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AA > 13. Reporting On An Audit Engagement (Basics) > Flashcards

13. Reporting On An Audit Engagement (Basics) Flashcards

1
Q

Who are included in TCWG?

A

Directors
(Audit committee where existent)

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2
Q

What needs to be provided to TCWG?

A

Engagement letter

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3
Q

What will engagement letter include?

A
  1. The form which communications to those charged with governance will take
  2. The appropriate persons to whom such communications will be made
  3. An explanation that only matters that happen to come to the auditor’s attention as a result of the performance of the audit will be communicated (the auditor is not required to design procedures to identify matters of governance interest).
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4
Q

OBT: Matters to be communicated to TCWG

A
  1. Responsibilities of the auditor in relation to the financial statements audit
  2. An overview of the planned scope and timing of the audit
  3. Significant findings from the

(For listed clients, matters relating to auditor independence must also be
communicated:
– confirmation the audit team have complied with ethical requirements
– declaration of matters that may have a bearing on independence including
disclosure of fees received for non-audit services from the client
– details of safeguards applied)

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5
Q

How can the A communicate with TCWG?

A

Orally or in writing

Discussions should be documented in the working papers.

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6
Q

Which matters must be communicated to TCWG in writing?

A
  1. Independence (For listed companies only)
  2. Significant deficiencies in internal control
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7
Q

Effective communication has the following attributes:

A

Timely

Appropriate extent, form and frequency

Fulfils expectations of those charged with governance

Includes management comments where relevant

Repeats the previous year’s points, where still unresolved and relevant

Includes a disclaimer, so that third parties do not rely on the communications.

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8
Q

When would formal communication be needed with TCWG for climate risks?

A

Requires changes to:
a. policies
b. estimates
c. disclosures

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9
Q

UK additions to international standards on audit reports?

A

Generally in line with international standards

Additional guidance specific to UK

ALSO guidance from UK law
E.g.
CA: Audit report further matters
Case law: Banneman para
UKCGC

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10
Q

Implications to climate-related uncorrected errors?

A

Disclosures are not appropriate or adequate

Entity’s accounting policies are not being applied correctly.

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11
Q

Climate laws/regulations UK Cs must follow

A

CA

Task Force on Climate-related Financial Disclosures (TCFD) information

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12
Q

Can climate risks be ‘key audit matters’?

A

YES

This area of the report may be affected by:
a. Significant climate-related auditor judgments, or
b. Specific climate-related events or transactions

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13
Q

What are KAMs?

A

Key Audit Matters:

Matters that the auditor judges to have had the most significant impact on the overall audit strategy and the audit work carried out

Including risks to material misstatement

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14
Q

What must the A do with KAMs?

A
  1. Provide a description of each KAM
    Which sets out why the matter was considered to be significant, and how it was addressed in the audit
    (including explanation of the significant judgements made by the engagement team)
  2. Include a summary of their responses/key observations
  3. Explain how the scope of their work addressed each KAM
    And was influenced by applying materiality
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15
Q

Is reporting a KAM a substitute for giving a modified opinion?

A

NO

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16
Q

Are Auditors also required to report on whether the information within the directors’ report is consistent with the financial statements?

A

YES

If an inconsistency is found, the auditor will ask the directors to amend their report.

If they fail to do so, then the auditor should modify the opinion given

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17
Q

CA: Situations when the A must report by exception

A
  1. Adequate accounting records have not been kept
  2. Returns adequate for the audit have not been received from branches not visited
  3. The financial statements are not in agreement with the underlying
    records
  4. Directors’ remuneration disclosures have not been made
  5. Information and explanation necessary for the audit were not
    received
  6. Corporate governance statement has not been prepared by a listed company
  7. Material misstatements have been identified, in the directors’ report or strategic report
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18
Q

CA: Should you only report items by exception if a problem?

A

NO

Good practice to mention anyway

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19
Q

What happened in the Bannerman case?

A

Royal Bank of Scotland was entitled to rely on the published financial statements of a company for the purposes of lending the company money

20
Q

Auditor’s Report response to Bannerman?

A

An extra paragraph, stating that they do not accept responsibility to anyone other than the company and the company’s shareholders as a body

21
Q

CA: Requires listed companies to include a Corporate Governance Statement in the annual report:

What must be reported?

A
  1. By exception if no Corporate Governance Statement is included
  2. On the company’s compliance with the specific provisions of the UK Corporate Governance Code.
22
Q

Modified reports: 2 types

A
  1. Modified report with an unmodified opinion
  2. Modified report with a modified opinion
23
Q

When is a modified report with unmodified opinion used?

A

FS true and fair but A wants to communicate something to users

24
Q

Modified report with unmodified opinion: 2 types of additional paras that can be used?

A
  1. Emphasis of matter
  2. Other matter
25
Q

Modified report with unmodified opinion: Emphasis of matter para: Use

A

Used to highlight a matter included in the financial statements which has been appropriately presented or disclosed, but which is fundamental to the understanding of the users of the financial statements

26
Q

Modified report with unmodified opinion: Emphasis of matter para: Description

A

Headed up ‘Emphasis of matter’

Describes the matter and includes a reference to where disclosures can be found in the financial statements

States that the audit opinion is not modified in this respect.

27
Q

Modified report with unmodified opinion: Emphasis of matter para: Example reasons

A

Material uncertainty concerning the outcome of litigation.

Major catastrophe that has a significant impact on the entity’s financial position.

Subsequent events are discovered after the date of the auditor’s report and the auditor provides a new or amended report.

28
Q

Modified report with unmodified opinion: Emphasis of matter para: (General) location

A

Below the basis of opinion

29
Q

Modified report with unmodified opinion: Other matter para: Use

A

Used to highlight a matter not included in the financial statements.

30
Q

Modified report with unmodified opinion: Other matter para: Layout

A

Headed up ‘Other matter’

Describes the matter

31
Q

Modified report with unmodified opinion: Other matter para: Example reasons

A

The prior period financial statements were audited by the predecessor auditor

Or were not audited at all (as required by ISA 710)

32
Q

Modified report with unmodified opinion: Other matter para: (General) location

A

Directly following the opinion paragraph

33
Q

Where the auditor expects to include an emphasis of matter or other matter in the auditor’s report, should the issue should be communicated with those charged with governance?

A

YES

34
Q

Modified report with a modified opinion: 2 reasons

A
  1. Financial statements are misstated
    (the auditor disagrees with the directors
    over accounting treatment or disclosure)
  2. The auditor is unable to obtain sufficient appropriate audit evidence
    (also known as a limitation on scope)
35
Q

Modified opinions – auditor’s actions

A
  1. Ask the client to make an adjustment to the financial statements where necessary (or provide information required)
  2. Consider materiality
  3. Consider the impact on the audit opinion
36
Q

2 levels of material errors

A
  1. Material (could be by size or nature)
  2. Material and pervasive
37
Q

Material and pervasive Definition

A
  1. Not confined to particular elements of the financial statements
  2. Represents a substantial proportion of the financial statements
  3. Is fundamental to the users’ understanding.
38
Q

Modified opinion: Where is reason for it explained?

A

After the opinion
(In a ‘basis for modified opinion’ paragraph)

39
Q

Audit opinions: FS materially misstated: Material but not pervasive

A

QUALIFIED opinion

40
Q

Audit opinions: FS materially misstated: Material and pervasive

A

ADVERSE opinion

41
Q

Audit opinions: Inability to obtain sufficient appropriate audit evidence: Material but not pervasive

A

QUALIFIED opinion

42
Q

Audit opinions: Inability to obtain sufficient appropriate audit evidence: Material and pervasive

A

DISCLAIMER OF OPINION

43
Q

Qualified opinion example

A

In our opinion, except for the effects of the matter described in the basis for qualified opinion paragraph, the financial statements give a true and fair view…

44
Q

Adverse opinion example

A

In our opinion, because of the significance of the matter described in the basis for adverse opinion paragraph, the financial statements do not give a true and fair view

45
Q

Disclaimer of opinion example

A

Because of the significance of the possible impact of the uncertainties, described in the basis for disclaimer of opinion paragraph, we do not express an opinion on the financial statements…

46
Q

Some companies will prepare a complete set of financial statements on a different accounting basis, for example:
Prepared on a tax basis to accompany a tax return
Prepared using the financial reporting provisions of a regulator
Prepared on a cash basis to provide cash flow information to creditors.

What should A do?

A

The auditor’s report should include an emphasis of matter paragraph highlighting the use of the special purpose framework

47
Q

Some companies will require an audit of a specific element of the financial statements, or a single financial statement, for example:
Externally managed assets and income of a private pension plan
Net tangible assets
A balance sheet.

What should A do?

A

Before accepting: Consider whether it is
practical to carry out this work without auditing the complete financial statements.

(In some circumstances, the work required may be disproportionate to the part of the financial statements being audited.)

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