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Assurance Flashcards

1
Q

Audit Planning

A

The overall framework for Audit Planning is the RAMP approach:
1. Risk of Material Misstatement at the Overall Financial Statement Level (RMM at OFSL)
2. Approach
3. Materiality
4. Procedures

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2
Q

RISK (RMM at OFSL) - FRAMEWORK

A
  1. Discuss factors that increase the risk of material misstatement at the OFSL. Link to case facts.
  2. Discuss factors that decrease risk of material misstatement at the OFSL. Link to case facts.
  3. Conclude on the appropriate risk of material misstatement at the OFSL using your above
    analysis.
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3
Q

Risk factors:

A

Factors that increase risk: 5-6. Decrease: 1-2.

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4
Q

MATERIALITY - FRAMEWORK

A
  1. Discuss the users AND their objectives
  2. Discuss the different bases and benchmarks that can be used for materiality. Select the most
    applicable base for the USER. (use NIBT due to user’s concern of profitability). Use lower end becuase users sensitivty to errors in FS
  3. Normalise the base or benchmark and apply the applicable percentages from Step 2 to
    calculate materiality.
  4. Assess Performance Materiality (PM) based on RMM at the OFSL (link to OFSL as high, complexity of transactions, and errors found, set PM to low, to ensure errors not higher than materiality.).
  5. Assess Specific Materiality (SM) based on the user sensitivity to misstatement at the
    assertion level (if applicable).
  6. Assess Specific Performance Materiality (SPM) based on the RMM at the Assertion level (if
    applicable).
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5
Q

USERS & THEIR OBJECTIVES

A

Common users and their objectives are as follows:
● Bank
○ Typically concerned with covenants on debt and will be interested in the specific inputs of that covenant calculation. Profitability is almost always one of those inputs. They could also be concerned with cash flow for debt repayments and in that case, net income should be used as a proxy for cash flow.
● Management
○ Usually concerned with earnings and net income as they likely have performance incentives tied to these figures.
● Shareholders
○ Usually concerned with stock price (for pubcos) and EPS growth which when boiled down, is made up of net income growth over time.
- Owners –> assess performance of company to determine management’s bonuses, expand operations, improve governance, internal controls, maximize share price
- potential investors: assess performance, financial health, and likely ROI

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6
Q

BASES & BENCHMARKS

A

Pre-Tax Income –> NPO, most common
○ Range is 3%-7%
Assets –> users concered with asset prices and growth
○ Range is 1%-3%
Equity or Net Assets –? rarely used
○ Range is 1%-3%
Revenue –> high growth startups losing money
○ Range is 1%-3%
Expenses –> common for NPOs where expenses are scrutinized
○ Range is 1%-3%

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7
Q

Audit approach: frameowrk

A
  1. Control environment and whether there are any identified control weaknesses that could lead to a fully substantive audit approach being required.
  2. Consider Fraud risks identified.
  3. Consider any major events in the period that would lead to complexities.
  4. Consider any specific items that are common causes for concern with regards to approach
    (inventory, new systems, etc.)
  5. Define Substantive vs. Combined approaches
  6. Conclude on which approach is appropriate and on any specific items listed above.
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8
Q

Audit approach some complexities: specific approaches needed

A

opening balances (inventory)
multiple locaitons
recent acquisiitons
system implementation or conversion
going concern issues (evaluate forecasts, interim FS, evaluate reliability of assumptions of data, new info)
need for specialist
use the work of internal auditor
group audits
significant unusual transactions
transaction volume

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9
Q

CONTROL ENVIRONMENT WEAKNESSES

A

Tone at the top
Board Oversight
Existence of internal audit
staff turnover

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10
Q

RMM at OFSL

A

o Identify valid risk factor (case fact) and WHY it is a risk
 Why: should be tied to fraud or potential ERRORS/BIAS to present positive financial results

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11
Q

Factors that increase RMM at OFSL

A

● Public Company that has many different sets of users.
● Bonuses and other metrics tied to earnings that increase management bias.
● Complex, non-routine transactions (ie. acquisition, conversion to ASPE) that management and the finance team may be unfamiliar with and that significant judgement could be involved.
● Previous accounting errors that have been identified in the Financial Reporting section of the case.
● Lots of turnover in the Finance department would cause a lack of familiarity with the systems and accounting policies.
● First time audit or review increases risk as the accounting policies have never been tested before.
● Bank covenants close to being violated could incentive management to boost metrics that these covenants are tied to.
● Sustained losses increase the risk of material misstatement as management has an incentive to boost results to keep investment in the company.
-weaknesses in control environemnt –> bring up specific processees (e.g. revenue cycle, cannot detect errors or not functioning properly).
-significant market competition
- stringent regulation on the indsutry and company –> regulatory agencies will be reviewing and scrutinizing FS

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12
Q

Factors that decrease RMM at OFSL

A

reduced RMM

● Private companies with limited users reduce risk as users are less sensitive to misstatement.
● Long-time client with a history of limited errors reduces risk as management has a proven track record.
● Independent and competent Internal Audit function reduces risk as it is more likely the company has strong internal controls over financial reporting to prevent, detect, and correct material misstatement.
- sales simple and routine
internal audit

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13
Q

Weaknesses in BOD

A

number of board members (should be odd)
independence of board members from management (CEO to be on board, but others should be independent people)
objectivity of board members (relatives on board)
independence of AC (mgmt should not be part of board)
strategic direction (board should be one to set it)
policy review (only approves 1 policy, do to set tone and direction of company)
meeting frequency
ethics hotline
subcommittees

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14
Q

Types of opinion (Everything on CAS 705)

A

o Unmodified audit opinion (misstatements immaterial)
o Qualified (everything is good except for) opinion [material but not pervise]
o Adverse opinion (material and pervasive)
o Disclaimer of opinion (material and pervasive without SAAE)

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15
Q

Pervasive

A

Describes the effects of the FS misstatements or the possible effect on the FS of misstatements, if any, that are undetected due to an inability to obtain SAAE. It also meets the following criteria:
■ Not confined to specific elements, accounts or items of the financial
statements
■ If so confined, represent or could represent a substantial portion of the
financial statements
■ In relation to disclosures, they are fundamental to users’ understanding of the financial statements.

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16
Q

Unmodified audit opinion

A

 Clean opinion

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17
Q

o Qualified opinion

A

o Qualified (everything is good except for) opinion
 Material but not pervasive OR

Unable to obtain SAAE on which to base opinion, but the auditor concludes that the possible effect on the financial statements of undetected misstatements, if any, could be material but not pervasive.

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18
Q

Adverse opinion

A

(material AND pervasive)
Obtained SAAE but concludes that misstatements, individually or in aggregate are both material and pervasive to the Financial Statements.

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19
Q

o Disclaimer of opinion

A

under CAS 705 “modified opinions”

(material AND pervasive)
Unable to obtain SAAE on which to base the opinion, the auditor concludes that the potential effects on the FS could be both material and pervasive.

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20
Q

how does modification affect the audit report

A

If a modification is required to the auditor’s report, the following changes should be made:
● Audit Opinion - the heading should change
● Under Basis for Opinion - state why the modification exists.

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21
Q

audit conclusions - triggers for modification to audit report

A

opening balances
going concern issues
scope limitation

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22
Q

Key Audit Matters

A

This paragraph should be included if you need to provide further information on matters that are significant to the audit. It should adequately describe how these significant matters were addressed in the audit
1. Handbook CAS 701
2. Go through criteria for EACH element:
a) areas of high risk of MM or sig. risks identified
b) significant judgement
c) effect of significant events or transactions

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23
Q

Material Uncertainty related to Going Concern (audit report)

A

If going concern is an issue, this paragraph should describe the material uncertainty and provide further information on the FS based on this. Something that could be discussed is liquidation accounting

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24
Q

Going concern Steps

A
  1. Identify going concern is issue (look at indicators)
  2. Objective of auditor (that going concern assumption used by mgmt is appropriate)
  3. perform procedures to obtain SAAE on GC assumption
  4. Conclude on whether material uncertainty exists (when impact and liklihood is high)
    a) if material uncertainty but adequate disclosure, unmofidied with EOM
    b) if material uncertainty but no disclosure, qualified or adverse [assess for pervasive]
    c) if material uncertainty, FS not prepared on going conern basis, qualified or adverse
  5. conclude on any modifications on audit report
    Headings for OPINION & BASIS FOR OPINION will change to basis for adverse (will explain reasoning and state not presented fairly with IFRS)
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25
Q

Other Matter Paragraph

A

For any other important matters that don’t fit anywhere else (KAM, going concern (includ. in EOM), emphasis of matter)

e.g. PY FS statements not reviewed

26
Q

Emphasis of Matter Paragraph

A

Provides additional information about an issue that is appropriately presented by management but that is important for the user to understand

  1. e.g. uncertainty relating to regulatory action, going concern, subsequent events
27
Q

scope limitations

A

If applicable, if management has imposed limitations on the auditor’s ability to obtain SAAE after the
engagement has already been accepted, the practitioner should:
● Request management remove the limitation
● If not removed, the auditor shall communicate with TCWG and see if additional procedures
can be performed to obtain SAAE
● If unable to obtain SAAE, and concludes the overall effects on the FS are material but not pervasive, issue Qualified Opinion, if pervasive, issue Disclaimer of Opinion

28
Q

Responsibility of the Auditor for Assessment of Going Concern

A
  • The external auditor should obtain sufficient appropriate audit evidence about management’s use of the going concern assumption in preparation of the financial statements
  • Conclude if a material uncertainty exists that the entity cannot continue as a going concern
  • Determine the implications on the auditor’s report
  • Communicate with those charged with governance if events or conditions cast doubt on the going concern
29
Q

Procedures for going concern

A
  • If no assessment has been made by management, request one
  • Evaluate management’s plan for future actions
  • Where there is a cash flow forecast and the forecast is a significant factor:
    o Evaluate the reliability of underlying data
    o Assess adequate support for assumptions
  • Consider additional information
  • Request written representations from management regarding future plans and feasibility
30
Q

Impact on the Auditor’s Report if Material Uncertainty exists (going concern)

A
  • If adequate disclosures are made in the financial statements, unmodified option but include an emphasis of matter in the auditor’s report
  • If adequate disclosures are not made, qualified or adverse opinion
31
Q

AC Composition

A

 All members must be independent of the organization, meaning that a member does not hold or has not held a position in the organization.
 Members must be financially literate.
 Every audit committee must have at least three members.

32
Q

Client Acceptance

A
  1. Discuss Integrity of Owners, Key Management, and Those Charged with Governance.
  2. Discuss whether the engagement team has the competence and the appropriate resources to
    complete the engagement.
  3. Discuss whether the firm can comply with ethical requirements. Independence is discussed
    here.
  4. Discuss significant matters from current or previous engagement.
  5. Discuss if there will be any scope limitations, and if so, is the client willing to accept these
    scope limitations (usually only applicable in first time audits).
  6. Conclude on the results of your analysis and whether you can accept the client.
33
Q

Independence

A

Independence in MIND (rationalize ot yourself and no conflicts of interest) and APPEARANCE (would third party agree you are independent)

34
Q

Threats to independence - Self-interest (& safeguard)

A

interest in the financial or other performance of
the Company that you are performing an engagement for.
1. To mitigate, you should resign or not accept the audit.

35
Q

Threats to independence - self-review (& safeguard)

A

reviewing work that you prepared.
1. To mitigate, have different teams perform the tax and audit work to
ensure that the audit team is not reviewing tax work that they
completed.

36
Q

Threats to independence - Advocacy (& safeguard)

A

practitioner of the firm is promoting the client in a different
manner to the point where objectivity comes into question.
1. To mitigate, implement a policy that prohibits business relationships
with clients apart from the engagement.

37
Q

Threats to independence - familiartiy (& safeguard)

A

threat that the practitioner and the client have too close of a relationship.
1. To mitigate, ensure partner rotation occurs every few years and
ensure that close family members of the audit team (or for a small
firm, any firm member) are not working at the client.

38
Q

Threats to independence - intimidation (& safeguard)

A

threat that the client threatens or is perceived to threaten the practitioner
if the practitioner does something that the client does not agree with.
1. To mitigate, communicate any threats or perceived threats to TCWG.
If they don’t take action, resign from the engagement.

39
Q

Audit vs. Review vs. Compilation

A

Assurance level
Standards
Planning (internal controls)
Procedures
Cost

40
Q

Going concern - additional procedures

A
  • Recommend procedure:
    o Evaluate management’s plan of action,
    o CF forecast,
    o Additional info since date of management’s assessment,
    o Obtain written reps from management/BOD
41
Q

Going concern indicators

A

All under CAS 570 (under A3 , events or conditions that may cast doubt)
● Current Ratio < 1 @
● Debt to Equity ratio increasing significantly during the year @
● AR & Inventory increasing significantly during the year paired with a decline in sales
● Operating Losses @
● Negative Retained Earnings @
● Loss of major customer(s)
● Introduction of major competitor with large market share
● Parent financing required to operate

42
Q

options for the impact of going concern issue:

A

consider different basis of accounting (e.g. liquidation - still can issue unmodified opinion), financial statement disclosures needed for unmodified opinion, issue adverse opinion

43
Q

Using the work of internal audit

A

CAS 610
1) Evaluating the Internal Audit Function
objectivity (report to the BOD and not management)
competence (experience in IA and deisignation)
systematic and disciplined approach (series of board approved policies followed and adhered to in completing work)

2) conclude if can use

3) develop procedures (if necessary). remember that proceudres are around the risk that they cannot be relied upon, so the critiera above

44
Q

Review engagement report

A

CSRE 2400 REVIEW

45
Q

Other communications

A

KAM
Material uncertainty related going concern
Other matter paragraph
Emphasis of matter

46
Q

first time audit considerations:

A

o Opening balances
o Comparative figures
o Understanding business/internal controls
o Independence and client acceptance

47
Q

Due diligence

A

 Understand nature of engagement
* Existence, ownership and valuation (fair value) of assets
* Completeness of liabilities
* Sustainability of earnings

 Consider impact of materiality

 Procedures – focus on high risk areas for the buyer
* Support why the area is high risk
* Tailored procedure (specific steps)

48
Q

KAM

A

1) determine materilaity (base, %, calculate) in order to determine significant areas

2) dicuss EACH POTENTIAL KAM balances taking into account: use case facts to explain.
a) significant event
b) material misstatement
c) judgement

3) conclude on EACH of those that are a KAM

49
Q

CAAT queries - Je testing

A
  • Sales reversed after year end
  • Sales entered manually
  • Expenses that increased significantly
  • Entries over a specific amount
  • Entries made to unrelated accounts
  • Accounts with few entries
  • Entries made to equity accounts
  • Entries by individuals who do not usually make entries
  • Entries with a blank description field
  • Entries with a rounded ending
  • Entries that the same person created and approved
  • Entries made after business hours
  • Entries under or over a threshold
  • Entries reversed in a subsequent period
  • Entries with specific entities like related parties
  • Entries that have the same details
50
Q

Errors in sampling - additional work

A

o The error can be extrapolated to the entire population of sales. Consider whether this is appropriate, given the small sample size.
o Evaluate the qualitative nature of the errors to determine how they arose.
o Discuss the errors with management.
o Increase the sample size and perform additional testing.

51
Q

Errors in sampling - audit plan revisions

A

o Consider whether controls were operating effectively over sales in the period that the errors were found, and whether only substantive testing is appropriate.
o Risk must be reassessed, although it is already assessed as high.
o The impact on PM must be considered.

52
Q

Errors in sampling - audit report

A

o If management doesn’t correct errors, then qualified opinion
o If errors are pervasive  adverse opinion
o If can’t rely on the system, then scope limitation may exist, so disclaimer

Professional judgement will be required to determine.

53
Q

Cash flow procedures

A

o Since it is a forecast, it should be future oriented procedures, not historical.
o This is where there were assumptions and then focus on obtaining evidence over the cash flow and going concern assessment
 Going concern is an overall financial statement level risk, not a specific account risk, so specific assertions are not provided

54
Q

MD&A

A

o Information should be complete, fair, and not misleading

discuss using case facts, with the above.

55
Q

When BS something

A

o Think about what I have done in audit at work, what are some key items
o Use case facts to make a brief attempt  “this should be considered”  make conclusion  then just move on
o “Professional judgement will be required to determine”
o Spend only 5-10 mins in HB then just go and write something. 5 mins to write. Then move on.

56
Q

If can’t obtain SAAE on opening balances (first time audit)

A

If the auditor is unable to obtain sufficient audit evidence for certain opening balances, this may lead to a modified audit opinion. This might take the form of a qualified scope opinion (if material but not pervasive) or a disclaimer of opinion (if material and pervasive).

57
Q

Auditor’s expert

A

Apply case facts to evaluate the expert’s competence, capabilities and objectivity

docuemnt and include in the apporahc section of the RAMP memo

58
Q

Component auditor

A

CAS600.19 must be consulted:
o In addition, procedures must be performed:
 Confirm independence
 Review qualifications
 Communicate component materiality and planning information
 Review component auditor working papers

59
Q

Disclosure document

A

1) read document
2) review for inconsistencies with FS
3) review for inconsistencies with other audit work
4) review for inconsistenties with knowledge of company
5) discuss inconsistencies
6) conclude whether disclosure is materially inconsistent

60
Q

Going concern

A
  • Recommend procedure:
    o Evaluate management’s plan of action,
    o CF forecast,
    o Additional info since date of management’s assessment,
    o Obtain written reps from management/BOD

CFE (11 decks)

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