Process Of Assurance: Planning The Assigment Flashcards
(77 cards)
What is the purpose of audit strategy?
Determines
1. scope
2. timing
3. direction
of audit.
Determines
development of audit plan
Audit plan
How overall strategy will be implemented
Attention paid to most important areas
Identify potential problems
Property Organise and manage audit
Assign work to appropriate audit team member
Facilitate reviews by senior auditors
Some key components of the audit strategy
- Understanding the entity and its environment
- Materially
- Risk assessment
- Nature, extent and timing of audit procedures
- Direction, supervision and review of work
- Other matters
Auditor responsible for?
Carrying out audit procedures in order to obtain sufficient appropriate audit evidence to support their opinion.
Why understand the entity?
- Assess RISK
- Help design and perform audit PROCEDURES
- Develop audit STRATEGY and plan
Understanding the entity areas
{One entity area is run by a MINIO(n)}
- Measurement and review of financial performance
- Industry, regulatory and other external factors (incl applicable financial reporting framework)
- Nature of entity, incl selection and application of accounting policies
- Internal controls
- Objectives, strategies and related business risks that may result in a material misstatement of the FA
Understanding the entity: Financial reporting framework
{Financial Reporting Framework Understanding the Penis}
- Accounting for FINANCIAL INSTRUMENTS
- REVENUE recognition
- FOREIGN CURRENCY assets, liabilities, transactions
- Accounting for UNUSUAL or complex transactions
- Accounting PRINCIPLES + industry specific practices
Understanding the entity: Accounting policies
- Methods used to recognise, measure, present and disclose significant and unusual transactions
- Effect of significant accounting policies on controversial or emerging areas with lack of consensus
- Changes in the environment e.g. accounting or tax changes that may necessitate a change in accounting policies
- FRSs and laws/regulations that are new to the entity
Some methods used to understand the entity
Enquiries of management and other client staff
Analytical procedures
Observation of processes
Inspection of documents/assets
Prior knowledge of client
Discussions among audit team
Materiality definition
An expression of the relative significance of a particular matter in the context of the FS as a whole
Two ways a matter can be material
- In size
- In nature
E.g. company and director transactions
Material by size thresholds
(For the exam)
- Profit before tax 5-10%
- Total assets 1-2%
- Revenue 1/2 - 1%
Usual approach to auditing
Risk-based
When is risk assessed?
At planning stage but re-assessed continually throughout
Effective risk assessment should:
- Improve EFFICIENCY (by focusing on high risk areas)
- Reduce inappropriate OPINIONS
- Reduce NEGLIGENCE claims against auditor
Audit risk definition
The risk an auditor arrives at an inappropriate opinion on the FSs.
Audit risk calculation
{DICs calculate audit risk}
Detection risk
x Inherent risk
x Control risk
2 elements of audit risk
- FS contain a material misstatement
- Auditor fails to detect material misstatements
How can FSs contain a material misstatement?
- Misstatement occurs
- Client controls don’t prevent/detect misstatement
How can the auditor fail to detect material misstatements?
Insufficient work
Inappropriate work
Poor judgement
Risk that a misstatement occurs in the first place
Inherent risk (IR)
Risk that client controls don’t prevent or detect misstatement
Control risk (CR)
Risk that the auditor fails to detect material misstatements
Detection risk (DR)
Inherent risk definition
The susceptibility of an assertion about:
A class of transaction,
Account balance
or Disclosure
To a misstatement
That could be material.
Either individually or when aggregated with other misstatements.
Before consideration of any related controls.
