Audit Ch5 Flashcards
What is the purpose of SA 500?
To design and perform audit procedures to obtain sufficient appropriate audit evidence for reasonable conclusions on which to base the auditor’s opinion.
What constitutes audit evidence?
Information used by the auditor in arriving at conclusions, including both information contained in accounting records and other information.
What is the difference between ‘selective examination of specific items’ and ‘audit sampling’?
‘Selective examination of specific items’ does not provide evidence for the entire population, while ‘audit sampling’ applies procedures to less than 100% of items with equal chance of selection.
What risk is associated with ‘selective examination of specific items’?
Non-sampling risk; the risk of reaching an erroneous conclusion due to inappropriate procedures or misinterpretation of evidence.
What audit procedures are performed to obtain audit evidence?
- Risk assessment procedures
- Test of controls
- Substantive procedures
What should the auditor consider when using information from a management expert?
The competence and objectivity of the expert and the appropriateness of the expert’s work.
What does SA 501 focus on?
Specific considerations for obtaining audit evidence regarding inventory, litigations and claims, and segment information.
How should auditors obtain evidence regarding inventory existence and condition?
- Attendance at physical inventory counting
- Performing audit procedures over final inventory records
What should an auditor do if they cannot attend a physical inventory count?
Perform alternate procedures or modify the opinion if attendance is impracticable.
What is the objective of SA 505?
To design and perform external confirmation procedures to obtain relevant and reliable audit evidence.
What should an auditor do if management refuses to allow sending a confirmation request?
Inquire about management’s reasons and evaluate the implications on the assessment of risks of material misstatement.
What are the circumstances under which negative confirmation can be used as a substantive audit procedure?
- Assessed risk of material misstatement is low
- Relevant controls are effective
- Population comprises large number of small, homogeneous transactions
- Very low exception rate is expected
What does SA 510 address?
Auditor’s responsibilities relating to opening balances during an initial audit engagement.
What must the auditor obtain evidence about regarding opening balances?
- Whether they contain misstatements affecting current period’s financial statements
- Whether accounting policies are consistently applied
Fill in the blank: Audit evidence is the information used by the auditor in arriving at the _______.
conclusions on which the auditor’s opinion is based.
True or False: Audit sampling allows the auditor to project results to the entire population.
False
What should auditors do to identify litigations and claims?
- Inquiry of management
- Reviewing minutes of meetings
- Reviewing legal expense accounts
What action should be taken if the auditor is unable to communicate with the external legal counsel?
Modify the opinion as per SA 705.
What is the significance of using external confirmations?
To obtain relevant and reliable audit evidence.
What should an auditor evaluate if there is a modification in the predecessor auditor’s report?
The effect of the matter giving rise to such modification with respect to current period’s financial statements.
This evaluation ensures that appropriate accounting policies are consistently applied, and any changes are properly accounted for, presented, and disclosed.
What procedures must an auditor perform on opening balances?
Read the most recent financial statements and predecessor auditor’s report, determine whether prior period’s closing balance has been correctly brought forward, determine whether the opening balances reflect appropriate accounting policies, perform audit procedures on opening balances.
These procedures help ensure the accuracy and reliability of the opening balances for the current audit period.
What is the consequence if the auditor cannot obtain audit evidence regarding opening balances?
Qualified/disclaimer of opinion.
If opening balances are misstated, what opinion should the auditor communicate?
Qualified/Adverse Opinion.
What should the auditor do if accounting policies are not consistently applied?
Issue a Qualified/Adverse Opinion.
What is the scope of SA 530?
Applies when the auditor has decided to use audit sampling in performing audit procedures.
What is the objective of SA 530?
To provide a reasonable basis for the auditor to draw conclusions about the population from which the sample is selected.
Define Audit Sampling.
The application of audit procedures to less than 100% of items within a population of audit relevance, ensuring all sampling units have a chance of selection.
This definition emphasizes the importance of statistical methods in audit procedures.
What must an auditor do if audit procedures are not applicable to a selected item?
Apply the procedure on a replacement item.
What must the auditor evaluate when a deviation or misstatement is identified?
Investigate the nature and cause of the deviation or misstatement and evaluate its possible effect.
What should the auditor do if deviations or misstatements are considered anomalies?
Perform audit procedures to obtain a high degree of certainty that it is not representative of the population.
What does SA 550 address?
The auditor’s responsibilities regarding related party relationships and transactions.
What should the auditor obtain regarding related party transactions?
Audit evidence that the transactions are properly identified, accounted for, and disclosed in the financial statements.
What is one requirement of SA 550 regarding communication?
The auditor shall communicate with TCWG significant matters arising during the audit related to the entity’s related parties.
What type of transactions must be inspected by the auditor?
Significant related party transactions outside the entity’s normal course of business.
What is one method for verifying existence and condition of inventories?
Attendance at physical inventory counting.
What should the auditor evaluate regarding management’s expert?
The competence, capabilities, and objectivity of that expert.
What additional procedures should the auditor perform for stocks lying with consignees?
Obtain confirmations and possibly attend physical counts at the consignees’ locations.
What is the auditor’s responsibility regarding litigation matters?
Design and perform audit procedures to identify litigation and claims involving the entity.
What should the auditor seek from external legal counsel regarding litigation?
A list of litigation and claims and management’s assessment of the outcomes.
What is the risk of material misstatement regarding litigation?
High risk due to potential financial implications like fines and penalties.
True or False: The auditor’s attendance at physical inventory counts is irrelevant to the nature of inventory.
False.
Fill in the blank: The auditor must perform procedures to verify the _______ of related party transactions.
identification, accounting, and disclosure.
What must be disclosed to the auditor when preparing financial statements?
All relevant facts must be disclosed and appropriately accounted for in accordance with the applicable financial reporting framework.
What is the role of CA Sceptic in the audit of the joint venture?
CA Sceptic heads the engagement team and is known for uncovering major frauds.
What is the financial situation of Mr. Bharose Lal?
He is in financial difficulty with mounting dues and huge outstanding exposure to banks and suppliers.
What is the main purpose of the joint venture formed by Real Trust Developers Private Limited?
To invest in SRA projects and develop them into commercial units for sale.
What is a significant risk factor identified in the case regarding the foreign partner?
The foreign partner has no knowledge of Indian regulations and is dependent on the local partner.
What payment was made to Useless & Sons Private Limited?
20 crores was paid to get consent from slum dwellers.
How much equity contribution is required from each partner in the joint venture?
5 crores.
What is a key fraud risk factor mentioned in the case?
The expensive lifestyle of the owners.
In the context of fraud, what does SA 550 emphasize?
The importance of maintaining professional skepticism regarding related party relationships and transactions.
What should the engagement team do if they suspect misappropriation of funds?
Plan additional audit procedures to investigate the likelihood of misstatement.
What is a common fraud risk factor classification?
Incentive or pressure, perceived opportunity, and ability to rationalize actions.
What should be the auditor’s action if they identify undisclosed related party relationships?
Communicate the findings to the engagement team and assess the impact on the audit.
What is the significance of maintaining a proper state of mind during the audit?
To be alert to the potential for material misstatement due to fraud.
What is the auditor’s responsibility regarding management’s representations?
Re-evaluate the reliability of management’s responses if fraud is suspected.
What is the main issue with the balance confirmation request to Woolen Private Limited?
The CFO refused to send a balance confirmation request.
What should CA Anu do after not receiving a response from Fashion Jingo Ltd.?
Perform alternative audit procedures.
What is a potential consequence of the external legal counsel refusing to comment?
This may affect the audit opinion.
What is the auditor’s responsibility under SA 500?
To design and perform audit procedures to obtain sufficient appropriate audit evidence.
What affects the quality of audit evidence?
Relevance and reliability of the information.
What does relevance in audit evidence refer to?
The logical connection with the purpose of the audit procedure.
What influences the reliability of audit evidence?
Its source, nature, and the circumstances under which it is obtained.
What should be done if management’s controls fail to identify related party transactions?
Inquire why the controls failed and perform additional audit procedures.
What are the two main factors affecting audit evidence?
Relevance and reliability
Relevance deals with the logical connection to the audit procedure, while reliability is influenced by the source, nature, and circumstances of the information.
What does relevance in the context of audit evidence refer to?
Logical connection with the purpose of the audit procedure
It also relates to the assertion under consideration.
What influences the reliability of audit evidence?
Source, nature, and circumstances of the information
Controls over preparation and maintenance of the information also play a role.
What must an auditor evaluate when using the work of a management’s expert?
Competence, capability, and objectivity of the expert
Additionally, the appropriateness of the expert’s work as audit evidence must be evaluated.
What does SA 501 specifically address?
Considerations for obtaining sufficient appropriate audit evidence regarding inventory, litigation, claims, and segment information
It highlights specific aspects relevant to these items.
What is required when inventory is material to financial statements?
Attendance at physical inventory counting
This is unless attendance is impracticable.
What should an auditor do regarding litigation and claims according to SA 501?
Identify litigation and claims that may give rise to a risk of material misstatement
These may need to be disclosed or accounted for in financial statements.
What is segment information in auditing?
Information about different types of products, services, and geographical operations of an enterprise
The auditor must obtain evidence regarding its presentation and disclosure.
What does SA 505 focus on?
Use of external confirmation procedures to obtain audit evidence
It guides auditors in designing and performing external confirmation procedures.
What is the purpose of SA 510?
Responsibilities relating to opening balances in initial audit engagements
This applies when prior financial statements were not audited or were audited by a predecessor.
What does SA 530 address?
Use of statistical and non-statistical sampling in audits
It covers designing, selecting, and evaluating audit samples.
What is the objective of the auditor when using audit sampling?
To provide a reasonable basis for conclusions about the population
This is based on the sample selected.
What is sampling risk?
Risk that the auditor’s conclusion based on a sample may differ from the conclusion if the entire population were audited
This highlights the importance of a representative sample.
What must be true about a sample used in audit sampling?
The sample must be representative of the whole population
It does not need to be exactly the same but should closely resemble it.
What does SA 550 cover?
Auditor’s responsibilities regarding related party relationships and transactions
This is critical for ensuring transparency in financial statements.
Fill in the blank: SA 501 requires auditors to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by attendance at _______.
physical inventory counting
True or False: The auditor can ignore the objectivity of a management’s expert if they have been consistently re-appointed.
False
The auditor must evaluate the objectivity regardless of the expert’s appointment history.
What should the auditor do if they cannot attend physical inventory counting due to unforeseen circumstances?
Make or observe counts on an alternative date and perform audit procedures on intervening transactions
SA 501 provides guidance on this matter.
What is required when there is a non-receipt of confirmation from a trade payable?
Evaluate the implications on the assessment of relevant risks of material misstatement
This includes the risk of fraud and the nature, timing, and extent of other audit procedures.
When auditing inventory held by a third party, what should the auditor do?
Request confirmation from the third party and perform appropriate audit procedures
This is necessary if the inventory is material to the financial statements.
What should be done if the auditor finds a response to a confirmation request not reliable?
Evaluate the implications on the assessment of relevant risks of material misstatement
This includes assessing risks related to fraud.
What should the auditor consider regarding the integrity of third parties when auditing inventory?
Perform additional audit procedures if there are doubts about the third party’s integrity
This may include attending physical counts or inspecting documentation.
What is the risk of interception, alteration, or fraud in audit responses?
Such risk exists regardless of the medium used for the response.
What factors may indicate doubts about the reliability of a response?
- Was received by the auditor indirectly
- Appeared not to come from the originally intended confirming party
What does SA 510 state regarding opening balances in an initial audit engagement?
The auditor must obtain sufficient appropriate audit evidence about whether opening balances contain misstatements that materially affect the current period’s financial statements.
What additional audit procedures may be necessary for inventories?
- Observing a current physical inventory count
- Performing audit procedures on the valuation of the opening inventory items
- Performing audit procedures on gross profit and cut-off
What is sampling risk in the context of an audit?
It is the risk that the auditor’s conclusion based on a sample may differ from the conclusion if the entire population were subjected to the same audit procedure.
What does SA 550 require the auditor to evaluate for related party transactions?
The business rationale or lack thereof for transactions that may indicate fraudulent financial reporting or conceal misappropriation of assets.
What considerations must auditors keep in mind when attending physical inventory counts according to SA 501?
- Evaluate management’s instructions and procedures
- Observe the performance of management’s count procedures
- Inspect the inventory
- Perform test counts
What should be done if attendance at physical inventory counting is impracticable?
Alternative audit procedures, such as inspecting documentation of subsequent sales, may provide sufficient appropriate audit evidence.
What does SA 705 require if sufficient appropriate audit evidence cannot be obtained?
The auditor must modify the opinion in the auditor’s report due to the scope limitation.
What are the considerations for segment information according to SA 501?
- Sales, transfers, and charges between segments
- Comparisons with budgets and expected results
- Allocation of assets and costs among segments
- Consistency with prior periods
What does SA 530 require the auditor to evaluate regarding audit sampling?
- The results of the sample
- Whether audit sampling provides a reasonable basis for conclusions about the population tested
What is the difference between negative and positive confirmations as per SA 505?
Negative confirmations provide less persuasive audit evidence than positive confirmations.
What should an auditor do if they do not receive a response to a negative confirmation request?
Examine subsequent cash disbursements or correspondence from third parties.
What does SA 500 state about using the work of a management’s expert?
The auditor must evaluate the competence, capabilities, and objectivity of the expert.
What types of threats may affect a management expert’s objectivity?
- Self-interest threats
- Advocacy threats
- Familiarity threats
- Self-review threats
- Intimidation threats
What should be included in the management’s instructions for the inventory count process?
- Supervision by a responsible officer
- No inward/outward movement of goods during counting
- Distinctive marks or tags after counting
How should quantities of work in progress be estimated?
At each stage of production, not for the plant as a whole.
What should be done with damaged or obsolete stock items?
Count and shift them to a separate area for assessment.
