section D Flashcards
ISA 300- Planning an audit of FS objective
to help auditor plan the audit so it will be performed in an effective manner. this is done by the adoption of 2 items: audit plan and strategy
audit strategy vs audit plan
strategy: characteristics of the engagement that define its scope as well as factors that might be significant in carrying out the engagement
plan: specific risk assessment procedures, assess risks of MM, responses to risks and any other work required to comply with ISAs, perform audit procedures, evaluate evidence
reasons for planning
-appt attention to imp areas
-problems identified n solved timely
-proper organisation and management
-proper assignment of work
-direction, supervision, review of team members
-coordination with experts and comp auditors
nature of audit might change
all such changes and reasons must be well documented
planning is a one off process at start of an engagement true or false
false
it is iterative and so the need for any additional procedures should be constantly reviewed.
what happens after planning
identify issues that may lead to uncertainty or risk in FS
-obtain understanding of entity and its environment
-understand internal controls
how to obtain understanding of entity and environment
-relevant industry, regulatory and external factors
-nature of entity , ownershio, structure etc
-accounting policies selected and how they r applied
-measurement and review of financial performance
how to understand control environment
-control activites
-entity’s risk assessment process
-monitoring of controls
-information system, including relevant business process relevant to financial reporting and communications
significant risks
those that require special audit attention
factors that indicate a risk might be significant
-risk of fraud
-degree of subjectivity
-unusual transactions
-significant transactions with a related party
-complexity of the transactions
auditor’s responses to assessed risks
after assessing risks
now obtain SAE regarding those risks
by designing and implementing appropriate reponses
this is where audit testing starts to appear
determine whether controls testing is appropriate or not
some substantive testing will always be carried out
where controls are ineffective, they will not be tested and only substantive testing will be relied upon instead
all conclusions must be fully documented to support the audit opinion
objectives of the auditor
to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatements, whether due to fraud and error
to report on the FS and communicate as per ISAs in accordance with auditor’s findings
key requirements for auditor to obtain reasonable assurance and express an opinion
-ethics
-professional skepticism
-professional judgement
-SAE and audit risk
audit risk is made of
detection x inherent x control risk
audit risk definition
risk that auditor will express inappropriate opinion when FS are materially misstated
inherent risk
susceptibility of an assertion to a misstatement assuming there are no internal controls
control risk
risk that MS will not be prevented, detected or corrected on a timely basisd
detection risk
risk that auditor will not detect a misstatement that exists in an assertion that could be material eithr individually or in aggregation
risk of material misstatement means
risk that FS are materially misstatetd (control x inherent risk)
what are business risks
they result from significant conditions, events, circumstances, actions or inactions that could adversely affect an entity’s ability to achieve its objectives and execute its strategies, or its from setting inappropriate objectives and strategies
is business risk model a replacment for the traditional audit risk model
no
its a vehicle for identifying audit risk
recognising that most business risks will have financial consequences
and therefore
an effect on the financial statements
it helps gain a better understanding of the business and increases likelihood of identifying risks of material misstatements
three categories of business risks
financial
operational
compliance
financial risk
arises from the company’s financial activities or the financial consequences of operations
eg.
business continuity problems (going concern)
overtrading
credit risk
interest risk
high cost of capital
unrecorded liabilities
operational risk
risk arising from operations such as stock outs, physical disasters, loss of key staff, poor brand management, loss of orders
