Audit Basics Flashcards
Explain the purpose of an audit.
The purpose of an audit is to enhance the degree of confidence of intended users in the FS. We do this by expressing an independent opinion on whether the FS are prepared, in all material respects, in accordance with an applicable financial reporting framework.
Explain the concept of audit risk.
- The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated is known as “audit risk”.
- Audit risk is comprised of inherent risk and control risk (collectively, risk of material misstatement) and detection risk. Inherent risk + control risk = risk of material misstatement.
What are financial statement assertions?
Management implicitly or explicitly makes representations regarding the recognition, measurement, presentation and disclosure of the various elements of financial statements and related disclosures, these are called financial statement assertions.
What is materiality?
Materiality is the magnitude of an omission or misstatement of accounting information that may influence the economic decisions of users of the financial statements.
What are the three key levels of materiality?
- Overall Materiality is used to determine if the financial statements as a whole are fairly stated.
- Performance Materiality is used to design audit procedures at the FSLI or class of transaction level or for disclosures. This is to allow for the possibility that I corrected and undetected misstatements of individual FSLIs could, in aggregate, exceed the overall materiality threshold. Therefore, it needs to be set at less than overall materiality.
- De Minimis SUM Posting Level is used to determine which identified misstatements exceed the ‘clearly trivial’ @3!3@,-!: need to be accumulated on the summary of un corrected misstatements.
How are the materiality levels applied throughout the audit?
The rationale behind the materiality calculation needs to be documented on the file. Materiality will always be reconsidered at the end of the audit irrespective of whether the final numbers change as a result of adjustments. If it’s recalculated, you’ll knees to consider if additional audit work is required.
Explain the impact of identified misstatements on the audit.
The engagement team shall accumulate the misstatements identified during the audit (except for those that are clearly trivial) onto the summary of uncorrected misstatements (SUM) and assess whether or not the misstatements have a material impact on the financial statements, individually or in aggregate. We also need to include misstatements identified which were corrected by the client.
Explain the concept of reasonable assurance.
Reasonable assurance relates to the accumulation of audit evidence necessary for the auditor to conclude that there are no material misstatements in the financial statements taken as a whole. An auditor cannot obtain absolute assurance over the financial statements because there are inherent limitations including the use of testing, internal control limitations including the use of testing, internal control limitations and the persuasive rather than conclusive nature of evidence.
What are the three levels of inherent risk?
- Normal
- Elevated
- Significant
What is one qualitative and one quantifiable factor to be considered when determining materiality?
- Material by nature (qualitative)
- Material by amount or percentage (qualitative)
When is audit evidence most reliable?
Audit evidence is most reliable when:
- it is provided by independent sources, if it is in its original document form when it is obtained directly by the auditor
- when the client’s internal controls are effective.
What are tests of details?
Tests of details are one type of substantive test involving the examination of support for individual items that make up balance sheet and income statement accounts.
What are the types of procedures used for tests of details?
- Inspection
- Observation
- Inquiry
- Recalculation
- External Confirmation
- Reperformance
When are tests of details performed?
Tests of details are performed to obtain audit evidence when we have been unable to gain sufficient appropriate audit evidence from tests of controls and substantive analytical procedures or believe it will be more efficient to perform tests of details.
Define ‘analytical procedures’.
Analytical procedures mean evaluations of financial information through analysis of plausible relationships among both financial and non-financial data.
