g., impact on their business model, industry factors, regulatory factors etc
examples of impacts that commitment to net zero can have?
- impairment of assets
- change in length of licenses
- change in asset values
materiality thresholds (by size)?
- 0.5%-1% of revenue
- 5% of PBT
- 1%-2% of total assets
- 2%-5% of net assets
- 0.5%-1% of gross profit
- 5%-10% of profit after tax
material by nature examples?
- misleading descriptions
- small amounts which impact critical points (e.g., turn a profit to a loss)
- transactions with directors
- related party transactions
performance materiality?
amount set at less than materiality to reduce the probability of uncorrected material misstatements
double materiality?
considers sustainability risks that may create financial risks, but also sustainability issues
material in two aspects - sustainability and financially
when are analytical procedures used?
- planning stage
- as a substantive procedures
- to assist in forming an overall conclusion
limitations of analytical procedures?
- require sound knowledge of the entity
- require experienced staff
- requires reliable source data
