1.1 - Understanding the Applicable Financial Reporting Framework

Question 1

ISA (UK) 315 requires the auditor to understand the entity’s financial reporting framework, including… (first 3 factors)

Answer 1

• accounting principles and industry-specific practices (e.g R&D for pharmaceuticals)
• revenue recognition
• accounting for financial instruments, including related credit losses

Question 2

ISA (UK) 315 requires the auditor to understand the entity’s financial reporting framework, including… (other 2 factors)

Answer 2

• foreign currency assets, liabilities and transactions
• accounting for unusual or complex transactions

Question 3

The auditor should understand the entity’s accounting policies, including any changes to them and including (first 2 factors):

Answer 3

• the methods the entity uses to recognise, measure, present and disclose significant and unusual transactions
• the effect of significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus

Question 4

The auditor should understand the entity’s accounting policies, including any changes to them and including (other 2 factors):

Answer 4

• changes in the environment (e.g accounting or tax changes) that may necessitate a change in accounting policies
• financial reporting standards and laws and regulations that are new to the entity, and when and how the entity will adopt or comply with such requirements