Things to understand in AAA:

1. New client – Initial audit engagement

ISA 300 - Planning an audit of financial statement

ISA 300 suggests that unless prohibited by law or regulation, arrangements should be made
with predecessor auditor for:

a. Inspect their working papers. To request previous auditor to request access to their
working paper for last year. It would help in understanding in

1. assessing the appropriateness of the client’ accounting policies,

2. Opening balance testing- ISA 510 (Initial Audit Engagement -opening balance).
Procedures should be performed to determine whether the opening balance
reflect the application of appropriate accounting policies and determining
whether the prior period’s closing balance have been correctly brought forward
into the current period.
3. potential related party identified in the board minutes and
4. finally most importantly if the audit report was modified and the reason if so.

b. Professional clearance that will impact the strategy of the audit:

1. Any matters brought to the attention of the client
2. Ethical consideration – most likely I need for an independent partner review in
case there is a due diligence being asked.

c. Understand the business, including regulatory and legal framework applicable to the
company. This must be fully documented and will help the team to develop an
appropriate audit strategy. This will also help in determining of the auditor expert is
required. ( add an example in the scenario).

d. Quality management
The audit firm have quality management procedures in place for use in the case of
initial engagements, for example, the involvement of another partner or senior
individual to review the overall audit strategy prior to commencing significant audit
procedures should be fully documented.
B) Audit risks – 3 marks each
ROMM - 3 marks each
Business risk- 2 marks each

Materiality
For the purpose of these briefing notes the following overall materiality level will be
used to assess the significance of identified risks and as requested this has been
based on the profitability of the Company.

Benchmarks
Using profit before tax or operating profit as suggested benchmark results in a
suggested range of $ 0.7m (5% of $14m) to $1.8m (10% of $18m). Preliminary
materiality proposed of $0.7m.

These benchmarks are only a starting point for determining materiality and
professional judgement will need to be exercised in determining the final level of
materiality level to be used during the course of the audit.

As this is a new client and therefore an initial audit engagement, due to the
increased detection risk, materiality should be set at the lower level of the range of
$0.7m.

Expert used for example valuation

The level of subjectivity which may be involved in determining the fair value
increases the risk of material misstatement . Risk is heightened as gruber may hire
an expert that is familiar to them in order to achieve a higher fair value which will
manipulate the profits for the year and therefore the objectivity of the expert used is
also a risk.

Revenue recognised on long term contract

IFRS 15 states the appropriate methods of measuring progress towards the

satisfaction of a performance obligation i.e the completion of the contract, include
output methods and input methods which:

1) Output method- are based on determining the stage of completion of the

performance obligation by reference to the value to the customer of the goods
or services being transferred to date relative to the remaining goods or services
promised under the contract

2) Input method- or on the basis of the entity’s efforts or inputs to the satisfaction
of a performance obligation (input method).
 Audit risks

O- Observation
M- materiality
A- Accouting traement
R- risk that
I- Risk that

Business risks
O- Observation
L- likelihood
I- Impact

Auditor’s expert (ISA 620)

Before work
- C – Competence – reputation, experience and qualification
- C- Capabilities – time and resources
- O- objectivity – Objectivity

After work

M- Methods
A - Assumptions
D - Data
C - conclusion
S – subsequenet event

Difficulty in measuring and reporting on social and environmental performance.

- Settings KPIs
- Quantification- complex, better use and qualitative approach
- Systems and controls- there may not be reliable and controls over the process of
relevant information
- Lack of standards- as each company might have multiplicity of reporting
packages/practices on different situation and targets change throughout the
year.
CAATS
1. Test data
Putting a dummy transaction through the system to ensure that the controls are
working and calculations are performed correctly.

2. Audit software

- Advantage
1. Independent across the data
2. Test the reliability of the client software
3. Increase the accuracy of audit tests
4. Perform audit tests more efficiency

- Disadvantage
1. Expensive and time consuming
2. Client permission and corporation
3. Potential incompatibility with client system
4. Audit team does not sufficient skills
5. Data may be lost or corrupted.

ISA 580- Written representations

It states that written representation from management should be used to support
other audit evidence and are not sufficient evidence on their own. In this situation, it
appears that the representation is the only evidence which has been sought in
regard to the likely success of the new product development which is inappropriate.

ISA 240 – Fraud

3 things must be proven to be negligent:
- A duty of care must exist
- A financial loss resulted due to negligent
- The duty of care was breached

Big data

Benefits-4
1) Quick and high standads
2) Continue to test audit procedures
3) More efficient as less billalble hours
4) and less time consuming
Drawbacks-4

1) Training of staff will still need to be done

2) There might be significant amount of estimates
3) professional judgements still need to be done
4) Data might not be completed, well- controlled

ISA 620- Relying on the work of an auditor expert

ISA 610- relying on work of internal audit of the client

ISA 402- using a service organisation

IAS 24- Related party transaction