Lecture 3 Flashcards Preview

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Flashcards in Lecture 3 Deck (28):
1

Risk

Cannot be eliminated, audit is all about reducing risk to sufficient level

2

Business understanding ISA 315 (6)

- Ensure skills/ competence of audit team
- Identify signif risks
- Assess client level controls
- Plan appropriate and efficient audit work
- Follow ISA requirements
- Helps identify fraud

3

ISA 315 > auditor must use assertions for:

- Classes of transactions and events
- Account balances at period end
- Presentation and disclosures

4

Obtain business knowledge from (3)

- External sources (media, credit agencies)
- Audit firm (PY file, team)
- Client (internal correspondence, client conversations)

5

Audit risk definition

Risk of auditor giving incorrect opinion
"Risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated"

6

Audit risk =

Inherent risk x control risk x detection risk

7

Inherent risk definition

Risk existing in something a permanent, essential or characteristic attribute
"Susceptibility of an assertion to material misstatement assuming no related internal controls"

8

3 levels of inherent risk used at different times

- Planning: industry/ sector level
- Entity level
- Individual audit programme: balance level

9

Control risk definition

Risk that a misstatement could occur in an assertion that could be material, individually or when aggregated with other misstatements and will not be prevented or detected and corrected on a timely basis by the entity's internal controls

10

Detection risk definition

Risk that an auditor's procedures will not detect misstatement that exists in assertion that could be material.

11

Auditor can control detection risk through (2)

- Planning
- Using correct team

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Detection risk made up of: (2)

- Sampling risk = issue with sample size/ items picked from sample
- Non-sampling risk = risk in population > DR not low enough therefore audit procedures not good enough

13

If IR + CR is high

Detection risk must be low

14

If IR + CR is low

Detection risk high

15

Materiality =

Information is material if omission or misstatement could influence economic decision of users

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Calculating materiality

- Turnover > 0.5% - 2%
- Profit before tax > 5%-10%
- Gross assets 1%-5%

17

Audit risk must always be

Low

18

Client engagement and acceptance process (steps)

Step 1) Complete independence checks
Step 2) Complete client & engagement acceptance procedures and money laundering
Step 3) Sign and issue engagement letter

19

Money laundering

Disguising origin of funds from illicit sources to enable them to be used by those who control them

20

Not paying creditors back =

Money laundering

21

Auditor's responsibilities in relation to money laundering (2)

- Report any grounds for suspicion that ML taking place
- Report to money laundering reporting officer/ SOCA

22

Engagement letter

Written contract between auditor and client before work starts.

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Purpose of engagement letter

To avoid misunderstandings during audit

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Engagement letter should be

Issued and signed by audit partner and client before work starts

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Re-issue of engagement letters PLC

Annually

26

Re-issue of engagement letters Non-listed

Every 3 years

27

Re-issue of engagement letter

If changes/ misunderstandings

28

Engagement letter confirms (3)

- Auditors acceptance engagement and extent of responsibilities
- Extent of scope of audit
- Director's responsibilities