1.
Audit Risk Model
• Audit Risk (AR) = Inherent Risk (IR) × Control Risk (CR) × Detection Risk
(DR)
o Inherent Risk (IR): Risk of material misstatement without considering
controls.
o Control Risk (CR): Risk that a misstatement won’t be prevented or detected
by internal controls.
o Detection Risk (DR): Risk that the auditor's procedures won't detect a
misstatement.
2. Materiality
• Overall Materiality = 5-10% of profit before tax, 1-2% of revenue, or 1-2% of total
assets.
• Performance Materiality: Usually set at a lower level (50-75% of overall
materiality).
• Clearly Trivial Threshold: Misstatements below this are not considered for further
evaluation (typically 5-10% of materiality).
3. Key Audit Assertions (COVER + U)
• Completeness: All transactions are recorded.
• Occurrence (Existence): Transactions actually occurred.
• Valuation: Transactions and balances are accurately valued.
• Existence: Assets, liabilities, and equity balances exist.
• Rights and Obligations: Entity owns the assets and owes liabilities.
• Understandability: Disclosures are clear and easy to comprehend.
4. Common Audit Procedures
Revenue
• Assertion: Occurrence, Completeness, Cut-off.
• Procedure: Test sales invoices, check credit notes after year-end, cut-off testing at
year-end.
Inventory
• Assertion: Existence, Valuation.
• Procedure: Physical inventory count, valuation testing, NRV checks.
Receivables
• Assertion: Existence, Valuation.
• Procedure: Send external confirmations, review subsequent receipts.
Liabilities
• Assertion: Completeness, Existence.
• Procedure: Review post-year-end payments, external confirmations for payables.
PPE (Property, Plant, Equipment)
• Assertion: Existence, Valuation.
• Procedure: Inspect assets, review purchase documents, depreciation recalculation.
Going Concern
• Assertion: All.
• Procedure: Review cash flow forecasts, check financing agreements, board minutes,
subsequent events.
5. Audit Evidence Quality (TAP)
• Timeliness: Evidence should be recent.
• Appropriateness: Evidence should be reliable (e.g., external confirmations > internal
evidence).
• Pertinence: Evidence should relate to the assertion being tested.
6. Substantive Procedures
• Tests of Details: Examine specific transactions, balances, or disclosures (e.g., vouch
invoices, inspect contracts).
• Analytical Procedures: Compare financial data to expectations (e.g., ratio analysis,
trends, variance analysis).
7. Analytical Procedures
Key Ratios
• Profitability:
o Gross Profit Margin = (Gross Profit ÷ Revenue) × 100
o Net Profit Margin = (Net Profit ÷ Revenue) × 100
• Liquidity:
o Current Ratio = Current Assets ÷ Current Liabilities
o Quick Ratio (Acid-Test) = (Current Assets – Inventory) ÷ Current Liabilities
• Solvency:
o Debt to Equity = Total Debt ÷ Equity
o Interest Coverage = Operating Profit ÷ Interest Expense
Common Findings
• Decreasing Profitability: Risk of overstated revenue or understated expenses.
• Weak Liquidity: Potential going concern risk, need for financing.
• High Leverage: Increased financial risk, going concern concerns.
8. Types of Audit Opinions
• Unmodified: True and fair view with no material misstatements.
• Modified Opinions:
o Qualified ("except for"): Material but not pervasive issue.
o Adverse: Financial statements are materially misstated and misleading.
o Disclaimer: Auditor is unable to obtain sufficient audit evidence to form an
opinion.
9. Audit Completion
• Subsequent Events:
o Adjusting Events: Events that provide additional evidence about conditions
that existed at the reporting date (e.g., receivables going bad).
o Non-adjusting Events: Events that occur after the reporting period (e.g.,
natural disasters).
• Management Representations: Written confirmation from management that
financial statements are accurate.
10. Ethical Considerations (IFAC Code)
• Independence: Avoid conflicts of interest.
• Confidentiality: Keep client information secure.
• Professional Competence: Maintain skills and knowledge.
• Integrity: Be straightforward and honest.
• Objectivity: Avoid bias or undue influence.
11. Common Ethical Threats
• Self-interest threat: Financial interests in the client (e.g., fee dependence).
• Self-review threat: Auditing your own work (e.g., preparing financial statements and
auditing them).
• Familiarity threat: Close relationship with the client leads to lack of skepticism.
• Intimidation threat: Pressure from management or external parties.
• Safeguards: Independent review, rotation of audit staff, and quality control
procedures.
12. Corporate Governance
• Audit Committee: Ensures integrity of financial reporting and independence of the
audit.
• Internal Controls: Ensure the reliability of financial reporting, compliance with laws,
and effective operations.
13. Key ISAs to Remember
• ISA 315: Identifying and assessing risks of material misstatement.
• ISA 330: Responding to assessed risks.
• ISA 500: Audit evidence.
• ISA 700: Forming an opinion and reporting on financial statements.
