Assurance and Risk: Chapter 3 - Planning and Risk assessment

These flashcards cover key concepts related to the planning and risk assessment processes within auditing, as discussed in the provided lecture notes.

What are the objectives of planning an audit? (APORS)

• Appropriate attention: Focus on important areas (e.g., mergers)

• Problems solved timely: Identify & resolve issues early

• Organisation: Ensure audit is organised & team is equipped

• Roles clarified: Clarify responsibilities; senior associates guide reviews

• Supervision: Ensure engagement is properly supervised and managed

What is an audit strategy (STD)?

• High-level plan covering:

  • Scope – which parts of the financial statements to audit

  • Timing – when audit procedures will be performed

  • Direction – how the audit is managed, including resources & focus areas

What is an audit plan (NET)?

Detailed plan outlining:

• Nature – what audit procedures will be performed

• Extent – how much testing will be done

• Timing – when procedures will be performed

What are the five components of internal control? (CRIME)

Control activities

Risk assessment

Information systems

Monitoring activities

Control Environment

Define Professional scepticism

A questioning mindset; being alert to misstatements due to error or fraud.

Why does the auditor understand the entity & its environment?

To identify risks of material misstatement and plan appropriate audit procedures.

Why are analytical procedures used at the planning stage?

To identify unusual trends or relationships indicating risk areas.

Professional judgement

Using knowledge, training, and experience to make informed decisions during an audit.

Materiality

Errors significant enough to influence users’ decisions

Materiality by size

Bigger numbers allow bigger errors

Materiality by nature

Some items matter regardless of size (e.g., fraud, related party transactions)

Double materiality

An item matters if it affects:

• Financial performance

• Social or environmental impact

Performance materiality

A safety buffer below overall materiality to catch smaller errors before they add up.

Review of materiality

To adjust for new information, errors found, or changes in financial figures.

Why must materiality be reviewed constantly?

Things can change during the engagement — for example, new information, errors found, or changes in financial figures.

What is the audit risk?

The risk that auditors will state an inappropriate opinion

Define risk of material misstatement

The possibility that financial statements might contain fraud or errors

Define Inherent risk + 1 example

Risk of material misstatement before considering controls, due to the nature of the business or transaction.
Example: Cash-based business.

Define Control risk + 1 example

Risk that internal controls fail to prevent or detect a misstatement.
Example: Poor segregation of duties.

Define Detection risk + 1 example

Risk that auditors fail to detect a material misstatement.
Example: Sampling risk.

How is an Audit risk calculated?

Audit risk = Inherent risk × Control risk × Detection risk

What are significant risks and what indicates them? (CUSCS)

Significant risks are risks that require special audit attention. They are indicated by:

• C – Complexity: Involves complicated transactions or accounting treatments

• U – Uncertainty: Amounts are hard to measure or involve high estimation risk

• S – Subjectivity: Heavy management judgement (e.g. provisions, valuations)

• C – Change: New transactions, standards, systems, or economic conditions

• S – Susceptibility: Easy for management bias or fraud to occur

State the 2 climate change related risks

1. Physical risks – direct climate impacts

2. Transition risks – economic/regulatory changes

Define Stranded assets

Assets that lose value or become unusable due to external factors (e.g. regulation, climate).

Define fraud

Intentional act causing a misstatement in the financial statements.

Who is responsible for fraud?

Management: prevent & detect fraud
Auditors: obtain reasonable assurance no material misstatement due to fraud

Define errors

Unintentional mistake causing a misstatement in the financial statements.