S1 - planning and risk assessment Flashcards
why do we need to understand the client
assess level of risk posed
Assess controls in place to reduce risk
Identify further significant risks
Plan an efficient audit
what is the approach to audit risk
risk assessment
Understand client
Identify risk and strategy
Assess risk and materiality
Respond to risks
Execute and evidence
Reporting
Form an opinion
what is understanding the client
Understand client
identify places of potential misstatements at different levels - entity, industry, broader economic
Sources of information - external, client, prior knowledge
what is identifying the risk
Engagement risk - risk posed by acceptance of a client
Higher risk means gathering more audit evidence
Clients business risk
Risk associated with conditions, circumstances and events that impair managements ability to do business - profitability and survival
Auditors business risk
Exposure to loss or injury to professional practice from litigation, adverse publicity - cannot be directly controlled by the auditor
Audit risk
risk that auditor expresses inappropriate audit opinion
Reasonable assurance of no materiality
what is audit risk
risk that auditor expresses inappropriate audit opinion
Reasonable assurance of no materiality
AR = IR X CR X DR
Inherent risk = auditors assessment of the likelihood that information in the FS will be materially misstated, regardless of internal controls
Control risk = what the client does to reduce inherent risks
Detection risk = risk that auditors won’t pick up material errors - under auditors control and determined by extent of IR and CR - perform more tests
Sampling risk = incorrect opinion due to unrepresentative sample
what is assess risk and materiality
materiality is a matter of judgement - subjective
Quantitative or qualitative
Overall materiality is a measure of precision of the audit
Planning level
Decide what to consider as material at the start of an audit
Entire FS level
Errors, diverting from framework
Classes of accounts balance level
Nature and size - e.g. sales
tolerable error - 2-15%
why plan an audit
obtain sufficient and appropriate evidence
Keep audit costs reasonable
Avoid misunderstanding with client
Establish strategy
what is audit strategy
Scope
Timing
Direction
Risk assessment procedures
Substantive tests
Analytical procedures
Tests of details of transactions
Tests of details of balances
tests of control
Effectively designed
Effectively operated
Substantive tests confirm assessment of control risk
advantages and cautions for interim audits
before year end
Focus on tests of control
Advantages
staff less busy
Auditor can modify plan if inadequate controls found
Reduce need for audit staff overtime
Take care
more tests needed
Has environment changed
May no longer be effective
what is an audit plan
detailed plan addressing matters in audit strategy
Obtain understanding of accounting system and control systems
Nature and extent of planning depends on:
Size and complexity
Previous experience of team
Changes during audit period
Contains:
Build up confidence in audit opinion
Materiality levels
Audit team details
Budgets and deadlines
Work of experts
what is the need for experts
value assets
Determine quantities of assets
Give legal opinions
Auditor should assess their experience, objectivity and scope of work
Used as audit evidence
Referred to if their work modifies the report
what is internal audit
may be used by external auditors
Commonly work on assessing the systems of internal control of an organisation
External auditors must assess for competence and perform audit procedures to ensure its adequate
what are service organisations
separate organisations supply part of accounting function
Auditor considers controls in place
Have their own auditor to report on controls
If auditors report is modified, external auditor using it has to consider materiality of it
what is documentation
supports opinion
Audit strategy
Audit procedures
Audit evidence
Conclusions
Other auditors should be able to understand nature, timing, extent, results, evidence, conclusions
Owned by auditor but mustang be shown without auditors consent
what are permanent and current files
permanent = historical data of continuing relevance
Memorandum
Manual
Lease documents
Current = current years audit including interim
FS
Audit strategy and plan
Working trial balance
Working papers
