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Audit & Assurance > AA1 > Flashcards

AA1 Flashcards

1
Q

What are the five elements of an assurance engagement?

A
  • 3 Parties (A responsible party, a practicioner, a user of the report)
  • A subject matter
  • Criteria
  • Sufficient and appropriate evidence to support the conclusion
  • A written report containing the conclusion.
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2
Q

How might an assurance provider source sufficient and appropriate evidence? (AEIOU)

A

Analytical procedures
Enquiries
Inspection
Observation
Recalculation

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3
Q

What are the two overall objectives of an audit engagement?

A

To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatements, whether due to fraud or error.

To exprees an opinon on whether the FS are prepared, in all material respects, in accordance with an applicable financial reporting framework.

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4
Q

What are the audit thresholds in relation to size?

A

2/3 of the below:
- over 50 employees
- turnover exceeding £10.2m
- net assets over £5.1m

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5
Q

What aspects of a company’s nature would necessitate an audit?

A

Their articles of association require one.
Shareholder with 10% or more holding asks for one.
Public companies.
Company involved in insurance or banking.

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6
Q

Why are most subsiduary companies exempt from audits irrespective of their size?

A

When the parent company guarantees their liabilities.
(Can still be audited in group audit).`

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7
Q

What are the responsibilities of management under the Companies Act?

A
  • Safeguard the
    assets
  • Maintain the
    books and
    records of the
    company
  • Prepare the financial
    statements
  • l
    statements
    – Correct basis
    – Adequate
    accounting policies
    – Appropriate
    judgements
    – Comply with
    accounting
    standards
    Lay the financial
    statements
    before the
    shareholders at
    the AGM
  • File the financial
    statements at
    Companies
    House on time
  • s172: Duties in relation
    to sustainability
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8
Q

Define sustainability

A

Meeting the needs of the present without compromising the ability of future
generations to meet their own needs.

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9
Q

In terms of sustainability, what are impacts and dependencies?

A

Impacts relate to the way that an organisation and its operations
can affect ESG issues e.g., Human rights, worker rights, health and safety; Waste, emissions; Water/land usage, biodiversity.

By contrast, dependencies relate to the way ESG issues can also have an effect on an organisation’s ability to create and maintain value e.g., Stakeholder expectations re worker health/diversity; Climatic conditions, resource availability; Regulation.

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10
Q

What are Physical risks?

A

Risks which arise from the physical effects of climate change, such as storms,
extreme temperatures, wildfires and flooding

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11
Q

What are Transition risks?

A

Risks which relate to social and economic shifts to a low-carbon economy,
such as changes to policy, regulation, technology and markets.

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12
Q

What is Scenario analysis?

A

Scenario analysis is a process for identifying and assessing the potential
implications of a range of plausible future states under conditions of uncertainty. Scenarios
are hypothetical constructs and not designed to deliver precise outcomes or forecasts.
Instead, scenarios provide a way for organisations to consider how the future might look if
certain trends continue or certain conditions are met. In an ESG context, many organisations
are using scenario analysis to consider the impact on their organisation of different increases
in global temperatures.

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13
Q

Net zero?

A

A term used to describe the global reduction of greenhouse gas emissions so they
match methods of absorbing carbon dioxide from the atmosphere (hence net zero
emissions) by 2050 and the action required to limit temperature rise to 1.5 degrees Celsius

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14
Q

Paris agreement

A

An international treaty on climate change generally regarded as the
framework for international action towards mitigating climate change and its impacts. The
Paris Agreement set the ambition to reaching net zero via a maximum of 2 degrees Celsius
global temperature change, with the preferred goal of 1.5 degrees above pre-industrial
levels.

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15
Q

What are Stranded asset?

A

Assets that are economically stranded, having suffered from ‘unanticipated or
premature write-downs, devaluations or conversion to liabilities’ (Smith School of Enterprise and
the Environment, 2014)

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16
Q

What are the rights auditors have as per Companies Act 2006?

A
  • The right of access at all times to the company’s books and accounts.
  • The right to obtain any information necessary for the audit from any employee of the company.
  • The right to attend any general meeting of the company.
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17
Q

What are the characteristics of journals that might heighten the risk of fraud?

A
  • Relate to seldom used accounts or suspense accounts
  • Processed by individuals that do not usually do journals
  • Unusual in timing
  • Contain no description or vague references
  • Are made outside of office hours
  • Lack commercial rationale
  • Involve related parties
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18
Q

What makes up the FRC?

A

Codes and Standards
Committee (Responsible for
actuarial policy,
audit and
assurance,
corporate
governance, and
accounting and
reporting policy).

The Conduct
Committee (Responsible for
audit quality
review, corporate
reporting review,
professional
discipline,
professional
oversight, and
supervisory
inquiries).

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19
Q

Describe how the FRC promotes improvements in audit quality

A
  • Issuing audit standards (ISAs) which describe auditor reposnsibilities and approaches
  • Issuing ethical standards, which help ensure objectivity
  • Issuing practice notes such as on professional scepticism
  • The FRC monitors compliance with ISAs and ES via its Audit Quality Review Team who
    visits audit firms
  • The FRC oversees matters of misconduct and has the power to take diciplinary action
    agains auditors and firms
  • The FRC also oversees the UK code of Corporate Governance part of which outlines
    responsibilities of the Audit Comittes to oversee the external audit function
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20
Q

What is Professional scepticism?

A

An attitude that includes a questioning mind, being alert to conditions which may indicate
possible misstatement due to error or fraud, and a critical assessment of audit evidence.

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21
Q

How might Big Data technology assist auditors?

A

It allows auditors to monitor very large or complete data sets, rather than samples, on a more frequent (or conitnuous) basis, and to mine unstructured sets of data, such as email, to identify anomalies, patterns, trends and unusual realtionships for further investigation.

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22
Q

What was the Kingman review?

A

Page 24

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23
Q

What was the CMA review?

A

Page 24

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24
Q

What was the Brydon report?

A

Page 24

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25
Q

What’s the difference between IFRS S1 and IFRS S2?

A

S1 relates to sustainability disclosures and S2 relates to climate-change disclosures.

26
Q

What are the 4 categories which information should be presented under for IFRS S1 and S2?

A

Governance - how a company manages sustainability risks and opportunities.
Strategy - how they identify the impacts and implications assoicated with risks and opportunities.
Risk Management - how they assess likelihood/impact and how the conduct scenario planning.
Metrics and targets - how they identify sustainability targets and how they monitor their progress.

27
Q

Integrity

A

A professional accountant should be straightforward and honest in all professional and business relationships

28
Q

Objectivity

A

A professional accountant should not allow bias, conflict of interest or undue
influence of others to override professional or business judgements

28
Q

Professional
competence and
due care

A

A professional accountant has a continuing duty to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques. A professional accountant should act diligently and in
accordance with applicable technical and professional standards when providing
professional services

29
Q

Confidentiality

A

A professional accountant should respect the confidentiality of information
acquired as a result of professional and business relationships and should not
disclose any such information to third parties without proper and specific authority
unless there is a legal or professional right or duty to disclose.

30
Q

Professional
behaviour

A

A professional accountant should comply with relevant laws and regulations and
should avoid any action that discredits the profession

31
Q

The self-interest
threat

A

All firms face the self-interest threat, simply because the client pays the fee, and to lose a client may be painful. The auditor may be tempted to allow inappropriate accounting treatments in order to keep the client.

32
Q

The self-review
threat

A

It may be difficult for the firm to maintain its objectivity if any product or
judgement made by the firm needs to be challenged or re-evaluated at a later date.
Examples include: valuations, aggressive tax schemes, carrying out accounting work.

33
Q

The management
threat

A

A management threat arises when the audit firm undertakes work that involves
making judgments and taking decisions, which are the responsibility of
management

34
Q

The advocacy
threat

A

The advocacy threat occurs where the professional adopts a stance arguing for or
against the client’s point of view, rather than taking a balanced (objective) position.

35
Q

The familiarity
threat

A

This recognises that, if the professional gets to know the client too well, objectivity
may be threatened because the auditor becomes too trusting of the client and
professional scepticism is impaired

36
Q

The intimidation
threat

A

This threat may range from bullying behaviour of a dominant personality who
insists on getting his (or her) own way to threatening the auditor with removal if a
qualified auditor’s report is produced, therefore influencing the auditor’s
judgement

37
Q

FRC ETHICAL STANDARD

A

Page 32-36.

38
Q

What are the 7 sections of the FRC Ethical Standard?

A

PART A
Overarching Principles and Supporting Ethical Provisions
PART B
Section 1 General Requirements and Guidance
Section 2 Financial, Business, Employment and Personal Relationships
Section 3 Long Association with the Audit Engagement
Section 4 Fees, Remuneration and Evaluation Policies, Litigation, Gifts and Hospitality
Section 5 Non-Audit/Additional Services
Section 6 Provisions Available for Small Entities

38
Q

What makes an informed management?

A

The client must have the genuine opportunity to decide between alternative courses of action.
There should be a member of management designated to receive the results of non-audit services and make necessary judgments and decisions.
That member must have the capability to make independent judgments and decisions on the basis of the information provided.

39
Q

What are the different types of systems that can be used to ensure quality in an audit firm?

A

Internal systems (technical team checks quality sytems and procedures in place to ensure work is to a sufficiently high standard).
External systems (Listed company audit files are reviewed periodically by an Audit Quality Review Team (AQRT) within the FRC; regulatory reviews of non-listed audits also carried out periodically.

In case of external - audit failures may result in disciplinary action
being taken against the firm. This can lead to
fines or, possibly, suspension of the firm’s
authorisation to carry out audits

39
Q

The system of quality maangement at a firm level, as outlined in ISQM 1, addresses which eight key elements?

A

(1) Risk assessment
(2) Governance and leadership
(3) Ethical requirements
(4) Continuance and acceptance
(5) Engagement performance (substantial cross over with ISA 220)
(6) Resources
(7) Information and communication
(8) Monitoring and remediation process

40
Q

What should be considered before accepting or continuing a client?

A
  • Ascertain the level of risk attached to the client.
  • Assess the integrity of the client. The auditor will not want to be
    associated with companies with a poor reputation or who have going concern issues.
  • Performing an identity check for money laundering purposes.
  • Ascertain whether the firm has adequate resources to perform the work.
  • Ascertain whether the firm has the necessary technical competence to perform the work.
  • Ensure that the firm is independent of the client.
  • Obtain professional clearance from the outgoing auditors.
  • Discuss and agree the terms of engagement (in the engagement letter).
41
Q

In terms of quality management of an audit engagement, what does DSR relate to?

A

Direction
Supervision
Review

42
Q

What does Direction relate to in terms of quality management of an audit engagement?

A

Engagement should be directed in accordance with the overall strategy. Also team members need to know:what work they will be doing, the nature of the business, any relevant risks, potential problem areas, and a detailed approach to the engagement.

42
Q

What does Supervision relate to in terms of quality management of an audit engagement?

A

Supervision includes tracking progress, monitoring adherence to the audit plan, and ensuring appropriate handling of any matters which may arise.

43
Q

What does Review relate to in terms of quality management of an audit engagement?

A

Other more senior staff will review to consider whether:
Work has been performed in accordance with professional standards and regulatory and legal requirements.
Significant matters have been raised for further consideration.
Appropriate consultations have taken place and the resulting conclusions have been documented and implemented.
The objectives of the engagement procedures have been achieved.
The work performed supports the conclusions reached and is appropriately documented.
The evidence obtained is sufficient and appropriate to support the report.
There is a need to revise the nature, timing and extent of work performed.

44
Q

Whn would you use a hot file review vs a cpld file review

A

COmparison summary page 44-45.

45
Q

What is the Reperformance Standard?

A

ISA 230 (UK) Audit Documentation requires that audit documentation should contain what would be necessary to provide an experienced auditor, with no previous connection to the audit, with an understanding of the nature, timing and
extent of audit procedures, the results of audit procedures, and the audit evidence obtained, and significant matters arising during the audit and conclusions reached thereon.

i.e. your documentation should be clear informative enough for someone of the same skill-level to recreate your work and come to the same conclusions.

46
Q

UK Corporate Governance Code requirements

A

See Page 46.

47
Q

What are the ethical implications of ‘lowballing’?

(Lowballing is the name given to the practice of charging less than the ‘market rate’ for the audit).

A

The ICAEW Code of Ethics states that a firm may quote any fee it considers acceptable.
In other words, the practice of lowballing is not unethical in itself.
However, ethical safeguards should be considered as lowballing does increase the
self-interest threat of not being able to complete the audit to the appropriate standards
in a commercial way.

48
Q

What should be considered when calculating an audit fee?

A
  • The seniority and professional experience of the persons necessarily engaged on the work
  • The time expended by each
  • The degree of risk and responsibility which the work entails
  • The nature of the client’s business, the complexity of its operation and the work to be performed
  • The priority and importance of the work to the client
  • Together with any expenses properly incurred
49
Q

Professional clearance

A

Diagram is on Page 50.

50
Q

How would one assess whether the directors/management of
the company appear to have integrity?

A

By looking at the accounting policies of the company,
qualifications of the finance director, obtaining references
from bankers or solicitors, or the previous auditors.

51
Q

How would one assess whether the company has a good
financial record?

A

By looking at recent and projected financial performance.

52
Q

How would one assess whether the company appears to have
good internal control or, at minimum, a good control environment?

A

The existence of an internal audit department, or assessed
through inquiries of management.

53
Q

How would one assess whether the company has unusual
transactions or a complex structure?

A

This can be assessed by reviewing published financial
statements and publicly available information at Companies
House.

54
Q

What are basics of understanding an entity?

A
  • Who they are
  • What they do
  • How they do it
  • The integrity and competence of their staff
  • Whether there are any special circumstances (like specific laws and regulations) which govern their business
55
Q

What are the benefits of understanding a client’s business properly?

A

You will:
- Be able to assess the skills and competence which the audit team needs
- Be able to plan your audit work so that it is appropriate and efficient
- Be able to assess what controls have been put in place by the client.
- Be able to assess any significant risks which need special attention
- Be able to perform analytical procedures
- Comply with professional requirements

56
Q

When an auditor finds out their client has outsourced, what are the main requirements?

A
  • Obtain an understanding of the services provided by a service organisation, including internal control (specifically: the nature of the services provided by the service organization; the nature and materiality of the transactions processed; the degree of interaction between the activities of the service organization and those of the company; the nature of the relationship between the user entity and the service organization, including the relevant contractual terms).
  • Consider access to sources of evidence
  • Assess the risks arising
57
Q

Identify key risks with outsourcing a payroll function

A
  • Loss of data or data protection issues
  • Incorrect calculation of wages/taxes and late payments leading to fines
  • Reputational damage
  • Increased cost
  • Risk of fraud

Audit & Assurance (3 decks)

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