1: Introduction to Audit

Question 1

What is an External audit?

Answer 1

• 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.

Question 2

What do we mean by someone who is independant?

Answer 2

Free from bias

Question 3

What do we mean by someone who is qualified?

Answer 3

Accountant (ACCA or ACA)

Question 4

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

Answer 4

CREST

Question 5

What are the elements to an assurance engagement?

Answer 5

Criteria
Report
Evidence
Subject matter
Three separate parties

Question 6

Who are the three parties to an assurance engagement?

Answer 6

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

Question 7

What do we mean by the subject matter?

Answer 7

The financial statements

Question 8

What do we mean by criteria?

Answer 8

The accounting standards

• IFRS
• UK GAAP

Question 9

What do we mean by evidence?

Answer 9

The procedures followed.

Question 10

What do we mean by the report?

Answer 10

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

Question 11

What is the objective of an audit? (3)

Answer 11

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

Question 12

What do we mean by true?

Answer 12

Accurate

Question 13

What do we mean by fair?

Answer 13

Unbiased

Question 14

Do the accounting standards have to be complied with?

Answer 14

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

Question 15

What is materiality?

Answer 15

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

Question 16

What are the benchmarks for materiality?

Answer 16

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

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

Question 17

Why do we have an audit? (2)

Answer 17

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

Question 18

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

Answer 18

No but gives reasonable assurance

Question 19

What do we mean by accountability? (2)

Answer 19

• 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.

Question 20

What do we mean by stewardship? (2)

Answer 20

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

Question 21

What do we mean by agency?

Answer 21

-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.

Question 22

What type of assurance does an external audit give?

Answer 22

High level, positive assurance, Reasonable assurance

Question 23

What type of assurance does an internal audit give?

Answer 23

Moderate, negative assurance, limited assurance

Question 24

What type of confidence does an external audit give?

Answer 24

High

Question 25

What type of confidence does an internal audit give?

Answer 25

Moderate

Question 26

What type of opinion does an external audit give?

Answer 26

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

Question 27

What type of opinion does an internal audit give?

Answer 27

In our opinion nothing has come to our attention

Question 28

What type of scope does an external audit give?

Answer 28

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

Question 29

What type of scope does an internal audit give?

Answer 29

Scope of work decided by parties involved (ethics)

Question 30

Who does an external audit report to?

Answer 30

The members

Question 31

Who does an internal audit report to?

Answer 31

Report to the party who engaged

Question 32

Give an example of an external audit

Answer 32

Statutory

Question 33

Give an example of an internal audit

Answer 33

- Reviews - Cash flows - Business plans

Question 34

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

Answer 34

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

Question 35

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

Answer 35

- Only sample is tested - Responsible for identifying material fraud or error - Review them (directors prepare) - Check accounts are materially correct

Question 36

What are some benefits of an audit?

Answer 36

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

Question 37

What are some disadvantages of an audit?

Answer 37

- 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.