Planning and Conducting the Audit of Financial Statements
What you must understand
This is the largest domain. Candidates must move confidently between risk assessment (understanding the entity, its environment and internal control), materiality (overall, performance, and clearly trivial thresholds), audit strategy and plan, response to assessed risks (substantive procedures and tests of controls), audit evidence and assertions, sampling, estimates and fair values, related parties, going concern, fraud, subsequent events, and evaluation of misstatements. Know the assertions (occurrence, completeness, accuracy, cut-off, classification, existence, rights and obligations, valuation) and how each drives procedure design.
Traps in questions
- Choosing procedures that do not address the asserted risk (e.g. testing existence when completeness is the risk).
- Setting materiality and never revisiting it as the audit progresses.
- Confusing tests of controls with substantive procedures.
- Treating going concern as a year-end step rather than an ongoing assessment.
- Forgetting professional scepticism and the risk of management override of controls.
- Mishandling uncorrected misstatements and their aggregation.
Rule of thumb
For every risk, write the chain: Risk → Assertion → Procedure → Evidence → Conclusion. If any link is missing, the answer is incomplete.
Worked example
A retailer recognises revenue on dispatch, but the risk is cut-off around year-end. The assertion is cut-off. The procedure: select despatches either side of year-end and agree to shipping documentation and revenue recognition date. The evidence: shipping records. The conclusion: whether revenue is recorded in the correct period.