Assumed knowledge Flashcards
what are the elements of an assurance engagement
Elements (CREST)
Criteria of subject Report Evidence (sufficient appropriate evidence) Subject matter Three parties
What is the objective of the external audit of a limited company?
The objective of the external audit of a limited company is to provide assurance on the credibility of the financial statements by reporting in “true and fair” terms.
‘true and fair’
what does true mean
to be true it must comply with acc standards and any relevant legislations
Factual and conforms with reality
includes data being correctly transferred from records to statements
‘true and fair’
what does fair mean
info is clear, impartial and unbiased
reflects the commercial substance of the transactions of the entity
what does engagement letter contain
Objective and scope of the audit
Management’s responsibilities
.
.
.
.
what is audit risk
Audit risk =
Detection risk x Risk of Material misstatement (Inherent risk x Control risk)
what does audit strategy contain
The audit strategy sets the scope, timing and direction of the audit.
scope
timing
direction
Materiality, audit risk and internal control all relate to the direction of the audit.
what does audit plan contain
audit team
materiality
performance materiality
designing audit procedures
It helps the auditors to devote appropriate attention to important areas of the financial statements
It provides assurance to the auditor that the risk of a material misstatement in the financial statements will be reduced
It helps the auditor to properly organise and manage the audit engagement, so that it is performed in an effective manner
what are the elements of ISQC- Quality control
Leadership
HR
Engagement performance (direction, supervision, review)
Monitoring
what are company law you must be aware of
Company Law Audit requirements Auditor's rights Auditor's duties Appointment Removal Resignation
what are sampling methods
Sampling Method Non Statistical haphazard selection block selection Statistical random selection systematic selection monetary unit sampling
what are some automated tools and techniques
Automated tools an techniques
Test data
Audit Software
Data analytical tools
name 2 types of audit procedures
1) Test of detail
2) substantive testing
what is test of detail
Test of control CAAT- Test Data Review / Observe / Inspect Objecting for each test something good happening to stop something bad from happening
what is substantive testing
Substantive testing Test of detail Verifying individual transactions and balances Analytical procedures CAAT- Audit Software e.g. ratios involve analysing relationships between information to identify unusual fluctuations which may indicate possible misstatement. Compare recalculate Agree
what does substantiate mean?
name the assertions for 1) transactions and events and 2) account balances
list the procedures/Tests
list the evidence sources
provide evidence to support or prove the truth of.
1) Transactions and event (SOP/L)
1 Completeness 2 Occurrence 3 Cut off 4
Accuracy 5 Presentation 6 Classification
2) Account balances (SOFP)
1 Existence 2 Rights and obligations 3
Completeness 4 Valuation/Accuracy & Allocation 5
Classification 6 Presentation
procedures: AEIOU
evidence sources (DADA3
Documents (invoices, GDNs, order forms, bank statements etc.)
Assets (which can be inspected to verify existence, and to assess value)
Directors (and other members of client’s staff, who can confirm things in written representations)
Accounting System (asset register, inventory list, cashbook, ledgers, sales day book etc.)
3rd Parties (lawyers, surveyors, bank, customers, suppliers etc., all useful independent people who can verify things in writing about the client)
when is analytical procedures mandatory
Planning stage (Preliminary analytical review – risk assessment (required by ISA 315)
Final review stage (Final analytical review (required by ISA 520)
what is substantive analytical review (voluntary)
Substantive analytical procedures
Analytical procedures are used as substantive procedures when the auditor considers that the use of analytical procedures can be more effective or efficient than tests of details in reducing the risk of material misstatements at the assertion level to an acceptably low level.
what is Final analytical review (required by ISA 520)
Analytical procedures are performed as an overall review of the financial statements at the end of the audit to assess whether they are consistent with the auditor’s understanding of the entity.
Final analytical procedures are not conducted to obtain additional substantive assurance. If irregularities are found, risk assessment should be performed again to consider any additional audit procedures are necessary.
what is preliminary analytical review i.e. risk assessment (required by ISA 315)
and What are the uses of analytical procedures during the PLANNING stage of the audit?
Preliminary analytical reviews are performed to
* obtain an understanding of the business and its environment (eg financial performance relative to prior years and relevant industry and comparison groups),
- to help assess the risk of material misstatement in order to determine the nature, timing and extent of audit procedures, ie to help the auditor develop the audit strategy and programme.
2nd Q
To identify the risks of material misstatement
To identifying unusual transactions and events
Regarding the use of the work of a specialist
is the auditor required to perform substantive procedures to verify the specialist’s assumptions and findings?
and identify what statements concerning the auditor’s use of the work of a specialist is true
The auditor is NOT required to perform substantive procedures to verify the specialist’s assumptions and findings
The auditor may choose to perform substantive procedures to verify the specialist’s findings if the specialist is related to the client, but the auditor is NOT REQUIRED to do so.
the following statements is concerning the auditor’s use of the work of a specialist is true
The specialist should understand the auditor’s use of the specialist’s findings
The client should understand the nature of the work to be performed by the specialist
The auditor should obtain an understanding of the methods and assumptions used by the specialist
In which scenario would an auditor be most likely to increase tests of controls?
When a client’s IT system is extensively integrated throughout the company’s accounting system, evidence for a substantive audit test may not be available and the auditor will need to place greater reliance on tests of internal controls related to the IT system.
