Chapter 7:audit Plan

Question 1

Purpose of planning an audit

Answer 1

> enable audit to be carried out in timely and effective manner
to ensure that
-appropriate attention is drawn to important areas of the audit
- potential problems are identified
-work is completed expeditiously
assist in
- proper assignment of work to team
- coordination of work done by others
facilitates review
required by ISA 300

Question 2

What is the key planning document

Answer 2

Audit strategy

Question 3

What does the audit strategy cover

Answer 3

> materiality
risk
audit approach
use if experts and internal audit
timing
team
Budgets
Deadlines

Question 4

Risk with audit packs

Answer 4

Audit packs have a specific planning section and sets out the key areas that the auditors must consider when planning an audit.
Care should be taken when using standard forms, as there is a risk that matters particulars to the client might be forgotten.
It is important to tailor the plan to the client, not the other way around.
Audit strategy should be updated as necessary during the course of the engagement.

Question 5

What is the audit plan

Answer 5

> more detailed than the audit strategy
sets out the nature,timing and extent of planned audit procedures(including risk assessment procedures)
should be updated as necessary during the course of the engagement

Question 6

Benefits of automated audit approach

Answer 6

> speed up the process, allowing the auditor to focus on value adding activities
introduced consistency and accuracy, thus reducing errors

Question 7

Risks of automation

Answer 7

> third party software= degree of risk should any of them fail
:flaws or bias
Initial outlay could be significant

Question 8

What is materiality

Answer 8

Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.
Is not capable of mathematical definition
Can be quantitative or qualitative
Depends on the size of the item or error judged in the particular circumstances of its omission or misstatement.
May be considered in the context of any individual primary financial statement within the FS or of the individual items included within them

Question 9

Performance materiality

Answer 9

An amount or amounts set by the audit at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole

Question 10

Items could be material due to their

Answer 10

Amount/nature/quantity
Nature/quality

Question 11

Some items are automatically material such as,

Answer 11

Matters relating to directors, or related parties because these matters have to be disclosed in financial statements regardless of their value

Question 12

Materiality is a matter of

Answer 12

Professional judgement

Question 13

Considering whether misstatements in qualitative disclosures could be material , one of the factors that the auditor needs to consider

Answer 13

Whether the qualitative disclosures are important to users of the financial statements
Eg sustainability and climate change will always be considered important
Consider how management has evaluated such disclosures based on judgements made by management

Question 14

ISSB materiality

Answer 14

An entity shall disclose material information about the sustainability related risks and opportunities that could reasonably be expected to affect the entity’s prospects

Question 15

Double materiality

Answer 15

A concept which considers not only the sustainability issues that might create financial risks for the company( financial materiality) but also those sustainability issues where a company’s activities materially impact on people and the environment (impact materiality)

Question 16

Benefits and limitations of analytical procedures

Answer 16

> identifies items for attention that detailed tests may miss
uses info outside accounting records eg budgets
allows comparison of data from different sources

> a good knowledge of the business is required to under results
consistency of results may conceal a material error
realiable data may not be available
requires an experienced member of staff to be done properly
may be a tendency to carry out procedures mechanically, without appropriate professional skepticism

Question 17

Response of an auditor in relation obtaining evidence regarding going concern

Answer 17

> whether a material uncertainty related to going concern exists
the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements

Question 18

How does the auditor obtain evidence in relation to managements assessment of going concern

Answer 18

Firstly perform risk assessment procedures, to obtain an understanding of the entity and its environment, the financial reporting framework and its systems of internal control
Also consider a risk of management bias in relation to the prep of the financial statements

Question 19

Auditors have to discuss the going concern use with the clients management, with an emphasis on

Answer 19

Test assumptions they have made to ensure they are justified
Obtain written representations from management about the things they are intending to do in the future to ensure that the going concern basis is appropriate
Review the disclosures made in the financial statements relating to going concern are sufficient to give a true and fair view

Question 20

Benefits and limitations of audit procedures at the planning stage of an internal audit

Answer 20

Obtain an understanding of the audited entity and its environment
Identify risk areas or areas of potential material misstatement
Identify areas requiring more resources
Identify areas where detailed testing can be kept to a minimum

Substantial knowledge and understanding of the business is required to interpret the results
Sufficient understanding and knowledge may be absent in the first year of an external audit
Requires an experienced member of staff to interpret the results
Consistency of results from one year to another may hide a material error
May be performed mechanically without the application of professionals scepticism
Rely upon good quality info which is not always available
They are limited use if the business is changing eg rapid growth or decline

Question 21

Calculation for inventory days

Answer 21

Average inventory/costs of goods sold x365

Question 22

Materiality thresholds

Answer 22

Profit before tax 5-10%
Total revenue/turnover - 0.5-3%
Total assets - 0.5-1%
Shareholders equity - 1-2%

Question 23

Purpose of performing substantive analytical procedures

Answer 23

Assist the auditor in forming an overall conclusion on the financial statements. Procedures are used to obtain relevant reliable audit evidence by identifying expected relationships or detecting material misstatements and can be used as a ‘proof in total’ . Procedures assist audit efficiency as they can reduce the need for tests of details, reduce sample sizes and identify areas where further work is required

Question 24

List of possible symptoms of going concern

Answer 24

ISA 570

Question 25

additional audit procedures if there are significant doubt on the entity’s ability to continue as a going concern

Answer 25

Analysing and discussing cash flow, profit and other relevant forecasts with management Analysing and discussing the entity’s latest available interim FS and management accounts with management Reading the terms of debentures and loan agreements and determine whether they have been breached Reading minutes of the meetings of shareholders, those charged with governance and relevant committed for reference to financial difficulty Reading minutes of management and where applicable, those charged with governance and correspondence between the entity and providers of finance

Question 26

Audit procedures to evaluate managements assessment

Answer 26

Confirming the existence, legality and enforceability of arrangements to provide or maintain financial support with related and third parties and assessing the financial ability of such parties to provide additional funds Evaluating the entity’s plans to deal with unfilled customer orders Performing audit procedures regarding subsequent events to identify those that either mitigate or otherwise affect the entity’s ability to continue as a going concern Confirming the existence, terms and adequacy of borrowing facilities

Question 27

ESG and going concern

Answer 27

In pursuit of achieving net zero targets, organisations are going to need to adapt their business models which may require investment in new technology of product development. This may in turn require access to green finance. Ability to secure this type of capital is crucial for business survival. Impact of climate change can affect supplies Adverse weather event can destroy assets and limit consumer demand

Question 28

Management override

Answer 28

Ability of management to manipulate accounting records and therefore produce misleading financial statements

Question 29

Reasons for management override

Answer 29

Financial gain Tax avoidance Enhancement of personal or business performance

Question 30

Audit procedures in response to management override

Answer 30

Testing journal entries to ensure they are appropriate Review of accounting estimates to judge whether management bias has been applied Scrutinising significant and unusual transactions

Question 31

When selecting journal entries for testing, auditors should include

Answer 31

Entries made to unrelated, unusual or seldom used accounts Journals put through by individuals who do not normally make journal entries Journals recorded at the end of the period or after closure, with little or no explanation or description Journals made without account numbers Round number entries Suspense accounts

Question 32

Audit procedures in response to risks relating to incorrect revenue recognition

Answer 32

Analytical procedures including revenue streams and month by month comparisons Customer confirmation Review sales near the end of the accounting period and any unusual terms and conditions Observe goods being despatched Sales and revenue cut off procedures Tests of controls over electronic revenue transactions

Question 33

Information required to carry out analytical procedures

Answer 33

Individual statements of comprehensive income - each division has different profit margins Split of the statement of FS for each division- enable the calculation of inventory and trade receivables days for each division Budget information When the machine division commenced trading - figures can be adjusted to take account of a trading period of less than one year Comparative info from previous statements - allow actual and budget performance to be compared Financial info from companies in the same industry