3. Controls Flashcards
The responsibilities of the Audit Committee include…
Oversight of reporting, internal controls and risk management, internal and external audit, whistleblowing
What are the three types of business risk assessed through internal controls?
Financial, compliance and operational
What are the five elements of the internal control system?
- The control environment
- The risk assessment process
- The information systems
- Control activities
- Monitoring of controls
What is the purpose of an audit?
The ascertain the validity and reliability of information, and to assess a company’s system of risk management and internal control
What are the five elements of an assurance service?
- Three party relationship (user, preparer and scrutiniser)
- Underlying subject matter
- Criteria
- Evidence to support the opinion
- A written report
What does ‘true and fair’ mean in the context of an audit opinion?
That the financial statement is a) factual and complies with accounting standards and is b) clear, impartial and unbiased
Financial statement are considered a fair presentation is they are…
Complete, neutral and free from error
How often should the audit engagement letter be reviewed and reissued?
Reviewed every year, reissued when changes are needed
What are the 4 main limitations of external audit?
- Relies on integrity of client management
- Reporting involves judgement and subjective decisions
- Limited time taken on only a sample
- Minor errors and frauds may not be detected due to materiality thresholds
What are the 2 types of audit test?
Controls testing (ensure controls can prevent, or detect and correct, errors) and detailed testing (check for material misstatements in high risk areas)
What is audit risk?
The risk that an auditor gives an inappropriate opinion
What are the 3 elements of audit risk?
Inherent risk, control risk and detection risk
What are the two levels of inherent risk?
Financial statement level (affect the whole entity) and assertion level (specific claims in the financial statement)
What are the two conditions for audit evidence?
It must be sufficient (enough) and appropriate (reliable and relevant)
Reliability of audit evidence is greater if…
From an independent external source or subject to effective control if internal, obtained form the auditor themselves, documented (rather than verbal) or in its original form
Who is the audit report for?
The shareholders (also filed on public record)
What are the 4 opinions that an auditor can share in their report?
- An unmodified opinion (accounts are true and fair)
- A qualified opinion (isolated material misstatement)
- An adverse opinion (multiple or significant misstatements)
- A disclaimer (not enough evidence)
To whom does the auditor issue the report on control deficiences?
Privately, to those charged with governance (the board)
To whom do the internal auditors present their reports?
The audit committee
Who appoints and controls the remuneration of the internal auditors?
The audit committee
What is the purpose of internal audit?
To evaluate and improve the effectiveness of governance, risk management and control processes
What are the limitations of internal audit? (3)
- Requirement to objective and independent despite being employees
- Often have insufficient resources
- May be unwilling to disclose fraud due to fear of repercussions
What are the 10 types of internal audit?
- Value for money (economy, efficiency and effectiveness)
- IT
- Financial
- Regulatory compliance
- Fraud investigation
- Customer experience
- Operational (effectiveness of area)
- Project
- Management
- Environmental
What is materiality?
A transaction or balance is considered material if its omission or misstatement could influence the economic decisions or users
What are the two elements of misstatement to be considered when determining the materiality?
The quantity (relative size) and quality (influence over decisions)
What are the industry guidelines for estimating materiality levels?
- 1% of revenue
- 5% of total assets
- 5% of profit before tax
What is performance materiality?
The lower materiality level set to detect smaller errors that might accumulate into material misstatements
How are the accumulative smaller misstatements recorded?
On the Schedule of Unadjusted Misstatements
What are the three categories of misstatement?
- Factual misstatement
- Judgemental misstatement
- Projected misstatement
What are the two causes of misstatement?
Error and fraud
How can material errors affect the accounts?
They can cause the trial balance not to balance, or to balance but be incorrect
What is an unequal amounts entry error?
One side of the double entry is correct and one is incorrect (do not match)
What is an two debits/credits entry error?
Both accounts are entered as debit or both as credit entries
What is an entry omission error?
Only one side of the double entry is made
What is a balance calculation error?
The balance on an account is calculated incorrectly before being transferred to the trial balance
What is a balance transfer error?
The balance of an account is calculated correctly but transferred incorrectly into the trial balance
What is a balance omission error?
A balance is omitted from the trial balance completely
What is an error of omission?
A transaction is not recorded at all in the double entry system
What is an error of original entry?
Debit and credit entry are the same but both wrong
What is an error of comission?
Either the debit or credit is recorded in the wrong account (but of the right type, e.g. rates not rent payable)
What is an error of principle?
Either the debit or credit is recorded in the wrong type of account (e.g. non-current asset, not rent payable)
What is a reversal of entries error?
Debit and credit value are flipped
What are the two forms of fraud?
Removal of funds or assets and intentional misrepresentation of the financial position of the company
Who should the external auditor report suspected or identified fraud to?
The audit committee, the shareholders and possibly the relevant authority if in the public interest
Who should the external auditor report suspected or identified money laundering to?
The firms Money Laundering Reporting Officers (who will make a report to the National Crime Agency)
