Topic 1 & 2 Flashcards
(25 cards)
What are the key elements of an assurance engagement?
CREST
Criteria Report Evidence Subject matter Three party relationship
What must an auditor do before accepting an engagement?
MANICS
Management integrity Adequate resources Nature of engagement Identification Communicate with previous auditor Stability
What makes up the audit risk?
Inherent risk x control risk x detection risk
What 4 things are required to be in an engagement letter?
Auditors responsibilities
Directors responsibilities
Scope/ objectives
Report to management
What are Analytical procedures?
Evaluation of financial info through study of financial and non financial data. E.g. ratio analysis
How do you work out return on capital employed?
PBIT divided by equity + debt
How do you work out return on shareholders funds?
Net profit for period divided by share capital + reserves
How do you work out operating cost percentage?
Operating costs/ overheads divided by revenue times 100
What is the current ratio?
Current assets: current liabilities
How do you work out quick ratio?
Receivables + current investments + cash : current liabilities
How do you work out gearing ratio?
Net debt divided by equity
How do you work out interest cover?
Profit before interest payable divided by interest payable
How do you work out net asset turnover?
Revenue divided capital employed
How do you work out inventory turnover?
Cost of sales divided by inventory?
How do you work out inventory days?
Inventory divided by cost of sales times 365
How do you work out trade receivables days?
Trade receivables divided by revenue times 365
How do you work out trade payables days?
Trade payables divided by credit purchases times 365
What Is detection risk?
Risk that the procedure is performed by the auditor to reduce risk will not detect a missstatement
What does ISA stand for?
International standards of Auditing
What are the guideline materiality levels for PBT, revenue and total assets?
PBT 5-10%
Revenue 1/2 - 1%
Total assets 1-2 %
What classes give a material amount regardless of the monetary amount?
Directors loan
Related party transactions
What is the purpose of an engagement letter?
Define responsibilities
Provide written confirmation
What is business risk?
A risk resulting from significant events that could adversely affect a business’ ability to achieve its objectives and execute its strategies.
What are the types of control activity?
SPIRA
Segregation of duties Physical controls Information processing Review of performance Authorisation
