AA Flashcards
Audit level of assurance
Type: Reasonable
Level: High
Opinion: Positive
Review of business plan level of assurance
Type: Limited
Level: Moderate
Opinion: Negative
Audit threshold
2/3 of the following:
- No more than 50 employees
- Revenue does not exceed £10.2m
- Gross assets do not exceed £5.1m
8 elements of audit as per ISA 500
Inspection of documentation; inspection of assets; observation; external confirmation; recalculation; reperformance; analytical procedures; inquiry
Three areas of Financial Reporting Council
- Codes and standards committee
- Conduct committee
- Supervision comittee
Potential penalties for accountants for non-compliance with money laundering legislation
Up to 14 years in prison
Procedure when onboarding new client
Check the client’s identity and hold these records for 6 years after they cease to be a client
Who do auditors report suspicions of bribery to?
National Crime Agency (NCA)
Under: Bribery Act 2010 & Proceeds of Crime Act 2002
ICAEW code of ethics - principles
Integrity Objectivity Professional competence and due care Confidentiality Professional behaviour
FRC code of ethics - threats to objectivity and independence
Self-interest Self-review Management Advocacy Familiarity Intimidation
FRC code of ethics - safeguards
Training
ICAEW central counselling service
ICAEW helpline
Quality control procedures
Quality control procedures
Planning, supervision and review
Hot and cold file reviews
Regulatory inspections
Partners involved in audit
Engagement partner Ethics partner (unless three or less partners in firm) Independent partner (if listed/PIE)
Two years rule
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
Time limits on single engagements for key audit staff - PIE and Listed
Five years in post
Can be extended to 7 years where need arises
Five years before they can be reappointed
Time limits on single engagements for key audit staff - Non-listed
Reviewed after ten years
Considered whether objective, reasonable and informed third party would conclude that independence/objectivity are compromised
Fee limits for PIE/Listed Audits
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
Fee limits for non-listed Audits
No more than 15% of firm’s fee income (ethics partner consulted between 10% and 15%)
Audit related services and approaches - other
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
Prohibited non-audit services
Internal audit - prohibited
Legal services - prohibited unless non-subjective
Recruitment - prohibited
Restructuring - generally prohibited
Fee dependence
One client regularly provides 10-15% of fee
Elements of firm’s quality control system
Leadership Ethical requirement Acceptance of engagements Human resources Engagement performance Monitoring
Hot review vs cold review
Hot review - takes place before audit opinion is formed
Cold review - takes place after assurance engagement is completed
Penalty for “knowingly/recklessly causing an audit report to include any matter that is misleading, false or deceptive in a material particular”
Fine
Steps taken when nominated by prospective client to become their auditors
- Explain to client professional duty to contact existing auditor
- Client gives written authority to existing auditor to discuss matters with prospective auditor
- Prospective auditor writes to existing auditor
- Existing auditor responds (unlawful acts, unpaid fees, differences of opinion)
Opinion shopping
Asking another assurance firm to provide an opinion on something where assurance has already been provided
Contents of engagement letter
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
Audit strategy vs audit plan
Audit strategy - overall approach to be taken in audit (materiality, team, deadlines, risks)
Audit plan - detailed document with actual procedures that will be undertaken
External sources of information regarding client
Credit reference agencies
Industry surveys and publications
HMRC Business Economic Notes
Companies House searches
Procedures for briefing audit team
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
Procedures for gaining initial information from client
Talk to people in department/area you are auditing
Read internal correspondence and board minutes
Read internal audit report
Access website and read brochures
Six areas to look for in client’s business
Entity Environment Industry Laws/regulations External factors Internal factors
Five key types of audit procedure
Analytical procedures Enquiry of management Inspection Observation Recalculation
Business risk
Risk inherent to company due to the nature of its business and the environment in which it operates
Three categories: financial; operational; compliance
Audit risk equation
Audit risk = (Inherent risk x Control risk) x Detection risk
Inherent risk
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
Inherent risk factors
Complexity
Subjectivity
Change (in something)
Management bias or fraud risk
Control risk
Risk that a misstatement is not prevented, detected or corrected by the entity’s internal controls
Detection risk
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)
Sampling risk
Possibility that opinions formed from results of sample are different than opinion formed if whole population had been examined
Non-sampling risk
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
Examples of significant risks
Property purchase/sale Acquisition/disposal of business Decision to factor receivables Potential sale of business Diversification into new sectors
Significant risk
Inherent risk assessment in upper end of spectrum (likelihood and/or impact)
Specific one off transactions
Sources of audit confidence
Controls
Tests of details
Analytical procedures
Two elements of substantive approach
Analytical procedures
Tests of details
Analytical procedures
Appropriate for large volumes of predictable transactions
e.g. profit margins, receivables days
Tests of details
Appropriate to gain information about account balances (existence and value)
e.g. inventory value, value of trade receivables
How should internal audit work be used by external auditors
Walkthrough testing
Reperforming sample of internal audit’s tests
Can lead to reduced assessment of control risk if internal audit work is satisfactory
Examples of tests on charities
Controls for collecting tins, gift aid receipts and fundraising activities
Loss of income through fraud
Recognition of all income
Consequence of getting audit opinion wrong
Sued by someone if they can demonstrate auditor owed them a duty of care (suffered loss relying on FS)
Fines and penalties from ICAEW
Items that are material regardless of size
Non-compliance with regulations
Masking a change in trends/ratios
Management compensation
Documents included in FS
What class of balances should auditors pay particular attention to when they are appointed for a new audito
Opening balances
Procedures auditors must undertake to ensure going concern principle is met
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
Adjusting events after end of year
Resolution of court case
Bankruptcy of major customer
Fresh evidence of inventory NRV
Discovery of fraud or errors
How must significant deficiencies in internal controls be reported to management
In writing
Types of audit report
Unmodified
Modified
Opinions given - FS are materially misstated
Material but not pervasive - Qualified opinion (‘true and fair except for’)
Material and pervasive - Adverse opinion (not true and fair)
Opinions given - inability to obtain sufficient and appropriate audit evidence
Material but not pervasive - Qualified opinion (‘true and fair except for’)
Material and pervasive - Disclaimer of opinion (‘do not express a opinion’)
Emphasis of matter paragraph
Used to draw users attention to particular matter in FS
Also used when there is uncertainty over future event that may affect FS
