Week 5

Question 1

Materiality & RMM

Answer 1

Assess RMM
Audit Work
Evaluate

Used together throughout the audit. However, not used to determine each other. Materiality is based on information needs of the users which is the same regardless of the risk assessment.

Question 2

Audit Strategy

Answer 2

Part of Audit Strategy
Scope, Timing, Direction

Part of Direction
Risk Assessment, Materiality, Analytical Procedures

Question 3

Accounting Cycles

Answer 3

Focusing on how business is conducted
How a business makes money
How a business spends money
How a business pays its employees
How a business manages its products

Focusing on how business is financed
How a business manages its capital assets
How a business manages its cash & investments
How a business manages its liabilities & equity

Question 4

Sales Business Process

Answer 4

Order:
Price Goods & Services
Place Order
Credit Check

Ship:
Pick Inventory
Deliver
Install
Return

Collect:
Create Invoice (Bill)
Receive Cash
Write off

Question 5

Sales Business Process

Need to understand:

Answer 5

What steps in the process trigger the transactions to be recorded
What data fields trigger recording, process
Where the risks and controls are and how are they designed
What source documents and reports are available

Question 6

Key decision in Audit Strategy is:

Answer 6

Rely on Controls
Control Risk = low
Called: Combined Audit Strategy

Don’t Rely on Controls
Control Risk = high
Called: Substantive Audit Strategy

Question 7

Combined Audit Strategy

Answer 7

Understand IC
Assess CR as Low
Test Controls
Substantive Testing

Question 8

Substantive Audit Strategy

Answer 8

Understand IC
Assess CR as High
Substantive Testing

Question 9

Understand your client: KPI

Answer 9

Understanding how client measures its own performance gives insight into accounts under pressure

Profitability – a common KPI

Liquidity – common concern of stakeholders

Question 10

Analytical Procedures

Answer 10

Definition:
Evaluation of financial information by studying plausible relationships among both financial and non-financial data

Dependant on clear expectations:
based on: your understanding of the client, industry, economy
Expectations of fluctuations
Ex.: AFDA increasing as the economy is struggling (2008 & 2009)
Existence or absence or contradiction of expectation

Question 11

Analytical Procedures

Forms of analytical procedures

Answer 11

Comparisons
Trend (horizontal)
Common-size (vertical)
Ratio (profitability, liquidity, solvency)

Question 12

Analytical Procedures

Reliable & Comparable must be considered

Answer 12

Effective IC
Independent reputable external source
Audited
Generated using consistent accounting methods
Internally generated with a track record (ex. Budget)

Question 13

Financial Statement Assertions

Answer 13

Transactions (R,E):
Occurrence (Real?)
Completeness (all?)
Accuracy (right \$\$?)
Cut-off (right period?)
Classification (right account?)

Balances (A,L, OE):
Exist (Real?)
Completeness (all?)
Valuation & Allocation (right value?)
Rights & Obligations (are these the clients?)

Question 14

CAVE

Answer 14

Completeness
Accuracy and Cut-off
Valuation
Existence

Question 15

CAVE is a part of …

Answer 15

Audit Assertions