Week 5 - Planning An Audit Pt.2

Question 1

are ‘audit risk’ and ‘significant risk’ interchangeable?

Answer 1

yes

Question 2

what risk is caused by constant change in production?

Answer 2

obselete inventory

Question 3

risk associated with expansion of factory?

Answer 3

have the expenditures involved been capitalised?

they should be capitalised, only repairs are expensed - capital expenditures are debited to the non-current asset

Question 4

risk associated with holding inventory off-site?

Answer 4

inventory figure is inaccurate as inventory count is incomplete

Question 5

examples of factors that create audit risks?

Answer 5

• recent appointment as auditor
• highly regulated industry
• payment for services
• rapid expansion
• increased borrowings/overdraft

Question 6

how to go about justifying an audit risk?

Answer 6

• why the balance is misstated
• whether the balance is likely to be over or understated

Question 7

how to test for understatement/completeness?

Answer 7

get sample from original source documents (e.g., GDN/GRNs, payroll documents, bank statement)

match it back to the FS

Question 8

how to test for occurrence or existence?

Answer 8

select sample from FS and match it back to source document

Question 9

do AP’s need to be described?

Answer 9

yes

APs may be used to:
- obtain breakdowns to identify anomalies
- analyse monthly data
- calculate expected amounts to actuals
- use of data analytics to identify high-risk transactions

Question 10

only management can assist the auditor with…

Answer 10

• anticipated changes in business activity
• rationale for an accounting treatment
• reasons for an unusual ratio
• anticipated outcome of ongoing R&D

Question 11

auditor doesn’t need to ask management for…

Answer 11

• public information
• accounting entries not subject to judgement
• queries on ratios/trends
• actions that impact the public

Question 12

audit procedures contain which three elements?

Answer 12

• action
• source
• objective

Question 13

examples of audit procedures

Answer 13

• read board minutes
• use an expert
• agree balance from purchase ledger
• enquiries with management

Question 14

examples of types of audit procedures

Answer 14

• evaluate & test controls over…
• obtain breakdown/schedule of…
• inspect/review… to assess…
• recalculate… to ensure…
• inspect board minutes for details of…
• document the system for…
• consider the use of an auditor’s expert for…
• obtain written rep from management regarding…

Question 15

audit procedures for foreign currency translation?

Answer 15

reperform a sample of translation calculations

agree the rates used to a reliable 3rd party

Question 16

audit procedures for inventory?

Answer 16

reperform stock count

inquire over use of NRV or cost as valuation method

inspect for impairment

inspect post y/e transactions and their impact on NRV

Question 17

audit procedures for accounting estimates?

Answer 17

ask management how they made their estimates

inspect correspondence with legal team

assess past similar situations to guess the outcome

speak to management regarding their assessment of the situation

get management written representations

Question 18

reasons for an increase in gross profit margin?

Answer 18

• increase in price
• reduction in cost
• large change in strategy/operations

ask management reason for large increase in gross profit margin

GPM is expected to be relatively consistent otherwise

Question 19

audit procedures for PPE?

Answer 19

• check whether costs have been capitalised or expensed appropriately
• match PPE on list to FS
• match disposals/acquisitions to FS
• inspect PPE for physical impairment
• understand depreciation policy / discuss this with management
• check depreciation’s been charged from the correct date
• reperform depreciation calculation

Question 20

accounting estimates?

Answer 20

monetary amounts which are subject to estimation uncertainty

Question 21

estimation uncertainty?

Answer 21

susceptibility to inherent lack of precision in measurement

Question 22

common estimates in accounting?

Answer 22

• inventory obsolescence
• depreciation of PPE
• pending litigation
• revenue on long term contracts
• FV of assets / liabilities

Question 23

ISA540?

Answer 23

states that estimates should be reasonable and FR requirements should be applied correctly

Question 24

auditor’s/management’s estimate?

Answer 24

auditor’s = amount developed by the auditor in evaluating management’s estimate

management’s = management selected amount for recognition/disclosure in FS

Question 25

if a company isn't a going concern, the company must be prepared on a...

Answer 25

'break-up basis' or liquidation basis

Question 26

'break up basis'?

Answer 26

preparation to sell the business - no non-current assets / liabilities - assets valued at recoverable amount - provisions may be required for new costs

Question 27

ISA570?

Answer 27

sets out requirements for the auditor in relation to going concern

Question 28

auditor responsibilities relating to going concern?

Answer 28

- check if there's a MM due to going concern - check the appropriateness of the going concern basis of accounting

Question 29

audit procedures to gather evidence on going concern?

Answer 29

- review of future plans including financial forecasts, projections etc - review the company's borrowing facilities & source of finance (e.g., covenant breaches) - review board minutes - examine forecasts and their reasonableness & perform sensitivity analysis

Question 30

how can ESG impact going concern?

Answer 30

- shortage of essential supplies - uninsured catastrophes - inability to comply with agreement terms - inability to obtain essential financing businesses must adapt/change in response to ESG

Question 31

who may auditors rely on?

Answer 31

- service organisations - internal auditors - expert - auditors of subsidiary/component auditors

Question 32

can auditors rely on others?

Answer 32

yes, however auditors are still responsible for their opinion e.g., inspect their independence, competence etc

Question 33

typical work carried out by internal auditors?

Answer 33

reviewing systems of internal controls

Question 34

procedures that an external auditor should carry out before relying on internal auditors?

Answer 34

- assess the internal audit function's objectivity, competence and approach - assess whether the work was properly planned, performed etc - assess whether there's sufficient appropriate evidence - test the work of the internal audit and assess the adequacy of their work - perform their own procedures if they conclude that internal audit work isn't adequate

Question 35

when are experts used?

Answer 35

when the field in which the client conducts business requires expertise e.g., interpreting legal contracts, valuing L&B, analysing complex tax issues etc

Question 36

auditor vs management expert?

Answer 36

auditor = chosen by auditor to assist in audit work management expert = chosen by client to assist client in preparing FS

Question 37

service organisations?

Answer 37

third parties used when a company needs to outsource processes and operations

Question 38

ISA402?

Answer 38

requires auditors to do the following when a service organisation is used - understand the services being outsourced - consider risks that may arise - speak to service organisation's auditors - test the service organisation's controls

Question 39

subsidiary?

Answer 39

component of a group an entity whose financial info is included in the group FS

Question 40

if the group auditor doesn't audit all of the components of a group...

Answer 40

they'll need to rely on the component auditors in order to form an opinion on the FS

Question 41

component? component auditors?

Answer 41

component = an entity whose financial info is included in the group FS component auditors = auditors who perform work on financial info related to a component

Question 42

group auditor?

Answer 42

group engagement partner & members of the audit team other than the component auditors responsible for: - establishing group audit strategy - directing/supervising component auditors - determining sufficient evidence - form & communicate an opinion on the group

Question 43

responsibilities of group engagement partner?

Answer 43

- forming an opinion on the group FS - auditor's report on group FS shouldn't refer to component auditors (unless required by law)

Question 44

how is materiality determined for groups/components?

Answer 44

- group materiality is determined - component materiality threshold can never be lower than group materiality

Question 45

does the group auditor take responsibility for designing/performing audit procedures?

Answer 45

yes

Question 46

does the group auditor determine the nature, timing and extent of work performed?

Answer 46

yes

Question 47

who's responsible for evaluating work on higher risk elements of the group audit identified by the component auditor?

Answer 47

the group auditor

Question 48

the group auditor should...

Answer 48

communicate its requirements to the component auditor request communication from the component auditor review/evaluate the work performed by component auditors if the work isn't adequate, the group auditor should determine which additional procedures need to be performed

Question 49

examples of group auditor communications to component auditors?

Answer 49

- work to perform - form & content of communications - list of related parties

Question 50

examples of component auditor communications to group auditor?

Answer 50

- confirmation of compliance with ethical requirements - list of uncorrected misstatements - overall findings, conclusions, opinions