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BUS273 - Audit & Assurance Services > Week 5 - Planning An Audit Pt.2 > Flashcards

Week 5 - Planning An Audit Pt.2 Flashcards

1
Q

are ‘audit risk’ and ‘significant risk’ interchangeable?

A

yes

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2
Q

what risk is caused by constant change in production?

A

obselete inventory

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3
Q

risk associated with expansion of factory?

A

have the expenditures involved been capitalised?

they should be capitalised, only repairs are expensed - capital expenditures are debited to the non-current asset

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4
Q

risk associated with holding inventory off-site?

A

inventory figure is inaccurate as inventory count is incomplete

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5
Q

examples of factors that create audit risks?

A
  • recent appointment as auditor
  • highly regulated industry
  • payment for services
  • rapid expansion
  • increased borrowings/overdraft
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6
Q

how to go about justifying an audit risk?

A
  • why the balance is misstated
  • whether the balance is likely to be over or understated
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7
Q

how to test for understatement/completeness?

A

get sample from original source documents (e.g., GDN/GRNs, payroll documents, bank statement)

match it back to the FS

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8
Q

how to test for occurrence or existence?

A

select sample from FS and match it back to source document

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9
Q

do AP’s need to be described?

A

yes

APs may be used to:
- obtain breakdowns to identify anomalies
- analyse monthly data
- calculate expected amounts to actuals
- use of data analytics to identify high-risk transactions

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10
Q

only management can assist the auditor with…

A
  • anticipated changes in business activity
  • rationale for an accounting treatment
  • reasons for an unusual ratio
  • anticipated outcome of ongoing R&D
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11
Q

auditor doesn’t need to ask management for…

A
  • public information
  • accounting entries not subject to judgement
  • queries on ratios/trends
  • actions that impact the public
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12
Q

audit procedures contain which three elements?

A
  • action
  • source
  • objective
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13
Q

examples of audit procedures

A
  • read board minutes
  • use an expert
  • agree balance from purchase ledger
  • enquiries with management
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14
Q

examples of types of audit procedures

A
  • evaluate & test controls over…
  • obtain breakdown/schedule of…
  • inspect/review… to assess…
  • recalculate… to ensure…
  • inspect board minutes for details of…
  • document the system for…
  • consider the use of an auditor’s expert for…
  • obtain written rep from management regarding…
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15
Q

audit procedures for foreign currency translation?

A

reperform a sample of translation calculations

agree the rates used to a reliable 3rd party

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16
Q

audit procedures for inventory?

A

reperform stock count

inquire over use of NRV or cost as valuation method

inspect for impairment

inspect post y/e transactions and their impact on NRV

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17
Q

audit procedures for accounting estimates?

A

ask management how they made their estimates

inspect correspondence with legal team

assess past similar situations to guess the outcome

speak to management regarding their assessment of the situation

get management written representations

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18
Q

reasons for an increase in gross profit margin?

A
  • increase in price
  • reduction in cost
  • large change in strategy/operations

ask management reason for large increase in gross profit margin

GPM is expected to be relatively consistent otherwise

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19
Q

audit procedures for PPE?

A
  • check whether costs have been capitalised or expensed appropriately
  • match PPE on list to FS
  • match disposals/acquisitions to FS
  • inspect PPE for physical impairment
  • understand depreciation policy / discuss this with management
  • check depreciation’s been charged from the correct date
  • reperform depreciation calculation
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20
Q

accounting estimates?

A

monetary amounts which are subject to estimation uncertainty

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21
Q

estimation uncertainty?

A

susceptibility to inherent lack of precision in measurement

22
Q

common estimates in accounting?

A
  • inventory obsolescence
  • depreciation of PPE
  • pending litigation
  • revenue on long term contracts
  • FV of assets / liabilities
23
Q

ISA540?

A

states that estimates should be reasonable and FR requirements should be applied correctly

24
Q

auditor’s/management’s estimate?

A

auditor’s = amount developed by the auditor in evaluating management’s estimate

management’s = management selected amount for recognition/disclosure in FS

25
Q

if a company isn’t a going concern, the company must be prepared on a…

A

‘break-up basis’ or liquidation basis

26
Q

‘break up basis’?

A

preparation to sell the business

  • no non-current assets / liabilities
  • assets valued at recoverable amount
  • provisions may be required for new costs
27
Q

ISA570?

A

sets out requirements for the auditor in relation to going concern

28
Q

auditor responsibilities relating to going concern?

A
  • check if there’s a MM due to going concern
  • check the appropriateness of the going concern basis of accounting
29
Q

audit procedures to gather evidence on going concern?

A
  • review of future plans including financial forecasts, projections etc
  • review the company’s borrowing facilities & source of finance (e.g., covenant breaches)
  • review board minutes
  • examine forecasts and their reasonableness & perform sensitivity analysis
30
Q

how can ESG impact going concern?

A
  • shortage of essential supplies
  • uninsured catastrophes
  • inability to comply with agreement terms
  • inability to obtain essential financing

businesses must adapt/change in response to ESG

31
Q

who may auditors rely on?

A
  • service organisations
  • internal auditors
  • expert
  • auditors of subsidiary/component auditors
32
Q

can auditors rely on others?

A

yes, however auditors are still responsible for their opinion

e.g., inspect their independence, competence etc

33
Q

typical work carried out by internal auditors?

A

reviewing systems of internal controls

34
Q

procedures that an external auditor should carry out before relying on internal auditors?

A
  • assess the internal audit function’s objectivity, competence and approach
  • assess whether the work was properly planned, performed etc
  • assess whether there’s sufficient appropriate evidence
  • test the work of the internal audit and assess the adequacy of their work
  • perform their own procedures if they conclude that internal audit work isn’t adequate
35
Q

when are experts used?

A

when the field in which the client conducts business requires expertise

e.g., interpreting legal contracts, valuing L&B, analysing complex tax issues etc

36
Q

auditor vs management expert?

A

auditor = chosen by auditor to assist in audit work

management expert = chosen by client to assist client in preparing FS

37
Q

service organisations?

A

third parties used when a company needs to outsource processes and operations

38
Q

ISA402?

A

requires auditors to do the following when a service organisation is used

  • understand the services being outsourced
  • consider risks that may arise
  • speak to service organisation’s auditors
  • test the service organisation’s controls
39
Q

subsidiary?

A

component of a group

an entity whose financial info is included in the group FS

40
Q

if the group auditor doesn’t audit all of the components of a group…

A

they’ll need to rely on the component auditors in order to form an opinion on the FS

41
Q

component?
component auditors?

A

component = an entity whose financial info is included in the group FS

component auditors = auditors who perform work on financial info related to a component

42
Q

group auditor?

A

group engagement partner & members of the audit team other than the component auditors

responsible for:
- establishing group audit strategy
- directing/supervising component auditors
- determining sufficient evidence
- form & communicate an opinion on the group

43
Q

responsibilities of group engagement partner?

A
  • forming an opinion on the group FS
  • auditor’s report on group FS shouldn’t refer to component auditors (unless required by law)
44
Q

how is materiality determined for groups/components?

A
  • group materiality is determined
  • component materiality threshold can never be lower than group materiality
45
Q

does the group auditor take responsibility for designing/performing audit procedures?

A

yes

46
Q

does the group auditor determine the nature, timing and extent of work performed?

A

yes

47
Q

who’s responsible for evaluating work on higher risk elements of the group audit identified by the component auditor?

A

the group auditor

48
Q

the group auditor should…

A

communicate its requirements to the component auditor

request communication from the component auditor

review/evaluate the work performed by component auditors

if the work isn’t adequate, the group auditor should determine which additional procedures need to be performed

49
Q

examples of group auditor communications to component auditors?

A
  • work to perform
  • form & content of communications
  • list of related parties
50
Q

examples of component auditor communications to group auditor?

A
  • confirmation of compliance with ethical requirements
  • list of uncorrected misstatements
  • overall findings, conclusions, opinions

BUS273 - Audit & Assurance Services (24 decks)

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