assurance new Flashcards
what is an assurance
a positive declaration intended to give confidence
explain an assurance engagement
where a practitioner provides a conclusion to enhance degree of confidence of intended users other than the responsible party about evaluation outcome or measurement of subject matter against criteria
what are the key elements of an assurance engagement
three party relationship - practitioner - intended users - responsible party subject matter subject criteria written report provide opinion on subject matter sufficient appropriate evidence to support assurance opinion
what are the two types of assurance engagements
reasonable assurance
limited assurance
explain why you can never get absolute assurance
not practical OR possible
explain reasonable assurance
high level of assurance
provides a positive opinion
true and fair view
sufficient and appropriate evidence - full range of tests
explain limited assurance
moderate level of assurance
nothing come to attention the misstated
provides negative opinion
sufficient and appropriate evidence - enquiry and analytical procedures
what is a negative opinion
no other evidence has come to light to contradict the opinion
so cannot confirm by showing evidence like positive
give examples of assurance engagement
statutory audit - external pension scheme audit bank audit due diligence reports business plan or projections
why have an audit
mandatory by law for businesses of certain size
allows auditor to express opinion on financial statements in material respects accordance applicable financial reporting framework
define true
not false, information is factual conforms reality and with required standards and law, so accounts correctly extracted from books
define fair
information free from discrimination and bias compliance expected standards and rules, accountant reflect commercial substance of company underlying transactions
why have external carry out assurance engagement
don’t have the correct professional knowledge on subject matter or criteria
enhances credibility
who benefits from assurance engagement and explain how and who
responsible party - directors helps act as a deterrent in preventing detecting errors or fraud reduce risk of bias
third party -Future investors and banks. even though not normally for them it can still provide professional verification and independent review
intended users - shareholders professional verification and independent review
limitations of assurance
clients staff may collude in fraud so misrepresent/hide
estimates so may not be accurate
accounting systems reliance on have inherent limitations
don’t oversee whole process/every transaction
subjective and projessional judgement required
audit evidence persuasive rather than conclusive
what is the expectation gap
difference between what users think auditor does and what auditor actually does
how does expectation gap arise
from economic + commercial scandals
how to reduce expectation gap
regularly review and complete forms
issue engagement letter
what is corporate governance
the way a business is controlled/ run
what is shareholder role in corporate governance
to appoint auditor directors and satisfy appropriate governance structure in place
what are the main governance needs of stakeholders
adhere to good business ethics
adhere to good practice in good corporate governance
interests to be reflected in companies objectives
scope conflicts to be reduced
what is the agency problem
managers lose sight on who they’re seeking to benefit and shouldnt harm others
who is a company owned by and managed by
shareholders own
directors manage
what is the agency issue
conflicts between individuals who control and who own it
when agency issue is discussed what’s it called
agency theory
what does OECD stand for
organisation for economic corporate development
what are the principles of OECD
promote transparent + efficient financial market consist rule of law
protect and facilitate shareholder rights
equitable treatment of all shareholders
recognise rights of shareholders
timely and accurate disclosure on material matters
ensure board is effective
what are institutional shareholders
term for organisation that invest money on behalf of other people
examples of institutional shareholders
insurance companies
pension funds
investment trusts
what is the code
UK corporate governance code
code of practice embodying shareholder led approach to corporate governance sets out underlying principles off all good governance;
accountability
transparency
probity
focus on sustainable success of entity over longer term
how to obtain audit clients
tender for engagements - reactive
advertise - proactive
what are the processes nominee auditors carry out
obtain professional clearance communicate with present auditors
ensure adequate existing resources
ensure professionally qualified
ensure management team integrity –>obtain references
what are the sources used to find information about client
published info
management team
company lawyers or other auditors
specific regulations and laws applying to that industry
what are the procedures carried out after the engagement acceptance
ensure outgoing removal/resignation properly conducted
send and receive back engagement letter
ensure new auditor appointment valid
perform money laundering checks and procedures
what are auditing standards
auditor and client agree terms of engagement in writing
–>done through engagement letter
what MUST engagement letter include
managements responsibilities if auditor needs information report etc in respect of audit should hand it over audits responsibility reporting framework scope of audit objective of audit
what are the objectives of an audit plan
ensure appropriate evidence to important areas
identify potential problems +resolve on timely basis
ensure audit properly organised + managed
assign work to engagement team members
- overall: efficiency, cost and risk management
what is an audit strategy
sets scope timing and direction of audit whilst guiding audit plan
what is an audit plan
sets nature timing and extent of audit, to obtain sufficient appropriate audit evidence
why develop audit plan and strategy
comply with ISAs
what is included in the audit strategy
understand entity + business environment
understand entity accounting + internal control system
materiality + risk
resources
when are analytical procedures
used at risk assessment stage of the audit procedure as part of understanding the entity and environment
what is materiality
matter or material of mission or misstatement influence economic decisions on users on basis of financial accounting
how is materiality calculated
a matter of judgement but general basis
profit before revenue 5-10
revenue 1/2-1
total asses 1-2
why is the level of materiality constantly reviewed
draft accounts altered and overall materiality needs to be changed
external factors cause changes in risk assessment leading to reassessment materiality
what is audit risk
the risk that an auditor expresses an inappropriate opinion on financial statements are materially misstated
what is audit risk made up of
detection
inherent
control
what is professional scepticism
applying a questioning mindset
what is audit evidence
information used by auditor to arrive at conclusion auditors opinion is based on
what are the tests associated with audit evidence
test of control - preventing detecting and correcting misstatement at assertion level
substantive procedures - audit procedure designed to detect material misstatement two types
test of detail
substantive analytical procedures
what does sufficient and appropriate refer to
measure quantity of evidence
measure quality of evidence or relevance, reliability
how do auditors gain evidence
Analytical procedures Inspection Observation recalcUlation Enquiry
what is CAAT
Computer Aided Auditing Techniques
what are the two tests of auditing
test data testing integrity of clients system
audit software used to assist auditor to perform procedure
name types of audit sampling techniques
random systematic hapahazrad sequence/block monetary unit
what effects the sample size auditor takes
level of assurance
auditors assessment of risk
misstatement auditor expected to find
use of analytical procedures
what is internal control
process designed implemented and maintained by those charged with governance management and other personnel provide reasonable assurance about achievement of entity objectives regard to;
- effectiveness + efficiencies of operations
- reliability of financial reporting
- compliance with applicable laws and regulations
response for internal controls
minimise companys business risk
ensure continuing effective functioning
ensure company complies with relevant laws and regulations
what is business risk
risk resulting from significant conditions events circumstances actions or inactions adversely affect entity achieve objectives and strategies
what are the limitations of internal control
expense
human elements
collusion
unusual transactions
what are the components of internal control
- control environment
- risk assessment process
- information systems
- control activities
- monitoring
5 stages of control activities
authorisation performance review information processing segregation of duties physical controls
what are factors of internal audit
FTSE350 no legal requirement
improve operational effectiveness and efficiency
report to board, audit committee head of department
no need to be professionally qualified
maybe employees or external
what are factors of external audit
legal requirement for most companies give evidence on truth + fairness of financial statements report to shareholders professionally qualified independent not employees
what are the internal audit function
examine financial operating information
review of compliance with laws and regulations + other external requirements
review of economy efficiency + effectiveness of operations
monitor effectiveness of internal controls
special investigations
evaluate significant exposure to risk + recommend where improvements in risk management + control systems could be made
what is a control objective
desired response to mitigate an identified risk
–> when mentioning can say “to ensure that”
what is an internal control
policy or procedure implemented in response to a control objective to manage an identified risk
what is test of control
need to know whether the internal control is effective in response to control objective in respect of identified risk effective
what is a revenue system
process a business goes through to sell goods to as customer
what are the stages in a revenue system
sales invoice –>
Goods despatch note–>
sales order–>
receipt remittance advance slip
what are some risks associated with the revenue systems
goods not received by customers goods not correctly matched to customers goods given to customers who can’t pay goods given to customers who take along time to pay orders not correctly recorded
what are some control objectives associated with the revenues systems
goods only supplied to customers with good credit control
orders are correctly matched to customers
ensure orders are correctly fulfilled
what are controls associated with revenue systems
orders only accepted of high rated credit customers
segregation of duties
authorisation of credit terms from well rated customers
set credit limits for customers
what are test of controls for the revenue systems
check references obtained from customers
check segregated duties
take a sample of customers to test
observe despatch process
what is the purchase system
the process a business goes through to buy goods from suppliers
what are the key stages in a purchase system
Purchase order–>
Goods received note–>
Purchase invoice–>
Payment supplier statement
what are some risks associated with the purchase system
poor quality goods accepted
may pay extenuate prices
pay supplier late/not pay supplier
incorrect goods accepted
what are control objectives associated with the purchase system
only accept good quality goods
pay a reasonable price for items
ensure suppliers paid on time
what are some controls associated with the purchase system
check goods before accepting them take extra care with notes of due date monitor os supplier terms authorisations from senior members safeguard blank order forms
what are some test of controls in the purchase system
taks sample
observe the process
check process steps
(AIEOU)
what is the payroll system
process by which a business pays its employees for service provided
what are the key stages in the payroll system
calculate wages–>
record wages–>
pay wages
what are some key documents associated with the payroll system
timesheet
payslips
contracts
what are some risks associated with the payroll system
pay employees for work not done
pay former employees even though they no longer provide the service
what are some control objectives associated with the payroll system
correctly pay employees
correctly record the amount of time employees worked
ensure valid employees paid
what some controls put in place associated with the payroll system
ensure timesheets are checked by senior management
communicate effectively with HR to check employees who have left
what are some test of controls for the payroll system
take a sample
observe a process occurring
enquire from HR
recalculate wages ensure they are worked out correctly
what is audit documentation
working papers to provide evidence in support of the conclusion that the auditor has reached
why have audit documentation
provides evidence for conclusion reached in reason to objectives
helps to show for matters of continuing importance for the auditor
keeps individual accountable
enables experienced auditor to carry out quality control review
evidence for well performed and planned in accordance to the ;legal + regulatory requirements
assists certain team members to direct and supervise work
what is the audit documentation effected by
sizer and complexity of client
nature of audit procedures to be performed
identified risk of material misstatements
significance of audit evidence
nature and extent of exceptions
need documentation conclusion
audit methodology and tools used
what is included in the audit documentation
client name and year end
audit team involved, name who performed and who received
work performed and conclusion reached and record details exceptions and reasons for
what is a permeant audit file and examples
any informations which is of continuing importance to the audit
- engagement letter
- control system notes
- prior year signed financial statement
what is a current audit files
any information of relevance to current years audit
- draft financial statements + final signed financial statements
- list of uncorrected misstatements
- review notes
when can working papers be destroyed
at least 6 years from end of accounting period
who do working papers belong to
assurance provider
who do audit report belong to
client
what are the outcomes for items tested in the financial statements
fairly stated
misstated - overstated -understated
when is risk higher for overstated and
understated
overstated - assets
understated - liability
what is common audit procedures
obtain total item lists and agree total to trial balance
agree total from trial balance to draft financial statements
agree comparative information to prior year signed financial statements
–>also substantive analytical procedures only sometimes though
what are the sources of information for tangible non current asset
non current asset register purchase invoices registration document leases or hire purchase documentation physical asset inspection depreciation records or calculations
what are the main controls over inventory count
organisation of count
counting of inventory
recording of the counts
what is inventory valued at
lower of NRV or cost
when is NRV normally lower than cost
when goods are; obsolete damaged sale items loss leaders
what are the sources of information for receivables
receivables ledger information
customer confirmation
remittance advance slip
settlements receive from customers at year end
what are the types of confirmation process
positive - either way have to respond ACTIVE
negative - only respond if amount stated is disputed PASSIVE
which is preferred method over positive and negative
positive as more reliable
when would you use negative method over positive
assessed low risk
relevant control operating effectively
large number of small balances involved
substantial number of errors not expected
auditor no reason customer disregard request
what should receive special attention when constructing a sample
material high risk accounts old unpaid accounts accounts written off during period under review accounts with credit balances accounts settled by round sum payments accounts nil balances
what are the sources for bank and cash
cash book
confirmation from bank / bank letter
bank statements
bank reconciliation carried out by client
procedure of auditor confirmation from the bank
The banks require explicit written authority from their client to disclose the information requested.
The assurance providers’ request must refer to the client’s letter of authority and the date of the letter. Alternatively the request may be countersigned by the client or it may be accompanied by a specific letter of authority.
The request should reach the branch manager at least two weeks in advance of the client’s year-end and should state both the year-end date and the previous year- end date.
The request should confirm that the bank confirmation should be returned directly from the bank to the assurance provider.
what are the sources of information for payables and accruals
payable ledger records
confirmation from suppliers
supplier invoices
supplier statement reconciliation
what are the long term liabilities/ non current liability sources of information
schedule of loans statutory books loan agreements bank letter + direct confirmation cash book board minutes client schedule and calculations
what is ethics
systems of behaviour which is deemed acceptable in society or context under consideration. somewhat tells us how to behave
–>morality + conscience
what is ethical culture
business culture where basic values and beliefs in company encourage people within the company to behave in line with acceptable business ethics
what is business value
underpin both policy and behaviour throughout the company from top down includes integrity objectivity accountability openness honesty fairness trust
what are business ethics
the ways in which a company behave in a society which has certain expectations of how decent company should behave. represent the moral standards that are expected
–> culture + expectations
what are some examples of good business ethics
paying a fair wage
offer opportunities for personal development and promotion
being open and transparent with staff
giving back to local community / charity work
minimise negative impact on environment
how can ethical culture be promoted
ethical leadership from board of directors
code of ethics or business conduct to formalise moral principles, values and expectations
policies and procedures to support ethical behaviour
what are the fundamental code of ethics for IFAC
integrity objectivity professional competence and due care confidentiality professional behaviour
what are threats
things that could compromise your ethical behaviour (objectivity)
what are safeguards
ways to manage/mitigate
why are independence and objectivity important
provide an objective assurance
public interest
what are the types of ethical threats
self interest self review advocacy familiarity intimidation management
what are appropriate safeguards for conflicts of interests
separate teams for different clients professional information barriers informed client consent to act briefing on confidentiality for staff confidentiality agreements
in situations threats occur what should an accountant do
seek to resolve matter internally using a formal dispute resolution process, audit committee or whistleblowing procedure
contract their institute
seek legal advice
resign from appointment
informations acquires in course of professional work only disclosed where
consent has been obtained from client, employer or other proper source
there’s a public duty to disclose
there’s a legal or professional right or duty to disclose
