Chapter 7: Planning

Question 1

Why is audit planning important? (3 reasons)

Answer 1

1. Time may be wasted on unnecessary work.
2. Important areas may be overlooked.
3. Auditor may reach the wrong conclusion.

Question 2

What does an audit strategy consider? (9 things)

Answer 2

1. Materiality
2. Risks
3. Audit approach
4. Experts
5. Team
6. Budgets
7. Deadlines
8. Timing
9. Guides + developments of the audit plan

Question 3

What does the audit plan provide?

Answer 3

More detailed instruction for the audit (compare to audit strategy). Specifies:

*Nature
*Timing
*Extent of the audit procedures

Question 4

An item can be material via two factors

Answer 4

1. Amount (value or size)
2. Nature (type or importance)

Question 5

Benchmark ways to determine materiality (3)

Answer 5

1. % of revenue
2. % of profit before tax
3. % of gross assets

Question 6

Standard % used to determine materiality as a % of revenue

Answer 6

0.5% to 1%

Question 7

Standard % used to determine materiality as a % of gross assets

Answer 7

1% to 2%

Question 8

Standard % used to determine materiality as a % of profit before tax

Answer 8

5% to 10%

Question 9

Examples of when matters are material by nature (5)

Answer 9

1. Misstatement affects compliance with laws/regulations.
2. Misstatement impacts debt covenants (e.g. loan agreement conditions).
3. Misstatement hides changes in earnings.
4. Misstatement affects key financial ratios.
5. Misstatement influences management bonuses or compensation

Question 10

Idea of performance materiality

Answer 10

High risk = lower materiality level

Question 11

Double materiality

Answer 11

Considers financial and sustainability materiality.

Question 12

Sustainability materiality

Answer 12

A sustainability issue is material if leaving it out, misstating it, or hiding it could influence users’ decisions based on the financial statements and related sustainability disclosures.

Question 13

Benefits of analytical procedures in the planning phase (5)

Answer 13

1. Identifying risk or material areas.
2. Highlight unusual items/trends
3. Reveal possible errors
4. Using external information (e.g. budgets) that management has less control over
5. Allows the auditor to understand the entity’s business better.

Question 14

Limitations to analytical procedures in the planning phase (5)

Answer 14

1. Auditor needs good knowledge of the entity’s business to interpret results correctly.
2. Consistent results can sometimes hide material errors.
3. Procedures may be mechanical - without enough professional scepticism.
4. They require an experienced auditor to perform effectively.
5. Reliable data may not always be available.

Question 15

Key performance ratios (4)

Answer 15

1. Return on capital employed
2. Gross profit margin
3. Operating cost %
4. Operating profit margin

Question 16

Formula for return on capital employed

Answer 16

PBIT/ TALC

Question 17

Formula for gross profit margin

Answer 17

GP/Revenue

Question 18

Formula for operating cost %

Answer 18

OC/Revenue

Question 19

Formula for operating profit margin

Answer 19

PBIT/Revenue

Question 20

Key liquidity ratios (2)

Answer 20

1. Current ratio
2. Quick ratio

Question 21

Formula for current ratio

Answer 21

Current assets/ current liabilities

Question 22

Formula for quick ration

Answer 22

(Current assets - inventory)/ current liabilities

Question 23

Key long term solvency ratios (2)

Answer 23

1. Gearing
2. Interest cover

Question 24

Formula for gearing

Answer 24

Net debt/ equity

Net debt = all borrowings - cash owned

Question 25

Formula for interest cover

Answer 25

Profit before interest payable/ interest payable

Question 26

Key efficiency ratios (4)

Answer 26

1. Net asset turnover 2. Inventory period 3. TR period 4. TP period

Question 27

Challenges to cyber security (4)

Answer 27

1. Communication - CS language is technical and difficult to understand. 2. Responsibility + accountability - if no ownership of the issue the CS will go unmanaged. 3. Board level accountability - CS must be embedded into the board's general risk management 4. Lack of knowledge

Question 28

Combating IT risks and security (8)

Answer 28

1. Business continuity planning (ensure business can continue after a major IT failure) 2. System access control 3. Systems development and maintenance 4. Physical security 5. Compliance (e.g. data protection) 6. Security policy 7. Asset classification and control (treats information as an asset - assigning an accountable owner) 8. Personnel security (hiring trustworthy staff & training them on IT and security policies)

Question 29

Cloud computing

Answer 29

Delivering IT services (storage, software) over the internet - allowing users to access resources without owning the hardware.

Question 30

Impacts of cloud computing on auditing (5)

Answer 30

1. Clients using it may create specific audit challenges. 2. Auditors may need to access data stored by 3rd parties. 3. External certifications can support audit planning. 4. Auditors must understand the cloud system's structure. 5. As audits become more automated, software tools can link directly to cloud data