1 - accountability, purpose of audit, fundamental concepts

Question 1

what is accountability?

Answer 1

creating corporate legitimacy by following rules, regulations and ethical codes. more than responsibility, must be clear requirements and rules.

to create trust, monitoring process by external auditors.

Question 2

what does the corporate governance code 2018 contain?

Answer 2

independent committees: audit (set and oversee internal controls and audits), risk, nomination (who gets promoted), remuneration (pay packages).

Question 3

what is an internal control? what are some common examples?

Answer 3

internal controls are set for reducing errors and frauds

third party reviews, authorisations are common

Question 4

what is an internal auditor?

Answer 4

make sure there is no fraud or misstatements. implement internal controls and monitor them

Question 5

why are external auditors needed if internal auditors exist?

Answer 5

external auditors are needed to ensure strong accountability. Internal auditors will be subject to company cultures and values, and this could affect their trustworthiness.

Question 6

what is a whistle-blowing system?

Answer 6

element needed for accountability, most frauds caught this way.

Question 7

what characteristic is important for a monitoring process?

Answer 7

must be seen as trustworthy, otherwise has very little value.

Question 8

what is the objective of an audit of financial statements?

Answer 8

ISA 200:

to enable the auditor to express an opinion on whether the financial statements are prepared, in all material aspects, in accordance with an applicable financial reporting framework.

Question 9

what are the objectives of an auditor?

Answer 9

ISA 200:

objectives of an auditor: to obtain reasonable assurance (not absolute) about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, in order to enable them to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.

Question 10

what is an audit opinion?

Answer 10

certification that accompanies financial statements. it is based on an audit of the procedures and records used to produce the statements and delivers an opinion as to whether material misstatements exist in the financial statements.

Question 11

what are the four types of audit opinion?

Answer 11

unqualified

qualified

adverse

disclaimer of opinion

Question 12

what does an unqualified audit opinion mean?

Answer 12

auditor reports this is financial statements presumed free from material misstatements. AKA clean

Question 13

what does a qualified audit opinion mean?

Answer 13

company’s financial records have not followed GAAP in all financial transactions. Although wording is similar to unqualified, auditor provides additional paragraph including deviations from GAAP in statements and points out why auditor report is not qualified

Question 14

what does an adverse audit opinion mean?

Answer 14

most unfavourable, indicates financial records are not in accordance with GAAP and contain grossly material and pervasive misstatements. may be an indicator of fraud. will lose shareholder support.

Question 15

what is a disclaimer of opinion?

Answer 15

in event auditor is unable to complete audit report due to absence of financial records or insufficient cooperation from management. the auditor issues a disclaimer of opinion. referred to as a disclaimer of opinion. this is referred to as a scope limitation and is an indication that no opinion over the financial statements could be determined.

Question 16

what are the accounting frameworks impacting financial statements in the UK?

Answer 16

GAAP - Generally Accepted Accounting Practice

IFRS - International Financial Reporting Standards

Charities SORP - Statements of Recommended Practice

public sector accounting standards
Gov Financial Reporting Manual (FReM)
International public sector accounting standards (IPSAS)

Companies Act

Question 17

what accounting frameworks impact external audit in the UK?

Answer 17

GAAP

IFRS

Companies Act

Auditing Standards (ISAs)

Question 18

what is the auditor’s responsibility of financial statement?

Answer 18

to obtain reasonable assurance that FS are free from material misstatement.

can’t always guarantee they will detect the material misstatements, due to fraud or error

Question 19

what things should an auditor do when checking financial statements?

Answer 19

identify and assess the risk of misstatements

understand internal controls and design audit appropriately

evaluate statements are appropriate in terms of the accounting policies, reasonable in terms of estimate and check related disclosures have been made by mgment

assess company’s ability to continue as a going concern

evaluate overall presentation - structure and content of FS, disclosures, underline transaction and event fairly presented.

Question 20

why is there a demand for audit?

Answer 20

agency theory

information hypothesis

insurance hypothesis

Question 21

what is agency theory?

Answer 21

need for audit is one aspect emerging from general theory of Jensen and Meckling, 1976.

shareholders provide financial resources to a company and delegate day-to-day control to its management (agents). agents may use resources to maximise own wealth at expense of principals, enabled by info asymmetry. financial reports help overcome this asymmetry if they represent what they purport to. independent audit provides assurance on this to principals.

Question 22

what is information hypothesis?

Answer 22

audit increases value of information. more useful because it is more reliable. audit process may also improve other qualitative characteristics of info that make it useful (e.g. comparability).

Question 23

what is insurance hypothesis?

Answer 23

auditor as source of financial redress for those who have lost as result of reliance on an audit opinion given negligently. this is not protection against bad business decisions or company failure.