Planning assurance engagements

Question 1

What might happen in audits are not planned

Answer 1

Time wasted doing the wrong work
Important work not done at all
Wrong conclusion may be drawn

Question 2

Audit strategy

Answer 2

Guides the development of the audit plan

Question 3

Audit strategy considerations

Answer 3

Materiality
Risk
Audit approach
Experts
Timing
Team
Budgets
Deadlines

Question 4

Audit plan

Answer 4

Sets out the specific nature, timing and extent of the audit procedures to be performed by the engagement team members in order to obtain sufficient and appropriate evidence

Question 5

When is information material?

Answer 5

If its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements
Items might be material due to qualitative / quantitative factors

Question 6

Materiality ranges

Answer 6

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

Question 7

When misstatements are material by nature

Answer 7

Affect compliance with regulations
Impact debt covenants
Obscure a change in earnings / affect ratios used to evaluate the entity
Affect management compensation

Question 8

Performance materiality

Answer 8

Using a figure lower than planning materiality to audit riskier elements of the financial statements to ensure their appropriate auditing

Question 9

Double materiality

Answer 9

Financial materiality - financial risks for company from sustainability issues
Impact materiality - impact on people / environment from sustainability issues

Question 10

Benefits of analytical procedures

Answer 10

Identifies risk / material areas requiring further work
Identifies items which look odd in relation to accounts as a whole / issues for further consideration
Highlights errors not identified by detailed testing
Uses information outside of the accounting records which the preparer may have less scope over - eg. budgets
Assists in understanding a client’s business

Question 11

Limitations of analytical procedures

Answer 11

A good knowledge of the system is required to understand results
Consistency of results may conceal a material error
Tendency to perform procedures mechanically without appropriate professional scepticism
Requires an experienced member of staff to be done properly
Reliable data may not be available

Question 12

Return on capital employed

Answer 12

Profit before interest and tax / TALCL

Question 13

Gross profit margin

Answer 13

(Gross profit x 100) / Revenue

Question 14

Operating cost percentage

Answer 14

(Operating costs x 100) / Revenue

Question 15

Operating profit margin

Answer 15

(Profit before interest and tax x 100) / Revenue

Question 16

Current ratio

Answer 16

Current assets / Current liabilities

Question 17

Quick ratio

Answer 17

(Current assets - Inventory) / Current liabilities

Question 18

Gearing

Answer 18

(Net debt x 100) / Equity

Question 19

Interest cover

Answer 19

Profit before interest payable / Interest payable

Question 20

Net asset turnover

Answer 20

Revenue / Capital Employed

Question 21

Inventory period

Answer 21

(Inventories / Cost of sales) x 365

Question 22

Trade payable period

Answer 22

(Trade payables / Cost of sales) x 365

Question 23

Trade receivable period

Answer 23

(Trade receivables / Revenue) x 365

Question 24

Threats of cyber attacks

Answer 24

Breach of data protection
Loss of competitive advantage
Reputational damage
System downtime

Question 25

Challenges of cyber security

Answer 25

Communication is a big barrier
Responsibility and accountability
Board level accountability
Lack of knowledge

Question 26

Recommendations of cyber security

Answer 26

Appoint a Chief Information Security Officer
Employ information security functions
Regularly consider cyber security risk and ensure awareness of such is embedded in day-to-day operations
Ensure regular training

Question 27

Approaches to combat IT risk

Answer 27

Business planning continuity
System access controls
System development and maintenance
Physical security
Compliance
Security policy
Asset classification and control
Personnel security

Question 28

Understanding a client’s business properly enables an auditor to…

Answer 28

Assess the skills and competence which the audit team needs
Plan the audit work
Assess the controls put in place by the client / any significant risks
Perform analytical procedures
Comply with professional requirements

Question 29

Sources of information on the entity and its environment

Answer 29

External sources
Auditing firm
The client

Question 30

Service organisations

Answer 30

Companies outsourcing processes and operations to third party organisations

Question 31

If the client has outsourced to service organisations, the auditor must obtain an understanding of the…

Answer 31

Services provided
Transactions processed
Degree of interaction between the activities of the service organisation and the company
Relationship between the user entity and the service organisation

Question 32

Type 1/2 reports

Answer 32

Obtained by the auditor from the auditor of the service organisation
Provide an understanding of the service organisation’s internal controls, aiming to convey negative assurance on the service organisation’s system

Question 33

Key risks when outsourcing to a service organisation

Answer 33

Loss of data
Reputational damage
Increased cost
Risk of fraud