Assurance Flashcards
what is assurance
a positive declaration intended to give confidence
what is assurance engagement
practitioner creates conclusion designed to enhance degree of confidence of intended users about outcome measuring subject matter to criteria
what are the types of assurance engagement and explain them
1. Reasonable positive declaration said as “true + fair” full range of test 2. limited negative declaration enquiry + analytical tests
give an example of assurance engagement
statutory audit
what are the key elements of assurance engagement
three party relationship - practitioner - intended users - responsible party subject matter subject criteria written report providing opinion on subject matter sufficient appropriate evidence to support assurance opinion
what is the objective of an audit for financial statements
enable the auditor to express a true and fair opinion on the financial statements
to give an element of credibility
Define True (from “true + fair”)
information is factual conforms with reality not false + information conforms with standards and law, accounts correctly extracted from books and records
Define Fair ( from “true + fair”)
information is free from discrimination + bias compliance with expected standards and rules accounts reflect commercial substance of company underlying the transaction
name an example for each of the following
1. untended users
2.third parties
3.responsible party
+ explain how each benefits from assurance
1.shareholders
independent personal verification
2.future investors and banks
give confidence to others other than intended users
3.directors
prevent or detect errors or fraud + reduce risk of bias
list some limitations of assurance
- subjective + professional judgement is required
- clients staff may collude in fraud
- most audit evidence persuasive than conclusive
- reliance on accounting systems have a degree of inherent limitations
- fact testing is used - can’t tell 100% of procedures
- some figures are estimates so uncertain
what is the expectation gap
difference between what the users think that the auditor does and what the auditor actually does
how to reduced expectation gap
issue engagement letter
regularly review forms and content of assurance repots
why does expectation gap occur
lack of knowledge of the limitations of an assurance
Explain some governance needs of stakeholders
interest and expectations reflected in objectives
scope for conflicts to be reduced
adhere to good practice in corporate governance
adhere to good business ethics
what is the agency problem
managers lose sight of who they are seeking to benefit and that they should not harm others
what is the role of directors and what are they also referred to as
manage interests of shareholder
also referred to as agents of shareholders
what is the agency issue- agency theory
ownership and control are separated sometimes conflicts arise those who control vs those who own it
shareholders vs directors
name some principles of the organisation for economic co operation and development
- promote transparent and efficient financial markets with rile of law
- protect and facilitate shareholder rights
- equitable treatment os all shareholders
- recognise shareholder rights
- timely and accurate disclosure on all material matters
- board is effective
what is an institutional shareholder
and name some examples of this
a broad term for organisations who invest money on behalf of others examples include
- pension scheme
- insurance companies
- investment trusts
what is the code short for
uk corporate governance code
What is the code
code of practices embodying a shareholder led approach to corporate governance sets out underlying principles of good governance
- accountability
- transparency
- probity
- focus on sustainable success of entity long term
what is stewardship
accountability of management resources entrusted to them as a gents of company
Explain the planning stage in the audit process
Client acceptance/continuance this involves - profesional clearance - money laundering - engagement letter then engagement planning this involves - understanding the entity - assess + respond to risk of material misstatements - audit strategy and plan
Explain the testing and field work stage in the audit process
left
test controls
restricted substantive testing
right
don’t test controls
report to management
full substantive testing
Explain the completion stage in the audit process
sufficient appropriate evidence
finalisation
letter of representation / report and opinion
how to obtain clients
pro active -advertise
reactive - respond to tenders
what are the acceptance procedures nominee auditors carry out
ensure professionally qualified to act
ensure existing resources adequate
consider integrity of management/ obtain references
communicate + present auditors
what are the sources used to asses the risk of undertaking a client
published information
company lawyers or other advisors
specific regulated + laws apply to industry
management team
what are the processes conducted “after acceptance”
outgoing auditors removal or resignation properly conducted
ensure new auditor appointments valid
signed letter of engagement
money laundering checks and procedures
what is the purpose of an audit plan
ensure appropriate attention to important areas of audit
identify potential problems and resolve them
audit is properly organised + managed
assign work to engagement team members
facilitate direction and supervision of engagement team members
facilitate review of work
all summarised
cost efficiency
risk management
what is an audit strategy
formulation of general strategy for audit sets cope coming and direction of audit gives development of audit plan
what is an audit plan
more detailed than the strategy sets nature timing and extent of audit procedures perform engagement team members to obtain sufficient appropriate audit evidence
what does the audit strategy include
understanding of entity behaviour and environment
understanding entity accounting + internal control system
materiality and risk
resources
what is materiality
significance of an omission to misstatement could influence economic decision of users taken on timely basis of financial statements
how to calculate materiality
value %
profit before tax 5-10 left is low
revenue 1/2-1 high is on right
total assets 1-2
what is audit risk
the risk that the auditor expresses an inappropriate opinion when financial statements are materially misstated
what is audit risk made up of
- inherent
- control
- detection
what is professional scepticism
attitude that includes a questioning mindset
what is audit evidence
the information used by a auditor in arriving at the conclusions which auditors opinion is based
what is test of control
tests for audit evidence
evaluated operating effectiveness of controls in preventing detecting and correcting material misstatements
what is substantive procedures
and name some
tests for audit evidence
designed to detect material misstatements
-test of detail : tracing figures to documentation ensure accuracy
-substantive analytical procedures : comparison of data from sources
explain what is meant by sufficient
measure quantity of evidence
explain what is meant by appropriate
measures the quality of evidence relevance and reliability
what re the procedures used to gather evidence
analytical procedures enquiry inspection observation recalculation
what is CAAT and what are the two types
Computer Assisted Audit Techniques
assist with gathering and processing audit evidence
two types
- test data tests integrity of the clients systems
- audit software asset auditor to perform substantive audit procedures
what are the assertions auditors make about class of transactions and events for period under audit
occurrence completeness accuracy cut off classification
what are the assertions auditors make about presentation and disclosure
occurrence + rights + obligations
completeness
classification+ understandability
accuracy + valuation
what are the assertions auditors make about account balances at period end
existence
rights +obligations
completeness
valuation + allocation
what is audit sampling
application of audit procedures to less than 100% of items within a population of audit relevance
explain random sampling
all items have equal chance of being selected
explain systematic sampling
using a constant interval between selection
explain haphazard sampling
auditor reflects at random
explain sequence/block sampling
check certain items have particular characteristics
explain monetary unit sampling
ensures every £1 has equal chance of selection also all materials are used
name factors that would increase audit sample size
auditors desired level of assurance
increased amount go misstatement auditor expected to find in population
decrease use of analytical procedures test same balance
what is internal control
process designed implemented and maintained those charged with governance to provide reasonable assurance about achievement of entity objectives
why is an internal control implemented
minimise business risk
ensure continuity effective functioning of company
ensure compliance with relevant laws and regulations
what are limitations of internal controls
expense
human element
collusion
unusual transactions
name some components of internal control
risk assessment process information systems monitoring control environment control activities
types of control activities
authorisation performance review information processing segregation of duties physical controls
what are some examples of application controls
control over input accuracy and completeness
controls over input authorisation
control over processing of inputs
what are some examples of the general controls
development of and changes to computer application
prevention detection of unauthorised changes to programme
controls ensure continuing of company operations
what is the function of internal audit function
appraisal activity provide service to entity to examine evaluate and monitor adequacy and effectiveness
name factors of internal audit
no legal requirement to undertake
impose operational effectiveness and efficiency
no requirement for professional qualification
name factors of external audit
legal requirement for most companies
give opinions true and fairness of financial statements
must be professionally qualified
must be independent
what are activities if internal audit
review of compliance laws and regulations and. external
review of economy efficient and effectiveness of operations
monitor effectiveness of internal controls
special investigations
examine financial + operating information
evaluating significant exposure to risk
