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Audit and Assurance > AA > Flashcards

AA Flashcards

1
Q

Audit level of assurance

A

Type: Reasonable
Level: High
Opinion: Positive

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2
Q

Review of business plan level of assurance

A

Type: Limited
Level: Moderate
Opinion: Negative

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3
Q

Audit threshold

A

2/3 of the following:

  • No more than 50 employees
  • Revenue does not exceed £10.2m
  • Gross assets do not exceed £5.1m
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4
Q

8 elements of audit as per ISA 500

A

Inspection of documentation; inspection of assets; observation; external confirmation; recalculation; reperformance; analytical procedures; inquiry

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5
Q

Three areas of Financial Reporting Council

A
  • Codes and standards committee
  • Conduct committee
  • Supervision comittee
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6
Q

Potential penalties for accountants for non-compliance with money laundering legislation

A

Up to 14 years in prison

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7
Q

Procedure when onboarding new client

A

Check the client’s identity and hold these records for 6 years after they cease to be a client

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8
Q

Who do auditors report suspicions of bribery to?

A

National Crime Agency (NCA)

Under: Bribery Act 2010 & Proceeds of Crime Act 2002

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9
Q

ICAEW code of ethics - principles

A 
Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behaviour
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10
Q

FRC code of ethics - threats to objectivity and independence

A 
Self-interest
Self-review
Management
Advocacy
Familiarity 
Intimidation
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11
Q

FRC code of ethics - safeguards

A

Training
ICAEW central counselling service
ICAEW helpline
Quality control procedures

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12
Q

Quality control procedures

A

Planning, supervision and review
Hot and cold file reviews
Regulatory inspections

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13
Q

Partners involved in audit

A 
Engagement partner
Ethics partner (unless three or less partners in firm)
Independent partner (if listed/PIE)
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14
Q

Two years rule

A

Senior employee of client joins audit firm –> cannot participate in audit for two years
Audit partner appointed as senior employee at audit firm within two years of auditing firm –> firm must resign as auditors

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15
Q

Time limits on single engagements for key audit staff - PIE and Listed

A

Five years in post
Can be extended to 7 years where need arises
Five years before they can be reappointed

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16
Q

Time limits on single engagements for key audit staff - Non-listed

A

Reviewed after ten years
Considered whether objective, reasonable and informed third party would conclude that independence/objectivity are compromised

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17
Q

Fee limits for PIE/Listed Audits

A

No more than 10% of firm’s fee income (ethics partner consulted between 5% and 10%)
Non-audit services total must be no more than 70% of average audit fee income for last 3 years

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18
Q

Fee limits for non-listed Audits

A

No more than 15% of firm’s fee income (ethics partner consulted between 10% and 15%)

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19
Q

Audit related services and approaches - other

A

IT services - not allowed if large impact on accounting system and/or FS production
Valuation - not allowed if subjective and/or material
Tax services - allowed if firm is not advocate in court over material issue
Corporate finance - allowed with safeguards

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20
Q

Prohibited non-audit services

A

Internal audit - prohibited
Legal services - prohibited unless non-subjective
Recruitment - prohibited
Restructuring - generally prohibited

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21
Q

Fee dependence

A

One client regularly provides 10-15% of fee

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22
Q

Elements of firm’s quality control system

A 
Leadership
Ethical requirement
Acceptance of engagements
Human resources
Engagement performance
Monitoring
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23
Q

Hot review vs cold review

A

Hot review - takes place before audit opinion is formed

Cold review - takes place after assurance engagement is completed

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24
Q

Penalty for “knowingly/recklessly causing an audit report to include any matter that is misleading, false or deceptive in a material particular”

A

Fine

25
Q

Steps taken when nominated by prospective client to become their auditors

A
  1. Explain to client professional duty to contact existing auditor
  2. Client gives written authority to existing auditor to discuss matters with prospective auditor
  3. Prospective auditor writes to existing auditor
  4. Existing auditor responds (unlawful acts, unpaid fees, differences of opinion)
26
Q

Opinion shopping

A

Asking another assurance firm to provide an opinion on something where assurance has already been provided

27
Q

Contents of engagement letter

A 
Objectives and scope of audit
Management's responsibility for FS
Form that reports will take
Some material misstatement may remain undiscovered
Unrestricted access to records
28
Q

Audit strategy vs audit plan

A

Audit strategy - overall approach to be taken in audit (materiality, team, deadlines, risks)
Audit plan - detailed document with actual procedures that will be undertaken

29
Q

External sources of information regarding client

A

Credit reference agencies
Industry surveys and publications
HMRC Business Economic Notes
Companies House searches

30
Q

Procedures for briefing audit team

A

Read: last year’s file; permanent file; correspondence file; tax file
Talk to: audit partner; audit manager; tax contactl last year’s senior; firm specialist

31
Q

Procedures for gaining initial information from client

A

Talk to people in department/area you are auditing
Read internal correspondence and board minutes
Read internal audit report
Access website and read brochures

32
Q

Six areas to look for in client’s business

A 
Entity
Environment
Industry
Laws/regulations
External factors
Internal factors
33
Q

Five key types of audit procedure

A 
Analytical procedures
Enquiry of management
Inspection
Observation
Recalculation
34
Q

Business risk

A

Risk inherent to company due to the nature of its business and the environment in which it operates
Three categories: financial; operational; compliance

35
Q

Audit risk equation

A

Audit risk = (Inherent risk x Control risk) x Detection risk

36
Q

Inherent risk

A

Susceptibility of assertion about a transaction to a misstatement that could be material
i.e. how likely it is that a certain balance will be wrong –> how likely this will lead to FS being materially misstated

37
Q

Inherent risk factors

A

Complexity
Subjectivity
Change (in something)
Management bias or fraud risk

38
Q

Control risk

A

Risk that a misstatement is not prevented, detected or corrected by the entity’s internal controls

39
Q

Detection risk

A

Risk that the auditor’s procedures to reduce audit risk will not detect a misstatement that is material (or material when aggregated with other misstatements)

40
Q

Sampling risk

A

Possibility that opinions formed from results of sample are different than opinion formed if whole population had been examined

41
Q

Non-sampling risk

A

Possibility of coming to wrong conclusion about FS for any reason other than sampling risk
E.g: lack of understanding of client, drawing inappropriate conclusions from samples, failure to investigate certain assets/transactions

42
Q

Examples of significant risks

A 
Property purchase/sale
Acquisition/disposal of business
Decision to factor receivables
Potential sale of business
Diversification into new sectors
43
Q

Significant risk

A

Inherent risk assessment in upper end of spectrum (likelihood and/or impact)
Specific one off transactions

44
Q

Sources of audit confidence

A

Controls
Tests of details
Analytical procedures

45
Q

Two elements of substantive approach

A

Analytical procedures

Tests of details

46
Q

Analytical procedures

A

Appropriate for large volumes of predictable transactions

e.g. profit margins, receivables days

47
Q

Tests of details

A

Appropriate to gain information about account balances (existence and value)
e.g. inventory value, value of trade receivables

48
Q

How should internal audit work be used by external auditors

A

Walkthrough testing
Reperforming sample of internal audit’s tests
Can lead to reduced assessment of control risk if internal audit work is satisfactory

49
Q

Examples of tests on charities

A

Controls for collecting tins, gift aid receipts and fundraising activities
Loss of income through fraud
Recognition of all income

50
Q

Consequence of getting audit opinion wrong

A

Sued by someone if they can demonstrate auditor owed them a duty of care (suffered loss relying on FS)
Fines and penalties from ICAEW

51
Q

Items that are material regardless of size

A

Non-compliance with regulations
Masking a change in trends/ratios
Management compensation
Documents included in FS

52
Q

What class of balances should auditors pay particular attention to when they are appointed for a new audito

A

Opening balances

53
Q

Procedures auditors must undertake to ensure going concern principle is met

A

Discuss with management
Test the assumptions made
Obtain written representations from management regarding how they will ensure going concern basis is appropriate
Review disclosures in FS

54
Q

Adjusting events after end of year

A

Resolution of court case
Bankruptcy of major customer
Fresh evidence of inventory NRV
Discovery of fraud or errors

55
Q

How must significant deficiencies in internal controls be reported to management

A

In writing

56
Q

Types of audit report

A

Unmodified

Modified

57
Q

Opinions given - FS are materially misstated

A

Material but not pervasive - Qualified opinion (‘true and fair except for’)
Material and pervasive - Adverse opinion (not true and fair)

58
Q

Opinions given - inability to obtain sufficient and appropriate audit evidence

A

Material but not pervasive - Qualified opinion (‘true and fair except for’)
Material and pervasive - Disclaimer of opinion (‘do not express a opinion’)

59
Q

Emphasis of matter paragraph

A

Used to draw users attention to particular matter in FS

Also used when there is uncertainty over future event that may affect FS

Audit and Assurance (1 decks)

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