Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Audit & Assurance > AA2 > Flashcards

AA2 Flashcards

1
Q

What is Financial risk?

A

Financial risks are the risks arising from the financial activities or financial consequences of an
operation, for example, cash flow issues or overtrading

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is Operational risk?

A

Operational risks are the risks arising with regard to operations, for example, the risk that a major
supplier will be lost and the company will be unable to operate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is Compliance risk?

A

Compliance risk is the risk that arises from non-compliance with laws and regulations that surround
the business, for example a restaurant failing to comply with food hygiene regulations might face
fines, enforced closure, legal action from customers and so on

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is Inherent risk?

A

A factor that increases the susceptibility of an assertion to misstatement that could be material, either individually or
when aggregated with other misstatements.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is Control risk?

A

The risk that a misstatement will not be prevented, or detected and corrected, on a timely basis by the entity’s internal contro

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is Detection risk?

A

The risk that the procedures
performed by the auditor to reduce audit risk to an acceptably
low level will not detect a misstatement that exists.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is Audit risk?

A

The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What can contribute to Inherent risk?

A

Complexity
Subjectivity
Change
Uncertainty
Susceptibility of bias or fraud
Spectrum of inherent risks (how likely and how material)

(P69 for more detail)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What factors into Control risk?

A

Indirect controls
(control environment, entity’s risk assessment process, entities process to monitor internal controls)

Direct controls
(Information system and communication + control activities such as: authorisation, reconciliation, segregation of duties, and physical controls)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What contributes to Detection risk

A

Sampling risk
Non sampling risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is Sampling risk?

A

A risk that a material
misstatement will not be discovered due to the fact that the auditor does not sample 100% of transactions.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are non-sampling risks (in regards to detection risk)?

A

Risk that MM not detected due to: recent appointment, rush job, poor approach, lack objectivity & professional scepticism

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is classified as Significant risk?

A

An audit risk is deemed to be significant when it plots ‘high’ on the spectrum of risk discussed above, ie it is likely to have high likelihood and/or materiality. The auditor is required to undertake evaluation of controls in respect of significant risk areas.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is Scalability?

A

This is a concept introduced by ISA 315 revised which states that all requirements of an ISA should be implemented regardless of the size of client or how complex or not they are.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What do the auditors need to communicate to the client prior to the audit beginning?

A

Their responsibilities.
Planned scope and timing of the audit.
Their declared independence and the safeguards put in place to eliminate threats.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What do the auditors need to communicate to the client after the audit?

A

Any significant findings.
Any issues regarding compliance with the UK Corporate Governance Code.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What constitutes a significant finding in the audit?

A
  • Written representations the auditor is requesting.
  • The auditor’s views about significant qualitative aspects of the entity’s accounting practices, including accounting policies, accounting estimates and financial statement disclosures.
  • Significant difficulties, if any, encountered during the audit.
  • Significant matters, if any, arising from the audit that were discussed with management .
  • Other matters, if any, arising from the audit that, in the auditor’s professional judgement, are significant to the oversight of the financial reporting process.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is a management letter?

A

Significant deficiencies are communicated in writing to those charged with governance. Written communication shall include a description of the deficiencies and their potential effects of the deficiency.

This will take into account, the likelihood of the deficiencies leading to material misstatements, the susceptibility to loss/fraud, the volume of activity exposed to the deficiency, and the frequency of the deficiency.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is an unmodified opinion?

A

The auditor is satisfied that the evidence obtained is sufficient and
appropriate and supports the view presented in the financial statements prepared by the company’s management.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is an modified opinion?

A

The auditor is either not satisfied with the sufficiency or appropriateness of the evidence that has been obtained, compared with what could reasonably be expected, or has issues with the content of the financial statements. Note that a modified opinion
automatically results in a modified auditor’s report.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Main components of an auditor’s report
CRUCIAL

A

Page 111-112

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What type of opinion is given when when there is a material, yet not pervasive, issue?

A

A qualified opinion

“Except for ……………….. the financial statements do show a
true and fair view.”

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

If there is a misstatement that is material and pervasive what opinion is made?

A

Adverse opinion

“The financial statements do not show a true and fair view due
to………………”

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

If there is an inability to obtain sufficient and appropriate evidence which has a material and pervasive impact, what opinion is made?

A

Disclaimer opinion

“We are unable to express an opinion as to whether the financial statements show a true and fair view due to……”

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What is the strict methodical approach you should follow when approaching an auditor’s report question?

A
  • Identify the ‘issue’ (misstatement or lack of sufficient, appropriate evidence).
  • Conclude and justify whether the misstatement/possible misstatement is material.
  • Conclude and justify whether it is pervasive (or is it just isolated to a few balances e.g., a misclassification).
  • Conclude on impact on audit opinion.
  • Conclude on any further impacts on the auditor’s report (does the issue need an emphasis of matter or a MURGC or to be reported by exception?
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Where there is an unmodified audit opinion but a modified audit report, what is suitbale to include?

A

An ‘emphasis of matter’ paragraph.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What is an emphasis of matter paragraph?

A

An ‘emphasis of matter’ paragraph where the auditor considers it necessary to draw users’ attention to a matter presented or disclosed adequately in the financial statements that are of such importance that they are fundamental to users’ understanding of the financial statements. It should be included immediately after the opinion on the FS paragraph. Stating ‘Without qualifying our opinion we draw your attention to…………..’

E.g., to emphasise the disclosure note that the company is not a going concern OR to emphasis a disclosure note surrounding unquantifiable litigation facing the company.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

The Auditor’s Responsibilities Relating to Other Information in
Documents Containing Audited Financial Statements.

A

See Page 115

29
Q

What does a planned audit need to be?

A

Efficient and effective

30
Q

What’s the difference between audit strategy and audit plan?

A

Audit strategy: The formulation of the general strategy for the audit, which considers materiality, risk, audit approach, experts, timing, team, budgets and the deadlines of the audit and guides the development of the audit plan.

Audit plan: An audit plan is more detailed than the strategy and sets out the specific nature, timing and extent of the audit procedures to be performed by the engagement team members in order to obtain sufficient and appropriate evidence.

31
Q

Define Materiality

A

Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.

32
Q

What are some examples of matters that are material by nature?

A
  • Misstatements which affect compliance with regulatory requirements
  • Misstatements which impact on debt covenants
  • Misstatements which obscure a change in earnings or affect ratios used to evaluate the entity
  • Misstatements which affect management compensation
  • Fraud
  • Director and related party payments.
33
Q

What is double materiality?

A

Double materiality is a concept which considers not only the sustainability issues that might create financial risks for the company (financial materiality), but also those sustainability issues where a company’s activities materially impact on people and the environment (impact materiality).

34
Q

What are the benefits of analytical procedures at the planning stage?

A
  • Allows auditor to identify risk areas/material
    areas requiring further work.
  • Identifies items which look odd in relation to accounts as a whole/issues for further consideration.
  • May highlight errors not identified by detailed testing
  • Uses information outside of the accounting records which the preparer may have less scope over (ie budgets).
  • Assists in understanding client’s business.
35
Q

What are the limitations of analytical procedures at the planning stage?

A
  • A good knowledge of the business is required to understand results.
  • Consistency of results may conceal a material error.
  • There may be a tendency to carry out procedures mechanically, without appropriate professional scepticism.
  • Requires an experienced member of staff to be done properly.
  • Reliable data may not be available.
36
Q

KEY RATIOS

A

Page 56 -57.

37
Q

How might Audit Data Analytics be used in an audit?

A

As the volume of data both structured (easily interpreted) and unstructured (photos) produced by client’s increases auditors are developing methods to capture and mine all the information to identify patterns, correlations, anomalies, red flags and deviations from expected outcomes perhaps giving insight into risks of misstatement.

For example a flurry of angry customer emails may indicate a potential product recall leading to implications on the existing stock in the financial statements, provisions for claims and refunds, and potentially overstated receivables!

38
Q

How much can a xompany be fined for failure to prevent a cyber attack?

A

£500,000

39
Q

What are the key challenges and recommendations relating to cyber attacks?

A

Communication is a key barrier - ICAEW reccommend Organisations should appoint a Chief Information Security Officer to translate cyber security language making it more accessible.

Responsibility and accountability (issue/risk can go unmanaged if no one is responsible for security) - Organisations are increasingly employing information security functions (either in-house or outsourced) tasked with protecting the organisation.

Board level accountability - Boards should regularly consider cyber security risk and ensure awareness of such is embedded in day-to-day operations

Lack of knowledge (amongst NEDS and Audit committee)- Ensuring a diverse mix of NEDs and regular training and provision of expertise should be made available if they require it (so they can hold the board to account).

40
Q

What is Business continuity planning?

A

Measures to ensure continuation of the business should a major IT failure occur (scenario planning).

41
Q

What are system access controls?

A

Including prevention and detection of information systems from unauthorised activities.

42
Q

What is physical security?

A

Prevention of theft of data and hardware.

42
Q

What is systems development and maintenance?

A

Ensuring systems are up to date and protected.

43
Q

What is compliance? (in terms of cyber security)

A

Meeting legal requirements ie data protection.

44
Q

What is security policy?

A

A written document setting out organisations approach to information security.

45
Q

What is asset classification and control?

A

Information is an asset, it should be recognised and provided with an ‘owner’ who is accountable and responsible for it.

46
Q

What is personnel security?

A

Including employment of trustworthy staff and training of staff to ensure they know the companies IT policies.

47
Q

According to ISA 330, ‘the auditor shall design and perform further audit procedures …..’

A

‘Whose nature, timing and extent are based on and in response to the assessed risks of material misstatement at the assertion level’

48
Q

What are sources of audit confidence?

A

Internal controls
Substantive procedures
Tests of details
Analytial procedures

49
Q

What must an auditor do to be able to rely on client controls?

A
  • Test the control.
  • In doing so, obtain evidence that the control is effective, and obtain evidence that the control was effective throughout the period under review.
  • Be mindful of the nature of the control and the risk it is seeking to mitigate (for instance, a higher sample size might be used on a control that is frequently used and failure of which could cause substantial misstatement.
50
Q

What is the difference between a walkthrough and a test of controls.

A

In practice, a test of controls might be the same process as a walkthrough
test, but it is done on more than one transaction (whereas a walkthrough is done on one transaction,
just to prove the system operates as the auditors were told it did).

51
Q

What items must auditors perform substantive tests on regardless of the strngth of the contol system?

A

Material items

52
Q

How do the results of a test of controls impact the scale of substantive testing?

A
  • If controls were expected to operate effectively, and testing proves that they did, substantive testing can be reduced.
  • If controls were expected to operate effectively, and testing proves that they did NOT, additional substantive testing may have to be done.
  • If controls are not tested at all, enough substantive testing much be done to reduce the overall audit risk to an acceptable level.
53
Q

View benefitsof data analytics

A

Page 88

54
Q

Designing audit procedures

A

Page 92 - 94.

55
Q

When might you use the work of internal audit?

A

At planning, you might use their identification and assessment of risk and documentation of internal controls.

You may also use internal control tests and walkthroughs which they have conducted in the interim period.

56
Q

What is direct assistance and is it permitted?

A

Requests made to the internal auditor to conduct specific substantive procedures are prohibited (by ISA 610) where it relates to material areas and requires subjective judgement.

57
Q

What three things are crucial for to the assessment of the internal audit function when determining if work is adequate for the purposes of the external audit?

A

Their objectivity.
Their competence.
Whether they have a systematic and disciplined approach.

58
Q

When mght you require the work of an expert?

A
  • Valuations of complex financial instruments and certain types of assets
  • Actuarial calculations of insurance or employee benefit liabilities
  • Estimation of oil and gas reserves
  • Valuation of environmental liabilities
  • Interpretations of contracts, laws and regulations
  • Analysis of complex or unusual tax compliance issues
59
Q

What’s the difference between an auditor’s expert and a management’s expert?

A

AE: An individual or organisation possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence.

ME: An individual or organisation possessing expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the financial statements.

60
Q

What might influence an auditor’s decision to rely on the work of management’s expert?

A
  • The nature, scope and objectives of the management’s expert’s work
  • Whether the management’s expert is employed by the entity, or is a party engaged by it to provide relevant services
  • The extent to which management can exercise control or influence over the work of the management’s expert
  • The management’s expert’s competence and capabilities
  • Whether the management’s expert is subject to technical performance standards or other professional or industry requirements
61
Q

Group Audit

A

Diagram Page 97.

62
Q

What is a Management’s Point Estimate?

A

Amounts recognised by management for an estimate in the financial statements

63
Q

What is an Auditor’s Point Estimate?

A

Amounts developed by the auditor for assessing management’s point estimate

64
Q

What is Estimation Uncertainty?

A

The susceptibility of an estimate to error due to lack of precision

65
Q

What are the inherent risk attached to estimates?

A
  • Level of estimation uncertainty
  • Complexity
  • Subjectivity
  • Motives to understate or overstate
  • Impact on the financial statements leading to bias (such as a bonus based on profits)
  • Changing approach to one giving a more favourable result
66
Q

What are the control risk attached to estimates?

A
  • Methods used to establish the estimate
  • Reliability of data used to create the estimate
  • Who calculated the estimate, are they objective?
  • Were experts used, are they credible?
  • Existence of segregation of duties
  • Existence of change controls to methodologies
67
Q

What are the processes for auditing estimates?

A
  • Test the controls
  • Consider subsequent events
  • Consider historical accuracy
  • Consider compliance with the
    relevant accounting standard
  • Be sceptical
  • Verification of data used by
    management
  • Managements expert
  • Create an auditor’s point
    estimate
  • Ensure related disclosure are
    adequate
  • Inclusion in written
    representation letter

Audit & Assurance (3 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions