AA

Question 1

What to do if you have a conflict of interest?

Answer 1

• consent from both competing clients

- separate teams for each client (sign confidentiality agreement)

Question 2

What safeguards to use with self-interest? “Reluctant to disagree with client”

Answer 2

If more than 5% of RECURRING fees - talk to engagement partner and have extended hot review

Question 3

What safeguards to use with management threat?

Answer 3

Agree responsibilities in Engagement letter

If listed, cannot do other accounting activities for them

Question 4

Oh companies must have an audit, regardless of size?

Answer 4

Plcs to have an audit
Shareholders that have at least 10% request one
Articles of association require an audit
Non-dormant public companies

Question 5

When is the Sarbanes-Oxley act relevant?

Answer 5

Relevant when auditing UK subsidiaries of US parent
CEOs and CFOs attest to the veracity of financial statements and effectiveness of internal controls (criminal penalties for making it falsely)

Question 6

Is lowballing unethical or illegal?

Answer 6

Cutting below the market rate is fine as long as it doesn’t compromise quality

Question 7

What is in the audit strategy?

Answer 7

Business
Systems
Materiality
Analytical Procedures
Risks
Timing + team

Question 8

What is in the audit plan (in detail)?

Answer 8

Nature of tests
Extent of tests eg sample sizes
Timing of tests

Question 9

Who are related parties?

Answer 9

Directors
Key management
AND THEIR FAMILIES

And subsidiaries

Question 10

What should auditors do re: list of related parties?

Answer 10

Identify related parties
Identify RP transactions

And use professional scepticism when reviewing written representations from directors

Question 11

How do you guesstimate that there is a RPT? What procedures can you use to check to identify them?

Answer 11

1) unusual price, credit terms (receivables: 30 days; payables - 90days), unusual processing in journals, no sensible business reason

PROCEDURES
Payroll
List of related parties (written reps from management)
Company search from companies house
GM minutes (shareholders) or BM minutes (directors)

Question 12

What are the benefits of being audited?

Answer 12

Reassurance on internal controls for management
Reassurance for stakeholders (banks - loans; shareholders)
Future-proofing (advice on management letter)
Greater level of assurance

Question 13

What is the mnemonic for quality control for audit?

Answer 13

LEADERSHIP - partner in charge of QC: competence, experience, authority
ETHICS (independence) - 2 way communication process - disclosing share holdings
ACCEPTANCE OF ENGAGEMENT - policies to ensure appropriate client is accepted
RESOURCES (human) - employs and retains capable, committed staff (good recruitment procedures). Performance evaluation etc. Allocated to right job
ENGAGEMENT PERFORMANCE
1) supervision
2) review - by grade above staff member
3) independent review - only if client listed and high risk
4) consultation
MONITORING - to confirm QC its working. Cold review (after opinion signed)

Question 14

What is the materiality size figures ?

Answer 14

Revenue 0.5-1
Assets 1-2
Profit before tax 5-10

RAP = materialism

Question 15

Why is integrity of prospective clients important ?

Answer 15

• no. Of disclosures needed for FS based on directors judgment
• reliance on controls
• an inappropriate limitation in the scope of audit work (areas that they might not want to see) or intimidation by management
• money laundering issues - legality
• higher audit risk associated with engagement (risk of forming an inappropriate opinion) –> investigation by regulators and claims from reliance on audit opinion.. Adverse impact on firms rep