last audit questions steve!

GlynisGlynis Trusted RegularPosts: 488Registered
Steve these are my last questions before I do my sim I promise. Please help me.

Is an anomlos error something that won't affect the auditors opinion but they will have to do more testing of detail?

If the controls don't work as they should do then you don't rely on them but do more detailed tests and the report is modified.

A substantive audit is more reliant than a non substantive audit.

Thank you in advance.

Comments

  • Steve CollingsSteve Collings Experienced Mentor Posts: 997Registered
    Glynis,

    An anomalous error is a "one off" error which the auditor can isolate and which is unlikely to occur more than once. It can affect the auditor's opinion if it is material.

    If the controls do not work as expected, or if there has been a failing then the auditor should do more detailed substantive testing. If sufficient and appropriate audit evidence can be gathered using a more substantive approach then there is no need to qualify the audit opinion. The weaknesses in the controls should be notified to management.

    In terms of substantive procedures being more reliable than tests of controls then this can be illustrated using detection risk and financial statement risk. Detection risk is the risk that the auditor will fail to detect a material misstatement in the financial statements; financial statement risk is the risk that the financial statements contain a material misstatement.

    If financial statement risk is deemed LOW (ie the auditor is relying on internal controls and doing less substantive testing) then financial statement risk becomes HIGH (simply because the auditor is doing less detailed substantive testing and placing more reliance on internal controls). Conversely, if detection risk is HIGH then financial statement risk becomes low - this relationship is known as an inverse relationship.

    Hope that helps.

    Regards

    Steve
  • GlynisGlynis Trusted Regular Posts: 488Registered
    But what hs risk got to do with testing? I am confused.
  • Steve CollingsSteve Collings Experienced Mentor Posts: 997Registered
    Glynis,

    Risk has everything to do with testing! The whole audit process is geared around minimising the risk of material misstatement and there is a whole ISA on risk - ISA 330.

    If you have a client where financial statement risk is high then of course you would do more detailed substantive testing which then means detection risk is low because the auditor stands more chance of finding a material misstatement when detection risk is low than they do when it is high. The auditor wouldn't just rely on internal controls for a high risk client.

    Regards

    Steve
  • GlynisGlynis Trusted Regular Posts: 488Registered
    So how do you know when a customer is high risk and when they are not and how do you know what tests to do and what not to do.

    Sorry for this but I am really confused.
  • Steve CollingsSteve Collings Experienced Mentor Posts: 997Registered
    Glynis,

    You establish the risk profile of the client at the planning stage and it is based on varying factors such as what the client deals in, their internal controls, technical competencies, whether goods/services are being sold in rising/falling/static markets etc etc. If you step back and think about it logically- what would be the point of the auditor going to audit a client they knew nothing about. They wouldn't know what procedures to perform on low and high risk areas because they wouldn't know which audit areas were high/low risk, they wouldn't be able to base analytical review on other companies in the same sector, if that was applicable and they wouldn't be able to relate any audit conclusions to their knowledge of the client. This is where ISA 315 comes into play.

    Once you have established the risk profile of the client and done the planning, you can then decipher the audit procedures because at that point in time (even before the client sees the auditors) you will have a thorough understanding as to the high risk areas and the procedures to be adopted in those areas.

    You must have covered this already in your IAP studies.

    Regards
    Steve
  • GlynisGlynis Trusted Regular Posts: 488Registered
    Steve I think it has finally clicked. Am I right then in saying we do the planning to look at the risk then we look at which procedures using controls and substantive procedures.

    Also if we see any weaknesses more substantive tests are done.

    Is this right?
  • Steve CollingsSteve Collings Experienced Mentor Posts: 997Registered
    That is right. There's more to the planning stage than simply assessing risk, but you are on the right track!!:thumbup:

    Regards

    Steve
  • GlynisGlynis Trusted Regular Posts: 488Registered
    Thanks steve. I appreciate your help.

    I am going to have a chocolate biscuit to treat myself!

    Thanks again.
Sign In or Register to comment.