Audit Planning

Question 1

What are the 3 stages of the audit process?

Answer 1

Planning, execution, conclusion

Question 2

What occurs in the planning stage of the audit process?

Answer 2

1. Understanding the business
2. internal controls assessment
3. Risk assessment

Question 3

What occurs in the execution stage of the audit process?

Answer 3

Performing substantive audit processes for the financial statement

Question 4

What occurs in the conclusion stage of the audit process?

Answer 4

1. wrapping up the audit for financial statements
2. Post balance sheet event review (review events after the balance sheet date)
3. Issue audited financial statements

Question 5

What does the business risk mean?

Answer 5

The Auditor’s exposure to being shamed publicly for not auditing the financial statements accurately

Question 6

What does the Audit risk mean?

Answer 6

The risk that the auditor will state an inappropriate opinion to a materially misstated financial statement
Because
1. the FS contained a material error
2. The auditor failed to detect the material error

Question 7

How do you know if a client is high risk?

Answer 7

1. a public listed status
2. going concern problem (non financially stable)
3. Previous finanical reports had one or more issues

Question 8

State the audit risk model

Answer 8

Audit Risk = IR X CR X DR

IR X CR = risk of material misstatement

DR
There is 2 types of risk
- sampling risk
- non sampling risk

Question 9

What does Inherent risk mean?

Answer 9

• the risk of the account itself (before considering internal controls) - this means the account has complicated entries
• auditors expectation of error before considering internal controls - this means that the auditor did not expect much error

Question 10

What are control risks?

Answer 10

Whether the internal controls of the company are strong enough to prevent fraud

Question 10

What are the 2 risks that causes the risk of material misstatements (RMM) and why?

Answer 10

IR & CR
this is because these are the 2 risks that can contain fraud

Question 11

What does Detection risk mean?

Answer 11

the risk that audit procedures fail to detect the material misstatements
1. it is controllable by the auditor
2. the amount of audit procedures carried out depends on the detection risk (low detection risk, more procedures)

Question 12

What is sampling (under detection risk), and what are its risks?

Answer 12

What is sampling?
- choosing items to test instead of 100% of the items

what is the sampling risk?
- items chosen does not represent the whole population

Question 13

What is non sampling risk?

Answer 13

The chance that auditors might miss errors

Question 14

Why do auditors sample?

Answer 14

• large volume of transactions
• time constraint
• too costly for businesses to do a 100% audit

Question 15

How do auditors sample?

Answer 15

1. Choose high value/important items
2. Items over a certain amount
3. random sampling

Question 16

What does Materiality mean?

Answer 16

Its to set a benchmark to consider if something is big enough to be important to check

Question 17

What is the relationship between materiality and audit work?

Answer 17

if auditor decides to take a high risk, their materiality will be high, sampling will be low and audit work will be low

If the auditor decides to risk very low, then materiality is low, the amount of sampling is higher, and audit work is higher.

Question 18

At the planning stage how is the preliminary audit procedures carried out?

Answer 18

1. Develop an expectation
2. Define a tolerable difference (5%)
3. Compare the expectation to the recorded amount
4. If the difference is greater than tolerable difference, then the account has a higher likelihood of a material misstatement (more sampling shld be done), if not it does not have a high risk of material misstatement