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AA > 4. Planning An Audit (Basics) > Flashcards

4. Planning An Audit (Basics) Flashcards

1
Q

Key considerations for audit strategy (OBT)?

A
  1. The entity and its environment
  2. Materiality
  3. Preliminary analytical procedures
  4. Risk assessment
  5. Audit approach
  6. Coordination of the audit (timing, team, locations, budgets and deadlines).
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2
Q

What should an audit plan include?

A

Nature, extent and timing of:
1. Risk assessment
2. Further audit procedures (assertion level)

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3
Q

Audit plan: Why can’t individual account balances be audited at the start?

A

Haven’t completed (detailed) risk assessment procedures yet

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4
Q

Can the audit plan be changed?

A

Yes

The audit plan should be modified where necessary in response to new information,
or the results of audit testing carried out

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5
Q

4 ways an understanding of the entity is obtained?

A
  1. Firm
    Partner
    Manager briefing
    Industry experts
    Last year’s team
  2. Client
    Discussion
    Observation
    Website/brochures
    Analytical procedures
  3. Me
    Past experience
  4. Other
    Industry surveys
    Credit reference
    agencies
    Companies House
    Internet search
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6
Q

Understanding the entity and environment: Environment examples

A

Laws and regulations
Industry conditions (e.g.
competition, technology,
seasonality)
Data protection regulations
(e.g. GDPR)

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7
Q

Understanding the entity and environment: Entity examples

A

Operations
Ownership and governance
Investments
Structure and finance
Accounting policies
Objectives and strategies
System of internal control
Use of outsourcing
Applicable financial reporting framework

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8
Q

Understanding an entity’s accounting policies: Where should attention be paid?

A
  1. Methods applied to unusual transactions
  2. Controversial areas/emerging issues
  3. Environment changes
  4. New financial reporting standards/laws and regulations
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9
Q

Understanding the entity: Climate risks to consider

A
  1. Business model/supply chain
  2. Industry
  3. Regulation (climate laws)
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10
Q

Is materiality a matter of professional judgement?

A

Yes

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11
Q

Materiality percentages: What can be used?

A
  1. Revenue
  2. Profit before tax
  3. Total assets
  4. Gross profit
  5. Net assets
  6. Profit after tax
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12
Q

Materiality percentages: Revenue

A

(0.5-) 1%

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13
Q

Materiality percentages: Profit before tax

A

5%

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14
Q

Materiality percentages: Total assets

A

(1-) 2%

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15
Q

Materiality percentages: Gross profits

A

(0.5-) 1%

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16
Q

Materiality percentages: Net assets

A

(2 - ) 5%

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17
Q

Materiality percentages: Profit after tax

A

(5-) 10%

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18
Q

Things that are material by nature

A
  1. Misleading descriptions
  2. Critical points
    E.g. profit to loss threshold
    company size
  3. Transactions with directors
  4. Related party transactions
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19
Q

Why have PM?

A

To reduce aggregate small misstatements Could become material

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20
Q

Can climate disclosures be material?

A

Yes
(If important to users)

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21
Q

When MUST analytical procedures be used?

A
  1. Planning
  2. Forming overall conclusion
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22
Q

When CAN analytical procedures be used?

A

As a substantive procedure

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23
Q

Analytical procedures: Limitations

A
  1. Require good knowledge/experience
  2. Require experienced staff
  3. Depends on reliability of source data
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24
Q

Analytical procedures: Steps

A
  1. Understand the business
  2. Develop an expectation
  3. Compare to actual

Any unexpected variations = risk

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25
Q

Can you use ratios in APs?

A

Yes

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26
Q

Ratios: Performance

A
  1. Gross profit margin
  2. Operating margin
  3. ROCE
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27
Q

Ratios: Short-term liquidity

A
  1. Current
  2. Quick
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28
Q

Ratios: Solvency

A
  1. Gearing
  2. Interest cover
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29
Q

Ratios: Efficiency

A
  1. Tr Re Coll Period
  2. Inv hold period
  3. Tr Pay payment period
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30
Q

Ratios: Gross profit margin calculation

A

Gross profit/Revenue * 100

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31
Q

Ratios: Operating margin calculation

A

Operating profit/Revenue * 100

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32
Q

Ratios: ROCE calculation

A

Operating profit/(Equity + debt) * 100

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33
Q

Ratios: Current ratio calculation

A

Current assets/Current liabilities

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34
Q

Ratios: Quick ratio calculation

A

(Current assets - inventory)/Current liabilities

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35
Q

Ratios: Gearing ratio calculation

A

Net debt/equity

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36
Q

Ratios: Interest cover calculation

A

Profit before interest payable/Interest payable

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37
Q

Ratios: TR Coll Per calculation

A

TR/Revenue * 365

38
Q

Ratios: Inv hol per calculation

A

Inv/COS * 365

39
Q

Ratios: TP pay per calculation

A

TP/Purchases * 365

40
Q

Ratios: Purpose: GPM

A

Assess profitability before taking overheads into account

41
Q

Ratios: Purpose: Operating profit

A

Assess profitability after taking overheads into account

42
Q

Ratios: Purpose: ROCE

A

Measure how effectively resources are used to generate profit

43
Q

Ratios: Purpose: Current ratio

A

Assess ability to pay current liabilities from current assets

44
Q

Ratios: Purpose: Quick ratio

A

Assess ability to pay current liabilities from reasonably liquid assets

45
Q

Ratios: Purpose: Gearing ratio

A

Assess reliance on external finance

46
Q

Ratios: Purpose: Interest cover

A

Assess ability to pay interest charges

47
Q

Ratios: Purpose: TR coll per

A

Assess average time taken to collect cash from credit customers

48
Q

Ratios: Purpose: Inv hol per

A

Assess average length of time inventory is held

49
Q

Ratios: Purpose: TP pay per

A

Assess average time taken to pay suppliers

50
Q

Business risk definition (OBT)

A

Could adversely affect objectives and strategies

51
Q

Who should manage business risk?

A

Directors

52
Q

What type of business risk are auditors interested in?

A

If impacts FS

53
Q

3 types of business risk?

A
  1. Financial
  2. Operational
  3. Compliance
54
Q

Business risks associated with climate change?

A

Non-compliance
Sector risks (agriculture, supermarkets)
Investor loss
Lack of evolution
Extreme climate events

55
Q

Who’s impact to consider when something happens to a client?

A
  1. FS
  2. Business (+related audit) risks
  3. Going concern
56
Q

Audit risk definition?

A

Wrong opinion on FS

57
Q

What 2 things does audit risk comprise of?

A
  1. Material misstatement
  2. Detection
58
Q

What are the 2 risks of material misstatement

A
  1. Inherent risk
  2. Controls risk
59
Q

What are the 2 detection risks?

A
  1. Sampling risk
  2. Non-sampling risk
60
Q

Audit risk calculation:

A

Inherent risk
TIMESED BY
Control risk
TIMESED BY
Detection risk

61
Q

Risk of material misstatement: Timing

A

BEFORE audit commences

62
Q

Risk of material misstatement: 2 levels

A
  1. Overall FS
    E.g. lack of skilled personnel, control deficiencies, past misstatements
  2. Assertion-level
    (inherent and control risk)
63
Q

2 things risk assessment procedures help understand?

A
  1. Entity and environment
  2. FR Framework & accounting policies
64
Q

What is inherent risk?

A

The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material (either individually or when aggregated with other misstatements) before consideration of any related controls

65
Q

Three levels of inherent risk

A
  1. Industry level
  2. Entity level
  3. Balance level
66
Q

Control risk definition

A

Misstatement is not prevented/detected/corrected by entity’s controls

67
Q

What is detection risk?

A

Procedure performed by auditor does not detect a misstatement that could be material

68
Q

What is detection risk made up of?

A
  1. Sampling risk
  2. Non-sampling risk
69
Q

Detection risk: What is sampling risk?

A

Different result form sample as would have been gained if whole population tested

70
Q

Detection risk: What is non-sampling risk?

A

Risk of drawing the wrong conclusion (from reasons not sampling risk)
E.g.
1st year audit
Undue time pressure
(Poor risk assessment by auditor)

71
Q

Significant risk definition

A

Inherent risk close to upper end

e.g.
Subjective transactions (multiple accounting treatments)
High estimation uncertainty/complex models
Complex data collection/processing
Complex calculations
Differing accounting interpretations
Accounting changes from business changes (mergers & acquisitions)

72
Q

Risk factors common to most audits

A
  1. Management override
  2. Journals
  3. Revenue recognition
  4. Cyber security
73
Q

Journals: Which types shoudl be selected?

A

Unusual items
Round numbers
Unusual people
Outside hours
Suspense acocunts

74
Q

Revenue recognition risk higher when?

A

Management reward linked to revenue/profit

75
Q

OBT: How should auditor reduce audit risk?

A
  1. Overall responses to FS level risks
  2. Perform procedures at assertion level
76
Q

Responding to risks: Overall responses examples

A

Emphasis to staff the need to maintain professional skepticism

Assign extra or more experienced staff

Use the work of experts, internal auditors or other auditors

Change the nature, timing and extent of supervision and review during the audit

Incorporate more unpredictability into audit procedures

Change the audit strategy.

77
Q

Responding to risks: Assertion level examples

A

Adjust nature, extent and timing

Consider climate risks

78
Q

What needs to be done if auditor relying on work of others
E.g. internal audit

A

3P is assessed:

  1. General assessment
  2. Specific assessment
79
Q

3P assessment: General assessment

A

Is 3P competent and independent?

80
Q

3P assessment: Specific assessment

A

Is the specific piece of work suitable?

81
Q

OBT: What needs to be documented?

A

Audit team discussions/decisions

Elements of the auditor’s understanding

Evaluation of identified controls

Risks (at both the financial statement and assertion levels)

Responses to address risks of material misstatement at the financial statement level

Results of audit procedures/conclusions

Previous audit work relied upon (and why it is appropriate)

How the financial statements agree/reconcile with accounting records.

82
Q

Cyber security definition

A

Protecting
Systems, networks and data
In cyberspace

Unauthorized modification, disclosure and destruction
Information system from failure

83
Q

Why is cyber security a key risk?

A

Increasing use of tech
Constantly evolving risk

84
Q

Some key cyber risks

A

Hacking
Theft of funds (fraud)
Sabotage
Viruses, malware, corruption
DOS attacks

85
Q

Some big data risks

A

Reputational damage
Legislation breaches
Misstatement

86
Q

General procedures IT controls should address

A
  1. Prevention
  2. Detection
  3. Deterrence
  4. Recovery
87
Q

Some IT security controls

A

Business continuity
System access control
Systems development and maintenance
Physical and environmental security
Compliance
Personal security
Security organization
Computer and network management
Asset classification and control
Security policy

88
Q

IT controls: System development and maintenance

A

Should ensure projects etc. don’t detriment security

89
Q

IT controls: Computer and network management

A

Protection from viruses
Protection of info esp when exchanged with other organizations

90
Q

IT controls: Assist classification and control

A

Assign ‘ownership’ of info assets

91
Q

Benefits of cloud computing

A

Cost savings

92
Q

Detriments of cloud computing

A

Lack of control:
3P doesn’t have adequate security
(Auditor should assess 3P controls)

AA (16 decks)

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