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ACCA F8 Audit and Assurance & F7 > Audit and Assurance > Flashcards

Audit and Assurance Flashcards

1
Q

What is Assurance engagements/ what are the levels of assurance?

A

1) External Audits

An Auditor states an opinion as to whether the financial statements Give a true and fair view.

2) Review engagements

The auditor reviews the financial statements using less evidence than required by an audit

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2
Q

What are the 5 types of Review engagements?

A

*Risk assessment reports
*Review of internal controls
*System reliability reports
*Value for money reviews
*Social and environmental reports

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3
Q

What is an external audit ?

A

This is a type of assurance engagement that is carried out by an auditor to give an independent opinion on a set of financial statements

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4
Q

What is the objective of an audit ?

A

The objective of an audit of financial statements is to enable the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial
reporting framework. An audit of financial statements is an example of an assurance engagement.

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5
Q

What is an engagement letter?

A

An engagement letter is a letter from the auditor to the client indicating various matters concerning the engagement

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6
Q

what does the Engagement Quality Control Review provide?

A

provides an objective evaluation, before signing the report, of any significant judgments & conclusions

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7
Q

What is Control risk?

A

Control risk is the risk of material misstatement due to inadequate internal controls within the business.

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8
Q

defined what An audit is

A

the independent examination of an expression of opinion on the financial
statements of an entity by a duly appointed auditor in pursuit of that appointment

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9
Q

What are the five elements of an assurance engagement?

A

(1) A three-party relationship involving a practitioner, a responsible party and intended users.
(2) Appropriate subject matter.
(3) Suitable criteria.
(4) Sufficient appropriate evidence.
(5) A written assurance report in the form appropriate to a reasonable assurance engagement or a limited assurance engagement

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10
Q

Expand on one of the elements of an assurance engagement: A three-party relationship

A

-Practitioner: for example an auditor. The practitioner is responsible for determining the nature, timing and extent of procedures
-A responsible party: the person responsible for the information and assertions.
-The intended users are the person(s) for whom the practitioner prepares the assurance report. The responsible party can be one of the intended users.

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11
Q

expand on one of the elements of an assurance engagement: Suitable criteria

A

The subject matter is compared to the criteria in order for it to be assessed and an opinion provided.

-When reporting on internal control, the criteria may be an established internal control framework.

-When reporting on compliance, the criteria may be the applicable law, regulation or contract.

Suitable criteria exhibit the following characteristics: Relevance, Completeness, Reliability, neutrality and understandability.

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12
Q

expand on one of the elements of an assurance engagement: sufficient Evidence

A

The practitioner plans and performs an assurance engagement with an attitude of professional skepticism to obtain sufficient appropriate evidence about whether the subject matter information is free from material misstatement.

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13
Q

Expand on one of the elements of an assurance engagement: Assurance Report

A

The practitioner provides a written report containing a conclusion.

In a reasonable assurance engagement the practitioner’s conclusion is worded in the positive form, or example: “In our opinion internal control is effective, in all material respects, based on xxx criteria.”

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14
Q

What are the five financial statements being audited?

A

1)The statement of financial position (or balance sheet).
2)The statement of profit or loss and other comprehensive income.
3)The statement of changes in equity.
4)The cash flow statement.
5)The notes to the financial statements, including significant accounting policies.

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15
Q

General Note

A

external auditor reporting is determined by statute.

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16
Q

Local authorities are required by government to implement the ‘4 C’ principles. 4Cs stand for?

A

challenge, compare, consult, compete

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17
Q

Identify the six building blocks of a firm’s system of quality control of audit (ISQC 1):

A
  1. Ethics
  2. Client Relationships
  3. Leadership
  4. Human Resources
  5. Engagement Performance
  6. Monitoring
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18
Q

What are three (3) main steps in Operation assignments ?

A

1) Identify key risks
2) What procedures are in place to reduce risk?
3) Are those procedures being followed?

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19
Q

What is analytical procedures?

A

Consist of ‘evaluations of financial information through analysis of plausible relationships among both financial and non-financial data’

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20
Q

What is an Audit?

A

An audit is an official examination of the accounts (or accounting systems) of an
entity by an auditor. An audit provides assurance to the shareholders and other stakeholders of a company on the financial
statements because it is independent and impartial.

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21
Q

What is the objective of an audit ?

A

The objective of an audit of financial statements is to enable the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.

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22
Q

An audit of financial statements is an example of…………

A

an assurance engagement.

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23
Q

General Note

A

Directors act as stewards of the shareholders’ investments. They are agents of the shareholders.

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24
Q

How are the applicable financial reporting framework is decided by?

A

legislation (within each individual country), and accounting standards

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25
Q

What are the key features of the audit report?

A

The auditors producing the report are independent from the directors
producing the financial statements
􀂄 The report gives an opinion on whether the financial statements ‘give a true and
fair view’ of the position and results of the entity.
􀂄 The report considers whether the financial statements give a true and fair view
in all material respects. The concept of materiality is applied in reaching an
audit opinion.

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26
Q

What is an assurance engagement?

A

an engagement in which a practitioner expresses a conclusion designed to enhance the degree. of confidence of the intended users other than the responsible party.

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27
Q

What is a misstatement ?

A

occurs when something has not been treated correctly in the financial statements. meaning that the applicable financial reporting framework, namely IFRS, has not been properly applied.

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28
Q

What is Audit sampling?

A

is used as a basis for reaching a conclusion on the entire population.

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29
Q

What is the sampling process?

A

-sample design
- Sample Size
- Sample Selection
- Performing audit procedures

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30
Q

how may types of sampling are there?

A

Two sampling - Strategic and nob strategic sampling.

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31
Q

What is Strategic Sampling ?

A

The sample approach involves random selection and applies probability theory to evaluate the sample result and the measurement of sampling risk.

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32
Q

What is non- strategic sampling( judgmental sampling) ?

A

This is any sampling technique not based on probability.

33
Q

What are the methods of sampling/Selection method ?

A

1.Random selection
2.Systematic selection
3.Haphazard selection
4.Block selection
5.Monetary Unit Sampling
6.Stratification

34
Q

What is Random selection?

A

Random selection ensures that all items within a population ( sampling unit) stand a equal chance of selection.

35
Q

What is Systematic selection?

A

Selecting items using a constant interval between selection.

36
Q

What are the fundamental principles of ethics?

A

1.Integrity
2.Objectivity
3.Professional competence and due care
4.Confidentiality:
Obligatory disclosure
Voluntary disclosure
5. Professional behavior

37
Q

What does fair mean?

A

Information is clear, impartial and unbiased, and also reflects plainly the commercial substance of the
transactions of the entity.

38
Q

What is Those charged with governance (TCWG) /

A

–The person(s) with responsibility for overseeing the strategic direction of the
entity and obligations related to the accountability of the entity.

39
Q

What does engagement partner mean?

A

The partner in the firm who is responsible for the audit engagement and its performance, and for the auditor’s report that is issued on behalf of the firm, and who has the appropriate
authority from a professional, legal or regulatory body.

40
Q

What does Professional scepticism mean ?

A

An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.

41
Q

What are the auditor’s duties?

A
  • To form an opinion on whether the financial statements give a true and fair view and are prepared in accordance with applicable reporting framework
  • issue an audit report.
42
Q

What ae the auditor’s rights ?

A
  1. Right of access at all the company’s books, accounts and vouchers.
  2. Right to require from an officer to obtain information or explanations as they think necessary for the performance of their duties as auditors.
  3. Right to receive all communications relating to written resolutions.
  4. Right to receive all notices of, and other communications relating to, any general meeting.
  5. Right to attend any general meeting.
  6. Right to be heard at any general meeting.
43
Q

How can an auditor be removed?

A
  1. RESIGNATION: If an auditor resigns, they should do so in writing and they may wish to speak to the shareholders to explain their reasons.
  2. FORCED REMOVAL: BoD or shareholders may remove the auditor. A General Meeting must be called so that the shareholders can vote on the proposal.
  3. AUDITORS DO NOT WISHTO SEEK REAPPOINTMENT: The auditors should politely decline and issue a Statement of
    Circumstances.
44
Q

What are the Fundamental principles of ethics ?

A
  1. Integrity: Members should be straightforward and honest in all professional and business relationships.
  2. Objectivity: Members should not allow bias, conflicts of interest or undue influence of others to
    override professional or business judgements.
  3. Professional competence and due care: to maintain professional knowledge and skill at the level
    required to ensure that a client receives competent professional service.
    4.Confidentiality : Members should respect the confidentiality -*Obligatory: Auditors are obliged to make disclosure where *Voluntary :In certain circumstances auditors are free, as opposed to obliged, to disclose information without
    obtaining the client’s permission first.
    5.Professional behaviour: Members should comply with relevant laws and regulations and should avoid
    any action that discredits the profession.
45
Q

What are the threats associated with auditing?

A

Self-interest
Self-Review
Familiarity
Advocacy
Intimidation

46
Q

what are the limitations of internal controls?

A

-Cost > benefit
-human error
-collusion
-management override
-non-routine transactions/use of judgment (pg-72)

47
Q

What are the characteristic of criteria ?

A

-Relevance
-Completeness
-Reliability
-Neutrality
-Understandability

48
Q

what are the fundamental principles?

A

-integrity
-objectivity
-professional competence and due care
-confidentiality
-professional behaviour (pg 21)

49
Q

what is the aim of input controls?

A

to ensure accuracy and completeness

50
Q

What is a Management Letter ?

A

a letter prepared by the auditor which discusses findings and recommendations for improvements in internal control, that were identified during the audit and were not required to be included in the auditor’s report on internal control, and other management issues. It contains (Deficiency, Consequence and Recommendation )

51
Q

What is a statutory audit ?

A

is a legally required review of the accuracy of a company’s or government’s financial statements and records. The term statutory denotes that the audit is required by statute.

52
Q

What is a non-statutory audit ?

A

an audit that is conducted at the request of the directors, Trustees or shareholders – although not required by legislation.

53
Q

What is a Irregularity?

A

An intentional misstatement to mislead user

54
Q

General information

A

An intentional misstatement to mislead users is irregularity.

55
Q

General information

A

The valuation assertion in receivables refers to bad debt.

56
Q

What are the procedures to gather audit evidence?

A

Analytical procedures
Enquiry and confirmation
Inspection
Observation
RecalcUtion and reperformance
(AEIOU) pg61

57
Q

What are the Assertions of the financial statement?

A

Accurate
Complete
Cut off is correct
Allocated
Classification and presentation
Occurrence
Valuation
Existence
Right and Obligations
(ACCA ACOVER) pg 64

58
Q

for Analytical Procedures you must be able to determine what ?

A

Reason
Artefact
Test
Implication
Other effects
(RATIO) Pg 62

59
Q
A
60
Q

What are the components of internal control?

A

Control Environment
Risk Assessment Process
Information System
Control Activities
Monitoring Process
(CRIME) pg70

61
Q

What are the 5 control activities to address risks of material misstatement at the assertion level ?

A

Segregation of duties
Authorization and approval
Verification
Accounting reconciliation
Physical or legal control

62
Q

What are he limitation of internal controls

A

Cost >Benefits
Human error
Collusion
Management override
Non- routine transaction

63
Q

How can internal controls be tested (audit procedure)?

A

Inspection
Observation
Reperformance

64
Q

What are the Transactions and Events (IS) assertions?

A
  1. Accuracy
  2. Cut off
  3. Completeness
  4. Classification and presentation
  5. Occurrence
65
Q

What are the Account balance(SFP) assertions?

A
  1. Accuracy
  2. Completeness
  3. Classification and presentation
  4. Valuation
  5. Existence
  6. Rights and obligations
    5.Allocation
66
Q

What are the two types of external confirmation ( trade receivables) ?

A

Positive and negative confirmation requests

67
Q

What is a positive confirmation request (trade receivables circularization )?

A

Request a reply from everyone who has been written to, whether or not they agree with the balance.( suitable when risk of misstatement is high )

68
Q

What is negative confirmation request (trade receivables circularization)?

A

Request a reply only if customer does not agree with the balance that they have been asked to confirm.

69
Q

How do you obtain relevant assertion for receivables?

A

Send a receivable circularization (letter) to the debtors to ask for confirmation of amounts owing- they replies go directly to the audit.( either positive or negative confirmation)

70
Q

What are the assertions for receivables ?

A
  1. Accuracy - ( receivable circularization)
  2. Completeness
  3. Classification and presentation
  4. Valuation
  5. Existence - ( receivable circularization)
  6. Rights and obligations
    5.Allocation
71
Q

what are some of the ways to verify receivables ?

A
  1. Reconcile ledger to control account
  2. Aged listings
  3. Receivables circularization
  4. Correspondence with customer
  5. Board Minutes
  6. Collection Period
  7. Receipts after year end
  8. Scrutinize credit notes issued after year end
  9. Tracing
72
Q

what are the substantive procedures (testing) for receivables?

A
  1. Analytical procedure :
    -collection period
    -compare receivable to last year
  2. Tests of detail:
    Where the auditor traces and inspects details which provide evidence that an amount is free from material misstatement. e.g.: age listing, receipts after year.
73
Q

what are some of the ways to verify payables ?

A
  1. Reconcile ledger to control account
  2. Statement of reconciliation & payable circularization
  3. Trace payments to and from cash book (accuracy & cut off)
  4. Correspondence with suppliers
  5. Board Minutes
    6.Payable Period (payable days)
  6. payment after year end
    8.Trace orders and GRN to entries in the payable ledger (accuracy, completeness & cut off)
74
Q

What are the fundamental ethic of an Auditor?

A

Integrity,
Independence,
Objectivity,
Confidentiality Competence

75
Q

Define the Assurance engagement ne

A

Assurance engagement is a situation where practitioners aim to obtain appropriate and sufficient evidence to draw a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria.”

76
Q

What does Occurrence mean?

A

this means that the transactions recorded or disclosed actually happened and relate to the entity.

77
Q

What is the common benchmark for materiality level?

A

Gross Profit & Revenue - 0.5% - 1 %
Total Assets : 1%-2%
Net Assets: 2% - 5%
P.B.T: 5%
Profit After Tax: 5% - 10%

78
Q
A

ACCA F8 Audit and Assurance & F7 (3 decks)

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