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ACCA Audit and Assurance > 1: Introduction to Audit > Flashcards

1: Introduction to Audit Flashcards

1
Q

What is an External audit?

A
  • An external audit is when an independent qualified person examines and checks the financial statements.
  • The auditor will then prepare a report to present to the shareholders.
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2
Q

What do we mean by someone who is independant?

A

Free from bias

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3
Q

What do we mean by someone who is qualified?

A

Accountant (ACCA or ACA)

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4
Q

What is the acronym for the elements to an assurance engagement?

A

CREST

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5
Q

What are the elements to an assurance engagement?

A 
Criteria
Report
Evidence
Subject matter
Three separate parties
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6
Q

Who are the three parties to an assurance engagement?

A
  • The intended user / shareholder
  • The responsible party / managers/directors
  • The practitioner (one who provided the opinion)
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7
Q

What do we mean by the subject matter?

A

The financial statements

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8
Q

What do we mean by criteria?

A

The accounting standards

  • IFRS
  • UK GAAP
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9
Q

What do we mean by evidence?

A

The procedures followed.

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10
Q

What do we mean by the report?

A

The opinion given by the practitioner on whether the financial statements are true and fair

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11
Q

What is the objective of an audit? (3)

A

For the auditor to express an opinion on whether the financial statements…

  • Show a true and fair view
  • Have been prepared in accordance with specific legislation
  • Materially correct
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12
Q

What do we mean by true?

A

Accurate

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13
Q

What do we mean by fair?

A

Unbiased

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14
Q

Do the accounting standards have to be complied with?

A

No, but non-compliance has to be stated and explained that this was necessary in order to show a true and fair view.

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15
Q

What is materiality?

A

This is an error or misstatement that will influence the users decision.

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16
Q

What are the benchmarks for materiality?

A

Revenue - 0.5%
PBT - 5%
Net assets - 1%

This is a range but the values above are the ones we use when calculating materiality.

17
Q

Why do we have an audit? (2)

A
  • To give the user the confidence in the financial statements.
  • Reduce the risk of fraud or error.
18
Q

Does the audit give a 100% guarantee of accuracy and lack of fraud?

A

No but gives reasonable assurance

19
Q

What do we mean by accountability? (2)

A
  • This is where people in positions of power can be held to account for their actions
  • They can be compelled to explain their decisions and can be criticised or punished if they have abused their position.
20
Q

What do we mean by stewardship? (2)

A
  • Stewardship is the responsibility to take good care of resources.
  • A steward is a person entrusted with management of another person’s property.
21
Q

What do we mean by agency?

A

-When one party, the principle, employs another party, the agent, to perform a task on their behalf.

E.g the directors act on behalf of the shareholders.

22
Q

What type of assurance does an external audit give?

A

High level, positive assurance, Reasonable assurance

23
Q

What type of assurance does an internal audit give?

A

Moderate, negative assurance, limited assurance

24
Q

What type of confidence does an external audit give?

A

High

25
Q

What type of confidence does an internal audit give?

A

Moderate

26
Q

What type of opinion does an external audit give?

A

In our opinion the financial statements shows a true and fair view

27
Q

What type of opinion does an internal audit give?

A

In our opinion nothing has come to our attention

28
Q

What type of scope does an external audit give?

A

Scope of work governed by the law (ISA’s, ethics)

29
Q

What type of scope does an internal audit give?

A

Scope of work decided by parties involved (ethics)

30
Q

Who does an external audit report to?

A

The members

31
Q

Who does an internal audit report to?

A

Report to the party who engaged

32
Q

Give an example of an external audit

A

Statutory

33
Q

Give an example of an internal audit

A
  • Reviews
  • Cash flows
  • Business plans
34
Q

What are four false expectations of an audit represented by expectations gap?

A
  • 100% of transactions are tested
  • Responsible for identifying fraud or error
  • Auditors prepare financial statements
  • Make sure accounts are correct
35
Q

Correct these false expectations below

  • 100% of transactions are tested
  • Responsible for identifying fraud or error
  • Auditors prepare financial statements
  • Make sure accounts are correct
A
  • Only sample is tested
  • Responsible for identifying material fraud or error
  • Review them (directors prepare)
  • Check accounts are materially correct
36
Q

What are some benefits of an audit?

A
  • Independent confirmation
  • Assurance of compliance with accounting standards
  • Can make recommendations on the system
  • Adds credibility to financial information
  • Improves quality and reliability
37
Q

What are some disadvantages of an audit?

A
  • Expensive
  • Some estimates are subjective (goodwill)
  • Inherent controls relied upon may have limitations
  • Do not test all transactions
  • Evidence is often persuasive not conclusive
  • Representations from management may have to be relied upon.

ACCA Audit and Assurance (12 decks)

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