Chapter 6 - Planning

Question 1

What are the benefits of planning?

Answer 1

• more efficient
• better understanding of where things might go wrong
• audit team can be selected with the right skills and experience
• quality management procedures can be built

Question 2

Why must an auditor follow the auditing standards?

Answer 2

• provides a checklist of what the auditor must do
• confidence in the opinion of the auditor
• consistency
• better quality to check against

Question 3

What are the 2 key planning documents an auditor will create?

Answer 3

• the audit strategy
• the audit plan

Question 4

What is the audit strategy?

Answer 4

• provides overall framework for the audit

Question 5

What are the 4 main areas of the audit strategy?

Answer 5

• reporting objectives, timing and communication
• significant factors and preliminary engagement activities
• Nature, timing and extent of resources
• characteristics of the engagement

Question 6

What are the key elements of reporting, objectives, timing and communication?

Answer 6

• timetable for reporting
• communication with client, team and 3rd party

Question 7

What will reporting objectives, timing and communication cover?

Answer 7

the practicalities of the audit in order to make sure it is completed on time. Involve setting deadlines.

Question 8

What are the key elements of significant factors and preliminary engagement activities?

Answer 8

• materiality
• risk assessment
• internal controls
• need for scepticism
• changes in laws and regulations
• significant developments

Question 9

Significant factors and preliminary engagement activities will include what?

Answer 9

• planning activities, which will shape the rest of the audit, are documented.
• the results of the risk assessment and document
• preliminary materiality assessment
• auditor’s views of the client’s internal controls

Question 10

What are the key elements of nature, timing and extent of resources?

Answer 10

• selection of audit team
• budget

Question 11

What are the key elements of characteristics of the engagement?

Answer 11

• FR framework
• Industry reporting
• knowledge of business
• internal audit
• service organisation]
• use of ATTs
• Availability of client staff

Question 12

The strategy document sets the overall approach for the audit. This will vary from client to client depending on what?

Answer 12

• which accounting standards they are using
• whether there are any additional reporting responsibilities
• whether they have an internal audit function or use a service organisation which influences how the auditor can obtain some of the audit evidence

Question 13

What is the job of the audit plan?

Answer 13

to take the audit strategy which ends with an overall general approach to the audit and to turn it into a detailed schedule of the work to be done

Question 14

When is the audit plan produced?

Answer 14

at the end of the planning process

Question 15

What is some common content between the audit strategy and the audit plan?

Answer 15

• results of risk assessment
• determination of materiality
• special audit considerations
• deadlines

Question 16

The audit plan includes what?

Answer 16

• what specific work should be done on each area
• who on the team should do each test
• how much work should be done on each area - how big a sample
• when should each part of the work be done - at which visit

Question 17

How many stages will an audit be performed?

Answer 17

one or two stages

Question 18

If an audit is performed all in one go, the audit work will be performed when?

Answer 18

at the final audit stage

Question 19

If an audit is performed in 2 stages, when will the audit work be performed?

Answer 19

some work at the interim audit stage and some work will be performed at the final audit stage

Question 20

What occurs before the year end?

Answer 20

• interim audit.
• No full year FS so limit to what testing can be performed
  - auditor will document client systems and make decision on whether reliance can be placed on the internal controls
  - significant purchases can be tested
  - inventory system can be reviewed

Question 21

What will occur at the year end?

Answer 21

• client may perform a full inventory count and auditor is required to attend
• Auditor may visit the client shortly after year end to organise a receivables circularisation (sample of the clients customers asked to confirm what they owe at YE)

Question 22

What will occur after the year end?

Answer 22

• every audit will have a final audit
• majority of the audit work will be done
• focus on detailed testing of the year end balances

Question 23

Fraud and error is one of the examples of what?

Answer 23

the expectation gap

Question 24

What is fraud?

Answer 24

an intentional act by one or more individuals among management, those charged with governance employees or third parties involving the use of deception to obtain an unjust illegal advantage

Question 25

When would we inform shareholders if fraud has occurred?

Answer 25

only if it has led us to modify our audit opinion

Question 26

What are the 2 types of fraud?

Answer 26

fraudulent financial reporting missappropriation

Question 27

what is fraudulent financial reporting?

Answer 27

deliberately misstating the financial statements to make the company's performance or position look better/worse than it actually is

Question 28

what is misappropriation?

Answer 28

the theft of a company's assets such as cash or inventory

Question 29

what is error?

Answer 29

an unintentional misstatement

Question 30

when would we identify fraud to managemenet?

Answer 30

communicate the fraud on a timely basis

Question 31

When would we identify fraud to those charged with governance?

Answer 31

if the suspected fraud involves management

Question 32

when would we identify fraud to 3rd parties?

Answer 32

if there is a duty to report

Question 33

If the auditor finds that the client has not complied with the relevant laws and regulations what must the auditor do?

Answer 33

- understand the nature and circumstances - obtain further information

Question 34

How does the auditor understand the nature and circumstances?

Answer 34

Auditor must obtain an understanding of what has happened: - was it deliberate? - is it a serious breach? - has anybody suffered harm? - does the regulatory authority need to be made aware?

Question 35

How does the auditor assess whether the non-compliance will have a material impact on the FS?

Answer 35

- discussing the issue with management and company's legal department - reading correspondence from the regulatory authority - reading minutes of board and/or management meetings - reviewing bank statements

Question 36

What is non-compliance?

Answer 36

acts of omission or commission by the entity, either intentional or unintentional, which are contrary to the prevailing laws or regulations

Question 37

When would an auditor report non-compliance to management?

Answer 37

communicate the non-compliance on a timely basis

Question 38

When would an auditor report non-compliance to those charged with governance?

Answer 38

if the non-compliance is a deliberate act by management

Question 39

When would an auditor report non-compliance to 3rd parties?

Answer 39

if there is a duty to report e.g., to a regulator

Question 40

When would an auditor report non-compliance to shareholders?

Answer 40

by modifying the auditor's opinion

Question 41

When might the auditor decide that they need to withdraw from the engagement?

Answer 41

- the non-compliance laws and regulations is so serious they can no longer maintain a relationship - breakdown of trust - auditor has doubts about the competence of management

Question 42

What are the 3 most important quality management standards?

Answer 42

- engagement resources - engagement performance - monitoring and remediation

Question 43

What does engagement resources comprise of?

Answer 43

-human resources - technological resources - intellectual resources

Question 44

What are human resources?

Answer 44

refers to the audit team which must have appropriate experience and expertise to perform a high-quality audit

Question 45

what are technological resources?

Answer 45

use technology, such as automated tools and techniques, computerised audit files, video calls to facilitate meetings etc

Question 46

What are intellectual resources?

Answer 46

allow for consistency in approach, such as the audit firm's templates and checklists, which ensure auditing standards have been followed

Question 47

What is engagement performance?

Answer 47

looks at the quality measures that should be in place for each individual engagement

Question 48

What is the composition of the audit team?

Answer 48

- audit engagement partner - audit seniors - audit juniors

Question 49

What are the key elements to engagement performance?

Answer 49

- direction and supervision of audit - review of the work

Question 50

What is an engagement quality review?

Answer 50

additional quality measures that will be used for listed and other high-risk clients

Question 51

What is the purpose of working papers?

Answer 51

- to allow the audit partner to form an appropriate opinion - to be our defence in a negligence case that the qudit was carried out correctly and completely

Question 52

how long should the working papers be kept for?

Answer 52

5 years after the auditor's report is signed

Question 53

What are the 2 files the working papers are kept?

Answer 53

- permanent file (all items to use to future audits) - current file (all working papers relevant to work done on this years audit)

Question 54

What are the qualities of a good working paper?

Answer 54

- client name and y/e - prepared by and date prepared - reviewer name and date reviewed - work performed, results and conclusion