Module 15: Audit Process: Planning

Question 1

How can planning help the auditor achieve the overall objective ?

Answer 1

1. Helping to ensure that sufficient and appropriate attention is directed to the important areas of the audit
2. Helping to ensure that potential problems are identified and resolved early
3. Assisting in the selection of appropriate engagement staff, including the assignment of work to them
4. Helping to complete work effectively and efficiently
5. Facilitating direction and supervision of the audit

Question 2

What is the first step to identifying risks in the financial statements of an entity?

Answer 2

Through understanding the entity. Risk assessment procedures must be performed to obtain an understanding of:

1. The entity and its environment
2. Organisational structure, ownership and governance
3. Industry, regulatory and other external factors
4. The measures used internally and externally, to assess the entity’s financial performance.
5. The applicable financial reporting framework and the entity’s accounting policies
6. How inherent risk factors identified will affect the susceptibility of assertions to misstatement a
7. Internal controls

Question 3

What are the following risk assessment procedures identified by ISA UK 315)(AEIO)?

Answer 3

1. Analytical procedures
2. Enquiry
3. Inspection
4. Observation

Question 4

What is involved with enquiry?

Answer 4

The auditor will have initial planning meetings with those charged with governance to discuss objectives of the entity and any changes that have occurred over the year. Can also make enquires to third parties or other employees within the business.

Question 5

What is involved with inspection?

Answer 5

Documents will be collected to assess inherent risk: 
Prior year FS 
Prior year audit files 
Internal control files 
Business plans and strategic documents of the entity 
Industry publications 
Analyst reports 
Company website.

Question 6

What is involved with observation?

Answer 6

A tour of client site.

Question 7

What are analytical procedures?

Answer 7

Involve the evaluation of financial information through analysis of plausible relationships among both financial and non financial data.

Question 8

When do analytical procedures take place?

Answer 8

As a risk assessment during planning stage
and
When forming an overall conclusion on the consistency of the financial statements during completion stage.

Question 9

Analytical procedure techniques?

Answer 9

1. Comparison - does not provide sufficient audit evidence for a substantive procedure. Can identify an unexpected figure, for the purpose of planning risk assessment)
2. Ratio analysis - Also does not provide sufficient evidence. Can also identify unexpected figures for the purpose of planning risk assessment)
3. Reasonableness - can be used at both planning and substantive testing stages
4. Trend analysis - Used at substantive testing to get more in-depth review of account
5. Large and unusual items review - Also used at substantive testing to get more in-depth review of an account

Question 10

What are the three types of materiality used in Audit?

Answer 10

1. Overall materiality - represents a threshold as to what is significant to the financial statements as a whole
2. Performance materiality - usually set below overall materiality to reduce the probability that uncorrected/undetected misstatements exceed overall materiality.
3. Specific items materiality - Individual accounts or disclosures in the financial statements may have their own lower materiality.

Question 11

Explain the timing of materiality calculation?

Answer 11

Overall materiality will be estimated at the planning stage.
Materiality is re-assessed throughout the audit as circumstances change.
The overall materiality figure is recalculated at the completion stage of the audit based on actual financial statement figures.

Question 12

Setting the performance materiality?

Answer 12

Often set as a percentage of overall materiality, exercising professional judgement.

Question 13

What are the two types of fraud?

Answer 13

1. Fraudulent financial reporting: An intentional manipulation of financial information to obtain an unjust illegal advantage
2. Misappropriation of assets: An intentional theft of company assets or inappropriate and unauthorised use of company assets

Question 14

What are the directors responsibilities in respect to fraud?

Answer 14

Preventing and detecting fraud by implementing a sound system of internal controls at the company and encouraging an appropriate culture

Question 15

What are the auditors responsibilities in respect to fraud?

Answer 15

Obtaining reasonable assurance that the financial statements are free from material misstatement.

Auditor should recognise the possibility of fraud throughout the audit. To achieve this the auditor must consider the ROMM in the financial statements due to fraud as part of overall risk assessment.

Question 16

What are the fraud risk factors?

Answer 16

1. Incentives or pressures - motivate an individual to perpetrate a fraud
2. Opportunities - Opportunities that allow an individual to perpetrate fraud
3. The mind-set of an individual making them believe that it is justifiable or acceptable to perpetrate fraud.

Question 17

What type of risk is associated with the fraud risk factors, incentives and rationalisation?

Associated with opportunities?

Answer 17

Inherent risks. The incentives or rationalisations to commit fraud are inherent to the financial statements due to the nature of the entity.

Control risks. Opportunity arises where there are weak or no controls.

Question 18

Define audit data analytics?

Answer 18

The science and art of discovering and analysing patterns, deviations and inconsistencies, and extracting other useful information in the data underlying or related to the subject matter of an audit through analysis, modelling and visualisation for the purpose of planning and performing the audit.

Question 19

Main advantages of ADA?

Answer 19

1. Data can be processed more quickly and accurately by automated processes which allows sampling risk to be reduced.
2. Once suitable technology has been invested in, the use of ADA can make the audit process more cost effective.
3. Improving audit quality through allowing a deeper understanding of the entity, allowing the stratification of large data populations or identifying instances of fraud.

Question 20

To ensure ADA provides sufficient and appropriate evidence what steps should the auditor consider?

Answer 20

1. Consider the overall objective of the ADA and how it will be achieved - Find out what the purpose of the ADA is, may be perform a risk assessment procedure. What data should be used and also an appropriate technique, such as a developed program.
2. Obtain and cleanse the data to be used in the ADA - Auditor must obtain data from client and making this info as accurate as possible.
3. Consider whether the data to be used is relevant and reliable - An example of this is making sure that all journal entries were posted in the year.
4. Carry out the ADA technique
5. Evaluate and report on the ADA - A risk of material misstatements has been identified or no risk of material misstatements.