Audit Textbook

• Business studies GCSE. Presented by www.anki.com. Other flashcards available: Physics, Biology, Maths, German, French at www.anki.com, copyright 2024.
• When analysing markets, a range of assumptions are made about the rationality of economic agents involved in the transactions
• The Wealth of Nations was written

  1776
• Rational


  (in classical economic theory) economic agents are able to consider the outcome of their choices and recognise the net benefits of each one
• Rational agents will select the choice which presents the highest benefits
• Consumers act rationally by

  Maximising their utility
• Producers act rationally by


  Selling goods/services in a way that maximises their profits
• Workers act rationally by


  Balancing welfare at work with consideration of both pay and benefits
• Governments act rationally by


  Placing the interests of the people they serve first in order to maximise their welfare
• Groups assumed to act rationally


  • Consumers
  • Producers
  • Workers
  • Governments
• Rationality in classical economic theory is a flawed assumption as people usually don't act rationally
• Marginal utility


  The additional utility (satisfaction) gained from the consumption of an additional product
• If you add up marginal utility for each unit you get total utility
• AUDIT AND RISK STUDY GUIDE Pdf_Folio:i Published 2024 by John Wiley & Sons Australia, Ltd, 310 Edward St, Brisbane Queensland 4000, on behalf of Chartered Accountants Australia & New Zealand Copyright © Chartered Accountants Australia and New Zealand 2024. All rights reserved.
• This publication is copyright. Apart from any use as permitted under the Copyright Act 1968 (Australia) and Copyright Act 1994 (New Zealand), as applicable, it may not be copied, adapted, amended, published, communicated or otherwise made available to third parties, in whole or in part, in any form or by any means, without the prior written consent of Chartered Accountants Australia and New Zealand.
• Audit overview


  Auditor's objectives and responsibilities in conducting an audit
• Audit quality


  • Quality management
  • Auditor independence
  • Acceptance and continuance and the preconditions for an audit
  • Agreeing the terms of audit engagements
  • Communication with those charged with governance
• Risk assessment


  • Risk in an audit context
  • Risk assessment procedures and related activities
  • Obtaining an understanding of the entity and its environment
  • Materiality
  • Identifying and assessing risk
  • Specific topics important to risk assessment
  • Engagement team discussion
  • Revising risk assessment
• Audit plan


  • Overall audit strategy
  • Audit program
• Internal controls


  • Understanding an entity's system of internal control
  • Evaluating the design of internal controls
  • Evaluating the implementation of internal controls
  • Assessing control risk
• Tests of controls


  • Selecting controls to test
  • Designing tests of controls
  • Performing tests of controls
  • Evaluating the results of controls testing
• Substantive testing


  • Substantive analytical procedures
  • Designing substantive tests of details
  • Performing substantive tests of details
  • Evaluating the results of tests of details
  • Specific audit areas
  • Using the work of others
• Completing the audit


  • Other general audit procedures
  • Evaluating audit evidence
  • Evaluating misstatements
  • Other information
  • Communicating with those charged with governance
  • Written representations
• Audit opinion and auditor's report


  • Form an audit opinion
  • The auditor's report
• Auditor's objectives


  To enhance the degree of confidence intended users have in financial statements by providing reasonable assurance about whether the financial statements are prepared, in all material respects, in line with the applicable financial reporting framework
• There is intense global debate over the degree of confidence in audit quality, and auditors are experiencing a high degree of scrutiny from the media and regulators
• Inherent limitations in an audit


  • Management are required to make estimates and judgements in the process of preparing the financial statements
  • Auditors are required to take a 'risk-based approach' and perform audit procedures on a test basis and/or use sampling methods rather than testing the entire population
  • Audit evidence is often persuasive rather than conclusive, requiring the auditor to exercise judgement when evaluating it
• Audit risk model


  Describes the three different components of audit risk and their interrelationships: inherent risk, control risk, and detection risk
• Audit risk model


  1. Inherent risk

  2. Control risk

  3. Detection risk

  4. Audit risk
• Audit risk model


  • The addition of each element of risk multiplies the risk presented by the other components, generating the overall audit risk
  • The auditor must reduce audit risk to an acceptably low level by applying the audit risk model to the audit process
• Requirements in conducting an audit under ISAs


  • Ethics
  • Professional scepticism
  • Professional judgement
  • Sufficient appropriate audit evidence and audit risk
  • Conduct of an audit in line with ISAs
• Ethics


  The auditor must comply with relevant ethical requirements, including those that relate to independence
• Professional scepticism


  An attitude that includes having a questioning mind, being alert to conditions that may indicate possible misstatement due to error or fraud, and critically assessing audit evidence
• Professional judgement


  The auditor needs to exercise professional judgement in planning and performing an audit, interpreting the requirements of the ISAs and making informed decisions throughout an audit
• Areas where professional judgement is particularly important


  • Assessing materiality and audit risk
  • Determining the nature, timing and extent of audit procedures
  • Evaluating whether sufficient appropriate audit evidence has been obtained
  • Evaluating management's judgements in applying the entity's financial reporting framework
  • Drawing conclusions based on evidence obtained
  • Forming an audit opinion
• Elements of an effective professional judgement process


  1. Identify and define the issue

  2. Gather the facts and information and identify the relevant literature

  3. Perform the analysis and identify alternatives

  4. Make the decision

  5. Review and complete the documentation and rationale for the conclusion
• Sufficient appropriate audit evidence


  Information used by the auditor to arrive at the conclusions on which the auditor's opinion is based
• Sufficiency and appropriateness of audit evidence


  • Relevance of audit evidence
  • Reliability of audit evidence
  • Quantity of audit evidence
  • The auditor needs more and better quality audit evidence as the risk of material misstatement increases
• The auditor obtains audit evidence by performing audit procedures during the audit
• The auditor must comply with all ISAs that are relevant to the audit, unless the entire ISA is not relevant