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 devoted to important areas of the audit (e.g mergers)-

• Identify and solve potential problems in a timely manner- Ensure audit is properly organised and managed (Is the team equipped for clients)

• Organised and managed team

• Clarify roles and responsibilities for engagement team-

• Senior associates facilitate review by offering guidance

Define audit strategy (STD)

• Scope: What parts of the company's financial statements will be audited.

• Timing: When the audit procedures will be performed (e.g., interim or year-end).

• Direction: How the audit will be managed and led, including resources and key focus areas.

Define audit plan (NET)

A detailed plan outlining the Nature, Extent, and Timing of audit procedures to be performed by the audit team.

CRIME

Control activities

Risk assessment

Information systems

Monitoring activities

Control Environment

Define Professional scepticism

An attitude that includes a questioning mind and being alert to conditions which may indicate possible misstatement due to error or fraud.

Professional judgement

Using your training, knowledge, and experience to make informed decisions and arrive at appropriate conclusions during an audit, especially in difficult or complex situations.

Materiality

The level of importance of an error that could influence the decisions of users relying on the report.

Materiality by size

Deciding how big an error matters based on the size of the financial numbers.

👉 In short: The bigger the number, the bigger the mistake can be before it’s important.

Materiality by nature

When an item is important because of what it is, not how big it is.

👉 Example: Fraud or transactions with directors are material by nature, even if the amount is small.

Double materiality

Double materiality:
Means checking what’s important in two ways:

• Financial side: Does it affect the company’s money or performance?

• Social/environmental side: Does it affect people or the planet?

👉 In short: Something matters if it’s important for the business or for society.

Performance materiality

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

Review of materiality

Reassessing the materiality level during an assurance engagement to check if it’s still appropriate based on new information or changes in circumstances.

👉 In short: It’s when auditors recheck if their materiality amount is still suitable.

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

The risk of a material misstatement in financial statements before any controls are applied, simply because of the nature of the business, transaction, or account.

👉 In short: It’s the “built-in” risk that something could go wrong.

E.g Cash based business

Define Control risk + 1 example

The risk that a company’s internal controls fail to prevent or detect a material misstatement in the financial statements.

E.g Integrity and competence of employees

Define Detection risk + 1 example

The risk that the auditor fails to detect a material misstatement in the financial statements.

E.g Sampling risk due to not testing 100% of population

How is an Audit risk calculated?

Audit risk = Inherent risk x Control risk x Detection risk

What are significant risks in auditing and what factors indicate them? (CUSCS)

Significant risks are important risks in an audit that need extra attention from the auditor. Factors indicating a significant risk include:

1. Complexity: The risk deals with complicated transactions or accounting rules.

2. Uncertainty: It's hard to measure or estimate accurately.

3. Subjectivity: It needs a lot of judgment from management or involves estimates that could be very wrong.

4. Change: The risk comes from new economic, accounting, or other changes.

5. Susceptibility to management bias or fraud: The risk is easy for management to manipulate or intentionally misstate.

State the 2 climate change related risks

1. Physical risks: Direct impacts from climate change (e.g., droughts, bushfires).

2. Transition risks: Shifts in society and economy as we address climate change.

Define Stranded assets

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

Define fraud

An intentional act that may cause misstatements in financial statements

Define errors

An unintentional mistake that may cause misstatements in financial statements