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BUS273 - Audit & Assurance Services > Week 5 - Planning An Audit > Flashcards

Week 5 - Planning An Audit Flashcards

1
Q

two ways in which something can be material in the FS?

A

material by nature

quantitatively material

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2
Q

interest cover calculation?

A

how much your profit can cover your interest payment

profit from operations / interest expense

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3
Q

trade receivables days calculation?

A

t/r / sales x 365

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4
Q

payables settlement period calculation?

A

t/p / COGS x 365

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5
Q

what is the link between payables and receivables days?

A

ideally, receivables days will be on par or quicker than payables days to ensure the business always has funds available to settle payments

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6
Q

ISA300?

A

requires the auditor to plan the audit engagement and identify the benefits of planning

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7
Q

benefits of audit planning?

A
  • 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
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8
Q

two major documents used in audit planning?

A
  • detailed audit plan
  • audit strategy
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9
Q

key considerations when devising an audit strategy?

A
  • materiality
  • entity & its environment
  • coordination of audit
  • audit approach
  • risk assessment
  • preliminary analytical procedures
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10
Q

audit approach?

A

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

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11
Q

audit plan should include…

A
  • the details of the risk assessment procedures
  • the details of further audit procedures at the assertion level
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12
Q

assertion level?
FS level?

A

assertion level = when looking at specific areas of the FS

FS level = looking at the whole FS

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13
Q

can an audit plan be modified?

A

yes if necessary in response to new information, or the result of the audit testing carried out

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14
Q

how to obtain an understanding of a client?

A
  • via the firm (partner, manager briefing)
  • via the client (discussion, observation)
  • via myself (past experience)
  • other (companies’ house, internet)
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15
Q

what should an auditor understand about a client?

A
  • the environment (e.g., laws & regs, industry conditions, competition etc)
  • the entity (e.g., operations, policies, strategies etc)
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16
Q

ISA315?

A

requires the auditor to understand the FR framework of the entity

e.g., accounting principles, revenue recognition, industry-specific practices

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17
Q

when understanding an entity, must the implications of sustainability be considered?

A

yes

e.g., impact on their business model, industry factors, regulatory factors etc

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18
Q

examples of impacts that commitment to net zero can have?

A
  • impairment of assets
  • change in length of licenses
  • change in asset values
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19
Q

materiality thresholds (by size)?

A
  • 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
20
Q

material by nature examples?

A
  • misleading descriptions
  • small amounts which impact critical points (e.g., turn a profit to a loss)
  • transactions with directors
  • related party transactions
21
Q

performance materiality?

A

amount set at less than materiality to reduce the probability of uncorrected material misstatements

22
Q

double materiality?

A

considers sustainability risks that may create financial risks, but also sustainability issues

material in two aspects - sustainability and financially

23
Q

when are analytical procedures used?

A
  • planning stage
  • as a substantive procedures
  • to assist in forming an overall conclusion
24
Q

limitations of analytical procedures?

A
  • require sound knowledge of the entity
  • require experienced staff
  • requires reliable source data
25
Q

how to perform analytical procedures?

A
  • understand the business
  • develop an expectation
  • compare actual to expectation
  • unexpected variation = risk
26
Q

gross profit margin?
operating margin?
return on capital employed?

A

GPM = GP/rev x 100
OM = OP/rev x 100
ROCE = OP/ (equity + debt) x 100

27
Q

current ratio?
quick ratio?

A

CR = CA/CL
QR = (CA - inventory) / CL

28
Q

gearing ratio?
interest cover?

A

GR = net debt / equity
IC = operating profit / interest exp

29
Q

inventory holding period?

A

inventory / COGS x 365

30
Q

return on capital employed purpose?

A

shows how well assets being put to use

31
Q

gearing ratio purpose?

A

shows how much an entity is relying on external finance

32
Q

different types of business risk?

A
  • financial risk
  • operational risk
  • compliance risk
33
Q

who should manage business risk?

A

management

auditors are interested in business risk that impacts the FS

34
Q

business risks around climate change?

A
  • non-compliance with climate change regulation
  • damaged reputation
  • loss of investors
  • failure to adapt/evolve
  • extreme climate events/ weather
35
Q

difference between physical and transition risks?

A

physical = risks associated with severe weather

transition = risks associated with transition to net zero (e.g., stranded assets)

36
Q

what impact can climate change have to an auditor’s work?

A
  • may impact the FS materially
  • may impact going concern assumption
  • can give rise to audit risks
37
Q

audit risk = ?

A

inherent risk x control risk x detection risk

ROMM / audit risk & detection risk

38
Q

scalability?

A

requirements of ISA must be applied to all entities regardless of size/complexity

39
Q

significant risks?

A

when inherent risk is close to the upper end of the spectrum of inherent risk (high impact & likelihood)

significant risks require special consideration

e.g., subjective transactions, estimations, complex processes

40
Q

risk factors that are common in audits?

A
  • management override
  • journals (one-offs)
  • revenue recognition
  • cyber security
41
Q

ISA330?

A

auditor must determine overall responses to risks on FS level

auditor must perform audit procedures to respond to risks at assertion level

42
Q

examples of responses to risks (FS level)?

A
  • emphasise need for pro scepticism
  • assign extra staff
  • use work of experts
  • change audit strategy
  • make procedures unpredictable
43
Q

examples of responses to risks at assertion level?

A
  • adjust timing & extent of audit procedures
  • consider risks from climate change
44
Q

what needs to be considered when relying on the work of others? (e.g., expert, internal audit, 3rd parties)

A
  • competence
  • independence
  • whether external reliance is suitable
45
Q

what audit work needs to be documented?

A
  • audit team discussions
  • evaluation of controls
  • risks
  • responses to risks
  • work relied upon
46
Q

risks involving cyber security?

A
  • breach of GDPR leading to fines
  • reputational damage
  • misstatements in FS

responses include putting controls in place as well as policies & procedures to mitigate these risks

47
Q

risk associated with storing data via cloud computing?

A

greater risk of data loss, corruption or stolen data

BUS273 - Audit & Assurance Services (24 decks)

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