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Planning and risk assessment - Coggle Diagram
Planning and risk assessment
ISA 200
Overall objectives of audit
To obtain reasonable assurance on whether the FS as a whole are free from MM, due to fraud or error, and thereby express an opinion in the auditor's report
To report on the FS, and communicate as required by the ISA, in accordance with auditor's findings
Key requirements to discharge the above
Complying with ethics
Exercising professional skepticism
Exercising professional judgement
Obtaining sufficient appropriate audit evidence to reduce the audit risk
Audit risk and ROMM
Formula
Audit risk = (Inherent risk x Control risk) x Detection risk
Audit risk
Risk that auditor expresses an inappropriate opinion when the FS are materially misstated
ROMM
Consists of control and inherent risk
Inherent risk
Risks, before any controls are put in place
Control risks
Risks that would not be prevented, detected and corrected by the entity's controls
Occurred before the audit
Exists when there is likelihood and magnitude (ie being material if it were to occur)
ISAs that would be required to be considered
ISA 300
Planning an audit of FS
Objective
Help the auditor plan the audit so it will be performed in a effective manner
Done by two complementary items
Audit strategy
Audit plan
Shall not be a one-off process only carried out at the start of the engagement
It is iterative and so the need for any additional procedures should be constantly reviewed
ISA 315
Identifying and assessing ROMM
Objective
To identify and assess ROMM, whether due to fraud or error, at the FS and assertion levels, then design and implement responses to those risks
ROMM at the FS level
Relate to the entire FS and could affect many assertions
ROMM at assertion level
The auditor focuses on assertions about a class of transactions, an account balance or a disclosure. they are being assessed separately in the context of two components : inherent and control risk assessment
Auditor's approach
Enquiries
AP
Observation
Inspection
Sharing info from other sources, such as acceptance and continuance procedures and discussions among audit team members
ISA 330
Auditor's responses to assessed risks
Ask for the auditor to determine whether controls testing is appropriate or not
If controls are ineffective, then this would not be tested,. Substantive testing would be relied upon instead,
Business risk approach
3 categories
Financial risk
Arise from the co's financial activities or the financial consequences of the operations
Going concern issue
Unrecorded liabilities
Overtrading
Credit risk
High cost of capital
Interest risk
Operational risk
Arise from the operations of the business
Stock outs
Physical disasters
Loss of key staff
Poor brand management
Loss of orders
Compliance risk
Arise from non-compliance with laws, regulations, policies, procedures and contracts
Breach of listing rules
Health and safety risks
Tax penalties
Sales tax problems
Litigation risks
Breach of data protection legislation
Once risks are identified, management must decide whether they accept the risk or what their control strategy would be to manage the risk
ISA 320
Materiality in planning and performing an audit
Deemed material if it is due to
Nature
Such as transactions with directors
Value
such as a significant asset acquired
Impact
such as a $1000 journal that turns a profit into a loss
Benchmark for materiality
REVENUE
0.5-1%
TOTAL ASSETS
1-2%
PBIT5-10%
Performance materiality
amounts set by auditor at less than materiality for the FS as a whole
This means that performance materiality is more sensitive in terms of materiality. even small items could be material
ISA 520
Analytical procedures
Should be applied as risk assessment procedures to obtain understanding of the entity and its environment and in the overall review at the end of the audit
Can also be used as a source of substantive audit evidence when their use is more effective than test of details
Comparisons
Prior periods
Budgets and forecasts
Industry information
Predictive estimates
Relationships between elements of FS ie ratio analysis
Gross profit margin
Receivable collection period
Inventory holding period
Payables payment period
Current ratio
Quick or acid test ratio
Gearing ratio
ROCE
Relationships between financial and non-financial info ie payroll costs to the number of employees