4: Planning engagements

Question 1

What are the suggested materiality ranges for 3 sections

Answer 1

Revenue 0.5-1%

PBT 5-10%

Gross assets 1-2%

Question 2

3 matters that might be material by nature

Answer 2

£1 that turns a profit into loss

£1 that changes company threshold eg small to medium

Automatically material like directors and related parties

Question 3

Current ratio

Answer 3

Current assets : Current liabilities

Question 4

Quick ratio

Answer 4

Receivables + current investments + cash : liabilities

Question 5

Gearing ratio

Answer 5

Net debt / Equity

Question 6

Interest cover

Answer 6

Profit before interest payable / Interest payable

Question 7

Net asset turnover

Answer 7

Revenue / Capital employed

Question 8

Inventory turnover

Answer 8

Cost of sales / Inventories

Question 9

Trade receivables collection period

Answer 9

Trade receivables × 365 / Revenue

Question 10

Trade payables payment period

Answer 10

Trade payables x 365 / Credit purchases

Question 11

Return on capital employed

Answer 11

Profit before interest and tax / Equity + net debt

Question 12

Return on shareholders’ funds

Answer 12

Net profit for the period / Share capital + reserves

Question 13

Gross profit percentage

Answer 13

Gross profit x 100 / Revenue

Question 14

Cost of sales percentage

Answer 14

Cost of sales x 100 / Revenue

Question 15

Operating cost percentage

Answer 15

(Operating costs/ overheads x 100) / Revenue

Question 16

Net margin/ operating margin

Answer 16

(Profit before interest and tax x 100) / Revenue

Question 17

Audit risk formula

Answer 17

= (inherent risk x control risk) x Detection risk

Question 18

5 inherent risk factors

Answer 18

complexity

subjectivity

change

uncertainty

susceptibility to misstatement due to management bias or fraud

(ISA 315)

Question 19

5 limitations of internal controls

Answer 19

Cost > benefit

Routing/non-routine transactions

Human error

Management override or circumvention by collusion

Change in procedures

Question 20

2 criteria for significant risk

Answer 20

it has an inherent risk assessment close to the upper end of the spectrum of inherent risk due to likelihood and or impact

OR

is required to be treated as a significant risk by another ISA (IK)

Question 21

4 Vs or big data

Answer 21

Volume

Velocity

Variety

Veracity

Question 22

6 aspects of cyber controls

Answer 22

Prevention

Detection

Deterrence

Recovery procedures

Correction procedures

Threat avoidance