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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
Can you use ratios in APs?
Yes
26
Ratios: Performance
1. Gross profit margin 2. Operating margin 3. ROCE
27
Ratios: Short-term liquidity
1. Current 2. Quick
28
Ratios: Solvency
1. Gearing 2. Interest cover
29
Ratios: Efficiency
1. Tr Re Coll Period 2. Inv hold period 3. Tr Pay payment period
30
Ratios: Gross profit margin calculation
Gross profit/Revenue * 100
31
Ratios: Operating margin calculation
Operating profit/Revenue * 100
32
Ratios: ROCE calculation
Operating profit/(Equity + debt) * 100
33
Ratios: Current ratio calculation
Current assets/Current liabilities
34
Ratios: Quick ratio calculation
(Current assets - inventory)/Current liabilities
35
Ratios: Gearing ratio calculation
Net debt/equity
36
Ratios: Interest cover calculation
Profit before interest payable/Interest payable
37
Ratios: TR Coll Per calculation
TR/Revenue * 365
38
Ratios: Inv hol per calculation
Inv/COS * 365
39
Ratios: TP pay per calculation
TP/Purchases * 365
40
Ratios: Purpose: GPM
Assess profitability before taking overheads into account
41
Ratios: Purpose: Operating profit
Assess profitability after taking overheads into account
42
Ratios: Purpose: ROCE
Measure how effectively resources are used to generate profit
43
Ratios: Purpose: Current ratio
Assess ability to pay current liabilities from current assets
44
Ratios: Purpose: Quick ratio
Assess ability to pay current liabilities from reasonably liquid assets
45
Ratios: Purpose: Gearing ratio
Assess reliance on external finance
46
Ratios: Purpose: Interest cover
Assess ability to pay interest charges
47
Ratios: Purpose: TR coll per
Assess average time taken to collect cash from credit customers
48
Ratios: Purpose: Inv hol per
Assess average length of time inventory is held
49
Ratios: Purpose: TP pay per
Assess average time taken to pay suppliers
50
*Business risk* definition (OBT)
Could adversely affect *objectives and strategies*
51
Who should manage business risk?
Directors
52
What type of business risk are auditors interested in?
If impacts FS
53
3 types of business risk?
1. Financial 2. Operational 3. Compliance
54
Business risks associated with climate change?
Non-compliance Sector risks (agriculture, supermarkets) Investor loss Lack of evolution Extreme climate events
55
Who's impact to consider when something happens to a client?
1. FS 2. Business (+related audit) risks 3. Going concern
56
Audit risk definition?
Wrong *opinion* on FS
57
What 2 things does audit risk comprise of?
1. Material misstatement 2. Detection
58
What are the 2 risks of material misstatement
1. Inherent risk 2. Controls risk
59
What are the 2 detection risks?
1. Sampling risk 2. Non-sampling risk
60
Audit risk calculation:
Inherent risk TIMESED BY Control risk TIMESED BY Detection risk
61
Risk of material misstatement: Timing
BEFORE audit commences
62
Risk of material misstatement: 2 levels
1. Overall FS E.g. lack of skilled personnel, control deficiencies, past misstatements 2. Assertion-level (inherent and control risk)
63
2 things risk assessment procedures help understand?
1. Entity and environment 2. FR Framework & accounting policies
64
What is inherent risk?
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
Three levels of inherent risk
1. Industry level 2. Entity level 3. Balance level
66
Control risk definition
Misstatement is not prevented/detected/corrected by *entity's* controls
67
What is detection risk?
Procedure performed *by auditor* does not detect a misstatement that could be material
68
What is detection risk made up of?
1. Sampling risk 2. Non-sampling risk
69
Detection risk: What is sampling risk?
Different result form sample as would have been gained if whole population tested
70
Detection risk: What is non-sampling risk?
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
Significant risk definition
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
Risk factors common to most audits
1. Management override 2. Journals 3. Revenue recognition 4. Cyber security
73
Journals: Which types shoudl be selected?
Unusual items Round numbers Unusual people Outside hours Suspense acocunts
74
Revenue recognition risk higher when?
Management reward linked to revenue/profit
75
OBT: How should auditor reduce audit risk?
1. Overall responses to FS level risks 2. Perform procedures at assertion level
76
Responding to risks: Overall responses examples
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
Responding to risks: Assertion level examples
Adjust nature, extent and timing Consider climate risks
78
What needs to be done if auditor relying on work of others E.g. internal audit
3P is assessed: 1. General assessment 2. Specific assessment
79
3P assessment: General assessment
Is 3P *competent* and *independent*?
80
3P assessment: Specific assessment
Is the specific piece of work *suitable*?
81
OBT: What needs to be documented?
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
Cyber security definition
Protecting Systems, networks and data In cyberspace Unauthorized modification, disclosure and destruction Information system from failure
83
Why is cyber security a key risk?
Increasing use of tech Constantly evolving risk
84
Some key cyber risks
Hacking Theft of funds (fraud) Sabotage Viruses, malware, corruption DOS attacks
85
Some big data risks
Reputational damage Legislation breaches Misstatement
86
General procedures IT controls should address
1. Prevention 2. Detection 3. Deterrence 4. Recovery
87
Some IT security controls
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
IT controls: System development and maintenance
Should ensure projects etc. don't detriment security
89
IT controls: Computer and network management
Protection from viruses Protection of info esp when exchanged with other organizations
90
IT controls: Assist classification and control
Assign 'ownership' of info assets
91
Benefits of cloud computing
Cost savings
92
Detriments of cloud computing
Lack of control: 3P doesn't have adequate security (Auditor should assess 3P controls)

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