week 7 Flashcards
What are three benefits of audit planning for financial statements?
- Focus on Risk Areas:
- Efficient Use of Resources:
- Facilitation of Team Direction and Supervision:
How does the geographical spread of stores affect the audit strategy?
The decentralization introduces complexities in logistics, stocktaking, and control testing. A risk-based approach is necessary, possibly visiting selected stores based on revenue contribution, prior errors, or internal control weaknesses.
ISA 500 and ISA 530 guide sampling and evidence gathering across multiple locations.
What is the impact of revenue concentration in two stores on the audit strategy?
These stores are material individually, requiring significant audit attention on controls, revenue recognition, and stock management. Substantive testing and control testing should be prioritized for these two locations.
How does the marketing strategy and inventory risks affect the audit strategy?
The strategy leads to frequent markdowns and potential obsolescence, increasing inherent risk in inventory valuation.
Auditors should test for net realizable value adjustments under IAS 2 – Inventories and ensure compliance.
This also calls for testing managements estimation methods in line wit ISA 540- Auditing Accounting Estimates
What is the effect of a strict timetable for monthly reports on the audit strategy?
Timeliness pressures might lead to potential errors or override of controls. Audit planning should incorporate interim testing and tight supervision to ensure deadlines are met without compromising audit quality.
This supports ISA 300’s guidance on adapting timing of audit procedures based on client deadlines.
How does the implementation of a new computer-based accounting system affect the audit strategy?
This introduces control risk due to potential teething problems in the system and data transfer issues. The auditor should evaluate general IT controls (GITCs) and application controls under ISA 315.
If reliance is placed on system-generated reports, the auditor may also refer to ISA 330 regarding the responses to assessed risks.
What is meant by the term ‘materiality’ in auditing?
Materiality refers to the magnitude of an omission or misstatement that could influence the economic decisions of users based on financial statements. It is defined under ISA 320.
What is overall materiality and how is it determined?
Overall materiality is a threshold for considering what constitutes a material misstatement, usually a percentage of a financial benchmark, such as 5% of profit before tax or 0.5–1% of revenue.
What is performance materiality?
Performance materiality is set lower than overall materiality to reduce the risk that undetected and uncorrected misstatements exceed materiality, allowing for sampling errors and uncertainty in audit evidence.
How do qualitative considerations affect materiality?
Certain items, such as director’s remuneration or related party transactions, may be material by nature even if not material in amount.
How is materiality applied in audit planning?
planning, sampling, evaluation
Materiality helps define the nature, timing, and extent of audit procedures, guiding sample sizes under ISA 530 and evaluating uncorrected misstatements at the end of the audit.
Explain the benefit of audit planning : focus on risk areas
Audit planning helps identify and direct audit efforts toward areas of higher risk of material misstatement.
Explain the benefit of audit planning: efficient use of resources
Planning allows auditors to allocate time and resources appropriately among team members.
Explain the benefit of audit planning: facilitation of team direction and supervision
Proper planning defines clear roles and responsibilities among team members.
