Assurance Flashcards
Identify threats to independence
- Self Interest ->benefiting from financial or other interest in client
- Self review
- Advocacy ->firm/ person promotes a clients position to the point that objectivity may be impaired
- Familiarity -> Close relationship with client, may become too sympathetic of clients interests
- Intimidation
Audit planning steps
- If engagement not accepted yet, consider acceptance issues
- Consider whether there are any threats to independence
- Assess risk of material misstatement at OFSL
- Set materiality
- Explain overall audit approach
Differences between audit/ review/ compilation
- Cost
- Level of assurance (none, limited, reasonable)
- Planning (Audit - need to document and test internal controls to determine if they can be relied upon; review - obtain understanding of the entity and environment; compilation - obtain knowledge of entity’s business, accounting system and basis of accounting)
- Applicable standards (ASPE,IFRS, ASNPO for audit and review; compilations not required to comply but basis of accounting must be agreed upon)
- Type of work (procedures) - Audit - physical inspection, observation, confirmation, reperformance, examination; review- inquiry and analytical procedures; compilation - compile in accordance with selected basis of accounting
- Independence - audit/ review required to be independent of the entity; not specifically required in compilation
- Management responsibilities - All - management is responsible for ultimate prep and presentation of FS; Audit/ review - specifically responsible for for same with chosen framework and developing maintaining internal controls to ensure statements are free from material misstatement
Materiality - percentages?
Net income - 3-7%
Use alternatives if there is a net loss or income is not relevant (NPO)
- Revenues/ expenses/ assets - 1-3%
- Equity 3-5%
How do you determine what base and percentage of materiality to use?
Based on USER’s needs of the financials and sensitivity to misstatements
What is performance materiality and how is the percentage determined?
Auditor focused - used to ensure that total of all uncorrected misstatements is below materiality
Should reflect the amount of RISK
50-90%
Factors impacting approach
CONTROL based
- systems not functioning properly during year - may be >1 system with one reliable and one not
- New system installed in the year - may have reliance for part of the year, need to test new system and conversion
- Management integrity concerns - less reliance on management representations
What approach to use on a first time audit?
First - document control environment and test controls to determine fi they can be relied upon
- If no deficiencies - combined approach
- If known deficiencies - substantive approach
Must perform procedures on opening balances
What do you need to get from the prior auditor on a first time engagement?
- Obtain information about opening balances (need to gain assurance - consider key risk areas)
- The working papers, audit report, FS
Audit assertions for Balance Sheet and what they test
Pre-CCA
Presentation - Whether the account balance disclosed or shown on the FS appropriately
Rights and obligations - Whether the company actually owns the right to the asset or is actually responsible for the obligation of the liability
Existence - Whether the account balance recorded actually exists
Completeness - Whether the account balance includes all items that should be recorded
Classification - whether the account balance is recorded in the right area of the FS
Accuracy & Valuation - Whether the amount of the account balance is recorded correctly
Audit assertions for the Income statement and what they test
COP-CCA
Completeness - Whether the transactions/ components that have occurred have been recorded
Occurrence - Whether the transaction recorded actually happened
Presentation - Whether the transaction is disclosed or shown on the FS appropriately
Classification - Whether the transaction is recorded in the right area of the FS
Cut off - Whether the transaction is recorded in the proper period
Accuracy - Whether the amount of the transaction is recorded correctly
Audit misstatements
- Steps?
- identify issue:
-> Explicit trigger ex) discuss impact on the audit report of finding accounting errors
-> Implicit trigger ex) audit is complete and you are reviewing the work performed - Compare unadjusted errors to materiality level to determine whether misstatements are material
- Conclude whether material and if material, explain impact:
- Management needs to adjust FS to obtain unqualified audit opinion
- If management wont adjust, modified audit opinion
Types of opinions?
- Unmodified - misstatements are immaterial (individually and in aggregate)
- Qualified opinion - Misstatements are material but not pervasive OR auditor unable to gain sufficient audit evidence to make an opinion, but possible effects could be material but not pervasive
- Adverse opinion - misstatements are both material and pervasive to the FS
- Disclaimer of opinion - auditor unable to obtain sufficient audit evidence to make an opinion, and concludes that effects could be both material and pervasive
Describe an ‘emphasis of matter paragraph’ and where to find in handbook
Examples?
CAS 706 ‘Emphasis of matter paragraphs and other matter paragraphs’
Provides additional information about an appropriately presented issue, due to its IMPORTANCE FOR THE USERS UNDERSTANDING of the FINANCIAL STATEMENTS
Used when the auditor would not be required to modify the opinion as a result of the matter and when the matter has not been determined to be a key audit matter.
Examples:
- An uncertainty relating to the future outcome of exceptional litigation or regulatory action
- A significant subsequent event
- Application of a new accounting standard that has material effect on the FS
- A catastrophe that has/ had significant effect on FS
Describe ‘other matter paragraph’ and where to find in handbook
Examples?
CAS 706 ‘Emphasis of matter paragraphs and other matter paragraphs’
Provides additional information about a matter other than those presented or disclosed that is RELEVANT TO THE USERS UNDERSTANDING of the AUDITORS REPORT
- Component auditor has a modified opinion
- Change in audit opinion
- Reporting on compliance
Describe ‘Material uncertainty related to going concern paragraph’ and where to find in handbook
CAS 570 Going Concern
Provides information on material uncertainty as disclosed in financial statement
If adequate disclosure about the material uncertainty is made in the FS, can express unmodified opinion but include this paragraph
If adequate disclosure is not made in the FS, express a qualified or adverse opinion
Describe ‘Key Audit Matters paragraph’ and where to find it in the handbook
Examples?
CAS 701 ‘Communicating key audit matters in the independent auditors report’
Provides additional information on matters significant to the audit and how they were addressed in the audit
3 things listed in CAS to consider:
1.Higher significant risks
2. Auditor judgements
3. Impact from significant transactions
- Revenue recognition
- Instances Fraud
- Impairment of assets
- Provisions and contingent liabilities
Auditors report
- What are the 5 things listed?
Opinion
Basis for opinion
Managements responsibilities
Auditor’s responsibilities
Audit firm, auditor address, date of auditors report
General overall required inquiries related to a review
- Accounting estimates
- Related parties and transactions
- Significant, unusual or complex transactions or significant changes
- Existence of fraud, illegal acts or non compliance with laws and regulations
- Subsequent events
- Going conern
- Material commitments, contractual obligations or contingencies
- Material non- monetary transactions
Thought process when determining report options
- Consider user needs:
- Level of assurance required
- Cost considerations
- Financial vs non financial
- Historical vs future oriented - Explain nature of engagement for each valid option
- Recommend report option