Planning and Risk Assessment

Question 1

What is the purpose of audit planning?

Answer 1

To ensure the audit is efficient, focused on high-risk areas, and completed on time.

Question 2

What are the main steps in audit planning?

Answer 2

Understanding the entity, assessing risks, determining materiality, developing an audit strategy and detailed plan.

Question 3

What is materiality in auditing?

Answer 3

The level at which misstatements, individually or in aggregate, could influence users’ economic decisions.

Question 4

What is the purpose of risk assessment in an audit?

Answer 4

To identify areas where material misstatements are more likely so that audit work can be targeted effectively.

Question 5

What are the three components of audit risk?

Answer 5

Inherent risk, Control risk, Detection risk.

Question 6

Define audit risk.

Answer 6

The risk that the auditor expresses an inappropriate opinion when the FS are materially misstated.

Question 7

What is the audit risk model?

Answer 7

AR = IR × CR × DR.

Question 8

What is the relationship between detection risk and substantive testing?

Answer 8

Higher detection risk = less substantive work; lower detection risk = more substantive work.

Question 9

What is the purpose of internal control systems?

Answer 9

To help ensure orderly and efficient operations, safeguard assets, prevent and detect fraud/error, ensure accuracy of accounting records.

Question 10

What are the five components of internal control (COSO framework)?

Answer 10

Control environment, Risk assessment, Control activities, Information & communication, Monitoring.

Question 11

What is the auditor’s responsibility regarding internal controls?

Answer 11

To understand and evaluate them to plan the audit; not to give an opinion on effectiveness (unless required).

Question 12

What is a test of control?

Answer 12

An audit procedure to test the operating effectiveness of a control (e.g. re-performance, inspection).

Question 13

What is a substantive procedure?

Answer 13

Audit test designed to detect material misstatements at assertion level (e.g. confirmations, recalculations, substantive analytics).

Question 14

What audit evidence is required?

Answer 14

Sufficient, appropriate evidence to support the auditor’s opinion.

Question 15

What determines the sufficiency of audit evidence?

Answer 15

The quantity needed, based on assessed risks and quality of controls.

Question 16

What determines the appropriateness of audit evidence?

Answer 16

Relevance and reliability of the evidence.

Question 17

What is external vs internal evidence?

Answer 17

External (from third parties) is generally more reliable; internal is less reliable.

Question 18

What is professional scepticism?

Answer 18

An attitude of questioning mind, alert to conditions which may indicate misstatement due to error or fraud.

Question 19

What is the purpose of using analytical procedures?

Answer 19

To identify unusual relationships, assess risks, and gather substantive evidence.

Question 20

At what stages are analytical procedures used?

Answer 20

Planning (risk assessment), Substantive testing, Overall review at completion.

Question 21

Give examples of analytical procedures.

Answer 21

Trend analysis, ratio analysis, reasonableness tests, data analytics.

Question 22

What must an auditor assess regarding professional ethics and ISAs in relation to the acceptance/continuance of audit engagements?

Answer 22

• Integrity of management
• Independence
• Competence
• Available resources

Decline or discontinue if ethical or professional issues threaten objectivity (ISA 220, ISQM 1).

Question 23

What are the preconditions for an audit according to ISA 210?

Answer 23

• Acceptable financial reporting framework
• Acknowledge responsibility for financial statements
• Internal controls
• Access to information

Management must meet these conditions for an audit to proceed.

Question 24

What is the process by which an auditor obtains an audit engagement?

Answer 24

• Assess client integrity
  *Communicate with previous auditor, obtain transfer of information
• Evaluate risks and independence
  *Assess Preconditions of Audit
• Agree terms
• Issue engagement letter
• Document acceptance

This process must be completed before the audit starts.

Question 25

What is the importance and purpose of **engagement letters**?

Answer 25

* Sets out scope * Objectives * Responsibilities * Fees ## Footnote Reduces misunderstandings and includes auditor’s and management’s duties, as well as reference to ISAs.

Question 26

What are the overall **objectives of the auditor** in conducting an audit?

Answer 26

* Obtain reasonable assurance financial statements free from material misstatement * Follow ISAs for consistency and credibility ## Footnote These objectives guide the audit process.

Question 27

How is **materiality** calculated from financial information?

Answer 27

Materiality = threshold where misstatements influence decisions, usually: * 5–10% of profit before tax * 1–2% of revenue/assets ## Footnote Apply judgement to context.

Question 28

How do auditors obtain an initial understanding of the **entity and its environment**?

Answer 28

* Inquiries * Analytical procedures * Reviewing prior audits ## Footnote Helps identify risks and plan the audit effectively (ISA 315).

Question 29

What are key **ratios** used in analytical procedures?

Answer 29

* Profitability ratios * Liquidity ratios * Efficiency ratios ## Footnote Examples include GP%, current ratio, inventory days. Compare to prior periods or industry to spot unusual trends or risks.

Question 30

What effect does **fraud and misstatements** have on the audit strategy?

Answer 30

* Increases professional scepticism * Expands audit scope * Requires more testing * Focus on management override - audit planning is a continuous process, hence why changes to the strategy and plan can be made ## Footnote These factors necessitate adjustments in audit procedures.

Question 31

Who has the primary responsibility for the **prevention and detection of fraud and error**?

Answer 31

* Management/internal audit * External auditor: obtain reasonable assurance fraud/error not material ## Footnote External auditors are not expected to prevent fraud.

Question 32

What is the auditor’s responsibility regarding **laws and regulations**?

Answer 32

* Understand legal framework * Detect non-compliance with direct effects * Report breaches materially affecting financial statements to management, or in serious cases regulatory/professional/law enforcement ## Footnote This is outlined in ISA 250.

Question 33

What are the **benefits of planning an audit**?

Answer 33

* Ensures efficient work * Identifies significant risks * Assigns staff/time effectively * Reduces audit risk ## Footnote Planning is essential for a successful audit (ISA 300).

Question 34

What does the **overall audit strategy** include?

Answer 34

* Scope * Timing * Direction Extent * Key risks ## Footnote This strategy guides the audit plan.

Question 35

What are the contents of the **audit plan**?

Answer 35

* Detailed procedures for each area (audit programme) * Staff assignment * Resource allocation ## Footnote The plan is developed from the overall audit strategy.

Question 36

What is the difference between an **interim** and **final audit**?

Answer 36

* Interim: before year-end, tests controls and transactions * Final: after year-end, verifies balances and disclosures ## Footnote Each serves a different purpose in the audit process.

Question 37

What is the purpose of an **interim audit**?

Answer 37

* Early detection of issues * Smoother final audit ## Footnote Procedures include control testing, walkthroughs, analytical review, interim financial testing.

Question 38

How does the work performed during the **interim audit** impact the final audit?

Answer 38

* Reduces year-end workload * Allows reliance on tested controls * Focuses final audit on remaining high-risk areas ## Footnote This efficiency is beneficial for the audit process.

Question 39

What is the importance of **audit documentation/working papers**?

Answer 39

* Provides evidence of audit work * Supports conclusions * Enables review * Proves compliance with ISAs ## Footnote Documentation is critical for accountability.

Question 40

What should **working papers and supporting documentation** include?

Answer 40

* Checklists * Schedules * Correspondence * Summaries ## Footnote Must show who performed/reviewed work, dates, and conclusions.

Question 41

What procedures ensure the **safe custody and retention** of working papers?

Answer 41

* Keep secure (passwords, locked storage) * Restrict access * Retain for minimum required period (usually 7 years) * Dispose confidentially ## Footnote These practices protect sensitive information.

Question 42

What is the Purpose of an Audit Engagement

Answer 42

The agreeance of audit between an auditor and client to confirm an agreement in terms and avoid misunderstandings

Question 43

Important Documents to Familiarise with Client

Answer 43

Memorandum of Association Last Year FS Cash Flow Budgets and Forecast Prior Year Audit File ( may be limited due to changes in FS) Organisation Chart

Question 44

Permanent Audit File

Answer 44

Contains information of continuing importance and history of Key Audit Matters

Question 45

Current Audit File

Answer 45

Contains info relevant for the current period, usually split between interim and final

Question 46

Importance of Standardised and Confidential Working Papers

Answer 46

-Instruct staff and facilitate the delegation of work - Owned by auditor and remain confidential

Question 47

Preliminary Planning

Answer 47

Ensures professional and ethical requirements remain intact - after audit engagement stage

Question 48

Discovering Fraud

Answer 48

Enquiries with lawyer Substantive Testing Inspecting board meeting