Basic Knowledge

Question 1

Name the 5 Elements of Assurance Engagement

Answer 1

Criteria, Report, Evidence, Subject Matter and Third Party Relationship

Question 2

Name and describe the two levels of assurance

Answer 2

Reasonable - Positively expressed report – happens when we have plenty of historical data
Subject matter conforms in all material respects with identified suitable criteria
Limited - Negatively expressed report – lower level due to the limited information we have.
Works mainly with forecasting information

Question 3

What is an external audit?

Answer 3

Gives reasonable assurance over the truth and fairness of financial statements

• True = info is factual and conforms with reality
• Fair = free from discrimination and bias and in compliance with expected standards and rules

Question 4

What is the objectives of an external audit?

Answer 4

Allows auditors to express an opinion whether the financial statements are prepared in material respect and adhere to financial reporting framework.

Question 5

What is an auditors role?

Answer 5

Review and test accounting systems
Carry out tests on sample basis
Check accounting standards have been followed
Check and verify completeness, ownership, valuation, existence and disclosure of assets and liabilities.

Question 6

What is the audit threshold?

Answer 6

Revenue less than £10.2m
Gross assets less than 5.1m
No more than 50 employees

Question 7

What are the benefits of an audit?

Answer 7

Enhances credibility of information
Reduces risk of bias, error or fraud
Gives investors added faith in market

Question 8

What are the limitations of an audit?

Answer 8

Use of estimation (going concern)
Historic nature of reporting
Nature of evidence (where the evidence is coming from)

Question 9

What is a self threat?

Answer 9

Occurs when a firm or a member of the audit team has some financial or other interest in an assurance client

Question 10

What is a self-review threat?

Answer 10

Reviewing something you have done yourself

Pre judgement needs to be revaluated by members responsible for that judgement

Question 11

What is an advocacy threat?

Answer 11

Offering advice to a client

Occurs when members promote a position or opinion to the point that subsequent objectivity may be compromised

Question 12

What is familiarity?

Answer 12

Close relationship becomes too sympathetic to the interest of others

Question 13

What is an intimidation threat?

Answer 13

When members are deterred from acting objectively by threats.

Question 14

Name the three safeguards

Answer 14

Created by profession
In the work environment
Created by the individual

Question 15

List the duties of a director

Answer 15

Safeguard the assets of company
Preparing and delivering financial statements
Keeping accurate books and records for company

Question 16

List the duties of an auditor

Answer 16

Report if financial statements have been prepared in accordance to accounting standards
Give opinion on truth and fairness
Report if accounting records have been kept

Question 17

What rights does the auditor have?

Answer 17

o	Access to records
o	Information and explanations
o	Attendances at/ notices of GM
o	Right to be heard at GM
o	Rights to written resolutions

Question 18

What is business risk?

Answer 18

o Risk inherent to the entity in its operations. (Risk that exists because of what the organisation does)

Question 19

What is audit risk?

Answer 19

o Risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Question 20

What is professional indemnity?

Answer 20

Protects audits from providing the wrong opinion