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Prof AA > CH7 planning > Flashcards

CH7 planning Flashcards

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1
Q
A
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2
Q

What is the audit strategy?

A

The formulation of the general strategy for the audit, which considers materiality, risk, audit approach, experts, timing, team, budgets and deadlines of the audit.

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3
Q

What does the audit strategy guide?

A

The development of the audit plan.

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4
Q

How does the audit plan differ from the audit strategy?

A

The audit plan is more detailed and sets out the specific nature, timing and extent of the audit procedures.

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5
Q

What are the key components considered in the audit strategy?

A
  • Materiality
  • Risk
  • Audit approach
  • Experts
  • Timing
  • Team
  • Budgets
  • Deadlines
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6
Q

What is the purpose of the audit plan?

A

To obtain sufficient and appropriate evidence through specific audit procedures.

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7
Q

Fill in the blank: The audit plan sets out the specific nature, _______ and extent of the audit procedures.

A

[timing]

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8
Q

What is the benchmark percentage range for revenue materiality?

A

0.5% – 1%

Revenue materiality is used to assess the significance of revenue figures in financial reporting.

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9
Q

What is the benchmark percentage range for gross assets materiality?

A

1% – 2%

Gross assets materiality helps determine the importance of total assets in financial statements.

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10
Q

What is the benchmark percentage range for profit before tax materiality?

A

5% – 10%

Profit before tax materiality indicates the significance of profit figures in assessing a company’s financial performance.

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11
Q

What are examples of material misstatements?

A

Misstatements which affect compliance with regulatory requirements
Misstatements which impact on debt covenants
Misstatements which obscure a change in earnings or affect ratios used to evaluate the entity
Misstatements which affect management compensation

These misstatements can significantly influence financial reporting and decision-making.

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12
Q

Fill in the blank: Misstatements which obscure a change in earnings or affect _______ used to evaluate the entity.

A

[ratios]

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13
Q

What is double materiality?

A

A concept that considers both financial materiality and impact materiality.

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14
Q

Define financial materiality.

A

Sustainability issues that might create financial risks for the company.

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15
Q

Define impact materiality.

A

Sustainability issues where a company’s activities materially impact on people and the environment.

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16
Q

True or False: Double materiality only considers financial risks.

A

False

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17
Q

Fill in the blank: Double materiality considers sustainability issues that create financial risks for a company and those that impact _______.

A

[people and the environment]

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18
Q

What does ISA 315 (UK) state regarding the use of analytical procedures?

A

The auditor MUST use analytical procedures in risk assessment to obtain an understanding of the entity and its environment.

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19
Q

What is one benefit of using analytical procedures at the planning stage?

A

Allows auditor to identify risk areas/material areas requiring further work.

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20
Q

How do analytical procedures assist in identifying odd items?

A

Identifies items which look odd in relation to accounts as a whole/issues for further consideration.

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21
Q

What is a benefit of analytical procedures related to errors?

A

May highlight errors not identified by detailed testing.

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22
Q

What type of information do analytical procedures utilize that may be less controlled by the preparer?

A

Uses information outside of the accounting records (ie budgets).

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23
Q

How do analytical procedures contribute to understanding a client’s business?

A

Assists in understanding client’s business.

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24
Q

What is a limitation of analytical procedures related to knowledge of the business?

A

A good knowledge of the business is required to understand results.

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25
What potential issue can arise from the consistency of results in analytical procedures?
Consistency of results may conceal a material error.
26
What is a risk of performing analytical procedures mechanically?
There may be a tendency to carry out procedures mechanically, without appropriate professional scepticism.
27
Who is required to properly conduct analytical procedures?
Requires an experienced member of staff to be done properly.
28
What is a concern regarding the availability of data for analytical procedures?
Reliable data may not be available.
29
30
What are analytical procedures in an audit?
Involve evaluating financial information by analyzing relationships and trends ## Footnote Examples include comparing ratios and budgets vs. actuals
31
What is the purpose of analytical procedures?
Help identify unusual fluctuations or areas that may need further investigation ## Footnote Often used in planning and review stages
32
What are tests of detail in an audit?
Involve examining individual transactions, balances, or supporting documentation to verify accuracy ## Footnote Examples include invoices and contracts
33
What do tests of detail provide in an audit?
Direct evidence about specific assertions ## Footnote Focuses on verifying financial statement items
34
True or False: Analytical procedures are focused on individual transactions.
False ## Footnote Analytical procedures are broader and pattern-focused
35
Fill in the blank: Analytical procedures are _______ and pattern-focused.
broader
36
Fill in the blank: Tests of detail are _______ and evidence-focused.
deeper
37
What is the formula for Return on Capital Employed (ROCE)?
Return on capital employed = Profit before interest and tax / TALCL ## Footnote TALCL refers to Total Assets Less Current Liabilities.
38
What are potential causes for changes in Return on Capital Employed?
* Change in returns * Age of plant * Revaluations of non-current assets * New loans/overdraft ## Footnote These factors can influence the profitability and capital structure of a business.
39
What are some audit risks associated with Return on Capital Employed?
* Misstated profit * Unrecorded liabilities * Change in accounting policy regarding revenue recognition * Change in depreciation policy ## Footnote These risks can affect the accuracy of financial statements and the assessment of ROCE.
40
Fill in the blank: Return on capital employed is calculated by dividing profit before interest and tax by _______.
TALCL
41
What are the two ways of calculating TALCL?
TA - CL E + LTL
42
What is the formula for Gross profit margin?
Gross profit margin = Gross profit / Revenue × 100
43
What is the formula for Operating cost percentage?
Operating cost percentage = Operating costs / Revenue × 100
44
What is the formula for Operating profit margin?
Operating profit margin = Profit before interest and tax / Revenue × 100
45
What are potential causes affecting revenue?
* Sales price changes * Changes in sales mix * Launch of new products * Effects of currency translation
46
What factors can impact the cost of sales?
* Changes in raw-material prices * Foreign currency changes * Labour rate or quantity changes * Economies of scale gained
47
What are some audit risks related to revenue?
* Early recognition of revenue * Cut off issues * Mistranslation of overseas sales
48
What are some audit risks associated with cost of sales?
* Fraud overstating an expense * Mistranslation of overseas costs * Misclassified costs distorting * Misstated closing inventory * Deferring costs into the next period * Change in cost estimation (e.g., depreciation)
49
Fill in the blank: Gross profit margin is calculated as Gross profit divided by _______.
Revenue
50
Fill in the blank: Operating cost percentage is calculated as Operating costs divided by _______.
Revenue
51
True or False: Operating profit margin is calculated before considering interest and tax.
True
52
What is the formula for Current ratio?
Current assets / Current liabilities
53
What is the formula for Quick ratio?
(Current assets – inventory) / Current liabilities
54
What does a low Current ratio indicate?
Highlights liquidity problems
55
What does a high Current ratio suggest?
Poor use of shareholder funds
56
Name a potential cause for a low Current ratio.
Inventory/receivables/payables misstated
57
What is another potential cause for a low Current ratio?
Manipulation ie repayment of liabilities just prior to YE
58
What is the formula for Gearing?
Net debt / Equity × 100 ## Footnote Net debt is all borrowings less cash owned.
59
What is the formula for Interest cover?
Profit before interest payable / Interest payable
60
What can cause a decrease in Gearing?
Upward revaluation of NCA
61
What can cause an increase in Gearing?
* Large impairments * New finance * Large cash purchase
62
What are some audit issues related to Gearing?
* Going concern * Breach of covenants * Understated liabilities * Inappropriate revaluation of NCA
63
True or False: An upward revaluation of NCA can decrease Gearing.
True
64
Fill in the blank: Interest cover is calculated as _______.
Profit before interest payable / Interest payable
65
What is the formula for net asset turnover?
Net asset turnover = Revenue / Capital employed ## Footnote This ratio measures how efficiently a company uses its assets to generate revenue.
66
What does a high inventory period indicate?
Potential obsolescence problems ## Footnote A high inventory period suggests that products may not be sold before they become outdated.
67
What does a low inventory period suggest?
Run risk of running out of inventory ## Footnote A low inventory period indicates that inventory is sold quickly, which can lead to stock shortages.
68
What is the formula for the inventory period?
Inventory period = Inventories × 365 / Cost of sales ## Footnote This ratio calculates the average time inventory is held before it is sold.
69
What is the formula for the trade receivable period?
Trade receivable period = Trade receivables × 365 / Revenue ## Footnote This measures the average number of days it takes to collect payment from customers.
70
What may a change in the trade receivable period indicate?
* Bad debt/collection problems * Change in customer base/change in terms * Revenue cut off issues ## Footnote Monitoring this ratio can help identify issues affecting cash flow.
71
What is the formula for the trade payable period?
Trade payable period = Trade payables × 365 / Credit purchases or COS ## Footnote This measures the average time a company takes to pay its suppliers.
72
What does a high trade payable period indicate?
May indicate liquidity problems, risk of supplier ceasing supply, enforcing liquidation ## Footnote A prolonged payable period can signal that a company is struggling to meet its short-term obligations.
73
What is a key barrier to effective communication in cyber security?
Cyber security language can be highly technical and difficult to understand ## Footnote This complexity can hinder effective communication within organizations.
74
What is a recommended solution to improve communication in cyber security?
Organisations should appoint a Chief Information Security Officer to translate such language making it more accessible ## Footnote This role helps bridge the gap between technical language and organizational understanding.
75
What challenge arises from the lack of ownership in cyber security?
If there is no ownership of the issue the cyber security will go unmanaged ## Footnote This can lead to vulnerabilities and increased risk for the organization.
76
What is a recommendation to address responsibility and accountability in cyber security?
Organisations are increasingly employing information security functions (either in-house or outsourced) tasked with protecting the organisation ## Footnote These functions help ensure that cyber security is actively managed.
77
How should cyber security be integrated at the board level?
Cyber security needs to be embedded into the board's general risk management ## Footnote This integration ensures that cyber security is considered alongside other organizational risks.
78
What should boards regularly consider regarding cyber security?
Boards should regularly consider cyber security risk and ensure awareness of such is embedded in day-to-day operations ## Footnote Regular review helps maintain a proactive stance toward cyber threats.
79
What challenge do non-executive directors and audit committees face in cyber security?
They may lack the knowledge to hold the board to account for cyber security ## Footnote This knowledge gap can prevent effective oversight and accountability.
80
What recommendation is made to improve knowledge among non-executive directors?
Ensuring a diverse mix of NEDs and regular training and provision of expertise should be made available if they require it ## Footnote This helps build a more informed board capable of addressing cyber security issues.
81
What is business continuity planning?
Measures to ensure continuation of the business should a major IT failure occur ## Footnote Business continuity planning is crucial for mitigating risks associated with IT failures.
82
What are system access controls?
Including prevention and detection of information systems from unauthorised activities ## Footnote These controls help protect sensitive information from unauthorized access.
83
What is the purpose of systems development and maintenance?
Ensuring systems are up to date and protected ## Footnote Regular updates and maintenance are essential for system security.
84
What does physical security aim to prevent?
Prevention of theft of data and hardware ## Footnote Physical security measures protect against tangible threats to IT assets.
85
What is compliance in the context of IT security?
With legal requirements ie data protection ## Footnote Compliance ensures that organizations adhere to laws and regulations regarding data security.
86
What is a security policy?
A written document setting out organisations approach to information security ## Footnote A security policy guides employee behavior and outlines security measures.
87
What is asset classification and control?
Information is an asset, it should be recognised and provided with an ‘owner’ who is accountable and responsible for it ## Footnote Proper classification ensures that information is adequately protected.
88
What does personnel security involve?
Including employment of trustworthy staff and training of staff to ensure they know the companies IT policies ## Footnote Personnel security is vital for maintaining a secure IT environment.
89
What are possible risks of MM resulting from a cyber attack?
1. Fines: u/s liabs, u/s exps 2. Compensation: u/s liabs, u/s exps 3. GC risk: reputational damage - loss of confidence from customers. o/s assets (they should all be impaired, u/s liabs (they would need to create provs for redundancies and onerous contracts). Rectification costs. 4. Risk of lost licences. impairments of IT systems. Links to GC as well.
90
What is cloud computing?
Cloud computing is the delivery of computing services—such as storage, processing power, and software—over the internet.
91
What advantage does cloud computing provide to users?
It allows users to access and use resources on-demand without needing to own or manage physical hardware.
92
What specific challenges do auditors face when auditing clients using cloud-based accounting systems?
Auditors must plan for reviewing data stored remotely, access dependent on third parties, and arrangements for sufficient audit evidence.
93
What are external certifications that may assist auditors during cloud-based audits?
External certifications like SOC2 can provide useful information during audit planning.
94
Why can accessing cloud data be complex for auditors?
Accessing cloud data can be complex due to security protocols, requiring specific access permissions.
95
What must auditors ensure to protect client data during cloud audits?
Auditors need to meet security standards to protect client data confidentiality.
96
What should auditors understand about cloud systems when performing audits?
Firms must understand the structure of the cloud system to apply their audit methods properly.
97
What factors should be considered in audit planning for cloud-based systems?
Timing for data access, staff expertise, and how evidence will be stored.
98
True or False: Audits become more automated with the help of software that interfaces with client data in the cloud.
True
99
Fill in the blank: Cloud computing allows users to access and use resources _______.
on-demand

Prof AA (16 decks)

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