Module 15 Audit Process: Planning Flashcards
When is the planning stage usually performed?
Before the year end
How does audit planning help auditors achieve audit objectives?
- attention is directed to the important areas of audit
- potential problems are identified and resolved early
- Assists in the selection of appropriate engagement staff
- Helping to complete work effectively and efficiently
- Facilitates direction and supervision of the audit
What does the overall audit strategy do?
It sets out the scope, timing and direction of the audit
What does the detailed audit plan do?
It describes the approach for the expected nature, timing and extent of the audit procedures to be performed
How are inherent risks identified?
- Analytical procedures
- Enquiry
- Inspection
- Observation
What is analytical procedures (planning analytical review)?
Evaluation of financial information through analysis of plausible relationships among both financial and non financial data.
When must analytical procedures be undertaken?
During the planning stage and when forming an overall conclusion on the consistency of the financial statements (completion stage)
What are the techniques used in analytical procedures?
Comparison - (Planning and completion stage)
Ration analysis (Planning stage)
Reasonableness test (planning and substantive testing stage)
Trend analysis (substantive testing stage)
Large and unusual items review (substantive testing stage)
What are the three types of materiality?
Overall materiality - the threshold as to what is significant to the financial statements as a whole
Performance materiality - Set below overall materiality to reduce the probability that uncorrected/undetected misstatements exceed overall materiality to an acceptably low level (This is the materiality used to perform testing during audits)
Specific items materiality - Individual accounts/disclosures may have lower materiality levels due to their nature of being more material to the users of financial statement.
How is overall materiality calculated?
It is estimated during the planning stage and it is based on professional judgement and are usually based on materiality bases set out by the audit firm.
Materiality is reassessed throughout the audit as circumstances inevitably change.
At the completion stage, materiality is based on actual financial statements and this is known as reporting materiality
How is performance materiality set?
It is often set depending on the knowledge of the entity, the industry it operates and the auditor’s expectations in relation to misstatement in the current year.
Often set as a % of overall materiality and professional judgement is crucial.
How does misstatements occur in financial statements?
Through Error or Fraud
What are the two types of fraud?
Fraudulent financial reporting - an intential manipulation of financial information
Misappropriation of assets - an intentional theft of company assets
What are the responsiblities of management and auditors in relation to fraud?
ISA (UK) 240 states the responsiblities:
Management/Directors are responsible for preventing and detecting fraud by implementing a sound system of internal controls and encouraging appropriate culture
Auditors are only responsible for obtaining reasonable assurance that the financial statements are free from material misstatement whether due to fraud or error
What are the 3 risk factors that may increase the potential of fraud?
- Incentives or pressures (inherent risk)
- Opportunities (control risk)
- Rationalisations (inherent risk)
