1:1 The Audit Process 1 Flashcards
What are the phases of an Audit? (5)
Obtaining an Audit - firms put a lot of effect in to this
Do we want it? - Firms might not want to audit for some firms
Clearance from previous auditors - Might be a reason for a firm no to want an audit
Letter of engagement (ISA210)
The work
What is the Audit Process? (8)
Understanding the client Assessing risk exposure Evaluating internal controls - If good controls are in place then compliance tests and reliance assessment is performed. Minimal/Extensive substantive testing depending on controls Financial statement analytical review Overall audit assessment Audit opinion and report
What are the Directors and Auditors responsible for?
Directors produce the accounts
Auditors form an opinion if the accounts show a true and fair view
What is the primary objective of an audit?
To collect sufficient evidence to form the basis of the overall audit opinion
What are the ancillary objectives of an audit?
Maximise audit efficiency/minimise costs - affects audit quality
Minimise client disruption
What is Compliance testing?
If the internal control appear strong this will test whether this is the case.
This test doesn’t look at the monetary value but rather if procedures are correct and everything is done correctly
What is Substantive testing?
A detailed check of account balances to verify their validity. Ensures that each transaction is valid
Monetary value of items is the focus of attention
What are the other objectives of substantive testing? (7)
Completeness Ownership Valuation Classification Cut-off : right accounting period? Accuracy Disclosure
What is an internal control system?
All the policies and procedures adopted by the directors and management of an entity in achieving their objectives and ensuring that the business operates correctly
What are the components of an internal control system and danger signals (7) (6)
Organisation - no accountability
Duty segregation - no holidays
Physical custody - excessive wastage
Authorisation & Approval - Fictitious transactions
Arithmetic and Accounting - Incomplete transactions
Personnel - Peter Principle
Supervision/ Management
What are the components of an internal control system and characteristics? (7) (7)
Organisation - Delegation/ responsibility
Duty segregation - segregate authority
Physical custody - Security
Authorisation & Approval - Limits & audit trail
Arithmetic and Accounting - Control accounts, trial balance, reconciliation
Personnel - Competence and trustworthiness
Supervision/Management - Budget / variance analysis
How to evaluate an IC system?
Establish what the system is - ask questions
Record the system - flow charts
Check that the permanent file is correct and nothing changed
Evaluate the system - taking a sample of documents and testing if the correct controls operated
What are the types of audit evidence? (7)
Physical examination Direct confirmation Documentation Observation Enquiries of clients Re- performance Analytical procedures
What are analytical procedures?
Evaluation of financial information through analysis of plausible relationships among both financial and non-financial data.
Why has Analytical review grown in importance in recent years?
Easy to do - saves on costs while maintaining audit quality
Highlights problems areas at the planning stage
Fits into a version of the audit Risk Model
