Audit and Assurance Deck Flashcards
What are the threats to independence and objectivity?
Self-interest, Self-review, Management, Advocacy, Intimidation, Familiarity
What are the four steps of assurance?
Acceptance, planning, evidence, conclusion and reporting.
What are the steps of acceptance in assurance?
Law, Ethics, Risk analysis, Resources.
What are the steps of Planning in assurance?
Understand the entity, Materiality, Analytical procedures, Risk assessment
Why might receivables go up?
Generous payment, significantly grown, bad debt.
What are the steps of evidence in assurance?
Address risks, obtain sufficient and appropriate evidence, to support opinion.
What are the steps of Conclusion and reporting in Assurance?
Completion tasks, Report opinion, Other reporting.
What is a good layout for audit reporting questions?
What is the problem. How serious, What opinion would you give, what is the impact on report?
When are things material?
By size or by nature.
What can you use as a base for materiality?
Revenue, Profit before tax, gross assets.
What would be materiality if using revenue?
0.5 - 1%
What would be materiality if using profit before tax?
5 - 10%
What would be materiality when using gross assets?
1 - 2%
What things are material by nature?
Related party transactions, Anything that impacts a key point in accounts (e.g. changes from profit to loss), Misleading disclosure.
In exam, the material limits?
Don’t really exist, if bigger than 0.5, 5 or 1 for relevant area then material.
When talking about the problem for an audit?
Comment on things like misstatement, lack of evidence, uncertainty.
When talking about the seriousness of a problem in audit?
Talk about materiality guidelines, consider if material by nature?
The audit committee is?
A subsection of the board of directors
The auditor should ensure that those charged with governance are provided with the engagement letter which includes:
The form communications will take, appropriate contact persons, explanation that only matters that come to auditors attention will be communicated.
The responsibility of the auditor is to?
Form an opinion.
Matters to be communicated by auditor are?
Responsibilities of auditor, overview of scope, significant findings, for listed clients - factors relating to independence.
Matters relating to independence to be communicated for listed clients are?
Confirmation the audit team have complied with ethics, details of safeguards applied, declaration of matters that may have bearing on independence (disclosure of non audit fees)
Effective communication is?
Timely, appropriate extent form and frequency, fulfils expectations, includes management comments, repeats unresolved or relevant previous year comments, disclaimer for third partied (not to rely on us).
An auditors report will also include?
A cover letter and appendix setting out deficiencies, consequences and recommendations.
Set out your comments on internal controls deficiencies?
In a table, One column for consequences and one for recommendations.
Consequences of deficiencies may be:
Risk of non-compliance with laws and regulations, penalties on timing. cost to business, cash, goodwill, revenue, assets. Lead to potential misstatements. How could it affect FS? E.g. theft give overstatement of inventory.
Recommendations for deficiencies need…
to be specific, commercially feasible, or if control in place but not followed - training, recommunication, segregation of duties, disciplinary action, regular stock counts.
The direction you do a test in (from assets to list or vice versa) measures?
Either completeness or existence depending on the direction.
An unmodified audit report is if?
You found no or immaterial issues. Unmodified report with unmodified opinion. ISA700 Clean audit report.
The three statements in a clean audit report:
True and fair, accounts properly prepared in accordance with standards, directors report consistent with financial statements.
A significant uncertainty in audit report is?
Uncertainty e.g. around going concern, Must be disclosed in accounts, if adequate issue modified report with unmodified opinion, include “emphasis of matter” paragraph. If inadequate do same as with disagreement in a material issue.
A material issue in an audit report can be (two types) ?
A material disagreement (e.g. accounting treatment) or Limitation of scope (e.g. can’t collect sufficient and appropriate evidence for material balance).
The two descriptors for material misstatements are:
“Material but not pervasive” and “Material and pervasive” (not common at all).
For a material but not pervasive material issue in a report?
Issue a modified report with a modified opinion. Say it is qualified except for. (Problem not big enough to chuck in bin).
For a material and pervasive material issue due to a disagreement?
For a disagreement (e.g. incorrect basis of accounts) issue a modified report with modified opinion, adverse opinion.
For a material and pervasive material issue due to a limitation of scope?
e.g. no evidence. Give a modified report with a modified opinion. (A “Disclaimer”).
If there is an issue in the annual report?
Often misleading statement is in “Chairman’s report” (not part of accounts). Issue a modified report with an unmodified opinion, with “other matters” paragraph - e.g. your report about company goings on at the beginning is misleading.
Audit reporting exam technique, report consists of:
Introduction, seriousness, Impact on report.
The intro of the audit report contains:
Brief summary of issue, disagreement, limitation of scope, significant uncertainty.
The seriousness section of your audit report contains:
If material (=error / base[like revenue] compare this to base materiality percentage), If pervasive
The impact on report section of your audit report contains?
Modified report? Modified opinion? What is the opinion?
The emphasis of matter paragraph comes?
After the main opinion.
Disclaimers, adverse opinions and “except for” opinions come?
Before the main opinion.
Consignment stock is?
Inventory that is yours but held somewhere else.
The three types of audit report are?
No or immaterial issues, Significant uncertainty or Material issue.
When doing the audit report questions?
State the issue, state if material and how, state conclusion.
Reasonable assurance is?
High level of assurance, positive opinion, e.g. audit of financial information.
Limited assurance is?
Moderate level of assurance, negative opinion, e.g. review of financial information.
The objectives of an auditor are?
To obtain reasonable assurance, report on financial statements, communicate with those charged with governance.
A small private company is exempt from audit if it satisfies two of?
Maximum 50 employees, turnover maximum ?6.5m, gross assets max ?3.26m (if exempt must state this in FS)
Subsidiary companies will not require audits if?
Their parent companies guarantee their liabilities.
Companies that must have an audit even if they fit rules of being exempt are?
Insurance companies, Banks, Plc., Where shareholder owning at least 10% of shares asks for audit.
A statutory audit (reports to, scope determined by, reporting about, level of assurance, circulation of)
The members, Companies act / ISAs / audit regulations, opinion on truth fairness / properly prepared / directors report, reasonable, in public domain.
A non-statutory assurance (reports to, scope determined by, reporting about, level of assurance, circulation of)
Management, Terms of engagement / ISAEs or ISREs , Arrive at conclusion depending on work performed, usually limited, likely to be restricted.
The difference between tests of control and substantive tests is?
Tests of control test the system which generates the number, substantive tests test the actual number in the accounts.
ISA 240 relates to?
The auditors responsibilities relating to fraud in an audit of financial statements. Fraudulent financial reporting or misappropriation of assets.
The triangle indicators of fraud risk are?
Opportunity, Attitude and rationalisation, incentives and pressure.
In trying to identify fraud you should be?
performing a fraud risk assessment, be professionally sceptic, discuss with engagement team, respond to fraud risk, consider implications on rest of audit.
If fraud is suspected or discovered then ?
Report to management.
If fraud has caused material misstatement or uncertainty in financial statements ?
Report to shareholders.
If there is a duty or right to disclose fraud findings then?
Report to third parties.
ISA 250 concerns?
Consideration of Laws and Regulations in an Audit of Financial Statements sets out the respective responsibilities of management and auditor with respect to compliance, and procedures for the auditor to follow.
In identifying misstatement caused by non-compliance?
Perform a risk assessment (How should the client be complying with the laws), Obtain evidence of compliance and written confirmations of known non-compliance, if non-compliance then document and discuss with management.
If the auditor wishes to report non-compliance but managers are involved then?
Report to the audit committee, or if not seek legal advice.
Suspicions of bribery must be reported to?
The national crime agency (NCA)
Bribery may often be covered up as?
Hospitality expenses or donations.
The focus of bribery prevention policies is?
Top level culture, risk assessment, communication to staff, monitoring and review.
Bribery (3 forms) is?
Being bribed, offering a bribe, bribing a foreign public official.
The Sarbanes Oxley Act states?.
CEOs must attest to veracity of FS, more disclosure of amendments to FS in auditing, stricter auditor independence, the public company accounting oversight board (PCAOB) can inspect audit files.
A related party is a party that (transactions must be)?
Might be expected to have undue influence on the company being audited. Relevant transactions must be disclosed.
Audit procedures regarding related parties:
Get list, test transactions, review relevant minutes, review bank confirmations and investment transactions, confirm disclosures are made, obtain confirmation of complete disclosures.
Examples of money laundering?
Making illegal earnings seem legitimate, tax evasion, saving costs by non-compliance, oversea offences that are criminal in the UK.
Verbs involved with money laundering
Using, acquiring, retaining, controlling, concealing, disguising, converting, transferring, removing from UK.
An accountant must report to the MLRO if?
they have reasonable grounds to believe there is money laundering. (MLRO then reports to NCA if a report is necessary).
Money laundering offences include?
Failure to report, Failure to provide suitable training to staff, tipping off money launderer. 14 years is most jail time.
Bribery offences can still be reported to ?
MLRO
The expectations gap is the gap between?
The expectations of the users of the reports and the firms responsibilities regarding the reports.
To narrow the expectations gap auditors can?
Improve the audit report to set out responsibilities, include responsibilities in engagement letter, liaise with audit committees.
Audit failure can be because (some examples)?
Failure to assess audit risk, to respond to the assessed audit risk, to recognise or respond to threats to objectivity or to respond to situations where the auditor isn’t competent.
Overall regulation of auditing is driven by?
the IFAC (ICAEW is a member).
How does the IFAC play a role?
The IFAC and the forum of firms nominate members of the International auditing and assurance standards board (IAASB) which issue standards.
Standards issued by the IAASB include?
ISAs - audits, ISAEs - assurance engagements not on historic financial information, ISREs assurance engagements historic, ISRRSs - non assurance, ISQCs - all assurance engagements.
The FRC board comprises of?
The codes and standards committee, The executive committee (overseas work), The conduct committee (review of quality)
The FRC issues:
Amended ISAs, Ethical standards for Auditors, Practice notes, Bulletins,
Current issues facing the auditing profession are:
Mandatory re-tendering after 10 years, Change of auditor at least every 20 years, A ban on providing non-audit services to public interest entities.
Harmonisation is?
aligning global standards so that companies are audited in a comparable way regardless of location,
IAStadards were adopted by all EU listed companies for periods commencing?
on or after 1 January 2005.
In March 2012 the FRC issued a briefing paper about?
The difficulty to engage in professional scepticism when working closely with a company.
Auditors get ethical guidance from?
IFAC code of ethics, ICAEW code of ethics, FRC ethical standards for auditors.
The fundamental ethical principals are?
Professional competence and due care, professional behaviour, Confidentiality, Objectivity, Integrity.
If non-audit work is carried out that is audit related, threats are?
Usually insignificant when it is similar work to the audit work,
If non-audit work is carried out that is internal audit, threats and safeguards
Self-review and management. Separate teams, independent partner review, don’t perform if audit will rely on IA work.
If non-audit work is carried out that is IT related, threats and safeguards
Self review, Management (if management can’t control IT, few available safeguards). Separate teams, Independent partner review, Don’t perform if audit will rely on IT.
If non-audit work is carried out that is Tax related, threats and safeguards
Self-interest, Management, Advocacy, Self-review, Separate teams, review by ind. Partner, don’t promote tax structures if doubt as to accounting treatment, contingent fees not allowed, don’t act as advocate, don’t make material tax calculations (listed companies).
If non-audit work is carried out that is Recruitment related, threats and safeguards
Familiarity, Management. (Listed) Don’t provide recruitment services in relation to key management, (unlisted) can provide advice if partner/staff not in audit.
If non-audit work is carried out that is Remuneration related, threats and safeguards
Familiarity, Management. Relating to directors/key management. Familiarity is unsurmountable, decline audit,
If non-audit work is carried out that is Transaction related, threats and safeguards
Management, Self-review. Separate teams, due diligence work reviewed by ind transactions partner, ind partner review of audit.
If non-audit work is carried out that is accounting related, threats and safeguards
Self-review, management. No accounting to listed client unless emergency, to non-listed client only if technical and mechanical, no judgment, separate teams, reviewed by partner of both work.
If non-audit work is carried out that is valuation related, threats and safeguards
Self-review, management. Separate teams, ind partner review, don’t do valuation if it would be material (listed) and also involves subjectivity (non-listed).
The main response to management threat is?
prohibiting work that involves taking management decisions, and ensuring informed management is in place for engagements that are taken on
The main response to self-review threat is?
separate teams and independent partner review.
ESPASE is?
The ES provisions available for small entities,
ES4 is the requirement for ?. (and ESPASE?)
external ind quality review if 10%
ES5 is the requirement for ?. (and ESPASE?)
Restriction of provisions of non-audit services. ESPASE restrictions waved provided there is: informed management, regular cold review or audit, disclosure of non-audit services.
ES2 is the requirement for ?. (and ESPASE?)
Where audit partner joins client, firm should resign, can’t accept again for 2 years. ESPASE firm can continue provided: no threat to integrity independence objectivity, disclosure made in audit report.
Audit quality I measured by the?
FRC monitoring committee, ICAEW practice assurance scheme.
The FRC promotes audit quality by?
issuing ISAs, ethical standards and briefings. Monitoring compliance through reviews of audit firms. Overseeing professional accountancy bodies, investigating misconduct.
The professional standard ISQC 1?
Quality Control for Firms and Perform Audits and Reviews of Financial Statements and other Assurance and Related Services Engagements.
The professional standard ISA 220?
Quality Control for an Audit of Financial Statements
Things the auditor should consider include:
Management integrity, competence time and resources, compliance with ethical standards, significant matters (even from previous audits).
Details of the engagement quality control review:
“Hot review” - independent evaluation of independence, significant judgments made and conclusions in audit opinion. Before opinion issues. For listed/high risk clients.
Details of the monitoring review?
“Cold review”, ensure compliance with the firms procedures and ISAs, ethical standards etc. identify improvement areas. Ongoing basis, done for a sample of audit files.
On quality control failure the ICAEW can issue?
Fines, disciplinary action, withdrawal of firm’s authorisation to carry out audits.
What three lists of rules govern all Chartered Accountants assurance engagements?
Internal Standards on Quality Control, ICAEW Code of ethics, Terms of Engagement
Name 3 things issued by the FRC out of: International Standards on Auditing, Ethical standards for Auditors, Practice Notes, International Standards on Auditing, International Standards on Quality Control.
Ethical Standards for Auditors, Practice Notes, International Standards on Auditing.
Fraud caused by employees should be reported to…
Client management. (Management Fraud goes to MLRO).
Why are related party transactions high risk?
Extensive and complex structure range, information systems may be ineffective at identifying related party transactions.
Under Ethical Standards 1 which of these does not need to be communicated for non-listed clients: Threats to Objectivity and Independence, Safeguards adopted and why they are effective, Details of non-audit services and fees charged, Overall assessment of safeguards and threats.
Details of non-audit services and fees charged.
What things would an Ethics Partner be responsible for?
The adequacy of the firm’s policies and procedures relating to integrity, objectivity and independence, Communicating the firm’s policies and procedures relating to integrity, objectivity and independence to partners and staff, Providing guidance to individual partners with a view to achieving a consistent approach to the application of Ethical Standards.
Bob, the audit manager on Mortimer Ltd, has resigned to take up work as the Finance Director of Mortimer Ltd. What action should be taken by the audit firm?
The audit firm should consider the composition of the audit team
Dhruv was previously the audit engagement partner on Hallowell plc, a listed company, for five years and stood down from the role two years ago so…
he cannot return to the role for another three years.
In the case of a senior manager who has worked on a listed client for eight years…
Introduce an additional review of the work done by the manager by the audit engagement partner and Carry out an enhanced engagement quality control review
Patricia and Co regularly receives 8% of its gross practice income from the audit of Karen plc, a listed company, and 7% of its gross practice income from the audit of Linda Ltd, a private company. You should…
Implement safeguards in respect of Karen plc and take no action with respect to Linda Ltd
According to Ethical Standard 5 what is Informed management?
Informed management requires a member of management to be designated to receive the results of non-audit services and make any necessary judgements, and the member of management designated to receive the results of non-audit services to be capable of making independent judgements on the basis of the information provided.
A liability cap is…
something which limits the liability to companies on statutory audits.
Facts about Liability caps…
Only cover one financial year, need to be approved by shareholders. Enforceable if fair and reasonable, based on auditors share of responsibility, set monetary amount or formula.
The most popular kind of liability for liability caps is…
proportional liability. The auditor is not the sole one responsible.
Audit firms must carry professional indemnity insurance, this is…
any settlements of claims against company will be settled by insurer. Also legal fees and partner time and damage to reputation.
If a low fee is charged for audit work there might be a threat of…
Self-interest. Can they really ensure they complete all work sufficiently. Quality review.
Things to consider before accepting an audit engagement…
Risk analysis, ethical barriers, resources, legal issues.
Risk analysis before an engagement helps to determine…
Risk of client, audit fee, areas that will need more work.
When prospective auditors contact existing auditors they must…
Ask client permission, contact about relevant information accepting appointment. (Response is similar, request, state no matters to be aware of or set out matters).
Auditors can be appointed by directors for…
Casual vacancies (e.g. When the existing auditor resigns), or first auditor between incorporation and AGM.
Auditors can be appointed by members when…
Ordinary resolution (>50%), at AGM. Appointment within 28 days after latest date for financial statement filing (or existing auditor reappointed).
Secretary of state may appoint auditor when…
no auditor has been appointed in time (rare).
When removing an auditor…
Ordinary resolution at general meeting, The auditor must submit a statement of circumstances to the company’s registered office. Auditor has right to prepare written representation for members arguing case and has right to notice.
If an auditor is going to resign, they must:
Submit notice to company’s registered office, prepare statement of circumstances to office (for shareholders and creditors), can request a general meeting (can be 4 weeks after called) to explain and written representation to be circulated. Then company must notify Registrar of companies, and anyone entitled to a copy.
If the auditor simply decides not to be reappointed the auditor must still…
prepare statement of circumstances or confirm in writing that there are no circumstances members should know of.
The notice and resolution needed for auditor removal…
Ordinary notice with special resolution.
ISA 210 concerns…
Agreeing the terms of the Audit engagement,
The engagement letter should cover…
Objective, scope, management responsibilities, auditors responsibilities, form and content of communications, right to access, expectation of management to provide written representations.
On a recurring engagement a letter…
May not net to be sent, but perhaps if terms need to be revised or if client needs to be reminded.
The audit strategy should cover…
Materiality, Risk, Audit Approach, Timing, team, budgets, deadlines.
ISA 300 concerns…
Planning an audit of financial statements.
An item is material if…
Its omission or misstatement could influence the economic decisions of users.
ISA 315 concerns…
Identifying and assessing risks of material misstatement.
Analytical procedures are used in these three key stages…
Planning, evidence, overall review.
Limitations to analytical procedures at the planning stage are…
Need sound knowledge of entity, high level activity and requires staff, needs reliable source data, division of data needed.
To perform analytical procedures you must…
Gain an understanding of the business, develop expectation, compare actual to expectation.
The audit risk (equation) is…
Inherent risk x control risk x detection risk.
Entity risk is…
Inherent risk and control risk.
An audit risk associated with a desire to increase overdraft is…
Could be a sign of financial difficulties.
An audit risk associated with 3-5 year contracts is…
Revenue recognition may be complicated.
An audit risk associated with Property that has been revalued is…
Revaluation is subjective which increases ROMM, Revaluation may have been done to relate favourable impression for bank, they may withdraw funding if they realise it was based on misstated balance.
An audit risk associated with an increase in Revenue is…
Overstated revenue (recognised too early) or expansion due to borrowing.
An audit risk associated with an increase in profit margin is…
No indication in change in business so overstated revenue? Unrecorded purchases?
An audit risk associated with an increase of receivables days…
Overstatement of receivables? Irrecoverable debts? Sales recorded early?
An audit risk associated with a fall in payables days is…
Due to unrecorded liabilities?
An audit risk associated with a loss on sale of vehicles is…
Inappropriate asset lives being used, PPE overstated, going concern risk if companies have been forced to sell goods at undervalue.
If there is an increase in GPM and payables days this may be due to…
Unrecorded liabilities.
Risk and impact of auditing a new firm is…
Opening balances audited by previous firm - additional testing required. Lack of knowledge - Increase planning time.
Risk and impact of auditing foreign currency purchases are…
Purchases and inventory may be incorrectly translated - test rates that were used, re-perform.
Risk and impact of profit related bonuses…
Increases the likelihood of manipulation of results - need increased awareness when testing subjective areas.
Risk and impact of testing overdraft renewals…
Breach of loan covenant may lead to bank withdrawing overdraft, threaten going concern - consider errors in light of impact on loan covenant and planning materiality.
A significant risk is …
an identified risk that requires special attention.
These factors may decide if a risk is significant…
Whether it is fraud, complexity, transactions with related parties, subjectivity, outside normal course of business.
If you are asked to explain audit risk you should include one of…
Increased risk of misstatement, going concern risks, difficulties gathering evidences.
If a client is gone into liquidation and can’t pay for WIP you have done… you should value it at…
lower of cost so far and net realisable value (how much you could get for it).
If a matter is material but not pervasive you should…
Give explanation of matter in an “except for” paragraph included in the bases for qualified opinion paragraph immediately above the opinion paragraph.
If management have refused to accept responsability for financial statement preparation and provide auditor with all relevant information then you should…
It was a material and pervasive problem so the auditor should say that he doesn’t express an opinion. Immediatley above th opinion there should be an explanation of the reasons. “Disclaimer”.
If the statements have been prepared as a going concern basis but the company clearly has no option but liquidation…
The prblem is material and pervasive. Adverse opinion posted “do not show a true and fair view”. There are now no long term assets, they are valued at recoverable amount, new liabilities for items such as closures. Reasons set out in “basis of adverse opinion paragraph” after the opinion.
If directors make appropriate disclosures about a company that you doubt can be listed as going concern…
Then there is no misstatement in FS. But it is of fundamental importance so an “emphasis of matter” paragraph should be included after opinion. Describe uncertainty referring to disclosure note. State opinion isn’t modified.
If directors do not make appropriate disclosures about a company that you doubt can be listed as going concern…
There is a misstatement. This is material and maybe pervasive. A qualified except for opinion should be given. Or adverse if it is pervasive. Reasons set out in “Basis of qualified opinion” paragraph above the opinion.
If there is a related party transaction that has not been disclosed (if it is disclosed then issue unmodified opinion with unmodified report) …
There is a misstatement. See if it is material by size or nature. Maybe you would then need to give a qualified “except for” opinion. Reasons set out in “basis for qualified opinion” paragraph immediately after the opinion.
ISAE 3400 applies to…
Engagements to provide assurance on financial forecasts.
In providing assurance on financial forecasts you might…
Consider manager competence, assess reasonableness, mathematical accuracy, written representation regarding completeness/use of information/ acceptance of responsability, If any of period has already elapsed - check historic info.
Sensitivity analysis is…
When you are analysing future cash flows, for example, exchange rate may vary in foreign sales [good one to talk about]. Or if there was a different growth rate of business or store opened a bit later.
If a question asks to identify the specific matters you would consider in reviewing reasonableness of assumptions on receipts and payments, think about…
Cashflow forecasts: amounts and timing, sensitivity analysis. Insurance, professional fees (legal and audit [audit is a good one to talk about]), tax, utilities. Do answers specific to question first then generic ones.
ISRE 2400 applies to…
the review of engagements where an assurance practicioner, other than the statutory auditor, review historic financial information.
When it asks you to prepare briefing notes you need…
detailed notes. Imagine you are preparing notes for a meeting with the scariest client you have had. Give headings, but can use bullet points.
Things to discuss in preparing briefing notes…
Why is there a revenue increase? and then follow it up (very important). Why is it not inline with previous years when there was less growth. resons why - e.g. is it due to new customers or poduct? Change in revenue recognition. Look at changes in profit margins - back up with standard markup? significant discounts?
A non-audit assurance engagement …
has likely lmited work done on it, assurance provider will issue a conclusion, not an opinion, usually expressed negatively.
In reports on forecasting (prospective financial information), it is good to state…
Actual results likely to be different from the forecast. Nothing has come to our intention which causes us to believe that these assumptions do not provide a reasonable basis for forecase. Management is responsible for the forecast including assumtions set out in note X
ISAE 3410 sets out…
requirements for practicioners performing assurance engagements on greenhouse gas statements. (Listed companies have to do it). Level of assurance could be reasonable (prepared acceptably), limited (anything come to our attention).
The four stages of an assurance engagement are…
Acceptance, planning, evidence, reporting.
Comparison of Audit and assurance.
Audit: Scope determined by Companies Act 2006 and ISAs, audit procedures in ISA 500. Inspection, obesrvation, confirmation, recalculation, reperformance, analytical, enquiry.
Assurance: Scope determined by engagement and relevant ISAE or ISRE, enquiry, analytical procedures, written management representations, less work.
To describe an audit test (audit procedure to do)
Action (inquire, recalculate…), source (what are you inquiring with…), objective (how does this address the risk you are looking at).
The risk of a new audit is…
lack of cumulative knowledge, greater risk of material misstatement.
The risk with using a perpetual inventory count is… (controls)
You are never doing a full count. Errors in the system could cause misstatements. “Evaluate and test controls over the inventory system” (Remember this phrase), attend periodic count and perform 2 way testing.
A risk of overheads in inventory…
Overheads are subjective to calculate, how do you split up electricity costs etc. Could lead to misstatements.
Agree a sample of labour costs to payroll, components to invoice. Discuss basis of overhead calculation with management. Reperform calculations.
A risk of inventory that has been returned… (Audit procedures?)
Misstatement if hey are included at full price. Review inventory listing that they have been excluded or written down.
If inventory days have gone up… (average number of days inventory is held for)
Their may be an overstatement in inventory.
Review aged inventroy listing to discuss valuation of slow moving items. Look at post-year end selling prices - What did you actually sell it for - Does NRV exceed cost?
Audit procedures for risks due to foreign currency transactions.
Agree rates to reliable third party source, reperform a sample of calculations.
If payables days has fallen, the risk could be… (Audit procedures)
Understatement. But look at any reasons that might relate to this (i.e. moved to new supplier?) Test post year end payments, relate to pre year end goods receipts and trace to payables listing. Obtain a sample of supplier statement reconciliations and test reconciling items.
The audit risk related to warranty provisions (audit procedures)…
Is it an estimate? This increases risk. What is the provsion as a percentage of revenue and how does it change? Is there an understatement?
Discuss assumptions with management, reperform calculations, inspect post year end costs incurred (repairs), obtain written management representationsthat provision is adequate.
A thing to mention (apart from provisions) if there are large legal claims. And audit procedures.
Could risk going concern.
Discuss likely outcome with management, inspect board minutes about settlement. Obtain companie’s solicitor’s opinion on outcome of case. Obtain written management representation with view of outcome.
In order to reduce audit risk to an acceptable level, ISA 330 requires the audit to…
Determine the overall responses to assessed risks at FS level. Perform audit procedures to respond to assessed risks at assertion level.
If the auditor plans to rely on the work of others (e.g. internal audit) the third party needs to …
be assessed to ensure they are competent and independent (“General assessment”). The piece of work in particular needs to be evaluated, are conclusions appropriate (“Specific assessment”).
The audit approach follows this generic trend…
Preliminary assessment of controls and walkthroughs. If you expect controls to be effective do test of controls. If they’re effective perform some substantive procedures anyway due to the inherent limitation of controls (collusion, management override, human error, non-routine transaction), if ineffective or expected to be so then do full substantive testing audit.
Data analytics can be embedded in the audit plan to assist with:
Transaction analysis, judgemental areas (sensitivity analysis to test assumptions on the net realisable value of inventory), analytical procedures (using external market or economic data to form expectations).
In terms of relying on the work of experts, an auditor can and cannot…
CAN place reliance on the work of others when forming their opinion.
CANNOT devolve responsibility for forming the audit opinion to others.
An internal audit usually includes:
monitoring internal controls, examination of financial and operating information, review of operating activities, review of compliance with laws and regulations, risk managements, governance.
Under ISA ____ if you want to use the work of internal auditors as an external one you must.
610 - Assess the internal audit function (objective, competant, systematic), assess the specific work upon which reliance is placed (planned, competence, effective conclusions), test the work of internal audit (is it adequate for the external audit?)
Experts may be used for valuation of buildings, pensions, quantitiies. You would need…
A surveyor for buildings and some quantities. Actuary for pensions.
Using an auditor’s expert or a management expert have info in IAS…
620 and 500
If an auditor accepts an engagement to audit a parent of a group, they will be responsible for an opinion on…
The parent company’s FS and the group FS. If the auditor doesn’t audit all components they must place reliance on component auditors.
The details of ISA 600 (objectives in paragraph 8) you need an awareness of are…
Determing whether to act as auditor of the group FS. If doing so, communicate clearly with component auditors, Obtain sufficient appropriate audit evidence regarding the financial information of components and the consolidation process to express an opinion on the group financial statements.
If a client has outsorced functions (payroll, facilities management) the auditor shoud… under ISA…
402, Obtain understanding of services outsourced, consider access to sources of evidence (like the assurance report of the service), assess risks arising.
In audits for not-for-profit entities…
Wealth maximisation isn’t main objective. Some will be companies and will need audits. Auditor must establish if statutory audit is required, if not, what are objectives of engagement, and to who/on what are we reporting about? The format?
Charities following Statement of recommended practice based on FRSSE for charities with annual income
Statement of financial activities (resources and expediture, reconcilliation of fund changes), Summary of income and expenditure account (if prepares under Companies Act 2006 or if governing instrument requires it), Balance sheet (inc. restricted funds), Cash flow statement (where required bu accounting standards), notes.
Charities following Statement of recommended practice based on FRS 102 for larger charities (>£6.5)
Cashflow is mandatory, legacies to be recognised where probable rather than certain, disclosure of eomployee benefits received by management, disclosure of staff recieiving pay > 60k, list of institutional grants.
Unincorporated charity audit requirements.
Required for gros income >1m or assets ?3.26m and income > 250k. If income is between 25k and 1m - do independent FS verification. Qualified acountant for >250k. For >25k send account copy to charity comission.
If a charity is a company, to do an audit follow ISA…
700
The structure of how pulic money is spent and audited:
House of commons decides n money to spend, Committee of public accounts ensures value for money, NAO is responsible for auditing gov departments and non-gov agencies. Public sector audit appointments manages contracts for audit of local government (health, housing, criminal justice, fire and rescue.)
The main purpose of public sector audit is acocuntability. The three key principles are…
Independence, wide scope of audit, make results available to public.
An audit of public sector may cover…
Financial statements, internal control systems, Regularity (regulations), propriety (ethically), value for money.
Internal audit in the public sector is governed by…
Public Sector Internal Audit Standards.
The two main questions asked on audit completion are…
Do the financial statements comply with the Companies act and accounting standards? Do the financial statements make sense?
Evaluation of misstatements in the audit (ISA….) treatment is on completion…
(450) Inform mangement, reassess materiality, are uncorrected misstatements material individually or in aggregate? Get management written confirmations about the effect of uncorrected misstatements.
Initial audit engagements… opening balances (IAS…)…
(510) Consider if there is sufficient evidence to support opening balance figures. Has the balance audited last year been brought forward correctly? Assess accounting policies applied. Review previous auditor’s working, do this year’s audit test provide evidence over auditing balances.
ISA 710 regards…
Comparative financial information. If there is a misstatement there may be a comparative mistatement next year to sort it. In inventory, this could lead to 3 years of misstatement.
ISA 570 concerns…
The going concern (list of reasons to suspect and relevant procedures). Under IAS 1 Presentation of financial statements must be on the going concern basis.
Non adjusting events…
are ones which relate to happenings after year end… should be disclosed in FS.
ISA 580 concerns…
Written representations.
ISA 720 concerns…
The other items the FS ar epublished with (Directors report, financial summaries or highlights, key quarterly data, management review of year)
If there are material inconsistencies between the financial statements and other information…
ISA 720A requires the auditor to read the information and consider nee for “Other matter” paragraph in the audit report.
The summary of an audit (covered by a senior member) will include…
Significant changes in business, main risks, judgement areas, accounting policies, material uncertainties and conclusions, misstatements comclusions, matters to communicate to governance, practical matters (costs vs budget).
What audit concerns would there be with fix priced contracts?
Cost overruns might result in losses
If an audit reveeals a sales credit note issued post year end but in relation to a pre year end event…
It’s adjusting event so should be dealt with. If goods were faulty may need a provision, perhaps it affected multiple customers,
The “Current ratio” is…
The ratio of current assets to current liabilities.
What is a Bannerman paragraph?
In it the auditor accepts responsibility to the company and the company’s shareholders as a body only.
You are completing the audit of Alandale Ltd, and have found that inventory is overstated by a material amount. The directors have refused to amend the financial statements. Which of the following is a suitable opinion to include in your audit report?
In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements give a true and fair view…
Where does the “Emphasis of matter” paragraph come?
After the opinion on financial statements.
If the auditor can’t get access to legal entity to verify litigatin claims etc…
Issue a modified opinion inder IAS 705
If an engagement partner has been with the listed client for five years, by ethical standard…
3, they should be rotated off to avoid familiarity. (May stay on for extra 2 years if there is a change of senior management to protect audit.
From a listed client, if audit and non-audit fees exceed… a self-interest threat arises. (non-listed?) Fee dependency threat.
5% and 10%
What are the purposes of quality control measures?
Ensure engagements are carried out so that tey meet users expectations, reliable service, high standard work, value for money, requirements of inspection units satisfied, increases confidence in profession. To protect against negligence claims, disciplinaries.
Where external and internal audit are provided by the same firm there is a risk of…
Self-review. ISA 610 says external can rely on internal only if satisfied with work. External may rely on internal too much. Internal may provide too much. Should only be accepted if these things aren’t done or else refuse internal audit. Use different teams and partners. Ind review. “Informed management”.
If an outgoing auditor has refused to repeat audit, there is a risk…
the management lacked integrity. Do a directors search at Companies House and review press cuttings and the internet.
Things to consider when taking on new client…
Do you have experience in this sector, do you have offices in the right place, can you compete with a popular year end.
Things to consider if there are funds acquired by manager of client …
Where they acquired lawfully? MLRO?
Things to consider if your client has a loan with a bank…
Do they owe a duty of care to the bank? What happens if they don’t pay?
If a bank is giving a contingent loan based on the statements, there may be a risk…
Of management bias in order to comply with covenants attached to the loan. Detection risk might be higher die to time commitments on covenant.
Some risks associated with a client in a regulated industry are…
There might be fines that there are no contingent liabilities for.
What might these imply: Renewable government contracts, need to comply with rules for operating license, covenants of a bank loan.
Going concern risk.
What are the responsabilities of an outgoing auditor?
Obtain authority with company to discuss affairs with incoming auditor (but comply with confidentiality). Answer communication with incoming auditor promptly. Record discussions as evidence. Relay any important matters. (Not to tip off money laundering or terrorism matters though). Return books and records to entity.
If there is a chance for legal claims against your client…
Does your firm really want to be associated?
If an audit firm specialises in music production and considers taking on a music productin company…
Might there be conflicts of interest with its other clients?
What are the two times when a report would be modified without the opinion?
When there is an emphasis of matter paragraph (e.g. material uncertainty regarding future outcome of legal action which has been disclosed). Or Other matter paragraph (Something not disclosed but still relevant - material inconsistency in other information).
If the directors make a disclosure that, due to legal proceedings, they are unsure of going concern, the auditor…
if satisfied will issue an audit opnion can be given with an emphasis of matter paragraph. If unsatisfied he will give a qualified opinion.
If depreciation has been charged over the wrong period of time the auditor shoud issue (the difference is material but not pervasive)…
there is a difference in acocunting treatment. The audit opinion should be modified with qualified one and an “except for” paragraph.
If it says “how does a familiarity threat arise in relation to this particular entity?”…
Say what a familiarity threat is first, then how it relates.
If a percentage of fees are taken on commencement of a project, how should revenue be recognised?
Deferred incme.
What procedure can you have in place in an audit plan if you are looking at the risk of WIP?
Evaluate controls over posting in purchases and payrolls. Compare actual costs to budget (cost overruns may indicate losses). Compare total final costs to contracts. Ascertain basis of overhead allocation an review for reasonableness. (Only attributable overheads and percentage allocation is reasnable.)
Why is there an audit risk associated with an increase of trade receivables and what are safeguards available?
May indicate overstatement due to inclusion of irrecoverable receivables. Deliberately overstated to ensure compliance with loan covenant. Review receipts after receivables ageng aalysis to identify amounts allowances should be made for. Inspect customer correspondance. Direct confirmation on a sample of receivables.
Why is there an audit risk associated with a decrease of purchases and payables and what are safeguards available?
Perhaps understatement due to unrecorded invoices. Translation errors? Might record current period invoices after year end to comply with loan covenant. Test controls of recording. Reconcile payables balances with purchase ledger. Cut off tests compare goods received records to invoice entries. Appropriate conversions?
What are some safeguards you should do if there is a going concern risk?
Review profit and cash flow forecasts for 12 months from year end. Consider reasonablenss, results of sensitivity analysis, ability to meet debts. Review post year end management accounts to assess performance. Inspect borrowing agreement and ability to comply with covenants. Monitor bank relaitonship. Written representation of management intentions.
Non compliance with health and safety regulations (from an auditors perspective)…
May materially affect financial statements. Adjustment or disclosure. Will there need to be provisions or contingent liabilities? Business may need to close for a while. Going concern risk. If deliberate non-compliance then this is money laundering.
What steps would you go through to get evindence for a reliability in increase of expected revenue?
Agre eprior year revenue to working papers. Agree price increaeses to board minutes, correspondance, contracts, invoices. Agree expired contract details and new contract details.
If it is not a statutory audit, internatinal accoutning standards…
will not be followed.
Can a firm produce absolute or reasonable assurance over prospective financial information?
No. And less work will be undertaken than on a statutory audit.
If you are analysing prospective financial information, what should you do to the external auditor.
Notify them in case there are important matters to discuss.
What are some key things you would do in completing review of prospective financial information for a client?
Consider consistancy, recalculate, sensitivity analysis around key assumptions, appropriateness of accounting policies, reasonableness of assumptions, is inflation and seasonality anticipated, currency fluctuations, plans within capabilities, is presentaiton informative or not misleading, written representations that management accepts responsability.
Why might fixed price contracts be a problem in business?
Costs may overrun.
What would be the differen reports you might give in a going concern problem?
Modified with unmodified opinion with emphasis of matter paragraph (material uncertainty, adequate disclosure). Qualified except for disagreement (over disclosure details but satisfied with preparation). Adveres opinion (disagreement on true and fair view). Qualified except for/ disclaimer/ limitation of scope (little evidence, management won’t extend going concern assessment).
What can be acheived with an internal system of controls?
Reasonable assurance on reliability of reporting, effectiveness of operaiton, compliance. Inherent limitations means absolute assurance can’t be given. (human error, collusion, misuse).
An auditor will only consider elements of a control system that…
are relevant to an audit and the FS. So nothing to do with efficiency of management etc.
Audit fees depend on…
Seniority and experience of team, time expended, first year of audit?, degree of risk and responsability, nature of business, responsability, priority of work, expenses.
Advantages and disadvantages to a client of having an auditor experiences in his industry.
Knowledgable. But perhaps conflict of interest. Confidentiality. Seperate audit teams from different offices used. Information barriers. Partner review.
If the financial statements are not prepared as a going concern they are prepared as…
a break up basis.
If the statements need to be presented with a break up basis and this has been explained then…
An unmodified opinion can be given. But report will be modified with an emphasis of matter paragraph. Specific statement within it saying that the audit opinion is not qualified.
A qualified report is given when…
When the financial statements are materially misstated due to one particular account, class of transaction or disclosure that does not have pervasive effect on the financial statements. Or when the auditor is unable to obtain audit evidence regarding particular account balance, class of transaction or disclosure that does not have pervasive effect on the financial statements.
A disclaimer of opinion is issued when…
When the auditor is not independent or when there is conflict of interest. When the limitation on scope is imposed by client, as a result the auditor is unable to obtain sufficient appropriate audit evidence. When the circumstances indicate substantial problem of going concern in client. When there are significant uncertainties in the business of client.
In an unqualified report…
the auditors conclude that the financial statements of your business present fairly its affairs in all material aspects.
A qualified report is when…
most matters have been dealt with adequately, except for a few issues. An auditor’s report is qualified when there is either a limitation of scope in the auditor’s work, or when there is a disagreement with management regarding application, acceptability or adequacy of accounting policies.
If you need to make a modified opinion due to disagreement over potential for break up basis…
modification may be qualified opinion/except for if considered material but not pervasive or adverse if considered material and pervasive.
Who may sue auditors if for damages?
Company and shareholders for breach of contract if negligent. Third parties (like bank) may sure for tort of negligence bt they must show duty of care was owed. But auditors may be protcected from these claims by a Bannerman paragraph.
What is the primary risk of an auditor?
Giving the wrong opinion.
What might you do in a preliminary risk assessment as an auditor?
Check for ethical risks (self-interest, familiarity etc.…), Risk of material misstatements (revenue, inventory, any balance), other factors (legal, practical issues etc.)
How much of your total income can come from one client without threats being raised?
For unlisted client, 15% is maximum threshold (safeguards at 10%). If listed client, no more than 10% of your fee can come from one client, safeguards at 5%.
If a client has to keep loan covenants there is an…
incentive to manipulate (similar if they are about to list on stock exchange).
In the planning questions of the exam, how should you lay out your answers?
A table with justification (i.e. increases risk of material misstatement. going concern risk, or limits ability to collect evidence) on left and procedures to address on right.
What are the three justifications for something being an audit risk?
Increase of material misstatement, increase of going concern risk, limits ability to collect evidence.
What are the risks with food based items in inventory?
They are perishable and would alter valuation.
What are some possible procedures to address if you have fixed percentage overheads on WIP?
Obtain workings for calculation and assess for reasonableness, ensure only attributable costs assigned, reperform calculation, evaluate and test controls over the production of management accounts.
What are some possible procedures to address if there are fixed-price contracts?
Compare actual costs to budget to identify cost overruns which may indicate potential losses. Compare expected receipts to contract costs to see if a provision for losses is required. Inspect aging of WIP to identify unbilled/ irrecoverable WIP.
What are some procedures to address in terms of the risk of judging the stage of completion of NCA?
Inspect surveyors report, consider objectivity, qualifications and reputation of surveyor by enquiring with third parties. Consider use of auditor’s expert to obtain a second opinion regarding the valuation. Inspect work so far. Inspect bank statements for payment to date.
What are some risks associated to overseas transactions?
Hard to chase overseas debt, may be misstatements due to translation errors.
In the ethics questions, when explaining a threat (e.g. self review threat) - don’t explain what the threat actually is but…
The effect it has on you, e.g. a self-review threat means we might not properly review our work due to a feeling of knowing it already.
In ethics based questions the basic layout is…
Say the threat and how it affects you, then write the safeguards against it.
What is due diligence work?
Corporate finance services - usually worth a lot of money.
In an appendix to management, (type of question in exam) how would you structure it?
Table with Consequences on left and Controls on right. Consequences would be things that cause costs to business or cause misstatements. Controls must be specific with commercial feasibility.
What could be some controls to counteract failure to outsource PPE and Consequences of employees buying their own things or PPE overstatement.
Finance director approves all purchases over £1000. Regular reconciliation of fixed asset register to physical assets, retraining on control procedures, disciplinary procedures.
What are the two types of controls?
Preventative or detective.
What is the audit report if you have no or immaterial issues?
Unmodified report with an unmodified opinion? (ISA 700)
What report would you produce if you have a significant uncertainty? (e.g. loss of major customer - may produce going concern risk) And the disclosure was adequate?
Modified report with an unmodified opinion. The modification is an emphasis of matter paragraph.
What report would be issued if there is a material issue due to a disagreement that is material but not pervasive?
Issue a modified report with a modified opinion, “this is qualified except for…”
What report would be issued if there is a material issue due to a limitation of scope that is material but not pervasive?
Issue a modified report with a modified opinion, “this is qualified except for…”
What report would be issued if there is a material issue due to a disagreement that is material and pervasive?
A modified report with a modified opinion. The opinion is adverse. The financial statements are not true and fair. This is if they are not a going concern but are believed to be so.
What report would be issued if there is a material issue due to a limitation of scope that is material and pervasive?
A modified report with a modified opinion with a disclaimer. No evidence to form opinion.
If there is a management representation letter that isn’t signed or doesn’t say that they accept responsibility for financial statements then the report is…
Limitation of scope - disclaimer.
What opinion would you issue if there is a significant uncertainty and the disclosure isn’t adequate?
Same as if there is a material disagreement…
What things would you put in an “other matters” paragraph?
Things out of the scope of 2006 companies act. (I.e. if they’ve claimed to given to charity and they haven’t, or inconsistency with the chairman’s report).
How would you layout questions regarding the type of report to be given?
First state the issue at hand, classify the issue (as significant uncertainty, disagreement or limitation of scope). Then the seriousness (materiality - by size or nature - and pervasiveness). Then the impact on report.
What things are material by nature?
Related party transactions, something that changes you from profit to loss making or asset to liability, misleading accounting disclosures.
What things might be different in examining future cash flows for a bank and a normal audit?
Addressee, the scope (audit is ISA, other is reasonable assurance), distribution (unrestricted for audit but may include bannerman, other is restricted), opinion (audit-positive, report in cash flows-negative), caveats (cash flow report has caveat with achievability of results)
If a director is unwilling to correct a financial statement in a way that is below materiality to stick to a loan covenant what would you think?
Fraudulent reporting, lack of integrity, risk of inappropriate opinion, intimidation threat, material by nature due to loan covenant, perhaps going concern issue. This means pervasive issue, adverse opinion. Uncertainty on gc modified opinion. Qualified if material but not pervasive. Adverse if material and pervasive.
If material but not pervasive what opinion should you issue?
Qualified opinion.
Inventory records have been destroyed, directors estimate an amount that is material. What should you think?
Likely material but not pervasive. Qualified opinion with paragraph showing inability to obtain sufficient evidence. State that adequate accounting records were not maintained.
If a company relies on a loan continuing, but there is no further agreement even though likely, and they have prepared cash flow projections…
Modify report but not opinion, if they are willing to include a note there is no disagreement. But significant uncertainty in going concern, emphasis of matter paragraph. Note that opinion isn’t qualified.
What kind of things would you put in “planning notes” for a meeting following analytical procedures?
Write “Reason for…” Then state a change (like % gross profit margin) and possible reasons for the change.
What are some reasons for a increase in revenue?
New product, inflation, pricing policy, new outlets, new wholesale customers, change in income recognition policy.
What are some reasons for increases in GP margin?
Lower cost base to new sources of goods? Increase in sales of higher brand, exchange rates…
In the completion stage when the auditor reviews the statements what conclusions should he be able to reach?
Statements are consistent with auditor understanding, review procedures corroborate conclusions formed, previous risk of material misstatement or if true and fair view. May need to evaluate planned audit procedures again, new factors which may affect fs. Were they prepared with consistent accounting policies.
If directors didn’t want to change an immaterial amount as it would alter their bonuses…
Modified on grounds of disagreement. Material by nature, except for paragraph as unlikely to be pervasive, opinion part of report states amount of overstatement.
Difference between unqualified and qualified?
Unqualified is fine, qualified has a caveat that the directors report isn’t mentioning, eg all fine except for…
If full disclosure has been made about the hurdles a company needs to overcome to remain a going concern, should you issue a qualified opinion?
No, disclosures are already made. Report can be modified but opinion not qualified. Modification is an emphasis of matter paragraph.
If there are no records of cash sales and cash makes up 15% of revenue, what should your opinion be?
Modified with an “except for” qualification due to the limitation of scope. 15% or revenue is material but not pervasive probably. Include reference to lack of adequate accounting records.
What are some problems you should think about with dishonest directors?
Lack of integrity, not acting in interests of company as per companies act 2006. Indicative that other areas might be criminal. Misstatement possibilities and wrong audit opinion. Reputation of audit firm and loss of clients.
Consequences and recommendations of head office staff not checking the till records detailing cash sales.
Takings may be banked on the wrong day or late, bad cash flows. Designated member of staff should reconcile, cash banked compared to budgets, review by signature, discrepancies to management.
If data is lost relating to detailed sales (but not monthly sales listings) what are consequences and recommendations?
Inability to process orders, cash flow problems. Data recovery costs. Reminder of importance to back up, designated monitored, disciplinary procedures for breaches.
Amendments to selling prices aren’t verified. Consequences and recommendations?
Charged too much or too little resulting in lack of goodwill or cash flow problems. Restricted access and passwords for amending prices, printout of amendments and signed by sales director, periodic one for one checking of prices.
If credit limits for customers are bit reviewed, the consequences and recommendations?
Rejection of sales to good customers and selling more to bad. IDE. Cash flows, good will. Review by credit controller, account for payment history, ability to pay, agency reports, changed authorised in writings.
If accounting records aren’t adequate, what should you do in your report?
Report by exception under the companies act 2006 that accounting records not maintained. Qualified, except for opinion due to limitation of scope.
Which ISRE is in engagements to review financial statements?
2400
If you are doing a non audit assurance in statements, what phrase will you be looking to write?
Negatively phrased: nothing to show these statements don’t give a true and fair view in accordance with the international financial reporting standards.
If you’re doing assurance on financial statements what liability would you need to discuss.
Cannot be relied upon to disclose if fraud errors or illegal acts exist. Sole use of management and single third party, permission must be requested for greater distribution, liability cap stating maximum amount which may be claimed in damages from negligence.
In making equities about preliminary analytics of a companies figures how should you layout your answers…
State the question you want to ask (what are the procedures for recording sales, how much of sales relate to new outlets). Then some potential reasons for the questions. Then perhaps a list of documents to request.
How could work in progress be affected in terms of losses? Risks?
Risks that there is a failure to provide for losses in contracts so held in wip
If arbitrary discounts can be given by staff, what are some consequences and procedures?
Fraudulent conduct, staff applying discounts and keeping difference, cash flow, lack of goodwill for low discount. Automatic discount applied, reconciliation of discounts given to cash out signed by manager. Staff training.
If auditing revenue on 3 restaurants and 1 isn’t recording discounts well, what report can you give?
Limitation of scope of lack of data, can provide limited assurance on the other restaurants, qualified opinion with except for paragraph.
What is the difference between a qualified and an adverse audit opinion?
Qualified is when a misstatement isn’t pervasive enough to affect the whole statement, except for statement. In adverse, the problem is pervasive, do not give a true and fair view. In both a basis for qualified/adverse opinion will be included before opinion paragraph with the issue and quantification. Auditors responsibility will state that they have sufficient and appropriate evidence to provide basis of modified opinion.
Some key common audit safeguards:
Independent partner review, independent quality review, ensure there is ‘informed management’, observe and evaluate the effectiveness of system controls.
Why is there a conflict of interest when one if your clients wants to acquire one of your other clients and how should you employ safeguards?
Confidentiality issues, parent wants to minimise consideration and subsidiary wants to maximise. Separate teams and confidentiality agreements by team members. Both clients should agree they’re happy for firm to act. Regular senior review.
What are some procedures you could do as an auditor if a going concern is a risk?
Obtain post year end management accounts, profit and cash flow forecasts for 12 months to see if debts can be paid, reasonable assumptions? Sensitivity analysis on revenue, finance costs etc. Review board minutes for… Discuss plans with management, written representation from management about feasibility, inspect loan terms, bank correspondence for continuity of overdraft.
What are some procedures to cover a risk in PPE audit?
Discuss with management about valuation, reasonableness test, vouch costs of refurbishment to invoices, ensure asset register is correct, is external valuer independent and qualified? Market value of similar properties, appropriate accounting treatment in Fs, no revaluation cherry picking,
What procedures would you do to address a provision risk?
Inspect public announcement, discuss basis for estimation, review contracts of affected employees, review post year end events for accuracy of estimate, written representation from management regarding future intentions, make sure disclosures are complete and appropriate.
Why are the procedures and concerns around a legal claim from a client customer?
Concerns: provision or contingent liability, reputation. Procedures: review lawyer correspondence to assess likelihood, is there insurance cover, review documentation made at event, review similar legal cases, inspect minutes (I.e. For out of court settlement), representation of intentions, cash flow forecasts.
If there is an adequate disclosure about the potential for going concern issues you should issue…
Modified report with an emphasis of matter paragraph. If inadequate disclosure issue qualified or adverse depending on circumstances.
An immaterial balance from a company your director has majority shares in has become irrecoverable. Should it be disclosed?
Yes it is material by nature as a related party transaction.
How should a report be modified if a related party transaction isn’t appropriately disclosed?
Qualified with an “except for” paragraph and details of the transaction.
If an irrecoverable amount is material by size what should the company make for the outstanding amount?
Provision
If an entity is not a going concern, what three things can be good to mention in the break up basis?
Assets valued at recoverable amounts, assets and liabilities classed as current, note in financial statements that not a going concern.
What does an owner managed business do to risk?
Increases it.
What bad thing could a rapid growth rate lead to?
Over trading
If a director seems dodgy what could you do?
Search companies house for director qualifications. Review press or Internet for adverse publications.
Why might an advocacy threat arise in providing tax services?
Supporting the firm while dealing with the HMRC
What ISA says auditors should disclaim an opinion on the financial statements when the directors refuse to provide representations?
580 do a limitation of scope. Material and pervasive, we do not express an opinion.
How would you work out the gross profit percentage?
Gross profit x 100 / revenue
How would you work out the cost of sales percentage?
Cost of sales x 100 / revenue
How would you work out the operating cost percentage?
operating costs x 100 / revenue
How would you work out the short term liquiditycurrent ratio?
Current assets : Current Liabilities
This is the ability to pay current liabilities from current assets
What is the quick ratio that shows how easy it is to pay current liabilities from reasonably liquid assets?
Receivables + Current Investments + Cash : Liabilities.
How do you measure the net asset turnover and what is the purpose?
Revenue / capital employed (It is the asset revenue generated from asset base)
How do you measure the inventory turnover and what is it?
Cost of sales / inventories (It is to assess the level of inventory hold).
How do you measure the trade receivables collection period and what is it?
Trade receivables x 365 / revenue (It is the ability to turn receivables into cash.
How do you measure the payables payment period and what is it?
Trade payables x 365 / Credit purchases (It assesses the ability to pay suppliers)
If the opening figures are from a different auditor you could…
Use more senior staff in risky areas, thorough planning, ensure enough staff, independent quality review, review prior year papers, substantive testing on opening balances that can’t be verified by other means.
Risks and procedures with cash transactions?
May fail to be recorded, susceptible to misappropriation, poor control use by temporary staff. Evaluate and test controls.
Review correspondence, discuss with management, evaluate and test controls, examine forecasts, ascertain sensitivity, review board minutes to view management opinion on going concern status.
Are all good generic procedures to mitigate audit risk. Use them
How does the FRC promote improvements in the quality of auditing?
Issuing ISAs, ethical standards, briefing papers on audit issues such as professional skepticism. Monitoring compliance through review.
An audit engagement partner can act for…
5 years, then break for 5 years. If needed to safeguard quality then extra 2 years is allowed.
What ISA requires junior audit team work to be reviewed?
- 230 requires documentation of details of the review.
What ISAs involve an audit expert?
Es2 requires satisfaction with objectivity. 620 requires a number of matters are agreed with expert.
Cold review and hot review differences.
Hot review evaluated significant conclusions made, (review if judgements, independence, review of audit report, significant matters) cold reviews evaluated system of control is working well. ISAs ethics regulations.
What representation should be given when reviewing cash flow forecasts?
Intended use of forecast communicated so liability restricted, competences of management assumptions disclosed, explanation that team isn’t responsable for preparation, only for analysis
What would be the difference in assurance level given on cash flow forecasts and external auditing?
Cash flow forecasts will be limited or moderate assurance, expressed negatively. External audit will be high assurance, expressed positively, true and fair, prepared in accordance with companies act. Review has less assurance as it is in future uncertain judgements.
What recommendations can you put in place to suggest if there are no bribery regulations?
Document and implement policies, introduce whistleblowing policy, appoint designated person for compliance, top level commitment.
What procedures can be set out if a company doesn’t follow accounting policies?
Standardised monthly returns to be completed which set out basis of preparation, returns signed by local office manager who should confirm compliance with company policies, returns viewed by a designated member of staff at head office with significant variances investigated.
If there is some kind of limitation of scope where the auditor can’t see some documents, after the opinion paragraph the auditor should…
Report by exception under the companies act 2006 that all information required was not obtained.
How could you confirm integrity of client?
Get permission to contact past auditors, inspect previous reports, obtain references from reliable third parties like advisors or credit agencies, search relevant databases, Internet and press searches, discussions with directors, identification procedures.
What are some things you could do to check payables?
Credit note received cut off, test system for recording, reperform currency conversions, cut off testing by tracing goods received to invoices in purchase day book, inspect supplier contract for credit terms,
What ISA requires auditors to communicate with those charged with governance about issues found?
260
Is there a partner rotation rule for non listed companies?
No but ES3 recommends that if more than ten years then consideration should be given as to if a reasonable and informed 3rd party would consider objectivity to be impaired.
If a company is lying in the directors report about using organic chocolate how would this change your report?
It wouldn’t, but the companies act requires auditors to report on consistency of director report with financial statements. This is a misstatement of fact. Doesn’t relate to fs so put it in an other matter paragraph.
Why does a juniors work get reviewed?
Check work is in accordance with professional standards and legal framework, significant matters are raised for further consideration, appropriate consultations taken place, consideration of need to amend natur extent and timing, supports conclusions and is will documented, evidence is sufficient and appropriate, compliance with ISA220 quality control
If directors refuse to make an immaterial change would it affect the auditors report?
If it is not even material by nature then apparently not, could be material though if aggregated with other items. Qu16.3
If an FD gets aggressive then offers a compensation gift…
Intimidation and self interest threat. Alert engagement partner, decline camera as value is not insignificant, ask group of any other threats or gifts given, see if work was adversely affected. Perhaps replace affected team members with more experienced. Perhaps approach audit committee. If significant concerns then resign.
What are the benefits and limitations of analytical procedures at the planning stage of an audit?
Obtain understanding of entity and environment, identify risk areas of misstatement, identify areas needing more resources, where can detailed listing be kept to minimum.
Needs substantial knowledge (may be absent esp in first year), need experienced staff member, consistency of previous results may hide material error, may be performed mechanically without skepticism, rely on good information, limited use if business is changing.
What are inventory problems with phones
Subject to pilferage and also rapid change in technological modernness
What is a qualified opinion?
Misstatement, I.e. Disagreement, or unable to obtain sufficient evidence, material but not pervasive, except for…
What is an adverse opinion?
Expressed when disagreement is material and pervasive. Do not give a true and fair view.
What is a disclaimer of opinion?
Unable to obtain appropriate evidence. Like limitation of scope, possible effects of misstatements are material and pervasive, also w occasionally when there are multiple uncertainties. “We do not express an opinion on the financial statements”
In questions where it says: State the outcome of the effect on the audit opinion..
You are welcome to say “if it’s disclosed then this, if it’s… If if if”
If there is a immaterial misstatement would you modify the report?
No but it must be considered in aggregate with other items.
3 (kind of) extra ethics on top of the self -interest etc.…
Professional competence, conflict of interest, confidentiality.
If you are within the range of having fees be a large or really large percent of total income…
Discuss with ethics partner and do independent quality review.
What threats are in place if a director from an audited firm is now a partner in your audit firm?
Familiarity threat, self-review threat. Can’t be assigned on the audit or be in a position of influence for 2 years.
When can you break confidentiality?
Client permission, public interest, defend in legal proceedings (right to disclose). Required by regulator, ordered by court, money laundering (duty to disclose).
General things to think about in regards to preacceptance reviews - important…
Risks, laws, ethics, resources (are any of these increased?) ISA 220
If a company has reduced employees in the accounts department…
It might be harder to get evidence.
Limited means…
Not listed
When looking at preacceptance stuff…
Think about increases in detection risk, inherent risk, control risk…
If a company is specialised (like marine biology research)…
It is quite specialised, can offer the right additional work?
What three justifications for problems would you state in planning?
Increases risk of material misstatement, going concern, prevents you from collecting sufficient and appropriate evidence.
Justification for risks with cash revenue…
Risk of understatement due to misappropriation and delays in banking.
If there is a contactless system and a commission is taken by contactless company…
The revenue should be shown gross.
General PPE tests.
Physically inspect, inspect vehicle registration to confirm ownership, agree costs of new items to invoices.
ISA 600 tells you
What you need to do as the group or component auditor. Paragraph 30, 40, 41
Which ISA requires an integrity check on management?
220
The management representation letter (appendix) contains…
Consequences (costs or misstatements) and controls.
What would be in an audit report with modifications to make?
An intro (explanation of issue (disagreement, L of S, significant uncertainty), seriousness (material, pervasive?), Impact on report.
Misleading accounting policies/ disclosures are…
Material by nature.
What is a consequence of overstated profits and tax?
Taxed too much.
What is a good thing to do in cash flow projection analysis? Sen…
Perform sensitivity analysis
What is the difference between an audit and an assurance report?
Just change the word “opinion” to “conclusion”, still use all the except for paragraphs etc. (But there is no such thing as an emphasis of matter paragraph).
How could you gain comfort over inventory at third parties?
look at delivery notes and trace to listed amount, trace to suppliers invoice, ask management of the records they have, with company’s permossion visit premises, if there is used items then view dispatch notes.
If there is an immaterial disagreement you should…
Not modify report but add to list of immaterial disagreements. Disclose that better accounting records need to be kept.
What are the risks associated with a new audit client?
less comfort on opening balances and les sknowledge of workings of business.
When analysing WIP you might want to look at expeced costs and receipts to determine if…
A provision for loss is necessary and has been made.
Informed management is…
To be used if there is a management threat, someone at the client who can make receive the non-audit services and can make an independent management decision.
A test you can do with deferred revenue…tr
trace the transfer from deferred revenue to revenue.
If one of your clients has new owners you should…
Reissue the engagement letter. Undertake a risk analysis.
How could you check understatement of liabilities?
Review post year end payments to see which relate to pre year end. Are un-invoiced items included in costs and accruals? See pre year end costs agree. Review invoices received post year end and trace to pre year end accruals.
