Audit and Assurance Deck

Question 1

What are the threats to independence and objectivity?

Answer 1

Self-interest, Self-review, Management, Advocacy, Intimidation, Familiarity

Question 2

What are the four steps of assurance?

Answer 2

Acceptance, planning, evidence, conclusion and reporting.

Question 3

What are the steps of acceptance in assurance?

Answer 3

Law, Ethics, Risk analysis, Resources.

Question 4

What are the steps of Planning in assurance?

Answer 4

Understand the entity, Materiality, Analytical procedures, Risk assessment

Question 5

Why might receivables go up?

Answer 5

Generous payment, significantly grown, bad debt.

Question 6

What are the steps of evidence in assurance?

Answer 6

Address risks, obtain sufficient and appropriate evidence, to support opinion.

Question 7

What are the steps of Conclusion and reporting in Assurance?

Answer 7

Completion tasks, Report opinion, Other reporting.

Question 8

What is a good layout for audit reporting questions?

Answer 8

What is the problem. How serious, What opinion would you give, what is the impact on report?

Question 9

When are things material?

Answer 9

By size or by nature.

Question 10

What can you use as a base for materiality?

Answer 10

Revenue, Profit before tax, gross assets.

Question 11

What would be materiality if using revenue?

Answer 11

0.5 - 1%

Question 12

What would be materiality if using profit before tax?

Answer 12

5 - 10%

Question 13

What would be materiality when using gross assets?

Answer 13

1 - 2%

Question 14

What things are material by nature?

Answer 14

Related party transactions, Anything that impacts a key point in accounts (e.g. changes from profit to loss), Misleading disclosure.

Question 15

In exam, the material limits?

Answer 15

Don’t really exist, if bigger than 0.5, 5 or 1 for relevant area then material.

Question 16

When talking about the problem for an audit?

Answer 16

Comment on things like misstatement, lack of evidence, uncertainty.

Question 17

When talking about the seriousness of a problem in audit?

Answer 17

Talk about materiality guidelines, consider if material by nature?

Question 18

The audit committee is?

Answer 18

A subsection of the board of directors

Question 19

The auditor should ensure that those charged with governance are provided with the engagement letter which includes:

Answer 19

The form communications will take, appropriate contact persons, explanation that only matters that come to auditors attention will be communicated.

Question 20

The responsibility of the auditor is to?

Answer 20

Form an opinion.

Question 21

Matters to be communicated by auditor are?

Answer 21

Responsibilities of auditor, overview of scope, significant findings, for listed clients - factors relating to independence.

Question 22

Matters relating to independence to be communicated for listed clients are?

Answer 22

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)

Question 23

Effective communication is?

Answer 23

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).

Question 24

An auditors report will also include?

Answer 24

A cover letter and appendix setting out deficiencies, consequences and recommendations.

Question 25

Set out your comments on internal controls deficiencies?

Answer 25

In a table, One column for consequences and one for recommendations.

Question 26

Consequences of deficiencies may be:

Answer 26

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.

Question 27

Recommendations for deficiencies need…

Answer 27

to be specific, commercially feasible, or if control in place but not followed - training, recommunication, segregation of duties, disciplinary action, regular stock counts.

Question 28

The direction you do a test in (from assets to list or vice versa) measures?

Answer 28

Either completeness or existence depending on the direction.

Question 29

An unmodified audit report is if?

Answer 29

You found no or immaterial issues. Unmodified report with unmodified opinion. ISA700 Clean audit report.

Question 30

The three statements in a clean audit report:

Answer 30

True and fair, accounts properly prepared in accordance with standards, directors report consistent with financial statements.

Question 31

A significant uncertainty in audit report is?

Answer 31

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.

Question 32

A material issue in an audit report can be (two types) ?

Answer 32

A material disagreement (e.g. accounting treatment) or Limitation of scope (e.g. can’t collect sufficient and appropriate evidence for material balance).

Question 33

The two descriptors for material misstatements are:

Answer 33

“Material but not pervasive” and “Material and pervasive” (not common at all).

Question 34

For a material but not pervasive material issue in a report?

Answer 34

Issue a modified report with a modified opinion. Say it is qualified except for. (Problem not big enough to chuck in bin).

Question 35

For a material and pervasive material issue due to a disagreement?

Answer 35

For a disagreement (e.g. incorrect basis of accounts) issue a modified report with modified opinion, adverse opinion.

Question 36

For a material and pervasive material issue due to a limitation of scope?

Answer 36

e.g. no evidence. Give a modified report with a modified opinion. (A “Disclaimer”).

Question 37

If there is an issue in the annual report?

Answer 37

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.

Question 38

Audit reporting exam technique, report consists of:

Answer 38

Introduction, seriousness, Impact on report.

Question 39

The intro of the audit report contains:

Answer 39

Brief summary of issue, disagreement, limitation of scope, significant uncertainty.

Question 40

The seriousness section of your audit report contains:

Answer 40

If material (=error / base[like revenue] compare this to base materiality percentage), If pervasive

Question 41

The impact on report section of your audit report contains?

Answer 41

Modified report? Modified opinion? What is the opinion?

Question 42

The emphasis of matter paragraph comes?

Answer 42

After the main opinion.

Question 43

Disclaimers, adverse opinions and “except for” opinions come?

Answer 43

Before the main opinion.

Question 44

Consignment stock is?

Answer 44

Inventory that is yours but held somewhere else.

Question 45

The three types of audit report are?

Answer 45

No or immaterial issues, Significant uncertainty or Material issue.

Question 46

When doing the audit report questions?

Answer 46

State the issue, state if material and how, state conclusion.

Question 47

Reasonable assurance is?

Answer 47

High level of assurance, positive opinion, e.g. audit of financial information.

Question 48

Limited assurance is?

Answer 48

Moderate level of assurance, negative opinion, e.g. review of financial information.

Question 49

The objectives of an auditor are?

Answer 49

To obtain reasonable assurance, report on financial statements, communicate with those charged with governance.

Question 50

A small private company is exempt from audit if it satisfies two of?

Answer 50

Maximum 50 employees, turnover maximum ?6.5m, gross assets max ?3.26m (if exempt must state this in FS)

Question 51

Subsidiary companies will not require audits if?

Answer 51

Their parent companies guarantee their liabilities.

Question 52

Companies that must have an audit even if they fit rules of being exempt are?

Answer 52

Insurance companies, Banks, Plc., Where shareholder owning at least 10% of shares asks for audit.

Question 53

A statutory audit (reports to, scope determined by, reporting about, level of assurance, circulation of)

Answer 53

The members, Companies act / ISAs / audit regulations, opinion on truth fairness / properly prepared / directors report, reasonable, in public domain.

Question 54

A non-statutory assurance (reports to, scope determined by, reporting about, level of assurance, circulation of)

Answer 54

Management, Terms of engagement / ISAEs or ISREs , Arrive at conclusion depending on work performed, usually limited, likely to be restricted.

Question 55

The difference between tests of control and substantive tests is?

Answer 55

Tests of control test the system which generates the number, substantive tests test the actual number in the accounts.

Question 56

ISA 240 relates to?

Answer 56

The auditors responsibilities relating to fraud in an audit of financial statements. Fraudulent financial reporting or misappropriation of assets.

Question 57

The triangle indicators of fraud risk are?

Answer 57

Opportunity, Attitude and rationalisation, incentives and pressure.

Question 58

In trying to identify fraud you should be?

Answer 58

performing a fraud risk assessment, be professionally sceptic, discuss with engagement team, respond to fraud risk, consider implications on rest of audit.

Question 59

If fraud is suspected or discovered then ?

Answer 59

Report to management.

Question 60

If fraud has caused material misstatement or uncertainty in financial statements ?

Answer 60

Report to shareholders.

Question 61

If there is a duty or right to disclose fraud findings then?

Answer 61

Report to third parties.

Question 62

ISA 250 concerns?

Answer 62

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.

Question 63

In identifying misstatement caused by non-compliance?

Answer 63

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.

Question 64

If the auditor wishes to report non-compliance but managers are involved then?

Answer 64

Report to the audit committee, or if not seek legal advice.

Question 65

Suspicions of bribery must be reported to?

Answer 65

The national crime agency (NCA)

Question 66

Bribery may often be covered up as?

Answer 66

Hospitality expenses or donations.

Question 67

The focus of bribery prevention policies is?

Answer 67

Top level culture, risk assessment, communication to staff, monitoring and review.

Question 68

Bribery (3 forms) is?

Answer 68

Being bribed, offering a bribe, bribing a foreign public official.

Question 69

The Sarbanes Oxley Act states?.

Answer 69

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.

Question 70

A related party is a party that (transactions must be)?

Answer 70

Might be expected to have undue influence on the company being audited. Relevant transactions must be disclosed.

Question 71

Audit procedures regarding related parties:

Answer 71

Get list, test transactions, review relevant minutes, review bank confirmations and investment transactions, confirm disclosures are made, obtain confirmation of complete disclosures.

Question 72

Examples of money laundering?

Answer 72

Making illegal earnings seem legitimate, tax evasion, saving costs by non-compliance, oversea offences that are criminal in the UK.

Question 73

Verbs involved with money laundering

Answer 73

Using, acquiring, retaining, controlling, concealing, disguising, converting, transferring, removing from UK.

Question 74

An accountant must report to the MLRO if?

Answer 74

they have reasonable grounds to believe there is money laundering. (MLRO then reports to NCA if a report is necessary).

Question 75

Money laundering offences include?

Answer 75

Failure to report, Failure to provide suitable training to staff, tipping off money launderer. 14 years is most jail time.

Question 76

Bribery offences can still be reported to ?

Answer 76

MLRO

Question 77

The expectations gap is the gap between?

Answer 77

The expectations of the users of the reports and the firms responsibilities regarding the reports.

Question 78

To narrow the expectations gap auditors can?

Answer 78

Improve the audit report to set out responsibilities, include responsibilities in engagement letter, liaise with audit committees.

Question 79

Audit failure can be because (some examples)?

Answer 79

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.

Question 80

Overall regulation of auditing is driven by?

Answer 80

the IFAC (ICAEW is a member).

Question 81

How does the IFAC play a role?

Answer 81

The IFAC and the forum of firms nominate members of the International auditing and assurance standards board (IAASB) which issue standards.

Question 82

Standards issued by the IAASB include?

Answer 82

ISAs - audits, ISAEs - assurance engagements not on historic financial information, ISREs assurance engagements historic, ISRRSs - non assurance, ISQCs - all assurance engagements.

Question 83

The FRC board comprises of?

Answer 83

The codes and standards committee, The executive committee (overseas work), The conduct committee (review of quality)

Question 84

The FRC issues:

Answer 84

Amended ISAs, Ethical standards for Auditors, Practice notes, Bulletins,

Question 85

Current issues facing the auditing profession are:

Answer 85

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.

Question 86

Harmonisation is?

Answer 86

aligning global standards so that companies are audited in a comparable way regardless of location,

Question 87

IAStadards were adopted by all EU listed companies for periods commencing?

Answer 87

on or after 1 January 2005.

Question 88

In March 2012 the FRC issued a briefing paper about?

Answer 88

The difficulty to engage in professional scepticism when working closely with a company.

Question 89

Auditors get ethical guidance from?

Answer 89

IFAC code of ethics, ICAEW code of ethics, FRC ethical standards for auditors.

Question 90

The fundamental ethical principals are?

Answer 90

Professional competence and due care, professional behaviour, Confidentiality, Objectivity, Integrity.

Question 91

If non-audit work is carried out that is audit related, threats are?

Answer 91

Usually insignificant when it is similar work to the audit work,

Question 92

If non-audit work is carried out that is internal audit, threats and safeguards

Answer 92

Self-review and management. Separate teams, independent partner review, don’t perform if audit will rely on IA work.

Question 93

If non-audit work is carried out that is IT related, threats and safeguards

Answer 93

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.

Question 94

If non-audit work is carried out that is Tax related, threats and safeguards

Answer 94

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).

Question 95

If non-audit work is carried out that is Recruitment related, threats and safeguards

Answer 95

Familiarity, Management. (Listed) Don’t provide recruitment services in relation to key management, (unlisted) can provide advice if partner/staff not in audit.

Question 96

If non-audit work is carried out that is Remuneration related, threats and safeguards

Answer 96

Familiarity, Management. Relating to directors/key management. Familiarity is unsurmountable, decline audit,

Question 97

If non-audit work is carried out that is Transaction related, threats and safeguards

Answer 97

Management, Self-review. Separate teams, due diligence work reviewed by ind transactions partner, ind partner review of audit.

Question 98

If non-audit work is carried out that is accounting related, threats and safeguards

Answer 98

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.

Question 99

If non-audit work is carried out that is valuation related, threats and safeguards

Answer 99

Self-review, management. Separate teams, ind partner review, don’t do valuation if it would be material (listed) and also involves subjectivity (non-listed).

Question 100

The main response to management threat is?

Answer 100

prohibiting work that involves taking management decisions, and ensuring informed management is in place for engagements that are taken on

Question 101

The main response to self-review threat is?

Answer 101

separate teams and independent partner review.

Question 102

ESPASE is?

Answer 102

The ES provisions available for small entities,

Question 103

ES4 is the requirement for ?. (and ESPASE?)

Answer 103

external ind quality review if 10%

Question 104

ES5 is the requirement for ?. (and ESPASE?)

Answer 104

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.

Question 105

ES2 is the requirement for ?. (and ESPASE?)

Answer 105

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.

Question 106

Audit quality I measured by the?

Answer 106

FRC monitoring committee, ICAEW practice assurance scheme.

Question 107

The FRC promotes audit quality by?

Answer 107

issuing ISAs, ethical standards and briefings. Monitoring compliance through reviews of audit firms. Overseeing professional accountancy bodies, investigating misconduct.

Question 108

The professional standard ISQC 1?

Answer 108

Quality Control for Firms and Perform Audits and Reviews of Financial Statements and other Assurance and Related Services Engagements.

Question 109

The professional standard ISA 220?

Answer 109

Quality Control for an Audit of Financial Statements

Question 110

Things the auditor should consider include:

Answer 110

Management integrity, competence time and resources, compliance with ethical standards, significant matters (even from previous audits).

Question 111

Details of the engagement quality control review:

Answer 111

“Hot review” - independent evaluation of independence, significant judgments made and conclusions in audit opinion. Before opinion issues. For listed/high risk clients.

Question 112

Details of the monitoring review?

Answer 112

“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.

Question 113

On quality control failure the ICAEW can issue?

Answer 113

Fines, disciplinary action, withdrawal of firm’s authorisation to carry out audits.

Question 114

What three lists of rules govern all Chartered Accountants assurance engagements?

Answer 114

Internal Standards on Quality Control, ICAEW Code of ethics, Terms of Engagement

Question 115

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.

Answer 115

Ethical Standards for Auditors, Practice Notes, International Standards on Auditing.

Question 116

Fraud caused by employees should be reported to…

Answer 116

Client management. (Management Fraud goes to MLRO).

Question 117

Why are related party transactions high risk?

Answer 117

Extensive and complex structure range, information systems may be ineffective at identifying related party transactions.

Question 118

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.

Answer 118

Details of non-audit services and fees charged.

Question 119

What things would an Ethics Partner be responsible for?

Answer 119

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.

Question 120

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?

Answer 120

The audit firm should consider the composition of the audit team

Question 121

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…

Answer 121

he cannot return to the role for another three years.

Question 122

In the case of a senior manager who has worked on a listed client for eight years…

Answer 122

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

Question 123

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…

Answer 123

Implement safeguards in respect of Karen plc and take no action with respect to Linda Ltd

Question 124

According to Ethical Standard 5 what is Informed management?

Answer 124

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.

Question 125

A liability cap is…

Answer 125

something which limits the liability to companies on statutory audits.

Question 126

Facts about Liability caps…

Answer 126

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.

Question 127

The most popular kind of liability for liability caps is…

Answer 127

proportional liability. The auditor is not the sole one responsible.

Question 128

Audit firms must carry professional indemnity insurance, this is…

Answer 128

any settlements of claims against company will be settled by insurer. Also legal fees and partner time and damage to reputation.

Question 129

If a low fee is charged for audit work there might be a threat of…

Answer 129

Self-interest. Can they really ensure they complete all work sufficiently. Quality review.

Question 130

Things to consider before accepting an audit engagement…

Answer 130

Risk analysis, ethical barriers, resources, legal issues.

Question 131

Risk analysis before an engagement helps to determine…

Answer 131

Risk of client, audit fee, areas that will need more work.

Question 132

When prospective auditors contact existing auditors they must…

Answer 132

Ask client permission, contact about relevant information accepting appointment. (Response is similar, request, state no matters to be aware of or set out matters).

Question 133

Auditors can be appointed by directors for…

Answer 133

Casual vacancies (e.g. When the existing auditor resigns), or first auditor between incorporation and AGM.

Question 134

Auditors can be appointed by members when…

Answer 134

Ordinary resolution (>50%), at AGM. Appointment within 28 days after latest date for financial statement filing (or existing auditor reappointed).

Question 135

Secretary of state may appoint auditor when…

Answer 135

no auditor has been appointed in time (rare).

Question 136

When removing an auditor…

Answer 136

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.

Question 137

If an auditor is going to resign, they must:

Answer 137

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.

Question 138

If the auditor simply decides not to be reappointed the auditor must still…

Answer 138

prepare statement of circumstances or confirm in writing that there are no circumstances members should know of.

Question 139

The notice and resolution needed for auditor removal…

Answer 139

Ordinary notice with special resolution.

Question 140

ISA 210 concerns…

Answer 140

Agreeing the terms of the Audit engagement,

Question 141

The engagement letter should cover…

Answer 141

Objective, scope, management responsibilities, auditors responsibilities, form and content of communications, right to access, expectation of management to provide written representations.

Question 142

On a recurring engagement a letter…

Answer 142

May not net to be sent, but perhaps if terms need to be revised or if client needs to be reminded.

Question 143

The audit strategy should cover…

Answer 143

Materiality, Risk, Audit Approach, Timing, team, budgets, deadlines.

Question 144

ISA 300 concerns…

Answer 144

Planning an audit of financial statements.

Question 145

An item is material if…

Answer 145

Its omission or misstatement could influence the economic decisions of users.

Question 146

ISA 315 concerns…

Answer 146

Identifying and assessing risks of material misstatement.

Question 147

Analytical procedures are used in these three key stages…

Answer 147

Planning, evidence, overall review.

Question 148

Limitations to analytical procedures at the planning stage are…

Answer 148

Need sound knowledge of entity, high level activity and requires staff, needs reliable source data, division of data needed.

Question 149

To perform analytical procedures you must…

Answer 149

Gain an understanding of the business, develop expectation, compare actual to expectation.

Question 150

The audit risk (equation) is…

Answer 150

Inherent risk x control risk x detection risk.

Question 151

Entity risk is…

Answer 151

Inherent risk and control risk.

Question 152

An audit risk associated with a desire to increase overdraft is…

Answer 152

Could be a sign of financial difficulties.

Question 153

An audit risk associated with 3-5 year contracts is…

Answer 153

Revenue recognition may be complicated.

Question 154

An audit risk associated with Property that has been revalued is…

Answer 154

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.

Question 155

An audit risk associated with an increase in Revenue is…

Answer 155

Overstated revenue (recognised too early) or expansion due to borrowing.

Question 156

An audit risk associated with an increase in profit margin is…

Answer 156

No indication in change in business so overstated revenue? Unrecorded purchases?

Question 157

An audit risk associated with an increase of receivables days…

Answer 157

Overstatement of receivables? Irrecoverable debts? Sales recorded early?

Question 158

An audit risk associated with a fall in payables days is…

Answer 158

Due to unrecorded liabilities?

Question 159

An audit risk associated with a loss on sale of vehicles is…

Answer 159

Inappropriate asset lives being used, PPE overstated, going concern risk if companies have been forced to sell goods at undervalue.

Question 160

If there is an increase in GPM and payables days this may be due to…

Answer 160

Unrecorded liabilities.

Question 161

Risk and impact of auditing a new firm is…

Answer 161

Opening balances audited by previous firm - additional testing required. Lack of knowledge - Increase planning time.

Question 162

Risk and impact of auditing foreign currency purchases are…

Answer 162

Purchases and inventory may be incorrectly translated - test rates that were used, re-perform.

Question 163

Risk and impact of profit related bonuses…

Answer 163

Increases the likelihood of manipulation of results - need increased awareness when testing subjective areas.

Question 164

Risk and impact of testing overdraft renewals…

Answer 164

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.

Question 165

A significant risk is …

Answer 165

an identified risk that requires special attention.

Question 166

These factors may decide if a risk is significant…

Answer 166

Whether it is fraud, complexity, transactions with related parties, subjectivity, outside normal course of business.

Question 167

If you are asked to explain audit risk you should include one of…

Answer 167

Increased risk of misstatement, going concern risks, difficulties gathering evidences.

Question 168

If a client is gone into liquidation and can’t pay for WIP you have done… you should value it at…

Answer 168

lower of cost so far and net realisable value (how much you could get for it).

Question 169

If a matter is material but not pervasive you should…

Answer 169

Give explanation of matter in an “except for” paragraph included in the bases for qualified opinion paragraph immediately above the opinion paragraph.

Question 170

If management have refused to accept responsability for financial statement preparation and provide auditor with all relevant information then you should…

Answer 170

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”.

Question 171

If the statements have been prepared as a going concern basis but the company clearly has no option but liquidation…

Answer 171

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.

Question 172

If directors make appropriate disclosures about a company that you doubt can be listed as going concern…

Answer 172

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.

Question 173

If directors do not make appropriate disclosures about a company that you doubt can be listed as going concern…

Answer 173

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.

Question 174

If there is a related party transaction that has not been disclosed (if it is disclosed then issue unmodified opinion with unmodified report) …

Answer 174

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.

Question 175

ISAE 3400 applies to…

Answer 175

Engagements to provide assurance on financial forecasts.

Question 176

In providing assurance on financial forecasts you might…

Answer 176

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.

Question 177

Sensitivity analysis is…

Answer 177

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.

Question 178

If a question asks to identify the specific matters you would consider in reviewing reasonableness of assumptions on receipts and payments, think about…

Answer 178

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.

Question 179

ISRE 2400 applies to…

Answer 179

the review of engagements where an assurance practicioner, other than the statutory auditor, review historic financial information.

Question 180

When it asks you to prepare briefing notes you need…

Answer 180

detailed notes. Imagine you are preparing notes for a meeting with the scariest client you have had. Give headings, but can use bullet points.

Question 181

Things to discuss in preparing briefing notes…

Answer 181

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?

Question 182

A non-audit assurance engagement …

Answer 182

has likely lmited work done on it, assurance provider will issue a conclusion, not an opinion, usually expressed negatively.

Question 183

In reports on forecasting (prospective financial information), it is good to state…

Answer 183

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

Question 184

ISAE 3410 sets out…

Answer 184

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).

Question 185

The four stages of an assurance engagement are…

Answer 185

Acceptance, planning, evidence, reporting.

Question 186

Comparison of Audit and assurance.

Answer 186

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.

Question 187

To describe an audit test (audit procedure to do)

Answer 187

Action (inquire, recalculate…), source (what are you inquiring with…), objective (how does this address the risk you are looking at).

Question 188

The risk of a new audit is…

Answer 188

lack of cumulative knowledge, greater risk of material misstatement.

Question 189

The risk with using a perpetual inventory count is… (controls)

Answer 189

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.

Question 190

A risk of overheads in inventory…

Answer 190

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.

Question 191

A risk of inventory that has been returned… (Audit procedures?)

Answer 191

Misstatement if hey are included at full price. Review inventory listing that they have been excluded or written down.

Question 192

If inventory days have gone up… (average number of days inventory is held for)

Answer 192

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?

Question 193

Audit procedures for risks due to foreign currency transactions.

Answer 193

Agree rates to reliable third party source, reperform a sample of calculations.

Question 194

If payables days has fallen, the risk could be… (Audit procedures)

Answer 194

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.

Question 195

The audit risk related to warranty provisions (audit procedures)…

Answer 195

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.

Question 196

A thing to mention (apart from provisions) if there are large legal claims. And audit procedures.

Answer 196

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.

Question 197

In order to reduce audit risk to an acceptable level, ISA 330 requires the audit to…

Answer 197

Determine the overall responses to assessed risks at FS level. Perform audit procedures to respond to assessed risks at assertion level.

Question 198

If the auditor plans to rely on the work of others (e.g. internal audit) the third party needs to …

Answer 198

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”).

Question 199

The audit approach follows this generic trend…

Answer 199

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.

Question 200

Data analytics can be embedded in the audit plan to assist with:

Answer 200

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).

Question 201

In terms of relying on the work of experts, an auditor can and cannot…

Answer 201

CAN place reliance on the work of others when forming their opinion.
CANNOT devolve responsibility for forming the audit opinion to others.

Question 202

An internal audit usually includes:

Answer 202

monitoring internal controls, examination of financial and operating information, review of operating activities, review of compliance with laws and regulations, risk managements, governance.

Question 203

Under ISA ____ if you want to use the work of internal auditors as an external one you must.

Answer 203

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?)

Question 204

Experts may be used for valuation of buildings, pensions, quantitiies. You would need…

Answer 204

A surveyor for buildings and some quantities. Actuary for pensions.

Question 205

Using an auditor’s expert or a management expert have info in IAS…

Answer 205

620 and 500

Question 206

If an auditor accepts an engagement to audit a parent of a group, they will be responsible for an opinion on…

Answer 206

The parent company’s FS and the group FS. If the auditor doesn’t audit all components they must place reliance on component auditors.

Question 207

The details of ISA 600 (objectives in paragraph 8) you need an awareness of are…

Answer 207

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.

Question 208

If a client has outsorced functions (payroll, facilities management) the auditor shoud… under ISA…

Answer 208

402, Obtain understanding of services outsourced, consider access to sources of evidence (like the assurance report of the service), assess risks arising.

Question 209

In audits for not-for-profit entities…

Answer 209

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?

Question 210

Charities following Statement of recommended practice based on FRSSE for charities with annual income

Answer 210

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.

Question 211

Charities following Statement of recommended practice based on FRS 102 for larger charities (>£6.5)

Answer 211

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.

Question 212

Unincorporated charity audit requirements.

Answer 212

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.

Question 213

If a charity is a company, to do an audit follow ISA…

Answer 213

700

Question 214

The structure of how pulic money is spent and audited:

Answer 214

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.)

Question 215

The main purpose of public sector audit is acocuntability. The three key principles are…

Answer 215

Independence, wide scope of audit, make results available to public.

Question 216

An audit of public sector may cover…

Answer 216

Financial statements, internal control systems, Regularity (regulations), propriety (ethically), value for money.

Question 217

Internal audit in the public sector is governed by…

Answer 217

Public Sector Internal Audit Standards.

Question 218

The two main questions asked on audit completion are…

Answer 218

Do the financial statements comply with the Companies act and accounting standards? Do the financial statements make sense?

Question 219

Evaluation of misstatements in the audit (ISA….) treatment is on completion…

Answer 219

(450) Inform mangement, reassess materiality, are uncorrected misstatements material individually or in aggregate? Get management written confirmations about the effect of uncorrected misstatements.

Question 220

Initial audit engagements… opening balances (IAS…)…

Answer 220

(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.

Question 221

ISA 710 regards…

Answer 221

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.

Question 222

ISA 570 concerns…

Answer 222

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.

Question 223

Non adjusting events…

Answer 223

are ones which relate to happenings after year end… should be disclosed in FS.

Question 224

ISA 580 concerns…

Answer 224

Written representations.

Question 225

ISA 720 concerns…

Answer 225

The other items the FS ar epublished with (Directors report, financial summaries or highlights, key quarterly data, management review of year)

Question 226

If there are material inconsistencies between the financial statements and other information…

Answer 226

ISA 720A requires the auditor to read the information and consider nee for “Other matter” paragraph in the audit report.

Question 227

The summary of an audit (covered by a senior member) will include…

Answer 227

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).

Question 228

What audit concerns would there be with fix priced contracts?

Answer 228

Cost overruns might result in losses

Question 229

If an audit reveeals a sales credit note issued post year end but in relation to a pre year end event…

Answer 229

It’s adjusting event so should be dealt with. If goods were faulty may need a provision, perhaps it affected multiple customers,

Question 230

The “Current ratio” is…

Answer 230

The ratio of current assets to current liabilities.

Question 231

What is a Bannerman paragraph?

Answer 231

In it the auditor accepts responsibility to the company and the company’s shareholders as a body only.

Question 232

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?

Answer 232

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…

Question 233

Where does the “Emphasis of matter” paragraph come?

Answer 233

After the opinion on financial statements.

Question 234

If the auditor can’t get access to legal entity to verify litigatin claims etc…

Answer 234

Issue a modified opinion inder IAS 705

Question 235

If an engagement partner has been with the listed client for five years, by ethical standard…

Answer 235

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.

Question 236

From a listed client, if audit and non-audit fees exceed… a self-interest threat arises. (non-listed?) Fee dependency threat.

Answer 236

5% and 10%

Question 237

What are the purposes of quality control measures?

Answer 237

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.

Question 238

Where external and internal audit are provided by the same firm there is a risk of…

Answer 238

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”.

Question 239

If an outgoing auditor has refused to repeat audit, there is a risk…

Answer 239

the management lacked integrity. Do a directors search at Companies House and review press cuttings and the internet.

Question 240

Things to consider when taking on new client…

Answer 240

Do you have experience in this sector, do you have offices in the right place, can you compete with a popular year end.

Question 241

Things to consider if there are funds acquired by manager of client …

Answer 241

Where they acquired lawfully? MLRO?

Question 242

Things to consider if your client has a loan with a bank…

Answer 242

Do they owe a duty of care to the bank? What happens if they don’t pay?

Question 243

If a bank is giving a contingent loan based on the statements, there may be a risk…

Answer 243

Of management bias in order to comply with covenants attached to the loan. Detection risk might be higher die to time commitments on covenant.

Question 244

Some risks associated with a client in a regulated industry are…

Answer 244

There might be fines that there are no contingent liabilities for.

Question 245

What might these imply: Renewable government contracts, need to comply with rules for operating license, covenants of a bank loan.

Answer 245

Going concern risk.

Question 246

What are the responsabilities of an outgoing auditor?

Answer 246

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.

Question 247

If there is a chance for legal claims against your client…

Answer 247

Does your firm really want to be associated?

Question 248

If an audit firm specialises in music production and considers taking on a music productin company…

Answer 248

Might there be conflicts of interest with its other clients?

Question 249

What are the two times when a report would be modified without the opinion?

Answer 249

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).

Question 250

If the directors make a disclosure that, due to legal proceedings, they are unsure of going concern, the auditor…

Answer 250

if satisfied will issue an audit opnion can be given with an emphasis of matter paragraph. If unsatisfied he will give a qualified opinion.

Question 251

If depreciation has been charged over the wrong period of time the auditor shoud issue (the difference is material but not pervasive)…

Answer 251

there is a difference in acocunting treatment. The audit opinion should be modified with qualified one and an “except for” paragraph.

Question 252

If it says “how does a familiarity threat arise in relation to this particular entity?”…

Answer 252

Say what a familiarity threat is first, then how it relates.

Question 253

If a percentage of fees are taken on commencement of a project, how should revenue be recognised?

Answer 253

Deferred incme.

Question 254

What procedure can you have in place in an audit plan if you are looking at the risk of WIP?

Answer 254

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.)

Question 255

Why is there an audit risk associated with an increase of trade receivables and what are safeguards available?

Answer 255

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.

Question 256

Why is there an audit risk associated with a decrease of purchases and payables and what are safeguards available?

Answer 256

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?

Question 257

What are some safeguards you should do if there is a going concern risk?

Answer 257

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.

Question 258

Non compliance with health and safety regulations (from an auditors perspective)…

Answer 258

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.

Question 259

What steps would you go through to get evindence for a reliability in increase of expected revenue?

Answer 259

Agre eprior year revenue to working papers. Agree price increaeses to board minutes, correspondance, contracts, invoices. Agree expired contract details and new contract details.

Question 260

If it is not a statutory audit, internatinal accoutning standards…

Answer 260

will not be followed.

Question 261

Can a firm produce absolute or reasonable assurance over prospective financial information?

Answer 261

No. And less work will be undertaken than on a statutory audit.

Question 262

If you are analysing prospective financial information, what should you do to the external auditor.

Answer 262

Notify them in case there are important matters to discuss.

Question 263

What are some key things you would do in completing review of prospective financial information for a client?

Answer 263

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.

Question 264

Why might fixed price contracts be a problem in business?

Answer 264

Costs may overrun.

Question 265

What would be the differen reports you might give in a going concern problem?

Answer 265

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).

Question 266

What can be acheived with an internal system of controls?

Answer 266

Reasonable assurance on reliability of reporting, effectiveness of operaiton, compliance. Inherent limitations means absolute assurance can’t be given. (human error, collusion, misuse).

Question 267

An auditor will only consider elements of a control system that…

Answer 267

are relevant to an audit and the FS. So nothing to do with efficiency of management etc.

Question 268

Audit fees depend on…

Answer 268

Seniority and experience of team, time expended, first year of audit?, degree of risk and responsability, nature of business, responsability, priority of work, expenses.

Question 269

Advantages and disadvantages to a client of having an auditor experiences in his industry.

Answer 269

Knowledgable. But perhaps conflict of interest. Confidentiality. Seperate audit teams from different offices used. Information barriers. Partner review.

Question 270

If the financial statements are not prepared as a going concern they are prepared as…

Answer 270

a break up basis.

Question 271

If the statements need to be presented with a break up basis and this has been explained then…

Answer 271

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.

Question 272

A qualified report is given when…

Answer 272

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.

Question 273

A disclaimer of opinion is issued when…

Answer 273

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.

Question 274

In an unqualified report…

Answer 274

the auditors conclude that the financial statements of your business present fairly its affairs in all material aspects.

Question 275

A qualified report is when…

Answer 275

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.

Question 276

If you need to make a modified opinion due to disagreement over potential for break up basis…

Answer 276

modification may be qualified opinion/except for if considered material but not pervasive or adverse if considered material and pervasive.

Question 277

Who may sue auditors if for damages?

Answer 277

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.

Question 278

What is the primary risk of an auditor?

Answer 278

Giving the wrong opinion.

Question 279

What might you do in a preliminary risk assessment as an auditor?

Answer 279

Check for ethical risks (self-interest, familiarity etc.…), Risk of material misstatements (revenue, inventory, any balance), other factors (legal, practical issues etc.)

Question 280

How much of your total income can come from one client without threats being raised?

Answer 280

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%.

Question 281

If a client has to keep loan covenants there is an…

Answer 281

incentive to manipulate (similar if they are about to list on stock exchange).

Question 282

In the planning questions of the exam, how should you lay out your answers?

Answer 282

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.

Question 283

What are the three justifications for something being an audit risk?

Answer 283

Increase of material misstatement, increase of going concern risk, limits ability to collect evidence.

Question 284

What are the risks with food based items in inventory?

Answer 284

They are perishable and would alter valuation.

Question 285

What are some possible procedures to address if you have fixed percentage overheads on WIP?

Answer 285

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.

Question 286

What are some possible procedures to address if there are fixed-price contracts?

Answer 286

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.

Question 287

What are some procedures to address in terms of the risk of judging the stage of completion of NCA?

Answer 287

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.

Question 288

What are some risks associated to overseas transactions?

Answer 288

Hard to chase overseas debt, may be misstatements due to translation errors.

Question 289

In the ethics questions, when explaining a threat (e.g. self review threat) - don’t explain what the threat actually is but…

Answer 289

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.

Question 290

In ethics based questions the basic layout is…

Answer 290

Say the threat and how it affects you, then write the safeguards against it.

Question 291

What is due diligence work?

Answer 291

Corporate finance services - usually worth a lot of money.

Question 292

In an appendix to management, (type of question in exam) how would you structure it?

Answer 292

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.

Question 293

What could be some controls to counteract failure to outsource PPE and Consequences of employees buying their own things or PPE overstatement.

Answer 293

Finance director approves all purchases over £1000. Regular reconciliation of fixed asset register to physical assets, retraining on control procedures, disciplinary procedures.

Question 294

What are the two types of controls?

Answer 294

Preventative or detective.

Question 295

What is the audit report if you have no or immaterial issues?

Answer 295

Unmodified report with an unmodified opinion? (ISA 700)

Question 296

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?

Answer 296

Modified report with an unmodified opinion. The modification is an emphasis of matter paragraph.

Question 297

What report would be issued if there is a material issue due to a disagreement that is material but not pervasive?

Answer 297

Issue a modified report with a modified opinion, “this is qualified except for…”

Question 298

What report would be issued if there is a material issue due to a limitation of scope that is material but not pervasive?

Answer 298

Issue a modified report with a modified opinion, “this is qualified except for…”

Question 299

What report would be issued if there is a material issue due to a disagreement that is material and pervasive?

Answer 299

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.

Question 300

What report would be issued if there is a material issue due to a limitation of scope that is material and pervasive?

Answer 300

A modified report with a modified opinion with a disclaimer. No evidence to form opinion.

Question 301

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…

Answer 301

Limitation of scope - disclaimer.

Question 302

What opinion would you issue if there is a significant uncertainty and the disclosure isn’t adequate?

Answer 302

Same as if there is a material disagreement…

Question 303

What things would you put in an “other matters” paragraph?

Answer 303

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).

Question 304

How would you layout questions regarding the type of report to be given?

Answer 304

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.

Question 305

What things are material by nature?

Answer 305

Related party transactions, something that changes you from profit to loss making or asset to liability, misleading accounting disclosures.

Question 306

What things might be different in examining future cash flows for a bank and a normal audit?

Answer 306

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)

Question 307

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?

Answer 307

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.

Question 308

If material but not pervasive what opinion should you issue?

Answer 308

Qualified opinion.

Question 309

Inventory records have been destroyed, directors estimate an amount that is material. What should you think?

Answer 309

Likely material but not pervasive. Qualified opinion with paragraph showing inability to obtain sufficient evidence. State that adequate accounting records were not maintained.

Question 310

If a company relies on a loan continuing, but there is no further agreement even though likely, and they have prepared cash flow projections…

Answer 310

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.

Question 311

What kind of things would you put in “planning notes” for a meeting following analytical procedures?

Answer 311

Write “Reason for…” Then state a change (like % gross profit margin) and possible reasons for the change.

Question 312

What are some reasons for a increase in revenue?

Answer 312

New product, inflation, pricing policy, new outlets, new wholesale customers, change in income recognition policy.

Question 313

What are some reasons for increases in GP margin?

Answer 313

Lower cost base to new sources of goods? Increase in sales of higher brand, exchange rates…

Question 314

In the completion stage when the auditor reviews the statements what conclusions should he be able to reach?

Answer 314

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.

Question 315

If directors didn’t want to change an immaterial amount as it would alter their bonuses…

Answer 315

Modified on grounds of disagreement. Material by nature, except for paragraph as unlikely to be pervasive, opinion part of report states amount of overstatement.

Question 316

Difference between unqualified and qualified?

Answer 316

Unqualified is fine, qualified has a caveat that the directors report isn’t mentioning, eg all fine except for…

Question 317

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?

Answer 317

No, disclosures are already made. Report can be modified but opinion not qualified. Modification is an emphasis of matter paragraph.

Question 318

If there are no records of cash sales and cash makes up 15% of revenue, what should your opinion be?

Answer 318

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.

Question 319

What are some problems you should think about with dishonest directors?

Answer 319

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.

Question 320

Consequences and recommendations of head office staff not checking the till records detailing cash sales.

Answer 320

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.

Question 321

If data is lost relating to detailed sales (but not monthly sales listings) what are consequences and recommendations?

Answer 321

Inability to process orders, cash flow problems. Data recovery costs. Reminder of importance to back up, designated monitored, disciplinary procedures for breaches.

Question 322

Amendments to selling prices aren’t verified. Consequences and recommendations?

Answer 322

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.

Question 323

If credit limits for customers are bit reviewed, the consequences and recommendations?

Answer 323

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.

Question 324

If accounting records aren’t adequate, what should you do in your report?

Answer 324

Report by exception under the companies act 2006 that accounting records not maintained. Qualified, except for opinion due to limitation of scope.

Question 325

Which ISRE is in engagements to review financial statements?

Answer 325

2400

Question 326

If you are doing a non audit assurance in statements, what phrase will you be looking to write?

Answer 326

Negatively phrased: nothing to show these statements don’t give a true and fair view in accordance with the international financial reporting standards.

Question 327

If you’re doing assurance on financial statements what liability would you need to discuss.

Answer 327

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.

Question 328

In making equities about preliminary analytics of a companies figures how should you layout your answers…

Answer 328

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.

Question 329

How could work in progress be affected in terms of losses? Risks?

Answer 329

Risks that there is a failure to provide for losses in contracts so held in wip

Question 330

If arbitrary discounts can be given by staff, what are some consequences and procedures?

Answer 330

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.

Question 331

If auditing revenue on 3 restaurants and 1 isn’t recording discounts well, what report can you give?

Answer 331

Limitation of scope of lack of data, can provide limited assurance on the other restaurants, qualified opinion with except for paragraph.

Question 332

What is the difference between a qualified and an adverse audit opinion?

Answer 332

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.

Question 333

Some key common audit safeguards:

Answer 333

Independent partner review, independent quality review, ensure there is ‘informed management’, observe and evaluate the effectiveness of system controls.

Question 334

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?

Answer 334

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.

Question 335

What are some procedures you could do as an auditor if a going concern is a risk?

Answer 335

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.

Question 336

What are some procedures to cover a risk in PPE audit?

Answer 336

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,

Question 337

What procedures would you do to address a provision risk?

Answer 337

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.

Question 338

Why are the procedures and concerns around a legal claim from a client customer?

Answer 338

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.

Question 339

If there is an adequate disclosure about the potential for going concern issues you should issue…

Answer 339

Modified report with an emphasis of matter paragraph. If inadequate disclosure issue qualified or adverse depending on circumstances.

Question 340

An immaterial balance from a company your director has majority shares in has become irrecoverable. Should it be disclosed?

Answer 340

Yes it is material by nature as a related party transaction.

Question 341

How should a report be modified if a related party transaction isn’t appropriately disclosed?

Answer 341

Qualified with an “except for” paragraph and details of the transaction.

Question 342

If an irrecoverable amount is material by size what should the company make for the outstanding amount?

Answer 342

Provision

Question 343

If an entity is not a going concern, what three things can be good to mention in the break up basis?

Answer 343

Assets valued at recoverable amounts, assets and liabilities classed as current, note in financial statements that not a going concern.

Question 344

What does an owner managed business do to risk?

Answer 344

Increases it.

Question 345

What bad thing could a rapid growth rate lead to?

Answer 345

Over trading

Question 346

If a director seems dodgy what could you do?

Answer 346

Search companies house for director qualifications. Review press or Internet for adverse publications.

Question 347

Why might an advocacy threat arise in providing tax services?

Answer 347

Supporting the firm while dealing with the HMRC

Question 348

What ISA says auditors should disclaim an opinion on the financial statements when the directors refuse to provide representations?

Answer 348

580 do a limitation of scope. Material and pervasive, we do not express an opinion.

Question 349

How would you work out the gross profit percentage?

Answer 349

Gross profit x 100 / revenue

Question 350

How would you work out the cost of sales percentage?

Answer 350

Cost of sales x 100 / revenue

Question 351

How would you work out the operating cost percentage?

Answer 351

operating costs x 100 / revenue

Question 352

How would you work out the short term liquiditycurrent ratio?

Answer 352

Current assets : Current Liabilities

This is the ability to pay current liabilities from current assets

Question 353

What is the quick ratio that shows how easy it is to pay current liabilities from reasonably liquid assets?

Answer 353

Receivables + Current Investments + Cash : Liabilities.

Question 354

How do you measure the net asset turnover and what is the purpose?

Answer 354

Revenue / capital employed (It is the asset revenue generated from asset base)

Question 355

How do you measure the inventory turnover and what is it?

Answer 355

Cost of sales / inventories (It is to assess the level of inventory hold).

Question 356

How do you measure the trade receivables collection period and what is it?

Answer 356

Trade receivables x 365 / revenue (It is the ability to turn receivables into cash.

Question 357

How do you measure the payables payment period and what is it?

Answer 357

Trade payables x 365 / Credit purchases (It assesses the ability to pay suppliers)

Question 358

If the opening figures are from a different auditor you could…

Answer 358

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.

Question 359

Risks and procedures with cash transactions?

Answer 359

May fail to be recorded, susceptible to misappropriation, poor control use by temporary staff. Evaluate and test controls.

Question 360

Review correspondence, discuss with management, evaluate and test controls, examine forecasts, ascertain sensitivity, review board minutes to view management opinion on going concern status.

Answer 360

Are all good generic procedures to mitigate audit risk. Use them

Question 361

How does the FRC promote improvements in the quality of auditing?

Answer 361

Issuing ISAs, ethical standards, briefing papers on audit issues such as professional skepticism. Monitoring compliance through review.

Question 362

An audit engagement partner can act for…

Answer 362

5 years, then break for 5 years. If needed to safeguard quality then extra 2 years is allowed.

Question 363

What ISA requires junior audit team work to be reviewed?

Answer 363

220. 230 requires documentation of details of the review.

Question 364

What ISAs involve an audit expert?

Answer 364

Es2 requires satisfaction with objectivity. 620 requires a number of matters are agreed with expert.

Question 365

Cold review and hot review differences.

Answer 365

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.

Question 366

What representation should be given when reviewing cash flow forecasts?

Answer 366

Intended use of forecast communicated so liability restricted, competences of management assumptions disclosed, explanation that team isn’t responsable for preparation, only for analysis

Question 367

What would be the difference in assurance level given on cash flow forecasts and external auditing?

Answer 367

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.

Question 368

What recommendations can you put in place to suggest if there are no bribery regulations?

Answer 368

Document and implement policies, introduce whistleblowing policy, appoint designated person for compliance, top level commitment.

Question 369

What procedures can be set out if a company doesn’t follow accounting policies?

Answer 369

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.

Question 370

If there is some kind of limitation of scope where the auditor can’t see some documents, after the opinion paragraph the auditor should…

Answer 370

Report by exception under the companies act 2006 that all information required was not obtained.

Question 371

How could you confirm integrity of client?

Answer 371

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.

Question 372

What are some things you could do to check payables?

Answer 372

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,

Question 373

What ISA requires auditors to communicate with those charged with governance about issues found?

Answer 373

260

Question 374

Is there a partner rotation rule for non listed companies?

Answer 374

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.

Question 375

If a company is lying in the directors report about using organic chocolate how would this change your report?

Answer 375

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.

Question 376

Why does a juniors work get reviewed?

Answer 376

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

Question 377

If directors refuse to make an immaterial change would it affect the auditors report?

Answer 377

If it is not even material by nature then apparently not, could be material though if aggregated with other items. Qu16.3

Question 378

If an FD gets aggressive then offers a compensation gift…

Answer 378

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.

Question 379

What are the benefits and limitations of analytical procedures at the planning stage of an audit?

Answer 379

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.

Question 380

What are inventory problems with phones

Answer 380

Subject to pilferage and also rapid change in technological modernness

Question 381

What is a qualified opinion?

Answer 381

Misstatement, I.e. Disagreement, or unable to obtain sufficient evidence, material but not pervasive, except for…

Question 382

What is an adverse opinion?

Answer 382

Expressed when disagreement is material and pervasive. Do not give a true and fair view.

Question 383

What is a disclaimer of opinion?

Answer 383

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”

Question 384

In questions where it says: State the outcome of the effect on the audit opinion..

Answer 384

You are welcome to say “if it’s disclosed then this, if it’s… If if if”

Question 385

If there is a immaterial misstatement would you modify the report?

Answer 385

No but it must be considered in aggregate with other items.

Question 386

3 (kind of) extra ethics on top of the self -interest etc.…

Answer 386

Professional competence, conflict of interest, confidentiality.

Question 387

If you are within the range of having fees be a large or really large percent of total income…

Answer 387

Discuss with ethics partner and do independent quality review.

Question 388

What threats are in place if a director from an audited firm is now a partner in your audit firm?

Answer 388

Familiarity threat, self-review threat. Can’t be assigned on the audit or be in a position of influence for 2 years.

Question 389

When can you break confidentiality?

Answer 389

Client permission, public interest, defend in legal proceedings (right to disclose). Required by regulator, ordered by court, money laundering (duty to disclose).

Question 390

General things to think about in regards to preacceptance reviews - important…

Answer 390

Risks, laws, ethics, resources (are any of these increased?) ISA 220

Question 391

If a company has reduced employees in the accounts department…

Answer 391

It might be harder to get evidence.

Question 392

Limited means…

Answer 392

Not listed

Question 393

When looking at preacceptance stuff…

Answer 393

Think about increases in detection risk, inherent risk, control risk…

Question 394

If a company is specialised (like marine biology research)…

Answer 394

It is quite specialised, can offer the right additional work?

Question 395

What three justifications for problems would you state in planning?

Answer 395

Increases risk of material misstatement, going concern, prevents you from collecting sufficient and appropriate evidence.

Question 396

Justification for risks with cash revenue…

Answer 396

Risk of understatement due to misappropriation and delays in banking.

Question 397

If there is a contactless system and a commission is taken by contactless company…

Answer 397

The revenue should be shown gross.

Question 398

General PPE tests.

Answer 398

Physically inspect, inspect vehicle registration to confirm ownership, agree costs of new items to invoices.

Question 399

ISA 600 tells you

Answer 399

What you need to do as the group or component auditor. Paragraph 30, 40, 41

Question 400

Which ISA requires an integrity check on management?

Answer 400

220

Question 401

The management representation letter (appendix) contains…

Answer 401

Consequences (costs or misstatements) and controls.

Question 402

What would be in an audit report with modifications to make?

Answer 402

An intro (explanation of issue (disagreement, L of S, significant uncertainty), seriousness (material, pervasive?), Impact on report.

Question 403

Misleading accounting policies/ disclosures are…

Answer 403

Material by nature.

Question 404

What is a consequence of overstated profits and tax?

Answer 404

Taxed too much.

Question 405

What is a good thing to do in cash flow projection analysis? Sen…

Answer 405

Perform sensitivity analysis

Question 406

What is the difference between an audit and an assurance report?

Answer 406

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).

Question 407

How could you gain comfort over inventory at third parties?

Answer 407

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.

Question 408

If there is an immaterial disagreement you should…

Answer 408

Not modify report but add to list of immaterial disagreements. Disclose that better accounting records need to be kept.

Question 409

What are the risks associated with a new audit client?

Answer 409

less comfort on opening balances and les sknowledge of workings of business.

Question 410

When analysing WIP you might want to look at expeced costs and receipts to determine if…

Answer 410

A provision for loss is necessary and has been made.

Question 411

Informed management is…

Answer 411

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.

Question 412

A test you can do with deferred revenue…tr

Answer 412

trace the transfer from deferred revenue to revenue.

Question 413

If one of your clients has new owners you should…

Answer 413

Reissue the engagement letter. Undertake a risk analysis.

Question 414

How could you check understatement of liabilities?

Answer 414

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.